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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, 2001
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 [ ]
Number of shares of common stock outstanding as of August 31, 2001 is
16,472,000 shares.
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MEADE INSTRUMENTS CORP.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page No.
--------
Consolidated Balance Sheets (Unaudited)--August 31, 2001 and
February 28, 2001..................................................... 3
Consolidated Statements of Income (Unaudited) -- Three and Six
Months Ended August 31, 2001 and 2000................................. 4
Consolidated Statements of Cash Flows (Unaudited) -- Six Months
Ended August 31, 2001 and 2000........................................ 5
Notes to Consolidated Financial Statements (Unaudited)................... 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 8
PART II -- OTHER INFORMATION
Other Information........................................................ 12
SIGNATURES............................................................... 14
EXHIBIT INDEX............................................................ 15
2
ITEM 1. FINANCIAL STATEMENTS.
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
AUGUST 31, FEBRUARY 28,
2001 2001
------------- -------------
Current assets:
Cash ................................................................ $ 887,000 $ 1,186,000
Accounts receivable, less allowance for doubtful accounts
of $739,000 at August 31, 2001 and $2,175,000 at
February 28, 2001 ................................................ 24,326,000 10,254,000
Inventories ......................................................... 33,367,000 41,651,000
Deferred income taxes ............................................... 6,915,000 6,915,000
Prepaid expenses and other current assets ........................... 3,858,000 4,805,000
------------- -------------
Total current assets ...................................... 69,353,000 64,811,000
Other assets ............................................................ 3,466,000 3,950,000
Property and equipment, net of accumulated depreciation of $6,029,000
at August 31, 2001 and $5,466,000 at February 28, 2001 .............. 8,535,000 7,705,000
------------- -------------
$ 81,354,000 $ 76,466,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ................................................. $ 12,571,000 $ 14,585,000
Accounts payable .................................................... 7,754,000 2,522,000
Accrued liabilities ................................................. 4,968,000 4,051,000
Current portion, long-term debt and capital lease obligations ....... 4,233,000 4,786,000
------------- -------------
Total current liabilities ................................. 29,526,000 25,944,000
------------- -------------
Long-term bank debt ..................................................... 1,171,000 --
------------- -------------
Long-term capital lease obligations, net of current portion ............. 77,000 171,000
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized;
16,472,000 shares issued and outstanding at August 31,
2001 and at February 28, 2001 .................................... 165,000 165,000
Additional paid-in capital .......................................... 32,367,000 32,367,000
Retained earnings ................................................... 23,705,000 23,743,000
Accumulated other comprehensive income .............................. (385,000) (359,000)
------------- -------------
55,852,000 55,916,000
Unearned ESOP shares ................................................ (5,272,000) (5,565,000)
------------- -------------
Total stockholders' equity ................................ 50,580,000 50,351,000
------------- -------------
$ 81,354,000 $ 76,466,000
============= =============
See accompanying notes to consolidated financial statements
3
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
---------------------------- -----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net sales ............................. $ 27,162,000 $ 35,630,000 $ 43,306,000 $ 58,420,000
Cost of sales ......................... 19,260,000 21,297,000 30,752,000 34,802,000
------------- ------------- ------------- -------------
Gross profit ........................ 7,902,000 14,333,000 12,554,000 23,618,000
Selling expenses ...................... 3,111,000 5,331,000 5,349,000 8,683,000
General and administrative expenses ... 2,128,000 2,621,000 4,577,000 4,738,000
ESOP expense .......................... 344,000 772,000 652,000 1,421,000
Research and development expenses...... 589,000 546,000 1,186,000 1,004,000
------------- ------------- ------------- -------------
Operating income .................... 1,730,000 5,063,000 790,000 7,772,000
Interest expense ...................... 385,000 441,000 724,000 675,000
------------- ------------- ------------- -------------
Income before income taxes .......... 1,345,000 4,622,000 66,000 7,097,000
Provision for income taxes ............ 585,000 1,990,000 104,000 3,096,000
------------- ------------- ------------- -------------
Net income ............................ $ 760,000 $ 2,632,000 $ (38,000) $ 4,001,000
============= ============= ============= =============
Basic earnings per share .............. $ 0.05 $ 0.18 $ 0.00 $ 0.27
============= ============= ============= =============
