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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 QUARTERLY PERIOD ENDED MAY 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22183
----------------
MEADE INSTRUMENTS CORP.
-----------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-2988062
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6001 OAK CANYON, IRVINE, CA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 451-1450
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Number of shares of common stock outstanding as of July 1,, 2004 is
19,988,857, $0.01 par value per share.
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MEADE INSTRUMENTS CORP.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page No.
--------
Consolidated Balance Sheets (Unaudited) -- May 31, 2004 and
February 29, 2004................................................... 1
Consolidated Statements of Operations (Unaudited) -- Three Months
Ended May 31, 2004 and 2003......................................... 2
Consolidated Statements of Cash Flows (Unaudited) -- Three Months
Ended May 31, 2004 and 2003......................................... 3
Notes to Consolidated Financial Statements (Unaudited)................. 4
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 8
Quantitative and Qualitative Disclosures about Market Risk............. 10
Controls and Procedures................................................ 11
PART II -- OTHER INFORMATION
Legal Proceedings...................................................... 12
Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities.................................................... 13
Defaults Upon Senior Securities........................................ 13
Submission of Matters to a Vote of Security Holders.................... 13
Other Information...................................................... 13
Exhibits and Reports on Form 8-K....................................... 13
Signatures............................................................. 15
i
ITEM 1. FINANCIAL STATEMENTS.
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
MAY 31, FEBRUARY 29,
2004 2004
------------- -------------
Current assets:
Cash ................................................................ $ 5,367,000 $ 7,806,000
Accounts receivable, less allowance for doubtful accounts of $810,000
at May 31, 2004 and $704,000 at February 29, 2004 ................ 20,107,000 22,462,000
Inventories ......................................................... 42,394,000 39,777,000
Deferred income taxes ............................................... 8,153,000 7,888,000
Prepaid expenses and other current assets ........................... 877,000 491,000
------------- -------------
Total current assets ...................................... 76,898,000 78,424,000
Goodwill ................................................................ 1,548,000 1,548,000
Acquisition-related intangible assets, net .............................. 3,650,000 3,742,000
Property and equipment, net ............................................. 4,295,000 4,551,000
Other assets, net ....................................................... 177,000 297,000
------------- -------------
$ 86,568,000 $ 88,562,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ................................................. $ 4,877,000 $ 5,059,000
Accounts payable .................................................... 6,148,000 5,319,000
Accrued liabilities ................................................. 6,937,000 6,884,000
Income taxes payable ................................................ 2,001,000 3,059,000
Current portion, long-term bank debt ................................ 582,000 580,000
------------- -------------
Total current liabilities ................................. 20,545,000 20,901,000
Long-term bank debt ..................................................... 1,559,000 1,729,000
Deferred income taxes ................................................... 1,054,000 1,054,000
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized;
19,989,000 shares issued and outstanding at May 31, 2004 and
at February 29, 2004 ............................................. 200,000 200,000
Additional paid-in capital .......................................... 40,447,000 40,445,000
Retained earnings ................................................... 24,732,000 25,891,000
Accumulated other comprehensive income .............................. 461,000 882,000
------------- -------------
65,840,000 67,418,000
Unearned ESOP shares ................................................ (2,430,000) (2,540,000)
------------- -------------
Total stockholders' equity ................................ 63,410,000 64,878,000
------------- -------------
$ 86,568,000 $ 88,562,000
============= =============
See accompanying notes to consolidated financial statements.
1
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
-----------------------------
2004 2003
------------- -------------
Net sales ............................................................ $ 19,617,000 $ 24,491,000
Cost of sales ........................................................ 14,912,000 18,758,000
------------- -------------
Gross profit ..................................................... 4,705,000 5,733,000
Selling expenses ..................................................... 3,402,000 3,327,000
General and administrative expenses .................................. 2,476,000 2,669,000
ESOP contribution expense ............................................ 103,000 169,000
Research and development expenses .................................... 525,000 534,000
------------- -------------
Operating loss ................................................... (1,801,000) (966,000)
Interest expense ..................................................... 151,000 216,000
------------- -------------
Loss before income taxes ............................................. (1,952,000) (1,182,000)
Benefit for income taxes ............................................. (793,000) (470,000)
------------- -------------
Net loss ............................................................. $ (1,159,000) $ (712,000)
============= =============
Basic and diluted loss per share ..................................... $ (0.06) $ (0.04)
============= =============
Weighted average number of shares outstanding - basic and diluted .... 19,232,000 18,788,000
============= =============
See accompanying notes to consolidated financial statements.
