Attached files
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EX-31.1 - EX-31.1 - MEADE INSTRUMENTS CORP | a60048bexv31w1.htm |
EX-32.2 - EX-32.2 - MEADE INSTRUMENTS CORP | a60048bexv32w2.htm |
EX-32.1 - EX-32.1 - MEADE INSTRUMENTS CORP | a60048bexv32w1.htm |
EX-31.2 - EX-31.2 - MEADE INSTRUMENTS CORP | a60048bexv31w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - MEADE INSTRUMENTS CORP | Financial_Report.xls |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 31, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-22183
MEADE INSTRUMENTS CORP.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
95-2988062 (I.R.S. Employer Identification No.) |
|
27 Hubble, Irvine, CA (Address of principal executive offices) |
92618 (Zip Code) |
(949) 451-1450
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark if the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definition of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Securities Exchange Act of 1934.
Non-accelerated filer o | Large Accelerated filer o | Accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
As
of October 13, 2011, there were 1,229,767 outstanding shares of the Registrants common
stock, par value $0.01 per share.
MEADE INSTRUMENTS CORP.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED
August 31, 2011
REPORT ON FORM 10-Q FOR THE QUARTER ENDED
August 31, 2011
TABLE OF CONTENTS
Page No. | ||||||||
PART I FINANCIAL INFORMATION |
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2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
11 | ||||||||
15 | ||||||||
15 | ||||||||
PART II OTHER INFORMATION |
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16 | ||||||||
16 | ||||||||
16 | ||||||||
16 | ||||||||
16 | ||||||||
16 | ||||||||
16 | ||||||||
17 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
Table of Contents
ITEM 1. FINANCIAL STATEMENTS.
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
August 31, | February 28, | |||||||
2011 | 2011 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash |
$ | 2,616 | $ | 5,076 | ||||
Accounts receivable, less allowance for
doubtful accounts of $64 at August 31,
2011 and $408 at February 28, 2011 |
4,013 | 2,784 | ||||||
Inventories |
7,014 | 6,038 | ||||||
Prepaid expenses and other current assets |
281 | 245 | ||||||
Total current assets |
13,924 | 14,143 | ||||||
Property and equipment, net |
193 | 257 | ||||||
Acquisition-related intangible assets, net |
790 | 875 | ||||||
Other assets, net |
107 | 109 | ||||||
$ | 15,014 | $ | 15,384 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,104 | $ | 1,704 | ||||
Accrued liabilities |
1,798 | 2,149 | ||||||
Total current liabilities |
3,902 | 3,853 | ||||||
Deferred rent |
24 | 24 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value; 2,500
shares authorized; 1,167 shares issued
and outstanding at August 31, 2011 and
February 28, 2011 |
12 | 12 | ||||||
Additional paid-in capital |
52,653 | 52,572 | ||||||
Accumulated deficit |
(41,577 | ) | (41,077 | ) | ||||
Total stockholders equity |
11,088 | 11,507 | ||||||
$ | 15,014 | $ | 15,384 | |||||
See accompanying notes to consolidated financial statements
2
Table of Contents
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, expect per share data)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
August 31, | August 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 6,140 | $ | 7,096 | $ | 10,313 | $ | 12,598 | ||||||||
Cost of sales |
4,770 | 5,916 | 7,574 | 10,284 | ||||||||||||
Gross profit |
1,370 | 1,180 | 2,739 | 2,314 | ||||||||||||
Selling |
584 | 607 | 1,043 | 1,160 | ||||||||||||
General and administrative |
821 | 952 | 1,766 | 2,188 | ||||||||||||
Research and development |
218 | 193 | 417 | 397 | ||||||||||||
Operating loss |
(253 | ) | (572 | ) | (487 | ) | (1,431 | ) | ||||||||
Interest income |
1 | 1 | 2 | 2 | ||||||||||||
Loss before income taxes |
(252 | ) | (571 | ) | (485 | ) | (1,429 | ) | ||||||||
Income tax expense |
15 | | 15 | | ||||||||||||
Net loss |
$ | (267 | ) | $ | (571 | ) | $ | (500 | ) | $ | (1,429 | ) | ||||
Net loss per sharebasic and diluted |
$ | (0.23 | ) | $ | (0.49 | ) | $ | (0.43 | ) | $ | (1.22 | ) | ||||
Weighted average common shares
outstandingbasic and diluted |
1,167 | 1,167 | 1,167 | 1,167 | ||||||||||||
See accompanying notes to consolidated financial statements
3
Table of Contents
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended | ||||||||
August 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (500 | ) | $ | (1,429 | ) | ||
Adjustments to reconcile net loss to net cash used in
operating activities: |
||||||||
Depreciation and amortization |
171 | 270 | ||||||
Bad debt expense |
2 | | ||||||
Stock-based compensation |
81 | 200 | ||||||
Deferred rent amortization |