Diluted earnings per share ............ $ 0.05 $ 0.17 $ 0.00 $ 0.25
============= ============= ============= =============
Weighted average number of shares
outstanding-- basic ................. 15,055,000 14,667,000 15,025,000 14,615,000
============= ============= ============= =============
Weighted average number of shares
outstanding-- diluted ............... 15,244,000 15,856,000 15,025,000 15,876,000
============= ============= ============= =============
See accompanying notes to consolidated financial statements
4
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
AUGUST 31,
-----------------------------
2001 2000
------------- -------------
Cash flows from operating activities:
Net income (loss) ............................................... $ (38,000) $ 4,001,000
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ................................... 1,137,000 898,000
ESOP contribution ............................................... 652,000 1,421,000
Allowance for doubtful accounts ................................. 705,000 116,000
Changes in assets and liabilities:
Increase in accounts receivable .............................. (14,783,000) (23,487,000)
Decrease (increase) in inventories ........................... 8,179,000 (12,370,000)
Decrease in prepaid expenses and other assets ................ 1,365,000 220,000
Increase in accounts payable ................................. 5,230,000 4,734,000
Increase (decrease) in accrued liabilities ................... 479,000 (634,000)
Decrease in income taxes payable ............................. -- (1,230,000)
------------- -------------
Net cash provided by (used in) operating activities ... 2,926,000 (26,331,000)
------------- -------------
Cash flows from investing activities:
Capital expenditures ............................................ (1,521,000) (1,620,000)
------------- -------------
Net cash used in investing activities ................. (1,521,000) (1,620,000)
------------- -------------
Cash flows from financing activities:
Net borrowings (payments) under bank line of credit ............. (2,019,000) 25,357,000
Borrowing on long-term note ..................................... 1,151,000 --
Payments on bank note ........................................... (500,000) --
Payments under capital lease obligations ........................ (146,000) (140,000)
Exercise of stock options ....................................... -- 748,000
------------- -------------
Net cash provided by (used in) financing activities ... (1,514,000) 25,965,000
------------- -------------
Effect of exchange rate changes on cash ............................. (190,000) 174,000
------------- -------------
Net increase (decrease) in cash ..................................... (299,000) (1,812,000)
Cash at beginning of period ......................................... 1,186,000 2,180,000
------------- -------------
Cash at end of period ............................................... $ 887,000 $ 368,000
============= =============
See accompanying notes to consolidated financial statements
5
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, 2001.
The Company has experienced, and expects to continue to experience,
substantial fluctuations in its sales, gross margins and profitability from
quarter to quarter. Factors that influence these fluctuations include the volume
and timing of orders received, changes in the mix of products sold, market
acceptance of the Company's products, competitive pricing pressures, the
Company's ability to meet demand and delivery schedules and the timing and
extent of research and development expenses, marketing expenses and product
development expenses. In addition, a substantial portion of the Company's net
sales and operating income typically occur in the third quarter of the Company's
fiscal year primarily due to disproportionately higher customer demand for
less-expensive telescopes during the Christmas holiday season. The results of
operations for the quarters ended August 31, 2001 and 2000, respectively, are
not necessarily indicative of the operating results for the entire fiscal year.
B. BANK FINANCINGS
In September 2001, the Company refinanced its bank borrowings by
entering into a new credit agreement (the "U.S. Credit Agreement") with a bank.
The U.S. Credit Agreement provides the Company with a $32,100,000 credit
facility consisting of a $30,000,000 revolving credit line (the "U.S. Revolving
Loan") and a $2,100,000 term loan (the "U.S. Term Loan"). Availability under the
U.S. Revolving Loan is subject to a borrowing base with standard advance rates
against eligible accounts receivable and inventories. The U.S. Term Loan is
secured by domestic machinery and equipment. The credit facility has a
three-year term and is collateralized by substantially all of the domestic
assets of the Company and its domestic subsidiaries. Outstanding amounts on the
U.S. Revolving Loan and U.S. Term Loan bear interest at the bank's base rate or
LIBOR rate plus applicable margins. In August 2001, the Company's German
subsidiary entered into an agreement with a bank to provide up to DM 7.5 million
in revolving loans (subject to a borrowing base of eligible accounts receivable
and inventories) expiring in July 2002 and a five-year term loan of DM 2.5
million secured by land and buildings owned by the German subsidiary.
Outstanding amounts on the Deutsche Mark loans bear interest at the bank's base
rate plus or minus applicable margins.
C. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of inventories is as follows:
AUGUST 31, FEBRUARY 28,
2001 2001
------------ ------------
Raw materials ............................. $ 8,209,000 $ 9,915,000
Work-in-process ........................... 4,869,000 7,919,000
Finished goods ............................ 20,289,000 23,817,000
------------ ------------
$33,367,000 $41,651,000
============ ============
Included in prepaid expenses and other current assets at August 31,
2001 is $2,920,000 of net prepaid income taxes.
6
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
D. COMMITMENTS AND CONTINGENCIES
On June 3, 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 held that the Company has not
infringed the patent. On July 27, 1999 the opposing party filed a purported
notice of appeal with respect to the summary judgment motion. On May 2, 2000 the
Company filed a motion to dismiss the appeal. On June 23, 2000 the court granted
the Company's motion and ordered a dismissal of the appeal. On July 7, 2000, the
opposing party filed a petition for rehearing of the appeal. On March 12, 2001,
the appellate court denied the opposing party's petition for a rehearing of the
appeal. On or about July 10, 2001, the opposing party filed a petition for a
writ of certiorari, seeking review by the United States Supreme Court. The
Supreme Court has not yet ruled on whether to grant certiorari. In the event of
any further proceedings on the merits, the Company intends to vigorously defend
its position. The ultimate liability of the Company under this action is not
presently determinable. After discussion with counsel, and in light of the
summary judgment and actions of the appellate court, 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.
The Company is involved from time to time in litigation incidental to
its business. Management believes that the outcome of current litigation will
not have a material adverse effect on the Company.
E. NET INCOME PER SHARE
Basic earnings per share amounts exclude the dilutive effect of
potential common shares. Basic earnings per share are based upon the
weighted-average number of common shares outstanding. Diluted earnings per share
are based upon the weighted-average number of common shares and dilutive
potential common shares outstanding. Potential common shares are outstanding
stock options under the Company's stock incentive plan that are included under
the treasury stock method.
The following is a reconciliation of the denominators of the basic and
diluted earnings per share computations for the quarters ended August 31, 2001
and 2000, respectively.
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
---------------------------- -----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net income (loss) ................ $ 760,000 $ 2,632,000 $ (38,000) $ 4,001,000
============= ============= ============= =============
Shares outstanding -- basic ...... 15,055,000 14,667,000 15,025,000 14,615,000
Effect of dilutive securities:
Stock options ................. 189,000 1,189,000 -- 1,261,000
------------- ------------- ------------- -------------
Shares outstanding -- diluted .... 15,244,000 15,856,000 15,025,000 15,876,000
============= ============= ============= =============
Net income -- basic .............. $ 0.05 $ 0.18 $ 0.00 $ 0.27
Net income -- diluted ............ $ 0.05 $ 0.17 $ 0.00 $ 0.25
F. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
Reporting Comprehensive Income establishes standards for reporting and
displaying of comprehensive income and its components in the Company's
consolidated financial statements. Comprehensive income is defined in SFAS 130
as the change in equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources.
Total comprehensive income (loss) was $927,000 and ($64,000), for the three and
six months ended August 31, 2001, respectively. The difference from net income
(loss) as reported is the change in the cumulative currency translation
adjustment.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The nature of the Company's business is seasonal. Historically, sales
in the third quarter have been higher than sales achieved in each of the other
three fiscal quarters of the year. Thus, expenses and, to a greater extent,
operating income vary by quarter. Caution, therefore, is advised when appraising
results for a period shorter than a full year, or when comparing any period
other than to the same period of the previous year.
THREE MONTHS ENDED AUGUST 31, 2001 COMPARED TO THREE MONTHS ENDED
AUGUST 31, 2000
Net sales for the second quarter of fiscal 2002 were $27.2 million
compared to $35.6 million for the second quarter of fiscal 2001, a decrease of
23.8%. Sales declined across most of the Company's major product lines with the
decrease from the prior year principally due to lower sales of less-expensive
telescopes and telescope accessories.
Gross profit decreased from $14.3 million (40.2% of net sales) for the
second quarter of fiscal 2001 to $7.9 million (29.1% of net sales) for the
second quarter of fiscal 2002, a decrease of 44.9%. Competitive pricing
pressures in both the U.S. and Europe, contributed to the lower margins.
Selling expenses decreased from $5.3 million (15.0% of net sales) for
the second quarter of fiscal 2001 to $3.1 million (11.4% of net sales) for the
second quarter of fiscal 2002, a decrease of 41.6%. This decrease was primarily
due to decreases in advertising and marketing expenses. The Company expects
advertising and marketing costs to continue to decrease from prior year levels
as the Company has reduced national consumer advertising and concentrated its
efforts on point-of-sale promotions supported by targeted advertising with its
major customers.
