Item 1. Business
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 such 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 hundreds of 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 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 $0.9 million and $0.8 million on research and development during the fiscal years ended February 29, 2012 and February 28, 2011, 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 which are expected to begin shipping in early fiscal 2013.
The Company manufactures a complete line of advanced astronomical telescopes. 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.
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.
In the United States and Canada, the Company distributes its products through a network of more than 200 specialty retailers, distributors and mass merchandisers, which offer the Company’s products in approximately 2,000 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 $6.2 million and $6.7 million for the years ended February 29, 2012 and February 28, 2011, representing approximately 29% and 25% 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, 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 it is well positioned in the marketplace to capitalize on its strong brand names, its research and development resources, its history of innovation and its manufacturing capabilities to bring new and innovative products to market. However, 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. The Company’s strategy is to continue to develop products which focus on the Company’s competitive advantage of superior optics in the product segments in which the Company believes it can obtain more market share.
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 LX90GPS, to the venerable LX200 lines. The LX200 telescopes, available in 8, 10, 12, 14 and 16-inch apertures, are the most popular of the Company’s telescopes among serious amateur astronomers. The LX200 telescopes feature the Company’s proprietary ACF optics, a Global Positioning System (“GPS”) receiver for telescope alignment and a built-in computer library of more than 145,000 celestial objects. These objects are cataloged in the Company’s proprietary hand-held computerized Autostar II control system. By entering any of the celestial objects presented on the Autostar II display, the telescope automatically locates and tracks the selected object. Advanced telescopes also include the Company’s LX90GPS, a moderately priced line of Schmidt-Cassegrain telescopes available in 8, 10 and 12 inch apertures. The
Company’s LXD75 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 28% and 24% of the Company’s net sales for the years ended February 29, 2012 and February 28, 2011, 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 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 48% of the Company’s net sales for the years ended February 29, 2012 and February 28, 2011, 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 year ended February 29, 2012 were approximately 7% of net sales compared to approximately 1% of net sales for the year ended February 28, 2011. The substantial increase in sales of sport optics was attributable to sales of the Company’s new spotting scope products introduced in fiscal 2012.
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 the United States. Weather stations and digital clock sales in each of the years ended February 29, 2012 and February 28, 2011 represented approximately 3% and 4% 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 7% and 12% of the Company’s net sales for the years ended February 29, 2012 and February 28, 2011, respectively. Sales of accessories products were higher in the prior year as compared to fiscal 2012 due to sales of discontinued products in fiscal 2011 in an effort to reduce inventories and also due to reduced sales in fiscal 2012 of high-end and intermediate telescopes, which included reduced sales of accessory products for those telescopes. Other optical products accounted for approximately 14% and 11% of the Company’s net sales for each of the years ended February 29, 2012 and February 28, 2011, 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 140 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 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 competitive position, 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 and results from operations 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.
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 2012, the Company sold its products to mail order dealers, to distributors, and to more than 200 specialty retailers and mass merchandisers that offer the Company’s products in approximately 2,000 retail store outlets. During the fiscal year ended 2011, one customer accounted for approximately 15% of the Company’s net sales. No such concentration existed in fiscal 2012. 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 significant 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.
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.
Quality Control. The Company’s manufacturing and engineering personnel coordinate and oversee the manufacturing process in order to ensure that product quality is maintained at a high level within an efficient cost structure. The Company has in place quality controls covering all aspects of the manufacturing process of its products, from each product’s precision optical system to its final assembly and testing. Parts and components for the advanced telescopes are manufactured and assembled in our Mexico facilities. The Company’s binoculars, microscopes and many of its less-expensive telescopes, as well as certain component parts for its small to midrange telescopes, are manufactured under our proprietary designs by manufacturers located in Asia.
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.
Superior Customer Service. The Company believes that its high level of customer service and technical support are important factors that differentiate it from its competitors. In addition to providing toll-free phone access to customers in an effort to provide superior post-sale service, Meade has consolidated its various customer service departments and increased its technical support staff for all of its product offerings. Communications infrastructure has been upgraded with a new phone system integrated with CRM software, and an on-line automated service request system that tracks repairs and replacement parts while automatically reporting back to the customer that submitted the request. The Company’s internet support pages also include video how-to instruction for many of the Company’s products, as well as technical manuals to further educate users about product operation.
