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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, 1999
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)
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
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. [X]
As of May 18, 1999, there were outstanding 7,883,463 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 18, 1999 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 $12.56 per share as
reported by Nasdaq, was approximately $54.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1999 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, 1999.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Business.................................................... 1
Executive Officers of the Registrant........................ 6
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 8
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 8. Financial Statements and Supplementary Data................. 16
Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 16
Item 11. Executive Compensation...................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 16
Item 13. Certain Relationships and Related Transactions.............. 16
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K......................................................... 17
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
Report of Independent Accountants..................................... F-1
Consolidated Balance Sheets at February 28, 1998 and 1999............. F-2
Consolidated Statements of Income for each of the three years in the
period ended February 28, 1999...................................... F-3
Consolidated Statements of Stockholders' Equity for the three years in
the period ended February 28, 1999.................................. F-4
Consolidated Statements of Cash Flows for the three years in the
period ended February 28, 1999...................................... F-5
Notes to Consolidated Financial Statements............................ F-6
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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 nearly the complete line of its advanced
astronomical telescopes in Irvine, California, including the production all 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, Natural Wonders, J.C. Penney and Discovery
Channel Stores. 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 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 merchandiser, 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 nearly $1 million to research and
development during fiscal 1999, 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 1,500 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 15% of the
Company's net sales for the fiscal year ended February 28, 1999. 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 industry 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 employs a Taiwanese
quality control engineer on a full-time basis and 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, 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 $11.6 million for the fiscal year ended February 28, 1999.
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 electronic keypad command center, which operates
the computerized control system for the LX200 telescopes. By entering any
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of the celestial objects into the keypad, the telescope automatically locates
and tracks the selected object. Also 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. In fiscal 1998, the Company introduced its LXD500 series followed by
the LXD300 series in fiscal 1999, 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 3% of telescope units shipped and approximately 22% of
the Company's net sales for the fiscal year ended February 28, 1999.
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, the original
ETX mirror-lens telescope and the recently introduced ETX-90EC, include many 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 entry-level telescopes comprised approximately 97%
of the Company's telescope units shipped and approximately 60% of the Company's
net sales for the fiscal year ended February 28, 1999.
Binoculars. The Company recently introduced a complete line of consumer
binoculars that have been 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 3% of the
Company's net sales for the fiscal year ended February 28, 1999.
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 15% of the Company's net sales for the
fiscal year ended February 28, 1999.
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 principally 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, MIC International Corp.
(Japan), Astrocom GmbH (Germany), Wal-Mart, J.C. Penney and Discovery Channel
Stores.
Throughout fiscal 1999, 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 more than 1,500 retail store outlets. During fiscal 1999,
The Nature Company ("TNC"), the Company's largest customer, accounted for
approximately 14% of the Company's net sales. Service Merchandise Co. and TNC
accounted for approximately 14% and 12%, respectively, of the Company's net
sales for fiscal 1998. No customer other than TNC and Service Merchandise 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 55% of the Company's net sales in fiscal 1999. 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. Certain of the Company's
products contain computerized drive systems and other electronic circuitry. The
components of these computerized drive and electronic systems are purchased from
various suppliers and are generally assembled by third party vendors.
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-refractors,
Maksutov-Cassegrain optical sets, Schmidt-Cassegrain optical sets, or parabolic
Newtonian primary mirrors progress through the grinding, polishing and
hand-figuring stages of development, they are 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 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
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new supply agreement with exclusivity provisions that are similar to those of
the 1995 agreement. The Company owns many of the designs, molds and dies 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 (recently acquired by Tasco),
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, 1999, Meade had 296 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 (the "ESOP"), effective March 1, 1996. The ESOP provides
participating employees an opportunity to receive beneficial ownership of
Meade's common stock.
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, 1999:
NAME AGE POSITION
---- --- --------
John C. Diebel................... 55 Chairman of the Board and Chief Executive Officer
Steven G. Murdock................ 47 President, Chief Operating Officer, Secretary,
Director
Joseph A. Gordon, Jr............. 49 Senior Vice President -- North American Sales,
Director
Brent W. Christensen............. 40 Vice President -- Finance and Chief Financial
Officer
Mark D. Peterson................. 37 Vice President and General Counsel
Kenneth W. Baun.................. 51 Vice President -- Engineering
Robert A. Wood, III.............. 38 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
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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 a 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 and the
Company's Secretary since April 1996. 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 a 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 received a BS degree in
marketing from the University of Cincinnati.
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 a 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 a BA degree in electrical engineering and an 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 worked as a project engineer
for the Company. Mr. Wood received a 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. 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 judgement 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. A
counterclaim dated June 3, 1998 alleging infringement by the Company's LX200
series telescope system (and unspecified other products) of Reddwarf's U.S.
Patent No. 4,764,881 was also filed against the Company. The counterclaim
further alleges that the infringement is willful and seeks unspecified damages,
an injunction and other relief against the Company. The Company contends the
counterclaim is without merit and vigorously
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contests its allegations. The Company will pursue its defenses in its action for
declaratory judgment of non-infringement and invalidity. 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.