2
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
---------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss ................................................................ $(1,159,000) $ (712,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ........................................... 490,000 629,000
ESOP contribution ....................................................... 103,000 169,000
Allowance for doubtful accounts ......................................... 107,000 47,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ........................... 2,228,000 (1,100,000)
(Increase) decrease in inventories ................................... (2,708,000) 1,625,000
Increase in prepaid and deferred taxes, expenses and other assets .... (148,000) (183,000)
Increase in accounts payable ......................................... 850,000 1,083,000
Decrease in accrued liabilities ...................................... (548,000) (1,970,000)
Decrease in income taxes payable ..................................... (1,045,000) --
------------ ------------
Net cash used in operating activities ......................... (1,830,000) (412,000)
------------ ------------
Cash flows from investing activities:
Capital expenditures .................................................... (168,000) (127,000)
------------ ------------
Net cash used in investing activities ......................... (168,000) (127,000)
------------ ------------
Cash flows from financing activities:
Net (payments) borrowings on bank line of credit ........................ (182,000) 1,693,000
Payments on long-term debt .............................................. (144,000) (113,000)
Payments under capital lease obligations ................................ -- (29,000)
------------ ------------
Net cash provided by financing activities ..................... (326,000) 1,551,000
------------ ------------
Effect of exchange rate changes on cash ..................................... (115,000) 148,000
------------ ------------
Net (decrease) increase in cash ............................................. (2,439,000) 1,160,000
Cash at beginning of period ................................................. 7,806,000 2,445,000
------------ ------------
Cash at end of period ....................................................... $ 5,367,000 $ 3,605,000
============ ============
See accompanying notes to consolidated financial statements.
3
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. THE CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED BY THE COMPANY AND
ARE UNAUDITED.
In management's opinion, the information and amounts furnished in this
report reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for the fair presentation of the financial position and
results of operations for the interim periods presented. These financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the fiscal year ended February 29, 2004.
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 May 31, 2004 and 2003, respectively, are not
necessarily indicative of the operating results for the entire fiscal year.
B. STOCK BASED COMPENSATION
The Company accounts for employee stock-based compensation in
accordance with the intrinsic value method described in Accounting Principles
Board Opinion No. 25 and related interpretations. The Company has adopted the
disclosure only provisions of SFAS No. 123. Accordingly, no compensation cost
has been recognized for the fixed stock option plans. Had compensation cost for
the Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans, consistent with the
method prescribed by SFAS No. 123, the Company's loss and loss per share would
have been increased to the pro forma amounts indicated below.
THREE MONTHS ENDED MAY 31,
2004 2003
--------------- ---------------
Reported net loss................................... $ (1,159,000) $ (712,000)
Compensation cost................................... (236,000) (257,000)
--------------- ---------------
Pro forma net loss.................................. $ (1,395,000) $ (969,000)
=============== ===============
Reported loss per share - basic and diluted......... $ (0.06) $ (0.04)
=============== ===============
Pro forma loss per share - basic and diluted........ $ (0.07) $ (0.05)
=============== ===============
The fair value of the Company's stock options used to compute pro forma
net income and earnings per share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with the following
assumptions:
THREE MONTHS ENDED MAY 31,
2004 2003
--------------- ---------------
Weighted average expected life (years).............. 6.0 6.0
Volatility.......................................... 69.3% 100.9%
Risk-free interest rate............................. 3.01% 3.75%
Expected dividends.................................. None None
Weighted average fair value of options granted...... $ 1.90 $ 2.19
4
C. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of inventories is as follows:
MAY 31, FEBRUARY 29,
2004 2004
-------------- --------------
Raw materials................................. $ 6,933,000 $ 7,691,000
Work-in-process............................... 4,833,000 6,193,000
Finished goods................................ 30,628,000 25,893,000
-------------- --------------
$ 42,394,000 $ 39,777,000
============== ==============
The composition of acquisition-related intangible assets is as follows:
MAY 31, FEBRUARY 29,
2004 2004
---------------- ----------------
Brand names - non-amortizing................................... $ 2,041,000 $ 2,041,000
--------------- ----------------
Trademarks..................................................... 1,398,000 1,398,000
Customer relationships......................................... 1,390,000 1,390,000
Accumulated amortization....................................... (1,179,000) (1,087,000)
--------------- ----------------
Total amortizing acquisition-related intangible assets...... 1,609,000 1,701,000
--------------- ----------------
Total acquisition-related intangible assets................. $ 3,650,000 $ 3,742,000
=============== ===============
Amortization of trademarks and customer relationships over the next
five fiscal years is estimated as follows:
FISCAL YEAR AMOUNT
----------------------- -------------------
2005........... $ 367,000
2006........... 367,000
2007........... 139,000
2008........... 139,000
2009........... 139,000
The Company accounts for goodwill and acquisition-related intangible
assets in accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") which requires that
goodwill and identifiable assets determined to have an indefinite life no longer
be amortized, but instead be tested for impairment at least annually.