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 29, 2012, the Company had approximately 159 full-time employees, worldwide. 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.
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:
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 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.
Item 1A.
Item 1A. Risk Factors
1. We continue to incur losses despite our efforts to restructure our business in an effort to return to profitability.
We have incurred significant net losses since fiscal 2005. During fiscal 2008 and fiscal 2009, we took several actions to restructure and reduce our business operations, overhead structure and improve our financial position in an effort to return our Company to profitability and ensure it has appropriate liquidity to fund its continuing operations. These actions included moving our manufacturing from California to Mexico, lowering our administrative expenses by reducing our executive team and employee headcount, monetizing certain assets and selling Meade Europe. However, although we have reduced the annualized net losses, we cannot assure we will be able to achieve or sustain profitability.
2. Our ability to borrow funds for working capital purposes is limited.
The Company maintains credit facility agreements with First Capital (the “Agreements”). The Agreements primarily consist of a factoring arrangement for all of the Company’s accounts receivable and includes a smaller credit line component using the Company’s inventory as collateral. While the Agreements do not contain explicit financial covenants, the Agreement provides First Capital with significant latitude in restricting, reducing, or withdrawing our lines of credit at its sole discretion.
If First Capital restricts, reduces or eliminates the Company’s access to credit, or requires immediate repayment of the amounts outstanding under the Agreement, we will be required to pursue additional or alternative sources of liquidity such as equity financings or a new debt agreement with other creditors, both of which may contain less favorable terms. We can not assure that such additional sources of capital will be available on reasonable terms, if at all. Our inability to maintain a sufficient credit facility could have a material adverse effect on our business, results of operations and financial condition.
The initial term of the credit agreement with First Capital expired in January 2012 at which time the pre-payment penalty provision expired but the other terms of the agreement were not materially affected, including First Capital’s ability to terminate the agreement. Management is currently working on obtaining a new agreement for a smaller, lower cost credit facility. However, there can be no assurances that we will be successful.
3. 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.
4. 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.
5. 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 Asian 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 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.
6. 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.
7. 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.
8. 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.
9. 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 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.
10. 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.
11. 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.
12. 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.
13. 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 [and plan to increase our international sales efforts as part of our growth strategy]. 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.
14. 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 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.
15. 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.
16. 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.
17. 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.
18. 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 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.
19. 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.
20. 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.
21. 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,
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a prohibition on stockholder action by written consent, and
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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 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.
22. We may be unable to successfully execute our growth and profitability strategies.
Our net sales and operating results have fluctuated significantly over the past five fiscal years and we may experience similar fluctuations in the future. Our ability to grow in the future depends upon, among other things, our ability to return to profitability, the maintenance and enhancement of our brand image and expansion of our product offerings and distribution channels. Furthermore, if our business becomes larger, we may not be able to effectively manage our growth. We anticipate that as the business grows, we will have to improve and enhance our overall financial and managerial controls, reporting systems and procedures. We may be unable to successfully implement our current growth and profitability strategies or other growth strategies or effectively manage our growth, any of which would negatively impact our business, results of operations and financial condition.
Item 2.
Item 2. Properties
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 is currently attempting to sublease its vacant 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 2012. The Company is currently negotiating a new lease with its landlord in Mexico.
The Company’s management believes that all facilities occupied by the Company are 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.
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.
Item 4. Mine Safety Disclosure
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s Common Stock is listed on the NASDAQ Capital Market under the symbol “MEAD”. The high and low sales prices on a per share basis for the Company’s Common Stock during each quarterly period for the fiscal years ended February 29, 2012 and February 28, 2011 were:
The reported closing sales price of the Company’s Common Stock on the NASDAQ Capital Market on May 21, 2012 was $3.65. As of May 21, 2012, there were 105 holders of record of the Company’s Common Stock.
Since August 1996, the Company has not paid any cash dividends on its Common Stock and does not anticipate declaring or paying any cash dividends on its Common Stock in the foreseeable future.
Item 6.
