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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-22183
MEADE INSTRUMENTS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-2988062
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION)
6001 OAK CANYON, IRVINE, CALIFORNIA 92620
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 451-1450
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(TITLE OF CLASS)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of May 27, 1998, there were outstanding 7,875,500 shares of the
Registrant's common stock, par value $0.01 per share ("common stock"), which is
the only class of common stock of the Registrant. As of May 27, 1998 the
aggregate market value of the shares of common stock held by non-affiliates of
the Registrant, computed based on the closing sale price of $11.00 per share as
reported by Nasdaq, was approximately $46.5 million.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders of the
Registrant which will be filed with the Securities and Exchange Commission not
later than 120 days after February 28, 1998.
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PART I
ITEM 1. BUSINESS
GENERAL
Meade Instruments is a leading designer and distributor of telescopes and
accessories for the beginning to serious amateur astronomer. Management believes
that the Company is recognized for its expertise in telescope innovation and the
high quality of its products. Meade has successfully introduced a wide range of
new products, resulting in what the Company believes to be the broadest and most
complete line of telescopes available. The Company offers more than 40 different
telescope models with several different optical configurations, as well as more
than 250 accessory products. The Company's telescopes range in aperture from 2
to 16 inches and in retail price from less than $100 to more than $15,000.
Since its founding in 1972, Meade has strived to develop a reputation for
providing the amateur astronomer with technically sophisticated products at
competitive prices. Meade manufactures the complete line of its advanced
astronomical telescopes in Irvine, California, including the production of the
optical systems, which are critical components of telescopes. Combining its
manufacturing expertise with its dedication to innovation, quality and value,
Meade has developed and produced some of the industry's most technologically
advanced consumer telescopes at affordable prices. Although professional and
institutional applications of Meade's telescopes are not Meade's primary market,
the Company's Schmidt-Cassegrain telescopes are used by many universities,
scientific laboratories and aerospace companies, including the University of
California, Los Alamos National Laboratory, Lawrence Livermore Laboratory,
National Radio Astronomy Observatory and NASA/Aames Research. The Company has
capitalized on its brand name recognition among serious amateur astronomers to
market successfully its less-expensive telescopes to beginning and intermediate
amateur astronomers. Meade has become a major supplier of telescopes to such
retailers as The Nature Company, Service Merchandise, Natural Wonders, Wal-Mart
and J.C. Penney. To complement its extensive line of telescopes and leverage its
distribution system, in 1996, the Company introduced a complete line of
binoculars to be sold under the Meade brand name.
Meade was sold by its founder and current Chief Executive Officer to a
private investor in 1986 and was then reacquired by the Company's current senior
management in 1991. After reacquisition, management reemphasized the importance
of research and development for new products and product enhancements. Meade
also significantly broadened the Company's less-expensive telescope line and
negotiated an exclusive arrangement with a Taiwanese company (the "Taiwanese
Factory") to manufacture substantially all of the Company's less-expensive
telescopes in accordance with the Company's proprietary designs. Meade also
increased the marketing of its products by advertising in periodicals directed
to amateur astronomers and by providing greater support to the Company's
dealers, specialty retailers, foreign distributors, mass merchandisers, and the
end users of Meade's products. Emphasis on research and development, enhancing
the Company's less-expensive telescope line, targeted marketing and end user
support continues. The Company committed over $800,000 to research and
development during fiscal 1998, with the majority of those expenditures centered
on the development of the Company's less-expensive telescope lines. Recently,
Meade has expanded its print advertising campaign into more than two dozen
consumer magazines in order to reach a broader segment of the consumer market.
Meade also publishes a comprehensive, full-color, high quality product catalogue
which provides significant product exposure to the serious amateur astronomer.
In addition, Meade publishes an abridged version of its product catalogue aimed
at the casual observer or general consumer with an interest in celestial or
terrestrial observing.
In the United States and Canada, the Company distributes its products
through a network of more than 500 specialty retailers and mass merchandisers,
which offer Meade's products in more than 1,000 retail store locations. The
Company also sells certain of its telescope models to selected national mail
order dealers. Meade sells its products internationally through a network of
approximately 30 foreign distributors, many of which service retail locations in
their respective countries. Export sales accounted for approximately 19% of the
Company's net sales for the fiscal year ended February 28, 1998. The Company
intends to continue to
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pursue an integrated strategy of product line expansion, aggressive marketing,
further expansion into the binocular market and expansion of the Company's
distribution network.
INDUSTRY OVERVIEW
Market-size data for the telescope and binocular industries is difficult to
obtain because many of the companies in the industries are either private or
subsidiaries or divisions of larger public companies. The Company believes that
the overall size of the telescope market is driven, in part, by the introduction
of new products.
The telescope industry is generally divided into two categories (i)
advanced astronomical telescopes for serious amateur astronomers who consider
astronomy to be an important leisure activity and (ii) less-expensive telescopes
for beginning to intermediate amateur astronomers. The market for advanced
astronomical or higher-end telescopes is characterized by frequent technological
developments, including the relatively recent introduction of electronic and
computer-aided features. Serious amateur astronomers demand that the optical,
electronic and mechanical performance of the telescopes and accessories they
purchase be of very high quality. This high-end telescope market, while smaller
than the less-expensive telescope market, continues to drive the technological
advances in the industry. Management believes that overall consumer awareness is
increased by the advances made in the high-end telescope market.
Within the industry, manufacturers generally offer three types of
telescopes (a) refracting telescopes, which use a lens at the upper end of the
optical tube to collect light, (b) reflecting telescopes, which use a concave
mirror as the primary optical element and (c) catadioptric (mirror-lens)
telescopes, which employ a combination of mirrors and lenses to form the image.
Each type has its own advantages: refractors are easy to maintain, yield sharp
images and are relatively inexpensive in smaller apertures; reflectors generally
are the lowest-cost means of purchasing larger apertures and are well suited to
the intermediate amateur astronomer; and mirror-lens telescopes are more
portable in larger apertures and are popular among serious amateur astronomers.
COMPETITIVE STRENGTHS
Meade believes that it derives significant benefits from its position as a
leading designer and distributor of telescopes and related products. These
benefits include its ability to offer its customers one of the most innovative,
broadest product lines available, embodying both high quality and value. The
Company attributes its success to the following competitive strengths:
New Products/Research and Development. Meade places a primary emphasis on
product innovation and quality through its research and development efforts. The
Company currently employs nine engineers on-site, developing new products,
technological advances and improvements to existing products, in an effort to
remain the industry leader. The Company is able to obtain additional benefits by
out-sourcing certain research and development services to supplement its
internal expertise. Because of this dedication to research and development, the
Company has been able to introduce many new products over time and has been able
to take advantage of certain market opportunities as they have occurred. See
"Business -- Products." Meade believes that the members of its senior level
management are among the most experienced in the telescope industry. The
Company's three most experienced officers have been employed in this industry
for an average of about 20 years. The Company, its management and its employees
are dedicated to the goal of producing technically superior yet
price-competitive products for the amateur astronomer and have been responsible
for some of the industry's most technically advanced consumer telescopes.
Broadest Line of Products. The Company's strategy has been to leverage its
brand name recognition and reputation for high-end telescopes to facilitate the
sales of its less-expensive telescopes. As a result, the Company believes it
currently has the most complete line of telescopes available, including more
than 40 different telescope models with several different optical configurations
as well as more than 250 accessory products. The Company's telescopes range in
aperture from 2 to 16 inches and in retail price from less than $100 to more
than $15,000.
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Optical Systems Expertise. Meade has made substantial investments to
develop an expertise in optical engineering, providing it with the ability to
produce high quality optics on-site. Meade employs highly skilled opticians who
use sophisticated manufacturing techniques and equipment, including specialized
optical polishing machines and vacuum-coating machines, to produce what the
Company believes to be the highest quality optics available in the consumer
telescope market.
Quality Control. Meade's manufacturing and engineering personnel coordinate
the manufacturing process in order to ensure that product quality is maintained
at a high level within an efficient cost structure. The Company has in place
quality controls covering all aspects of the manufacturing process of its
products, from each product's precision optical system to its final assembly and
testing. The Company manufactures all of its high-end advanced telescopes in its
manufacturing facility in Irvine, California, while most of the Company's
less-expensive telescopes are manufactured for the Company in Taiwan through an
exclusive arrangement with the Taiwanese Factory. This exclusive arrangement
provides the Company with the ability to exert control over the telescope
manufacturing process to ensure the quality and performance of its less-
expensive products. To support this arrangement, Meade regularly commits one of
its United States based quality control engineers to the Taiwanese Factory.
Broad Distribution Network. The Company's sales force works closely with
specialty retailers, distributors and mass merchandisers on product quality,
technical knowledge and customer service. Meade has its own on-site graphic arts
department to work with specialty retailers, distributors and mass merchandisers
to produce print advertising, hang-tags for displays within retail outlets, and
other point-of-sale support. This capability provides the Company's customers
with a comprehensive marketing program to assist in their sales efforts. As a
result of these efforts, Meade has become a major supplier of telescopes to such
retailers as The Nature Company, Service Merchandise, Natural Wonders, Wal-Mart,
J.C. Penney and Discovery Channel Stores. Meade also has an expanding
international presence. Export sales have grown from $4.2 million for the fiscal
year ended February 28, 1995 to $11.3 million for the fiscal year ended February
28, 1998.
Superior Customer Service. Meade believes that its high levels of customer
service and technical support are important factors that differentiate it from
its competitors. In an effort to provide each of the Company's customers with
post-sale service and to relieve them of the burden of such service, Meade has
established multiple dedicated toll-free telephone numbers so that its customers
and end users can call the Company's support personnel with any questions
relating to its products. The Company's experience is that product returns from
first-time telescope users have been historically higher than necessary for the
industry because such first-time customers are often unfamiliar with assembly
procedures and telescope operation. The Company believes that providing this
toll-free assistance reduces product returns by better educating first-time
users. In addition, in an effort to simplify assembly of the Company's products,
Meade pre-assembles a substantial portion of its telescopes prior to packaging.
Meade also makes available to telescope owners astronomical software and other
product enhancements.
