PART I
General
Meade Instruments Corp., a Delaware corporation, (“Meade” or the
“Company”) is a consumer products company that designs, manufactures, imports and distributes telescopes, telescope accessories, binoculars, spotting scopes, and other consumer products. Meade is dedicated to bringing innovative,
cutting-edge, consumer-friendly products to the consumer products marketplace. The Company’s brands, which include
Meade
®
and Coronado
®
, are recognized throughout the world and are associated with innovation in the amateur astronomy, consumer optical and sporting goods markets. Products include the
new LX850, LX600 and LX80, as well as the venerable LX200
®
series of telescopes that combine the advanced
features of the LX200™ with the precision of Advanced Coma Free (“ACF”) optics; the LX90GPS™ that brings GPS capabilities to a moderately priced Schmidt-Cassegrain telescope; LS™, Meade’s fully computerized telescopes
using “Lightswitch” technology, which provides a revolutionary self-alignment routine, allowing users with no astronomy experience to enjoy a multi-media guided-tour of the night sky; the new LT series, which is our value platform, using
the same high-quality mechanics of the LS™, but with Meade’s more traditional computer control; and the Deep Sky Imager™ (“DSI”) series of high-performance charge-coupled device (“CCD”) cameras that have advanced
astro-imaging to near point-and-shoot simplicity, help sustain the Meade
®
brand as a brand known for innovation
in amateur astronomy and other consumer products.
The Company continues to offer numerous telescope and binocular models as
well as various accessory products for amateur astronomy and sporting goods consumers. The Company’s telescopes range in aperture from 40mm to 20 inches and in retail price from less than $50 to approximately $35,000. The Company offers several
families of binoculars at retail price points from about $10 to approximately $300. Whether a consumer is a serious amateur astronomer, a naturalist or someone just looking for a good pair of binoculars, Meade offers a complete range of quality
products to satisfy the consumer optics buyer.
Founded in 1972, Meade has built a reputation for providing the amateur
astronomer with technically sophisticated products at competitive prices. 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. Capitalizing on its brand name recognition among serious amateur astronomers and its ability to bring advanced technology to lower price points, the Company has marketed its less-expensive
telescopes to beginning and intermediate amateur astronomers.
The Company has consistently emphasized a business plan that
concentrates on new product development and effective targeted marketing. As an indication of its commitment to product development, the Company spent $1.1 million and $0.9 million on research and development during the fiscal years ended
February 28, 2013 and February 29, 2012, respectively. These research and development expenditures were centered on the development of technologically advanced telescopes and other astronomy related products, other new products for the
general consumer and sports optics markets as well as product improvement and industrial applications of the Company’s existing technologies. In the fall of 2011, the Company announced its new LX800 and LX80 telescope lines and announced its
new LX600 telescopes in April 2012. The Company encountered substantial difficulties in completing the development of these products and was unable to begin shipping the LX800 line successfully until February 2013 and the LX600 telescopes did not
begin shipping until April 2013. This delay in shipment of these products adversely affected the Company’s revenues, results from operations and liquidity.
Parts and components for the advanced telescopes are manufactured and assembled in the Company’s Mexico facility. Many of the Company’s less-expensive telescopes and its binoculars, as well as
certain component parts for its small to midrange telescopes, are manufactured under our proprietary designs by manufacturers located in Asia.
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The Company complements its efforts in new product development with a targeted marketing
plan. The Company’s marketing plan includes website, print advertising in astronomy, outdoor related magazines and, at times, in general consumer magazines, as well as jointly developed advertising campaigns with many of the Company’s key
retail partners, and point-of-sale marketing displays.
The Company has incurred operating losses for several years and failed
to return to profitability, despite numerous attempts to restructure the Company. As a result of the Company’s continued losses and weakened financial position, the Company began exploring strategic alternatives in January 2013 which ultimately
culminated in the signing of a definitive merger agreement on May 17, 2013 with JOC North America LLC (the “Acquiror”) and JOCNA Inc., a wholly-owned merger subsidiary of the Acquirer. The Acquirer is a wholly-owned subsidiary of
Jinghua Optics & Electronics Co., Ltd., a former significant supplier of the Company and the majority owner of Meade Instruments Europe GMBH & Co. KG, one of the Company’s largest customers and international distributor, which
will result in the Acquiror acquiring all of the outstanding shares of the Company for $3.45 per share, subject to shareholder approval and other conditions.
In the United States and Canada, the Company distributes its products through a network of more than 150 specialty retailers, distributors and mass merchandisers, which offer the Company’s
products in approximately 1,500 retail store locations. The Company also sells certain of its products to selected national mail order dealers. In December 2009, the Company began distributing weather stations and timing devices. Meade also sells
its products internationally through a network of over 40 foreign distributors, many of which service dealer locations in their respective countries. These foreign distributors include the Company’s former European distribution operations
(“Meade Europe”). Including products sold to Meade Europe, net sales to customers outside North America were $6.6 million and $7.2 million for the years ended February 28, 2013 and February 29, 2012, representing approximately
38% and 33% of the Company’s net sales, respectively. The Company intends to continue to pursue an integrated strategy of product line expansion, targeted marketing, and expansion of the Company’s domestic and international distribution
networks.
Industry Overview
Market-size data for the consumer optics industry are difficult to obtain because nearly all of the companies in the industry are privately held. The Company believes the overall size of the consumer
optics market is driven, in part, by the introduction of new products.
The Company offers products at numerous price points
in the consumer optics market, from advanced astronomical telescopes and cutting-edge binoculars to less-expensive telescopes for beginning amateur astronomers and low-priced binoculars for the casual user.
The advanced astronomical telescope market is characterized by frequent technological developments, including the introduction of
innovative optical designs 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. These advanced telescopes
continue to drive the technological advances specifically in the telescope industry and generally in the consumer optics industry.
Telescopes are generally offered in three different optical configurations: (a) refracting telescopes, which use lenses to collect light; (b) reflecting telescopes, which use mirrors 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 generally
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.
The binocular market is typically characterized less by technological developments than by styling, features, quality and price. The
principal features generally considered by binocular buyers include: (1) the diameter of the objective lenses, which serve to collect light, (2) the types of prisms used to right the visual image—either porro prisms (which give some
binoculars the familiar zig-zag profile) or roof prisms that permit straight line designs,
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and (3) the magnification, or power, of the optical system. Binoculars’ field of view, anti-reflective lens coatings and eye relief are also considered by consumers buying binoculars.
Binoculars typically range in size from mini- binoculars that generally have objective lenses not larger than 26mm to professional-level binoculars that can support objective lenses exceeding 60mm in diameter. Binocular retail prices range from
under ten dollars to several thousand dollars. The Company’s binoculars offered under the Meade
®
brand
name, as well as under various private label names, generally sell for between $10 and $300 at retail.
The Company believes
that the market for telescopes and related products may have been negatively impacted by the global economic conditions and technological advancements in consumer electronics such as smart phones and the increasing availability of content on those
devices and the internet. Management has noted a reduction in the attendance of historically popular trade shows, astronomy events and other indications of a decline in demand for telescope products. It’s possible that the market for telescopes
and related products is shrinking and that the Company and its competitors are competing over an increasingly smaller market. But it’s not possible to say for certain due to the fact that most of the Company’s competitors are privately
held foreign-owned companies and there is no trade association for the industry.
Products
The Company has developed and expanded its product line to include a full line of telescopes and accessories for the beginning,
intermediate and serious amateur astronomer. The Company offers a complete line of binoculars from small aperture theater glasses to full-size waterproof roof-prism glasses. Moreover, in addition to adding new products, the Company continually
refines and improves its existing products. Certain of the Company’s products are described in greater detail below:
Advanced Astronomical Telescopes.
Among the Company’s most sophisticated products are its LX series ACF and Schmidt-Cassegrain telescopes. The LX telescopes incorporate optical systems that
provide high-quality resolution, contrast and light transmission and offer the serious amateur astronomer a broad range of products, from the attractively priced Autostar-controlled LX80 and LX90GPS, to the new LX850 and LX600 models featuring the
Company’s new Starlock
®
autoguider and its venerable LX200 lines. The Company’s LX80 series and Truss
Dobsonian telescopes offer the more serious amateur a wide variety of advanced features on larger aperture telescopes at economical prices. The Company also has sophisticated, dedicated solar viewing telescopes in its Coronado
®
telescope line. The SolarMax™ telescopes, ranging in aperture from 40mm to 90mm, feature Coronado’s
patented hydrogen-alpha (“H-alpha”) etalon filters. Coronado’s H-alpha etalons isolate the hydrogen-alpha wavelength while rejecting all others allowing “naked-eye” observation of the sun, its flares, prominences, filaments,
spiculae, faculae, and active regions. Advanced astronomical telescopes collectively represented approximately 4% of telescope units shipped and approximately 33% and 28% of the Company’s net sales for the years ended February 28, 2013 and
February 29, 2012, respectively.
Entry-Level Telescopes.
Designed specifically for the beginning to intermediate
amateur astronomer or terrestrial observer, the Company’s less-expensive 50mm to 130mm refracting, reflecting and spotting scopes and the ETX series telescopes include many of the features of the more advanced telescopes at economical prices.
Meade’s revolutionary LS “Lightswitch” series of telescopes use advanced technologies like GPS, LNT and ECLIPS CCD imaging, and automatically aligns itself with ultimate tracking and pointing accuracy. Also, the LT-6 is a fully
featured computer controlled 6” ideal telescope for any astronomer who demands superior optics, mechanics and computer controlled in a compact, high performance package. With the NG and NGC series of telescopes (the “NG telescopes”)
and the Digital Electronic Series telescopes (the “DS telescopes”), with apertures ranging from 60mm to 130mm, and the ETX series, with apertures ranging from 60mm to 125mm, some of the most sophisticated features of the Company’s
advanced telescopes are made available at some of the Company’s lowest retail price points. Equipped with the hand-held Autostar Computer Controller, the ETX series and the DS telescopes can find and track any one of one thousand or more
celestial objects at the push of a button. The Autostar, with its “go to” capability, brings to the general consumer, for prices starting at a few hundred dollars, features that have previously been available only on the most sophisticated
high-end telescopes selling for thousands of dollars. The Company offers several variations of its small refracting and
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reflecting telescopes (including its traditional models, the NG telescopes and the DS telescopes) for distribution on a semi-exclusive basis to specific specialty retailers. The Company also has
a solar viewing telescope in its entry-level offerings, the Coronado Personal Solar Telescope (“P.S.T.”). The P.S.T. is a 40mm dedicated solar telescope that makes solar viewing possible at a more consumer friendly price. The P.S.T uses a
filtering technology similar to that which goes into a SolarMax telescope but with unique design characteristics that allow for a lower price to the consumer. These various telescope models comprise the lower-priced end of the Company’s
telescope product lines. Sales of entry-level telescopes comprised approximately 96% of the Company’s telescope units shipped and approximately 41% and 39% of the Company’s net sales for the years ended February 28, 2013 and
February 29, 2012, respectively. The reason for the significant decrease in entry-level telescopes was a decrease in sales of lower-end telescopes which were imported from China and distributed through mass retail customers. The Company has
found it increasingly difficult to compete on price with its vertically-integrated, Chinese-owned competitors in this especially low-margin, price-sensitive product segment and is developing new, higher-end and intermediate telescopes which the
Company is more able to compete favorably with such competitors. The market for higher-end / intermediate telescopes is much less subject to price-sensitivity and high returns from consumers.
Sport Optics.
The Company sells spotting scopes to large retailers in North America and a complete line of consumer binoculars
through its domestic distribution network under the Meade brand name. The spotting scopes and binoculars sold by the Company are purchased from manufacturers outside the United States. Sport Optics sales for the each of the years ended
February 28, 2013 and February 29, 2012 were approximately 7% of net sales.
Weather Stations and Digital Clocks.
The Company sells a complete line of consumer digital weather and time products from simple desktop units to full featured semi-professional weather stations through its domestic distribution network under the Meade brand name. These products
sold by the Company are purchased from manufacturers outside of the United States. Weather stations and digital clock sales in each of the years ended February 28, 2013 and February 29, 2012 represented approximately 4% and 3% of the
Company’s net sales during those fiscal years, respectively.
Accessories.
The Company also offers accessories for
each of its principal product lines that range from additional eyepieces and multi-media celestial observation guides to software that enhances the consumer’s telescope experience. The Coronado brand adds several high-end H-alpha etalon filters
to the list of telescope accessories for the serious amateur astronomer. Sales of accessories represented approximately 11% and 9% of the Company’s net sales for the years ended February 28, 2013 and February 29, 2012, respectively.
Other optical products accounted for approximately 4% and 14% of the Company’s net sales for each of the years ended February 28, 2013 and February 29, 2012, respectively.
Operations
Supply Chain Management.
Management of the supply chain is critical to on-time delivery of the Company’s products to its customers. The Company works closely with factories primarily in China to develop proprietary product designs for many of its products which are
purchased from Chinese manufacturers. The Company owns many of the key designs, molds and dies used by such suppliers. The Company also utilizes its facility in Tijuana, Mexico, for its more advanced telescopes. This facility employs over 95 people
(which varies based upon product sales levels and seasonal demand) engaged in the manufacture and assembly of telescopes, electronic sub-assemblies, and accessory products, as well as certain general and administrative functions.
Materials and Supplies.
The Company purchases high grade optical glass for its higher-end telescopes in order to avoid
imperfections that can degrade optical performance. Lenses and mirrors for the Company’s internally manufactured telescopes are individually polished and figured by master opticians to precise tolerances 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
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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.
Optical Testing.
As each of Meade’s ACF and Schmidt-Cassegrain optical sets, or parabolic
Newtonian primary telescope mirrors, progress through the grinding, polishing and figuring stages of development, they are repeatedly tested and re-tested for irregularities, smoothness of figure and correction. Optical testing of the Company’s
products produced outside of the United States is performed by trained optical technicians to comply with strict quality standards. The Company maintains strict quality standards for all of its optics included in the Company’s products from
telescopes and eyepieces to binoculars.
Optical Alignment and Centration.
Finished, individually-matched and figured
high-end optical sets are sent to the optical alignment and centration process, where each optical set is placed into a special optical tube that permits rotation of the optical elements about their optical axes. A variation of this alignment and
centration process is performed on all of the Company’s optical products.
Intellectual Property
The Company relies on a combination of patents, trademarks and trade secrets to establish and protect its proprietary
rights and its technology. In general, the Company pursues patent protection both in the United States and selected foreign countries for subject matter considered patentable and important to the Company’s business strategy. The Company has
patents either issued and/or pending in the U.S. and in several foreign jurisdictions including Europe, Australia, Canada, Japan and China.