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 years ended February 28, 1998 and 1999 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
YEAR ENDED FEBRUARY 28, 1999: HIGH LOW
----------------------------- ------ ------
Fourth quarter..................................... $13.63 $10.75
Third quarter...................................... $11.00 $ 9.25
Second quarter..................................... $11.00 $ 9.38
First quarter...................................... $11.13 $ 9.13
The reported closing sales price of the Company's common stock on the
Nasdaq National Market on May 18, 1999 was $12.56. As of May 18, 1999, there
were 44 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.
8
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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
consolidated financial statements, including the consolidated balance sheets at
February 28, 1998 and 1999 and the consolidated statements of income for the
three years ended February 28, 1999 and the notes thereto appearing elsewhere
herein.
YEAR ENDED FEBRUARY 28 (29),
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Net sales............................ $ 24,934 $ 29,770 $ 47,151 $ 59,905 $ 76,321
Cost of sales........................ 17,040 20,054 31,845 38,245 44,255
---------- ---------- ---------- ---------- ----------
Gross profit....................... 7,894 9,716 15,306 21,660 32,066
Selling expenses..................... 2,035 2,832 4,759 6,771 12,268
General and administrative
expenses(1)........................ 2,118 2,951 5,970 6,564 8,525
Research and development expenses.... 423 518 628 854 978
---------- ---------- ---------- ---------- ----------
Operating income................... 3,318 3,415 3,949 7,471 10,295
Interest expense..................... 470 659 1,657 1,034 473
---------- ---------- ---------- ---------- ----------
Income before income taxes......... 2,848 2,756 2,292 6,437 9,822
Income taxes......................... 797 1,200 960 2,702 4,223
---------- ---------- ---------- ---------- ----------
Net income before accretion.......... 2,051 1,556 1,332 3,735 5,599
Accretion on redeemable preferred
stock(2)........................... (4,310) (374)
---------- ---------- ---------- ---------- ----------
Net income (loss) available to common
stockholders....................... $ 2,051 $ 1,556 $ (2,978) $ 3,361 $ 5,599
========== ========== ========== ========== ==========
Per share information:
Net income before adjustment to net
income available per common
share -- basic..................... $ 0.45 $ 0.34 $ 0.34 $ 0.58 $ 0.82
Accretion on redeemable preferred
stock(2)........................... (1.10) (0.06)
---------- ---------- ---------- ---------- ----------
Net income (loss) per share available
to common stockholders -- basic.... $ 0.45 $ 0.34 $ (0.76) $ 0.52 $ 0.82
========== ========== ========== ========== ==========
Net income (loss) per share available
to common stockholders --diluted... $ 0.45 $ 0.34 $ (0.76) $ 0.52 $ 0.80
========== ========== ========== ========== ==========
Weighted average common shares
outstanding -- basic............... 4,571,000 4,571,000 3,938,000 6,410,000 6,859,000
========== ========== ========== ========== ==========
Weighted average common shares
outstanding -- diluted............. 4,571,000 4,571,000 3,938,000 6,458,000 7,035,000
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Working capital...................... $ 3,358 $ 4,183 $ 6,252 $ 15,417 $ 21,388
Total assets......................... 10,197 13,035 20,524 24,592 34,624
Total current liabilities............ 5,827 7,364 11,775 5,829 9,134
Long-term debt, net of current
portion............................ 650 450 6,599
Redeemable preferred stock........... 6,490
Stockholders' equity (deficit)....... 3,215 4,771 (4,952) 18,422 25,267
9
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- ---------------
(1) General and administrative expenses for the fiscal years ended February 28,
1997, 1998 and 1999 included ESOP contribution expenses of $2.0 million,
$1.1 million and $1.2 million, respectively. See "Management's Discussion
and Analysis of Financial Condition and Result 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 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.
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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 consolidated 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 consolidated statements of income as a percentage of net
sales for the periods indicated.
YEAR ENDED FEBRUARY 28,
-----------------------
1997 1998 1999
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 67.5 63.8 58.0
----- ----- -----
Gross profit................................................ 32.5 36.2 42.0
Operating expenses:
Selling expenses.......................................... 10.1 11.3 16.0
General and administrative expenses....................... 12.6 11.0 11.2
Research and development expenses......................... 1.4 1.4 1.3
----- ----- -----
Total operating expenses............................... 24.1 23.7 28.5
----- ----- -----
Income from operations...................................... 8.4 12.5 13.5
Interest expense............................................ 3.5 1.8 .6
----- ----- -----
Income before income taxes.................................. 4.9 10.7 12.9
Provision for income taxes.................................. 2.1 4.5 5.5
----- ----- -----
Net income.................................................. 2.8 6.2 7.4
===== ===== =====
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales increased from $59.9 million in fiscal 1998 to $76.3 million in
fiscal 1999, an increase of 27.4%. This increase was primarily due to (i) an
increase of approximately $11.0 million in net sales of entry-level telescopes,
reflecting demand for smaller aperture more affordable telescopes and (ii) a
combined increase of approximately $6.0 million in net sales of advanced
telescopes and telescope accessories offset by approximately $1.0 million
decrease in binocular sales.