D. COMMITMENTS AND CONTINGENCIES
In 2001 and 2002, the Company filed suits against Tasco Sales, Inc.
("Tasco") and Celestron International, Inc. ("Celestron"), charging the two
companies with patent infringement and unfair competition. The complaints
alleged that a number of Tasco's and Celestron's consumer telescopes willfully
infringe certain of the Company's U.S. patents. Tasco and Celestron filed
answers and certain counterclaims denying the Company's allegations. The
counterclaims also alleged, among other things, that the Company infringed
certain Celestron patents. On July 8, 2004, the Company announced that it had
reached an agreement, effective May 10, 2004, under which all outstanding
litigation between the parties had been resolved.
As stipulated in the agreement, Celestron acknowledges the validity of
Meade's claims to two utility patents ("Meade's Patents"), including the
"level-North" alignment technology for computerized telescopes, as well as a
patented architecture by which several microprocessors in a computerized
telescope optimally communicate with one another. Also as stipulated in the
agreement, Meade acknowledges the validity of Celestron's claim to two design
patents and one utility patent covering certain telescope tripods and mounts
("Celestron's Patents"). Celestron also transfers to Meade ownership of a
patent, originally claimed by Celestron, covering "level-North" technology.
5
The settlement includes a licensing agreement under which, effective
August 15, 2004, and continuing for the life of the Meade Patents, Meade will
grant Celestron a non-exclusive license to utilize the patents, and Celestron
will pay to Meade royalties equal to the greater of $100-per-unit or 8% of
Celestron's net revenue from sales of all telescopes that utilize the
"level-North" technology. Celestron in turn grants Meade royalty-free,
non-exclusive licenses for the rights to use the designs and technology covered
by Celestron's Patents.
The agreement further stipulates that the parties will promptly dismiss
with prejudice all claims and counterclaims in the pending litigation between
them, including for past damages.
The Company is also involved from time to time in litigation incidental
to its business. Management believes that the outcome of such litigation will
not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
E. NET INCOME (LOSS) PER SHARE
Basic earnings (loss) per share amounts exclude the dilutive effect of
potential shares of common stock. Basic earnings (loss) per share is based upon
the weighted-average number of shares of common stock outstanding. Diluted
earnings (loss) per share is based upon the weighted-average number of shares of
common stock and dilutive potential shares of common stock outstanding for each
period presented. Potential shares of common stock consist of outstanding stock
options which are included under the treasury stock method. Due to the net loss
in each quarter presented, potential shares of common stock of 224,000 and
85,000 related to stock options have been excluded from diluted weighted average
shares of common stock for the three months ended May 31, 2004 and 2003,
respectively, as the effect would be anti-dilutive.
F. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as a change in the equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources and, at May 31, 2004, includes foreign
currency translation adjustments and adjustments to the fair value of highly
effective derivative instruments. For the periods ended May 31, 2004 and 2003,
respectively, the Company had other comprehensive income (loss) as follows:
THREE MONTHS ENDED
MAY 31,
------------------------------
2004 2003
-------------- --------------
Net loss........................................... $ (1,159,000) $ (712,000)
Currency translation adjustment.................... (31,000) 362,000
Change in fair value of foreign currency forward
contracts, net of tax........................... (398,000) (876,000)
Unrealized loss in marketable securities,
net of tax...................................... -- (97,000)
Change in fair value of interest rate swap......... 8,000 6,000
-------------- --------------
Total other comprehensive loss..................... $ (1,580,000) $ (1,317,000)
============== ==============
6
G. PRODUCT WARRANTIES
The Company provides reserves for the estimated cost of product
warranty-related claims at the time of sale, and periodically adjusts the
provision to reflect actual experience. The amount of warranty liability accrued
reflects management's best estimate of the expected future cost of honoring
Company obligations under its warranty plans. Additionally, from time to time,
specific warranty accruals may be made if unforeseen technical problems arise.
Meade and Bresser branded products, principally telescopes and binoculars, are
generally covered by a one-year limited warranty. Many of the Simmons products,
principally riflescopes and binoculars, have lifetime limited warranties.
Changes in the warranty liability, which is included as a component of accrued
liabilities on the accompanying Consolidated Balance Sheets, follows.
THREE MONTHS ENDED
MAY 31,
2004 2003
-------------- --------------
Beginning balance............................ $ 1,427,000 $ 1,794,000
Warranty accrual............................. 130,000 123,000
Labor and material usage..................... (353,000) (173,000)
-------------- --------------
Ending balance............................... $ 1,204,000 $ 1,744,000
============== ==============
H. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company utilizes a variety of derivative financial instruments to
manage its currency exchange rate and interest rate risks as summarized below.
The Company does not enter into these arrangements for trading or speculation
purposes.
MAY 31, 2004 FEBRUARY 29, 2004
------------------------- -------------------------
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ----------- ------------ -----------
Interest rate swap agreement $ 980,000 $ (9,000) $ 1,085,000 $ (17,000)
Forward currency contracts $ 3,000,000 $ (663,000) -- --
At May 31, 2004, the fair values of forward currency contracts and
interest rate swap agreements are recorded in accrued liabilities on the
accompanying Consolidated Balance Sheets. Changes in the fair value of the
interest rate swap agreement and the cash flow forward currency contracts have
been recorded as a component of other comprehensive income, net of tax, as these
items have been designated and qualify as cash flow hedges. The settlement dates
on the forward currency contracts vary based on the underlying instruments
through February 2005.
I. BANK BORROWINGS
At May 31, 2004, the Company was in compliance with all restrictive
covenants and required ratios under its U.S. credit agreement, with the
exception of its U.S. EBITDA requirement. On July 9, 2004 the Company executed
the Second Amendment to Amended and Restated Credit Agreement (the "Amendment").
The Amendment extends the term of the facility to September 30, 2007, eliminates
the U.S. EBITDA covenant, adds a U.S. fixed charge coverage ratio requirement,
and makes several other changes, principally improving the facility's pricing,
availability calculations and reporting requirements. The Company is required to
report its covenant calculations to the bank for the quarter ended May 31, 2004
based upon the terms of the Amendment. The Company was in compliance with all
restrictive covenants and required ratios as of May 31, 2004 as prescribed in
the Amendment.
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 MAY 31, 2004 COMPARED TO THREE MONTHS ENDED MAY 31,
2003
Net sales for the first quarter of fiscal 2005 were $19.6 million
compared to $24.5 million for the first quarter of fiscal 2004, a decrease of
19.9%. The decrease in net sales from the prior year was partly due to a
decrease of over $2 million in sales of the Company's mid-priced and
higher-priced telescopes. Management believes that the Mars opposition (a
celestial event that occurred in the second quarter of last fiscal year) may
have had a positive effect on first quarter sales of such telescopes in the
prior year that was not repeated during the current year's first quarter. In
addition, sales of such telescopes were strong in the fourth quarter of fiscal
2004 due, in part, to certain promotional programs which management believes may
have affected sales in the first quarter of the current year. Also included in
the prior year's net sales was nearly $3 million in discontinued product sales
from the Simmons subsidiary. Those sales were not repeated during the current
year quarter. The Simmons acquisition was completed in October 2002. Offsetting
those decreases was an increase in sales of over $1 million primarily comprised
of sales of the Company's binocular with an integrated digital camera.
