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Meade Instruments 10-Q 2010 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended November 30, 2009
or
Commission File Number 0-22183
MEADE INSTRUMENTS CORP.
(Exact name of registrant as specified in its charter)
(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 þ No o
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 during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o 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.
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12(b)-2 of the Exchange Act). Yes o No þ
As of January 8, 2010, there were 1,167,267 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, 2009 TABLE OF CONTENTS
Table of Contents
ITEM 1. FINANCIAL STATEMENTS
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
See accompanying notes to consolidated financial statements
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MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, expect per share data)
(Unaudited)
See accompanying notes to consolidated financial statements
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MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, Shares and US Dollars)
(Unaudited)
See accompanying notes to consolidated financial statements
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MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
See accompanying notes to consolidated financial statements
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. The Consolidated Financial Statements Have Been Prepared by the Company and are Unaudited
In the opinion of the management of Meade Instruments Corp. (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,
2009.
In April 2008, the Company sold its Weaver and Redfield sport optics brands, and sold its
Simmons sport optics brand in June 2008. The sale of these brands and associated assets did not
qualify as a “Discontinued Operation” as defined by ASC 360-10, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“ASC 360-10”) because the operations and cash flows could not be
clearly distinguished from the rest of the entity. These brands and inventory were fully integrated
into the structure of a much larger business.
As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended February
28, 2009, the Company sold its former European operations (“Meade Europe”) in January 2009.
Accordingly, Meade Europe is presented in the consolidated financial statements as a “Discontinued
Operation” as defined by ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived
Assets” (“ASC 360-10”). As a discontinued operation, revenues, expenses and cash flows of Meade
Europe have been excluded from the respective captions in the Consolidated Statements of Operations
and Consolidated Statements of Cash Flows.
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.
Historically, a substantial portion of the Company’s net sales and results from operations
typically occurred in the third quarter of the Company’s fiscal year primarily due to
disproportionately higher customer demand for less-expensive telescopes during the holiday season;
however, net sales during its third quarter of fiscal 2010 were not substantially greater than its
second quarter, due to difficult market conditions brought about by the poor general economic
environment and increased competition from Asia-based manufacturers. While seasonality is not as
pronounced as it was prior to the sale of Meade Europe, the Company continues to experience
significant sales to mass merchandisers who, 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.
B. Liquidity
At November 30, 2009, the Company had cash and cash equivalents of $3.5 million, as compared
to $5.9 million at February 28, 2009, a decrease of $2.4 million due to changes in working capital
and the Company’s loss from operations.
Net cash used in operating activities decreased from $8.4 million during the nine months ended
November 30, 2008 compared to $3.1 million during the nine months ended November 30, 2009—a
decrease of $5.3 million or 63% due primarily to the decrease in operating loss excluding gain on
brand sales. Operating loss excluding gain on
brand sales decreased from $10.9 million during the nine months ended November 30, 2008 to
$2.8 million during the nine months ended November 30, 2009—a decrease of $8.1 million or 74%, due
to an improved gross margin and lower operating expenses.
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
Approximately $1.2 million or 39% of the $3.1 million of cash used from operating activities
during the nine months ended November 30, 2009 related to changes in working capital associated
with seasonality of the Company’s business.
In addition, approximately $1.0 million or 32% of the $3.1 million of cash used in operating
activities during fiscal 2010 consisted of restructuring costs associated with officer severance
and the lease termination fee associated with the relocation of the Company’s corporate
headquarters in February 2009.
The following table illustrates certain of the key liquidity and capital structure ratios that
management uses in evaluating the Company’s liquidity and capital structure:
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 $3.6 million as
of November 30, 2009, and was based solely on accounts receivable, as the Company was still in the
process of working with its lender to determine availability on the $3.0 million inventory
component of the facility. 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.
In the event the Company requires more capital than is presently anticipated due to unforeseen
factors, the Company may need to rely on its credit facility. In such an instance, if its lender
restricts, reduces or eliminates the Company’s access to credit, or requires immediate repayment of
the amounts outstanding under the agreement, the Company would be required to pursue additional or
alternative sources of liquidity such as equity financings or a new debt agreement with other
creditors, either of which may contain less favorable terms. The Company cannot assure that such
additional sources of capital would be available on reasonable terms, if at all.