| 4 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(1,231 | ) | (2,825 | ) | ||||
Inventories |
(976 | ) | 298 | |||||
Prepaid expenses and other current assets |
(36 | ) | (213 | ) | ||||
Accounts payable |
400 | 1,554 | ||||||
Accrued liabilities |
(351 | ) | (4 | ) | ||||
Net cash used in operating activities |
(2,440 | ) | (2,145 | ) | ||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(20 | ) | (31 | ) | ||||
Net cash used in investing activities |
(20 | ) | (31 | ) | ||||
Cash flows from financing activities |
| | ||||||
Net decrease in cash |
(2,460 | ) | (2,176 | ) | ||||
Cash at beginning of period |
5,076 | 5,055 | ||||||
Cash at end of period |
$ | 2,616 | $ | 2,879 | ||||
See accompanying notes to consolidated financial statements
4
Table of Contents
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. The Consolidated Financial Statements Have Been Prepared by the Company and are Unaudited.
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 Companys Mexico facility. Sales of the Companys
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 Companys corporate headquarters, research and development facility and U.S. distribution
center; the Mexico facility contains the Companys manufacturing, assembly, repair, packaging and
other general and administrative functions. The Companys business is highly seasonal and the
financial results have historically varied significantly on a quarter-by-quarter basis throughout
each year.
In the opinion of the management of the Company, the information and amounts furnished in this
report reflect all adjustments (consisting of normal recurring adjustments) considered necessary
for the fair statement of the financial position and results of operations for the interim periods
presented. These financial statements should be read in conjunction with the Companys Annual
Report on Form 10-K for the fiscal year ended February 28, 2011.
The Company has experienced, and expects to continue to experience, substantial fluctuations
in its sales, gross margins and profitability from quarter to quarter. Factors that influence these
fluctuations include the volume and timing of orders received, changes in the mix of products sold,
market acceptance of the Companys products, competitive pricing pressures, the Companys 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.
B. Liquidity
At August 31, 2011 and 2010, the Company had cash and cash equivalents of $2.6 million and
$2.9 million, respectively, as compared to $5.1 million at February 28, 2011 and 2010.
The Company typically experiences increases in accounts receivable and inventories beginning
with the end of its first fiscal quarter and culminating with the end of its third fiscal quarter.
Receivables and inventories then typically decrease at the end of the Companys fiscal year.
Net cash used in operating activities was approximately $2.4 million during the six months
ended August 31, 2011 compared to $2.1 million during the six months ended August 31, 2010 an
increase of $0.3 million or 14% primarily due to the increase in accounts receivable of $1.2
million and an increase in inventories of $1.0 million, offset partially by the reduction of
approximately $0.9 million or 65% in the Companys net loss and an increase in accounts payable of
approximately $0.4 million. The Company believes that the fluctuations in working capital were
attributable to the timing of order fulfillment compared to the prior year.
The Company currently has in place an undrawn $10.0 million secured credit facility with First
Capital. Availability of funds under this facility is based on a percentage of eligible accounts
receivable and inventory. Availability on this facility amounted to approximately $3.9 million as
of August 31, 2011. While the Companys credit facility does not contain explicit financial
covenants, the Companys lender has significant latitude in restricting, reducing or withdrawing
the Companys credit facility at its sole discretion with limited notice, as is customary with
these types of arrangements.
The initial term of the credit facility with First Capital ends in January 2012, after which
sixty days prior notice shall be required for termination. 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
Companys 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. However, the Company
cannot assure that such additional sources of capital would be available on reasonable terms, if at
all.
5
Table of Contents
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The Company currently anticipates that cash on hand and funds generated from operations,
including cost saving measures the Company has taken and additional measures it could still take,
will be sufficient to meet the Companys anticipated cash requirements for at least the next twelve
months.