Gross profit decreased from $5.7 million (23.4% of net sales) for the
first quarter of fiscal 2004 to $4.7 million (24.0% of net sales) for the first
quarter of fiscal 2005, a decrease of 17.9%. The decrease followed the decrease
in net sales for the quarter. The increase in gross margin (gross profit as a
percent of net sales) was principally due to higher average selling prices on
many of the products sold during the quarter. Unit price increases and the sale
of first line product at Simmons (as opposed to the significant sales of
close-out and discontinued product in the prior year) contributed to the
slightly higher average selling prices.
Selling, general and administrative expenses decreased from $6.0
million (24.5% of net sales) for the first quarter of fiscal 2004 to $5.9
million (30.0% of net sales) for the first quarter of fiscal 2005, a decrease of
2.0%. There were no significant fluctuations in the selling, general and
administrative accounts of the Company, resulting in selling, general and
administrative expenses remaining relatively flat as compared to the prior year.
ESOP contribution expense decreased from $0.2 million for the first
quarter of fiscal 2004 to $0.1 million for the first quarter of fiscal 2005, a
decrease of 39.1%. The decrease in this non-cash charge was principally due to a
decrease in the number of shares allocated to the Employee Stock Ownership Plan
during the quarter as compared to the prior year. The non-cash ESOP contribution
expense may fluctuate as the number of shares allocated and the market value of
the Company's common stock changes.
Research and development expenses remained flat at $0.5 million (2.2%
and 2.7% of net sales for the prior and current year quarter, respectively) in
each of the periods presented. Research and development expenses continue to be
focused on new product development and product improvement in the Company's core
consumer product categories.
Interest expense remained relatively flat, at approximately $0.2
million in each of the quarters presented. Lower average borrowings were the
principal reason the expense decreased slightly from the prior year.
8
SEASONALITY
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, the timing
and extent of research and development expenses, the timing and extent of
product development costs and the timing and extent of advertising expenditures.
In addition, a substantial portion of the Company's net sales and operating
income typically occurs in the third quarter of the Company's fiscal year
primarily due to disproportionately higher customer demand for less-expensive
telescopes during the holiday season. The Company continues to experience
significant sales to mass merchandisers. Mass merchandisers, along with
specialty retailers, purchase a considerable amount of their inventories to
satisfy such seasonal customer demand. These purchasing patterns have caused the
Company to increase its level of inventory during its second and third quarters
in response to such demand or anticipated demand. As a result, the Company's
working capital requirements have correspondingly increased at such times.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended May 31, 2004 the Company funded its
operations principally with cash on hand. The net loss for the period adjusted
for non-cash charges was principally offset by a decrease in accounts receivable
and an increase in accounts payable. Additional cash was used principally
through an increase in inventories and a decrease in income taxes payable. The
changes in the inventories and receivables were influenced by lower sales during
the quarter. The change in accounts payable principally reflected cash
management and the change in income taxes payable reflects the net loss for the
period. Net working capital totaled approximately $56.4 million at May 31, 2004,
compared to $57.5 million at February 29, 2004. Working capital requirements
fluctuate during the year due to the seasonal nature of the business. These
requirements are typically financed through a combination of internally
generated cash flow from operating activities and short-term bank borrowings.
The Company continues to depend on operating cash flow and availability
under its bank lines of credit to provide short-term liquidity. Availability
under its bank lines of credit at May 31, 2004 was approximately $14.0 million.
At May 31, 2004, the Company was in compliance with all restrictive covenants
and required ratios under its U.S. credit agreement, with the exception of its
U.S. EBITDA requirement. On July 9, 2004 the Company executed the Second
Amendment to Amended and Restated Credit Agreement (the "Amendment"). The
Amendment extends the term of the facility to September 30, 2007, eliminates the
U.S. EBITDA covenant, adds a U.S. fixed charge coverage ratio requirement, and
makes several other changes, principally improving the facility's pricing,
availability calculations and reporting requirements. The Company is required to
report its covenant calculations to the bank for the quarter ended May 31, 2004
based upon the terms of the Amendment. The Company was in compliance with all
restrictive covenants and required ratios as of May 31, 2004 as prescribed in
the Amendment. In the event the Company's plans require more capital than is
presently anticipated, additional sources of liquidity such as debt or equity
financings, may be required to meet its capital needs. There can be no assurance
that such additional sources of capital will be available on reasonable terms,
if at all. However, management believes that operating cash flow and bank
borrowing capacity in connection with the Company's business should provide
sufficient liquidity for the Company's obligations for at least the next twelve
months.