PRODUCTS
Meade has developed and expanded its product line to include a full line of
telescopes and accessories for the beginning, intermediate and serious amateur
astronomer. Moreover, in addition to adding new products, the Company
continually refines and improves its existing products. Certain of Meade's
products are described in greater detail below:
Advanced Astronomical Telescopes. Among the Company's most sophisticated
products are its LX series Schmidt-Cassegrain and Maksutov-Cassegrain
telescopes, which incorporate an optical system that provides high-quality
resolution, contrast and light transmission. The LX series offers the serious
amateur a broad range of products from the economical 8" LX10 to the
state-of-the-art 16" LX200. The model LX200 telescopes, also available in 7, 8,
10, and 12-inch apertures, are the most popular of the Company's telescopes
among serious amateur astronomers. The LX200 telescopes feature a built-in
computer library of 64,350 celestial objects. These objects are catalogued in
the Company's proprietary hand-held keypad electronic command center, which
operates the computerized control system for the LX200 telescopes. By entering
any of the celestial objects into the keypad, the telescope automatically
locates and tracks the selected object. Also
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well received by the serious amateur market is the Company's line of Starfinder
telescopes. These larger-aperture reflecting telescopes are economically priced
and offer views of a wide range of celestial objects. During fiscal 1998, the
Company introduced its LXD500 series, a mid-priced line of telescopes on
equatorial mounts. These telescopes offer the serious amateur, with a preference
for an equatorial mount, a telescope ready for a wide range of advanced
photographic and visual applications. The advanced astronomical telescopes
collectively represented approximately 5% of telescope units shipped and
approximately 25% of the Company's net sales for the fiscal year ended February
28, 1998.
Entry-Level Telescopes. Designed specifically for the beginning to
intermediate amateur astronomer or terrestrial observer, the Company's
less-expensive 60mm to 114mm refracting and reflecting telescopes, as well as
the ETX mirror-lens telescope, include some of the features of the more advanced
telescopes at economical prices. The Company also offers several variations of
its small refracting and reflecting telescopes for distribution on an exclusive
basis of selected models to specific specialty retailers. These telescope models
comprise the lower-price end of the Company's product line. Sales of these
telescopes comprised approximately 95% of the Company's telescope units shipped
and approximately 56% of the Company's net sales for the fiscal year ended
February 28, 1998.
Binoculars. The Company recently introduced a complete line of consumer
binoculars that will initially be sold through the Company's existing
distribution network. The binoculars sold by the Company are purchased from
manufacturers outside the United States. Binoculars represented approximately 5%
of the Company's net sales for the fiscal year ended February 28, 1998.
Accessories. The Company also offers accessories for each of its telescope
series which range from additional eyepieces and camera adapters to CCD
autoguider/imagers and celestial observation software. Approximately 250
accessory products are currently available from the Company. Sales of
accessories represented approximately 14% of the Company's net sales for the
fiscal year ended February 28, 1998.
SALES AND MARKETING
The Company's telescopes and accessories are sold through a domestic
network of mail order dealers, specialty retailers and mass merchandisers and
through an international network of foreign distributors. The Company's high-end
products are generally sold through mail order dealers or single and multiple
location specialty retailers, while Meade's less-expensive products are sold in
a similar manner but are also sold through mass merchandisers. The Company
maintains direct contact with its larger domestic dealers and foreign
distributors through the Company's sales professionals. A network of independent
representatives is used to maintain contact with its smaller specialty
retailers.
The Company's sales force works closely with its dealers, specialty
retailers, distributors and mass merchandisers on product quality, technical
knowledge and customer service. The Company employs seven persons in sales
positions, all of whom have significant industry experience. These individuals
advise the Company's specialty retailers about the quality features of the
Company's products and provide answers to questions from specialty retailers as
well as directly from amateur astronomers. The Company stresses service to both
its customers and end users by providing marketing assistance in the form of
hang-tags, catalogue layouts and other print media as well as dedicated toll
free customer service telephone numbers. The Company believes toll free
telephone numbers help reduce the number of product returns from end users who
are generally unfamiliar with the assembly and operation of telescopes. In an
effort to further simplify assembly and use of the Company's products, Meade
preassembles a substantial portion of its telescopes prior to packaging. See
"Business -- Competitive Strengths -- Superior Customer Service." The Company's
products are regularly advertised in most major domestic and international
telescope and astronomy-related magazines and periodicals with comprehensive,
full color, technically informative advertisements which present a consistent
message of innovation and quality about the Company and its products. In
addition, the Company has recently launched an aggressive marketing program
aimed at expanding the existing telescope market through more traditional
consumer oriented print media. The Company's dedication to providing a high
level of customer service is one factor that management believes sets Meade
apart from its competition.
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CUSTOMERS
The Company markets its products domestically through a network of mail
order dealers, specialty retailers and mass merchandisers and internationally
through a network of foreign distributors. Included among the Company's
customers are the following retail outlets, mass merchandisers and foreign
distributors: The Nature Company, Natural Wonders, Service Merchandise, MIC
International Corp. (Japan), Astrocom GmbH (Germany), Wal-Mart, J.C. Penney and
Discovery Channel Stores. Generally, other than the recent addition of mass
merchandisers such as Service Merchandise and Wal-Mart, the Company's major
customers have not materially changed during the past three fiscal years.
During fiscal 1998, the Company sold its products to mail order dealers and
to more than 500 specialty retailers and mass merchandisers which offer Meade's
products in over 1,000 retail store outlets. During that period, Service
Merchandise and The Nature Company ("TNC"), the Company's largest customers,
accounted for approximately 14% and 12%, respectively, of the Company's net
sales. No customer other than Service Merchandise and TNC has accounted for more
than 10% of the Company's net sales during the last three fiscal years. The
Company's ten largest customers, in the aggregate, accounted for approximately
54% of the Company's net sales in fiscal 1998. The loss of, or the failure to
replace, any significant portion of the sales made to any significant customer
could adversely affect results of operations of the Company to the extent the
Company did not replace any such lost sales with increased sales to existing or
new customers.
OPERATIONS
Materials and Supplies. The Company purchases high grade optical glass in
order to avoid imperfections that can degrade optical performance. Lenses and
mirrors for the Company's domestically manufactured telescopes are individually
polished and hand-figured by a master optician to achieve a high level of
resolution. The Company purchases metal telescope components from numerous
foundries, metal stamping and metal working companies. The Company's LX200
series telescopes require additional installation of the computerized drive and
celestial object database circuit board. The components of the board are
purchased from various suppliers and assembled by third party vendors and by
certain of the Company's manufacturing personnel. The boards are installed at
the Company's manufacturing facility and undergo a rigorous burn-in period prior
to shipment to customers.
Polishing and Hand Figuring. After a Schmidt-Cassegrain,
Maksutov-Cassegrain, ED-refractor or Newtonian glass surface is fine ground, the
mirror or lens is polished for up to 16 hours to obtain full transmission or
reflectivity. It is at this point that the Company's opticians perform the final
lens or mirror shaping (a process called figuring).
Optical Testing. As each of the Company's ED-refractor, Maksutov-Cassegrain
optical set, Schmidt-Cassegrain optical set, or parabolic Newtonian primary
mirror progresses through the grinding, polishing and hand-figuring stages of
development, it is repeatedly tested and re-tested for irregularities,
smoothness of figure and correction.
Optical Alignment and Centration. Finished, individually-matched
Maksutov-Cassegrain and Schmidt-Cassegrain optical sets and matched ED-refractor
doublet objective lenses are sent to the optical alignment and centration
department, where each optical set is placed into a special optical tube that
permits rotation of the optical elements about their optical axes. With optimal
orientation fixed, each optics set is placed into machined housings of an
optical tube or collimation lens cell. The optical system is once again tested
and only after passing this final test is an optical tube system ready to be
used.
Most of the Company's less-expensive telescopes are manufactured
exclusively for the Company in Taiwan. Since 1990, the Company has worked
closely with the Taiwanese Factory, developing proprietary telescope designs and
instructing the Taiwanese Factory's personnel in the production of telescopes
that meet the Company's quality standards. In January 1995, in order to assure a
reliable flow of products to meet the Company's increasing requirements, and in
order to ensure the Company would be able to exert sufficient control over the
manufacturing process and thus ensure that its quality standards are maintained,
the Company and the Taiwanese Factory entered into a supply agreement ("the 1995
agreement") wherein the
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Taiwanese Factory agreed to manufacture telescopes exclusively for sale through
Meade and wherein Meade agreed to purchase essentially all of its less-expensive
telescopes from the Taiwanese Factory. The 1995 agreement expired on May 5,
1998. As of that date, the Company and the Taiwanese Factory entered into a new
supply agreement with exclusivity provisions that are similar to those of the
1995 agreement. The Company owns many of the designs and optical machine tooling
used by the Taiwanese Factory and regularly sends manufacturing and engineering
personnel to the manufacturing facility in Taiwan to ensure that high quality
telescopes are produced.
COMPETITION
The telescope and binocular industries are highly competitive and sensitive
to consumer needs and preferences. In the telescope market, Meade competes in
the United States and Canada with Celestron, Bushnell, Tasco and Simmons and, to
a lesser extent, with other significantly smaller companies which service niche
markets. In Europe and Japan, the Company competes primarily with Celestron,
Bresser Optik GmbH, and Vixen Optical Industries, Ltd., and with other smaller
regional telescope importers and manufacturers. In addition, some of the
Company's current and potential competitors in the telescope market may possess
greater financial or technical resources and competitive cost advantages due to
a number of factors, including, without limitation, lower taxes and
substantially lower costs of labor associated with manufacturing.
In the binocular market, which is generally more competitive than the
telescope market, with a greater number of competitors at each price point, the
Company competes primarily with Bushnell, Tasco, Nikon Inc., Canon Inc., Minolta
Camera, Co., Ltd., Pentax Corporation, Simmons and various smaller manufacturers
and resellers. Many of these competitors in the binocular market have
significantly greater brand name recognition and financial and technical
resources than those of the Company, and many have long-standing positions,
customer relationships and established brand names in their respective markets.
EMPLOYEES
As of February 28, 1998, Meade had 305 full-time employees. The Company
believes that it offers competitive compensation and other benefits and that its
employee relations are good. None of the Company's employees is represented by a
union. The success of the Company's future operations depends in large part on
the Company's ability to attract and retain highly skilled technical, marketing
and management personnel. There can be no assurance that the Company will be
successful in attracting and retaining such key personnel.