Item 6. Selected Financial Data
As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, we are not required to provide the information required by this item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements due to known and unknown risks, uncertainties and other factors, including those risks discussed in “Risk Factors” and elsewhere in this Form 10-K. Those risk factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. We do not have any intention or obligation to update forward-looking statements included in this Form 10-K after the date of this Form 10-K, except as required by law.
Overview of the Company and Recent Developments
Meade Instruments Corp. is engaged in the design, manufacture, marketing and sale of consumer products, primarily telescopes, telescope accessories and sport optics products such as binoculars and spotting scopes. We design our products in-house or with the assistance of external consultants. Most of our products are manufactured overseas by contract manufacturers in Asia, while our high-end telescopes are manufactured and assembled in our Mexico facilities. Sales of our products are driven by an in-house sales force as well as a network of sales representatives throughout the U.S. and through international distributors worldwide. We currently operate out of two primary locations: Irvine, California and Tijuana, Mexico. Our California facility serves as the Company’s corporate headquarters and served as our U.S. distribution facility through February 2012, at which time we eliminated the U.S. positions associated with our U.S. distribution activities in order to reduce the Company’s costs in reaction to the decline in sales of the Company’s low-end telescopes and other imported products. The distribution of the Company’s products, including imported products, is now managed at our Mexico facility which contains our manufacturing, assembly, repair, packaging, research and development, distribution and other general and administrative operations. Our business is highly seasonal and our financial results have historically varied significantly on a quarter-by-quarter basis throughout each year.
We believe that the Company holds valuable brand names and intellectual property that provide us with a competitive advantage in the marketplace. The Meade® brand name is ubiquitous in the consumer telescope market, while the Coronado® brand name represents a unique niche in the area of solar astronomy.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates under different assumptions or conditions. The significant accounting policies which management believes are the most critical to assist users in fully understanding and evaluating the Company’s reported financial results include the following:
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.
Inventories
Inventories are stated at the lower of cost, as determined using the first-in, first-out (“FIFO”) method, or market. Costs include materials, labor and manufacturing overhead. The Company evaluates the carrying value of its inventories taking into account such factors as historical and anticipated future sales compared with quantities on hand and the price the Company expects to obtain for its products in their respective markets. The Company also evaluates the composition of its inventories to identify any slow-moving or obsolete product. These evaluations require material management judgments, including estimates of future sales, continuing market acceptance of the Company’s products, and current market and economic conditions. Inventory may be written down based on such judgments for any inventories that are identified as having a net realizable value less than its cost. However, if the Company is not able to meet its sales expectations, or if market conditions deteriorate significantly from management’s estimates, reductions in the net realizable value of the Company’s inventories could have a material adverse impact on future operating results.
Acquisition-related intangible assets
The Company accounts for acquisition-related intangible assets in accordance with FASB Accounting Standards Codification 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 29, 2012, 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.
As of February 29, 2012 and as of February 28, 2011, the Company has 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. At February 29, 2012, 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 2011 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.
Results of Operations
The following table sets forth, for the periods indicated, certain items from the Company’s statements of operations as a percentage of net sales for the periods indicated.
The following table summarizes our net sales by product category (in millions):
Fiscal 2012 Compared to Fiscal 2011
The Company reported net sales of $21.6 million during the fiscal year ended February 29, 2012, a decrease of $4.7 million or 18% from net sales of $26.3 million during the fiscal year ended February 28, 2011.
Approximately $2.7 million or 57% of this decrease in net sales was due to a decrease in net sales of the Company’s imported low-end telescope products to mass-retail customers. This decrease of sales of low-end telescopes to mass-retail customers was partially offset by sales of sport optics products to such customers. Sales of sport optics products to mass retail customers increased approximately $1.3 million compared to the prior year. Sales of nearly all of the Company’s other products were down. Declines in the Company’s high-end and intermediate telescope and related products were attributed
to increased competition, effects on consumer discretionary spending associated with the general economic conditions and a decrease in order fulfillment attributed primarily to the announcement of the Company’s new LX800 and LX80 products in fall 2011. The Company received approximately $1.5 million in orders for these products during the fourth quarter of fiscal 2012 but the Company was not able to begin shipping these products until after the end of fiscal 2012. The LX800 began shipping in April 2012 and the LX80 is expected to ship soon after that.