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 the remainder of fiscal
2010 and fiscal 2011.
C. Discontinued Operations
As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended February
28, 2009, the Company sold its former European operations (“Meade Europe”) in January 2009.
Accordingly, Meade Europe is presented in the consolidated financial statements as a “Discontinued
Operation” as defined by ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived
Assets” (“ASC 360-10”). As a discontinued operation, revenues, expenses and cash flows of Meade
Europe have been excluded from the respective captions in the Consolidated Statements of Operations
and Consolidated Statements of Cash Flows.
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
The results of operations of the discontinued business of Meade Europe are summarized as
follows:
D. Gain on Brand Sales
On April 17, 2008, the Company sold its Weaver brand and associated inventory to Ammunition
Accessories, Inc., a subsidiary of Alliant Techsystems Inc., for cash proceeds of $5.0 million. On
April 18, 2008, the Company sold its Redfield brand to Leupold & Stevens, Inc. for cash proceeds of
$3.0 million. The gain on these brand sales was approximately $4.5 million.
On June 12, 2008, a subsidiary of the Company entered into an agreement and sold its Simmons
brand and associated inventory to Bushnell for gross cash proceeds of $7.3 million. The gain on
this brand sale was approximately $0.8 million.
The sale of these brands and associated assets did not qualify as a “Discontinued Operation”
as defined by ASC No. 360-10, because the operations and cash flows could not be clearly
distinguished from the rest of the entity. These brands and inventory were fully integrated into
the structure of a much larger business.
E. Restructuring Costs
During fiscal 2009, the Company engaged in a number of restructuring initiatives in an effort
to better align its cost structure with market conditions. The following table provides a summary
of the accrued restructuring costs associated with these initiatives (in millions):
Employee termination benefits are included in accrued liabilities and facility closure costs
are included in the accrued lease termination fee in the Consolidated Balance Sheets.
The Company provided its landlord a promissory note of $0.7 million which was issued
concurrent with the early termination of the lease of the Company’s former headquarters in February
2009. The note was secured by an irrevocable standby letter of credit, which was itself
collateralized by cash which was presented on the Consolidated Balance Sheets as restricted cash.
The note was paid in full during the nine months ended November 30, 2009.
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
F. 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, 2009 and 2008, were approximately $0.6 million
and $0.4 million, respectively. Due to deferred tax valuation allowances provided, no net benefit
was recorded against the share-based compensation charged.
The Company estimates the fair value of stock options using the Black-Scholes valuation model.
Key input assumptions used to estimate the fair value of stock options include the expected option
term, forfeiture rate, the expected volatility of the Company’s stock over the option’s expected
term, the risk-free interest rate over the option’s expected term, and the Company’s expected
annual dividend yield. The Company believes that the valuation technique and the approach utilized
to develop underlying assumptions are appropriate in calculating the fair values of the Company’s
stock options. Estimates of fair value are not intended to predict actual future events or the
value ultimately realized by persons who receive equity awards.
The Company did not grant stock options during either of the three months ended November 30,
2009 and 2008, respectively. The fair value of the Company’s stock options granted in the nine
months ended November 30, 2009 and 2008, was estimated on the grant date using the Black-Scholes
option-pricing model with the following assumptions:
As of November 30, 2009, the Company had approximately $0.6 million of unrecognized
compensation cost related to unvested stock options. This cost is expected to be recognized over a
weighted-average period of approximately 2 years. At February 28, 2009, the Company had
approximately $0.9 million of unrecognized compensation costs related to unvested stock options.
Approximately $75,000 of unvested restricted stock was forfeited by the Company’s former Chief
Financial Officer, concurrent with his termination in April 2009.
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
G. Composition of Certain Balance Sheet Accounts
The composition of accounts receivable is as follows:
The total due from factor at November 30, 2009 included approximately $3.8 million of invoices
assigned on a recourse basis. Accordingly, the credit risk associated with the assigned invoices
remained with the Company at November 30, 2009.