In order to enable its employees to share in the Company's growth and
prosperity, Meade established the Meade Instruments Corp. Employee Stock
Ownership Plan, effective March 1, 1996 (the "ESOP"). The ESOP provides
participating employees an opportunity to receive beneficial ownership of
Meade's common stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles and present and past positions
of the persons serving as executive officers of the Company as of May 15, 1998:
NAME AGE POSITION
---- --- --------
John C. Diebel............................. 54 Chairman of the Board and Chief Executive
Officer
Steven G. Murdock.......................... 46 President, Chief Operating Officer,
Secretary, Director
Joseph A. Gordon, Jr....................... 48 Senior Vice President -- North American
Sales, Director
Brent W. Christensen....................... 39 Vice President -- Finance and Chief
Financial Officer
Mark D. Peterson........................... 36 Vice President and General Counsel
Kenneth W. Baun............................ 50 Vice President -- Engineering
Robert A. Wood, III........................ 37 Vice President -- Manufacturing
John C. Diebel founded Meade Instruments Corp. in 1972. He has been the
Chairman of the Board and Chief Executive Officer of the Company for the
majority of the time since December 1975. Prior to founding the Company, Mr.
Diebel worked as an engineer for TRW Inc. and Hughes Aircraft Co. Mr. Diebel
graduated from the California Institute of Technology with BS and MS degrees in
electrical engineering and received his Ph.D. degree in electrical engineering
from the University of Southern California.
Steven G. Murdock, a director of the Company since April 1996, has been the
Company's President and Chief Operating Officer since October 1990. From May
1980 to October 1990, Mr. Murdock was the Company's Vice President of Optics.
From November 1968 to May 1980, Mr. Murdock worked as the optical manager for
Coulter Optical, Inc., an optics manufacturer. Mr. Murdock received his BS
degree in business administration from California State University at
Northridge.
Joseph A. Gordon, Jr., a director of the Company since April 1996, has been
the Company's Senior Vice President -- North American Sales since June 1995.
From December 1984 to June 1995, he worked as the Company's Vice
President -- North American Sales. From January 1981 to December 1984, Mr.
Gordon was the Vice President of Sales at Celestron. Mr. Gordon graduated from
the University of Cincinnati with a BS degree in marketing.
Brent W. Christensen has been the Company's Vice President -- Finance since
June 1995 and Chief Financial Officer since April 1996. From August 1993 to June
1995, he worked as the Company's controller. Mr. Christensen is a Certified
Public Accountant, and from January 1985 to August 1993, he worked as an audit
manager with Ernst & Young LLP. Mr. Christensen received his BA degree in
business administration from California State University at Fullerton.
Mark D. Peterson has been the Company's Vice President and General Counsel
since October 1997. From October 1991 to October 1997, Mr. Peterson was an
attorney with O'Melveny & Myers LLP, specializing in corporate and securities
law. Mr. Peterson received a BS degree in accounting from Brigham Young
University and a JD degree from the University of California -- Berkeley, Boalt
Hall School of Law.
Kenneth W. Baun has been the Company's Vice President -- Engineering since
June 1995. From March 1995 to June 1995, he worked as an engineering manager for
the Company. From 1991 to 1995, Mr. Baun was the President of Summit Instruments
Corp., a producer of disk drive test equipment. In addition, from 1973 to 1980,
Mr. Baun worked as an engineering department manager at UNISYS. Mr. Baun
received his BA degree in electrical engineering and his MS degree in computer
science from the University of California at Los Angeles.
Robert A. Wood, III has been the Company's Vice President -- Manufacturing
since June 1995. From March 1991 to June 1995, he was the Company's
Manager-Optics. From October 1988 to March 1991, he
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worked as a project engineer for the Company. Mr. Wood received his BS degree in
electronics engineering technology from Brigham Young University.
ITEM 2. PROPERTIES
The Company leases a 161,000 square foot manufacturing, distribution and
corporate facility located in Irvine, California. The lease expires in September
2007. Net lease expenses on the facility are approximately $75,000 per month,
with fixed increases of approximately 3% per year.
ITEM 3. LEGAL PROCEEDINGS
Meade Instruments Corporation v. Reddwarf Starware, LLC, aka Reddwarf
Instruments, LLC ("Reddwarf"), Civil No. SACV 98-240 GLT, United States District
Court for the Central District of California. 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,
and for an injunction and damages under Federal antitrust statutes and for an
injunction and other relief under California unfair competition statutes.
Reddwarf Starware, LLC v. Meade Instruments Corp. and Discovery
Communications, Inc., d.b.a. The Nature Company, Civil No. 98-480-A, United
States District Court for the Eastern District of Virginia. Acton for alleged
patent infringement initiated by a complaint filed April 2, 1998, by Reddwarf
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
complaint further alleges that the infringement is willful and seeks unspecified
damages, an injunction, and other relief against the Company.
The Company vigorously contests these allegations and will pursue its
defenses either in the context of its action for declaratory judgment of
non-infringement and invalidity in the United States District Court for the
Central District of California, or in the context of a counterclaim for
declaratory judgment of non-infringement and for declaratory judgment that
Reddwarf's patent is invalid, void, and unenforceable in the United States
District Court of the Eastern District of Virginia. Settlement efforts to date
have been unsuccessful and no further settlement negotiations have been
scheduled. Investigations by the Company's patent counsel to date reveal facts
that, in such counsel's opinion, give the Company meritorious defenses against
Reddwarf's patent. However, due to the uncertainties of litigation, the Company
is unable to provide an evaluation of the likelihood of an unfavorable outcome
in the case, or an estimate of the amount of potential loss in the event of an
unfavorable outcome.
The Company is also involved from time to time in litigation incidental to
its business. Management believes that the outcome of current litigation will
not have a material adverse effect on the Company.
Prior to the reacquisition of the Company by certain members of its senior
management, Meade agreed to be bound by the provisions of an order ("Order") of
the United States Federal Trade Commission ("FTC") prohibiting the Company from
making certain acquisitions. The Order provides that Meade shall not acquire,
without the prior approval of the FTC, any stock, equity interest or assets,
other than purchases of manufactured product in the ordinary course of business,
of any company engaged in the manufacture or sale of Schmidt-Cassegrain
telescopes with apertures of 8 to 11 inches in the United States. The Order is
effective until August 30, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year covered by this report.
8
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's initial public offering was completed on April 14, 1997 (the
"Offering"), and from that date to the present, the Company's common stock has
been listed on the Nasdaq National Market under the symbol "MEAD." The high and
low sales prices on a per share basis for the Company's common stock during each
quarterly period for the fiscal year ended February 28, 1998 were:
YEAR ENDED FEBRUARY 28, 1998: HIGH LOW
----------------------------- ---- ---
Fourth quarter............................................ $10.00 $8.63
Third quarter............................................. $10.75 $7.63
Second quarter............................................ $ 8.63 $6.88
First quarter............................................. $ 7.75 $6.25
The reported closing sales price of the Company's common stock on the
Nasdaq National Market on May 15, 1998 was $10.56. As of May 15, 1998, there
were 35 holders of record of the Company's common stock.
Other than dividends paid to the Company's ESOP in August 1996, the Company
has not paid any cash dividends on its common stock and does not anticipate
declaring or paying any dividends on its common stock in the foreseeable future.
Although the Company intends to make future contributions to the ESOP upon Board
approval, no dividends (other than dividends paid to all holders of common
stock) will be paid to the ESOP with respect to future periods.
9
11
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND WEIGHTED AVERAGE SHARE AMOUNTS)
The following data have been derived from the Company's audited financial
statements, including the balance sheets at February 28, 1997 and 1998 and the
statements of income for the three years ended February 28, 1998 and the notes
thereto appearing elsewhere herein.
YEAR ENDED FEBRUARY 28(29),
--------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Net sales...................................... $ 16,628 $ 24,934 $ 29,770 $ 47,151 $ 59,905
Cost of sales.................................. 11,670 17,040 20,054 31,845 38,245
---------- ---------- ---------- ---------- ----------
Gross profit................................. 4,958 7,894 9,716 15,306 21,660
Selling expenses............................... 1,565 2,035 2,832 4,759 6,771
General and administrative expenses (1)........ 1,378 2,118 2,951 5,970 6,564
Research and development expenses.............. 425 423 518 628 854
Amortization of deferred credit................ (53) -- -- -- --
---------- ---------- ---------- ---------- ----------
Operating income............................. 1,643 3,318 3,415 3,949 7,471
Interest expense............................... 493 470 659 1,657 1,034
---------- ---------- ---------- ---------- ----------
Income before income taxes................... 1,150 2,848 2,756 2,292 6,437
Income taxes................................... 110 797 1,200 960 2,702
---------- ---------- ---------- ---------- ----------
Net income..................................... 1,040 2,051 1,556 1,332 3,735
Accretion on redeemable preferred stock(2)..... -- -- -- (4,310) (374)
---------- ---------- ---------- ---------- ----------
Net income (loss) available to common
stockholders................................. $ 1,040 $ 2,051 $ 1,556 $ (2,978) $ 3,361
========== ========== ========== ========== ==========
Per share information:
Net income before adjustment to net income
available per common share................... $ 0.23 $ 0.45 $ 0.34 $ 0.34 $ 0.58
Accretion on redeemable preferred stock(2)..... -- -- -- (1.10) (0.06)
---------- ---------- ---------- ---------- ----------
Net income (loss) per share available to common
stockholders -- basic and diluted............ $ 0.23 $ 0.45 $ 0.34 $ (0.76) $ 0.52
========== ========== ========== ========== ==========
Weighted average common shares outstanding --
basic........................................ 4,571,000 4,571,000 4,571,000 3,938,000 6,410,000
========== ========== ========== ========== ==========
Weighted average common shares outstanding --
diluted...................................... 4,571,000 4,571,000 4,571,000 3,938,000 6,458,000
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Working capital................................ $ 1,176 $ 3,358 $ 4,183 $ 6,252 $ 15,417
Total assets................................... 7,992 10,197 13,035 20,524 24,592
Total current liabilities...................... 6,153 5,827 7,364 11,775 5,829
Long-term debt, net of current portion......... 571 650 450 6,599 --
Redeemable preferred stock..................... -- -- -- 6,490 --
Stockholders' equity (deficit)................. 1,164 3,215 4,771 (4,952) 18,422
- ---------------
(1) General and administrative expenses for the fiscal years ended February 28,
1997 and 1998 included ESOP contribution expenses of $2.0 million and $1.1
million, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(2) Represents accretion reflecting original issue discount and accrued
dividends on the redeemable preferred stock. In January 1997 the Company
entered into a binding agreement to redeem its redeemable preferred stock
earlier than the original mandatory redemption date. The accretion was
accelerated in the fiscal year ended February 28, 1997 to reflect the new
redemption date (April 14, 1997) and the Company recorded an additional $3.4
million in accelerated accretion on the redeemable preferred stock
10
12
pursuant to the redemption agreement (resulting in an aggregate $4.3 million
accretion for fiscal 1997). The Company recorded a final accretion adjustment of
approximately $374,000 during the first quarter of fiscal 1998 related to the
redemption of the redeemable preferred stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's statements of income as a percentage of net sales for the
periods indicated.