Generally, patents issued in the U.S. are effective for 20 years from the original date of application. The duration of foreign patents varies in accordance with applicable foreign local law. While the
duration of the Company’s patents varies, most of its important patents have been issued within the last ten years.
The
Company believes that its patents, proprietary technology, know-how and trademarks provide significant protection for the Company’s capabilities, and the Company intends to protect and enforce its intellectual property assets. Nevertheless,
there can be no assurance that the steps taken by the Company in this regard will be adequate to prevent misappropriation or infringement of its technologies or that the Company’s competitors will not independently develop technologies that are
substantially equivalent or superior to the Company’s technologies. Effective protection of intellectual property rights may be limited or unavailable in certain foreign countries.
Seasonality
The Company has experienced, and
expects to continue to experience, substantial fluctuations in its sales, gross margins and results from operations from quarter to quarter. Factors that influence these fluctuations include the volume and timing of orders received, changes in the
mix of products sold, market acceptance of the Company’s products, competitive pricing pressures, the Company’s ability to meet fluctuating demand and delivery schedules, the timing and extent of research and development expenses, the
timing and extent of product development activities and the timing and extent of advertising expenditures. Historically, a substantial portion of the Company’s net sales typically occurred in the third quarter of the Company’s fiscal year
primarily due to the disproportionately higher sales of its discontinued operations in Europe, as well as higher customer demand for less-expensive telescopes during the holiday season. Mass merchandisers, along with specialty retailers, purchase a
considerable amount of their inventories to satisfy 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. While seasonality is not as pronounced as it was prior to the sale of Meade Europe, the Company continues to experience significant sales to
mass merchandisers. Accordingly, the Company’s net sales and results from operations are still typically higher in its second and third quarters than in the first and fourth quarters of its fiscal year.
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Sales and Marketing
The Company’s products are sold through a domestic network of mail order and internet dealers, specialty retailers, distributors and
mass merchandisers. Internationally, the Company’s products are sold through a network of foreign distributors, including Meade Europe, and dealers in other countries around the world. The Company’s high-end telescopes are generally sold
through mail order and internet dealers or single and multiple-location specialty retailers. Meade’s less-expensive telescopes are sold in similar venues but are sold principally through mass merchandisers. The Company’s binoculars are
sold principally through a network of domestic distributors, as well as through specialty retailers and mass merchandisers. The Company maintains direct contact with its larger dealers and its domestic 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 a
sales and customer service force trained to assist the Company’s customers in all facets of its products’ operations. The Company’s internal sales personnel are supplemented by a network of regional sales representatives. Together,
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 end users of the Company’s products.
The Company stresses service to both its customers and end users by providing marketing assistance in the form of hang-tags, catalog layouts and other print media as well as dedicated toll-free customer service telephone numbers. In addition to
giving its customers personal attention, the Company believes toll-free telephone numbers also help reduce the number of product returns from end users who are generally unfamiliar with the assembly and operation of telescopes and binoculars.
Management believes the Company’s dedication to providing a high level of customer service is one factor that sets Meade apart from its competition.
The Company’s telescope products are regularly advertised in major domestic and international telescope and astronomy-related magazines with comprehensive, full color, technically informative
advertisements which present a consistent message of innovation and quality about the Company and its products. The Company also focuses advertising dollars on point-of-sale promotions and displays in partnership with its retail customers to jointly
market the Company’s products to the end consumer.
Throughout fiscal 2013, the Company sold its products to mail order
dealers, to distributors, and to more than 150 specialty retailers and mass merchandisers that offer the Company’s products in approximately 1,500 retail store outlets. The primary reason for the decline in sales to these customers is a
decrease in sales of lower-end telescope products which the Company imported from suppliers located in China.
Competitive Strengths
The Company believes that it derives benefits from its position as a leading designer and distributor of telescopes, binoculars, spotting scopes, and other consumer optical related products. These
benefits include its ability to offer its customers a broad and innovative product line embodying both high quality and value. The Company believes it has the following competitive strengths:
New Products/Research and Development.
The Company places a primary emphasis on product innovation and quality through its
research and development efforts. The Company employs an in-house engineering staff at its Irvine and Tijuana, Mexico facilities that develops new products and applies technological advances and improvements to existing products. The Company is able
to obtain additional benefits by out-sourcing certain research and development services to supplement its internal expertise. The Company, its management and its employees are dedicated to the goal of producing technically superior yet
price-competitive products and have been responsible for some of the consumer optics industry’s most technically advanced, easy to use, consumer optical products.
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Broad Line of Products.
The Company offers numerous different telescopes, spotting
scope and binocular models with several different optical configurations, as well as hundreds of accessory products for the consumer optics and sports optics buyers. The Company’s telescopes range in aperture from 40mm to 20 inches, and in
retail price from less than $50 to approximately $35,000. The Company offers several families of binoculars (including digital camera binoculars) under its several brand names at retail price points from about $10 to approximately $300. Whether a
consumer is a serious amateur astronomer or someone just looking for a good binocular, Meade offers a wide range of quality products to satisfy the consumer optics buyer.
Optical Systems Expertise.
The Company has made substantial investments to develop an expertise in optical engineering, providing it with the ability to produce high quality optics. The Company
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 more advanced consumer telescope market. The Company uses its optical engineering expertise to ensure that the optics in its foreign-sourced products meet the strictest of standards.
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 graphic arts department which works directly with the Company’s various types of customers (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.
Competition
The consumer optics market is competitive and sensitive to consumer needs and preferences. In the telescope market, the Company competes in the United States and Canada with SW Technology Corporation
(“Celestron”), an affiliate of Synta Technology, a corporation organized under the laws of Taiwan, and Bushnell Performance Optics, Inc. (“Bushnell”) and, to a lesser extent, with other smaller companies which service niche
markets. In Europe and Japan, the Company competes primarily with Celestron, Vixen Optical Industries, Ltd., and with other smaller regional telescope importers and manufacturers. 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 lower costs of labor associated with manufacturing.
The binocular market is generally more competitive than the telescope market with a greater number of competitors at each price point. In
the binocular market, the Company competes primarily with Bushnell, Nikon Inc., Pentax Corporation 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, 2013, the
Company had approximately 112 full-time employees. The Company believes that it offers competitive compensation and benefits and that its employee relations are generally good. None of the Company’s United States-based employees is represented
by a union. The Company’s employees at the Mexico facility are 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.
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Executive Officers of the Registrant
Set forth below are the names, ages, titles and present and past positions of the persons who are the Company’s executive officers:
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Name
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Age
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Position
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Steven G. Murdock
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Chief Executive Officer, Director
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John A. Elwood
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Senior Vice President—Finance and Administration, Chief
Financial Officer and Secretary
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Steven G. Murdock
was appointed the Company’s Chief Executive Officer on February 5, 2009 upon the
resignation of Steven L. Muellner. From May 2006 to February 2009, Mr. Murdock was a non-employee Director of the Company. Mr. Murdock also served as the Company’s Chief Executive Officer from June 2003 to May 2006 and as its
President and Chief Operating Officer from October 1990 to June 2003. From May 1980 to October 1990, Mr. Murdock served as the Company’s Vice President of Optics. From November 1968 to May 1980, Mr. Murdock worked as the optics
manager for Coulter Optical, Inc., an optics manufacturer. Mr. Murdock received a BS degree in business administration from California State University at Northridge.
John A. Elwood,
was appointed the Company’s Senior Vice President—Finance and Administration, Chief Financial Officer and Secretary on March 4, 2009. From July 2007 to March 2009,
Mr. Elwood was the Company’s Vice President—Finance and Corporate Controller. Prior to joining the Company, Mr. Elwood held a variety of financial management positions at DDi Corp., a NASDAQ-listed manufacturer of time-critical
printed circuit boards, including corporate controller, divisional controller, and director of financial planning and analysis. Mr. Elwood received a BA degree in business administration from California State University at Fullerton and became
a Certified Public Accountant while working in public accounting at Moss Adams LLP from February 1996 through July 2000.
Available Information
Meade’s website is located at http://www.meade.com. The Company makes available free of
charge, on or through our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission
(“SEC”). The information contained on the Company’s website is not part of this report. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
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1.
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There is substantial doubt about our ability to continue as a going concern.
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In their report dated May 29, 2013, our registered public accounting firm stated that our recurring losses, declining revenues and
accumulated deficit raise substantial doubts about our ability to continue as a going concern. We do not believe it is possible to restructure the Company in a manner that will return it to profitability or to increase revenues sufficient to resolve
the Company’s liquidity problems while remaining a standalone, public company.
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2.
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Risk factors relating to the merger agreement with JOC North America LLC (“JOC”):
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a.
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Failure to consummate or any delay in consummating the merger with JOC North America LLC, announced on May 17, 2013, for any reason could materially and
adversely affect our operations and our stock price.
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If the merger with JOC North America LLC is not
consummated for any reason, including the failure of our stockholders to adopt the merger agreement with JOC North America LLC or if there is a delay in the consummation of the merger, we will be subject to a number of material risks, including,
among other things:
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we could be required to pay to JOC North America LLC a termination fee of $250,000 under certain circumstances as set forth in the merger agreement;
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the market price of our common stock may decline to the extent that the current market price of our common stock reflects a market assumption that the
merger will be consummated;
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the possibility exists that certain key employees may terminate their employment with us as a result of the proposed merger with JOC North America LLC
even if the proposed merger is not ultimately consummated;
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the diversion of management’s attention away from our day-to-day business, limitations on the conduct of our business prior to completing the
merger, and other restrictive covenants contained in the merger agreement that may impact the manner in which our management is able to conduct the business of the company during the period prior to the consummation of the merger and the unavoidable
disruption to our employees and our relationships with customers and suppliers during the period prior to the consummation of the merger, may make it difficult for us to regain our financial and market position if the merger does not occur; and
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our financial condition could continue to deteriorate and, as a result, we may have to cease operations and file bankruptcy.
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In addition, if the merger agreement is terminated and our board of directors determines to seek another
business combination, there can be no assurance that we will be able to find another partner, and even if we do that, the new partner will agree to provide consideration similar to the consideration to be provided in the merger with JOC North
America LLC.
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b.
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Potential legal proceedings in connection with the merger agreement with JOC North America LLC (“JOC”) could adversely affect our business and divert
management’s attention and resources from other matters.
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Class action lawsuits may be filed by
third parties challenging our contemplated merger with JOC. If not ultimately dismissed, these lawsuits could adversely affect our business, financial position and results of operations and divert management’s attention and resources from other
matters.
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3.
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Our ability to borrow funds for working capital purposes is limited.
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The Company maintains a credit facility agreement (the “Agreement”) with Rosenthal & Rosenthal, Inc.
(“Rosenthal”). The Agreement does not contain explicit financial covenants, the Agreement allows the Company’s lender significant latitude to restrict, reduce or eliminate the Company’s access to credit or require the Company to
repay any and all amounts outstanding under the Agreement. If Rosenthal restricts, reduces or eliminates the Company’s access to credit, or requires immediate repayment of the amounts outstanding under the Agreement, the Company would be
required to pursue additional or alternative sources of liquidity such as equity financings, a new debt agreement with other creditors, seek strategic alternatives or liquidate assets. However, the Company cannot assure that any such additional
sources of liquidity would be available on reasonable terms, if at all.
The initial term of the credit facility with
Rosenthal is through November 30, 2015 and can be renewed thereafter. The credit facility can be terminated by the Company or Rosenthal with at least 60 days, but not more than 120 days, notice except in case of a default, in which case
Rosenthal can terminate the Agreement at any time.
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4.
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Our business may be negatively impacted as a result of changes in the economy.
|
The United States and global economies have been in a state of recession. Our business depends on the general economic environment and
levels of consumer spending that affect not only the end consumer, but also retailers who are our direct customers. Purchases of consumer optics decline in periods of recession or uncertainty regarding future economic prospects, when consumer
spending, particularly on discretionary items, declines. During periods of recession or economic uncertainty, we may not be able to maintain our sales to existing customers, make sales to new customers, or improve our operating results as a
percentage of net sales. As a result, our operating results may be materially adversely affected by downward trends in the economy or the occurrence of events that adversely affect the economy in general.
|
5.
|
We depend on our key personnel and may have difficulty attracting and retaining skilled employees.
|
Our future success will depend to a significant degree upon the continued contributions of our key management, marketing, technical,
financial, accounting and operational personnel, including Steven G. Murdock, our Chief Executive Officer. The loss of the services of one or more key employees could have a material adverse effect on our results of operations. We also believe that
our future success will depend in large part upon our ability to attract and retain additional highly skilled managerial and technical resources. Competition for such personnel is intense. There can be no assurance that we will be successful in
attracting and retaining such personnel. In addition, we have experienced several years of staff reductions and many of our employees have not received any pay increases for several years and this could have a negative impact on employee recruiting
and retention.
|
6.
|
We rely on independent contract manufacturers and, as a result, we are exposed to potential disruptions in product supply.
|
All of our consumer optics products with retail prices under $500 are currently manufactured by independent contract manufacturers
principally located in China. We do not have long-term contracts with our Chinese manufacturers, and we compete with other consumer optics companies for production facilities. We have experienced, and may continue to experience, difficulties with
these manufacturers, including reductions in the availability of production capacity, failure to meet our quality control standards, failure to meet production deadlines and increased manufacturing costs. Some manufacturers in China have faced labor
shortages and wage inflation as migrant workers seek better wages and working conditions. In addition, the increase in certain commodity prices has increased production costs for our manufacturers. If these trends continue, our current
manufacturers’ operations could be adversely affected.