The Company generated approximately 15% and 14% of its revenue from one customer during the
nine months ended November 30, 2009 and 2008. Included in accounts receivable at November 30, 2009
is approximately $0.9 million due from this customer.
The composition of inventories, net of reserves is as follows:
The composition of acquisition-related intangible assets is as follows:
The changes in the carrying amount of acquisition-related intangible assets for the nine
months ended November 30, 2009, are as follows:
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
Amortization of trademarks completed technologies over the next five fiscal years is estimated
as follows:
The composition of property and equipment is as follows:
H. 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.
I. Reverse Stock Split and Income (Loss) Per Share
On August 7, 2009, the Company filed an amendment to its Certificate of Incorporation (i)
establishing a one-for-twenty reverse split of common stock, and (ii) reducing the number of our
authorized shares of common stock to Two Million Five Hundred Thousand (2,500,000). Every twenty
shares of (old) common stock which were held as of August 7, 2009, the effective date, were
converted into one share of (new) common stock. Accordingly, all amounts reflected in this
document have been retroactively restated based upon this reverse split in order to ensure
comparability, including the shares and options granted and outstanding prior to the effective date
of the reverse split.
Basic income (loss) per share amounts exclude the dilutive effect of potential shares of
common stock. Basic income (loss) per share is based upon the weighted-average number of shares of
common stock outstanding. Diluted income (loss) per share is based upon the weighted-average
number of shares of common stock and dilutive potential shares of common stock outstanding for each
period presented. Potential shares of common stock include outstanding stock options and restricted
stock, which may be included in the weighted average number of shares of common stock under the
treasury stock method.
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
The total number of options and restricted shares outstanding were as follows:
A reconciliation of the basic weighted average number of shares outstanding and the diluted
weighted average number of shares outstanding follows:
Weighted average shares for the nine month period ended November 30, 2009 and 2008,
respectively, exclude the aggregate dilutive effect of potential shares of common stock related to
stock options and restricted stock, because the Company incurred a loss and the effect would be
anti-dilutive. Options with exercise prices greater than the average market price during the
periods presented are excluded from the calculation of weighted average shares outstanding because
the effect would be anti-dilutive.
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
J. Product Warranties
The Company provides reserves for the estimated cost of product warranty-related claims at the
time of sale, and periodically adjusts the provision to reflect actual experience related to its
standard product warranty programs
and its extended warranty programs. The amount of warranty liability accrued reflects management’s
best estimate of the expected future cost of honoring Company obligations under its warranty plans.
Additionally, from time to time, specific warranty accruals may be made if unforeseen technical
problems arise. Meade brand products, principally telescopes and binoculars, are generally covered
by a two-year limited warranty. Most of the Coronado products have limited five-year warranties.
Included in the warranty accrual as of November 30, 2009, is $0.6 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:
K. Employee Stock Ownership Plan
The Company terminated its Employee Stock Ownership Plan (“ESOP”) in August 2008, at which
time all unearned ESOP shares were allocated to participants’ accounts in accordance with the terms
of the ESOP.
L. Income Taxes
Income tax benefit for the three and nine months ended November 30, 2008 related almost
exclusively to the write-off of a deferred tax liability associated with the intangible assets sold
as part of the brand sales.
In accordance with ASC 740-10, 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 the time, to
recognize those assets for financial reporting purposes. For the period ended November 30, 2009,
the Company has not changed its assessment regarding the recoverability of its deferred tax assets.
Ultimate realization of the benefit of the deferred tax assets is dependent upon the Company
generating sufficient taxable income in future periods, including periods prior to the expiration
of certain underlying tax credits.
As of November 30, 2009 and as of February 28, 2009, unrecognized tax benefits, all of which
affect the effective tax rate if recognized, were $0.1 million. 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 interest and penalties related to uncertain tax positions in income tax
expense. At November 30, 2009, accrued interest related to uncertain tax positions and accrued
penalty was less than $0.1 million.
The tax years 2005 through 2008 remain open to examination by the major taxing jurisdictions
to which the Company is subject. However, the amount of net operating loss carryforwards 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.
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MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
M. Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No.