Gross profit increased from $21.7 million (36.2% of net sales) in fiscal
1998 to $32.1 million (42.0% of net sales) in fiscal 1999, an increase of 47.9%.
Gross profit as a percentage of net sales improved due to a sales mix that
favored more profitable lines of domestically manufactured products, increased
sales of accessories which generally have a higher gross profit margin than many
of the Company's other products and downward cost pressure on purchases from
Asia.
Selling expenses increased from $6.8 million (11.3% of net sales) in fiscal
1998 to $12.3 million (16.0% of net sales) in fiscal 1999, an increase of 80.9%.
This increase principally reflects (i) higher advertising and marketing expenses
to support higher sales volumes for the 1999 fiscal year as compared to the 1998
fiscal year, (ii) higher provisions for bad debts prompted by the bankruptcy of
a significant customer (iii) higher freight and other shipping costs due to
higher sales volumes in fiscal 1999 as compared to fiscal 1998 and (iv) higher
selling and shipping personnel expenses for fiscal 1999 as compared to fiscal
1998.
General and administrative expenses increased from $6.6 million (11.0% of
net sales) for the fiscal year ended February 28, 1998 to $8.5 million (11.2% of
net sales) for the 1999 fiscal year. This increase was generally due to
increases in personnel related costs, and increases in consulting and
professional fees.
Research and development expenses increased from $854,000 (1.4% of net
sales) in fiscal 1998 to $978,000 (1.3% of net sales) in fiscal 1999, an
increase of 14.5%. This increase was due to higher personnel related costs and
higher outside consulting costs during fiscal 1999 as compared to the prior
fiscal year.
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Interest expense decreased from $1.0 million for the fiscal year ended
February 28, 1998 to $473,000 for the 1999 fiscal year, a decrease of 52.7%.
Included in interest expense for the 1998 fiscal year was 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 in fiscal 1999 decreased 25.4% compared
to interest expense for the 1998 fiscal year before the write-off of $400,000 of
debt issuance costs. This decrease was due to lower average interest rates on
the Company's line of credit during fiscal 1999 as well as the elimination of
long-term bank debt that was retired with the proceeds of the Offering in early
fiscal 1998.
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
products, as well as sales of accessories and binoculars which generally have
higher gross profit margins 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 28, 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 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.
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
12
15
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, 1999.
The Company believes that all necessary adjustments have been included to
present fairly the quarterly information when read in conjunction with the
consolidated 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 1998 FISCAL 1999
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
Net sales............... $12,735 $12,289 $24,105 $10,776 $14,821 $15,412 $31,247 $14,841
Gross profit............ 4,209 4,402 8,961 4,088 6,080 6,511 13,291 6,184
Operating income........ 1,232 1,244 4,574 421 1,015 1,352 7,065 863
Net income.............. $ 376 $ 633 $ 2,534 $ 192 $ 554 $ 690 $ 3,896 $ 459
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). Cash provided by operations in
fiscal 1999 amounted to $1.3 million, a 77% decrease from fiscal 1998, primarily
due to increased use of cash for operating assets and liabilities in fiscal
1999. Significant increases in accounts receivable and inventory levels to
support sales growth offset higher profitability in fiscal 1999 resulting in
lower cash flow from operations. Net working capital (current assets less
current liabilities) totaled approximately $21.4 million at February 28, 1999,
up from $15.4 million in the prior year. Working capital requirements fluctuate
during the year due to the seasonal nature of the business. These requirements
are typically financed through a combination of internally generated cash flow
from operating activities and short-term bank borrowings.
Capital expenditures, including financed purchases of equipment, aggregated
$613,000, $2,130,000 and $3,091,000 for the fiscal years ended February 28,
1997, 1998 and 1999, respectively. Included in purchases of equipment for fiscal
1999 is approximately $1.3 million for equipment sold and leased back under
operating leases. The Company had no material capital expenditure commitments as
of February 28, 1999.
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 January 1998, the Company amended its Loan and Security Agreement (the
"Loan Agreement") to provide (i) a $15.0 million revolving line of credit and
(ii) a $5.0 million term note. The Loan Agreement is secured by the assets of
the Company. The Company had no outstanding borrowings under this Loan Agreement
at February 28, 1999.
Contributions to the Company's Employee Stock Ownership Plan ("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 number of shares are
13
16
added to the 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 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 that the
Company requires more capital than is presently anticipated, the Company's
remaining cash balances may be consumed and additional sources of liquidity,
such as debt or equity financings, may be required to meet its capital needs.