Capital expenditures, including financed purchases of equipment,
aggregated $0.2 million and $0.1 million for the three month periods ended May
31, 2004 and 2003, respectively. The Company had no material capital expenditure
commitments at May 31, 2004.
9
FORWARD-LOOKING INFORMATION
The preceding "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section contains various "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
which represent the Company's reasonable judgment concerning the future and are
subject to risks and uncertainties that could cause the Company's actual
operating results and financial position to differ materially, including the
following: the Company's ability to expand the markets for telescopes,
binoculars, riflescopes, microscopes, night vision and other optical products;
the Company's ability to continue to develop and bring to market new and
innovative products that will be accepted by consumers; the Company's ability to
integrate, develop and grow the Simmons business; the Company's ability to
further develop its wholly owned manufacturing facility in Mexico in combination
with its existing manufacturing capabilities; the Company expanding its
distribution network; the Company's ability to further develop the business of
its European subsidiary; the Company's ability to recognize any benefits from
its engineering office in China; the Company experiencing fluctuations in its
sales, gross margins and profitability from quarter to quarter consistent with
prior periods; the Company's expectation that 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 certain industrial applications such as 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:
Our business is vulnerable to changing economic conditions, including:
o a decline in general economic conditions;
o uncertainties affecting consumer spending; and
o changes in interest rates causing a reduction of investment income or
in the value of market interest rate sensitive instruments.
Our intellectual property rights are subject to risks, including:
o the potential that we may be unable to obtain and maintain patents and
copyrights to protect our proprietary technologies;
o competitors' infringement upon Meade's existing and future
intellectual property; and
o competitors' intellectual property that may restrict our ability to
compete effectively.
Our business is subject to other risks, including:
o a general decline in demand for the Company's products;
o an inability to continue to design and manufacture products that will
achieve and maintain commercial success;
o the potential that we may fail to penetrate the binocular and
riflescope markets and achieve meaningful sales;
o any significant interruption of our manufacturing abilities in our
domestic or Mexican facilities or in any of our suppliers located in
the Far East;
o greater than anticipated competition;
o any loss of, or the failure to replace, any significant portion of the
sales made to any significant customer of the Company; and
o increasing ESOP charges in the event the market price of the Company's
stock increases.
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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 countries and is primarily exposed to currency
exchange-rate risk with respect to its transactions and net assets denominated
in the Euro. Business activities in various currencies expose the Company to the
risk that the eventual net United States dollar cash inflows resulting from
transactions with foreign customers and suppliers denominated in foreign
currencies may be adversely affected by changes in currency exchange rates. In
prior years foreign currency fluctuations have not had a material impact on
Meade's revenues or results of operations. There can be no assurance that
European or other 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, financial
condition or cash flows.
The Company has adopted a hedging program to manage its foreign
currency exchange rate and interest rate risks. Upon continuing evaluation and
when deemed appropriate by management, the Company may enter into hedging
instruments to manage its foreign currency exchange and interest rate risks.
Under the terms of its credit agreement, the Company was required to
enter into an interest-rate swap to convert the variable interest rate on its
U.S. Term Loan to a fixed interest rate. The resulting cost of funds (7.9% per
annum) is currently higher than that which would have been available if the
variable rate had been applied during the period. Under the interest-rate swap
contract, the Company has agreed with the bank to exchange, at specified
intervals, the difference between variable-rate and fixed-rate interest amounts,
calculated by reference to agreed-upon notional amounts. The change in the fair
value of the interest rate swap for the period ended May 31, 2004 was an
unrealized gain of $8,000 which is included in other comprehensive income for
the period ended May 31, 2004.
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.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's chief
executive officer and chief financial officer have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act). These disclosure controls
and procedures are designed to ensure that the information required to be
disclosed by the Company in the reports it files under the Exchange Act is
gathered, analyzed and disclosed with adequate timeliness, accuracy and
completeness.