162” (“SFAS 168”). The FASB Accounting Standards Codification (“Codification”) will become the
source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB
to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification
will supersede all then-existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification will become
nonauthoritative. The Codification became effective for our third quarter ended November 30, 2009.
Since the new standard did not change U.S. GAAP, there was no change to our consolidated financial
statements other than to update all references to U.S. GAAP to be in conformity with the ASC.
In May 2009, the FASB issued Accounting Standards Codification No. ASC 855-10., “Subsequent
Events” (“ASC 855-10”). ASC 855-10 establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. In particular, this Statement sets forth:
ASC 855-10 was adopted by the Company on June 15, 2009, and did not have a material impact on
the Company’s consolidated financial statements.
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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. We currently operate
out of two primary locations: Irvine, California and Tijuana, Mexico. Our California facility
serves as the Company’s corporate headquarters and U.S. distribution center; our Mexico facilities
contain our manufacturing, assembly, repair, packaging, research and development, 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 throughout each year.
We believe that the Company holds valuable brand names and intellectual property that provide
us with a competitive advantage in the marketplace. The Meade brand name is ubiquitous in the
consumer telescope market, while the Coronado brand name represents a unique niche in the area of
solar astronomy.
During fiscal 2009, we sold our Simmons, Weaver and Redfield sports optics brands for gross
proceeds of $15.3 million. In January 2009, we sold our Meade Europe subsidiary for gross proceeds
of $12.4 million. The proceeds from these divestitures were used to repay the Company’s credit
facility balance, to fund the restructuring of the Company’s cost structure and to offset operating
losses.
The sale of the Company’s former sport optics brands and associated assets did not qualify as
a “Discontinued Operation” as defined by FASB Accounting Standard Codification No. 360-10,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“ASC No. 360-10”) because the
operations and cash flows could not be clearly distinguished from the rest of the entity. These
brands and inventory were fully integrated into the structure of a much larger business.
On the other hand, Meade Europe did qualify as a “Discontinued Operation” and is presented in
that manner in our consolidated financial statements. As a discontinued operation, revenues,
expenses and cash flows of Meade Europe have been excluded from the respective captions in the
Consolidated Statements of Operations and Consolidated Statements of Cash Flows.
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Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires management to make certain estimates, judgments and
assumptions that it believes are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the
periods presented. Actual results may differ from these estimates under different assumptions or
conditions. The significant accounting policies which management believes are the most critical to
assist users in fully understanding and evaluating the Company’s reported financial results include
the following:
Revenue Recognition
The Company’s revenue recognition policy complies with Revenue Recognition ASC 605. Revenue
from the sale of products is recognized when title and risk of loss has passed to the customer,
typically at the time of shipment, persuasive evidence of an arrangement exists, including a fixed
price, and collectibility is reasonably assured. The Company recognizes revenue when persuasive
evidence of an arrangement exists, title and risk of loss has passed to the customer, typically at
the time of shipment, the price to the buyer is fixed or determinable and collectibility is
reasonably assured. Revenue is not recognized at the time of shipment if these criteria are not
met. Under certain circumstances, the Company accepts product returns or offers markdown
incentives. Material management judgments must be made and used in connection with establishing
sales returns and allowances estimates. The Company continuously monitors and tracks returns and
allowances and records revenues net of provisions for returns and allowances. The Company’s
estimate of sales returns and allowances is based upon several factors including historical
experience, current market and economic conditions, customer demand and acceptance of the Company’s
products and/or any notification received by the Company of such a return. Historically, sales
returns and allowances have been within management’s estimates; however, actual returns may differ
significantly, either favorably or unfavorably, from management’s estimates depending on actual
market conditions at the time of the return.