There can be no assurance that additional capital beyond the amounts the Company
currently requires will be available on reasonable terms, if at all.
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 consolidated financial
statements.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133; Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 is required to be adopted in
fiscal years beginning after June 15, 1999 and establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Company does not anticipate that the adoption of SFAS 133 will have a material
impact on its financial position or result of operations.
YEAR 2000
The Company has evaluated its enterprise information system software and is
currently evaluating its other internal software applications and operating
systems and the preparedness of third parties with which the Company has
material relationships against anticipated Year 2000 concerns. The Company
currently believes that its business will not be materially affected by the
advent of the Year 2000. The Company has upgraded its enterprise information
system software to a Year 2000 compliant version. The Company has also evaluated
both its products and its machinery and equipment against Year 2000 concerns. As
a result of these evaluations, the Company is not currently aware of any
material exposure to contingencies related to the Year 2000 issue for its
enterprise information system software, its products or its machinery and
equipment. The Company continues to evaluate and test other internal software
applications and operating systems. The Company believes that these evaluations
and tests will not reveal any material Year 2000 issues and that the results of
such evaluations and tests will not require any material expenditures or other
material diversion of resources or have any other material adverse effect on the
Company's operations. The Company believes that its evaluations and tests of
other internal software applications and operating systems will be completed by
late 1999. The Company is currently working with third parties with which it has
material relationships to attempt to determine their preparedness with respect
to Year 2000 issues and to analyze the risk to the Company in the event any such
third parties experience material business interruptions as a result of Year
2000 noncompliance. The Company is currently unable to estimate reasonable
likely worst-case effects of the arrival of the Year 2000 and does not currently
have a contingency plan in place for any such unanticipated negative effects.
The Company is currently analyzing reasonable likely worst-case scenarios and
the need for such contingency
14
17
planning once the upgrade and testing of internal systems and review of
third-party preparedness described above has been completed. Such contingency
plans may include increased inventory levels, securing alternate sources of
supply and other appropriate measures. Completion of the Year 2000 contingency
plans is expected by late 1999. Once developed, Year 2000 contingency plans and
related cost estimates will be tested in certain respects and continually
refined as additional information becomes available. As of February 28, 1999 the
Company's total incremental costs (historical plus estimated future costs) of
addressing Year 2000 issues are estimated to be approximately $150,000 of which
approximately $60,000 has been incurred. These costs are being funded through
cash flow from operations. These amounts do not include any costs associated
with the implementation of the contingency plan, which, as stated above, is in
the process of being developed. Consequently the estimates and completion dates
discussed herein for the various components of the plan are subject to change.
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; 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; the Company's belief that its
business will not be materially affected by the advent of the Year 2000.
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; 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 and any material
effect on the Company's business and operations by the advent of the Year 2000.
15
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is set forth in Item 14.
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.
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19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
PAGE
----
1. Financial Statements:
Report of Independent Accountants........................ F-1
Consolidated Balance Sheets at February 28, 1998 and
1999................................................... F-2
Consolidated Statements of Income for each of the three
years in the period ended February 28, 1999............ F-3
Consolidated Statements of Stockholders' Equity for the
three years in the period ended February 28, 1999...... F-4
Consolidated Statements of Cash Flows for the three years
in the period ended February 28, 1999.................. F-5
Notes to Consolidated Financial Statements............... F-6
2. Financial Statement Schedules:
For each of the three years in the period ended February
28, 1999
II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulations 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.
17
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Meade Instruments Corp.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 17 present fairly, in all material
respects, the financial position of Meade Instruments Corp. at February 28, 1998
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended February 28, 1999, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the index appearing under 14(a)(2) on page 17,
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule 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.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
April 21, 1999
F-1
21
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
FEBRUARY 28, FEBRUARY 28,
1998 1999
------------ ------------
Current assets:
Cash...................................................... $ 1,649,000 $ 1,283,000
Accounts receivable, less allowance for doubtful accounts
of $485,000 in 1998 and $2,243,000 in 1999............. 6,024,000 10,864,000
Inventories (Note 9)...................................... 11,910,000 14,191,000
Deferred income taxes..................................... 1,424,000 3,928,000
Prepaid expenses and other current assets................. 239,000 256,000
----------- -----------
Total current assets.............................. 21,246,000 30,522,000
Other assets................................................ 361,000 274,000
Property and equipment, net (Note 9)........................ 2,985,000 3,828,000
----------- -----------
$24,592,000 $34,624,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,326,000 $ 1,503,000
Accrued liabilities (Note 9).............................. 2,692,000 5,386,000
Income taxes payable...................................... 1,606,000 1,991,000
Current portion of capital lease obligations (Note 3)..... 205,000 254,000
----------- -----------
Total current liabilities......................... 5,829,000 9,134,000
----------- -----------
Long-term capital lease obligations, net of current portion
(Note 3).................................................. 341,000 223,000
----------- -----------
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock; $0.01 par value; 20,000,000 shares
authorized; 7,882,007 and 7,875,500 shares issued and
