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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

    x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2012

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 Number)

27 Hubble

Irvine, California

92618

(Address of principal executive offices)

(Zip Code)

(949) 451-1450

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.01 par value   NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

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.

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   ¨  (Do not check if a smaller reporting company)    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 October 11, 2012, there were 1,306,017 outstanding shares of the Registrant’s common stock issued, par value $0.01 per share.

 

 

 


Table of Contents

Table of Contents

TABLE OF CONTENTS

 

          Page No.  
   PART I — FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
   Consolidated Balance Sheets (Unaudited) — August 31, 2012 and February 29, 2012      2   
  

Consolidated Statements of Operations (Unaudited) — Three and Six Months Ended August 31, 2012 and 2011

     3   
  

Consolidated Statements of Cash Flows (Unaudited) — Three and Six Months Ended August 31, 2012 and 2011

     4   
   Notes to Consolidated Financial Statements (Unaudited)      5   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      11   

Item 3.

   Quantitative and Qualitative Disclosure About Market Risk      14   

Item 4.

   Controls and Procedures      15   
   PART II — OTHER INFORMATION   

Item 1.

   Legal Proceedings      16   

Item 1A.

   Risk Factors      16   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      16   

Item 3.

   Defaults Upon Senior Securities      16   

Item 4.

   Mine Safety Disclosure      16   

Item 5.

   Other Information      16   

Item 6.

   Exhibits      16   
  

Signatures

     17   


Table of Contents
ITEM 1. FINANCIAL STATEMENTS.

MEADE INSTRUMENTS CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

 

     August 31,
2012
    February 29,
2012
 
ASSETS     

Current assets:

    

Cash

   $ 668      $ 3,904   

Accounts receivable, less allowance for doubtful accounts of $85 at August 31, 2012 and $139 at February 29, 2012

     2,535        1,668   

Inventories

     9,219        6,633   

Prepaid expenses and other current assets

     323        208   
  

 

 

   

 

 

 

Total current assets

     12,745        12,413   

Property and equipment, net

     232        170   

Intangible assets, net

     619        705   

Other assets, net

     104        105   
  

 

 

   

 

 

 
   $ 13,700      $ 13,393   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 3,446      $ 1,498   

Accrued liabilities

     1,425        1,686   
  

 

 

   

 

 

 

Total current liabilities

     4,871        3,184   

Deferred rent

     21        25   

Commitments and contingencies

    

Stockholders’ equity:

    

Common Stock; $0.01 par value; 2,500 shares authorized; 1,173 shares issued and outstanding at August 31, 2012 and 1,167 shares issued and outstanding at February 29, 2012

     12        12   

Additional paid-in capital

     52,693        52,670   

Accumulated deficit

     (43,897     (42,498
  

 

 

   

 

 

 

Total Stockholders’ equity

     8,808        10,184   
  

 

 

   

 

 

 
   $ 13,700      $ 13,393   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

2


Table of Contents

MEADE INSTRUMENTS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, expect per share data)

(Unaudited)

 

     Three Months Ended
August 31,
    Six Months Ended
August 31,
 
     2012     2011     2012     2011  

Net sales

   $ 3,984      $ 6,140      $ 8,088      $ 10,313   

Cost of sales

     3,440        4,770        6,677        7,574   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     544        1,370        1,411        2,739   

Selling expenses

     361        584        776        1,043   

General and administrative expenses

     895        821        1,799        1,766   

Research and development expenses

     261        218        533        417   

Release of warranty liability

     —          —          (294     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (973     (253     (1,403     (487

Interest income

     —          1        —          2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (973     (252     (1,403     (485

Income tax expense (benefit)

     —          15        —          15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (973   $ (267   $ (1,403   $ (500
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

   $ (0.83   $ (0.23   $ (1.20   $ (0.43
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—basic and diluted

     1,171        1,167        1,169        1,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

3


Table of Contents

MEADE INSTRUMENTS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
August 31,
 
     2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (1,403   $ (500

Adjustments to reconcile loss from continuing operations to net cash used in operating activities:

    