YEAR ENDED FEBRUARY 28(29),
-----------------------------
1996 1997 1998
------- ------- -------
Net sales........................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 67.4 67.5 63.8
----- ----- -----
Gross profit........................................ 32.6 32.5 36.2
Operating expenses:
Selling expenses.................................. 9.5 10.1 11.3
General and administrative expenses............... 9.9 12.6 11.0
Research and development expenses................. 1.7 1.4 1.4
----- ----- -----
Total operating expenses....................... 21.1 24.1 23.7
----- ----- -----
Income from operations.............................. 11.5 8.4 12.5
Interest expense.................................... 2.2 3.5 1.8
----- ----- -----
Income before income taxes.......................... 9.3 4.9 10.7
Provision for income taxes.......................... 4.0 2.1 4.5
----- ----- -----
Net income.......................................... 5.3 2.8 6.2
===== ===== =====
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased from $47.2 million in fiscal 1997 to $59.9 million in
fiscal 1998, an increase of 26.9%. This increase was primarily due to (i) an
increase of $7.0 million in net sales of entry-level telescopes, reflecting
demand for smaller aperture more affordable telescopes and (ii) a combined
increase of $4.8 million in net sales of binoculars and telescope accessories
reflecting a full year of binocular sales (binoculars were introduced in late
fiscal 1997) and increased demand for accessories.
Gross profit increased from $15.3 million (32.5% of net sales) in fiscal
1997 to $21.7 million (36.2% of net sales) in fiscal 1998, an increase of 41.8%.
Gross profit as a percentage of net sales improved due to a sales mix that
included strong demand for more profitable lines of domestically manufactured
product, as well as sales of accessories and binoculars which generally have
higher gross profit margin than the Company's other products.
Selling expenses increased from $4.8 million (10.1% of net sales) in fiscal
1997 to $6.8 million (11.3% of net sales) in fiscal 1998, an increase of 41.7%.
This increase principally reflects (i) higher advertising and other selling
expenses to support higher sales volumes for the 1998 fiscal year as compared to
the 1997 fiscal year, (ii) higher freight and other shipping costs due to higher
sales volumes in fiscal 1998 as compared to fiscal 1997 and (iii) higher selling
and shipping personnel expenses for fiscal 1998 as compared to fiscal 1997.
General and administrative expenses increased from $6.0 million (12.6% of
net sales) for the fiscal year ended February, 1997 to $6.6 million (11.0% of
net sales) for the 1998 fiscal year. Included in general and administrative
expenses were ESOP contribution expenses of $2.0 million (including a one-time
$995,000
11
13
ESOP contribution charge for a dividend paid on the ESOP stock in August 1996)
and $1.1 million for the 1997 and 1998 fiscal years, respectively. General and
administrative expenses, excluding ESOP expenses, for the fiscal year ended
February 28, 1998 increased 37.5% over the prior year. This increase was
generally due to increases in personnel related costs, costs and expenses
related to moving to the Company's new facility, costs associated with being a
public company and general increases across a broad category of expenses to
support higher sales volumes during fiscal 1998.
Research and development expenses increased from $628,000 (1.4% of net
sales) in fiscal 1997 to $854,000 (1.4% of net sales) in fiscal 1998, an
increase of 36.0%. This increase was due to higher personnel related costs and
higher outside consulting costs during fiscal 1998 as compared to the prior
fiscal year.
Interest expense decreased from $1.7 million for the fiscal year ended
February 28, 1997 to $1.0 million for the 1998 fiscal year, a decrease of 41.2%.
Included in interest expense for the 1998 fiscal year is approximately $400,000
recognized pursuant to the write-off of previously capitalized debt issuance
costs related to bank term debt that was retired with the proceeds of the
Offering in April 1997. Interest expense for the 1998 fiscal year before the
write-off of $400,000 of debt issuance costs, decreased 64.7% compared to the
prior year due to lower average borrowings on the Company's line of credit and
the elimination of the long-term bank debt that was retired with the proceeds of
the Offering.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased from $29.8 million in fiscal 1996 to $47.2 million in
fiscal 1997, an increase of 58.4%. This increase was primarily due to (i) an
increase of $11.3 million in net sales of less-expensive telescopes, primarily
due to increases in sales to mass merchandisers, (ii) an increase of
approximately $4.0 million in net sales of new products introduced in late
fiscal 1996 and early fiscal 1997, including the ETX Astro Telescope, the LX50
and the LX10 lines of Schmidt-Cassegrain and Maksutov-Cassegrain telescopes and
(iii) an increase of $1.9 million in net sales of telescope accessories.
Gross profit increased from $9.7 million (32.6% of net sales) in fiscal
1996 to $15.3 million (32.5% of net sales) in fiscal 1997, an increase of 57.7%.
Gross profit as a percentage of net sales remained relatively constant as result
of variations in product mix.
Selling expenses increased from $2.8 million (9.5% of net sales) in fiscal
1996 to $4.8 million (10.1% of net sales) in fiscal 1997, an increase of 71.4%.
This increase principally reflects (i) higher advertising and other selling
expenses to support higher sales volumes for the 1997 fiscal year as compared to
the 1996 fiscal year, (ii) higher freight and other shipping costs due to higher
sales volumes in fiscal 1997 as compared to fiscal 1996 and (iii) higher costs
due to a net increase in selling and shipping personnel for fiscal 1997 as
compared to fiscal 1996.
General and administrative expenses increased from $3.0 million (9.9% of
net sales) in fiscal 1996 to $6.0 million (12.6% of net sales) in fiscal 1997,
an increase of 100%. Included in general and administrative expenses during
fiscal 1997 were ESOP contribution expenses of $2.0 million consisting of (i) an
accrual of $1.0 million related to the Company ESOP contribution and (ii)
dividends of $995,000 declared and paid on the Series B common stock held by the
ESOP. All shares of Series B common stock were converted into shares of common
stock as of the closing of the Offering. The dividends paid are treated as an
ESOP contribution as the dividends are used to repay the principal balance of a
loan payable by the ESOP to the Company. General and administrative expenses,
excluding ESOP expenses, increased from $3.0 million (9.9% of net sales) in
fiscal 1996 to $4.0 million (8.4% of net sales) in fiscal 1997, an increase of
33.3%. This increase principally reflects higher personnel-related costs and
general office costs in fiscal 1997 as compared to fiscal 1996. The decrease in
general and administrative expenses as a percentage of net sales in fiscal 1997
as compared to fiscal 1996 was primarily due to the relatively fixed nature of
the Company's general and administrative expenses.
Research and development expenses increased from $518,000 (1.7% of net
sales) in fiscal 1996 to $628,000 (1.4% of net sales) in fiscal 1997, an
increase of 21.2%. This increase was primarily due to higher
12
14
personnel related costs and higher outside consulting costs during fiscal 1997
as compared to the prior fiscal year.
Interest expense increased from $659,000 for fiscal 1996 to $1.7 million
for fiscal 1997, an increase of 158.0%. This increase was principally due to (i)
interest expense on the bank term debt incurred in connection with the ESOP
recapitalization in April 1996 and (ii) increased average outstanding balances
on the bank line of credit to support higher receivables and inventories
associated with increased sales of less-expensive telescopes during fiscal 1997
as compared to fiscal 1996.
Income taxes decreased from $1.2 million (43.5% of income before income
taxes) for fiscal 1996 to $960,000 (41.9% of income before income taxes) for
fiscal 1997. The reduction in the tax rate for the fiscal year 1997 as compared
to fiscal 1996 was due to differences in the effect of expenses not deductible
for tax purposes in each period.
SEASONALITY AND QUARTERLY RESULTS OF OPERATIONS
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 has recently experienced
increased 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.
The following tables (in thousands of dollars) present unaudited financial
results for each of the eight quarters in the period ended February 28, 1998.
The Company believes that all necessary adjustments have been included to
present fairly the quarterly information when read in conjunction with the
financial statements and notes included elsewhere in this Report. The operating
results for any quarter are not necessarily indicative of the results for any
subsequent quarter.
FISCAL 1997 FISCAL 1998
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
Net sales........................... $7,166 $12,031 $19,769 $8,185 $12,735 $12,289 $24,105 $10,776
Gross profit........................ 2,154 3,926 6,619 2,607 4,209 4,402 8,961 4,088
ESOP contribution................... 250 1,245 250 250 250 250 300 300
Operating income (loss)............. 149 557 3,245 (2) 1,232 1,244 4,574 421
Net income (loss)................... $ (58) $ 53 $ 1,570 $ (233) $ 376 $ 633 $ 2,534 $ 192
Quarterly results can be affected by a number of factors including the
timing of orders, production delays or inefficiencies, and raw materials
availability. See "Business -- Operations -- Materials and Supplies."
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through internally
generated cash flow, borrowings from banks and financial institutions and
proceeds from the Offering (in April 1997). For the fiscal year ended February
28, 1998, the Company generated cash flow from operations of $5.5 million. At
February 28, 1998, the Company had accounts receivable of $6.0 million,
inventory of $11.9 million and working capital of $15.4 million.
13
15
Capital expenditures, including financed purchases of equipment, aggregated
$2,130,000, $613,000 and $664,000 for the fiscal years ended February 28, 1998,
February 28, 1997 and February 29, 1996, respectively. The Company had no
material capital expenditure commitments as of February 28, 1998.
The Company leases a 161,000 square foot manufacturing, distribution and
corporate facility. The lease expires in September 2007. Net lease expenses on
the new facility are approximately $75,000 per month, with fixed increases of
approximately 3% per year.
In April 1997 the Company completed the Offering which generated net
proceeds to the Company of approximately $18.0 million upon the sale of
2,875,500 shares of Common stock by the Company.
In April 1996, the Company entered into a five-year Loan and Security
Agreement with Fleet Capital Corporation ("Fleet") which provided for (i) a
$10.0 million revolving line of credit, secured by the Company's accounts
receivable and inventories and (ii) a $9.5 million term note (the "term note")
secured by the assets of the Company. The term note was repaid on April 14, 1997
with the proceeds of the Offering. As of January 15, 1998 the Company entered
into an Amended and Restated Loan and Security Agreement with Fleet which
provides a $20 million credit facility consisting of (i) a $15 million revolving
line of credit and (ii) a $5 million term note. The $20 million credit facility
is secured by a blanket lien on the assets of the Company.