If any of our current manufacturers modify their payment terms or
cease doing business with us, we could experience an interruption in the supply or manufacture of our products. Although we believe that we could find
10
alternative manufacturers, we may be unable to establish relationships with alternative manufacturers that will be as favorable as the relationships we have now. For example, new manufacturers
may have higher prices, less favorable payment terms, lower manufacturing capacity, lower quality standards or higher lead times for delivery. If we are unable to provide products to our customers that are consistent with our standards or the
manufacture of our products is delayed or becomes more expensive, this could result in our customers canceling orders, refusing to accept deliveries or demanding reductions in purchase prices, any of which could have a material adverse effect on our
business and results of operations.
|
7.
|
Our future success depends upon our ability to respond to changing consumer demands and successfully develop and market new products.
|
The consumer optics industry is subject to changing consumer demands and technology trends. Accordingly,
we must identify those trends and respond in a timely manner. Demand for and market acceptance of new products are uncertain, and achieving market acceptance for new products generally requires substantial product development and marketing efforts
and expenditures. Due to our reductions in headcount and our reduced resources, we may not be able to invest as much in product development and marketing. If we do not continue to meet changing consumer demands and develop successful products in the
future, our growth and profitability will be negatively impacted. We frequently make decisions about product designs and marketing expenditures several months to years in advance of the time when consumer acceptance can be determined. If we fail to
anticipate, identify or react appropriately to changes in trends or we are not successful in marketing new products, we could experience excess inventories, higher than normal markdowns or an inability to profitably sell our products. Because of
these risks, the consumer optics industry has experienced periods of growth in revenues and earnings and thereafter periods of declining sales and losses. Similarly, these risks could have a material adverse effect on our business, results of
operations, financial condition or cash flows.
|
8.
|
Our business and the success of our products could be harmed if we are unable to maintain our brand image.
|
Our principal brands include Meade
®
and Coronado
®
. If we are
unable to timely and appropriately respond to changing consumer demand, our brand names and brand images may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider these brands to be outdated or
undesirable. If we fail to maintain and develop our principal brands, our sales and profitability will be adversely affected.
|
9.
|
We depend upon a relatively small group of customers for a large portion of our sales.
|
Although we have long-term relationships with many of our customers, those customers do not have contractual obligations to purchase our
products and we cannot be certain that we will be able to retain our existing major customers. Furthermore, the retail industry regularly experiences consolidation, contractions and closings which may result in a loss of customers or the loss of our
ability to collect accounts receivable from major customers in excess of amounts that we have insured. If we lose a major customer, experience a significant decrease in sales to a major customer or are unable to collect the accounts receivable of a
major customer in excess of amounts insured, our business could be significantly harmed.
|
10.
|
Our business could be harmed if we fail to maintain appropriate inventory levels.
|
We place orders with suppliers for many of our products prior to the time we receive all of our customers’ orders. We do this to
minimize purchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We, at times, also maintain an inventory of certain products that we anticipate will be in greater demand. However, we may be unable to sell the
products we have ordered in advance from manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly
impair our brand image and have a
11
material adverse effect on our operating results and financial condition. Conversely, if we underestimate consumer demand for our products or if our suppliers fail to supply the products that we
require with the quality and at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to our customers, negatively impact our retailer and distributor relationships, reduce future orders from
customers and diminish brand loyalty.
|
11.
|
The disruption, expense and potential liability associated with any litigation against us could have a material adverse effect on our business, results of
operations, financial condition and cash flows.
|
We are subject to various legal proceedings and
threatened legal proceedings from time to time. Any litigation in the future, regardless of its merits, could significantly divert management’s attention from our operations and result in substantial legal fees being borne by us. Further, there
can be no assurance that any actions that have been or will be brought against us will be resolved in our favor or, if significant monetary judgments are rendered against us, that we will have the ability to pay such judgments. Such disruptions,
legal fees and any losses resulting from these claims could have a material adverse effect on our business, results of operations, financial condition and cash flows.
|
12.
|
We have divested significant portions of our business and are now a less diversified enterprise focused primarily on telescopes. The lack of a diversified
business makes us more exposed to volatility in the telescope market, which is highly discretionary in nature and has been contracting.
|
During fiscal 2009, we divested our Simmons, Weaver and Redfield sports optics business as well as our European operations. Each of these businesses had contributed profit to the Company and diversified
our sources of revenue and income. As a result, our business is now more dependent on the sale of telescopes, the market for which is highly discretionary and competitive in nature and has been contracting. If the telescope market continues to
deteriorate, it could have an adverse impact on our operating results. In addition, the sale of the divested businesses also generated significant amounts of cash for the Company. The Company has few remaining divestiture options should the need
arise to raise additional cash, further limiting the Company’s ability to raise additional cash should the need arise.
|
13.
|
We face intense competition, including competition from companies with significantly greater resources, and, if we are unable to compete effectively with these
competitors, our market share may decline and our business could be harmed.
|
We face intense competition
from other established companies. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them
to better withstand periodic downturns in the consumer optics market, compete more effectively on the basis of price and production and more quickly develop new products. In addition, new companies may enter the markets in which we compete, further
increasing competition in the consumer optics industry.
We believe that our ability to compete successfully depends on a
number of factors, including the type and quality of our products and the strength of our brand names, as well as many factors beyond our control. We may not be able to compete successfully in the future, and increased competition may result in
price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand the development and marketing of new products, any of which would adversely impact our results of
operations and financial condition.
12
|
14.
|
Our international sales and manufacturing operations are subject to the risks of doing business abroad, particularly in China and Mexico, which could affect our
ability to sell or manufacture our products in international markets, obtain products from foreign suppliers or control product costs.
|
Nearly all of our products are now manufactured in foreign countries—primarily Mexico and China. We also sell our products in several foreign countries. Foreign manufacturing and sales are subject to
a number of risks, including the following: political and social unrest; changing economic conditions; currency exchange rate fluctuations; international political tension and terrorism; labor shortages and work stoppages; electrical shortages;
transportation delays; loss or damage to products in transit; expropriation; nationalization; the imposition of domestic and international tariffs and trade duties, import and export controls and other non-tariff barriers; exposure to different
legal standards (particularly with respect to intellectual property); compliance with foreign laws; and changes in domestic and foreign governmental policies. In addition, there has been a significant increase in violence in Mexico due to the
Mexican government’s attempts to stop the illegal drug trade. We have not, to date, been materially affected by any such risks, but we cannot predict the likelihood of such developments occurring or the resulting long-term adverse impact on our
business, results of operations or financial condition.
In particular, because our products are manufactured in China and
Mexico, adverse changes in trade or political relations with these countries, political instability, the occurrence of a natural disaster such as an earthquake or hurricane or the outbreak of pandemic diseases such as Severe Acute Respiratory
Syndrome (“SARS”), the Avian Flu or the Swine Flu could severely interfere with the manufacture of our products in these countries and would have a material adverse effect on our operations. In addition, electrical shortages, labor
shortages or work stoppages may extend the production time necessary to produce our orders, and there may be circumstances in the future where we may have to incur premium freight charges to expedite the delivery of product to our customers. If we
incur a significant amount of premium charges to airfreight product for our customers, gross profit will be negatively affected if we are unable to pass those charges on to our customers.
Also, the manufacturers of our products that are located in China may be subject to the effects of exchange rate fluctuations should the
Chinese currency not remain stable with the U.S. dollar. The value of the Yuan, the Chinese currency depends to a large extent on the Chinese government’s policies and China’s domestic and international economic and political developments.
The valuation of the Yuan may increase/decrease incrementally over time should the Chinese central bank allow it to do so, which could significantly increase/decrease labor and other costs incurred in the production of our products in China.
|
15.
|
Our business could be harmed if our contract manufacturers or suppliers violate labor, trade or other laws.
|
We require our independent contract manufacturers to operate in compliance with applicable United States and foreign laws and regulations.
Manufacturers may not use convicted, forced or indentured labor (as defined under United States law) nor child labor (as defined by the manufacturer’s country) in the production process. Compensation must be paid in accordance with local law,
and factories must be in compliance with local safety regulations. Although we promote ethical business practices and send sourcing personnel periodically to visit and monitor the operations of our independent contract manufacturers, we do not
control them or their labor practices. If one of our independent contract manufacturers violates labor or other laws or diverges from those labor practices generally accepted as ethical in the United States, it could result in the loss of certain of
our major customers, adverse publicity for us, damage our reputation in the United States or render our conduct of business in a particular foreign country undesirable or impractical, any of which could harm our business.
In addition, if we, or our foreign manufacturers, violate United States or foreign trade laws or regulations, we may be subject to extra
duties, significant monetary penalties, the seizure and the forfeiture of the products we are attempting to import or the loss of our import privileges. Possible violations of United States or foreign laws or regulations could include inadequate
record keeping of imported products, misstatements or errors as to
13
the origin, quota category, classification, marketing or valuation of our imported products, fraudulent visas or labor violations. The effects of these factors could render our conduct of
business in a particular country undesirable or impractical and have a negative impact on our operating results.
|
16.
|
Our quarterly revenues and operating results fluctuate as a result of a variety of factors, including seasonal fluctuations in the demand for consumer optics,
delivery date delays and potential fluctuations in our annualized tax rate, which may result in volatility of our stock price.
|
Our quarterly revenues and net operating results have varied significantly in the past and can be expected to fluctuate in the future due to a number of factors, many of which are beyond our control. Our
major customers generally have no obligation to purchase forecasted amounts and may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice and without penalty. As a result, we may not be able to accurately
predict our quarterly sales or net operating results. In addition, sales of consumer optics have historically been seasonal in nature and tied to the winter holiday shopping season, with the strongest sales generally occurring in our third fiscal
quarter. Holiday shopping sales typically begin to ship in August, and delays in the timing, cancellation, or rescheduling of the related orders by our wholesale customers could negatively impact our net sales and results of operations. More
specifically, the timing of when products are shipped is determined by the delivery schedules set by our wholesale customers, which could cause sales to shift between our second, third and fourth quarters. Because our expense levels are partially
based on our expectations of future net sales, expenses may be disproportionately large relative to our revenues, and we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shifts or shortfalls, which could
have a material adverse effect on our net operating results. Also, our annualized tax rate is based upon projections of our operating results for the year, which are reviewed and revised by management as necessary at the end of each quarter, and it
is highly sensitive to fluctuations in the projected mix of earnings. Any quarterly fluctuations in our annualized tax rate that may occur could have a material impact on our quarterly net operating results. As a result of these specific and other
general factors, our net operating results vary from quarter to quarter and the results for any particular quarter may not be necessarily indicative of results for the full year which may lead to volatility in our stock price.
|
17.
|
Changes in currency exchange rates could affect our revenues and operating results.
|
A significant portion of our production is accomplished offshore, principally in China. Accordingly, fluctuations in the exchange rates
between the U.S. dollar and the currencies of Europe and Asia could make our products less competitive in foreign markets. Additionally, such fluctuations could result in an increase in cost of products sold in foreign markets, reducing margins and
earnings.
|
18.
|
We may not be able to raise additional funds when needed for our business or to exploit opportunities.
|
We may need to raise additional funds to maintain sufficient working capital, support expansion, develop new technologies, respond to
competitive pressures, or take advantage of unanticipated opportunities. If required, we will seek to raise additional funds through public or private debt or equity financing, strategic relationships or other arrangements. However, there can be no
assurance that such financing will be available on acceptable terms, if at all, and such financing, if obtained, would be dilutive to our stockholders.
|
19.
|
Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights or if we are sued for intellectual property infringement.
|
We use trademarks on virtually all of our products and believe that having
distinctive marks that are readily identifiable is an important factor in creating a market for our products, in identifying the Company and in distinguishing our goods from the goods of others. We consider our Meade
®
and Coronado
®
trademarks and brand names to be among our most valuable assets and we have registered these trademarks in many countries. In addition, we own many other trademarks
and trade names, which we utilize in marketing our products. We
14
continue to vigorously protect our trademarks against infringement. We also have a number of utility patents and design patents covering components and features used in many of our telescopes,
binoculars and other products. We believe our success depends more upon skills in design, research and development, production and marketing rather than upon our patent position. However, we have followed a policy of filing applications for United
States and foreign patents on designs and technologies that we deem valuable as critical contributors to our business.
|
20.
|
Our trademarks, design patents, utility patents and other intellectual property rights may not be adequately protected outside the United States.
|
We believe that our trademarks, design patents, utility patents and other proprietary rights are
important to our business and our competitive position. We devote substantial resources to the establishment and protection of our trademarks, design patents and utility patents on a worldwide basis. Nevertheless, we cannot assure that the actions
we have taken to establish and protect our trademarks and other proprietary rights outside the United States will be adequate to prevent infringement of our technologies or trade names by others or to prevent others from seeking to block sales of
our products as a violation of the trademarks and proprietary rights of others. Also, we cannot assure that others will not assert rights in, or ownership of, our trademarks, patents, designs and other proprietary rights or that we will be able to
successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. We may face significant expenses and
liability in connection with the protection of our intellectual property rights outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial
condition may be adversely affected.
|
21.
|
We are exposed to potential risks from legislation requiring public companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.
|
We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002. We, like
all other public companies, are incurring expenses and diverting management’s time in an effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). We are required to assess our compliance with
Section 404 and we believe we have devoted the necessary resources, including additional internal and supplemental external resources, to support our assessment. However, if in the future, we identify one or more material weaknesses, this could
result in a loss of investor confidence in our financial reports, have an adverse effect on our stock price and/or subject us to sanctions or investigation by regulatory authorities.
|
22.
|
Our charter and bylaws, as well as applicable corporate laws, could limit the ability of others to take over management control of the Company. We will have the
ability to issue preferred stock, which could adversely affect the rights of holders of our Common Stock.
|
Our Certificate of Incorporation and Bylaws provide for:
|
|
•
|
|
advance notice requirements for stockholder proposals and director nominations,
|
|
|
•
|
|
a prohibition on stockholder action by written consent, and
|
|
|
•
|
|
limitations on calling Stockholder meetings.
|
In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a “business combination” with an
“interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. These provisions could have
the effect of discouraging certain attempts to acquire the Company, which could deprive our stockholders of the opportunity to sell their shares of Common Stock at prices higher than prevailing market prices. In addition, our Board of Directors has
authority to issue up to 1,000,000 shares of preferred stock and to fix the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the
15
stockholders. The rights of the holders of our Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock could affect adversely the voting power of holders of our Common Stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. Additionally, the issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for our Common Stock at a premium over the market price of the Common Stock and may affect adversely the market price of and the
voting and other rights of the holders of our Common Stock.
The Company leases a building in Irvine, California which is approximately 25,000 square feet and currently serves as its corporate office and also served as its U.S. distribution center through February
2012. The minimum lease payments on this building are approximately $0.3 million per year and the lease expires in February 2014.
In an effort to reduce the Company’s costs due to the reduction in sales of its low-end telescopes and imported products, the Company eliminated its U.S. distribution operations effective March 2012.
The Company subleased its warehouse, which comprises approximately 19,000 square feet of its Irvine, California building.
The
Company also leases a building in Tijuana, Mexico which is approximately 50,000 square feet and serves primarily as its manufacturing, assembly and distribution operations for certain of the Company’s products or components thereof. The
minimum lease payments on this building are approximately $0.3 million per year and the lease expires in December 2013.
