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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, 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 November 30, 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)--November 30, 2001 and February 28, 2001.......................... 3
Consolidated Statements of Income (Unaudited) -- Three and Nine Months Ended
November 30, 2001 and 2000............................................................................ 4
Consolidated Statements of Cash Flows (Unaudited) -- Nine Months Ended November 30, 2001 and 2000........ 5
Notes to Consolidated Financial Statements (Unaudited)................................................... 6
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 9
PART II -- OTHER INFORMATION
Other Information........................................................................................ 13
SIGNATURES............................................................................................... 15
2
ITEM 1. FINANCIAL STATEMENTS.
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
NOVEMBER 30, FEBRUARY 28,
2001 2001
------------------ ------------------
Current assets:
Cash.................................................................... $ 1,082,000 $ 1,186,000
Accounts receivable, less allowance for doubtful accounts of $1,161,000
at November 30, 2001 and $2,175,000 at February 28, 2001............. 31,403,000 10,254,000
Inventories............................................................. 28,165,000 41,651,000
Deferred income taxes................................................... 6,915,000 6,915,000
Prepaid expenses and other current assets............................... 2,803,000 4,805,000
------------------ ------------------
Total current assets.......................................... 70,368,000 64,811,000
Other assets................................................................ 3,760,000 3,950,000
Property and equipment, net of accumulated depreciation of $6,596,000
at November 30, 2001 and $5,466,000 at February 28, 2001................ 7,435,000 7,705,000
------------------ ------------------
$ 81,563,000 $ 76,466,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit..................................................... $ 14,283,000 $ 14,585,000
Accounts payable........................................................ 7,164,000 2,522,000
Accrued liabilities..................................................... 5,523,000 4,051,000
Current portion, long-term debt and capital lease obligations........... 895,000 4,786,000
------------------ ------------------
Total current liabilities..................................... 27,865,000 25,944,000
------------------ ------------------
Long-term bank debt and capital lease obligations, net of current portion... 2,531,000 171,000
------------------ ------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized; 16,472,000
shares issued and outstanding at November 30, 2001 and
at February 28, 2001................................................. 165,000 165,000
Additional paid-in capital.............................................. 32,367,000 32,367,000
Retained earnings....................................................... 24,070,000 23,743,000
Accumulated other comprehensive income.................................. (457,000) (359,000)
------------------ ------------------
56,145,000 55,916,000
Unearned ESOP shares.................................................... (4,978,000) (5,565,000)
------------------ ------------------
Total stockholders' equity.................................... 51,167,000 50,351,000
------------------ ------------------
$ 81,563,000 $ 76,466,000
================== ==================
See accompanying notes to consolidated financial statements
3
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------------------- ---------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net sales.............................. $ 35,401,000 $ 42,424,000 $ 78,707,000 $ 100,844,000
Cost of sales.......................... 26,709,000 28,338,000 57,461,000 63,140,000
-------------- -------------- -------------- --------------
Gross profit......................... 8,692,000 14,086,000 21,246,000 37,704,000
Selling expenses....................... 4,404,000 6,436,000 9,753,000 15,119,000
General and administrative
expenses............................. 2,572,000 2,081,000 7,149,000 6,819,000
ESOP expense........................... 345,000 808,000 997,000 2,229,000
Research and development expenses 398,000 460,000 1,584,000 1,464,000
-------------- -------------- -------------- --------------
Operating income..................... 973,000 4,301,000 1,763,000 12,073,000
Interest expense....................... 328,000 799,000 1,052,000 1,474,000
-------------- -------------- -------------- --------------
Income before income taxes........... 645,000 3,502,000 711,000 10,599,000
Provision for income taxes............. 280,000 1,516,000 384,000 4,612,000
-------------- -------------- -------------- --------------
Net income............................. $ 365,000 $ 1,986,000 $ 327,000 $ 5,987,000
============== ============== ============== ==============
Basic earnings per share............... $ 0.02 $ 0.13 $ 0.02 $ 0.41
============== ============== ============== ==============
Diluted earnings per share............. $ 0.02 $ 0.13 $ 0.02 $ 0.38
============== ============== ============== ==============
Weighted average number of shares
outstanding-- basic.................. 15,129,000 14,717,000 15,060,000 14,649,000
============== ============== ============== ==============
Weighted average number of shares
outstanding-- diluted................ 15,166,000 15,679,000 15,135,000 15,810,000
============== ============== ============== ==============
See accompanying notes to consolidated financial statements
4
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
NOVEMBER 30,
-------------------------------------------
2001 2000
------------------ ------------------
Cash flows from operating activities:
Net income.............................................................. $ 327,000 $ 5,987,000
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization........................................... 1,606,000 1,391,000
ESOP contribution....................................................... 997,000 2,229,000
Allowance for doubtful accounts......................................... 986,000 444,000
Changes in assets and liabilities:
Increase in accounts receivable...................................... (22,135,000) (29,608,000)
Decrease (increase) in inventories................................... 13,486,000 (15,086,000)
Decrease in prepaid expenses and other assets........................ 1,716,000 410,000
Increase in accounts payable......................................... 4,642,000 3,122,000
Increase (decrease) in accrued liabilities and income taxes payable.. 1,062,000 (708,000)
------------------ ------------------
Net cash provided by (used in) operating activities........... 2,687,000 (31,819,000)
------------------ ------------------
Cash flows from investing activities:
Capital expenditures.................................................... (860,000) (2,212,000)
------------------ ------------------
Net cash used in investing activities......................... (860,000) (2,212,000)
------------------ ------------------
Cash flows from financing activities:
Net borrowings (payments) under bank line of credit..................... (302,000) 31,173,000
Borrowing on long-term note............................................. 1,151,000 --
Payments on long-term bank note......................................... (2,480,000) (250,000)
Payments under capital lease obligations................................ (187,000) (295,000)
Exercise of stock options............................................... -- 1,043,000
------------------ ------------------
Net cash provided by (used in) financing activities........... (1,817,000) 31,671,000
------------------ ------------------
Effect of exchange rate changes on cash..................................... (113,000) 421,000
------------------ ------------------
Net increase (decrease) in cash............................................. (104,000) (1,939,000)
Cash at beginning of period................................................. 1,186,000 2,180,000
------------------ ------------------
Cash at end of period....................................................... $ 1,082,000 $ 241,000
================== ==================
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 November 30, 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. Availability under the
U.S. Revolving Loan at November 30, 2001 was approximately $10,000,000. 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. At November 30, 2001 the Company was not in
compliance with certain financial covenants included in the U.S. Credit
Agreement. The Company is currently in negotiations with the bank to amend the
U.S. Credit Agreement and reset certain financial covenants. 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 (collectively, the "European Loans"). Outstanding amounts on the
European 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:
NOVEMBER 30, FEBRUARY 28,
2001 2001
--------------- ---------------
Raw materials.............................. $ 10,222,000 $ 9,915,000
Work-in-process............................ 4,164,000 7,919,000
Finished goods............................. 13,779,000 23,817,000
--------------- ---------------
$ 28,165,000 $ 41,651,000
=============== ===============
Included in prepaid expenses and other current assets at November 30,
2001 is $1,790,000 of net prepaid income taxes.
6
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
D. COMMITMENTS AND CONTINGENCIES
In October 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 alleges
that a number of Tasco's and Celestron's consumer telescopes willfully infringe
one of the Company's U.S. patents. In addition to seeking compensation for
damages incurred, the suit seeks to enjoin Tasco and Celestron from continuing
to manufacture or sell products that infringe the Company's patent. Tasco and
Celestron filed an answer and a counterclaim which deny the Company's
allegations. The counterclaim also alleges, among other things, that the Company
is infringing a Celestron design patent. 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 3, 1998 a complaint was filed against the Company by Reddwarf
Starware, LLC, 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 had not infringed the patent and a motion requesting summary judgment
that the patent was 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 had 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. On October 23, 2001, the Supreme Court denied the petition for a writ of
certiorari thus concluding the matter in the Company's favor.
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 November 30, 2001
and 2000, respectively.
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
--------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net income............................. $ 365,000 $ 1,986,000 $ 327,000 $ 5,987,000
============== ============== ============== ==============
Shares outstanding-- basic............. 15,129,000 14,717,000 15,060,000 14,649,000
Effect of dilutive securities:
Stock options....................... 37,000 962,000 75,000 1,161,000
-------------- -------------- -------------- --------------
Shares outstanding-- diluted........... 15,166,000 15,679,000 15,135,000 15,810,000
============== ============== ============== ==============
Net income-- basic..................... $ 0.02 $ 0.13 $ 0.02 $ 0.41
Net income-- diluted................... $ 0.02 $ 0.13 $ 0.02 $ 0.38
Shares issued and outstanding as disclosed on the face of the balance
sheet differ from the number of shares used in the calculation of earnings per
share on the income statement due to the accounting for leveraged shares held by
the Company's Employee Stock ownership Plan.