In April 1996, the Company was recapitalized through the sale of redeemable
preferred stock to Churchill ESOP Capital Partners, A Minnesota Limited
Partnership ("Churchill"). For proceeds of $6.0 million, the Company sold 1,000
shares of newly-issued redeemable preferred stock to Churchill and issued a
warrant to Churchill to purchase 1,000,000 shares of common stock at $0.01 per
share. The warrant was exercised in full in April 1996. The redeemable preferred
stock was redeemed by the Company on April 14, 1997 with proceeds received from
the Offering. The redemption amount was approximately $6.9 million.
In April 1996, the Company made an $11.0 million term loan to the ESOP (the
"ESOP Loan"), the proceeds of which were used by the ESOP to purchase the
Company's Series B Common stock from senior management. The ESOP pledged the
stock back to the Company as security for the ESOP Loan. The ESOP Loan has a
ten-year term and bears interest at 6% per annum. Principal and interest are due
annually, subject to the Company making contributions to the ESOP to fund the
principal and interest payments.
Contributions to the ESOP are accounted for as a contribution expense on
the Company's income statement and are accrued quarterly based upon the expected
annual contribution amount. As quarterly contributions are accrued, the
corresponding shares are added to weighted average common shares outstanding and
unearned ESOP shares on the Company's Balance Sheet are reduced.
The ESOP uses the contributions to repay amounts due on the ESOP Loan. The
ESOP contribution expense is a net non-cash charge which is added back to net
income to arrive at cash flows provided by operating activities. As the Company
makes these non-cash contributions to the ESOP to fund the repayment of the ESOP
Loan, the Company will realize cash tax savings equal to the product of the tax
basis of the contributions multiplied by the applicable statutory tax rates in
effect at the time.
The dividend of $995,000 paid in August 1996 to the ESOP on the shares of
Series B Common stock was also accounted for as a contribution expense because
the dividends were used to repay the principal balance of the ESOP Loan. The
dividend and related repayment of a portion of the ESOP Loan resulted in the
release of approximately 136,000 shares of Series B common stock from unearned
ESOP shares. All shares of Series B common stock were converted into common
stock as of the closing of the Offering.
The Company believes that internally generated cash flow and borrowing
ability will be sufficient to meet its operating, working capital and capital
expenditure requirements through the next twelve months. In the event the
Company's plans require more capital than is presently anticipated, the
Company's remaining cash balances may be consumed and additional sources of
liquidity, such as debt or equity financings, may be required to meet its
capital needs. There can be no assurance that additional capital beyond the
amounts the Company currently requires will be available on reasonable terms, if
at all.
14
16
INFLATION
The Company does not believe that inflation has had a material effect on
the results of operations during the past three years. There can be no assurance
that the Company's business will not be affected by inflation in the future.
NEW ACCOUNTING PRONOUNCEMENTS
Effective March 1, 1998, the Company adopted the Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS No.
130") and Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"). The adoption of SFAS No. 130 and SFAS No.
131 by the Company had no impact on the Company's financial statements.
FORWARD-LOOKING INFORMATION
The preceding "Business" section and this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section contain
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 reach new
market participants as a result of its increased advertising and marketing
efforts; the Company's ability to continue to develop and bring to market new
and innovative products; the Company's ability to retain and expand the
telescope, binocular and other optical products markets; the Company expanding
its distribution network; the Company experiencing fluctuations in its sales,
gross margins and profitability from quarter to quarter consistent with prior
periods; and the Company's expectation that it will have sufficient funds to
meet any working capital requirements during the foreseeable future with
internally generated cash flow and borrowing ability.
In addition to other information in this Report, the Company cautions that
certain factors, including without limitation the following, should be
considered carefully in evaluating the Company and its business and that such
factors may cause the Company's actual operating results to differ materially
from those set forth in the forward looking statements described above or to
otherwise be adversely affected: any significant decline in general economic
conditions or uncertainties regarding future economic prospects that affect
consumer spending; any general decline in the size of the telescope market or
any segment of the telescope market in which the Company competes, whether from
general economic conditions, a decrease in the popularity of telescopes or
otherwise; any inability to continue to design and manufacture products that
will achieve commercial success; any product designs being rendered obsolete
within a relatively short period of time as new products are introduced into the
market; any failure of the Company to penetrate the binocular market and achieve
meaningful sales; any unexpected termination or interruption of the Company's
manufacturing arrangements with the Taiwanese Factory; greater than anticipated
competition; any loss of, or the failure to replace, any significant portion of
the sales made to any significant customer of the Company; the inherent risks
associated with international sales, including variations in local economies,
fluctuating exchange rates (including conversion to Euros), increased difficulty
of inventory management, greater difficulty in accounts receivable collections,
costs and risks associated with localizing products for foreign countries,
changes in tariffs and other trade barriers, adverse foreign tax consequences,
cultural differences affecting product demand and customer service and burdens
of complying with a variety of foreign laws; and the inherent risks associated
with products manufactured by foreign suppliers located primarily in Taiwan,
Korea, Japan and the Peoples Republic of China, including, among other things,
imposition of quotas or trade sanctions, decline in the value of the U.S. dollar
against local currencies causing an effective increase in the price of finished
products and components or the decline in value of local currencies against the
U.S. dollar resulting in competitive products being manufactured for lower costs
and thus exerting downward pricing pressures on the Company's products, shipment
delays and the political instability between China and Taiwan.
15
17
The Company is currently addressing a potential problem facing many users
of automated information systems. The widespread use of two-digit date computer
programs to perform computations and decision-making functions may cause
computer systems to malfunction in the year 2000, which could lead to business
delays and disruptions in the U.S. and internationally. The Company has made and
will continue to make modifications in its computer systems to address this
problem. The Company expects to complete these modifications prior to the end of
calendar 1999 at a cost that is not expected to be material to the operations of
the Company. However, due to the independent nature of computer systems, the
Company may be adversely impacted depending on whether or not other entities not
affiliated with the Company address this issue successfully.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is set forth in "Index to Financial
Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission within 120
days after the close of the Company's fiscal year. Information regarding
executive officers of the Company is set forth under the caption "Executive
Officers of the Registrant" in Item 1 hereof.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission within 120
days after the close of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission within 120
days after the close of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission within 120
days after the close of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. The documents described in the "Index to Financial Statements" are
included in this report starting at page F-1.
2. All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have
been omitted.
3. Exhibits included or incorporated herein: See Exhibit Index.
(b) REPORTS ON FORM 8-K:
None.
16
18
INDEX TO FINANCIAL STATEMENTS
PAGE
NUMBER
------
Meade Instruments Corp.
Report of Independent Accountants......................... F-2
Balance Sheets............................................ F-3
Statements of Income...................................... F-4
Statements of Stockholders' Equity (Deficit).............. F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
F-1
19
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MEADE INSTRUMENTS CORP.
In our opinion, the accompanying balance sheets and the related statements
of income, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Meade Instruments Corp. at
February 28, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended February 28, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
April 2, 1998
F-2
20
MEADE INSTRUMENTS CORP.
BALANCE SHEETS
ASSETS
FEBRUARY 28, FEBRUARY 28,
1997 1998
------------ ------------
Current assets:
Cash...................................................... $ 4,000 $ 1,649,000
Accounts receivable, less allowance for doubtful accounts
of $248,000 in 1997 and $485,000 in 1998............... 4,830,000 6,024,000
Inventories (Note 11)..................................... 12,077,000 11,910,000
Deferred income taxes..................................... 885,000 1,424,000
Prepaid expenses and other current assets................. 231,000 239,000
------------ -----------
Total current assets.............................. 18,027,000 21,246,000
Other assets................................................ 1,047,000 361,000
Property and equipment, net (Note 11)....................... 1,450,000 2,985,000
------------ -----------
$ 20,524,000 $24,592,000
============ ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit (Note 2).............................. $ 4,358,000
Current portion of long-term debt (Note 4)................ 1,584,000
Current portion of capital lease obligations (Note 5)..... 218,000 $ 205,000
Accounts payable.......................................... 2,195,000 1,326,000
Accrued liabilities(Note 11).............................. 2,358,000 2,692,000
Income taxes payable...................................... 1,062,000 1,606,000
------------ -----------
Total current liabilities......................... 11,775,000 5,829,000
------------ -----------
Long-term debt, net of current portion (Note 4)............. 6,599,000
------------ -----------
Long-term capital lease obligations, net of current portion
(Note 5).................................................. 547,000 341,000
------------ -----------
Deferred rent............................................... 65,000
------------ -----------
Commitments and contingencies(Note 5)
Redeemable Series A preferred stock; 1,000 shares
authorized, issued and outstanding (Note 6)............... 6,490,000
------------ -----------
Stockholders' equity (deficit):
Preferred stock; 999,000 shares authorized, none issued
and outstanding........................................
Common stock; $0.01 par value; 20,000,000 shares
authorized; 7,875,500 shares issued and outstanding at
February 28, 1998...................................... 79,000
Series A common stock; 15,000,000 shares authorized;
3,500,000 shares issued and outstanding at February 28,
1997................................................... 3,511,000
Series B common stock; 5,000,000 shares authorized;
1,500,000 shares issued and outstanding at February 28,
1997 (Note 7)..........................................
Additional paid-in capital................................ 21,445,000
Retained earnings......................................... 1,542,000 4,903,000
------------ -----------
5,053,000 26,427,000
Unearned ESOP shares (Note 7)............................. (10,005,000) (8,005,000)
------------ -----------
Total stockholders' equity (deficit).............. (4,952,000) 18,422,000
------------ -----------
$ 20,524,000 $24,592,000
============ ===========
See accompanying notes to financial statements.
F-3
21
MEADE INSTRUMENTS CORP.