C. Stock Based Compensation
The Company accounts for stock-based compensation in accordance with the provisions of
Accounting Standards Codification No. ASC 718-10, Share-Based Payment (ASC 718-10), which
establishes accounting for equity instruments exchanged for employee services. Under the provisions
of ASC 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 employees requisite service
period (generally the vesting period of the equity grant). Share-based compensation expenses,
included in general and administrative expenses in the Companys consolidated statement of
operations for the six months ended August 31, 2011 and 2010, were approximately $81 thousand and
$200 thousand, 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 Companys stock over the options expected
term, the risk-free interest rate over the options expected term, and the Companys 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 Companys
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.
The fair value of the Companys stock options granted in the six months ended August 31, 2011
and 2010, respectively, was estimated on the grant date using the Black-Scholes option-pricing
model with the following assumptions:
August 31, | ||||||||
2011 | 2010 | |||||||
Expected life (1) |
5.8 | 3.8 | ||||||
Expected volatility (2) |
168 | % | 199 | % | ||||
Risk-free interest rate (3) |
1.3 | % | 1.4 | % | ||||
Expected dividends |
None |
None |
(1) | The option term is expressed in years and was determined using the simplified method for estimating expected option life. | |
(2) | The stock volatility for each grant is measured using the weighted average of historical daily price changes of the Companys 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. |
On June 29, 2011, each of the Executive Officers was granted a restricted stock award (an
Award) pursuant to the Companys form of Restricted Stock Agreement under the Companys 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 Companys fiscal years
2019, 2020 and 2021), as shown on the Companys audited consolidated financial statements for such
6
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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.
D. Composition of Certain Balance Sheet Accounts
The composition of accounts receivable, net of reserves, is as follows:
August 31, | February 28, | |||||||
2011 | 2011 | |||||||
(In thousands) | ||||||||
Due from factor |
$ | 3,905 | $ | 3,405 | ||||
Accounts receivable, other |
108 | (621 | ) | |||||
$ | 4,013 | $ | 2,784 | |||||
Substantially all of the credit risk associated with the assigned invoices remained with the
Company as of August 31, 2011. Accounts receivable, other includes reserves for subsequent sales
return and allowances for bad debtincluding reserves associated with certain invoices assigned to
the factor.
Approximately 21% of the Companys net sales were from two customers during the six months
ended August 31, 2011 and approximately 23% of the Companys net sales were from those customers
during the six months ended August 31, 2010. Included in accounts receivable at August 31, 2011
and 2010 were approximately $1.0 million and $2.3 million, respectively, due from these customers.
The composition of inventories is as follows:
August 31, | February 28, | |||||||
2011 | 2011 | |||||||
(In thousands) | ||||||||
Raw materials |
$ | 2,399 | $ | 2,264 | ||||
Work-in-process |
1,607 | 1,624 | ||||||
Finished goods |
3,008 | 2,150 | ||||||
$ | 7,014 | $ | 6,038 | |||||
Intangible assets were a result of an acquisition that occurred on December 1, 2004 and
included the following assets:
Amortization | August 31, 2011 | February 28, 2011 | ||||||||||||||||||||||||||
Periods | Gross Carrying | Accumulated | Net Book | Gross Carrying | Accumulated | Net Book | ||||||||||||||||||||||
(In Years) | Amount | Amortization | Value | Amount | Amortization | Value | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Trademarks |
7-15 | $ | 424 | $ | (343 | ) | $ | 81 | $ | 424 | $ | (326 | ) | $ | 98 | |||||||||||||
Completed
technologies |
12 | 1,620 | (911 | ) | 709 | 1,620 | (843 | ) | 777 | |||||||||||||||||||
Total |
$ | 2,044 | $ | (1,254 | ) | $ | 790 | $ | 2,044 | $ | (1,169 | ) | $ | 875 | ||||||||||||||
The changes in the carrying amount of acquisition-related intangible assets for the six
months ended August 31, 2011, are as follows:
Amortizing | ||||
Intangible Assets | ||||
(In thousands) | ||||
Balance, net, February 28, 2011 |
$ | 875 | ||
Amortization |
(85 | ) | ||
Balance, net, August 31, 2011 |
$ | 790 | ||
7
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Amortization of acquisition-related intangible assets over the next five fiscal years is
estimated as follows:
Fiscal Year | Amounts | |||
(In thousands) | ||||
2012 |
$ | 86 | ||
2013 |
171 | |||
2014 |
162 | |||
2015 |
135 | |||
2016 |
135 | |||
Thereafter |
101 | |||
Total |
$ | 790 | ||
The composition of property and equipment is as follows:
August 31, | February 28, | |||||||
2011 | 2011 | |||||||
(In thousands) | ||||||||
Molds and dies |
$ | 7,376 | $ | 7,357 | ||||
Machinery and equipment |
4,483 | 4,482 | ||||||
Furniture and fixtures |
251 | 251 | ||||||
Autos and trucks |
199 | 199 | ||||||
Leasehold improvements |
139 | 139 | ||||||
12,448 | 12,428 | |||||||
Less accumulated depreciation and amortization |
(12,255 | ) | (12,171 | ) | ||||
$ | 193 | $ | 257 | |||||
Since certain of the Companys machinery and equipment is old and fully depreciated, it is
possible that certain of the Companys machinery and equipment could require replacement in the
near future.
