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 November 30, 2011
or
| ¨ | 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 | | 95-2988062 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
| 27 Hubble, Irvine, CA | | 92618 |
| (Address of principal executive offices) | | (Zip Code) |
(949) 451-1450
(Registrant’s 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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 ¨ | | Large Accelerated filer ¨ | | Accelerated filer ¨ | | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of January 11, 2012, there were 1,229,767 outstanding shares of the Registrant’s common stock, par value $0.01 per share.
MEADE INSTRUMENTS CORP.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED
November 30, 2011
TABLE OF CONTENTS
ITEM 1. FINANCIAL STATEMENTS.
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
| | | | | | | | |
| | | November 30,
2011 | | | February 28,
2011 | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash | | $ | 1,247 | | | $ | 5,076 | |
Accounts receivable, less allowance for doubtful accounts of $128 at November 30, 2011 and $408 at February 28, 2011 | | | 5,597 | | | | 2,784 | |
Inventories | | | 7,401 | | | | 6,038 | |
Prepaid expenses and other current assets | | | 232 | | | | 245 | |
| | | | | | | | |
Total current assets | | | 14,477 | | | | 14,143 | |
Property and equipment, net | | | 169 | | | | 257 | |
Acquisition-related intangible assets, net | | | 747 | | | | 875 | |
Other assets, net | | | 102 | | | | 109 | |
| | | | | | | | |
| | $ | 15,495 | | | $ | 15,384 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 2,797 | | | $ | 1,704 | |
Accrued liabilities | | | 1,828 | | | | 2,149 | |
| | | | | | | | |
Total current liabilities | | | 4,625 | | | | 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 November 30, 2011 and February 28, 2011 | | | 12 | | | | 12 | |
Additional paid-in capital | | | 52,661 | | | | 52,572 | |
Accumulated deficit | | | (41,827 | ) | | | (41,077 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 10,846 | | | | 11,507 | |
| | | | | | | | |
| | $ | 15,495 | | | $ | 15,384 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements
2
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, expect per share data)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
November 30, | | | Nine Months Ended
November 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Net sales | | $ | 7,240 | | | $ | 8,648 | | | $ | 17,553 | | | $ | 21,246 | |
Cost of sales | | | 5,682 | | | | 6,984 | | | | 13,256 | | | | 17,268 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 1,558 | | | | 1,664 | | | | 4,297 | | | | 3,978 | |
Selling | | | 730 | | | | 729 | | | | 1,773 | | | | 1,889 | |
General and administrative | | | 846 | | | | 940 | | | | 2,611 | | | | 3,128 | |
Research and development | | | 218 | | | | 192 | | | | 635 | | | | 589 | |
| | | | | | | | | | | | | | | | |
Operating loss | | | (236 | ) | | | (197 | ) | | | (722 | ) | | | (1,628 | ) |
Interest income | | | 1 | | | | — | | | | 3 | | | | 2 | |
| | | | | | | | | | | | | | | | |
Loss before income taxes | | | (235 | ) | | | (197 | ) | | | (719 | ) | | | (1,626 | ) |
Income tax expense | | | 14 | | | | — | | | | 29 | | | | — | |
| | | | | | | | | | | | | | | | |
Net loss | | $ | (249 | ) | | $ | (197 | ) | | $ | (748 | ) | | $ | (1,626 | ) |
| | | | | | | | | | | | | | | | |
Net loss per share—basic and diluted | | $ | (0.21 | ) | | $ | (0.17 | ) | | $ | (0.64 | ) | | $ | (1.39 | ) |
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding—basic and diluted | | | 1,167 | | | | 1,167 | | | | 1,167 | | | | 1,167 | |
| | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
3
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | | |
| | | Nine Months Ended
November 30, | |
| | | 2011 | | | 2010 | |
Cash flows from operating activities: | | | | | | | | |
Net loss | | $ | (748 | ) | | $ | (1,626 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 254 | | | | 381 | |
Bad debt expense | | | 66 | | | | (1 | ) |
Stock-based compensation | | | 89 | | | | 262 | |
Deferred rent amortization | | | — | | | | 6 | |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable | | | (2,879 | ) | | | (3,602 | ) |
Inventories | | | (1,363 | ) | | | 1,509 | |
Prepaid expenses and other current assets | | | 13 | | | | (66 | ) |
Accounts payable | | | 1,093 | | | | 555 | |
Accrued liabilities | | | (323 | ) | | | (212 | ) |
| | | | | | | | |
Net cash used in operating activities | | | (3,798 | ) | | | (2,794 | ) |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Capital expenditures | | | (31 | ) | | | (46 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (31 | ) | | | (46 | ) |
| | | | | | | | |
Cash flows from financing activities | | | — | | | | — | |
| | | | | | | | |
Net decrease in cash | | | (3,829 | ) | | | (2,840 | ) |
| | | | | | | | |
Cash at beginning of period | | | 5,076 | | | | 5,055 | |
| | | | | | | | |
Cash at end of period | | $ | 1,247 | | | $ | 2,215 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements
4
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 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 and U.S. distribution center; the Mexico facility contains the Company’s manufacturing, assembly, repair, packaging 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.