General and administrative expenses decreased slightly from $2.6
million (7.4% of net sales) for the second quarter of fiscal 2001, to $2.1
million (7.8% of net sales) for the second quarter of fiscal 2002, a decrease of
18.8%. This decrease was principally due to reductions in compensation costs.
ESOP contribution expense decreased from $772,000 for the second
quarter of fiscal 2001 to $344,000 for the second quarter of fiscal 2002, a
decrease of 55.4%. 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 market value of the Company's common stock changes.
Research and development expenses increased slightly from $546,000 for
the second quarter of fiscal 2001 to $589,000 for the second quarter of fiscal
2002, an increase of 7.9%. The Company continues to pursue the development of
telescope and other consumer related products as well as industrial products in
the areas of free space optics and digital imaging. Therefore, research and
development costs are expected to continue to increase.
The effective tax rate for the quarter ended August 31, 2001 was
comparable to the rate for the prior year period and is the expected rate for
the full year ending February 28, 2002, subject to any significant fluctuations
in the non-deductible portion of the ESOP charge.
SIX MONTHS ENDED AUGUST 31, 2001 COMPARED TO SIX MONTHS ENDED AUGUST
31, 2000
Net sales for the six months ended August 31, 2001 were $43.3 million
compared to $58.4 million for the comparable prior year period, a decrease of
25.9%. Softness in the consumer market as well as competitive pricing pressures
for the first six months of the Company's fiscal year resulted in lower sales
across most of the Company's major product lines. Decreases from the prior year
were principally due to lower sales of less-expensive telescopes and telescope
accessories. Sales of several of the more advanced telescope products were also
down as the Company prepared for the introduction of two entirely new product
lines for the advanced amateur astronomer. Those new products were introduced to
the market through the Company's website and the astronomy-related magazines in
September 2001.
Gross profit decreased from $23.6 million (40.4% of net sales) for the
six months ended August 31, 2000 to $12.6 million (29.0% of net sales) for the
comparable current year period, a decrease of 46.9%. The Company's continuing
efforts to reduce inventories and competitive pricing pressures in both the U.S.
and Europe, contributed to the lower margins.
8
Selling expenses decreased from $8.7 million (14.7% of net sales) for
the six months ended August 31, 2000 to $5.3 million (12.4% of net sales) for
the comparable current year period, a decrease of 38.4%. This decrease was
primarily due to decreases in advertising and marketing expenses. The Company
expects advertising and marketing costs to continue to decrease from prior year
levels as the Company has reduced national consumer advertising and concentrated
its efforts on point-of-sale promotions supported by tarteted advertising with
its major customers.
General and administrative expenses decreased slightly from $4.7
million (8.1% of net sales) for the six months ended August 31, 2000 to $4.6
million (10.6% of net sales) for the comparable current year period, a decrease
of 3.4%. This decrease reflects the net effect of sundry general and
administrative expenses fluctuating slightly up or down as compared to the prior
year.
ESOP contribution expense decreased from $1.4 million for the six
months ended August 31, 2000 to $652,000 for the comparable current year period,
a decrease of 54.1%. The decrease in this non-cash charge was due to decreases
in the average market price of the Company's stock allocated to the Employee
Stock Ownership Plan during the period. The non-cash ESOP contribution expense
may fluctuate as the market value of the Company's common stock changes.
Research and development expenses increased from $1.0 million for the
six months ended August 31, 2000 to $1.2 million for the comparable current year
period, an increase of 18.1%. This increase was principally due to increased
engineering personnel costs and outside consulting costs. The Company continues
to pursue the development of telescope and other consumer related products as
well as industrial products in the areas of free space optics and digital
imaging. Therefore, research and development costs are expected to continue to
increase.
Interest expense increased slightly from $675,000 for the six months
ended August 31, 2000 to $724,000 for the comparable current year period, an
increase of 7.3%. The increase was due to slight variations in borrowing levels
and borrowing rates in the comparable periods.