E. Commitments and Contingencies
The Company is involved from time to time in litigation incidental to its business. Management
believes that the outcome of such litigation will not have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
F. Loss Per Share
Basic loss per share amounts excludes the dilutive effect of potential shares of common stock.
Basic loss per share is based upon the weighted-average number of shares of common stock
outstanding. Diluted loss per share is based upon the weighted-average number of shares of common
stock and dilutive potential shares of common stock outstanding for each period presented.
Potential shares of common stock include outstanding stock options and restricted stock, which may
be included in the weighted average number of shares of common stock under the treasury stock
method.
The total number of options and restricted shares outstanding were as follows:
August 31, | February 28, | |||||||
2011 | 2011 | |||||||
(In thousands) | ||||||||
Stock options outstanding |
78 | 78 | ||||||
Restricted
shares outstanding, unvested |
63 | |
These amounts were excluded from the weighted-average number of shares of common stock
outstanding, as including these items would be anti-dilutive due to
the Company's net loss.
8
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
G. Product Warranties
The Company provides reserves for the estimated cost of product warranty-related claims at the
time of sale, and periodically adjusts the provision to reflect actual experience related to its
standard product warranty programs and its extended warranty programs. The amount of warranty
liability accrued reflects managements 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
August 31, 2011 and February 28, 2011, is $0.5 million related to the Companys 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:
Three Months Ended | Six Months Ended | |||||||||||||||
August 31, | August 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Beginning balance |
$ | 750 | $ | 859 | $ | 810 | $ | 883 | ||||||||
Warranty accrual |
56 | 82 | 99 | 144 | ||||||||||||
Labor and material usage |
(43 | ) | (77 | ) | (146 | ) | (163 | ) | ||||||||
Ending balance |
$ | 763 | $ | 864 | $ | 763 | $ | 864 | ||||||||
H. Income Taxes
In accordance with ASC 740, Accounting for Income Taxes, the Company has 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
Companys determination that there was insufficient objective evidence, at this time, to recognize
those assets for financial reporting purposes. For the period ended August 31, 2011, the Company
has not changed its assessment regarding the recoverability of its deferred tax assets. Ultimate
realization of the benefit of the deferred tax assets is dependent upon the Company generating
sufficient taxable income in future periods, including periods prior to the expiration of certain
underlying tax credits.
The Company recorded a tax provision of approximately $15 thousand for minimum taxes in various
U.S. States and income taxes with respect to the Companys operations in Mexico. No provision for income taxes
was recorded in the prior period presented due to the significance of the Companys net loss.
The tax years 2007 through 2010 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.
Unrecognized Tax Benefits
The Company is subject to income taxes in the United States and Mexico. Significant judgment
is required in evaluating the Companys 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. At August 31, 2011 and
February 28, 2011, there were no unrecognized tax benefits.
9
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 August 31, 2011 and February 28, 2011, there were no accrued interest and
penalties related to uncertain tax positions.
10
Table of Contents
ITEM 2. MANAGEMENTS 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 in this Form
10-Q. This discussion may contain 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 in the Companys annual report on 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-Q after the date of this Form 10-Q, except as required by law.