Release of warranty liability

     (293     —     

Depreciation and amortization

     144        171   

Bad debt (recovery) expense

     (26     2   

Stock-based compensation

     23        81   

Deferred rent amortization

     (4     —     

Gain on sale of fixed assets

     (5     —     

Changes in assets and liabilities:

    

Accounts receivable

     (841     (1,231

Inventories

     (2,586     (976

Prepaid expenses and other current assets

     (119     (36

Accounts payable

     1,949        400   

Accrued liabilities

     35        (351
  

 

 

   

 

 

 

Net cash used in operating activities

     (3,126     (2,440
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (115     (20

Proceeds from sale of fixed assets

     5        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (110     (20
  

 

 

   

 

 

 

Cash flows from financing activities

     —          —     
  

 

 

   

 

 

 

Net decrease in cash

     (3,236     (2,460
  

 

 

   

 

 

 

Cash at beginning of period

     3,904        5,076   
  

 

 

   

 

 

 

Cash at end of period

   $ 668      $ 2,616   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

4


Table of Contents

MEADE INSTRUMENTS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. The Consolidated Financial Statements Have Been Prepared by the Company and are Unaudited.

Meade Instruments Corp. (the “Company”) is engaged in the design, manufacture, marketing and sale of consumer products, primarily telescopes, telescope accessories and binoculars. The Company designs its products in-house or with the assistance of external consultants. Most of the entry level products are manufactured overseas by contract manufacturers in Asia, while the high-end telescopes are manufactured and assembled at the Company’s Mexico facility. Sales of the Company’s products are driven by an in-house sales force as well as a network of sales representatives throughout the U.S. and through distributors internationally. The Company currently operates out of two primary locations: Irvine, California and Tijuana, Mexico. The California facility serves as the Company’s corporate headquarters, research and development facility; the Mexico facility contains the Company’s manufacturing, assembly, repair, packaging, distribution and other general and administrative functions. The Company’s business is highly seasonal and the financial results have historically varied significantly on a quarter-by-quarter basis throughout each year.

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 29, 2012.

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.

B. Liquidity

At August 31, 2012, the Company had cash of $0.7 million, as compared to $3.9 million at February 29, 2012 and $2.6 million at August 31, 2011. Net cash used in operating activities was approximately $3.1 million during the six months ended August 31, 2012 and $2.4 million during the six months ended August 31, 2011, an increase in net cash used of approximately $0.7 million compared to the prior year. This increase in cash used in operating activities was attributed primarily to the increase in the Company’s net loss of approximately $0.9 million from a loss of approximately $0.5 million during the six months ended August 31, 2011 compared to a loss of approximately $1.4 million during the six months ended August 31, 2012, offset slightly by favorable net fluctuations in working capital.

The Company typically experiences increases in accounts receivable and inventories and a corresponding decrease in cash 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, and cash increases, at the end of the Company’s fiscal year.

The Company currently has in place a 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 $1.0 million as of August 31, 2012 and was based solely on accounts receivable as substantially all of the Company’s inventory was deemed ineligible due to it being located in Mexico. The Company expects its availability to be limited to not more than $1.0 million in the foreseeable future. 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 ended in January 2012, at which time, the Company has continued to factor 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 did not affect the ability of First Capital to terminate the agreement as described above.

 

5


Table of Contents

MEADE INSTRUMENTS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The Company began advancing on accounts receivable in September 2012 in order to fulfill its working capital requirements and expects it will need to continue to rely on its credit facility through at least its third quarter. If its lender restricts, reduces or eliminates the Company’s access to credit, or requires immediate repayment of the amounts outstanding under the agreement, the Company would be required to pursue additional or alternative sources of liquidity such as equity financings, a new debt agreement with other creditors, or liquidate assets. However, the Company cannot assure that such additional sources of liquidity would be available on reasonable terms, if at all.

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 six months ended August 31, 2012 and 2011, were approximately $23 thousand and $81 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 restricted stock awards using the closing price on the grant date. 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 August 31, 2012 and 2011, respectively, was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

 

     August 31,
2012
    August 31,
2011
 

Expected life (1)

     6.0        5.8   

Expected volatility (2)

     165     168

Risk-free interest rate (3)

     0.8     1.3

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.