Approximately 15% of the Company’s net sales during the fiscal year ended February 28, 2011 were from one customer. No such concentration existed during the fiscal year ended February 29, 2012. The primary reason for the decline in sales to these customers was a decrease in sales of lower-end telescope products which the Company imported from suppliers located in China.
The gross profit margin during fiscal 2012 increased to 25% of net sales, compared with 23% of net sales in fiscal 2011. This improvement in the gross profit margin was driven primarily by a favorable change in product mix as the Company sold less low-end telescopes and imported products which typically earn a lower margin and are characterized by substantial returns by consumers who purchase those products at mass retail stores which have liberal return policies. Consumers who purchase the Company’s high end and intermediate telescopes and related accessories are most often knowledgeable about the product and are less likely to purchase the products impulsively and return the product to the retail store.
Selling expenses decreased from $2.5 million (9% of net sales) in fiscal 2011 to $2.4 million (11% of net sales) in fiscal 2012. This decrease was attributable to reduced net sales, offset partially by increases in discretionary spending such as advertising expenses attributable to new product introductions and related promotions. In order to address the increase in selling expenses as a percentage of net sales, the Company eliminated approximately 10 positions relating to its U.S. sales and distribution operations in January 2012 due to the decline in sales of the Company’s low-end telescopes and imported products. These reductions are expected to save the Company approximately $0.7 million annually.
General and administrative expenses for fiscal 2012 were $3.4 million (16% of net sales), a decrease of $0.8 million or 19% compared to $4.2 million (16% of net sales) in fiscal 2011. Approximately $0.2 million or 25% of the decrease was due to lower stock compensation expense. Approximately $0.2 million or 25% was attributable to further reductions in headcount. The remainder of the decrease was comprised of reductions in property and use taxes due to a reduction in the Company’s property and equipment located in Orange County, California, and lower insurance, legal fees, and other expenses as part of the Company’s continued efforts to minimize its costs.
Research and development expenses increased approximately $0.1 million or 15% from $0.8 million in fiscal 2011 to $0.9 million in fiscal 2012. The Company has been in the process of developing several new products which are intended to capitalize on the Company’s competitive advantages and to broaden the Company’s product line into areas of the market which the Company has been absent in for several years-such as German equatorial mounted telescopes. The LX800 and LX80 telescopes were announced in Fall 2011 and the LX600 is in the process of being announced. Additional product development projects are planned to be completed in fiscal 2013.
The Company earned interest income in fiscal 2012 and 2011, due to the continued cash balance the Company maintains. The reduction in interest income from $3 thousand in fiscal 2011 to $2 thousand in fiscal 2012 was due to lower rates and average carrying balances.
Liquidity and Capital Resources
Fluctuations in Cash & Working Capital
The Company had cash and cash equivalents of $3.9 million at February 29, 2012, a decrease of $1.2 million or 24% compared to $5.1 million at February 28, 2011 despite no change in the net loss (i.e., a net loss of $1.4 million in both years).
Approximately $0.9 million or 75% of the decrease in cash was due to an increase in cash used by operating activities due to net unfavorable fluctuations in working capital, such as increases in inventories and reductions in accounts payable and accrued liabilities.
In fiscal 2012, inventories increased by approximately $0.6 million primarily due to the fact that the Company’s new LX800 and LX80 products were awaiting final development changes prior to their being approved for shipment. In addition, accounts receivable decreased approximately $1.0 million compared to the prior year because of a decrease in net sales in the fourth quarter, not because of an improvement in the Company’s cash conversion cycle. The net increase in working capital in fiscal 2012 compared to the prior year resulted in an increase in cash used by operations of $0.2 million in fiscal 2012.
In fiscal 2011, the Company increased cash provided by operating activities by $0.7 million as a result of a reduction in working capital achieved by reducing its inventory as part of a concentrated effort to reduce inventory and reducing its sales backlog in the fourth quarter of fiscal 2011.
The remaining $0.3 million or 25% of the decrease in cash was due to the fact that the loss in fiscal 2012 was comprised of less non-cash expenses such as depreciation and amortization and stock-based compensation compared to fiscal 2011.