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 Company’s 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 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.
At November 30, 2011 and 2010, the Company had cash and cash equivalents of $1.2 million and $2.2 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 Company’s fiscal year.
Net cash used in operating activities was approximately $3.8 million during the nine months ended November 30, 2011 compared to $2.8 million during the nine months ended November 30, 2010 — an increase of $1.0 million or 36%. This increase in cash used in operating activities was primarily due to the net change in inventories changing from a $1.5 million decrease in the prior year to a $1.4 million increase in the current year. This change in inventories was due to timing of order fulfillment, reduced sales of low-end telescopes to mass retailers and an increase in manufactured inventory due in part to new products. The fluctuation in inventories was offset partially by a reduction of $0.9 million or 54% in the Company’s net loss and a net increase in the change in accounts payable of approximately $0.5 million.
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 $5.1 million as of November 30, 2011. 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 initial term of the credit facility with First Capital ends in January 2012. After the expiration of the initial term of the agreement, the Company expects to continue factoring its receivables with First Capital on a month-to-month basis and sixty days prior notice shall be required for the Company to terminate the agreement. The expiration of the initial term of the agreement does not affect the ability of First Capital to terminate the agreement as described above. 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
5
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 Company’s 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 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 the nine months ended November 30, 2011 and 2010, were approximately $89 thousand and $262 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 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.
The fair value of the Company’s stock options granted in the nine months ended November 30, 2011 and 2010, respectively, was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
| | | | | | | | |
| | | November 30, | |
| | | 2011 | | | 2010 | |
Expected life (1) | | | 5.8 | | | | 3.8 | |
Expected volatility (2) | | | 168 | % | | | 199 | % |
Risk-free interest rate (3) | | | 1.1 | % | | | 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 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. |
6
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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.
| D. | Composition of Certain Balance Sheet Accounts |
The composition of accounts receivable, net of reserves, is as follows:
| | | | | | | | |
| | | November 30,
2011 | | | February 28,
2011 | |
| | | (In thousands) | |
Due from factor | | $ | 6,310 | | | $ | 3,405 | |
Accounts receivable, other | | | (713 | ) | | | (621 | ) |
| | | | | | | | |
| | $ | 5,597 | | | $ | 2,784 | |
| | | | | | | | |
Substantially all of the credit risk associated with the assigned invoices remained with the Company as of November 30, 2011. Accounts receivable, other includes reserves for subsequent sales return and allowances for bad debt—including reserves associated with certain invoices assigned to the factor.
Approximately 23% of the Company’s net sales were from two customers during the nine months ended November 30, 2011 and approximately 27% of the Company’s net sales were from those customers during the nine months ended November 30, 2010. Included in accounts receivable at November 30, 2011 were approximately $2.8 million due from these customers.