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.

 

6


Table of Contents

MEADE INSTRUMENTS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

On August 10, 2012, each of the Company’s U.S. employees, including the Executive Officers, were granted restricted stock awards (the “Awards”) pursuant to the Company’s form of Restricted Stock Agreement under the Company’s 2008 Stock Incentive Plan. The Awards were in the aggregate amount of 76,250 shares of Common Stock. Each award vests in three equal installments with the first installment vesting on August 10, 2013 and the remainder vesting on each of the two succeeding anniversaries.

D. Composition of Certain Balance Sheet Accounts

The composition of accounts receivable, net of reserves, is as follows:

 

     August 31,
2012
     February 29,
2012
 
     (In thousands)  

Due from factor

   $ 2,206       $ 1,183   

Accounts receivable, other

     329         485   
  

 

 

    

 

 

 
   $ 2,535       $ 1,668   
  

 

 

    

 

 

 

Substantially all of the credit risk associated with the assigned invoices remained with the Company as of August 31, 2012. Accounts receivable, other includes reserves for subsequent sales return and allowances for bad debt—including reserves associated with certain invoices assigned to the factor.

The composition of inventories is as follows:

 

     August 31,
2012
     February 29,
2012
 
     (In thousands)  

Raw materials

   $ 3,930       $ 1,419   

Work in process

     2,771         2,424   

Finished goods

     2,518         2,790   
  

 

 

    

 

 

 
   $ 9,219       $ 6,633   
  

 

 

    

 

 

 

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 are as follows:

 

            August 31, 2012      February 29, 2012  
     Amortization
Periods

(In Years)
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Book
Value
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net book
Value
 
     (In thousands)  

Trademarks

     7-15       $ 424       $ (379   $ 45       $ 424       $ (361   $ 63   

Completed technologies

     12         1,620         (1,046     574         1,620         (978     642   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

      $ 2,044       $ (1,425   $ 619       $ 2,044       $ (1,339   $ 705   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

MEADE INSTRUMENTS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The changes in the carrying amount of acquisition-related intangible assets for the three months ended August 31, 2012, are as follows:

 

     Amortizing
Intangible Assets
 
     (In thousands)  

Balance, net, February 29, 2012

   $ 705   

Amortization

     (86
  

 

 

 

Balance, net, August 31, 2012

   $ 619   
  

 

 

 

Amortization of acquisition-related intangible assets over the next five fiscal years is estimated as follows:

 

Fiscal Year

   (In thousands)  

2013 (remaining six months)

   $ 85   

2014

     162   

2015

     135   

2016

     135   

2017

     102   
  

 

 

 

Total

   $ 619   
  

 

 

 

The composition of property and equipment is as follows:

 

     August 31,
2012
    February 29,
2012
 
     (In thousands)  

Molds and dies

   $ 1,316      $ 1,234   

Machinery and equipment

     4,511        4,507   

Furniture and fixtures

     251        251   

Autos and trucks

     126        199   

Leasehold improvements

     138        138   
  

 

 

   

 

 

 
     6,342        6,329   

Less accumulated depreciation and amortization

     (6,110     (6,159
  

 

 

   

 

 

 
   $ 232      $ 170   
  

 

 

   

 

 

 

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.

F. Loss Per Share

Basic loss per share amounts excludes the dilutive effect of potential shares of common stock. Basic loss per share is based upon the weighted-average number of shares of common stock outstanding. Diluted loss per share is based upon the weighted-average number of shares of common stock and dilutive potential shares of common stock outstanding for each period presented. Potential shares of common stock include outstanding stock options and restricted stock, which may be included in the weighted average number of shares of common stock under the treasury stock method.

 

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Table of Contents

MEADE INSTRUMENTS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The total number of options and restricted shares outstanding were as follows:

 

     August 31,
2012
     February 29,
2012
 
     (In thousands)  

Stock options outstanding

     74         77   

Restricted shares outstanding

     133         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.