The Company's chief executive officer and chief financial officer
concluded, based on their evaluation, that the Company's disclosure controls and
procedures are effective for the Company, taking into consideration the size and
nature of the Company's business and operations.
No change in the Company's internal control over financial reporting
occurred during the last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 17, 2001, the Company filed suit ("the '376 lawsuit")
against Tasco Sales, Inc. ("Tasco") and Celestron International, Inc.
("Celestron 1"), charging the two companies with patent infringement and unfair
competition. The complaint, filed in the United States District Court, Central
District of California, Southern Division (Case No. SA-CV 01-976 (GLT)), alleged
that Tasco and Celestron 1 willfully infringed Meade's Patent No. 6,304,376,
entitled "Fully Automated Telescope System with Distributed Intelligence" (the
"'376 Patent"). In addition to seeking compensation for damages incurred,
including enhanced damages, the suit sought to enjoin Tasco and Celestron 1 from
continuing to manufacture or sell products that infringe Meade's patent. On or
around November 7, 2001, the defendants filed an answer, subsequently amended,
to the complaint, in which they denied the Company's allegations and set forth
various affirmative defenses. On or around November 19, 2001, the defendants
filed a counterclaim, also subsequently amended, against the Company for
declaratory judgment of non-infringement of the '376 Patent, for declaratory
judgment that the '376 Patent is unenforceable and invalid, and for claims that
the Company is infringing a Celestron 1 design patent, U.S. Patent No. D438,221
(the "'221 Patent"), and Celestron 1's trade dress. The counterclaim further
alleged that the Company had willfully infringed the '221 Patent and sought an
unspecified amount of damages, enhanced damages, and an injunction and other
unspecified relief against the Company. However, this design-patent counterclaim
was later dismissed with prejudice as to Meade products on sale up to that time.
On June 4, 2002, the Company filed suit ("the '799 lawsuit") against
Celestron 1, Tasco and other related or affiliated parties charging the
defendants with patent infringement. The complaint, filed in the United States
District Court, Central District of California, Southern Division (Case No. SA
CV 02-544 (GLT)), alleged that the defendants willfully infringed Meade's Patent
No. 6,392,799, entitled "Fully Automated Telescope System with Distributed
Intelligence" (the "'799 Patent"). The '799 Patent covers the Company's "level
the telescope and point it North" alignment technology (the "Telescope Alignment
Technology"), which allows a telescope user to easily align a computer operated
telescope. In addition to seeking compensation for damages incurred, including
enhanced damages, the suit sought to enjoin Tasco, Celestron 1, and the other
defendants from continuing to manufacture or sell products that infringe the
'799 Patent.
On June 7, 2002, the Company filed suit (the '942 lawsuit) against
Celestron 1, Tasco and other related or affiliated parties, charging the
defendants with correction of patent inventorship, false and misleading
representations in violation of the Lanham Act, unfair competition and
fraudulent business practices. The complaint, filed in the United States
District Court, Central District of California, Southern Division (Case No.
SA-CV 02-558 (GLT)), alleged that the defendants misappropriated the Company's
Telescope Alignment Technology and subsequently conspired to obtain United
States Patent No. 6,369,942, entitled "Auto-Alignment Tracking Telescope Mount"
(the "'942 Patent"), by fraudulently representing themselves as the inventors
and owners of the Telescope Alignment Technology. In addition to other remedies,
the suit sought to establish that Meade invented the Telescope Alignment
Technology and that equitable and legal title to the '942 Patent should be
vested in the Company
Celestron 1 and Tasco, in May 2002, transferred certain of their assets
in an assignment for the benefit of creditors proceeding to James Feltman, an
assignee. Assignee James Feltman subsequently sold the assets on or around June
24, 2002 to a new Celestron entity, Celestron Acquisition LLC ("Celestron 2").
Celestron 2 appeared as a defendant and counterclaimant in the above-referenced
lawsuits. James Feltman was also a named defendant in the '799 lawsuit, but not
the '376 and '942 lawsuits.
On November 21, 2002, Celestron 2 filed an action alleging that Meade
products infringe United States Patent No. 6,467,738 entitled "Tripod Structure
for Telescopes" (the "'738 Patent"). The complaint sought injunctive relief,
compensatory and treble damages in an unspecified amount, and attorneys' fees
and costs. Meade filed an answer denying all claims in Celestron 2's complaint.