The composition of inventories is as follows:
| | | | | | | | |
| | | November 30,
2011 | | | February 28,
2011 | |
| | | (In thousands) | |
Raw materials | | $ | 2,399 | | | $ | 2,264 | |
Work-in-process | | | 2,032 | | | | 1,624 | |
Finished goods | | | 2,970 | | | | 2,150 | |
| | | | | | | | |
| | $ | 7,401 | | | $ | 6,038 | |
| | | | | | | | |
Intangible assets were a result of an acquisition of substantially all of the assets and assumption of substantially all of the liabilities of Coronado Technology Group, LLC, that occurred on December 1, 2004 and included the following assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amortization
Periods
(In Years) | | | November 30, 2011 | | | February 28, 2011 | |
| | | | Gross Carrying
Amount | | | Accumulated
Amortization | | | Net Book
Value | | | Gross Carrying
Amount | | | Accumulated
Amortization | | | Net Book
Value | |
| | | | | | (In thousands) | |
Trademarks | | | 7-15 | | | $ | 424 | | | $ | (353 | ) | | $ | 71 | | | $ | 424 | | | $ | (326 | ) | | $ | 98 | |
Completed technologies | | | 12 | | | | 1,620 | | | | (944 | ) | | | 676 | | | | 1,620 | | | | (843 | ) | | | 777 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | $ | 2,044 | | | $ | (1,297 | ) | | $ | 747 | | | $ | 2,044 | | | $ | (1,169 | ) | | $ | 875 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
7
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The changes in the carrying amount of acquisition-related intangible assets for the nine months ended November 30, 2011, are as follows:
| | | | |
| | | Amortizing
Intangible
Assets | |
| | | (In thousands) | |
Balance, net, February 28, 2011 | | $ | 875 | |
Amortization | | | (128 | ) |
| | | | |
Balance, net, November 30, 2011 | | $ | 747 | |
| | | | |
Amortization of acquisition-related intangible assets over the next five fiscal years is estimated as follows:
| | | | |
Fiscal Year | | Amounts | |
| | | (In thousands) | |
2012 | | $ | 43 | |
2013 | | | 171 | |
2014 | | | 162 | |
2015 | | | 135 | |
2016 | | | 135 | |
Thereafter | | | 101 | |
| | | | |
Total | | $ | 747 | |
| | | | |
The composition of property and equipment is as follows:
| | | | | | | | |
| | | November 30,
2011 | | | February 28,
2011 | |
| | | (In thousands) | |
Molds and dies | | $ | 7,387 | | | $ | 7,357 | |
Machinery and equipment | | | 4,483 | | | | 4,482 | |
Furniture and fixtures | | | 251 | | | | 251 | |
Autos and trucks | | | 199 | | | | 199 | |
Leasehold improvements | | | 139 | | | | 139 | |
| | | | | | | | |
| | | 12,459 | | | | 12,428 | |
Less accumulated depreciation and amortization | | | (12,290 | ) | | | (12,171 | ) |
| | | | | | | | |
| | $ | 169 | | | $ | 257 | |
| | | | | | | | |
Since certain of the Company’s machinery and equipment is old and fully depreciated, it is possible that certain of the Company’s 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.
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.
8
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The total number of options and restricted shares outstanding were as follows:
| | | | | | | | |
| | | November 30,
2011 | | | February 28,
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.
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 November 30, 2011 and February 28, 2011, is $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:
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
November 30, | | | Nine Months Ended
November 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | (In thousands) | |
Beginning balance | | $ | 763 | | | $ | 864 | | | $ | 810 | | | $ | 883 | |
Warranty accrual | | | 91 | | | | 119 | | | | 190 | | | | 263 | |
Labor and material usage | | | (46 | ) | | | (79 | ) | | | (192 | ) | | | (242 | ) |
| | | | | | | | | | | | | | | | |
Ending balance | | $ | 808 | | | $ | 904 | | | $ | 808 | | | $ | 904 | |
| | | | | | | | | | | | | | | | |
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 Company’s determination that there was insufficient objective evidence, at this time, to recognize those assets for financial reporting purposes. For the period ended November 30, 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 $14 thousand for the three months ended November 30, 2011 and $29 thousand for the nine months ended November 30, 2011 for minimum taxes in various states in the U.S. and income taxes with respect to the Company’s operations in Mexico. No provision for income taxes was recorded in the prior period presented due to the significance of the Company’s 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.
9
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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. At November 30, 2011 and February 28, 2011, there were 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 November 30, 2011 and February 28, 2011, there were no accrued interest and penalties related to uncertain tax positions.