Access to Credit
The Company currently has in place an undrawn $10 million secured credit facility with First Capital. The original term of the agreement expired in January 2012, at which time the prepayment penalty provision expired but the expiration of the initial term did not materially affect the lender’s ability to restrict, reduce or eliminate the Company’s access to credit. The Company continues to assign its invoices to First Capital. Availability of funds under this facility is based on a percentage of eligible accounts receivable and inventory located in the U.S. Availability on this facility amounted to over $0.9 million as of February 29, 2012 (approximately 80% of accounts receivable). While the Company’s credit facility does not contain explicit financial covenants, the Company’s lender has significant latitude in restricting, reducing or withdrawing the Company’s credit facility at its sole discretion with limited notice, as is customary with these types of arrangements. The Company is currently working to reduce its credit facility in order to minimize the costs of the credit facility and right-size the facility according to the Company’s needs.
The Company currently anticipates that cash on hand and funds generated from operations will be sufficient to meet the Company’s anticipated cash requirements for fiscal 2013.
In the event the Company requires more capital than is presently anticipated due to unforeseen factors, the Company may need to rely on its credit facility. In such an instance, 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 or a new debt agreement with other creditors, either of which may contain less favorable terms. The Company cannot assure that such additional sources of capital would be available on reasonable terms, if at all.
Cost Reductions
In February 2012, the Company eliminated all U.S. positions relating to its U.S. distribution operations as well as certain sales positions relating to its low-end telescope sales. This headcount reduction is expected to save the Company approximately $0.7 million per year.
As part of this restructuring, the Company relocated its U.S. inventory to its Mexico facility and is working with a real estate broker to sublease its U.S. warehouse, which is approximately 19,000 square feet of the Company’s 25,000 square foot facility in Irvine, California. The Company estimates that it could save an additional $0.1 million per year if it successfully subleases its U.S. warehouse.
In addition, the Company pays approximately $0.4 million annually for its current corporate office and warehouse located in Irvine, California; the lease expires in February 2014. According to discussions with the Company’s real estate broker, current market value for office space that is deemed sufficient for the remaining U.S.operations would be approximately $0.1 million annually, which would constitute savings of $0.3 million per year. As a result, the Company is exploring a sublease of all or a portion of its Irvine operations. However, there can be no assurance that the Company will be able to find a sublessee in order to realize the potential savings.
The movement of inventory out of the U.S., as part of the restructuring of the Company’s distribution operations, will reduce the Company’s ability to borrow on that inventory. However, the Company has not advanced on its credit facility against its inventory since inception of its initial agreement with First Capital in January 2009 and does not anticipate needing to borrow against its inventory in the future. In addition, eliminating the inventory component of the credit facility will reduce the costs of the Company’s credit facility. The Company is currently negotiating for a reduced credit facility, which will likely be reduced from $10 million to $5 million as the Company’s net sales could not generate a borrowing base of $10 million nor would the Company need to advance such a large amount for short-term working capital needs. The Company paid approximately $0.3 million of fees associated with its credit facility in fiscal 2012. If the Company is able to replace its current credit facility, the Company believes it could achieve potential savings of $0.1 million.
The following table summarizes the effected and potential cost reductions outlined above:
Capital expenditures, including financed purchases of equipment, aggregated $0.1 million for each of the years ended February 29, 2012 and February 28, 2011. The Company had no material capital expenditure commitments at February 29, 2012.
Inflation
The Company does not believe that inflation has had a material effect on the results of operations during the past two years. However, there can be no assurance that the Company’s business will not be affected by inflation in fiscal 2012 and beyond.
New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-A Replacement of FASB Statement No. 162” (“SFAS 168”). The FASB Accounting Standards Codification (“Codification”) became the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. Since the new codifications did not change U.S. GAAP, there was no change to our consolidated financial statements other than to update all references to U.S. GAAP to be in conformity with the provisions of the Accounting Standards Codification (“ASC”).