G. Product Warranties

The Company provides reserves for the estimated cost of product warranty-related claims at the time of sale, and periodically adjusts the provision to reflect actual experience related to its standard product warranty programs and its extended warranty programs. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring Company obligations under its warranty plans. Additionally, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Meade® brand products, principally telescopes and binoculars, are generally covered by a one-year limited warranty. Most of the Coronado® products have limited five-year warranties.

Included in the warranty accrual as of February 29, 2012, is $0.5 million related to the Company’s former sport optics brands that were sold in 2008 and for which the Company agreed to retain certain warranty liabilities. In June 2012, the Company entered into an agreement with the owner of one of the Company’s former sport optics brands which eliminated the Company’s remaining liability of approximately $0.3 million for any future product warranty claims associated with that brand. The Company reduced its warranty accrual as of May 31, 2012 by $0.3 million accordingly.

Changes in the warranty liability, which is included as a component of accrued liabilities on the accompanying Consolidated Balance Sheets, were as follows:

 

     Three Months Ended
August 31,
    Six Months Ended
August 31,
 
     2012     2011     2012     2011  
     (In thousands)  

Beginning balance

   $ 427      $ 750      $ 736      $ 810   

Release of warranty liability

     —          —          (293     —     

Warranty accrual

     69        56        111        99   

Labor and material

     (85     (43     (143     (146
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 411      $ 763      $ 411      $ 763   
  

 

 

   

 

 

   

 

 

   

 

 

 

H. Income Taxes

In accordance with ASC 740, Accounting for Income Taxes, the Company has determined that there was sufficient uncertainty surrounding the future realization of its deferred tax assets to warrant the recording of a full valuation allowance. The valuation allowance was recorded based upon the Company’s determination that there was insufficient objective evidence, at this time, to recognize those assets for financial reporting purposes. For the period ended August 31, 2012, the Company has not changed its assessment regarding the recoverability of its deferred tax assets. Ultimate realization of the benefit of the deferred tax assets is dependent upon the Company generating sufficient taxable income in future periods, including periods prior to the expiration of certain underlying tax credits.

 

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Table of Contents

MEADE INSTRUMENTS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

No provision for income taxes was recorded in the current or prior period presented due to the significance of the Company’s net loss.

The tax years 2008 through 2011 remain open to examination by the major taxing jurisdictions to which the Company is subject. However, the amount of a net operating loss carryforward can be adjusted for federal tax purposes for the three years (four years for the major state jurisdictions in which the Company operates) after the net operating loss is utilized.

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 August 31, 2012 and February 29, 2012, 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 August 31, 2012 and February 29, 2012, there were no accrued interest and penalties related to uncertain tax positions.

 

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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. 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 29, 2012 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 29, 2012, 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.

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.

 

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Results of Operations

The Company’s business is seasonal. Historically, sales in the second and third quarter ended August 31st and November 30th each year have been 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 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. Sales in the second quarter ended August 31, 2012 were lower than the first quarter ended May 31, 2012, as explained below, but sales are expected to be higher in the third quarter ending November 30, 2012.

Three Months Ended August 31, 2012 Compared to Three Months Ended August 31, 2011

The Company reported net sales of $4.0 million for the quarter ended August 31, 2012, a decrease of $2.1 million or 35% from net sales of $6.1 million in the same period in the prior year. Approximately $0.7 million or 31% of this decrease in net sales was attributable to a reduction in net sales of high-end telescopes, which was due to the delay in shipment of the Company’s new LX800 and LX600 products and the impact that delay has had on sales for the Company’s other high-end telescopes. Approximately $0.7 million or 31% and approximately $0.6 million or 27% of this decrease was due to reductions in net sales of low end telescopes and microscopes, respectively, to mass retail customers due to decreased demand. Approximately $0.2 million or 10% of the reduction in net sales was due to reductions in accessories which were attributable to the reduction in sales of high end telescopes. Approximately $0.3 million or 14% of the decrease in net sales was due to a reduction in sales of other products due to decreased demand. These decreases in net sales were partially offset by increases in sales of intermediate telescopes of approximately $0.2 million due to the introduction of new products, such as the LX80.