10
ITEM 2. 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 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 Company’s 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 Company’s 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 Management’s 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 Company’s 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 November 30, 2011 Compared to Three Months Ended November 30, 2010
The Company reported net sales of $7.2 million for the quarter ended November 30, 2011, a decrease of $1.4 million or 16% from net sales of $8.6 million in the same period in the prior year. This decrease was attributable primarily to a decrease in sales of low-end telescope products of approximately $1.5 million to mass retailers compared to the prior year, as well as decreases in sales of many of the Company’s other products, offset partially by increases in sales of the Company’s Sport Optics products—principally spotting scopes. The reduction in net sales of the Company’s low-end telescope products was attributable to reductions in distribution outlets for such products—the Company ceased distribution of low-end telescopes to the Company’s largest customer. The Company still distributes other products to that customer, including sport optics products such as spotting scopes—which comprised the majority of the offset to this decrease.
Gross profit during the three months ended November 30, 2011 of $1.6 million decreased $0.1 million or 6% compared to the same period of the prior year. The gross profit margin during the third quarter ended November 30, 2011 was 22% of net sales compared with 19% 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. 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 third quarter ended November 30, 2011 were $0.7 million or 10% of net sales compared to $0.7 million, or 8% of net sales, during the same quarter in the prior year. The increase in selling expenses as a percentage of net sales was due to increased discretionary selling expenses such as advertising and marketing expenses associated with increased promotion of the Company’s products and new product announcements relating to the Company’s LX800 and LX80 high-end and intermediate telescopes, which are expected to begin shipping in the next few months. The Company also increased its reserve for doubtful accounts by $64 thousand since the prior quarter.
General and administrative expenses for the third quarter ended November 30, 2011 were $0.8 million or 12% of net sales, a decrease of $0.1 million or 10%, compared to $0.9 million or 11% of net sales, in the same quarter in the prior year. This decrease in general and administrative expenses was mainly due to the reduction in stock compensation expense of $61 thousand, which was primarily from a reduction in expense associated with the options granted to Steve Murdock, the Company’s Chief Executive Officer, in March 2009. 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 achieved in headcount and discretionary costs due to the Company’s continued efforts to reduce its operating expenses as much as possible.
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Research and development expenses were up $26 thousand or 14% due to increased efforts at new product development, primarily associated with the Company’s recently announced LX800 and LX80 telescopes.
The Company earned a consistent amount of interest income for the third quarter ended November 30, 2011 and in the prior year due to the relatively consistent cash balance the Company maintained during the period.
The Company recorded a tax provision of approximately $14 thousand during the three months ended November 30, 2011 for minimum taxes in various U.S. States and income taxes on the Company’s operations in Mexico. No provision for income taxes was recorded in the prior period presented due to the significance of the Company’s net loss.
Nine Months Ended November 30, 2011 Compared to Nine Months Ended November 30, 2010
The Company reported net sales of $17.6 million for the first nine months of fiscal 2012, a decrease of $3.7 million or 17% from net sales of $21.2 million in the same period in the prior year. This decrease was nearly entirely attributable to a reduction of approximately $3.7 million in net sales of the Company’s low-end telescope products compared to the prior year. The Company also experienced a slight reduction in net sales of substantially all of its other products during the nine months ended November 30, 2011 compared to the same period in the prior year, with the exception of spotting scopes—which increased approximately $0.8 million or 106%. The reduction in sales of low-end telescope products compared to the prior year was attributable to the Company’s reduced distribution channels 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 apparently attributable to decreased demand due in part to increased competition. The increase in sales of the Company’s spotting scopes products was attributable to success in using its relationship with its largest customer to get those products into that customer’s retail stores.
Gross profit increased by approximately $0.3 million or 8% compared to the prior year, from $4.0 million to $4.3 million during the nine months ended November 30, 2010 and 2011, respectively. The gross profit margin during the first nine months of fiscal 2012 was 24% of net sales compared with 19% 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 Company’s 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 nine months of fiscal 2012 were $1.8 million or 10% of net sales compared to $1.9 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 were 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 nine months of fiscal 2012 were $2.6 million or 15% of net sales (a decrease of $0.5 million or 17%) compared to $3.1 million or 15% of net sales in the same period in the prior year. Most of the decrease in general and administrative expenses was due to further reductions in headcount, lower professional fees and insurance costs due to the Company’s 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 nine months of fiscal 2011 were relatively unchanged at approximately $0.6 million in both years due to the Company’s continued, but measured, focus on new product development and enhancement activities.