Forward-Looking Information
The preceding Management’s Discussion and Analysis of Financial Condition and Results of Operations section contains various forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, which represent the Company’s reasonable judgment concerning the future and are subject to risks and uncertainties that could cause the Company’s actual operating results and financial position to differ materially, including the following: the Company’s ability to expand the markets for telescopes, binoculars, and other optical products; the Company’s ability to continue to develop and bring to market new and innovative products that will be accepted by consumers; the Company’s ability to increase production of its high-end products and stimulate demand for those products; the Company’s ability to overcome intense competition in its low-end products and increase demand for those products; the Company’s ability to further develop its wholly-owned manufacturing facility in Mexico in combination with its existing manufacturing capabilities; the Company expanding its distribution network; the Company’s ability to further develop its international business; the Company experiencing fluctuations in its sales, gross margins and profitability from quarter to quarter consistent with prior periods; the Company’s expectation that its contingent liabilities will not have a material effect on the Company’s financial position or results of operations; the extent to which the
Company will be able to leverage its design and manufacturing expertise into markets outside its core consumer markets; the Company’s expectations that certain new accounting pronouncements will not have a material impact on the Company’s results of operations or financial position; the Company’s expectation that it will have sufficient funds to meet any working capital requirements during the foreseeable future with internally generated cash flow and borrowing ability; and the Company’s ability to achieve and sustain profitability.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, we are not required to provide the information required by this item.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by this item appears beginning on page of this Report, and an index thereto is included in Part IV, Item 15 of this Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
The Company’s management (with the participation of our Chief Executive Officer and Chief Financial Officer) evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been or will be detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.
The Company’s Chief Executive Officer and Chief Financial Officer concluded, based on their evaluation, that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Management’s Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that as of February 29, 2012, our internal control over financial reporting is effective. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Controls over Financial Reporting.
There was no change in our internal control over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer that occurred during the fiscal quarter ended February 29, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
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.
Item 11.
Item 11. Executive Compensation
Information with respect to this item is incorporated by reference from the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the close of the Company’s fiscal year.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
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.
Item 14.
Item 14. Principal Accounting Fees and Services
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.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors
Meade Instruments Corp.
We have audited the accompanying consolidated balance sheets of Meade Instruments Corp. (the “Company”) as of February 29, 2012 and February 28, 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Meade Instruments Corp. as of February 29, 2012 and February 28, 2011, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ MOSS ADAMS LLP
Irvine, CA
May 29, 2012
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
See accompanying notes to consolidated financial statements.
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to consolidated financial statements.
MEADE INSTRUMENTS CORP.
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 highly seasonal and the financial results have historically varied significantly on a quarter-by-quarter basis throughout each year.
The Company has experienced, and expects to continue to experience, substantial fluctuations in its sales, gross margins and profitability from year to year. 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 costs and the timing and extent of advertising expenditures.
2. Liquidity
The Company had cash and cash equivalents of $3.9 million at February 29, 2012. The Company funded its operations with internally generated cash flows and did not draw any funds against its credit facility during fiscal 2012 or fiscal 2011. The Company currently anticipates that cash on hand and funds generated from operations will be sufficient to meet the Company’s anticipated cash requirements for fiscal 2013.
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
In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-A Replacement of FASB Statement No. 162” (“SFAS 168”). The FASB Accounting Standards Codification (“Codification”) became the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. Since the new codifications did not change GAAP, there was no change to our consolidated financial statements other than to update all references to GAAP to be in conformity with the Codification.
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.
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (“FIFO”) method. 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.
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 29, 2012, 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.
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. At February 29, 2012, 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 2011 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 the years ended February 29, 2012 and February 28, 2011, the Company incurred shipping and handling costs of $0.6 million and $0.7 million, respectively.
Advertising
The Company expenses the costs of advertising, including production costs, as incurred. For the years ended February 29, 2012 and February 28, 2011, the Company incurred advertising, including cooperative advertising, and marketing expenses of approximately $0.5 million and $0.3 million, respectively. 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 29, 2012 and February 28, 2011, the Company incurred a net loss. Other than 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 earnings per share with respect to the net losses reported.