Overview of the Company
Meade Instruments Corp. is engaged in the design, manufacture, marketing and sale of consumer
optics products, primarily telescopes, telescope accessories and binoculars. We design our products
in-house or with the assistance of external consultants. Most of our entry level products are
manufactured overseas by contract manufacturers in Asia, while our high-end telescopes are
manufactured and assembled at our Mexico facility. 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
distributors internationally. We currently operate out of two primary locations: Irvine,
California and Tijuana, Mexico. Our California facility serves as the Companys corporate
headquarters, research and development facility and U.S. distribution center; our Mexico facility contains our manufacturing,
assembly, repair, packaging, and other general and administrative
functions. Our business is highly seasonal and our financial results have historically varied
significantly on a quarter-by-quarter basis 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 preparation of financial statements and related disclosures in conformity with U.S. GAAP
requires us to make judgments, assumptions and estimates that affect the amounts reported in the
Condensed Consolidated Financial Statements and accompanying notes. Note 1 to our Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year ended February 28, 2011
describes the significant accounting policies and methods used in the preparation of our Condensed
Consolidated Financial Statements. Our critical accounting estimates, discussed in the
Managements Discussion and Analysis of Financial Condition and Results of Operations in Part II,
Item 7 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2011, include
revenue recognition, estimates for allowances for doubtful accounts, inventories, property and
equipment, intangible assets, accounting for income taxes, shipping and handling costs,
advertising, research and development, loss per share, concentration of credit risk, fair value of
financial instruments, use of estimates in preparation of consolidated financial statements,
product warranties, and stock-based compensation. Such accounting policies and estimates require
significant judgments and assumptions to be used in the preparation of our Consolidated Financial
Statements and actual results could differ materially from the amounts reported based on
variability in factors affecting these estimates.
Our management discusses the development and selection of our critical accounting policies and
estimates with the Audit Committee of our Board of Directors at least annually. Our management also
internally discusses the adoption of new accounting policies or changes to existing policies at
interim dates, as it deems necessary or appropriate.
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New Accounting Pronouncements
From time to time, the Financial Accounting Standards Board or other standards setting bodies
issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are
communicated through issuance of an Accounting Standards Update. Unless otherwise discussed, we
believe that the impact of recently issued guidance, whether adopted or to be adopted in the
future, is not expected to have a material impact on our Consolidated Financial Statements upon
adoption.
Results of Operations
The nature of the Companys business is highly seasonal. Historically, sales in the second
and third quarter ended August 31st and November 30th each year have been
significantly higher than sales achieved in each of the other two fiscal quarters of the year.
Thus, expenses and, to a greater extent, results from operations may vary significantly by quarter.
Therefore, caution is advised when appraising results for a period shorter than a full year, or
when comparing any period other than to the same period of the previous year.
Three Months Ended August 31, 2011 Compared to Three Months Ended August 31, 2010
The Company reported net sales of $6.1 million for the quarter ended August 31, 2011, a
decrease of $1.0 million or 13% from net sales of $7.1 million in the same period in the prior
year. This decrease was attributable to a decrease in sales of low-end telescope products of
approximately $1.8 million to mass retailers compared to the prior year, offset partially by
increases in sales of the Companys high-end and intermediate telescopes and certain other
products. The reduction in net sales of the Companys low-end telescope products was attributable
to reductions in distribution outlets for such productsthe Company ceased distribution of low-end
telescopes to one of the Companys largest customers. The Company still distributes other products
to that customer. Net sales of high-end and intermediate telescopes were higher due to increased
demand attributable to sales promotions and to increased supply due to manufacturing operations
advancements.
Gross profit increased
approximately $0.2 million or 16% compared to the prior year, from $1.2 million to $1.4 million during
the three months ended August 31, 2010 and 2011, respectively.
The gross profit margin during the second quarter ended August 31, 2011 was 22% of net sales
compared with 17% in the same period last year. This improvement was a result of the substantial
reduction in sales of low-end telescope products to mass-merchandise retailers, which typically are
lower-margin products and which typically have a higher rate of consumer returns than other products. In addition, the Company
experienced further reductions in the amount of sales credits and allowances relating to returns
and quality issues. The gross margin was also beneficially impacted by improved absorption of
indirect costs of sales and reductions in freight and duty costs due to the reductions in low-end
telescopes imported from third party suppliers in China.
Selling expenses for the second quarter ended August 31, 2011 were $0.6 million or 10% of net
sales compared to $0.6 million, or 9% of net sales, during the same quarter in the prior year. The
increase in selling expenses as a percentage of net sales is due to increased discretionary selling
expenses such as advertising and marketing expenses associated with increased promotion of the
Companys products and new product announcements relating to the Companys LX800 and LX80 high-end
and intermediate telescopes, which are expected to begin shipping in the next few months.