7
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 was $293,000 and $229,000, for the three and nine
months ended November 30, 2001, respectively. The difference from net income as
reported is the change in the cumulative currency translation adjustment.
G. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
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 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, 2001 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 2000
Net sales for the third quarter of fiscal 2002 were $35.4 million
compared to $42.4 million for the third quarter of fiscal 2001, a decrease of
16.6%. Sales of the Company's manufactured telescope product lines from advanced
higher-priced telescopes to the less-expensive models, combined with reduced
sales of related telescope accessories, were down more than $10 million from the
prior year. Offsetting that decrease were increased sales of foreign-supplied
small telescopes and binoculars as well as slightly increased sales at the
Company's German subsidiary.
Gross profit decreased from $14.1 million (33.2% of net sales) for the
third quarter of fiscal 2001 to $8.7 million (24.6% of net sales) for the third
quarter of fiscal 2002, a decrease of 38.3%. Lower sales volume and lower profit
margins combined to lower gross profit in the third quarter of fiscal 2002.
Competitive pricing pressures in the U.S. and Europe, and lower sales of
advanced telescopes and accessories, both of which typically have higher profit
margins than many of the Company's other product lines, contributed to the lower
profit margins.
Selling expenses decreased from $6.4 million (15.2% of net sales) for
the third quarter of fiscal 2001 to $4.4 million (12.4% of net sales) for the
third quarter of fiscal 2002, a decrease of 31.6%. This decrease was primarily
due to decreases in advertising and marketing expenses. For the remainder of the
2002 fiscal year, 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 increased from $2.1 million (4.9%
of net sales) for the third quarter of fiscal 2001, to $2.6 million (7.3% of net
sales) for the third quarter of fiscal 2001, an increase of 23.6%. This increase
was principally due to increases in performance based compensation costs.
ESOP contribution expense decreased from $808,000 for the third quarter
of fiscal 2001 to $345,000 for the third quarter of fiscal 2002, a decrease of
57.3%. The decrease in this non-cash charge was principally due to decreases in
the average market price of the Company's common 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 decreased from $460,000 (1.1% of net
sales) for the third quarter of fiscal 2001 to $398,000 for the third quarter of
fiscal 2002, a decrease of 13.5%. 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.
During the third quarter of fiscal 2002, this pursuit led to continued
engineering expenditure increases over the prior year due to increased headcount
and outside consulting costs. However, research and development expenses
decreased overall because a portion (approximately $500,000) of the expenses
incurred were reimbursed by a customer of the Company on a non-contingent basis.
Interest expense decreased from $799,000 for the third quarter of
fiscal year 2001 to $328,000 for the third quarter of fiscal 2002. This decrease
was principally due to lower average bank borrowings during the current year
quarter.
9
NINE MONTHS ENDED NOVEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
NOVEMBER 30, 2000
Net sales for the nine months ended November 30, 2001 were $78.7
million compared to $100.8 million for the comparable prior year period, a
decrease of 22.0%. Softness in the consumer market as well as competitive
pricing pressures for the first nine 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
foreign-sourced less-expensive telescopes (down approximately $10 million), as
well as lower sales of the Company's manufactured telescope product lines from
advanced higher-priced telescopes to the less-expensive models, combined with
related telescope accessories (down more than $10 million). Sales of several of
the more advanced telescope products were down as the Company prepared for the
introduction of two entirely new product lines for the advanced amateur
astronomer. Those new products are expected to begin to ship in the Company's
fourth quarter of fiscal year 2002.
Gross profit decreased from $37.7 million (37.4% of net sales) for the
nine months ended November 30, 2000 to $21.2 million (27.0% of net sales) for
the comparable current year period, a decrease of 43.7%. Lower sales volume and
lower profit margins combined to lower gross profit for the nine months ended
November 30, 2001. Competitive pricing pressures in the U.S. and Europe, and
lower sales of advanced telescopes and accessories, both of which typically have
higher profit margins than many of the Company's other product lines,
contributed to the lower profit margins.