Gross profit of $0.5 million during the three months ended August 31, 2012 decreased $0.8 million or 60% compared to the same period in the prior year. Approximately $0.2 million or 25% of the decrease in gross profit was attributed to a net unfavorable change in product mix, principally the reduction in sales of high end telescopes and other products, and the remaining decrease of $0.6 million was due to the lower revenue level providing less contribution margin over fixed costs of sales.

Selling expenses for the second quarter ended August 31, 2012 were $0.4 million or 9% of net sales compared to $0.6 million or 10% of net sales during the same quarter in the prior year. The decrease in selling expenses as a percentage of net sales was due to reductions in the headcount attributable to the elimination of the Company’s U.S. distribution activities and recovery of bad debt.

General and administrative expenses for the second quarter ended August 31, 2012 were $0.9 million or 22% of net sales compared to $0.8 million or 13% of net sales in the same quarter in the prior year. The increase in general and administrative expenses relative to the prior year was mainly due to the timing of professional fees and a property tax refund of $0.1 million which reduced general and administrative expenses during the three months ended August 31, 2011.

Research and development expenses in the second quarter ended August 31, 2012 increased by $42 thousand or 19% compared to the same period in the prior year due to increased efforts at new product development and work being done to finish the development of new products.

No provision for income taxes was recorded in the current or prior period presented due to the significance of the Company’s net loss.

Six Months Ended August 31, 2012 Compared to Six Months Ended August 31, 2011

The Company reported net sales of $8.1 million for the six months ended August 31, 2012, a decrease of $2.2 million or 22% from net sales of $10.3 million in the same period in the prior year. Approximately $0.7 million or 30% and $0.5 million or 24% of this decrease was attributable to reduced net sales of low-end telescopes and microscopes, respectively, to mass retail customers due to reduced demand for these products. Approximately $0.2 million or 9% is attributable to a reduction in net sales of high-end telescopes due to delays in shipments of the Company’s new LX800 and LX600 products, which are still under development, and the impact that delay has had on net sales of other high-end telescope products. Approximately $0.1 million or 4% of the reduction in net sales was due to reductions in accessories which was attributed to the reduction in sales of high end telescopes. Approximately $0.7 million or 26% of the decrease in net sales was due to a reduction in sales of other products due to decreased demand.

 

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Gross profit of $1.4 million during the six months ended August 31, 2012 decreased $1.3 million or 48% compared to the same period in the prior year. Approximately $1.2 million or 88% of this decrease in gross profit was attributable to a reduction in net sales and approximately $0.1 million or 12% was attributed to unfavorable fluctuations in indirect manufacturing costs, such as labor and material variances, compared to the prior year.

Selling expenses for the six months ended August 31, 2012 and 2011 were consistent at 10% of net sales. Selling expenses decreased due to reductions in the headcount attributable to the elimination of the Company’s U.S. distribution activities and recovery of bad debt, offset by increased discretionary selling expenses such as advertising and marketing expenses.

General and administrative expenses for the six months ended August 31, 2012 and 2011 were $1.8 million in both periods. General and administrative expenses are mostly fixed costs and generally do not vary with net sales as much as selling expenses.

Research and development expenses for the six months ended August 31, 2012 of $0.5 million increased by $0.1 million or 27% compared to the same period in the prior year due to increased efforts to complete product development of the LX800 and LX600 products.

Release of warranty liability of $0.3 million during the six months ended August 31, 2012 pertained to a reduction in the Company’s warranty accrual which was recorded based upon an agreement which released the Company of its remaining warranty liability associated with those products. No such adjustment applied to the prior year.

No provision for income taxes was recorded in the current or prior period presented due to the significance of the Company’s net loss.

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. Sales in the second quarter ended August 31, 2012 were lower than the first quarter ended May 31, 2012, as explained below, but sales are expected to be higher in the third quarter ending November 30, 2012.