The income tax provision increased to 157.6% of income before income
taxes for the six months ended August 31, 2001 from 43.6% in the prior year
period. The current period income tax provision was greater than income before
income taxes due to the tax effect of the non-deductible portion of the ESOP
charge.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended August 31, 2001 the Company funded its
operations with internally generated cash flow. Cash flow from operating
activities was $2.9 million after adjusting the net loss for non-cash charges
and after a significant decrease in inventories and an increase in accounts
payable that was partially offset by increased accounts receivable. The decrease
in inventories (down $8.2 million from February 28, 2001 levels) was consistent
with the Company's ongoing plans to reduce inventory levels after
lower-than-expected results in the third and fourth quarters of fiscal year
2001. Trade accounts payable increased, even with reduced inventories,
principally due to longer payment terms from some of the Company's overseas
suppliers. Accounts receivable increased due to the volume and timing of sales
as compared to the period ending February 28, 2001. Net working capital totaled
approximately $39.8 million at August 31, 2001, compared to $38.9 million at
February 28, 2001. 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.
In September 2001, the Company refinanced its bank borrowings by
entering into a new credit agreement (the "U.S. Credit Agreement") with a bank.
The U.S. Credit Agreement provides the Company with a $32,100,000 credit
facility consisting of a $30,000,000 revolving credit line (the "U.S. Revolving
Loan") and a $2,100,000 term loan (the "U.S. Term Loan"). Availability under the
U.S. Revolving Loan is subject to a borrowing base with standard advance rates
against eligible accounts receivable and inventories. The U.S. Term Loan is
secured by domestic machinery and equipment. The credit facility has a
three-year term and is collateralized by substantially all of the domestic
assets of the Company and its domestic subsidiaries. Outstanding amounts on the
U.S. Revolving Loan and U.S. Term Loan bear interest at the bank's base rate or
LIBOR rate plus applicable margins. In August 2001, the Company's German
subsidiary entered into an agreement with a bank to provide up to DM 10.0
million consisting of up to DM 7.5 million in revolving loans (subject to a
borrowing base of eligible accounts receivable and inventories) expiring in July
2002 and a five-year term loan of DM 2.5 million secured by land and buildings
owned by the German subsidiary. Outstanding amounts on the deutsche mark loans
bear interest at the bank's base rate plus or minus applicable margins.
9
Capital expenditures, including financed purchases of equipment,
aggregated $1,521,000 and $1,620,000 for the six months ended August 31, 2001
and 2000, respectively. The Company had no material capital expenditure
commitments at August 31, 2001.
The Company believes that internally generated cash flow and borrowing
ability will be sufficient to meet its operating, working capital and capital
expenditure requirements for the foreseeable future. In the event that the
Company requires 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"); Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 was adopted during the
quarter ended May 31, 2001. It establishes accounting and reporting standards
for derivative instruments and for hedging activities. Management does not
expect the adoption of SFAS 133 to have a material impact on the Company's
financial position or results of operations.
In June 2001 the FASB approved SFAS No. 141 and No. 142, Business
Combinations and Goodwill and Other Intangible Assets, respectively. The Company
is required to adopt the provisions of these statements no later than the first
quarter of its fiscal year 2003. The Company has not yet determined the impact
of adopting SFAS No. 141 and No. 142.
FORWARD-LOOKING INFORMATION
The preceding "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section contains various "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
which represent the Company's reasonable judgment concerning the future and are
subject to risks and uncertainties that could cause the Company's actual
operating results and financial position to differ materially, including the
following: the Company's ability to expand the markets for telescopes,
binoculars and other optical products; the Company's ability to continue to
develop and bring to market new and innovative products; the Company
experiencing fluctuations in its sales, gross margins and profitability from
quarter to quarter consistent with prior periods; the Company's expectation that
its contingent liabilities will not have a material effect on the Company's
financial position or results of operations; the extent to which the Company
will be able to leverage its design and manufacturing expertise in the areas of
free-space optics and digital imaging; 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; uncertainties
concerning the impact the recent terrorist activities may have on the economy or
the public's confidence in general: 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 significant
interruption of the Company's manufacturing abilities in its domestic or Mexican
facilities or in any of its suppliers located in the far east; greater than
anticipated competition; any loss of, or the failure to replace, any significant
portion of the sales made to any significant customer of the Company; the
inherent risks associated with international sales, including variations in
local economies, fluctuating exchange rates (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; 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
increasing ESOP charges in the event the market price of the Company's stock
increases.
10
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 European 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 and will continue to consider the adoption of a foreign currency
hedging program.
The Company does not enter into derivatives or other financial
instruments for trading, speculative purposes or to manage its interest rate
risk. The Company's financial instruments consist of cash, accounts receivable,
accounts payable, and long-term obligations. The Company's exposure to market
risk for changes in interest rates relates primarily to short-term investments
and short-term obligations. As a result, the Company does not expect
fluctuations in interest rates to have a material impact on the fair value of
these instruments.