outstanding at February 28, 1999 and 1998,
respectively........................................... 79,000 79,000
Additional paid-in capital................................ 21,445,000 21,803,000
Retained earnings......................................... 4,903,000 10,502,000
----------- -----------
26,427,000 32,384,000
Unearned ESOP shares (Note 5)............................... (8,005,000) (7,117,000)
----------- -----------
Total stockholders' equity........................ 18,422,000 25,267,000
----------- -----------
$24,592,000 $34,624,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
22
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED FEBRUARY 28,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
Net sales........................................... $47,151,000 $59,905,000 $76,321,000
Cost of sales....................................... 31,845,000 38,245,000 44,255,000
----------- ----------- -----------
Gross profit........................................ 15,306,000 21,660,000 32,066,000
Selling expenses.................................... 4,759,000 6,771,000 12,268,000
General and administrative expenses................. 5,970,000 6,564,000 8,525,000
Research and development expenses................... 628,000 854,000 978,000
----------- ----------- -----------
Operating income.................................... 3,949,000 7,471,000 10,295,000
Interest expense.................................... 1,657,000 1,034,000 473,000
----------- ----------- -----------
Income before income taxes.......................... 2,292,000 6,437,000 9,822,000
Provision for income taxes (Note 6)................. 960,000 2,702,000 4,223,000
----------- ----------- -----------
Net income before accretion......................... 1,332,000 3,735,000 5,599,000
Accretion on redeemable preferred stock (Notes 1 and
4)................................................ 4,310,000 374,000
----------- ----------- -----------
Net income (loss) available to common
stockholders...................................... $(2,978,000) $ 3,361,000 $ 5,599,000
=========== =========== ===========
Net income (loss) per share available to common
stockholders -- basic............................. $ (0.76) $ 0.52 $ 0.82
=========== =========== ===========
Net income (loss) per share available to common
stockholders -- diluted........................... $ (0.76) $ 0.52 $ 0.80
=========== =========== ===========
Weighted average common shares outstanding -- basic
(Note 1).......................................... 3,938,000 6,410,000 6,859,000
=========== =========== ===========
Weighted average common shares outstanding --diluted
(Note 1).......................................... 3,938,000 6,458,000 7,035,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
23
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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 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 available to
common stockholders....... 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..... 2,875,500 $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
Net income available to
common stockholders....... 3,361,000
---------- ----------- ---------- ---------- --------- ------- ----------- -----------
Balance at February 28,
1998...................... 7,875,500 79,000 21,445,000 4,903,000
Exercise of stock options... 6,507 46,000
Release of ESOP shares...... 312,000
Net income available to
common stockholders....... 5,599,000
---------- ----------- ---------- ---------- --------- ------- ----------- -----------
Balance at February 28,
1999...................... $ $ 7,882,007 $79,000 $21,803,000 $10,502,000
========== =========== ========== ========== ========= ======= =========== ===========
UNEARNED
ESOP SHARES TOTAL
------------ ------------
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 available to
common stockholders....... 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
Net income available to
common stockholders....... 3,361,000
------------ ------------
Balance at February 28,
1998...................... (8,005,000) 18,422,000
Exercise of stock options... 46,000
Release of ESOP shares...... 888,000 1,200,000
Net income available to
common stockholders....... 5,599,000
------------ ------------
Balance at February 28,
1999...................... $ (7,117,000) $ 25,267,000
============ ============
See accompanying notes to consolidated financial statements.
F-4
24
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED FEBRUARY 28,
------------------------------------------
1997 1998 1999
------------ ----------- -----------
Cash flows from operating activities:
Net income before accretion........................ $ 1,332,000 $ 3,735,000 $ 5,599,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 659,000 513,000 755,000
Debt issuance costs.............................. 400,000
ESOP contribution................................ 1,995,000 1,100,000 1,200,000
Allowance for doubtful accounts.................. 1,758,000
Changes in assets and liabilities:
Accounts receivable........................... (291,000) (1,194,000) (6,598,000)
Inventories................................... (5,615,000) 167,000 (2,281,000)
Deferred income taxes......................... (555,000) (539,000) (2,504,000)
Prepaid expenses and other current assets..... (18,000) (8,000) (17,000)
Other assets.................................. (1,392,000) 303,000 87,000
Accounts payable.............................. 789,000 (869,000) 177,000
Accrued liabilities........................... 495,000 1,334,000 2,694,000
Income taxes payable.......................... 440,000 544,000 385,000
------------ ----------- -----------
Net cash provided by (used in) operating
activities............................. (2,161,000) 5,486,000 1,255,000
------------ ----------- -----------
Cash flows from investing activities:
Capital expenditures.......................... (169,000) (2,130,000) (2,921,000)
Proceeds from the sale and lease back of
equipment................................... 1,323,000
------------ ----------- -----------
Net cash used in investing activities.... (169,000) (2,130,000) (1,598,000)
------------ ----------- -----------
Cash flows from financing activities:
Payments on long-term debt.................... (1,967,000) (8,183,000)
Proceeds from long-term debt.................. 9,500,000
Net borrowings (payments) under bank line of
credit...................................... 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 46,000
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...... (193,000) (219,000) (69,000)
------------ ----------- -----------
Net cash provided by (used in) financing
activities............................. 2,331,000 (1,711,000) (23,000)
------------ ----------- -----------
Net increase (decrease) in cash.................... 1,000 1,645,000 (366,000)
Cash at beginning of year.......................... 3,000 4,000 1,649,000
------------ ----------- -----------
Cash at end of year................................ $ 4,000 $ 1,649,000 $ 1,283,000
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................... $ 1,696,000 $ 500,000 $ 503,000
Income taxes.................................. $ 1,075,000 $ 2,699,000 $ 6,342,000
Non-cash financing activities:
Capital lease obligations..................... $ 444,000 $ 170,000
Accretion on redeemable preferred stock....... $ 4,310,000 $ 374,000
See accompanying notes to consolidated financial statements.