General and administrative expenses for the second quarter ended August 31, 2011 were $0.8
million or 13% of net sales (a decrease of $0.1 million or 14%) compared to $1.0 million or 13% of
net sales, in the same quarter in the prior year. Certain general and administrative expenses are
variable and fluctuate with net sales; as such, reductions in net sales affect such expenses. In
addition, certain of the decrease in general and administrative expenses was due to further
reductions in headcount and discretionary costs due to the Companys continued efforts to reduce
its operating expenses as much as possible.
Research and development expenses for the second quarter ended August 31, 2011 increased to
$0.2 million, although fairly equal to the amount of the expenses in the same quarter in the prior
year primarily due to the Companys consistent, but measured, product development and product
enhancement activities.
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The Company earned a consistent amount of interest income for the second quarter ended August
31, 2011 and in the prior year due to the relatively consistent cash balance the Company
maintained.
The Company recorded a tax provision of approximately $15 thousand during the three months
ended August 31, 2011 for minimum taxes in various U.S. States and income taxes on the Companys
operations in Mexico. No provision for income taxes was recorded in the prior period presented due
to the significance of the Companys net loss.
Six Months Ended August 31, 2011 Compared to Six Months Ended August 31, 2010
The Company reported net sales of $10.3 million for the first six months of fiscal 2012, a
decrease of $2.3 million or 18% from net sales of $12.6 million in the same period in the prior
year. This decrease was nearly entirely attributable to a decrease of approximately $2.2 million
in net sales of the Companys low-end telescope products compared to the prior year. The Company
also experienced a slight overall reduction in net sales of substantially all of its other products
during the six months ended August 31, 2011 compared to the same period in the prior year. The
reduction in sales of low-end telescope products compared to the prior year was attributable to the
Companys reduced distribution channel for such products due to the fact that it no longer sells
low-end telescopes to one of its largest customers, whereas the reduction of sales of the other
products was attributable to decreased demand.
Gross
profit increased approximately $0.4 million or 18% compared to the
prior year, from $2.3 million to $2.7 million during the six months ended August 31, 2010 and 2011, respectively.
The gross profit margin during the first six months of fiscal 2012 was 27% of net sales
compared with 18% of net sales in the same period last year. This improvement was driven primarily
by a favorable change in product mix relating largely to the Companys reduced distribution of
low-end telescope products which were imported from third party manufacturers in China and sold to
mass-merchandise retailers. In addition, the Company experienced further reductions in the amount
of sales credits and allowances relating to returns, quality issues and other discounts.
Selling expenses for the first six months of fiscal 2012 were $1.0 million or 10% of net sales
compared to $1.2 million or 9% of net sales during the same period in the prior year, due to
decreased net sales and the resulting decreased variable selling expenses, offset partially by
increased discretionary selling expenses such as advertising and marketing expenses. Certain of
the increased advertising and marketing expenses are associated with new product introductions such
as the LX800 and LX80 products which the Company expects to begin shipping within the next few
months.
General and administrative expenses for the first six months of fiscal 2012 were $1.8 million
or 17% of net sales (a decrease of $0.4 million or 19%) compared to $2.2 million or 17% of net
sales in the same period in the prior year. Most of the decrease in general and administrative
expenses was due to reductions in headcount, lower professional fees and insurance costs due to the
Companys continued efforts to reduce its operating expenses. In addition, certain general and
administrative expenses are variable and therefore decreased due to the lower net sales.
Research and development expenses for the first six months of fiscal 2011 were approximately
unchanged at $0.4 million due to the Companys continued, but measured, focus on new
product development and enhancement activities.
The Company earned a nominal amount of interest income during each of the six months ended
August 31, 2011 and 2010.
The Company recorded a tax provision of approximately $15 thousand during the six months ended
August 31, 2011 for minimum taxes in various U.S. States and income taxes with respect to the Companys operations
in Mexico. No provision for income taxes was recorded in the prior period presented due to the
significance of the Companys net loss.
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Seasonality
The Company has experienced, and expects to continue to experience, substantial fluctuations
in its sales, gross margins, working capital requirements 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 Companys products,
competitive pricing pressures, the Companys 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 Companys net sales and results from operations
typically occurred in the second and third quarter of the Companys fiscal year primarily due to
the 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 Companys working capital requirements have correspondingly
increased at such times. The Company continues to experience significant sales to mass
merchandisers. Accordingly, the Companys net sales, working capital requirements and results from
operations are expected to be higher in its second and third quarters than in the first and fourth
quarters of its fiscal year.