STATEMENTS OF INCOME
YEAR ENDED FEBRUARY 28(29),
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
Net sales........................................... $29,770,000 $47,151,000 $59,905,000
Cost of sales....................................... 20,054,000 31,845,000 38,245,000
----------- ----------- -----------
Gross profit...................................... 9,716,000 15,306,000 21,660,000
Selling expenses.................................... 2,832,000 4,759,000 6,771,000
General and administrative expenses................. 2,951,000 5,970,000 6,564,000
Research and development expenses................... 518,000 628,000 854,000
----------- ----------- -----------
Operating income.................................. 3,415,000 3,949,000 7,471,000
Interest expense.................................... 659,000 1,657,000 1,034,000
----------- ----------- -----------
Income before income taxes........................ 2,756,000 2,292,000 6,437,000
Provision for income taxes (Note 8)................. 1,200,000 960,000 2,702,000
----------- ----------- -----------
Net income.......................................... 1,556,000 1,332,000 3,735,000
Accretion on redeemable preferred stock (Notes 1 and
6)................................................ 4,310,000 374,000
----------- ----------- -----------
Net income (loss) available to common
stockholders...................................... $ 1,556,000 $(2,978,000) $ 3,361,000
=========== =========== ===========
Net income (loss) per share available to common
stockholders -- basic and diluted................. $ 0.34 $ (0.76) $ 0.52
=========== =========== ===========
Weighted average common shares outstanding -- basic
(Note 1).......................................... 4,571,000 3,938,000 6,410,000
=========== =========== ===========
Weighted average common shares outstanding --diluted
(Note 1).......................................... 4,571,000 3,938,000 6,458,000
=========== =========== ===========
See accompanying notes to financial statements.
F-4
22
MEADE INSTRUMENTS CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SERIES A SERIES B
COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL
------------------------ ----------------------- -------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
---------- ----------- ---------- ---------- ---------- ------- ----------- ----------
Balance at February 28,
1995...................... 2,571,361 $ 1,000 1,500,000 $ $ $ $3,214,000
Net income.................. 1,556,000
---------- ----------- ---------- ---------- ---------- ------- ----------- ----------
Balance at February 29,
1996...................... 2,571,361 1,000 1,500,000 4,770,000
Redemption of Series A
common stock.............. (71,361) (250,000)
Purchase and exercise of
warrant for shares of
Series A common stock..... 1,000,000 3,510,000
Unearned ESOP shares........
Release of shares from
dividend payment on ESOP
acquisition loan..........
Accretion on redeemable
preferred stock........... (4,310,000)
Net income.................. 1,332,000
---------- ----------- ---------- ---------- ---------- ------- ----------- ----------
Balance at February 28,
1997...................... 3,500,000 3,511,000 1,500,000 1,542,000
Issuance of common stock at
initial public offering,
net of offering costs..... 2,876,000 29,000 21,345,000
Conversion of Series A and B
common stock to common
stock..................... (3,500,000) (3,511,000) (1,500,000) 5,000,000 50,000
Release of ESOP shares...... 100,000
Accretion on redeemable
preferred stock........... (374,000)
Net income.................. 3,735,000
---------- ----------- ---------- ---------- ---------- ------- ----------- ----------
Balance at February 28,
1998...................... $ $ 7,876,000 $79,000 $21,445,000 $4,903,000
========== =========== ========== ========== ========== ======= =========== ==========
UNEARNED
ESOP SHARES TOTAL
------------ ------------
Balance at February 28,
1995...................... $ $ 3,215,000
Net income.................. 1,556,000
------------ ------------
Balance at February 29,
1996...................... 4,771,000
Redemption of Series A
common stock.............. (250,000)
Purchase and exercise of
warrant for shares of
Series A common stock..... 3,510,000
Unearned ESOP shares........ (11,000,000) (11,000,000)
Release of shares from
dividend payment on ESOP
acquisition loan.......... 995,000 995,000
Accretion on redeemable
preferred stock........... (4,310,000)
Net income.................. 1,332,000
------------ ------------
Balance at February 28,
1997...................... (10,005,000) (4,952,000)
Issuance of common stock at
initial public offering,
net of offering costs..... 21,374,000
Conversion of Series A and B
common stock to common
stock..................... (3,461,000)
Release of ESOP shares...... 2,000,000 2,100,000
Accretion on redeemable
preferred stock........... (374,000)
Net income.................. 3,735,000
------------ ------------
Balance at February 28,
1998...................... $ (8,005,000) $ 18,422,000
============ ============
See accompanying notes to financial statements.
F-5
23
MEADE INSTRUMENTS CORP.
STATEMENTS OF CASH FLOWS
YEAR ENDED FEBRUARY 28(29),
------------------------------------------
1996 1997 1998
----------- ------------ -----------
Cash flows from operating activities:
Net income......................................... $ 1,556,000 $ 1,332,000 $ 3,735,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 300,000 659,000 513,000
Debt issuance costs.............................. 400,000
ESOP contribution................................ 1,995,000 1,100,000
Changes in assets and liabilities:
Accounts receivable........................... (1,153,000) (291,000) (1,194,000)
Inventories................................... (1,035,000) (5,615,000) 167,000
Deferred income taxes......................... (104,000) (555,000) (539,000)
Prepaid expenses and other current assets..... (109,000) (18,000) (8,000)
Other assets.................................. (112,000) (1,392,000) 303,000
Accounts payable.............................. 154,000 789,000 (869,000)
Accrued liabilities........................... (33,000) 495,000 1,334,000
Income taxes payable.......................... 362,000 440,000 544,000
----------- ------------ -----------
Net cash provided by (used in) operating
activities............................. (174,000) (2,161,000) 5,486,000
----------- ------------ -----------
Cash flows from investing activities:
Capital expenditures.......................... (247,000) (169,000) (2,130,000)
----------- ------------ -----------
Net cash used in investing activities.... (247,000) (169,000) (2,130,000)
----------- ------------ -----------
Cash flows from financing activities:
Payments on long-term debt.................... (200,000) (1,967,000) (8,183,000)
Proceeds from long-term debt.................. 9,500,000
Net borrowings (payments) under bank line of
credit...................................... 718,000 2,231,000 (4,358,000)
Payments on notes payable to related
parties..................................... (2,000,000)
Net proceeds from issuance of common stock.... 17,913,000
Redemption of common stock.................... (250,000)
Issuance of preferred stock................... 2,500,000
Redemption of preferred stock................. (6,864,000)
Purchase and exercise of warrant for common
stock....................................... 3,510,000
Unearned ESOP shares.......................... (11,000,000)
Payment of dividend on Series B common
stock....................................... (995,000)
Payment received on ESOP acquisition loan..... 995,000
Payments under capital lease obligations...... (136,000) (193,000) (219,000)
----------- ------------ -----------
Net cash provided by (used in) financing
activities............................. 382,000 2,331,000 (1,711,000)
----------- ------------ -----------
Net increase (decrease) in cash.................... (39,000) 1,000 1,645,000
Cash at beginning of year.......................... 42,000 3,000 4,000
----------- ------------ -----------
Cash at end of year................................ $ 3,000 $ 4,000 $ 1,649,000
=========== ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................... $ 639,000 $ 1,696,000 $ 500,000
Income taxes.................................. $ 940,000 $ 1,075,000 $ 2,699,000
Non-cash financing activities:
Capital lease obligations..................... $ 417,000 $ 444,000
Accretion on redeemable preferred stock....... $ 4,310,000 $ 374,000
Release of unearned ESOP shares............... $ 2,000,000
See accompanying notes to financial statements.
F-6
24
MEADE INSTRUMENTS CORP.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Meade Instruments Corp. (the "Company"), a Delaware corporation,
manufactures, imports and distributes telescopes and telescope accessories,
binoculars and microscopes.
In April 1996, the Company effected a recapitalization pursuant to which
the Company's stockholders exchanged their common stock for 2,571,361 shares of
Series A and 1,500,000 shares of Series B common stock. The accompanying
financial statements have been retroactively adjusted to give effect to this
transaction. The Company redeemed 71,361 shares of Series A common stock for
$250,000. The Company also issued 1,000 shares of redeemable Series A preferred
stock and a warrant to purchase 1,000,000 shares of Series A common stock at
$0.01 per share for $6.0 million in the aggregate. The warrant was exercised
immediately upon purchase of the Series A preferred stock. The Company allocated
$2.5 million of the proceeds as the fair value of the Series A preferred stock
and $3.5 million as the fair value of the Series A common stock. Also in April
1996, the Company's newly-formed Employee Stock Ownership Plan ("ESOP")
purchased all of the outstanding shares of Series B common stock (1,500,000
shares) from the existing stockholders. The ESOP financed the purchase through
the proceeds of an $11.0 million term loan from the Company.
In April 1997 the Company completed an initial public offering of 3,875,500
shares of common stock (including the underwriters' over-allotment option). The
offering included 2,875,500 newly issued shares of common stock and 1 million
shares of common stock held by the Company's then preferred stockholder. The
offering raised approximately $18.0 million for the Company (after underwriting
discounts and offering expenses). Net proceeds from the offering were used to
redeem approximately $6.9 million of outstanding Series A preferred stock,
including accrued dividends, and to repay approximately $11.1 million of
existing bank term and revolving debt. Prior to the closing of the offering, the
Company reincorporated into a Delaware corporation pursuant to a merger with and
into a newly-formed and wholly-owned Delaware subsidiary, with the Delaware
subsidiary being the surviving corporation. All of the outstanding shares of the
Series A and Series B common stock and Series A preferred stock of the Company
were exchanged on a ratio of one for one with shares of Series A and Series B
common stock and Series A preferred stock of the Delaware subsidiary as part of
the reincorporation. All shares of Series A and Series B common stock were
converted into shares of common stock upon completion of the initial public
offering.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Sales are recorded when products are shipped.
Inventories
Inventories are stated at the lower of cost, as determined using the
first-in, first-out ("FIFO") method, or market. Costs include materials, labor
and manufacturing overhead.
Property and equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets which range
from three to seven years. Properties held under capital leases are recorded at
the present value of the noncancellable lease payments over the term of the
lease and are amortized over the shorter of the lease term or the estimated
useful lives of the assets.
F-7
25
MEADE INSTRUMENTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income taxes
The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates that will be in effect when the
differences are expected to reverse. The Company files its tax return for the
year ending August 31, rather than for the financial reporting period ending the
last day of February.
Advertising
The Company expenses the production costs of advertising as incurred. For
the years ended February 29, 1996 and February 28, 1997 and 1998, the Company
incurred advertising expenses of approximately $1.0 million, $2.1 million and
$3.0 million, respectively.
Research and development
Expenditures for research and development costs are charged to expense as
incurred.
Net income per share
In fiscal year 1998 the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS No. 128") and related
interpretations, which required a change in the method used to compute earnings
per share. Under this new standard, primary and fully diluted earnings per share
were replaced with "Basic" and "Diluted" earnings per share. Basic earnings per
share amounts exclude the dilutive effect of potential common shares. Basic
earnings per share is based upon the weighted-average number of common shares
outstanding. Diluted earnings per share is 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 which are included under the treasury stock method.
The following is a reconciliation of the numerators and the denominators of
the basic and diluted earnings per share computations for net income available
to common stockholders for the fiscal year ended February 28, 1998. For the
fiscal years ended 1997 and 1996 there were no dilutive securities.