Selling expenses decreased from $15.1 million (15.0 % of net sales) for
the nine months ended November 30, 2000 to $9.8 million (12.4% of net sales) for
the comparable current year period, a decrease of 35.5%. This decrease was
primarily due to decreases in advertising and marketing expenses. For the
remainder of the 2002 fiscal year, 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 increased slightly from $6.8
million (6.8% of net sales) for the nine months ended November 30, 2000 to $7.1
million (9.1% of net sales) for the comparable current year period, an increase
of 4.8%. This increase 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 $2.2 million for the nine
months ended November 30, 2000 to $997,000 for the comparable current year
period, a decrease of 55.3%. The decrease in this non-cash charge was due to
decreases in the average market price of the Company's common 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 $1.5 million (1.5% of
net sales) for the nine months ended November 30, 2000 to $1.6 million (2.0% of
net sales) for the comparable current year period, an increase of 8.2%. 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. During the nine months ended November 30, 2001, this
pursuit led to continued engineering expenditure increases over the prior year
due to increased headcount and outside consulting costs. However, a portion
(approximately $500,000) of the expenses incurred were reimbursed by a customer
of the company on a non-contingent basis resulting in only a slight increase in
research and development expenses overall as compared to the prior year.
Interest expense decreased from $1.5 million for the nine months ended
November 30, 2000 to $1.1 million for the comparable current year period, a
decrease of 28.6%. The decrease was principally due to lower average bank
borrowings during the current period as compared to the prior period. Lower
interest rates during the current period also affected the interest expense.
The income tax provision increased to 54.0% of income before income
taxes for the nine months ended November 30, 2001 from 43.5% in the prior year
period. The increase in the rate was due to the tax effect of the non-deductible
portion of the ESOP charge.
10
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended November 30, 2001 the Company funded its
operations with internally generated cash flow. Cash flow from operating
activities was $2.7 million after adjusting net income 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 $13.5 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 many 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 $42.5 million at November 30, 2001, compared to $38.9 million at
February 28, 2001. Working capital requirements fluctuate during the year due to
the seasonal nature of the Company's 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. Availability under the
U.S. Revolving Loan at December 31, 2001 was approximately $6,000,000. 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. At November 30, 2001 the Company was not in
compliance with certain financial covenants included in the U.S. Credit
Agreement. The Company is currently in negotiations with the bank to amend the
U.S. Credit Agreement and reset certain financial covenants. 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 (collectively, the "European
Loans"). Outstanding amounts on the European Loans bear interest at the bank's
base rate plus or minus applicable margins.
Capital expenditures, including financed purchases of equipment,
aggregated $860,000 and $2,212,000 for the nine months ended November 30, 2001
and 2000, respectively. The Company had no material capital expenditure
commitments at November 30, 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 ("SFAS") No. 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.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement will be
effective for the first interim period of fiscal years beginning after December
31, 2001. The Company is currently evaluating the impact of adopting SFAS No.
143. In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement is effective for fiscal years beginning after June 15, 2002. The
Company is currently evaluating the impact of adopting SFAS No. 144.
11
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 consumer 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.
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 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.
Historically, the Company has not entered 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.
12
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"; collectively
"Defendants"), 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 C 01-976 (GLT) (MLGx)),
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, 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. 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.
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. On October 23,
2001, the United States Supreme Court denied Reddwarf's petition for a writ of
certiorari thus concluding the matter in the Company's favor.
The Company is also involved from time to time in litigation incidental
to its business. Management believes that the outcome of such current litigation
will not have a material adverse effect on the Company.
13
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(a) Exhibits filed with this Form 10-Q.
None
6(b) Reports on Form 8-K.
None.
14
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: January 14, 2002
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 January 14, 2002
- ----------------------------------- Executive Officer
John C. Diebel (Principal Executive Officer)
/s/ STEVEN G. MURDOCK Director, President, January 14, 2002
- ----------------------------------- Chief Operating Officer and Secretary
Steven G. Murdock
/s/ BRENT W. CHRISTENSEN Vice President, Finance and January 14, 2002
- ----------------------------------- Chief Financial Officer
Brent W. Christensen (Principal Financial and Accounting Officer)
/s/ JOSEPH A. GORDON, JR. Director and Senior Vice President January 14, 2002
- ----------------------------------- of North American Sales
Joseph A. Gordon, Jr.
/s/ TIMOTHY C. MCQUAY Director January 14, 2002
- -----------------------------------
Timothy C. McQuay
- ----------------------------------- Director
Harry L. Casari
- ----------------------------------- Director
Michael P. Hoopis
- ----------------------------------- Director
Vern L. Fotheringham
15