The
Company’s management believes that all facilities occupied by the Company are more than adequate for present requirements. The Company’s management believes its current equipment is suitable for the operations involved and does not know of
any specific instances in which any of its equipment will require substantial repair or replacement. However, much of the Company’s equipment is fully depreciated and is several years old; as such, it is possible that investment in repair or
replacement of equipment will be necessary in the near future.
|
Item 3.
|
Legal Proceedings
|
Although the Company is involved from time to time in litigation incidental to its business, management believes that the Company currently is not involved in any litigation which will have a material
adverse effect on the financial position, results of operations or cash flows of the Company.
|
Item 4.
|
Mine Safety Disclosure
|
Not applicable.
16
PART III
|
Item 10.
|
Directors, Executive Officers and Corporate Governance
|
Certain biographical information required by this Item with respect to our executive officers is set forth in Item 1, Business. Other
required information with respect to this item is incorporated by reference from the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the close of the Company’s fiscal year.
Information Regarding Directors
The information set forth below includes, with respect to each member of the Company’s Board of Directors, his age as of May 1, 2013, principal occupation and employment during the past five
years, the year in which he first became a director of the Company, and directorships he has held at other public companies during the past five years.
Steven G. Murdock
, age 61, has been a director of the Company since 2006 and has been the Company’s Chief Executive Officer since February 2009. Previously, he served as the Company’s
Chief Executive Officer from June 2003 to May 2006 and as its President and Chief Operating Officer from October 1990 to June 2003. From May 1980 to October 1990, Mr. Murdock served as 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. Mr. Murdock’s qualifications to serve on the Board include, among others: (i) he is the Company’s Chief Executive Officer and has been with the Company for over 30 years; and (ii) his role and
his experience enable him (A) to bring invaluable operational and financial perspectives to the Board; and (B) to continually educate and advise the Board on the Company’s industry and related, issues and challenges.
Timothy C. McQuay
, age 61, has been a director of the Company since 1997 and has served as Managing Director of Noble Financial
Capital Markets, an investment banking firm, since November 2011. From September 2008 to November 2011, he served as Managing Director of B. Riley & Co., an investment banking firm. From August 1997 to December 2007, he served as
a Managing Director—Investment Banking at A.G. Edwards & Sons, Inc. From May 1995 to August 1997, Mr. McQuay was a Partner at Crowell, Weedon & Co. and from October 1994 to August 1997 he also
served as Managing Director of Corporate Finance. From May 1993 to October 1994, Mr. McQuay served as Vice President, Corporate Development with Kerr Group, Inc., a New York Stock Exchange listed plastics manufacturing
company. From May 1990 to May 1993, Mr. McQuay served as Managing Director of Merchant Banking with Union Bank. Mr. McQuay received an AB degree in economics from Princeton University and a MBA degree in finance from the
University of California at Los Angeles. He also serves as the Chairman of the Board of Directors of BSD Medical, Corp. and as a director of Superior Industries International, Inc. Mr. McQuay’s qualifications to serve on the Board
include, among others, his extensive business and financial experience, his public company board and investment banking experience, his knowledge of the Company and his service as a director of the Company for over 14 years.
Frederick H. Schneider, Jr.
, age 57, has been a director of the Company since 2004 and has served as Chief Executive Officer
of ABP Arrowhead LLC, a manufacturer of plumbing and irrigation products since March 2010. Previously, he served as the Chief Financial Officer and as a director of Sketchers USA, Inc. from 2006 to 2010. From 2004 to 2005, he served as Senior
Managing Director of Pasadena Capital Partners, LLC, a private equity investment firm. Prior to working at Pasadena Capital Partners, LLC, Mr. Schneider was an independent private equity investor and consultant. From September 1994 to
January 1998, he served as Chief Financial Officer and Principal of Leonard Green & Partners, L.P., a merchant banking firm. From June 1978 to September 1994, he was employed by KPMG Peat Marwick, including five years as an
Audit and Due Diligence Partner. Mr. Schneider received a BA degree in accounting and management from Ambassador College. He served as a member of the Board of Directors of Sport Chalet, Inc. from May 2000 until July of 2010.
Mr. Schneider’s qualifications to serve on the Board include, among others, his corporate financial expertise
25
gained through his service as CFO and a board member of a public company in a consumer product field and as a partner of a large public accounting firm.
Mark D. Peterson
, age 50, has been a director of the Company since 2011 and has been a partner in the law firm of
O’Melveny & Myers LLP, specializing in corporate and securities law, since December 2011. From March 2008 to May 2011, he served as senior vice president, chief legal officer, and secretary of Conexant Systems, Inc., a manufacturer of
semiconductor devices. From August 2007 to March 2008, he served as senior vice president, general counsel and secretary of Targus Group International, Inc., a manufacturer of mobile computing accessories. From October 1997 to August 2007, he served
in various senior roles at the Company, including senior vice president, general counsel and secretary. 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. Mr. Peterson’s qualifications to serve on the Board include, among others, his former service as an executive officer of the Company, his service as an executive officer in other
multinational companies, including an international consumer products company, and his experience and knowledge regarding legal, governance, executive compensation and financial issues gained during his service as a business executive in public
companies and as an attorney with an international law firm.
Information Regarding Executive Officers
Information regarding the Company’s executive officers is set forth in Item 1 – “Business” of this Form 10-K
under the caption “Executive Officers of the Registrant.”
Code of Ethics
The Company has adopted a Code of Ethical Standards and Business Practices that applies to all of the Company’s employees, including
its Chief Executive Officer, Chief Financial Officer, and other financial personnel. The Code of Ethical Standards is designed to deter wrongdoing and to promote, among other things, (i) honest and ethical conduct, (ii) full, fair,
accurate, timely and understandable disclosures, and (iii) compliance with applicable governmental laws, rules and regulations. The Code of Ethical Standards and Business Practices is available on the Company’s website at
www.meade.com. If the Company makes any substantive amendments to the Code of Ethical Standards and Business Practices or grants any waiver, including any implicit waiver, from a provision of the Code to its Chief Executive Officer, Chief Financial
Officer or other executive officers, it will disclose the nature of such amendment or waiver on its website.
Audit Committee
The Company has a separately-designated standing Audit Committee. As of February 28, 2013, the Audit Committee was
comprised of Messrs. Schneider (Chairman), McQuay and Peterson. The Board of Directors has determined that Mr. Schneider has accounting and related financial management expertise within the meaning of the NASDAQ Stock Market listing
standards and qualifies as an “audit committee financial expert” within the meaning of the SEC regulations. The Board of Directors has also determined that each of the members of this Committee is an “independent director” as
defined in Rule 5605(a)(2) of the Marketplace Rules of the NASDAQ Stock Market and meets the additional criteria for independence of Audit Committee members set forth in Rule 10A-3(b)(1) under the Exchange Act.
26
|
Item 11.
|
Executive Compensation.
|
General
Summary Compensation Table
The following table presents information regarding the compensation of the Company’s principal executive officer and the only other highly compensated executive officer (collectively, the “Named
Executive Officers”).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)(1)
|
|
|
All Other
Compensation
($)(2)
|
|
|
Total ($)
|
|
|
Steven G. Murdock
Chief Executive Officer
|
|
|
2013
2012
|
|
|
|
250,000
250,000
|
|
|
|
—
—
|
|
|
|
102,000
182,250
|
|
|
|
524
558
|
|
|
|
352,524
432,808
|
|
|
John Elwood
Senior Vice President- Finance and Administration and Chief Financial Officer and Secretary
|
|
|
2013
2012
|
|
|
|
170,316
170,316
|
|
|
|
—
—
|
|
|
|
68,000
121,500
|
|
|
|
775
325
|
|
|
|
239,091
292,141
|
|
|
(1)
|
These amounts reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Detailed information about the amount recognized for specific
awards is reported in the table under “Outstanding Equity Awards at Fiscal 2013 Year-End.” For a discussion of the assumptions and methodologies used to calculate these amounts, please see the discussion of equity incentive awards
contained in Note 3 “Summary of Significant Accounting Policies—
stock based compensation
” and Note 10 “Stock Incentive Plan” to the Company’s Consolidated Financial Statements, included as part of this
Form 10-K.
|
|
(2)
|
Includes life insurance premium payments.
|
Compensation of Named Executive Officers
The Summary Compensation Table above quantifies the value of the different forms of compensation earned by or awarded to the Company’s Named Executive Officers during Fiscal 2012 and Fiscal 2013. The
primary elements of each Named Executive Officer’s total compensation reported in the table are base salary, an annual bonus and long-term equity incentives consisting of stock options or restricted stock. Named Executive Officers also were
paid the other compensation listed in the Summary Compensation Table, as further described in Footnote 2 to the table.
The
Summary Compensation Table should be read in conjunction with the other tables and narrative descriptions in this Form 10-K. A description of the material terms of each Named Executive Officer’s base salary, annual bonus, and equity
compensation is provided below. The Outstanding Equity Awards at Fiscal 2013 Year-End table below provides further information on the Named Executive Officers’ outstanding option and stock awards.
Employment Agreements
On August 14, 2012, Meade Instruments Corp., a Delaware corporation (the “Company”), and Steven Murdock, the Company’s
Chief Executive Officer, entered into an Amended and Restated Employment Agreement (the “Murdock Agreement”). In addition, on August 14, 2012, the Company and John Elwood, the Company’s Chief Financial Officer, entered into an
Amended and Restated Employment Agreement (the “Elwood Agreement”, and together with the Murdock Agreement, the “Executive Agreements”). The initial term of each Executive Agreement ends on February 28, 2013, and each
agreement is automatically renewed for one year periods unless the Company or the executive officer notifies the other of nonrenewal at least 90 days before the end of the initial term (or applicable renewal term).
Each Executive Agreement is essentially identical, except for compensation. The Executive Agreements provides for the following terms and
conditions: Each executive officer is entitled to the payment of an annual
27
base salary equal to the following amounts: $250,000 for Mr. Murdock and $170,316 for Mr. Elwood. The executive officers are also entitled to participate in and are covered by all
bonus, incentive and employee health, insurance, 401(k), and other plans and benefits established for the employees of the Company, although Mr. Murdock will not be required to contribute toward his medical and dental insurance premiums. In
addition, the Executive Agreements provide the executive officers with vacation benefits (three weeks per year for Mr. Elwood and four weeks per year for Mr. Murdock, up to a maximum accrual of six weeks for Mr. Elwood and eight weeks
for Mr. Murdock), and reimbursement of all business expenses. In addition, each executive officer is entitled to a cash bonus if certain targets are achieved. The calculation of such cash bonus amounts shall be determined by the Compensation
Committee of the Company’s Board of Directors within the first 60 days of each fiscal year. For the Company’s fiscal year ended February 28, 2013, if the Company had positive EBITDA for such fiscal year, each of the executive
officers would have received a cash bonus as follows: (i) Mr. Murdock would have received an amount equal to 28.75% of the Company’s positive EBITDA (up to a maximum cash bonus of $23,000); and (ii) Mr. Elwood would have
received an amount equal to 21.25% of the Company’s positive EBITDA (up to a maximum cash bonus of $17,000). For this purpose, EBITDA means the Company’s net income plus the provision for interest and income taxes, and plus the amount of
any non-cash expenses. However, since the Company had a net loss in Fiscal 2013 and did not achieve the required minimum EBITDA level, no bonuses were paid to the executive officers for Fiscal 2013. The bonus targets for the Company’s fiscal
year ending February 28, 2014 are still being determined by the Compensation Committee.
If the Company terminates the
employment of one of these executive officers without cause, the Company elects not to renew one of the executive officer’s Executive Agreement or if one of the executive officers terminates his employment for one of the following reasons:
(A) a material diminution of authority, duties or responsibilities of the executive officer, (B) any material reduction by the Company to the executive officer’s base salary, or (C) the Company requires the executive officer to
be based at any office or location which increases the distance from such executive officer’s home to the office or location by more than 45 miles from the distance in effect at the beginning of the term of the Executive Agreements, then such
executive officer would be entitled to an aggregate severance payment equal to: (x) 12 months base salary and (y) group medical and dental insurance COBRA benefits for 18 months (and with respect to Mr. Murdock, if longer the
period between the termination date and August 4, 2016) (collectively, the “Severance Payments”). The Severance Payments are to be paid in one lump sum within 30 days after termination. As partial consideration for the benefits
set forth above, the executive officers agreed to not solicit its customers or employees, during the term of employment and for 12 months after termination of employment.
Long-Term Share-Based Incentive Awards
The Company’s policy is that
the Named Executive Officers’ long-term compensation should be directly linked to the value provided to the Company’s stockholders. Therefore, 100% of the Named Executive Officers’ long-term compensation is currently awarded in the
form of share-based instruments that are in or valued by reference to the Company’s Common Stock, generally non-qualified stock options. The number of shares of the Company’s Common Stock subject to each annual award is intended to create
a meaningful opportunity for stock ownership in light of the Named Executive Officer’s current position with the Company, the individual’s potential for increased responsibility and promotion over the award term, and the individual’s
personal performance in recent periods. The Compensation Committee may also take into account the number of unvested equity awards held by the Named Executive Officer in order to maintain an appropriate level of equity incentive for that individual.
However, the Compensation Committee does not adhere to any specific guidelines as to the relative equity award holdings of the Company’s Named Executive Officers.
Stock Options
. The Company has traditionally and intends to continue to make a portion of its long-term incentive awards to Named Executive Officers in the form of stock options with an exercise
price that is equal to the fair market value of the Company’s Common Stock on the grant date. Thus, the Named Executive Officers will only realize value on their stock options if the Company’s stockholders realize value on their shares.
The stock options also function as a retention incentive for the Company’s executive officer as they generally vest over a four (4) year period following the grant date.
28
Restricted Stock
. At certain times, the Company has made a portion of its long-term
incentive grants (or a portion of its bonus awards) to Named Executive Officers in the form of restricted stock. Restricted stock represents Common Stock of the Company that is subject to a restriction until such time as a specified vesting
requirement is satisfied. The Company has determined that at times it is advisable to grant restricted stock in addition to or in lieu of larger stock option grants in order to minimize stock expense to the Company and dilution. The restricted stock
also functions as a retention incentive as the restrictions generally vest over a time period following the grant date.