F-5
25
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED 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 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.
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 28, 1997, 1998 and 1999, the Company incurred
advertising expenses of approximately $2.1 million, $3.0 million and $6.3
million, respectively.
F-6
26
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 years ended February 28, 1998 and 1999.
For the fiscal year ended 1997, there were no dilutive securities.
YEAR ENDED FEBRUARY 28, 1998 YEAR ENDED FEBRUARY 28, 1999
----------------------------------- ----------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
---------- ---------- --------- ---------- --------- ---------
Basic EPS:
Net income available to common
stockholders.......................... $3,361,000 6,410,000 $0.52 $5,599,000 6,859,000 $0.82
========== ===== ========== =====
Effect of dilutive securities:
Stock options......................... 48,000 176,000
---------- ---------
Diluted EPS:
Net income available to common
stockholders.......................... $3,361,000 6,458,000 $0.52 $5,599,000 7,035,000 $0.80
========== ========== ===== ========== ========= =====
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 at a level deemed appropriate by
management based on historical and other factors that affect collectibility. One
of the Company's significant customers filed for voluntary reorganization during
the year. Based upon the Company's assessment of the recoverability of the
receivable from this customer and in the opinion of management, the Company has
established adequate provisions related to this receivable.
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
F-7
27
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 an undiscounted basis to the net
book value of the assets. In the event that 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.
Accounting pronouncements
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130") during fiscal 1999. SFAS 130, which
is solely a financial statement presentation standard, established standards for
reporting comprehensive income and its components. Adoption of this standard had
no impact on the Company's disclosures.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133; Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 is required to be adopted in
fiscal years beginning after June 15, 1999 and establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Company does not anticipate that the adoption of SFAS 133 will have a material
impact on its financial position or result of operations.
Reclassifications
Certain reclassifications have been made to conform prior year information
to the fiscal 1999 presentation.
2. BANK DEBT
The Company is subject to a loan agreement which provides a $20.0 million
facility consisting of (i) a $15.0 million revolving line of credit which bears
interest at the bank's base rate (7.75% at February 28, 1999) less 0.25% with a
LIBOR plus 1.5% option, interest payable monthly in arrears and (ii) a $5.0
million term note bearing interest at the bank's base rate with a LIBOR plus
2.0% 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. The Company had no outstanding borrowings under this Loan
Agreement at February 28, 1999.
3. 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
F-8
28
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
minimum commitments under noncancellable leases and other agreements at February
28, 1999 that have remaining terms in excess of one year are as follows:
FISCAL YEAR CAPITAL OPERATING
----------- -------- -----------
2000................................................ $260,000 $ 1,345,000
2001................................................ 153,000 1,345,000
2002................................................ 99,000 1,398,000
2003................................................ 1,293,000
2004................................................ 1,070,000
Thereafter.......................................... 3,988,000
-------- -----------
Net minimum lease payments.......................... 512,000 $10,439,000
===========
Less amount representing interest................... 35,000
--------
Capital lease obligations........................... $477,000
========
For the years ended February 28, 1997, 1998 and 1999, the Company incurred
rent expense of $602,000, $698,000 and $1,207,000, 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.
4. 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 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.
5. 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. 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). The credited service requirement was amended to three years effective
January 1, 1999. Distributions of a participant's vested account are directed
F-9
29
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 twenty year term (pursuant to an amendment effective for
the 1998 plan year) 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 a formula defined in the plan. 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, 1998 and 1999 the Company recognized
ESOP contribution expense of $1,995,000, $1,100,000 and $1,200,000,
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, 1999 approximately 380,000 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
121,000 shares committed to be released as of February 28, 1999. Shares in
suspense at February 28, 1999 are 1,120,000.
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, 1999 was $12.63 per share, the market price as determined by the
Nasdaq National Market. At February 28, 1999, there was no repurchase
obligation.