YEAR ENDED FEBRUARY 28, 1998
------------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- --------- ---------
Basic EPS:
Net income available to common
stockholders............................ $3,361,000 6,410,000 $0.52
========== =====
Effect of dilutive securities:
Stock options........................... 48,000
---------
Diluted EPS:
Net income available to common
stockholders............................ $3,361,000 6,458,000 $0.52
========== ========= =====
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, are principally accounts receivable. The Company
maintains an allowance for doubtful accounts but historically has not
experienced any significant losses related to individual customers or groups of
customers in any particular industry or geographic area.
F-8
26
MEADE INSTRUMENTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fair value of financial instruments
The carrying amounts of cash, accounts receivable, prepaid expenses and
other current assets, accounts payable, accrued liabilities, and short-term
loans approximate fair value due to the short maturity of these instruments.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those estimates.
Long-lived assets
Long-lived assets are reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company reviews the recoverability of long-lived assets and intangible assets by
comparing the estimated future cash flows on a undiscounted basis to the net
book value of the assets. In the event projected undiscounted cash flows are
less than the net book value of the assets, the carrying value of the assets are
written down to their fair value, less costs to sell. Assets that are to be
disposed of are measured at the lower of cost or fair value, less costs to sell.
Reclassifications
Certain reclassifications have been made to conform the 1996 and 1997
information to the 1998 presentation.
2. BANK DEBT
In April 1996, the Company replaced its existing revolving line of credit
with a $10.0 million line of credit secured by receivables and inventory. The
line of credit bore interest at the bank's base rate (8.25% at February 28,
1997) plus 0.5%, interest payable monthly in arrears. In April 1996, the Company
also borrowed $9.5 million evidenced by a term note (Note 4). The Loan and
Security Agreement between the bank and the Company, which governed the line of
credit and term note, contained certain financial covenants including minimum
working capital, minimum profitability, and minimum interest and debt coverage
ratios.
In January 1998, the Company amended its existing loan agreements. The
amended agreement provides a $20 million facility consisting of (i) a $15
million revolving line of credit which bears interest at the bank's base rate
(8.5% at February 28, 1998) less .25% with a LIBOR plus 1.50% option, interest
payable monthly in arrears and (ii) a $5 million term note bearing interest at
the bank's base rate with a LIBOR plus 2.00% option, interest payable monthly in
arrears. The Amended and Restated Loan and Security Agreement (the "Loan
Agreement"), between the bank and the Company, which governs the line of credit
and term note facilities, contains certain financial covenants consisting of
minimum profitability and maximum debt-to-equity ratios. The Loan Agreement is
secured by a blanket lien on the assets of the Company.
3. NOTES PAYABLE TO RELATED PARTIES
In July 1993, the Company borrowed $1.5 million from a stockholder
evidenced by a subordinated promissory note payable. Also, payable to
stockholders were subordinated notes payable totaling $500,000. The notes
payable were repaid in full in April 1996.
F-9
27
MEADE INSTRUMENTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
As of February 28, 1997, the company had a note payable to a bank in the
amount of $8,183,000 of which $6,599,000 was reflected as long term and the
remaining balance of $1,584,000 was shown as the current portion on the
accompanying balance sheet. The note bore interest at the bank's base rate
(8.25% at February 28, 1997) plus .75% payable monthly, principal payments were
due in defined quarterly amounts totaling $1,584,000 annually for five years
commencing July 1996. This note was paid in its entirety with proceeds from the
initial public offering in April 1997. Approximately $400,000 of previously
capitalized debt issuance costs related to this note were written off and
presented as a component of interest expense for the year ended February 28,
1998.
5. COMMITMENTS AND CONTINGENCIES
The Company is obligated under certain long-term noncancellable leases and
other noncancellable agreements for its office and manufacturing facilities and
certain equipment and machinery. Aggregate future minimum commitments under
noncancellable leases and other agreements at February 28, 1998 that have
remaining terms in excess of one year are as follows:
FISCAL YEAR CAPITAL OPERATING
----------- -------- -----------
1999................................................ $252,000 $ 1,034,000
2000................................................ 226,000 1,034,000
2001................................................ 96,000 1,034,000
2002................................................ 58,000 1,086,000
2003................................................ 1,035,000
Thereafter.......................................... 5,059,000
-------- -----------
Net minimum lease payments.......................... 632,000 $10,282,000
===========
Less amount representing interest................... (85,000)
--------
Capital lease obligations........................... $547,000
========
For the years ended February 29, 1996, February 28, 1997 and 1998, the
Company incurred rent expense of $373,000, $602,000 and $698,000, respectively.
In December 1996, the Company executed a lease commencing October 1, 1997
for its office and manufacturing facilities. The lease term is ten years,
extendable for an additional ten years (two terms of five years each) at the
Company's option. Aggregate future minimum lease commitments for this lease are
included in the schedule above. Such commitments are subject to 9% increases at
the beginning of the months 31, 61 and 91.
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.
On April 2, 1998 a complaint was filed against the Company alleging
infringement of a U.S. patent by the Company. Management believes this complaint
is without merit and intends to defend this action vigorously. The ultimate
liability of the Company under this action is not presently determinable. After
discussion with counsel, it is the opinion of management that such liability is
not expected to have a material effect on the Company's financial position or
results of operations.
6. REDEEMABLE PREFERRED STOCK
At February 28, 1997, the Series A preferred stock had a cumulative 14%
dividend per annum payable quarterly. The Company recorded the Series A
preferred stock at $2.5 million, its fair value, and recorded accretion to
increase the carrying value of the Series A preferred stock to the redemption
value of $6.0 million
F-10
28
MEADE INSTRUMENTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
by April 23, 2001, the original redemption date, plus unpaid dividends. On
January 31, 1997, the Company entered into a binding agreement to redeem the
preferred stock earlier than the scheduled redemption date. The accretion was
accelerated in the fiscal year ended February 28, 1997 to reflect the new
redemption date (April 14, 1997) and the Company recorded an additional $3.4
million in accelerated accretion of the Series A preferred stock pursuant to the
new redemption agreement. Upon redemption of the Series A preferred stock on
April 14, 1997, the Company recorded a final accretion adjustment of $374,000.
7. EMPLOYEE STOCK OWNERSHIP PLAN
Adoption of the ESOP was effective March 1, 1996 and covers all employees
of the Company who meet certain service and eligibility requirements. Pursuant
to a Plan amendment the ESOP year ends on December 31 each year. A participant
becomes 100% vested in his ESOP account if, while employed at the Company, the
participant (i) reaches his 60th birthday, (ii) becomes disabled (as defined),
(iii) dies, or (iv) achieves five years of credited service (as defined).
Distributions of a participant's vested account are directed by the ESOP's
Administrative Committee. The Company provides a put option to any participant
who receives a distribution of Company stock, unless the stock is readily
tradable on an established market.
In April 1996, the ESOP purchased all of the outstanding shares of the
Company's Series B common stock (1,500,000 shares) held by the existing
stockholders for $11.0 million. The Series B common stock had a cumulative
dividend of $0.513 per share and a liquidation preference over the Series A
common stock. The ESOP financed the purchase of the Series B common stock (the
"financed shares") with the proceeds of an $11.0 million term loan (the
"acquisition loan") from the Company (all shares of Series A and B common stock
were converted into shares of common stock upon the completion of the initial
public offering, Note 1). The financed shares are held by the Meade Instruments
Corp. Employee Stock Ownership Trust (the "ESOP trust"). The ESOP pledged the
financed shares to the Company as security for the acquisition loan. The
financed shares were initially credited to a suspense account on the books of
the ESOP and will be allocated to the accounts of individual ESOP participants,
as of each plan year end, for payments made on the acquisition loan. The
acquisition loan has a ten year term and bears interest at 6% per annum.
Principal and interest is due annually, subject to the Company making
contributions to the ESOP to fund the principal and interest payments. The
release of financed shares from collateral is based on the ratio that the
payment of principal bears to the initial principal of the acquisition loan. The
Company accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares pledged as collateral are reported as unearned ESOP
shares in the balance sheet. As shares are committed to be released from
collateral, the Company records compensation expense, and the shares become
outstanding for net income per share purposes. Any dividends on allocated shares
are recorded as a reduction of retained earnings; any dividends on unallocated
ESOP shares are recorded as a reduction of debt and accrued interest.
For the years ended February 28, 1997 and 1998, the Company recognized ESOP
contribution expense of $1,995,000 and $1,100,000, respectively, including a
dividend payment in fiscal 1997 described below. In August 1996, the Company's
board of directors (i) authorized a contribution to the ESOP in the amount of
$237,000 to fund the interest payment due on the acquisition loan and (ii)
declared and paid a dividend on the Series B common stock in the amount of
$995,000. The ESOP trust used the proceeds of the contribution to pay the
semi-annual interest payment due on the acquisition loan. The ESOP used the
proceeds from the dividend to repay a portion of the acquisition loan. The
repayment released approximately 136,000 shares from collateral resulting in
$995,000 in ESOP contribution expense.
As of February 28, 1998, approximately 244,000 shares in the ESOP trust
have been allocated to individual participants. Allocation to individual
participant accounts are made in the ratio that the compensation of each
participant bears to the total compensation of all such participants. There are
approximately
F-11
29
MEADE INSTRUMENTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
136,000 shares committed to be released as of February 28, 1998. Shares in
suspense at February 28, 1998 are 1,256,000.
The fair value of the common stock upon purchase from the existing
stockholders in April 1996 was determined to be $7.33 per share. Under the terms
of the ESOP, the fair value of the common stock at any plan year end is to be
determined by an independent appraiser so long as the stock is not readily
tradable on an established market. The fair value of the shares held by the ESOP
at February 28, 1998 was $9.50 per share, the market price as determined on the
Nasdaq National Market. At February 28, 1998, there is no repurchase obligation.