401(k) Plan
The Company maintains a 401(k) Plan which is qualified under Section 401(k) of the Internal Revenue Code
(the “Code”) for all employees of the Company who have completed at least six months of service with the Company and are at least 21 years of age. The 401(k) Plan is designed for all eligible employees to save for retirement on a
tax-deferred basis. Eligible employees may contribute up to 15% of their annual compensation up to a maximum amount allowed under the Code. The 401(k) Plan does not currently include an employer match provision. On May 1, 2013 the Company
took formal action to terminate its 401(k) Plan. The date of plan termination is May 31, 2013, at which time all participants with an account balance will be fully vested and forfeiture amounts will be allocated in accordance with the terms of
the 401(k) Plan.
Severance and Other Benefits Upon Termination of Employment or Change in Control
Employment Agreements
. In order to achieve the Company’s compensation objective of attracting, retaining and motivating
qualified executives, the Board believes that it needs to provide the Company’s Named Executive Officers with certain severance protections. For Named Executive Officers, the Company’s philosophy is that severance should only be payable
upon certain terminations of a Named Executive Officer’s Executive Agreement with the Company. The Board believes that the occurrence, or potential occurrence, of a change in control transaction will create uncertainty regarding the continued
employment of Named Executive Officers. This uncertainty results from the fact that many change in control transactions result in significant organizational changes, particularly at the senior executive level. In order to encourage the Named
Executive Officers to remain employed with the Company during an important time when their prospects for continued employment following the transaction are often uncertain, the Company has provided Named Executive Officers under the Executive
Agreements with severance benefits in a change in control situation in which the Named Executive Officer was actually terminated by the Company without cause or by the Named Executive Officer for “good reason” as defined in such Executive
Agreements.
Option Plans
. Under the terms of the 1997 Plan and 2008 Plan, if there is a liquidation, sale of all or
substantially all of the Company’s assets, or merger or reorganization that results in a change in control of the Company, and such outstanding awards will not be continued or assumed following the transaction, then, like all other employees,
Named Executive Officers may receive immediate vesting of their outstanding long-term incentive compensation awards.
Section 162(m) Policy
Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly-held companies for compensation paid to certain executive officers, to the extent that compensation exceeds $1
million per officer in any year. The limitation applies only to compensation which is not considered to be performance-based, either because it is not tied to the attainment of performance milestones or because it is not paid pursuant to a
stockholder-approved plan. The Compensation Committee believes that in establishing the cash and equity incentive compensation programs for the Company’s executive officers, the potential deductibility of the compensation payable under those
programs should be only one of a number of relevant factors taken into consideration, and not the sole governing factor. Accordingly, the Compensation Committee may provide one or more executive officers with the opportunity to earn incentive
compensation, whether through cash bonus
29
programs tied to the Company’s financial performance or share-based awards in the form of restricted stock or stock options, which may be in excess of the amount deductible by reason of
Section 162(m) or other provisions of the Internal Revenue Code. The Compensation Committee believes it is important to maintain incentive compensation at the requisite level to attract and retain the executive officers essential to the
Company’s financial success, even if all or part of that compensation may not be deductible by reason of the Section 162(m) limitation.
OUTSTANDING EQUITY AWARDS AT FISCAL 2013 YEAR-END
The following table
presents information regarding the outstanding share-based awards held by each Named Executive Officer as of February 28, 2013.
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Option Awards (1)
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Stock Awards
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Name
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|
Grant
Date
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|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
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|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
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Option
Exercise
Price
($)
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Option
Expiration
Date
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Number of
Shares of
Stock
That Have
Not
Vested
(#)
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Market
Value of
Shares of
Stock
That
Have Not
Vested
($)
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Steven G. Murdock
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8/10/12
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(2)
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—
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—
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—
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30,000
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102,000
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6/29/11
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(3)
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—
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—
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—
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—
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33,750
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182,250
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3/13/09
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(4)
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37,500
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—
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4.40
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3/12/19
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—
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—
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3/13/09
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(4)
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25,000
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—
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4.40
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3/12/19
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—
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—
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7/10/08
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(5)
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250
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—
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15.00
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7/09/18
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—
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—
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7/12/07
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(5)
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250
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—
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44.20
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7/11/17
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—
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—
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1/31/07
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(5)
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250
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—
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55.20
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1/30/17
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—
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—
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John Elwood
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8/10/12
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(2)
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—
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—
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—
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—
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20,000
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68,000
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6/29/11
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(3)
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—
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—
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—
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—
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22,500
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121,500
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(1)
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Unless otherwise noted, each stock option grant reported in the table was granted under, and is subject to, the Company’s 1997 Plan. Unless otherwise noted, the
option expiration date shown in the table is the normal expiration date, and the latest date that the options may be exercised. The options may terminate earlier in certain circumstances described below. For each Named Executive Officer, the
unexercisable options shown in the table are also unvested and will generally terminate if the Named Executive Officer’s employment terminates. The exercisable options shown in the table, and any unexercisable options shown in the table that
subsequently become exercisable, will generally expire earlier than the normal expiration date if the Named Executive Officer’s employment terminates. Unless exercised, exercisable stock options will generally terminate within three months
after the date of termination of employment. In addition, the stock options (whether exercisable or not) will immediately terminate if a Named Executive Officer’s employment is terminated by the Company for cause or misconduct (as determined
under the 1997 Plan). The options may become fully vested and may terminate earlier than the normal expiration date if there is a change in control of the Company.
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(2)
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On August 10, 2012, each of the Executive Officers was granted a restricted stock award (an “Award”) pursuant to the Company’s form of Restricted
Stock Award Agreement under the Company’s 2008 Plan. Each Award vests in four equal installments with the first installment vesting on August 10, 2013 and the remainder vesting on each of the next three consecutive anniversaries. The
Awards also become fully vested upon a change in control of the Company. However, if an Executive Officer’s employment is terminated for any reason, any shares of such Executive Officer’s Award which are then unvested shall be forfeited.
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(3)
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On June 29, 2011, each of the Executive Officers was granted a restricted stock award (an “Award”) pursuant to the Company’s form of Restricted
Stock Award Agreement under the Company’s 2008 Plan.
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Footnotes continue on next page
30
Footnotes continued from previous page
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Each Award vests in ten equal installments with the first installment vesting on June 29, 2012 and the remainder vesting on each of the next nine consecutive anniversaries; provided,
however, if the Company subsequently achieves net income for any fiscal year of the Company (but excluding the Company’s fiscal years 2019, 2020 and 2021), as shown on the Company’s audited consolidated financial statements for each fiscal
year, the vesting of the Award shall accelerate such that the number of shares of the Award which are unvested at the end of such fiscal year shall vest in three substantially equal installments over the then next three consecutive anniversaries of
the date of the Award. The Awards also become fully vested upon a change in control of the Company. However, if an Executive Officer’s employment is terminated for any reason, any shares of such Executive Officer’s Award which are then
unvested shall be forfeited.
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(4)
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Twenty-five percent (25%) of each of these option awards vested and became exercisable on each of May 5, 2009, August 5, 2009, November 5, 2009 and
February 5, 2010. The 25,000 option grant was made under the Company’s 2008 Plan, the terms of which are substantially similar to the 1997 Plan. The 37,500 option grant was made under a stand-alone option agreement which also had terms
similar to options granted under the 1997 Plan.
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(5)
|
These option awards were granted to him while he was a non-employee director. Each of these option awards vest and become exercisable in three equal and successive
installments over the three year period commencing on the date of grant. The July 10, 2008 option grant was made under the Company’s 2008 Plan.
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Director Compensation
Directors who are also employees of the Company are
reimbursed for expenses incurred in attending meetings of the Board but do not otherwise receive compensation for serving as directors of the Company. The compensation paid to any director who was also one of the Company’s employees during
Fiscal 2013 is presented above in the Summary Compensation Table and the related explanatory tables. Such employee-directors are generally not entitled to receive additional compensation for their services as directors. Each director who is not an
employee of the Company (referred to herein as “Non-Employee Directors”) is entitled to receive compensation consisting of an annual retainer, fees for committee chairmanship and annual option awards as set forth below.
Annual Retainer and Chairmanship Fees
The following table sets forth the schedule of annual retainers and Chairmanship fees for each Non-Employee Director in effect during Fiscal 2013:
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Type of Fee
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Dollar
Amount
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Annual Board Retainer
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$
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10,000
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Additional Annual Fee to Chair of Audit Committee
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$
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1,500
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Additional Annual Fee to Chair of Compensation Committee
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$
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1,500
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Additional Annual Fee to Chair of Nominating and Governance Committee
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$
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1,500
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All Non-Employee Directors are also reimbursed for out-of-pocket expenses they incur serving as directors
and attending meetings.
Equity Awards to Non-Employee Directors
The Company’s 2008 Plan provides for the automatic granting of stock options to Non-Employee Directors. Each time a new Non-Employee
Director is elected, an option to purchase 250 shares of Common Stock is automatically granted to such Non-Employee Director at the then fair market value of the Common Stock. In
31
addition, Non-Employee Directors receive an additional grant of 250 options on the date of each Annual Meeting of Stockholders after which such director will continue in office, provided that any
new Non-Employee Director will only receive one automatic grant during the year in which such director is elected. All options granted to Non-Employee Directors are non-qualified stock options and vest ratably over the three-year period following
the date of the grant. The option exercise price is the fair market value or closing price of the Company’s Common Stock as of the date of grant. The options granted to Non-Employee Directors do not include any dividend or dividend equivalent
rights. However, Non-Employee Directors are entitled to dividends with respect to shares purchased under an option at the same rate as of the Company’s other stockholders.
Director Compensation Table
The following table presents information
regarding the compensation paid during Fiscal 2013 to Non-Employee Directors:
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Name
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Fees Earned or
Paid in Cash
($)
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Option
Awards
($)(1)(2)
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Stock
Awards
($)(3)
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Total
($)
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Timothy C. McQuay
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11,500
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469
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—
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11,969
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Frederick H. Schneider, Jr.
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11,500
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469
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—
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11,969
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Mark D. Peterson
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11,500
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469
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|
—
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11,969
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Paul D. Sonkin(4)
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7,500
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469
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—
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7,969
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Michael R. Haynes(4)
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7,500
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469
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—
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7,969
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(1)
|
The amounts reported as Option Awards above reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. For a discussion of the
assumptions and methodologies used in connection with the stock options reported as Option Awards above, please see the discussion of stock and option awards contained in Note 3 “Summary of Significant Accounting
Policies—
Stock-based compensation
” and Note 10 “Stock Incentive Plan” to the Company’s Consolidated Financial Statements, included as part of this Form 10-K.
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(2)
|
As described above, each of the Company’s Non-Employee Directors was automatically granted an award of 250 stock options in connection with the Company’s
Annual Meeting on July 12, 2012. The exercise price of each stock option awarded was equal to the closing price of the Company’s Common Stock on the grant date ($3.75 on July 12, 2012). See footnote (1) above for the assumptions
used to value these awards in the table. As of February 28, 2013, each Non-Employee Director held outstanding options for the following number of shares: Mr. McQuay, 2,500; Mr. Schneider, Jr., 2,250; and Mr. Peterson, 500.
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(3)
|
As of February 28, 2013, no Non-Employee Director held any stock awards.
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(4)
|
Messrs. Sonkin and Haynes each resigned from the Company’s Board of Directors in January 2013.
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Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|
The following table sets forth certain information with respect to the beneficial ownership of the Common Stock as of May 1, 2013,
for (i) each person known to beneficially own more than 5% of the Common Stock based solely on filings with the SEC, (ii) each of the directors, (iii) each of the executive officers, and (iv) all directors and executive officers
as a group. Except as otherwise indicated, beneficial ownership includes sole voting and sole dispositive power with respect to the shares shown.
32
Security Ownership Table
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Amount and
|
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|
|
Nature of
|
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Percent
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|
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Beneficial
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of
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Name and Address
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|
Ownership
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Class
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Principal Stockholders
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Hummingbird entities and Paul D. Sonkin(1)
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99,659
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7.64
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%
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Yifen Zhang(2)
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81,041
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6.20
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%
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Zhang Xiaoyan(3)
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75,402
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|
5.77
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%
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|
GRT Capital Partners, L.L.C.(4)
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68,656
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|
5.26
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%
|
|
Executive Officers and Directors
|
|
|
|
|
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|
|
|
|
Steven G. Murdock(5)(6)
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198,800
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|
|
14.53
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%
|
|
John A. Elwood(5)(7)
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45,334
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|
|
3.47
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%
|
|
Timothy C. McQuay(5)(8)
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|
|
2,100
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|
|
|
*
|
|
|
Frederick H. Schneider, Jr.(5)(9)
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|
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1,750
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|
|
*
|
|
|
Mark D. Peterson(5)(10)
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|
|
83
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|
|
|
*
|
|
|
All current directors and executive officers as a group (5 persons)(11)
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|
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248,067
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|
|
18.08
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%
|
|
(1)
|
According to a filing of a Schedule 13D/A dated January 4, 2012, filed with the SEC, Hummingbird Value Fund, L.P. (“HVF”) has sole
voting power and sole dispositive power as to such shares. Each of Hummingbird Management, LLC (f/k/a Morningside Value Investors, LLC), a Delaware limited liability company (“Hummingbird”), as investment manager, and Hummingbird Capital
LLC (“HC”), as general partner of HVF, may also be deemed to have sole voting power and sole dispositive power over such shares. In addition, Paul D. Sonkin, as managing member of HC and of Hummingbird may also be deemed to have sole
voting power and sole dispositive power as to such shares. Mr. Sonkin is a former director of the Company, resigning in January 2013. Based on the Company’s records, Mr. Sonkin also has beneficial ownership of an additional 4,188
shares of Common Stock which if included with the 99,659 shares listed above would result in a total of 103,847 shares or 7.95% of the total outstanding Common Stock. The address of the principal business of Mr. Sonkin and the Hummingbird
entities is 575 Madison Avenue, 9
th
Floor, New York, NY
10022.
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|
(2)
|
According to a filing of a Schedule 13G dated May 6, 2013, filed with the SEC, the address or principal business office of Yifen Zhang is 17 Wood Street, H102, San
Francisco, CA 94118.
|
|
(3)
|
According to a filing of a Schedule 13D dated May 18, 2013, filed with the SEC, the residence or business address of Zhang Xiaoyan is 1528 East Zhuan Xing Rd.,
Building 11, Suite 401, Shanghai, China 201108.
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|
(4)
|
According to a joint filing of a Schedule 13G dated February 14, 2013, filed with the SEC, GRT Capital Partners, L.L.C. (“GRT
Capital”) reported beneficial ownership of such shares, and GRT Capital reported that it has sole voting power and sole dispositive power with respect to such shares. The address or principal address of GRT Capital is One Liberty Square,
11
th
Floor, Boston, MA 02109.