F-10
30
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
Significant components of the provision for income taxes are as follows:
YEAR ENDED FEBRUARY 28,
---------------------------------------
1997 1998 1999
---------- ---------- -----------
Current:
Federal............................. $1,264,000 $2,729,000 $ 5,250,000
State............................... 251,000 512,000 1,477,000
---------- ---------- -----------
1,515,000 3,241,000 6,727,000
---------- ---------- -----------
Deferred:
Federal............................. (464,000) (454,000) (1,982,000)
State............................... (91,000) (85,000) (522,000)
---------- ---------- -----------
(555,000) (539,000) (2,504,000)
---------- ---------- -----------
$ 960,000 $2,702,000 $ 4,223,000
========== ========== ===========
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,
-----------------------
1997 1998 1999
----- ----- -----
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.................................................. 1.8 1.9 2.9
---- ---- ----
41.9% 42.0% 43.0%
==== ==== ====
The significant components of the net deferred tax assets and liabilities
were as follows:
FEBRUARY 28, FEBRUARY 28,
1998 1999
------------ ------------
Inventory and accounts receivable................... $1,212,000 $2,922,000
Accrued liabilities................................. 212,000 790,000
Other............................................... 216,000
---------- ----------
$1,424,000 $3,928,000
========== ==========
7. SIGNIFICANT CUSTOMERS AND FOREIGN SALES
The Company generated 11%, 12% and 14% of its revenue from one customer
during the years ended February 28, 1997, 1998 and 1999, respectively, and 12%
and 14% of its revenue from another customer during the years ended February 28,
1997 and 1998, respectively. Export sales approximated $9.2 million, $11.3
million and $11.6 million for the years ended February 28, 1997, 1998 and 1999,
respectively. Included in export sales are sales to Europe of $5.4 million, $9.0
million and $8.0 million in the years ended February 28, 1997, 1998 and 1999,
respectively.
8. 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 or its subsidiaries. The
Company has received director and stockholder approval to grant options and
other awards with respect to 750,000 shares of common stock under
F-11
31
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Plan. 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. The Board of Directors has
also granted non-qualified stock options to purchase common stock to each of the
Company's non-employee directors. The non-employee directors are granted 5,000
options each when elected and 5,000 each upon their re-election to the Board of
Directors at the Company's Annual Meeting each year. The directors' options vest
in equal annual amounts over three years. Option activity during fiscal years
1998 and 1999 was as follows:
WEIGHTED
OPTION AVERAGE
SHARES EXERCISE PRICE
------- --------------
Options outstanding at February 28, 1997............. 0
Granted.............................................. 645,000 $7.85
Forfeited............................................ (20,000) 7.25
-------
Options outstanding at February 28, 1998............. 625,000 7.86
-------
Granted.............................................. 268,000 9.49
Exercised............................................ (6,507) 7.14
Forfeited............................................ (17,500) 8.16
-------
Options outstanding at February 28, 1999............. 868,993 8.36
=======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------ ------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
EXERCISE REMAINING AVERAGE AVERAGE
PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
-------- ------- ---------------- -------------- ------- --------------
$ 7.00 - $ 7.25.. 303,493 8.2 years $ 7.06 134,332 $7.06
$ 7.63 - $ 7.81.. 45,000 8.5 years 7.67 17,083 7.67
$ 8.88 - $ 9.38.. 510,000 8.9 years 9.12 70,416 8.88
$10.75 - $12.94.. 10,500 9.7 years 12.31
------- -------
868,993 221,831
======= =======
The exercise price of options granted to employees was equal to the market
price at the grant date. Those options become exercisable 25% after one year and
ratably over the following 36 months. At February 28, 1999, outstanding options
for common stock held by Company employees totaled 868,993 of which 861,493 were
vested. The option prices range from $7.00 to $12.94 per share and are
exercisable over periods ending no later than 2009.
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.
F-12
32
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1999
------------ ------------
Net income available to common stockholders:
As reported...................................... $3,361,000 $5,599,000
Pro forma........................................ 3,243,000 5,311,000
Earnings per share:
Basic --
As reported...................................... $ 0.52 $ 0.82
Pro forma........................................ 0.51 0.77
Diluted --
As reported...................................... $ 0.52 $ 0.80
Pro forma........................................ 0.51 0.77
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 1999: expected volatility of 30.2%, a
risk-free interest rate of 5.25%, no expected dividends, and an expected term of
4 years. The weighted average fair value of the Company's stock options granted
in 1999 is $2.67.
9. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of inventories is as follows:
FEBRUARY 28, FEBRUARY 28,
1998 1999
------------ ------------
Raw materials..................................... $ 2,780,000 $ 3,417,000
Work in process................................... 1,819,000 1,514,000
Finished goods.................................... 7,311,000 9,260,000
----------- -----------
$11,910,000 $14,191,000
=========== ===========
The composition of property and equipment is as follows:
FEBRUARY 28, FEBRUARY 28,
1998 1999
------------ ------------
Molds and dies.................................... $ 743,000 $ 1,924,000
Machinery and equipment........................... 2,094,000 1,885,000
Furniture and fixtures............................ 269,000 945,000
Autos and trucks.................................. 104,000 130,000
Leasehold improvements............................ 1,091,000 1,015,000
----------- -----------
4,301,000 5,899,000
Less accumulated depreciation and amortization.... (1,316,000) (2,071,000)
----------- -----------
$ 2,985,000 $ 3,828,000
=========== ===========
The gross value of assets under capital leases included above are $1.2
million and $1.1 million at February 28, 1998 and 1999, respectively.
F-13
33
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The composition of accrued liabilities is as follows:
FEBRUARY 28, FEBRUARY 28,
1998 1999
------------ ------------
Salaries, wages, bonuses and other associated
payroll costs..................................... $ 779,000 $1,384,000
Advertising, cooperative advertising, shows and
convention expenses............................... 526,000 1,354,000
Professional fees................................... 379,000 957,000
Other............................................... 1,008,000 1,691,000
---------- ----------
$2,692,000 $5,386,000
========== ==========
F-14
34
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 28, 1999
MEADE INSTRUMENTS CORP.
By: /s/ JOHN C. DIEBEL
------------------------------------
John C. Diebel
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN C. DIEBEL Chairman of the Board and Chief May 28, 1999
- ----------------------------------------------------- Executive Officer (Principal
John C. Diebel Executive Officer)
/s/ STEVEN G. MURDOCK Director, President, Chief May 28, 1999
- ----------------------------------------------------- Operating Officer and Secretary
Steven G. Murdock
/s/ BRENT W. CHRISTENSEN Vice President -- Finance and May 28, 1999
- ----------------------------------------------------- Chief Financial Officer
Brent W. Christensen (Principal Financial and
Accounting Officer)
/s/ JOSEPH A. GORDON, JR. Director and Senior Vice May 28, 1999
- ----------------------------------------------------- President -- North American Sales
Joseph A. Gordon, Jr.
- ----------------------------------------------------- Director , 1999
Timothy C. McQuay
- ----------------------------------------------------- Director , 1999
Harry L. Casari
F-15
35
II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
BEGINNING OF CHARGED TO COSTS BALANCE AT
ALLOWANCE FOR DOUBTFUL ACCOUNTS PERIOD AND EXPENSES DEDUCTIONS(1) END OF PERIOD
------------------------------- ------------ ---------------- ------------- -----------------
Year ended February 28, 1997....... $ 73,000 $ 175,000 $ 248,000
Year ended February 28, 1998....... $248,000 $ 237,000 $ 485,000
Year ended February 28, 1999....... $485,000 $1,810,000 52,000 $2,243,000
- ---------------
(1) Write-off of delinquent accounts
36
EXHIBIT INDEX
EXHIBIT INCORPORATION
NUMBER DESCRIPTION REFERENCE
- ------- ----------- -------------
3.1 + Certificate of Incorporation of the Company, as amended..... (c)
3.2 + Bylaws of the Company....................................... (b)
4.1 + Specimen stock certificate.................................. (d)
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"), as amended and restated effective as of January 1,
1999........................................................ (g)
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............................................. (e)
10.15 + Employee Stock Ownership Plan Loan and Pledge Agreement,
dated April 23, 1996, between the ESOP and the Company, as
amended..................................................... (a)(e)
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, as
amended..................................................... (b)(f)
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......................................... (e)
10.33 + Agreement, dated as of May 5, 1998, by and between the
Company and Weidy Optical Co., Ltd.......................... (e)
10.34 + Form Employment Agreement, by and between the Company and
certain executive officers of the Company................... (e)
10.35 + Form Indemnification Agreement, by and between the Company
and each member of the Board of Directors and certain
executive officers.......................................... (e)
10.39 Amendment 1999-I to the Meade Instruments Corp. 1997 Stock
Incentive Plan..............................................
10.40 Amendment 1999-II to the Meade Instruments Corp. 1997 Stock
Incentive Plan..............................................
23.1 Consent of PricewaterhouseCoopers LLP.......................
27.1 Financial Data Schedule.....................................
- ---------------
+ Previously filed with the Securities and Exchange Commission as set forth in
the following table:
(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.
(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.
37
(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.
(e) Incorporated by reference to the Company's Annual Report on Form 10-K for
the Fiscal Year Ended February 28, 1998, as filed with the Securities and
Exchange Commission on May 29, 1998.
(f) Incorporated by reference to the Company's Registration Statement on Form -8
relating to the Company's 1997 Stock Incentive Plan, as filed with the
Securities and Exchange Commission on September 29, 1998.
(g) Incorporated by reference to the Company's Registration Statement on Form
S-8 relating to the Company's Employee Stock Ownership Plan, as filed with
the Securities and Exchange Commission on April 16, 1999.