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On September 9, 2003, the Company, Celestron 2, and James Feltman
agreed to pursue non-binding mediation of all pending litigation between the
parties. As part of the mediation process, the parties agreed to stay all
pending litigation (including the discovery process) in the above four cases.
This mediation took place on May 10, 2004. Pursuant to a binding handwritten
settlement agreement signed by the parties at the mediation (the "Handwritten
Agreement"), a settlement was reached as to all pending litigation among the
parties on the terms of one of two settlement alternatives. The Handwritten
Agreement provided that, in the event the conditions of the first settlement
alternative (the "First Alternative") were not satisfied on or before August 15,
2004, the pending litigation would be considered settled on the terms of the
second settlement alternative (the "Second Alternative"). Pursuant to the terms
of the First Alternative, in exchange for cash payments to be made by Meade,
Meade would acquire the exclusive rights to Celestron's computerized telescope
technology. Consummation of the First Alternative was subject to the
satisfaction of certain conditions, including approval of the United States
Federal Trade Commission and approval by Meade's board of directors. The
Handwritten Agreement provided that, if the First Alternative was not
consummated, the Second Alternative would be effective. Pursuant to the terms of
the Second Alternative, Meade grants a license to Celestron under which
Celestron will pay Meade a royalty from the sales of telescope products sold by
Celestron that include or use any "level the telescope and point it North" or
similar telescope alignment technology until the expiration of the last patent
licensed by Meade to Celestron. Regardless of which settlement alternative is
consummated: (i) Celestron agrees that Meade's '376 and '799 Patents are valid
and enforceable; (ii) Meade agrees that Celestron's '221, '899, and '738 Patents
are valid and enforceable; (iii) Celestron grants Meade paid-up, royalty free
licenses for the rights to use the designs covered by Celestron's '221, '899,
and '738 Patents; (iv) Celestron will stipulate to correction of inventorship of
its `942 patent and will transfer ownership of such patent to Meade; and (v) the
parties will promptly dismiss with prejudice all claims and counterclaims in the
pending litigation between them, including claims for past damages.
Thereafter, the Company and Celestron signed a further settlement
agreement, in which they agreed to proceed with the Second Alternative and in
which they more fully and formally set forth the terms and conditions of the
settlement, and pursuant to which Celestron will pay the Company royalties equal
to the greater of $100 per unit or 8% of Celestron's net revenue from sales of
all telescope products that utilize the "level-North" technology. On July 8,
2004, the Company and Celestron jointly announced the settlement.
The Company is also involved from time to time in litigation incidental
to its business. Management believes that the outcome of such litigation will
not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(a) Exhibits filed with or incorporated by reference to this Form 10-Q.
1. Settlement Agreement effective May 10, 2004, between the Company,
on the one hand, and Celestron Acquisition, LLC and James Feltman,
on the other hand (excluding exhibits thereto) (incorporated by
reference to Exhibit 10.56 to the Form 8-K filed with the SEC on
July 12, 2004).
2. Exhibit 10.57 Second Amendment to Amended and Restated Credit
Agreement dated July 9, 2004
3. Exhibit 31.1 Sarbanes-Oxley Act Section 302 Certification by
Steven G. Murdock
4. Exhibit 31.2 Sarbanes-Oxley Act Section 302 Certification by
Brent W. Christensen
5. Exhibit 32.1 Sarbanes-Oxley Act Section 906 Certification by
Steven G. Murdock
6. Exhibit 32.2 Sarbanes-Oxley Act Section 906 Certification by
Brent W. Christensen
6(b) Reports on Form 8-K.
The Company furnished the following Report with the SEC on the
following date.
1. Form 8-K, furnished on April 22, 2004, covering a press release
announcing the Company's financial results for the quarterly period
and fiscal year ended February 29, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2004
MEADE INSTRUMENTS CORP.
By: /s/ STEVEN G. MURDOCK
----------------------------------------
Steven G. Murdock
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND SECRETARY
By: /s/ BRENT W. CHRISTENSEN
----------------------------------------
Brent W. Christensen
SENIOR VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
14