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|
(5)
|
The address for all directors and executive officers of the Company is c/o Meade Instruments Corp., 27 Hubble, Irvine, CA 92618.
|
|
(6)
|
Includes an aggregate of (i) 63,250 shares subject to options that are currently exercisable or will become exercisable on or before June 30, 2013 and
(ii) 63,750 restricted shares of Common Stock that are subject to forfeiture and transfer restrictions until the vesting date of such shares, however, Mr. Murdock maintains sole voting power with respect to all such unvested shares. Also
includes 68,050 shares held by Steven G. Murdock, as Trustee of the Steven G. Murdock Trust u/a/d August 16, 2001.
|
|
(7)
|
Includes 42,500 restricted shares of Common Stock that are subject to forfeiture and transfer restrictions until the vesting date of such shares, however,
Mr. Elwood maintains sole voting power with respect to all such unvested shares.
|
33
Footnotes continued on next page
Footnotes continued from previous page
|
(8)
|
Includes 2,000 shares subject to options that are currently exercisable or will become exercisable on or before June 30, 2013.
|
|
(9)
|
Includes 1,750 shares subject to options that are currently exercisable or will become exercisable on or before June 30, 2013.
|
|
(10)
|
Includes 83 shares subject to options that are currently exercisable or will become exercisable on or before June 30, 2012.
|
|
(11)
|
Included in this total of all executive officers and directors as a group as of May 1, 2013. Includes
67,083 shares subject to options that are currently
exercisable or will become exercisable on or before June 30, 2013. See footnotes 6 through 10 above.
|
Entry
into a Material Definitive Agreement.
On May 17, 2013, Meade Instruments Corp. (the “Company”), JOC North
America LLC (“JOC”) and JOCNA Inc., a wholly-owned subsidiary of JOC (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of
certain conditions, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of JOC (the “Merger”).
At the effective time of the Merger, and as the result of the Merger, each share of Company common stock (other than any treasury shares held by the Company and any shares of Company common stock
beneficially owned by JOC, any of its subsidiaries or affiliates or any person who properly demands statutory appraisal of their shares) will be converted into the right to receive an amount in cash equal to $3.45, without interest (the “Merger
Consideration”). Each option to acquire Company common stock (whether vested or unvested) that is outstanding at the effective time of the Merger will become vested in full and will be canceled in exchange for the right to receive the Merger
Consideration minus the exercise price per share of the option. Each share of restricted Company common stock that is outstanding at the effective time of the Merger will vest in full and will convert into the right to receive the Merger
Consideration per share.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of February 28, 2013 with respect to shares of Meade common stock that may be issued under all of the Company’s equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
(a)
Number of
Securities
to
be Issued Upon
Exercise
of Outstanding
Options
|
|
|
(b)
Weighted-
Average
Exercise
Price of
Outstanding
Options
|
|
|
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity
Compensation
Plans
(Excluding Securities
Reflected in Column
(a))
|
|
|
Equity compensation plans approved by shareholders(1)
|
|
|
70,775
|
|
|
$
|
8.22
|
|
|
|
74,842
|
|
|
(1)
|
These plans include the 1997 Stock Incentive Plan and the 2008 Stock Incentive Plan, and also includes the stand-alone stock option agreement under which Steven Murdock
was granted an option covering 37,500 shares of common stock.
|
34
|
Item 13.
|
Certain Relationships and Related Transactions, and Director Independence.
|
See “Employment Agreements” and “Severance and Other Benefits Payments Upon Termination of Employment or Change in Control” above for a description of the Executive Agreements and
other agreements by and between the Company and certain of its Executive Officers.
The Company’s Certificate of
Incorporation, as amended (the “Certificate”) authorizes the Company to provide indemnification of the Company’s directors and officers, and the Company’s Amended and Restated Bylaws (the “Bylaws”) require the Company
to indemnify its directors and officers, to the fullest extent permitted by the Delaware General Corporation Law (the “DGCL”). In addition, each of the Company’s current directors and executive officers has entered into a separate
indemnification agreement with the Company. Finally, the Certificate and Bylaws limit the liability of directors to the Company or its stockholders to the fullest extent permitted by the DGCL.
On August 24, 2007 (the “Closing Date”), the Company entered into a Purchase Agreement (the “Purchase
Agreement”) with five institutional investors (the “Investors”) pursuant to which the Investors purchased in a private placement 3,157,895 shares of the Company’s common stock, par value $0.01 (the “Common Shares”) (or
157,895 Common Shares as adjusted to reflect the Reverse Stock Split), at a purchase price of $1.90 per share (or $38.00 per share as adjusted to reflect the Reverse Stock Split). Gross proceeds from the sale of the Common Shares were approximately
$6.1 million. Three of the Investors (the “Hummingbird Investors”) are controlled by, Paul D. Sonkin, through his management and control of Hummingbird Capital, LLC, the general partner of the Hummingbird Investors.
Mr. Sonkin was a director of the Company until he resigned in January 2013. The Hummingbird Investors purchased in the aggregate 526,316 of the Common Shares (or 26,316 Common Shares as adjusted to reflect the Reverse Stock Split) and paid a
purchase price of $2.00 per share (or $40.00 per share as adjusted to reflect the Reverse Stock Split) (or an aggregate purchase price of approximately $1.1 million) in accordance with applicable rules of the NASDAQ Stock Market. The
approximate dollar value of the amount of Mr. Sonkin’s interest in the transaction is $45,000. Prior to the sale of the Common Shares to the Hummingbird Investors, Mr. Sonkin beneficially owned approximately 15.6% of the
Company’s common stock.
In connection with entering into the Purchase Agreement on August 24, 2007, the Company
also entered into a Registration Rights Agreement with the Investors (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement a registration statement was filed with the Securities and Exchange Commission (the
“Commission”) and declared effective covering the resale of the Common Shares. Subject to certain exceptions if sales cannot be made pursuant to the registration statement, the Company must pay the Investors 1.5% of the aggregate purchase
price of the Common Shares for each 30-day period (or portion thereof) during which sales under the registration statement are not permitted. On May 9, 2013, in consideration for a payment of $50,000, the Hummingbird Investors settled any claim
they had regarding a registration statement not being available for sales of their Common Shares.
Independence of Board Of Directors
The Board of Directors has determined that each of the directors listed in Item 10 (including Paul Sonkin and Michael
Haynes who each resigned in January 2013), other than Steven G. Murdock (the Company’s current Chief Executive Officer), was “independent” under the applicable rules of the NASDAQ Stock Market listing standards for the
Company’s fiscal year ending February 28, 2013.
35
|
Item 14.
|
Principal Accounting Fees and Services.
|
Fees Paid to Independent Auditors
The Company was billed an aggregate of approximately $112,500 and $158,185 by Moss Adams LLP for professional services for the fiscal years ended February 29, 2012 and February 28, 2013,
respectively. The table below sets forth the components of these aggregate amounts.
|
|
|
|
|
|
|
|
|
|
|
Type of Fee
|
|
February 29, 2012
|
|
|
February 28, 2013
|
|
|
Audit Fees — professional services rendered for the audit of the Company’s annual financial statements and the review
of the financial statements included in the Company’s Form 10-Qs
|
|
$
|
112,500
|
|
|
$
|
121,200
|
|
|
Audit-Related Fees — services that are reasonably related to the performance of the audit or review of the Company’s
financial statements, including reviews of registration statements filed with the SEC
|
|
|
—
|
|
|
$
|
9,700
|
|
|
Tax Fees — professional services rendered for tax compliance, tax consulting and tax
|
|
|
—
|
|
|
$
|
27,285
|
|
Audit Committee Pre-Approval Policies and Procedures.
The Charter for the Audit Committee of the Board of Directors establishes procedures for the Audit Committee to follow to pre-approve
auditing services and non-auditing services to be performed by the Company’s independent auditors. Such pre-approval can be given as part of the Audit Committee’s approval of the scope of the engagement of the independent auditors or on an
individual basis. The pre-approval of non-auditing services can be delegated by the Audit Committee to one or more of its members, but the decision must be presented to the full Audit Committee at the next scheduled meeting. The charter prohibits
the Company from retaining its independent auditors to perform specified non-audit functions, including bookkeeping; financial information systems design and implementation; appraisal or valuation services; fairness opinions or contribution-in-kind
reports; actuarial services; and internal audit outsourcing services. The Audit Committee pre-approved all of the non-audit services provided by the Company’s independent auditors during Fiscal 2012 and Fiscal 2013.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Operations
Meade Instruments Corp. (the “Company”) is engaged in the design, manufacture, marketing and sale of consumer
products, primarily telescopes, telescope accessories and binoculars. The Company designs its products in-house or with the assistance of external consultants. Most of the entry level products are manufactured overseas by contract manufacturers in
Asia, while the high-end telescopes are manufactured and assembled at the Company’s Mexico facility. Sales of the Company’s products are driven by an in-house sales force as well as a network of sales representatives throughout the U.S.
and through distributors internationally. The Company currently operates out of two primary locations: Irvine, California and Tijuana, Mexico. The California facility serves as the Company’s corporate headquarters, research and development
facility; the Mexico facility contains the Company’s manufacturing, assembly, repair, packaging, distribution and other general and administrative functions. The Company’s business is seasonal and the financial results have historically
varied significantly on a quarter-by-quarter basis throughout each year.
The Company has incurred substantial losses for
several years and has attempted repeatedly unsuccessfully to restructure the Company and return it to profitability. In January 2013, the Company’s board of directors decided that the Company should explore strategic alternatives in order to
ensure that shareholder value was preserved. The Company’s board of directors approved a merger agreement and on May 17, 2013, the Company announced that it had entered into an Agreement and Plan of Merger which would allow for all
outstanding shares of the Company to be purchased by a wholly-owned subsidiary of JOC North America LLC, a subsidiary of Jinghua Optics & Electronics for approximately $4.5 million.
2. Liquidity
The Company incurred a net loss of approximately $3.7 million, which resulted in a net decrease in cash of
approximately $3.6 million from $3.9 million at February 29, 2012 to $0.3 million at February 28, 2013.
The Company
has limited working capital and access to credit. The Company had $40 thousand of remaining availability on its credit facility at February 28, 2013. In addition, while the Company’s financing agreement with its lender does not contain
explicit financial covenants, the Agreement allows the Company’s lender significant latitude to restrict, reduce or eliminate the Company’s access to credit or require the Company to repay any and all amounts outstanding under the
Agreement. If its lender restricts, reduces or eliminates the Company’s access to credit, or requires immediate repayment of the amounts outstanding under the agreement, the Company would be required to pursue additional or alternative sources
of liquidity such as equity financings, a new debt agreement with other creditors, or liquidate assets. However, the Company cannot assure that any such additional sources of liquidity would be available on reasonable terms, if at all.
The Company’s financial statements for the fiscal year ended February 28, 2013 were prepared assuming the Company
would continue as a going concern; however, the Company’s declining revenues, recurring losses, weakened financial position and reduced liquidity raise substantial doubt about its ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s board of directors decided in January 2013 that the Company should consider its strategic alternatives to preserve and
maximize shareholder value, which ultimately culminated in the approval on May 17, 2013 of the Agreement and Plan of Merger which, subject to shareholder approval, would allow for the outstanding shares of the Company to be purchased for $3.45
per share or approximately $4.5 million.
Due to the Company’s declining revenues, recurring losses, limited liquidity
and weakened financial position, the Company may not be able to operate long enough to execute that planned transaction.
F-6
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies
Basis of presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States, and include the accounts of the Company and all of its subsidiaries and reflect the elimination of all significant intercompany account balances and transactions.
Recent accounting pronouncements
There have been no recent accounting pronouncements which have had or are expected to have a material effect on the Company’s
financial statements.
Revenue recognition
The Company’s revenue recognition policy complies with ASC No. 605,
Revenue Recognition.
The Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk
of loss have passed to the customer, typically at the time of shipment, the price to the buyer is fixed or determinable and collectibility is reasonably assured. Revenue is not recognized at the time of shipment if these criteria are not met. Under
certain circumstances, the Company accepts product returns or offers markdown incentives. Material management judgments must be made and used in connection with establishing sales returns and allowances estimates. The Company continuously monitors
and tracks returns and allowances and records revenues net of provisions for returns and allowances. The Company’s estimate of sales returns and allowances is based upon several factors including historical experience, current market and
economic conditions, customer demand and acceptance of the Company’s products and/or any notification received by the Company of such a return. Historically, sales returns and allowances have been within management’s estimates; however,
actual returns may differ significantly, either favorably or unfavorably, from management’s estimates depending on actual market conditions at the time of the return.
Allowance for doubtful accounts
Management analyzes specific customer accounts receivable, customer credit-worthiness, historical bad debt expenses, current economic
trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of any of the Company’s customers were to deteriorate to the point of impairing the customer’s
ability to make payments on its account, additional allowances may be required. While credit losses have historically been within management’s expectations and the provisions established, significant deterioration in the liquidity or financial
position of any of the Company’s major customers or any group of customers could have a material adverse impact on the collectibility of accounts receivable and future operating results.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined principally by the first-in, first-out method (“FIFO”). Cost includes materials, labor, and manufacturing overhead
related to the purchase and production of inventories. Any write-down of inventory to the lower of cost or market at the close of a fiscal period creates a new cost basis that subsequently would not be marked up based on changes in underlying facts
and circumstances. On an on-going basis, the Company evaluates inventory for obsolescence and slow-moving items. This evaluation includes analysis of sales levels, sales projections, and purchases by item, as well as raw material usage related to
the Company’s manufacturing facilities. If the Company’s review indicates a reduction in utility below carrying value, it reduces inventory to a new cost basis. If future demand or market conditions are different than the Company’s
current estimates, an inventory adjustment may be required, and would be reflected in cost of goods sold in the period the revision is made.
F-7
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Buildings and related improvements, including leasehold improvements, are depreciated over seven to twenty-five years or through the end of the related lease term, whichever is shorter. All other property and equipment, except property held
under capital leases, is depreciated over 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.
Intangible assets
The Company accounts for acquisition-related intangible assets in accordance with FASB Accounting Standards Codification (“ASC”)
No. 805-10,
Business Combinations
, and ASC No. 350-20,
Goodwill and Other Intangible Assets
. A portion of the remaining difference between the purchase price and the fair value of net tangible assets at the date of
acquisition is included in the balance sheet as acquisition-related intangible assets. Amortization periods for the intangible assets subject to amortization range from seven to fifteen years depending on the nature of the assets acquired. The
carrying value of acquisition-related intangible assets, including the related amortization period, is evaluated in the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. If the carrying amount exceeds the fair value, which is determined based upon estimated discounted future cash flows based upon our estimated cost of capital, an impairment loss is reflected in loss from operations.