Inventories
Inventories are stated at the lower of cost, as determined using the first-in, first-out
(“FIFO”) method, or market. Costs include materials, labor and manufacturing overhead. The Company
evaluates the carrying value of its inventories taking into account such factors as historical and
anticipated future sales compared with quantities on hand and the price the Company expects to
obtain for its products in their respective markets. The Company also evaluates the composition of
its inventories to identify any slow-moving or obsolete product. These evaluations require material
management judgments, including estimates of future sales, continuing market acceptance of the
Company’s products, and current market and economic conditions. Inventory may be written down based
on such judgments for any inventories that are identified as having a net realizable value less
than its cost. However, if the Company is not able to meet its sales expectations, or if market
conditions deteriorate significantly from management’s estimates, reductions in the net realizable
value of the Company’s inventories could have a material adverse impact on future operating
results.
Intangible Assets
The Company accounts for acquisition-related intangible assets in accordance with FASB
Accounting Standards Codification No. 805-10, Business Combinations, and ASC No. 350-20, Goodwill
and Other Intangible Assets. A portion of the remaining difference between the purchase price and
the fair value of net tangible assets at the date of acquisition is included in the balance sheet
as acquisition-related intangible assets. Amortization periods for the intangible assets subject to
amortization range from seven to fifteen years depending on the nature of the assets acquired. The
carrying value of acquisition-related intangible assets, including the related amortization period,
is evaluated in the fourth quarter of each fiscal year and whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable. If the
carrying amount exceeds the fair value, which is determined based upon estimated discounted future
cash flows based upon our estimated cost of capital, an impairment loss is reflected in loss from
operations. Such estimates are subject to change and we may be required to recognize an impairment
loss in the future.
Income taxes
A deferred income tax asset or liability is established for the expected future consequences
of temporary differences in the financial reporting and tax bases of assets and liabilities.
Significant judgment is necessary in the determination for recoverability of the Company’s deferred
tax assets. Deferred tax assets are reviewed regularly for recoverability and the Company
establishes a valuation allowance when it is more likely than not that some portion, or all, of the
deferred tax assets will not be realized. The Company assesses the recoverability of the deferred
tax assets on an ongoing basis. In making this assessment, the Company is required to consider all
available positive and negative evidence to determine whether, based on such evidence, it is more
likely than not that some portion, or all, of the net deferred assets will be realized in future
periods. If it is determined that it is more likely than not that a
deferred tax asset will not be realized, the value of that asset will be reduced to its
expected realizable value, thereby decreasing net income. If it is determined that a deferred tax
asset that had previously been written down will be realized in the future, the value of that
deferred tax asset will be increased, thereby increasing net income in the period when the
determination is made. Actual results may differ significantly, either favorably or unfavorably,
from the evidence used to assess the recoverability of the Company’s deferred tax assets.
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The Company adopted the provisions of FASB Accounting Standards Codification No. ASC 740-10
(“ASC 740-10”) on March 1, 2007. As a result of the implementation of ASC 740-10, the Company
recognized no material increase in the liability for unrecognized income tax benefits. At February
28, 2009, unrecognized tax benefits, all of which affect the effective tax rate if recognized, were
$0.1 million. 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 interest and penalties
related to uncertain tax positions in income tax expense. As of February 28, 2009, accrued interest
related to uncertain tax benefit was less than $0.1 million. The tax years 2005-2008 remain open to
examination by the major taxing jurisdictions to which the Company is subject. However, the amount
of net operating loss carryforwards can be adjusted for federal tax purposes for the three years
(four years for the major state jurisdictions in which the Company operates) after the net
operating loss is utilized.
Results of Operations
Three Months Ended November 30, 2009 Compared to Three Months Ended November 30, 2008
The Company reported net sales of $7.3 million and $9.9 million for the three month periods
ended November 30, 2009 and 2008, respectively. This decrease of approximately $2.6 million or 26%
consisted of a decrease in sales of most of the Company’s products, offset partially by sales of
the Company’s new ETX-LS product which started shipping in May 2009. While net sales to the
Company’s top 25 customers increased slightly, by approximately 3%, net sales decreased overall.
Approximately 22% and 17% of the Company’s net sales during each of the three month periods ended
November 30, 2009 and 2008, respectively, were from one customer. The Company attributes much of
the decline in its net sales to reduced discretionary spending resulting from the current high
unemployment rates and the generally poor economic environment. In addition, the Company is
experiencing increased competition from Asia-based manufacturers—which is also exacerbated by the
economic environment. It is not possible to determine how much of the decrease is associated with
each of these factors.