Basic earnings (loss) per share amounts exclude the dilutive effect of potential shares of Common Stock. Basic earnings (loss) per share is based upon the weighted-average number of shares of Common Stock outstanding, which excludes unallocated ESOP shares. Diluted earnings (loss) per share is based upon the weighted-average number of shares of Common Stock and dilutive potential shares of Common Stock outstanding for each period presented. Potential shares of Common Stock include outstanding stock options which are included under the treasury stock method. For fiscal years ended February 29, 2012 and February 28, 2011, options to purchase 77,350 and 78,113 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.
The Company generated approximately 22% of its net sales from its top two customers during the fiscal year February 28, 2011. These customers did not have any amounts due to the Company at February 28, 2011. No such concentration existed during the fiscal year ended February 29, 2012.
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value of financial instruments
The carrying amounts of accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the short maturity of these instruments.
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, anticipated transactions to be hedged, 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 29, 2012, is $0.5 million and as of February 28, 2011, $0.5 million 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.
Changes in the warranty liability, which is included as a component of accrued liabilities on the accompanying Consolidated Balance Sheets, were as follows:
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 2012 and 2011, were approximately $0.1 million and $0.3 million, respectively. Due to deferred tax valuation allowances provided, no net benefit was recorded against the share-based compensation charged.
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.
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Bank and other debt
The Company maintains agreements with FCC, LLC, d/b/a First Capital, and its subsidiary for a $10 million credit facility.
The facility consists 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 contain 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 and February 28, 2011.
While the agreements with First Capital do not contain explicit financial covenants, the agreements provide First Capital with significant latitude in restricting, reducing, or withdrawing the Company’s lines of credit at its sole discretion. If First Capital restricts, reduces or eliminates the Company’s access to credit, or requires immediate repayment of the amounts outstanding under the agreements, the Company may be required to pursue additional sources of liquidity such as equity financings or a new debt agreement with other creditors, either of which may contain less favorable terms, if at all. The facility with First Capital expired in January 2012. After the expiration of the initial term of the agreements, the Company continued factoring its receivables with First Capital and sixty days prior notice is required for the Company to terminate the agreements. The expiration of the initial term of the agreements did not affect the ability of First Capital to terminate the agreement as described above.
5. Intangible Assets
Intangible assets were a result of an acquisition that occurred on December 1, 2004 and included the following assets:
The changes in the carrying amount of acquisition-related intangible assets for the years ended February 29, 2012 and 2011, respectively, are as follows:
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization of trademarks, customer relationships and completed technologies over the next five fiscal years is estimated as follows:
6. Commitments and Contingencies
The Company leases its corporate office in Irvine, California, with the lease expiring on February 28, 2014. Lease payments for this lease are subject to annual increases ranging between 2% to 4% per annum.
The Company’s lease for an assembly facility in Tijuana, Mexico was scheduled to expire in 2010 with two, five-year options remaining. Additionally, the Company maintained a lease for a second facility in Tijuana, Mexico to house its relocated telescope production. In May 2009, the Company entered into a lease modification with the lessor of these two facilities, renewing the lease for the second facility for three more years, expiring on December 31, 2012, and accelerating the termination of the lease on the Company’s initial Tijuana, Mexico facility to June 15, 2009.
Aggregate future minimum commitments under noncancellable leases at February 29, 2012 that have remaining terms in excess of one year are as follows:
For each of the fiscal years ended February 29, 2012 and February 28, 2011, the Company incurred rent expense of $0.6 million.
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.
7. Income Taxes
Pretax loss is as follows:
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the (benefit) provision for income taxes on continuing operations are as follows:
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:
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The deferred tax assets and liabilities were comprised of the following:
The change in valuation allowance for the years ended February 29, 2012 and February 28, 2011 was $10.0 million and $0.8 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 29, 2012, the Company has approximately $57.3 million and $58.6 million of net operating loss carryforwards 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. 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 $1.3 million, which 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
As of February 29, 2012, the Company has approximately $57.3 million and $58.6 million of net operating loss carryforwards 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. 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 $1.3 million, which 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.
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. Management believes that a Section 382 ownership change has occurred. As a result, approximately $37.2 million of the NOLs are subject to an annual limitation. Approximately $0.8 million and $0.5 million of federal and state Research and Development credits, respectively, and $3.8 million of foreign tax credits are also subject to the same limitation.