The Company earned a nominal amount of interest income during each of the nine months ended November 30, 2011 and 2010.
The Company recorded a tax provision of approximately $29 thousand during the nine months ended November 30, 2011 for minimum taxes in various U.S. States and income taxes with respect to the Company’s operations in Mexico. No provision for income taxes was recorded in the prior period presented due to the significance of the Company’s 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 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 second and third quarter of the Company’s 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 Company’s working capital requirements have correspondingly increased at such times. The Company continues to experience significant sales to mass merchandisers. Accordingly, the Company’s 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 November 30, 2011 and 2010, the Company had cash and cash equivalents of $1.2 million and $2.2 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 Company’s fiscal year.
Net cash used in operating activities was approximately $3.8 million during the nine months ended November 30, 2011 compared to $2.8 million during the nine months ended November 30, 2010 — an increase of $1.0 million or 36%. This increase in cash used in operating activities was primarily due to the net change in inventories changing from a $1.5 million decrease in the prior year to a $1.4 million increase in the current year. This change in inventories was due to timing of order fulfillment, reduced sales of low-end telescopes to mass retailers and an increase in manufactured inventory due in part to new products. The fluctuation in inventories was offset partially by a reduction of $0.9 million or 54% in the Company’s net loss and a net increase in the change in accounts payable of approximately $0.5 million.
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 $5.1 million as of November 30, 2011. 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 initial term of the credit facility with First Capital ends in January 2012. After the expiration of the initial term of the agreement, the Company expects to continue factoring its receivables with First Capital on a month-to-month basis and sixty days prior notice shall be required for the Company to terminate the agreement. The expiration of the initial term of the agreement does not affect the ability of First Capital to terminate the agreement as described above. 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. However, the Company cannot assure that such additional sources of capital would be available on reasonable terms, if at all.
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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 Company’s anticipated cash requirements for at least the next twelve months.
Capital expenditures were approximately $31 thousand and $46 thousand for the nine months ended November 30, 2011 and 2010, respectively. The Company had no material capital expenditure commitments at November 30, 2011. However, certain of the Company’s machinery and equipment is old and fully depreciated. It is possible that certain of the Company’s machinery and equipment could require replacement in the near future.
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 the remainder of fiscal 2012 and beyond.
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 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 Company’s expectation that it will continue to experience fluctuations in its sales, gross margins and profitability from quarter to quarter consistent with prior periods; the Company’s expectation that contingent liabilities will not have a material effect on the Company’s financial position or results of operations; the Company’s expectation that operating cash flow and bank borrowing capacity in connection with the Company’s business should provide sufficient liquidity for the Company’s 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 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 quarter ended November 30, 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 Company’s Chief Executive Officer and Chief Financial Officer concluded, based on their evaluation, that the Company’s disclosure controls and procedures are effective for the Company as of the end of the period covered by this report.
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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 November 30, 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
Not applicable.
Not applicable.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
Not applicable.
| | |
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 |
| |
101.INS* | | XBRL Instance Document |
| |
101.SCH* | | XBRL Taxonomy Extension Schema Document |
| |
101.CAL* | | XBRL Taxonomy Calculation Linkbase Document |
| |
101.LAB* | | XBRL Taxonomy Label Linkbase Document |
| |
101.PRE* | | XBRL Taxonomy Presentation Linkbase Document |
| |
* | | As provided in Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended. |
17
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: January 13, 2012 | | | | 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 |
| |
101.INS* | | XBRL Instance Document |
| |
101.SCH* | | XBRL Taxonomy Extension Schema Document |
| |
101.CAL* | | XBRL Taxonomy Calculation Linkbase Document |
| |
101.LAB* | | XBRL Taxonomy Label Linkbase Document |
| |
101.PRE* | | XBRL Taxonomy Presentation Linkbase Document |
| |
* | | As provided in Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended. |
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