Such estimates are subject to change and we may be required to recognize an impairment loss in the future.
Income taxes
In accordance with ASC 740,
Accounting for Income Taxes
the Company determined that there was sufficient uncertainty surrounding the future realization of its deferred tax assets to warrant the
recording of a full valuation allowance. The valuation allowance was recorded based upon the Company’s determination that there was insufficient objective evidence, at the time, to recognize those assets for financial reporting purposes. For
the fiscal year ended February 28, 2013, the Company has not changed its assessment regarding the recoverability of its deferred tax assets. Ultimate realization of the benefit of the deferred tax assets is dependent upon the Company generating
sufficient taxable income in future periods, including periods prior to the expiration of certain underlying tax credits.
The
Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. At February 28, 2013, there were no accrued interest and penalties related to uncertain tax positions.
The provision for income taxes consists of minimum tax in various U.S. states and income taxes on the Company’s operations in
Mexico.
The tax years 2008 through 2012 remain open to examination by the major taxing jurisdictions to which the Company is
subject. However, the amount of a net operating loss carryforward can be adjusted for federal tax purposes for the three years (four years for the major state jurisdictions in which the Company operates) after the net operating loss is utilized.
Shipping and handling costs
The Company records shipping and handling costs in selling expenses. For each of the years ended February 28, 2013 and
February 29, 2012, the Company incurred shipping and handling costs of $0.6 million.
F-8
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising
The Company expenses the costs of advertising, including production costs, as incurred. For each of the years ended February 28, 2013 and February 29, 2012, the Company incurred advertising,
including cooperative advertising, and marketing expenses of approximately $0.5 million. Cooperative advertising arrangements exist through which customers receive a certain allowance of the total purchases or an otherwise agreed upon amount from
the Company if certain qualitative advertising criteria are met and if specified amounts are spent on the advertisements. To receive the allowance, a customer must deliver to the Company evidence of all advertising performed that includes the
Company’s products. Because the Company receives an identifiable advertising benefit from the customer, the Company recognizes the cost of cooperative advertising as an advertising expense in selling expenses.
Research and development
Expenditures for research and development costs are charged to expense as incurred.
Loss per share
For each of the years ended February 28, 2013 and February 29, 2012, the Company incurred a net loss. Other than restricted stock and stock options, the Company has no dilutive securities.
Therefore, there is no difference between the number of shares used in the calculation of basic and diluted loss per share with respect to the net losses reported.
Basic loss per share amounts exclude the dilutive effect of potential shares of Common Stock. Basic loss per share is based upon the weighted-average number of shares of Common Stock outstanding. Diluted
loss per share is based upon the weighted-average number of shares of Common Stock and dilutive potential shares of Common Stock outstanding for each period presented. Potential shares of Common Stock include outstanding stock options which are
included under the treasury stock method. For fiscal years ended February 28, 2013 and February 29, 2012, options to purchase 70,775 and 77,350 shares of Common Stock, respectively, were also excluded from diluted weighted average shares
of Common Stock, as the option exercise prices were greater than the average market price of the Company’s Common Stock and, therefore, the effect would be anti-dilutive.
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of credit risk are principally accounts receivable and cash.
The Company maintains an allowance for doubtful accounts at a level deemed appropriate by management based on historical and other factors that affect collectibility. Based upon the Company’s assessment of the recoverability of the receivables
from its customers and in the opinion of management, the Company has established adequate reserves related to accounts receivable. The Company maintains cash balances at certain financial institutions in excess of amounts insured by federal
agencies. Management does not believe that as a result of this concentration it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.
Fair value of financial instruments
The carrying amounts of accounts receivable, credit facility, accounts payable and accrued liabilities, approximate fair value due to the
short maturity of these instruments.
F-9
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of estimates in the preparation of consolidated financial statements
The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States,
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the respective reporting periods. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, sales returns and reserves, allowances for doubtful accounts, excess and obsolete inventory,
income taxes, asset impairment, litigation reserves and contingencies.
Product warranties
The Company provides reserves for the estimated cost of product warranty-related claims at the time of sale, and
periodically adjusts the provision to reflect actual experience related to its standard product warranty programs and its extended warranty programs. The amount of warranty liability accrued reflects management’s best estimate of the expected
future cost of honoring Company obligations under its warranty plans. Additionally, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Meade
®
brand products, principally telescopes and binoculars, are generally covered by a one-year limited warranty. Most of the Coronado
®
products have limited five-year warranties. Included in the warranty accrual as of February 28, 2013 and
February 29, 2012, is $0.2 million and $0.5 million, respectively, related to the Company’s former sport optics brands that were sold in 2008 and for which the Company agreed to retain certain warranty liabilities. In June 2012, the Company
entered into an agreement with the owner of one of the Company’s former sport optics brands which eliminated the Company’s remaining liability of approximately $0.3 million for any future product warranty claims associated with that brand.
The Company reduced its warranty accrual by $0.3 million accordingly.
Changes in the warranty liability, which is included as
a component of accrued liabilities on the accompanying Consolidated Balance Sheets, were as follows:
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Fiscal Years Ended
|
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
736
|
|
|
$
|
810
|
|
|
Release of warranty liability
|
|
|
(294
|
)
|
|
|
—
|
|
|
Warranty accrual
|
|
|
243
|
|
|
|
217
|
|
|
Labor and material
|
|
|
(290
|
)
|
|
|
(291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
395
|
|
|
$
|
736
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
The Company accounts for stock-based compensation in accordance with the provisions of ASC No. 718-10,
Share-Based Payment
,
which establishes accounting for equity instruments exchanged for employee services. Under the provisions of ASC No. 718-10, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Share-based compensation expenses, included in general and administrative expenses in the Company’s consolidated
statement of operations for fiscal 2013 and 2012, were approximately $0.1 million. Due to deferred tax valuation allowances provided, no net benefit was recorded against the share-based compensation charged.
F-10
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company estimates the fair value of stock options using the Black-Scholes valuation
model. Key input assumptions used to estimate the fair value of stock options include the expected option term, forfeiture rate, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate
over the option’s expected term, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop underlying assumptions are appropriate in calculating the fair values
of the Company’s stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
4. Credit facility
The Company maintained agreements with FCC, LLC, d/b/a First Capital, and its subsidiary for a $10 million credit
facility through December 11, 2012. The facility with First Capital consisted of a factoring arrangement for the Company’s receivables with an 80% advance rate up to $10 million of available credit and a secured credit line tied to the
Company’s finished goods inventory of up to $3 million of available credit, subject to the overall credit limit of $10 million. The interest rate for advances against the facility was initially set at LIBOR plus 5.5%, subject to a LIBOR floor
of 2.25%. The agreements also contained unused line fees, minimum factoring commissions, early termination fees and other customary terms and conditions. No amount was outstanding under this facility at February 29, 2012.
On December 11, 2012, the Company entered into an Amended and Restated Factoring and Security Agreement with First Capital which reduced
the advance rate to seventy-five percent (75.0%) of the aggregate net invoice amount of domestic accounts receivable outstanding and limited advances to $3 million at any one time. No advances on foreign accounts were provided for under the
Agreement. The Agreement also did not provide for advances on inventory. Fees under the Agreement consisted of a factoring commission equal to seven-tenths of one percent (0.70%) of the gross invoice amount of each account and a facility fee in the
amount of two thousand dollars ($2,000) per month. The original term of the Agreement was two years but could be terminated by either party with 45 days notice and could be terminated immediately by First Capital in the event of a default, as
defined in the Agreement.
On December 28, 2012, the Company terminated its Amended and Restated Factoring and Security
Agreement First Capital and entered into a Financing Agreement (the “Rosenthal Agreement” or “Agreement”) with Rosenthal & Rosenthal, Inc. (“Rosenthal”).
The Rosenthal Agreement provides for advances of up to (i) seventy percent (70.0%) of the Net Amount of Eligible Receivables arising from
sales made to customers located in the United States of America and Canada and (ii) 50% of the Net Amount of Eligible Receivables arising from sales made to customers outside the United States of America and Canada, provided that in the case of such
sales are subject to a credit insurance policy, less any reserves as Rosenthal may deem, in its sole discretion, to be necessary from time to time.
Advances under the Rosenthal Agreement incur interest at the prime rate publicly announced in New York City by JPMorgan Chase Bank plus four percent. A minimum of $3,000 per month in interest will be paid
according to the Agreement. A facility fee in the amount of 1% was paid to Rosenthal on the closing date and will be paid on each anniversary thereof. An administration fee of $1,000 per month is also payable during the Agreement.
The Rosenthal Agreement continues through November 30, 2015 and from year to year thereafter unless terminated by either party. The
Company or Rosenthal can terminate the Agreement with at least 60 days, and not more than 120 days, written notice except in cases of a Default, at which time Rosenthal can terminate the Agreement at any time and the Company will pay to Rosenthal an
amount equal to (a) three percent of the
F-11
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maximum Credit Facility then in effect, if such termination occurs prior to the first anniversary of the Closing Date; (b) two percent of the Maximum Credit Facility then in effect, if such
termination occurs on or after the first anniversary of the Closing Date but prior to the second anniversary of the Closing Date; and (c) one percent of the Maximum Credit Facility then in effect if such termination occurs on or after the second
anniversary of the Closing Date.
No amount was owed to First Capital when the First Capital Agreement was terminated, and no
termination fees were incurred as a result of the termination of the First Capital Agreement. Rosenthal advanced approximately $1.6 million to the Company subsequent to entering into the Agreement, which constituted the full amount of availability
under the Agreement at that time.
At February 28, 2013, the Company had approximately $40 thousand of remaining
availability on its credit facility in addition to the balance owed of approximately $371 thousand.
5. Intangible Assets
Intangible assets were a result of an acquisition that occurred on December 1, 2004 and included the following
assets:
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|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
|
|
Amortization
Periods
(In Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net book
Value
|
|
|
|
|
(In thousands)
|
|
|
Trademarks
|
|
|
7-15
|
|
|
$
|
424
|
|
|
$
|
(397
|
)
|
|
$
|
27
|
|
|
$
|
424
|
|
|
$
|
(361
|
)
|
|
$
|
63
|
|
|
Completed technologies
|
|
|
12
|
|
|
|
1,620
|
|
|
|
(1,113
|
)
|
|
|
507
|
|
|
|
1,620
|
|
|
|
(978
|
)
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
2,044
|
|
|
$
|
(1,510
|
)
|
|
$
|
534
|
|
|
$
|
2,044
|
|
|
$
|
(1,339
|
)
|
|
$
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in the carrying amount of acquisition-related intangible assets for the years ended February 28, 2013
and 2011 and February 29, 2012, respectively, are as follows:
|
|
|
|
|
|
|
|
|
Amortizing
Intangible Assets
|
|
|
|
|
(In thousands)
|
|
|
Balance, net, February 28, 2011
|
|
$
|
875
|
|
|
Amortization
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
Balance, net, February 29, 2012
|
|
$
|
705
|
|
|
Amortization
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
Balance, net, February 28, 2013
|
|
$
|
534
|
|
|
|
|
|
|
|
Amortization of trademarks, customer relationships and completed technologies over the next five fiscal years is
estimated as follows:
|
|
|
|
|
|
|
Fiscal Year
|
|
(In thousands)
|
|
|
2014
|
|
$
|
162
|
|
|
2015
|
|
|
135
|
|
|
2016
|
|
|
135
|
|
|
2017
|
|
|
102
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
534
|
|
|
|
|
|
|
|
F-12
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments and Contingencies
The Company’s lease of its corporate office in Irvine, California expires on February 28, 2014. On
August 24, 2012, the Company entered into a Sublease Agreement, with Wet Products, Inc. (the “Sublessee”). The Sublessee has nonexclusive rights to the warehouse premises through September 30, 2013.
The Company’s lease of its manufacturing facility in Tijuana, Mexico expires on December 31, 2013. For the fiscal years ended
February 28, 2013 and February 29, 2012, the Company incurred rent expense of $0.7 million and $0.6 million, respectively.
Although the Company is involved from time to time in litigation incidental to its business, management believes that the Company currently is not involved in any litigation which would have a material
adverse effect on the financial position, results of operations or cash flows of the Company; however, class action lawsuits may be filed by third parties challenging our contemplated merger with JOC. If not ultimately dismissed, these lawsuits
could adversely affect our business, financial position and results of operations and divert management’s attention and resources from other matters.
7. Income Taxes
Pretax loss is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
(3,839
|
)
|
|
$
|
(1,503
|
)
|
|
Foreign
|
|
|
180
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,659
|
)
|
|
$
|
(1,359
|
)
|
|
|
|
|
|
|
|
|
|
|
Significant components of the provision for income taxes on continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
|
|
(7
|
)
|
|
|
24
|
|
|
Foreign
|
|
|
15
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,689
|
)
|
|
|
9,085
|
|
|
State
|
|
|
(248
|
)
|
|
|
938
|
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
Deferred tax asset valuation allowance
|
|
|
1,937
|
|
|
|
(10,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8
|
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
|
F-13
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes on continuing operations 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Federal income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
State income taxes, net of federal income tax benefit
|
|
|
5.7
|
|
|
|
4.3
|
|
|
Foreign Taxes
|
|
|
0.8
|
|
|
|
0.8
|
|
|
Research and development credits
|
|
|
2.0
|
|
|
|
1.2
|
|
|
Permanent differences
|
|
|
(0.1
|
)
|
|
|
(0.8
|
)
|
|
Adjustment to prior year deferred taxes
|
|
|
10.9
|
|
|
|
(8.1
|
)
|
|
Reversal of deferred tax asset related to Section 382
|
|
|
—
|
|
|
|
(773.5
|
)
|
|
Valuation allowance
|
|
|
(52.9
|
)
|
|
|
736.9
|
|
|
Changes in uncertain tax positions
|
|
|
—
|
|
|
|
—
|
|
|
Benefit for Federal research and development credits monetized
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
(0.6
|
)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)%
|
|
|
(4.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
The deferred tax assets and liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Sales returns
|
|
$
|
263
|
|
|
$
|
325
|
|
|
Inventory and accounts receivable
|
|
|
794
|
|
|
|
1,137
|
|
|
Accrued liabilities
|
|
|
117
|
|
|
|
168
|
|
|
Intangibles
|
|
|
507
|
|
|
|
526
|
|
|
Credits
|
|
|
400
|
|
|
|
—
|
|
|
Fixed assets
|
|
|
438
|
|
|
|
609
|
|
|
Stock-based compensation
|
|
|
439
|
|
|
|
400
|
|
|
Other
|
|
|
9
|
|
|
|
14
|
|
|
Net operating losses
|
|
|
19,522
|
|
|
|
17,374
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
22,489
|
|
|
|
20,553
|
|
|
Less valuation allowance
|
|
|
(22,489
|
)
|
|
|
(20,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
The change in valuation allowance for the years ended February 28, 2013 and February 29, 2012 was $1.9
million and $10.0 million, respectively, to recognize the uncertainty of realizing the benefits of the Company’s deferred tax assets. The valuation allowances were recorded because there is insufficient objective evidence at this time to
recognize those assets for financial reporting purposes. Ultimate realization of the benefit of the deferred tax assets is dependent upon the Company generating sufficient taxable income in future periods including periods prior to the expiration of
certain underlying tax credits.