8. INCOME TAXES
Significant components of the provision for income taxes are as follows:
YEAR ENDED FEBRUARY 28(29),
--------------------------------------
1996 1997 1998
---------- ---------- ----------
Current:
Federal.............................. $1,094,000 $1,264,000 $2,729,000
State................................ 210,000 251,000 512,000
---------- ---------- ----------
1,304,000 1,515,000 3,241,000
---------- ---------- ----------
Deferred:
Federal.............................. (87,000) (464,000) (454,000)
State................................ (17,000) (91,000) (85,000)
---------- ---------- ----------
(104,000) (555,000) (539,000)
---------- ---------- ----------
$1,200,000 $ 960,000 $2,702,000
========== ========== ==========
The provision for income taxes differed from the amount computed by
applying the U.S. federal statutory rate to income before income taxes due to
the effects of the following:
YEAR ENDED FEBRUARY 28(29),
---------------------------
1996 1997 1998
----- ----- -----
Federal income tax rate............................ 34.0% 34.0% 34.0%
State income taxes, net of federal income tax
benefit.......................................... 6.1 6.1 6.1
Other.............................................. 3.4 1.8 1.9
---- ---- ----
43.5% 41.9% 42.0%
==== ==== ====
Deferred tax assets at February 28, 1997 and February 28, 1998 consist of
certain inventory, accounts receivable and other reserves as well as differences
in the bases of fixed assets which are measured differently for tax and
financial reporting purposes.
9. SIGNIFICANT CUSTOMERS AND FOREIGN SALES
The Company generated 12%, 11% and 12% of its revenue from one customer
during the years ended February 29, 1996, February 28, 1997 and February 28,
1998, respectively, and 12% and 14% of its revenue from another customer during
the years ended February 28, 1997 and 1998, respectively. Export sales
approximated $7.4 million, $9.2 million and $11.3 million for the years ended
February 29, 1996, February 28, 1997 and 1998, respectively. Included in export
sales are sales to Europe of $4.1 million, $5.4 million and $9.0 million in the
years ended February 29, 1996, February 28, 1997 and 1998, respectively.
F-12
30
MEADE INSTRUMENTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK INCENTIVE PLAN
In February 1997, the Company's Board of Directors adopted the 1997 Stock
Incentive Plan (the "Plan"). The Plan provides for the grant of incentive and
non-qualified stock options, restricted stock, stock appreciation rights
("SARs"), and performance share awards to certain key employees (including
officers, whether or not directors) of the Company. Under the Plan, the Company
may grant options and other awards with respect to 750,000 shares of common
stock. Awards under the Plan generally vest after six months and become
exercisable over a four-year period, or as determined by the Compensation
Committee of the Board of Directors. Stock options generally remain exercisable
for a period of ten years from the date of grant. On March 9, 1997, the Board of
Directors granted, subject to the completion of the offering, non-qualified
stock options to purchase 230,000 shares of common stock to nine of the
Company's employees. The exercise price of the options was equal to the initial
public offering price of $7.00 per share. The options vest 25% after one year
and ratably over the following 36 months. The Company's two new non-employee
directors were granted 5,000 options each, at an exercise price equal to the
initial public offering price of $7.00 per share. The directors' options vest in
equal annual amounts over three years. During fiscal 1998, the Board of
Directors granted, to several company employees, non-qualified options to
purchase an additional 395,000 shares of common stock (net of 20,000
forfeitures). The exercise price of the options was equal to the market price at
the grant date and become exercisable 25% after one year and ratably over the
following 36 months.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which requires that companies with stock-based compensation plans
either recognize compensation expense based on the fair value of options granted
or continue to apply the existing accounting rules and disclose pro forma net
income and earnings per share assuming the fair value method had been applied.
The Company has chosen to continue applying Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans. 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 net
income available to common stockholders and earnings per share would have been
reduced to the pro forma amounts indicated below. The pro forma disclosures are
not representative of the effects on net income available to common stockholders
and earnings per share in future years.
YEAR ENDED
FEBRUARY 28,
1998
------------
Net income available to common stockholders:
As reported............................................ $3,361,000
Pro forma.............................................. $3,243,000
Earnings per share:
Basic --
As reported............................................ $ 0.52
Pro forma.............................................. $ 0.51
Diluted --
As reported............................................ $ 0.52
Pro forma.............................................. $ 0.51
F-13
31
MEADE INSTRUMENTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. The following
weighted-average assumptions were used for 1998: expected volatility of 32.4%, a
risk-free interest rate of 6.5%, no expected dividends, and an expected term of
4 years. The weighted average fair value of the Company's stock options granted
in 1998 is $2.77.
WEIGHTED
OPTION AVERAGE
SHARES EXERCISE PRICE
------- --------------
Granted............................................ 645,000 $7.845
Forfeited.......................................... (20,000) $7.250
------- ------
Options outstanding at February 28, 1998........... 625,000 $7.864
======= ======
RANGE OF NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING REMAINING CONTRACTUAL LIFE
- --------------- ----------- --------------------------
$7.0000 230,000 9.1 years
$7.2500 90,000 9.4 years
$7.8125 10,000 9.4 years
$7.6250 35,000 9.5 years
$8.8750 260,000 9.9 years
At February 28, 1998, outstanding options for common stock held by Company
employees totaled 625,000, of which 365,000 were vested. The option prices range
from $7.00 to $8.875 per share and are exercisable over periods ending no later
than 2008. There are no options outstanding for any prior years. There were no
exercisable stock options at February 28, 1998.
11. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of inventories is as follows:
FEBRUARY 28, FEBRUARY 28,
1997 1998
------------ ------------
Raw materials...................................... $ 3,095,000 $ 2,780,000
Work in process.................................... 1,407,000 1,819,000
Finished goods..................................... 7,575,000 7,311,000
----------- -----------
$12,077,000 $11,910,000
=========== ===========
The composition of property and equipment is as follows:
FEBRUARY 28, FEBRUARY 28,
1997 1998
------------ ------------
Molds and dies..................................... $ 720,000 $ 743,000
Machinery and equipment............................ 1,320,000 2,094,000
Furniture and fixtures............................. 41,000 269,000
Autos and trucks................................... 77,000 104,000
Leasehold improvements............................. 315,000 1,091,000
----------- -----------
2,473,000 4,301,000
Less accumulated depreciation and amortization..... (1,023,000) (1,316,000)
----------- -----------
$ 1,450,000 $ 2,985,000
=========== ===========
The gross value of assets under capital leases included in machinery and
equipment above is $1.2 million at February 28, 1997 and 1998.
F-14
32
MEADE INSTRUMENTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The composition of accrued liabilities is as follows:
FEBRUARY 28, FEBRUARY 28,
1997 1998
------------ ------------
ESOP expenses....................................... $1,000,000
Salaries, wages, bonuses and other associated
payroll costs..................................... 647,000 779,000
Advertising, cooperative advertising, shows and
convention expenses............................... 274,000 526,000
Professional fees................................... 173,000 379,000
Other............................................... 264,000 1,008,000
---------- ----------
$2,358,000 $2,692,000
========== ==========
F-15
33
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: May 29, 1998
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 May 29, 1998
- -------------------------------------------------------- Chief Executive Officer
John C. Diebel (Principal Executive
Officer)
/s/ STEVEN G. MURDOCK Director, President, Chief May 29, 1998
- -------------------------------------------------------- Operating Officer and
Steven G. Murdock Secretary
/s/ BRENT W. CHRISTENSEN Vice President -- Finance May 29, 1998
- -------------------------------------------------------- and Chief Financial
Brent W. Christensen Officer (Principal
Financial and Accounting
Officer)
/s/ JOSEPH A. GORDON, JR. Director and Senior Vice May 29, 1998
- -------------------------------------------------------- President -- North
Joseph A. Gordon, Jr. American Sales
Director May , 1998
- --------------------------------------------------------
Timothy C. McQuay
Director May , 1998
- --------------------------------------------------------
Harry L. Casari
F-16
34
EXHIBIT INDEX
EXHIBIT INCORPORATION
NUMBER DESCRIPTION OF EXHIBIT REFERENCE
-------- ---------------------- -------------
3.1+ Certificate of Incorporation of the Company, as amended..... (b)
3.2+ Bylaws of the Company....................................... (b)
4.1+ Specimen stock certificate.................................. (d)
10.1+ Form of Directors' and Officers' Indemnity Agreement........ (b)
10.7+ Industrial Lease (Single Tenant; Net; Stand-Alone), dated
December 20, 1996, between The Irvine Company and the
Company..................................................... (a)
10.13+ Meade Instruments Corp. Employee Stock Ownership Plan (the
"ESOP"), effective as of March 1, 1996, together with Form
of Amendments No. 1 and No. 2 to the ESOP................... (a)(b)
10.14 Employee Stock Ownership Trust Agreement, as Amended and
Restated as of April 9, 1997, between the Company and Wells
Fargo Bank, N.A. ...........................................
10.15+ Employee Stock Ownership Plan Loan and Pledge Agreement,
dated April 23, 1996, between the ESOP and the Company...... (a)
10.20+ Form of Trademark Distribution Agreement for EEC
Countries................................................... (a)
10.21+ Form of Trademark Distribution Agreement for Non-EEC
Countries................................................... (a)
10.24+ Celtic Master Lease, dated as of February 23, 1995, by and
between the Company and Celtic Leasing Corp................. (b)
10.29+ Meade Instruments Corp. 1997 Stock Incentive Plan........... (b)
10.30+ Form of Agreement of Merger, by and between the Company and
the predecessor of the Company.............................. (b)
10.31+ Preferred Stock Redemption Agreement, dated as of January
31, 1997, by and between the Company and Churchill.......... (b)
10.32 Amended and Restated Loan and Security Agreement, dates as
of January 15, 1998, by and between the Company and Fleet
Capital Corporation.........................................
10.33 Agreement, dated as of May 5, 1998, by and between the
Company and Weidy Opitcal Co., Ltd..........................
10.34 Form Employment Agreement, by and between the Company and
certain executive officers of the Company...................
10.35 Form Indemnification Agreement, by and between the Company
and each member of the Board of Directors and certain
executive officers of the Company...........................
10.36 Amendment No. 3 to Meade Instrument Corp. Employee Stock
Ownership Plan..............................................
10.37 Amendment No. 4 to Meade Instrument Corp. Employee Stock
Ownership Plan..............................................
10.38 Amendment No. 1 to ESOP Loan and Pledge Agreement...........
27.1 Financial Data Schedule.....................................
- ---------------
+ Previously filed with the Securities and Exchange Commission as set forth
below:
(a) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-21123), as filed with the Securities and Exchange
Commission on February 4, 1997.
(b) Incorporated by reference to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (Registration No. 333-21123), as filed with the
Securities and Exchange Commission on February 27, 1997.
35
(c) Incorporated by reference to the Company's Amendment No. 2 to Registration
Statement on Form S-1 (Registration No. 333-21123), as filed with the
Securities and Exchange Commission on March 13, 1997.
(d) Incorporated by reference to the Company's Amendment No. 3 to Registration
Statement on Form S-1 (Registration No. 333-21123), as filed with the
Securities and Exchange Commission on March 25, 1997.