The gross profit margin during the third quarter of fiscal 2010 was 21% of net sales, compared
to 12% of net sales during the comparable three month period in the prior year. The primary reason
for this improvement was a reduction in manufacturing costs associated with the Company’s
manufacturing facility, including the consolidation of the Company’s operations in Mexico to one
building in June 2009, reducing the Company’s monthly rent expense there by half—approximately
$0.1 million per quarter. Approximately 0.6% of the increase in the gross margin was due to lower
direct labor and other manufacturing costs as a result of the devaluation of the Mexican Peso
relative to the US Dollar. Most of the Company’s employees at its manufacturing facility in Mexico,
as well as certain other manufacturing costs, are paid in Mexican Pesos.
Selling expenses for the three months ended November 30, 2009 were $0.7 million, a 42%
decrease from $1.2 million for the same period in the prior year. The decrease was due to
headcount reductions and reduced discretionary spending, such as advertising and marketing
expenditures.
General and administrative expenses for the three months ended November 30, 2009 were $1.1
million, a decrease of $2.7 million or 71% compared to $3.8 million in the same period in the prior
year. Out of the $2.7 million reduction, $1.2 million was due to restructuring costs (lease
termination costs) recorded in the third quarter of the prior year. The rest of the decrease in
general and administrative expenses was mostly due to reductions in both headcount and the excess
facility costs associated with our former Irvine, California corporate headquarters.
Research and development expenses for the three months ended November 30, 2009 were $0.2
million, a decrease of $0.2 million or 50% compared to $0.4 million in the same quarter in the
prior year primarily due to completion of its new product introduction (ETX-LS) at the end of the
quarter ending May 31, 2009.
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The Company earned interest income in the third quarter of this fiscal year due to the net
cash received from the sale of Meade Europe in January 2009. Interest expense of $48 thousand was
incurred in the prior year due to the Company’s borrowings on its former credit facility, which was
paid off with the proceeds from the sale of the Company’s former sport optics brands.
The Company did not record any income tax provision or benefit during the three months ended
November 30, 2009 due to its loss from operations, level of net operating loss carry forwards and
valuation allowances recorded against the related deferred tax assets due to the Company’s
recurring historical losses. The Company recorded an income tax benefit of $0.9 million for the
quarter ended November 30, 2008 relating almost exclusively to the write-off of a deferred tax
liability associated with intangible assets sold as part of the brand sales.
As noted above, the Company sold Meade Europe in January 2009. As a result, the results of
Meade Europe have been classified as discontinued operations. Income from discontinued operations,
net of tax, was $0.6 million in the three months ended November 30, 2008.
Nine Months Ended November 30, 2009 Compared to Nine Months Ended November 30, 2008
The Company reported net sales of $19.1 million for the first nine months of fiscal year 2010,
a decrease of $5.6 million or 23% from net sales of $24.7 million in the same period last year.
This decrease was due to a decrease of approximately $3.4 million in net sales due to the Company’s
sale of its former sport optics brands last year, and the resulting elimination of the revenue
associated with those products. A decrease of approximately $2.0 million in sales of most of the
Company’s low-end telescopes and accessories products, were both partially offset by increases in
sales of the Company’s high-end and mid-range telescopes. The increase in the sales of the
Company’s high-end telescopes is attributable to improvements in the Company’s manufacturing
operations in Mexico, which had just begun full manufacturing operations in the first quarter of
fiscal 2009. The increase in sales of the Company’s mid-range telescopes was due primarily to the
development of the Company’s new ETX-LS product. Reduced distribution outlets, increased
competition and weak demand, were also factors contributing to the decline in sales. Approximately
15% and 14% of the Company’s net sales during each of the nine month periods ended November 30,
2009 and 2008 were from one customer.