Management has performed an analysis of whether an ownership change has occurred for tax reporting purposes. Based upon our analysis, we believe that 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.
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.
As of February 29, 2012 and as of February 28, 2011, 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.
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. As of February 29, 2012 and as of February 28, 2011, no interest and penalties related to uncertain tax positions were accrued.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
The tax years 2008 through 2011 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:
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 income (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:
A reconciliation of the basic weighted average number of shares outstanding and the diluted weighted average number of shares outstanding were as follows:
Weighted average shares for the fiscal 2012 and 2011, 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.
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:
(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.
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 29, 2012, there was approximately $0.01 million of unrecognized compensation cost related to unvested stock options. The $0.01 million as of February 29, 2012 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.
Option activity under these plans and Agreement (the “Option Plans”) during fiscal years 2012 and 2011 was as follows:
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 $199.80 per share and are exercisable over periods ending no later than 2021.
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
11. Composition of Certain Balance Sheet Accounts
The composition of accounts receivables, net of reserves, is as follows:
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 has a factoring agreement with FCC, LLC, d/b/a First Capital.
The composition of inventories is as follows:
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The composition of property and equipment is as follows:
For the fiscal years ended February 29, 2012 and February 28, 2011, the Company recorded depreciation expense of $0.3 million and $0.4 million, respectively.
The composition of accrued liabilities is as follows:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Schedule VALUATION AND QUALIFYING ACCOUNTS II-VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
(1) Principally recoveries and write-off of delinquent accounts
EXHIBIT INDEX
 Previously filed with the Securities Exchange Commission as set forth in the following table:
+ Management contract or compensatory plan or arrangement.
(a) Incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on August 12, 2009.
(b) Incorporated by reference to the Company’s Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-21123), as filed with the Securities and Exchange Commission on February 27, 1997.
(c) Incorporated by reference to the Company’s Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 333-21123), as filed with the Securities and Exchange Commission on March 13, 1997.
(d) Incorporated by reference to the Company’s Amendment No. 3 to Registration Statement on Form S-1 (Registration No. 333-21123), as filed with the Securities and Exchange Commission on March 25, 1997.
(e) Incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on December 9, 2011.
(g) Incorporated by reference to Annex A of the Company’s 2008 Proxy Statement on Schedule 14A, as filed with the Securities and Exchange Commission on June 16, 2008.
(i) Incorporated by reference to the Company’s Annual Report on Form 10-K for the Fiscal Year Ended February 29, 2000, as filed with the Securities and Exchange Commission on May 29, 2000.
(j) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarterly Period Ended May 31, 2000, as filed with the Securities and Exchange Commission on July 17, 2000.
(k) Incorporated by reference to the Company’s Annual Report on Form 10-K for the Fiscal Year Ended February 29, 2001, as filed with the Securities and Exchange Commission on May 29, 2001.
(l) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarterly Period Ended August 31, 2001, as filed with the Securities and Exchange Commission on October 15, 2001.
(m) Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on July 6, 2011.
(n) Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on July 6, 2011.
(q) Incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on July 12, 2004.
(s) Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on July 6, 2011.
(t) Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on July 6, 2011.
(x) Incorporated by reference to the Company’s Annual Report on Form 10-K for the Fiscal Year Ended February 28, 2009, as filed with the Securities and Exchange Commission on June 15, 2009.
(y) Incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on March 31, 2010.
(z) Incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 15, 2006.
(dd) Incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on November 17, 2006.
(ee) Incorporated by reference to the Company’s Annual Report on Form 10-K for the Fiscal Year Ended February 28, 2005, as filed with the Securities and Exchange Commission on May 31, 2005.
(hh) Incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on February 6, 2007.
(ll) Incorporated by reference to Exhibit 10.99 of the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on August 29, 2007.
(tt) Incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 16, 2008.
(yy) Incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on February 2, 2009.
(zz) Incorporated by reference to Exhibit 10.122 of the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on February 10, 2009.
(aaa) Incorporated by reference to Exhibit 10.123 of the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on February 10, 2009.
(bbb) Incorporated by reference to Exhibit 10.124 of the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on February 10, 2009.
(ddd) Incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on February 12, 2009.
(fff) Incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on March 19, 2009.