11
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Meade Instruments Corporation v. Reddwarf Starware, LLC, aka Reddwarf
Instruments, LLC ("Reddwarf"), Civil No. SACV 98-240 GLT, United States District
Court for the Central District of California, and Appeal No. 99-1517, United
States Court of Appeals for the Federal Circuit. 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 Reddwarf's patent is invalid, void, and unenforceable,
for an injunction and damages under federal antitrust statutes, and for an
injunction and other relief under California unfair competition statutes.
Reddwarf has filed a counterclaim, alleging infringement by the Company's LX200
series telescope system (and unspecified other products) of Reddwarf's U.S.
Patent No. 4,764,881. The counterclaim further alleges that the infringement is
willful and seeks an unspecified amount of damages, an injunction, and other
relief against the Company.
On June 29, 1999, the Court granted the Company's Motion for Summary
Judgment of Non-Infringement. On August 10, 1999, the Court granted in part and
denied in part the Company's Motion for Attorney's Fees under 35 U.S.C. Section
285 and, in an order of October 14, 1999, the Court determined that the amount
of attorneys' fees to be awarded to the Company from Reddwarf is $33,681.50.
On July 27, 1999, Reddwarf filed a Notice of Appeal to United States
Court of Appeals for the Federal Circuit. On June 23, 2000, the Court of Appeals
granted the Company's motion to dismiss Reddwarf's appeal. On February 27, 2001,
the Court of Appeals denied Reddwarf's petition for panel rehearing and, on
March 12, 2001, the Court of Appeals denied Reddwarf's petition for en banc
rehearing. On or about July 10, 2001, Reddwarf filed a petition for a writ of
certiorari, seeking review by the United States Supreme Court. The United States
Supreme Court has not yet ruled on whether to grant certiorari. Due to the
uncertainties of litigation, the Company is unable to provide an evaluation of
the likelihood of an unfavorable outcome should the United States Supreme Court
grant certiorari or in the event of other additional proceedings in this matter,
or an estimate of the amount of the potential loss in the event of an
unfavorable outcome.
The Company is also involved from time to time in litigation incidental
to its business. Management believes that the outcome of current litigation will
not have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In connection with the Company's Annual Meeting of Stockholders, held
on July 12, 2001, the stockholders of the Company (1) re-elected John C. Diebel
and Timothy C. McQuay as directors for a three-year term expiring at the
Company's Annual Meeting to be held in 2004 and (2) approved an amendment to the
Company's 1997 Stock Incentive Plan to increase the number of shares of the
Company's Common Stock available for issuance thereunder.
The voting results were as follows:
FOR AGAINST WITHHELD
---------- ---------- ----------
Re-election of John C. Diebel to the Company's
Board of Directors ............................... 14,045,754 918,381 --
Re-election of Timothy C. McQuay to the Company's
Board of Directors ............................... 14,882,040 82,095 --
Amendment to Company's 1997 Stock Incentive Plan ... 9,038,345 2,359,670 3,566,120
12
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. 10.45 - Credit Agreement dated as of September 24,
2001 between Bank of America, N.A. as the Lender and Meade
Instruments Corp. as the Borrower.
6(b) Reports on Form 8-K.
None.
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.
Dated: October 15, 2001
MEADE INSTRUMENTS CORP.
By: /s/ JOHN C. DIEBEL
---------------------------
John C. Diebel
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the 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 Chief October 15, 2001
---------------------------
John C. Diebel Executive Officer
(Principal Executive Officer)
/s/ STEVEN G. MURDOCK Director, President, October 15, 2001
---------------------------
Steven G. Murdock Chief Operating Officer and Secretary
/s/ BRENT W. CHRISTENSEN Vice President, Finance and October 15, 2001
---------------------------
Brent W. Christensen Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ JOSEPH A. GORDON, JR. Director and Senior Vice President October 15, 2001
---------------------------
Joseph A. Gordon, Jr. of North American Sales
/s/ TIMOTHY C. MCQUAY Director October 15, 2001
---------------------------
Timothy C. McQuay
--------------------------- Director
Harry L. Casari
--------------------------- Director
Michael P. Hoopis
--------------------------- Director
Vern L. Fotheringham
14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.45 Credit Agreement dated as of September 24, 2001 between Bank
of America, N.A. as the Lender and Meade Instruments Corp. as
the Borrower.
15