The gross profit margin during the first nine months of fiscal year 2010 increased to 20% of
net sales, compared with 13% of net sales in the prior year’s comparable nine month period. This
improvement in the gross profit margin was driven by a favorable change in product mix and
reductions in the Company’s manufacturing expenses. Approximately 2.3% of the improvement in the
gross profit margin was due to reductions in manufacturing expenses due to the devaluation of the
Mexican Peso relative to the US Dollar. Most of the Company’s employees at its manufacturing
facility in Mexico, as well as certain other manufacturing costs, are paid in Mexican Pesos. The
Company consolidated its operations in Mexico to one building in June 2009, reducing the Company’s
monthly rent by half—approximately $0.1 million per quarter. The Company’s operating efficiency
at its manufacturing facility in Mexico has also improved, reducing the Company’s manufacturing
costs.
Selling expenses for the first nine months of fiscal year 2010 were $2.0 million, a 41%
decrease from $3.4 million in the comparable nine month period in the prior year. While the lower
sales volume contributed to lower variable selling expenses such as freight out and commissions,
the overall decrease was also driven by lower headcount and reduced discretionary spending.
General and administrative expenses for the first nine months of fiscal year 2010 were $4.1
million, a decrease of $4.9 million or 54% compared to $9.0 million in the prior year’s comparable
nine month period. Out of the $4.9 million reduction, $1.2 million was due to restructuring costs
(lease termination costs) recorded in the third quarter of prior year. The rest of the decrease in
general and administrative expenses was mostly due to reductions in both headcount and the excess
facility costs associated with our former Irvine, California corporate headquarters.
Research and development expenses for the first nine months of fiscal year 2010 were $0.6
million, a decrease of $0.7 million or 54% compared to $1.3 million in the comparable nine month
period during the prior fiscal year primarily due to completion of its new product introduction
(ETX-LS) at the end of the quarter ending May 31, 2009.
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In August 2008, the Company terminated its ESOP and distributed the remaining shares to
eligible employees, which resulted in the elimination of this expense.
During the nine months ended November 30, 2008, the Company sold its Simmons, Weaver and
Redfield sport optics brands and associated inventory for gross proceeds of $15 million. This sale
resulted in a gain of approximately $5.2 million. Excluding this gain, the Company would have
reported a net loss of $10.2 million, or $8.74 per share.
The Company earned interest income in the nine months ended November 30, 2009, due to the net
cash received from the sale of Meade Europe in January 2009. Interest expense of $168 thousand was
incurred in the prior year due to the Company’s borrowings on its former credit facility during the
first nine months of the prior year. Due to the cash generated from the sale of Simmons, Weaver and
Redfield brands, the Company reduced its usage of credit facilities during the period.
The Company did not record any income tax provision or benefit during the nine months ended
November 30, 2009 due to its loss from operations, level of net operating loss carry forwards and
valuation allowances recorded against the related deferred tax assets due to the Company’s
recurring historical losses. The Company recorded an income tax benefit of approximately $1.9
million for the nine months ended November 30, 2008, relating almost exclusively to the write-off
of a deferred tax liability associated with intangible assets sold as part of the brand sales.
As noted above, the Company sold Meade Europe in January 2009. As a result, the results of
Meade Europe have been classified as a discontinued operation. Income from discontinued operations,
net of tax, was $0.8 million in the first three quarters ended November 30, 2008.
Seasonality
The Company has experienced, and expects to continue to experience, substantial fluctuations
in its sales, gross margins and results from operations from quarter to quarter. Factors that
influence these fluctuations include the volume and timing of orders received, changes in the mix
of products sold, market acceptance of the Company’s products, competitive pricing pressures, the
Company’s ability to meet fluctuating demand and delivery schedules, the timing and extent of
research and development expenses, the timing and extent of product development activities and the
timing and extent of advertising expenditures. Historically, a substantial portion of the
Company’s net sales and results from operations typically occurred in the third quarter of the
Company’s fiscal year primarily due to the disproportionately higher sales of its discontinued
operations in Europe, as well as higher customer demand for less-expensive telescopes during the
holiday season. Mass merchandisers, along with specialty retailers, purchase a considerable amount
of their inventories to satisfy seasonal customer demand. These purchasing patterns have caused the
Company to increase its level of inventory during its second and third quarters in response to such
demand or anticipated demand. As a result, the Company’s working capital requirements have
correspondingly increased at such times. However, the Company’s net sales during its third quarter
of fiscal 2010 were not greater than its second quarter. While seasonality is not as pronounced as
it was prior to the sale of Meade Europe, the Company continues to experience significant sales to
mass merchandisers. Accordingly, the Company’s net sales and results from operations are expected
to be higher in its second and third quarters than in the first and fourth quarters of its fiscal
year.