As of February 28, 2013, the Company has approximately $62.5 million and $62.5 million
of net operating loss carryforwards available to offset future taxable income for federal and state income tax purposes,
F-14
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
respectively. These net operating loss carryforwards are before any limitation under Section 382 (see discussion below) and will begin to expire during the fiscal years ending February 28,
2023 for federal income tax purposes and February 28, 2014 for state income tax purposes. Prior year stock option compensation expense included in the net operating losses is negligible. The Company has foreign tax credits and research and
experimentation and manufacturing incentive credits of approximately $3.8 million and $0.9 million for federal tax purposes. The Company has 0.9 million for CA tax purposes. These credits are before any limitation under Section 382 (see
discussion below) and will begin to expire during the fiscal years ending February 28, 2014 and February 28, 2021, respectively. The future realization of these credits is dependent upon the Company generating sufficient income both
outside the United States and within the United States.
Section 382 Limitation
Utilization of the net operating loss and tax credit carry-forwards may be subject to a substantial annual limitation due to ownership
change limitations that may have occurred or that could occur in the future, as required by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. These ownership changes may limit the amount of
NOL carry-forwards and tax credit carry-forwards that can be utilized annually to offset future taxable income and tax, respectively. Consequently, management has performed an analysis of whether an ownership change has occurred for tax reporting
purposes. Based upon our analysis, we believe that a Section 382 ownership change has occurred and approximately $14.5 million and $8.0 million of federal and state NOLs, respectively, $0.8 million and $0.5 million of federal and state research and
development credits, respectively, and $3.8 million of foreign tax credits may expire unutilized. As a result, we removed these assets from the above schedule of deferred tax assets. Since any recognizable deferred tax assets would be
fully reserved, future changes in our unrecognized tax benefits will not impact our effective tax rate.
As of
February 28, 2013, the Company has approximately $47.8 million and $54.5 million of net operating loss carryforwards, after application of the 382 limitation available to offset future taxable income for federal and state income tax purposes,
respectively. These net operating loss carryforwards will begin to expire during the fiscal years ending February 28, 2023 for federal income tax purposes and February 28, 2013 for state income tax purposes. The Company has no foreign tax
credits after application of the 382 limitation and has research and experimentation and manufacturing incentive credits of approximately $0.1 million after application of the 382 limitation, which begin to expire during the fiscal year ending
February 28, 2021. The future realization of these credits is dependent upon the Company generating sufficient income both outside the United States and within the United States.
Unrecognized Tax Benefits
The Company is subject to income taxes in the
United States and Mexico. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which
the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when the Company
believes that certain positions might be challenged despite a belief that its tax return positions are fully supportable. The Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of income tax audits. The
provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. Accruals for unrecognized tax benefits are provided for in accordance with the requirements of the prescribed authoritative
guidance.
F-15
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 28, 2013 and as of February 29, 2012, the Company had no
unrecognized tax benefits. Management does not anticipate that there will be a material change in the balance of unrecognized tax benefits within the next 12 months.
The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. As of February 28, 2013 and as of February 29, 2012, no interest and penalties
related to uncertain tax positions were accrued.
The tax years 2008 through 2012 remain open to examination by the major
taxing jurisdictions to which the Company is subject. However, the amount of a net operating loss carryforward can be adjusted for federal tax purposes for the three years (four years for the major state jurisdictions in which the Company operates)
after the net operating loss is utilized.
8. Business Segments, Geographic Data and Major Customers
The Company is a multinational consumer products company that designs, manufactures, imports and distributes
telescopes, telescope accessories, binoculars and other consumer products. The Company is organized and operates as one segment in one principal geographic location—North America. Product sales and geographic data are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
Telescope and telescope accessories
|
|
$
|
14,804
|
|
|
$
|
17,826
|
|
|
Weather Stations
|
|
|
626
|
|
|
|
702
|
|
|
Sport optics
|
|
|
1,193
|
|
|
|
1,497
|
|
|
Other
|
|
|
805
|
|
|
|
1,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,428
|
|
|
$
|
21,586
|
|
|
|
|
|
|
|
|
|
|
|
F-16
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Geographic data—product sales:
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
10,824
|
|
|
$
|
14,398
|
|
|
Europe
|
|
|
3,838
|
|
|
|
3,368
|
|
|
Other Foreign/Export
|
|
|
2,766
|
|
|
|
3,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,428
|
|
|
$
|
21,586
|
|
|
|
|
|
|
|
|
|
|
|
9. Loss Per Share
Basic loss per share amounts exclude the dilutive effect of potential shares of Common Stock. Basic loss per share is
based upon the weighted-average number of shares of Common Stock outstanding. Diluted loss per share is based upon the weighted-average number of shares of Common Stock and dilutive potential shares of Common Stock outstanding for each period
presented. Potential shares of Common Stock include outstanding stock options and restricted stock, which may be included in the weighted average number of shares of Common Stock under the treasury stock method.
The total number of options and restricted shares outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Stock options outstanding
|
|
|
71
|
|
|
|
77
|
|
|
Restricted shares outstanding
|
|
|
132
|
|
|
|
63
|
|
A reconciliation of the basic weighted average number of shares outstanding and the diluted weighted average number of
shares outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Basic weighted average number of shares
|
|
|
1,171
|
|
|
|
1,167
|
|
|
Dilutive potential shares of Common Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding
|
|
|
1,171
|
|
|
|
1,167
|
|
|
Number of options excluded from the calculation of weighted average shares because the exercise prices were greater than the
average market price of the Company’s Common Stock
|
|
|
71
|
|
|
|
77
|
|
|
Potential shares of Common Stock excluded from the calculation of weighted average shares
|
|
|
132
|
|
|
|
63
|
|
Weighted average shares for the fiscal 2013 and 2012, respectively, exclude the aggregate dilutive effect of potential
shares of Common Stock related to stock options and restricted stock, because the Company incurred a loss and the effect would be anti-dilutive. Options with exercise prices greater than the average market price during the periods presented are
excluded from the calculation of weighted average shares outstanding because the effect would be anti-dilutive.
F-17
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stock Incentive Plan
The fair value of the Company’s stock options granted during the last two fiscal years was estimated on the grant
date using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
Expected life (years)
(1)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
Expected volatility
(2)
|
|
|
165
|
%
|
|
|
160
|
%
|
|
Risk-free interest rate
(3)
|
|
|
0.8
|
%
|
|
|
1.1
|
%
|
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
|
(1)
|
The option term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options.
|
|
(2)
|
The stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company’s Common Stock over the most recent
period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.
|
|
(3)
|
The risk-free interest rate for periods equal to the expected term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant.
|
As of February 28, 2013, there was approximately $5 thousand of unrecognized compensation cost related to unvested
stock options, which is expected to be recognized over a weighted-average period of approximately 2 years.
In February
1997, the Company’s Board of Directors adopted the 1997 Stock Incentive Plan (the “1997 Plan”). The 1997 Plan provided 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 received director and stockholder approval to grant options and other awards
with respect to 275,000 shares of Common Stock under the 1997 Plan. Awards under the Plan generally vest after six months and become exercisable over a two to 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 250 options each when elected and 250 each upon their re-election to the Board of Directors at the Company’s Annual Meeting each year. The directors’ options generally become exercisable in
equal annual amounts over three years.
In June 2008, the Company’s Board of Directors adopted (and the stockholders
subsequently approved) the 2008 Stock Incentive Plan (the “2008 Plan”), which effectively is an extension of the 1997 Plan for an additional five years. The 2008 Plan’s aggregate share limit is 129,747 shares. Upon the adoption of the
2008 Plan, options can no longer be granted under the 1997 Plan.
On March 13, 2009, the Company’s Board of
Directors granted (and the stockholders subsequently approved) a stand-alone Stock Option Agreement (the “Agreement”) specific to Steven G. Murdock, granting him an option to purchase 37,500 shares of the Company’s Common Stock at an
exercise price of $4.40 per share.
F-18
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option activity under these plans and Agreement (the “Option Plans”) during
fiscal years 2013 and 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Options outstanding at February 28, 2011
|
|
|
78
|
|
|
$
|
12.71
|
|
|
Granted
|
|
|
1
|
|
|
|
4.39
|
|
|
Forfeited
|
|
|
(2
|
)
|
|
|
(57.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at February 29, 2012
|
|
|
77
|
|
|
|
11.11
|
|
|
Granted
|
|
|
1
|
|
|
|
3.75
|
|
|
Forfeited
|
|
|
(7
|
)
|
|
|
39.37
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at February 28, 2013
|
|
|
71
|
|
|
|
8.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 28, 2013
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
Number of
Options
(In thousands)
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Options
(In thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
$3.01 – $4.74
|
|
|
65
|
|
|
|
6.1 years
|
|
|
$
|
4.38
|
|
|
|
64
|
|
|
$
|
4.39
|
|
|
$15.00 – $57.20
|
|
|
4
|
|
|
|
2.9 years
|
|
|
$
|
45.90
|
|
|
|
4
|
|
|
$
|
45.90
|
|
|
$61.00 – $70.60
|
|
|
2
|
|
|
|
1.2 years
|
|
|
$
|
63.79
|
|
|
|
2
|
|
|
$
|
63.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exercise prices of certain options granted to employees was equal to the market price at the grant date. The
exercise price of certain other options granted to employees was less than the market price at the grant date. Options granted to employees generally become exercisable 33% or 25% after one year and ratably over the following 24 to 36 months,
respectively, or as otherwise determined by the Board of Directors. The option prices under the 1997 Plan range from $3.00 to $70.60 per share and are exercisable over periods ending no later than 2021.
On June 29, 2011, each of the Executive Officers was granted a restricted stock award (an “Award”) pursuant to the
Company’s form of Restricted Stock Agreement under the Company’s 2008 Stock Incentive Plan. The Awards to Mr. Murdock and Mr. Elwood were in the amounts of 37,500 shares of Common Stock and 25,000 shares of Common
Stock, respectively. Each Award vests in ten equal installments with the first installment vesting on June 29, 2012 and the remainder vesting on each of the next nine consecutive anniversaries; provided, however, if the Company subsequently
achieves net income for any fiscal year of the Company (but excluding the Company’s fiscal years 2019, 2020 and 2021), as shown on the Company’s audited consolidated financial statements for such fiscal year, the vesting of the Award shall
accelerate such that the number of shares of the Award which are unvested at the end of such fiscal year shall vest in three substantially equal installments over the then next three consecutive anniversaries of the date of the Award.
On August 10, 2012, each of the Company’s U.S. employees, including the Executive Officers, were granted restricted stock
awards (the “Awards”) pursuant to the Company’s form of Restricted Stock Agreement under the Company’s 2008 Stock Incentive Plan. The Awards were in the aggregate amount of 76,250 shares of Common Stock. Each award vests in three
equal installments with the first installment vesting on August 10, 2013 and the remainder vesting on each of the two succeeding anniversaries.
F-19
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in general and administrative expenses during the fiscal years ended February
28, 2013 and February 29, 2012, was $77 thousand and $20 thousand, respectively, of compensation expense attributable to the vesting of restricted stock.
11. Composition of Certain Balance Sheet Accounts
The composition of accounts receivables, net of reserves, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Due from factor
|
|
$
|
—
|
|
|
$
|
1,183
|
|
|
Accounts receivable, other
|
|
|
1,896
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,896
|
|
|
$
|
1,668
|
|
|
|
|
|
|
|
|
|
|
|
The total due from factor at February 29, 2012, included approximately $1.1 million of invoices assigned on a recourse
basis. Accordingly, the credit risk associated with the assigned invoices remained with the Company at February 29, 2012. As disclosed in footnote 4, the Company had a factoring agreement with FCC, LLC, d/b/a First Capital until December 10, 2012
The composition of inventories is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
2,560
|
|
|
$
|
1,419
|
|
|
Work in process
|
|
|
2,294
|
|
|
|
2,424
|
|
|
Finished goods
|
|
|
2,286
|
|
|
|
2,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,140
|
|
|
$
|
6,633
|
|
|
|
|
|
|
|
|
|
|
|
The composition of property and equipment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Molds and dies
|
|
$
|
1,317
|
|
|
$
|
1,234
|
|
|
Machinery and equipment
|
|
|
4,531
|
|
|
|
4,507
|
|
|
Furniture and fixtures
|
|
|
251
|
|
|
|
251
|
|
|
Autos and trucks
|
|
|
127
|
|
|
|
199
|
|
|
Leasehold improvements
|
|
|
138
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,364
|
|
|
|
6,329
|
|
|
Less accumulated depreciation and amortization
|
|
|
(6,168
|
)
|
|
|
(6,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
196
|
|
|
$
|
170
|
|
|
|
|
|
|
|
|
|
|
|
F-20
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the fiscal years ended February 28, 2013 and February 29, 2012, the
Company recorded depreciation expense of $112 thousand and $43 thousand, respectively.
The composition of accrued liabilities
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
|
|
|
(In thousands)
|
|
|
Salaries, wages, bonuses and other associated payroll costs
|
|
$
|
433
|
|
|
$
|
481
|
|
|
Warranty costs, Meade
|
|
|
195
|
|
|
|
242
|
|
|
Warranty costs, Simmons & Weaver
|
|
|
200
|
|
|
|
494
|
|
|
Freight expenses
|
|
|
28
|
|
|
|
21
|
|
|
Advertising and marketing expenses
|
|
|
47
|
|
|
|
117
|
|
|
Professional fees
|
|
|
78
|
|
|
|
66
|
|
|
Customer deposits
|
|
|
161
|
|
|
|
146
|
|
|
Other
|
|
|
131
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,273
|
|
|
$
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
F-21