Liquidity and Capital Resources
At August 31, 2011 and 2010, the Company had cash and cash equivalents of $2.6 million and
$2.9 million, respectively, as compared to $5.1 million at February 28, 2011 and 2010.
The Company typically experiences increases in accounts receivable and inventories beginning
with the end of its first fiscal quarter and culminating with the end of its third fiscal quarter.
Receivables and inventories then typically decrease at the end of the Companys fiscal year.
Net cash used in operating activities was approximately $2.4 million during the six months
ended August 31, 2011 compared to $2.1 million during the six months ended August 31, 2010 an
increase of $0.3 million or 14% primarily due to the increase in accounts receivable of $1.2
million and an increase in inventories of $1.0 million, offset partially by the reduction of
approximately $0.9 million or 65% in the Companys net loss and an increase in accounts payable of
approximately $0.4 million. The Company believes that the fluctuations in working capital were
attributable to the timing of order fulfillment compared to the prior year.
The Company currently has in place an undrawn $10.0 million secured credit facility with First
Capital. Availability of funds under this facility is based on a percentage of eligible accounts
receivable and inventory. Availability on this facility amounted to approximately $3.9 million as
of August 31, 2011. While the Companys credit facility does not contain explicit financial
covenants, the Companys lender has significant latitude in restricting, reducing or withdrawing
the Companys credit facility at its sole discretion with limited notice, as is customary with
these types of arrangements.
The initial term of the credit facility with First Capital ends in January 2012, after which
sixty days prior notice shall be required for termination. 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
Companys 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. However, the Company
cannot assure that such additional sources of capital would be available on reasonable terms, if at
all.
The Company currently anticipates that cash on hand and funds generated from operations,
including cost saving measures the Company has taken and additional measures it could still take,
will be sufficient to meet the Companys anticipated cash requirements for at least the next twelve
months.
Capital expenditures were approximately $20 thousand and $31 thousand for the six months ended
August 31, 2011 and 2010, respectively. The Company had no material capital expenditure commitments
at August 31, 2011. However, certain of the Companys machinery and equipment is old and fully
depreciated. It is possible that certain of the Companys machinery and equipment could require
replacement in the near future.
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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 Companys
business will not be affected by inflation in the remainder of fiscal 2012 and beyond.
Forward-Looking Information
The preceding Managements 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 Companys reasonable judgment concerning the future and are
subject to risks and uncertainties that could cause the Companys actual operating results and
financial position to differ materially, including the following: the Company being able to see
continued progress in its restructuring efforts, the timing of such restructuring efforts, and the
fact that the restructuring efforts will result in positive financial results in the future; the
Companys expectation that it will continue to experience fluctuations in its sales, gross margins
and profitability from quarter to quarter consistent with prior periods; the Companys expectation
that contingent liabilities will not have a material effect on the Companys financial position or
results of operations; the Companys expectation that operating cash flow and bank borrowing
capacity in connection with the Companys business should provide sufficient liquidity for the
Companys obligations for at least the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of
1934, the Company is not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
The Companys management (with the participation of our Chief Executive Officer and Chief
Financial Officer) evaluated the effectiveness of the Companys 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 quarter ended August 31, 2011. 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 Companys Chief Executive Officer and Chief Financial Officer concluded, based on their
evaluation, that the Companys disclosure controls and procedures are effective for the Company as
of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended August 31, 2011 that
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. RESERVED
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit No. | Exhibit Title or Description | |
31.1
|
Rule 13a-14(a)/15d-14(a) Certification Principal Executive Officer | |
31.2
|
Rule 13a-14(a)/15d-14(a) Certification Principal Financial Officer | |
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 Chief Executive Officer | |
32.2
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 Chief Financial Officer |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MEADE INSTRUMENTS CORP. |
||||
Dated: October 14, 2011 | By: | /s/ STEVEN G. MURDOCK | ||
Steven G. Murdock | ||||
Chief Executive Officer | ||||
By: | /s/ JOHN A. ELWOOD | |||
John A. Elwood | ||||
Senior Vice President Finance and Administration Chief Financial Officer |
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EXHIBIT INDEX
Exhibit No. | Exhibit Title or Description | |
31.1
|
Rule 13a-14(a)/15d-14(a) Certification Principal Executive Officer | |
31.2
|
Rule 13a-14(a)/15d-14(a) Certification Principal Financial Officer | |
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 Chief Executive Officer | |
32.2
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 Chief Financial Officer |
18