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Liquidity and Capital Resources
At November 30, 2009, the Company had cash and cash equivalents of $3.5 million, as compared
to $5.9 million at February 28, 2009, a decrease of $2.4 million due to changes in working capital
and the Company’s loss from operations.
Net cash used in operating activities decreased from $8.4 million during the nine months ended
November 30, 2008 compared to $3.1 million during the nine months ended November 30, 2009—a
decrease of $5.3 million or 63% due primarily to the decrease in operating loss excluding gain on
brand sales. Operating loss excluding gain on brand sales decreased from $10.9 million during the
nine months ended November 30, 2008 to $2.8 million during the nine months ended November 30,
2009—a decrease of $8.1 million or 74%, due to an improved gross margin and lower operating
expenses.
Approximately $1.2 million or 39% of the $3.1 million of cash used from operating activities
during the nine months ended November 30, 2009 related to changes in working capital associated
with seasonality of the Company’s business.
In addition, approximately $1.0 million or 32% of the $3.1 million of cash used in operating
activities during fiscal 2010 consisted of restructuring costs associated with officer severance
and the lease termination fee associated with the relocation of the Company’s corporate
headquarters in February 2009.
The following table illustrates certain of the key liquidity and capital structure ratios that
management uses in evaluating the Company’s liquidity and capital structure:
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 $3.6 million as
of November 30, 2009, and was based solely on accounts receivable, as the Company was still in the
process of working with its lender to determine availability on the $3.0 million inventory
component of the facility. While the Company’s credit facility does not contain explicit financial
covenants, the Company’s lender with 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.
In the event the Company requires more capital than is presently anticipated due to unforeseen
factors, the Company may need to rely on its credit facility. In such an instance, if its lender
restricts, reduces or eliminates the Company’s access to credit, or requires immediate repayment of
the amounts outstanding under the agreement, the Company would be required to pursue additional or
alternative sources of liquidity such as equity financings or a new debt agreement with other
creditors, either of which may contain less favorable terms. The Company cannot assure that such
additional sources of capital would be available on reasonable terms, if at all.
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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 during fiscal 2010 and
fiscal 2011.
Capital expenditures, aggregated $68 thousand and $122 thousand for the nine months ended
November 30, 2009 and 2008, respectively. The Company had no material capital expenditure
commitments at November 30, 2009.
Inflation
The Company does not believe that inflation has had a material effect on the results of
operations during the past two years. However, there can be no assurance that the Company’s
business will not be affected by inflation in fiscal 2010 and beyond.
New Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No.
162” (“SFAS 168”). The FASB Accounting Standards Codification (“Codification”) will become the
source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB
to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification
will supersede all then-existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification will become
nonauthoritative. This Statement became effective for our third quarter ended November 30, 2009.
Since the new standard did not change U.S. GAAP, there was no change to our consolidated financial
statements other than to update all references to U.S. GAAP to be in conformity with the ASC.
In May 2009, the FASB issued Accounting Standards Codification No. ASC 855-10., “Subsequent
Events” (“ASC 855-10”). ASC 855-10 establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. In particular, this Statement sets forth:
ASC 855-10 was adopted by the Company on June 15, 2009, and did not have a material impact on
the Company’s consolidated financial statements.
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 be able to resolve its liquidity challenges through negotiation
with its lenders and through restructuring its business to reduce its cost structure; the Company’s
expectation that it can successfully complete its transfer of its manufacturing operations without
significantly disrupting its supply chain; the Company’s expectations in the
amounts of cost savings to be achieved through restructuring the Company; the Company’s
expectations that it will be able to successfully retain the credit facility with its lender on
terms favorable to the Company; 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.
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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 4T. 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, 2009. 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.
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, 2009
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
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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.
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EXHIBIT INDEX
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