Liquidity and Capital Resources

At August 31, 2012, the Company had cash of $0.7 million, as compared to $3.9 million at February 29, 2012 and $2.6 million at August 31, 2011. Net cash used in operating activities was approximately $3.1 million during the six months ended August 31, 2012 and $2.4 million during the six months ended August 31, 2011, an increase in net cash used of approximately $0.7 million compared to the prior year. This increase in cash used in operating activities was attributed primarily to the increase in the Company’s net loss of approximately $0.9 million from a loss of approximately $1.4 million during the six months ended August 31, 2012 compared to a loss of approximately $0.5 million during the six months ended August 31, 2011, offset slightly by favorable net fluctuations in working capital.

 

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The Company typically experiences increases in accounts receivable and inventories and a corresponding decrease in cash 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, and cash increases, at the end of the Company’s fiscal year.

The Company currently has in place a 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 $1.0 million as of August 31, 2012 and was based solely on accounts receivable as substantially all of the Company’s inventory was deemed ineligible due to it being located in Mexico. The Company expects its availability to be limited to not more than $1.0 million in the foreseeable future. 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 ended in January 2012, at which time, the Company continued to factor 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 did not affect the ability of First Capital to terminate the agreement as described above.

The Company began advancing on accounts receivable in September 2012 in order to fulfill its working capital requirements. Based upon expected order fulfillment and results from operations, the Company expects that it will need to continue to rely on its credit facility for working capital for at least its third quarter. If its lender restricts, reduces or eliminates the Company’s access to credit, or requires immediate repayment of the amounts outstanding under the agreement, the Company would be required to pursue additional or alternative sources of liquidity such as equity financings, a new debt agreement with other creditors, or liquidate assets. However, the Company cannot assure that such additional sources of liquidity would be available on reasonable terms, if at all.

Capital expenditures were approximately $115 thousand and $20 thousand for the six months ended August 31, 2012 and 2011, respectively. The increase in capital expenditures related to purchases of tools, molds and dies associated with new product development. The Company had no material capital expenditure commitments at August 31, 2012. 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 2013 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.

 

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.

 

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

As of August 31, 2012, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

Previously Reported Material Weakness in Internal Control over Financial Reporting

In connection with management’s assessment of our internal control over financial reporting, we identified a material weakness in our internal control over financial reporting as of May 31, 2012 as described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

We did not effectively maintain a sufficient level of resources within our accounting department, which resulted in a lack of separation of duties between the preparation and review of adjustments necessary to properly state inventory as of May 31, 2012. We have subsequently modified the preparation and review procedures relative to inventory adjustments to address this deficiency in our internal control procedures, which is how the error was identified by management, and expect that this deficiency will be remediated through these modifications.

As a result of the material weakness in internal control over financial reporting described above, management concluded that the Company’s internal control over financial reporting was not effective as of May 31, 2012 based on the criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, we amended and restated our financial statements contained in our Quarterly Report on Form 10-Q for the three months ended May 31, 2012.

For additional information regarding the restatements of these financial results and the material weakness identified by management, see “Item 4. Controls and Procedures” in the Company’s Quarterly Report on Form 10-Q/A for the three months ended May 31, 2012, filed on October 4, 2012 with the Securities and Exchange Commission.

Changes in Internal Control Over Financial Reporting

Except for the remediation steps to address the material weakness in its internal control over financial reporting described above, there has been no change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Specifically, the preparation and review of the adjustment to record capitalized overhead and variances from standard costs has been separated.

Under the direction of the Audit Committee, management will continue to review and make any changes it deems necessary to the overall design of the Company’s internal control over financial reporting, including implementing improvements in policies and procedures.

We are committed to a strong internal control environment, and believe that these remediation actions will remediate the material weakness described above. The Company anticipates that it will complete its testing of the additional internal control processes designed to remediate this material weakness during the balance of its fiscal year ending in February 2013. We will continue to assess the effectiveness of our remediation efforts in connection with management’s future evaluations of 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. MINE SAFETY DISCLOSURE

Not applicable.

 

ITEM 5. OTHER INFORMATION

Not applicable.

 

ITEM 6. EXHIBITS

 

Exhibit

  

Exhibit Title or Description

  10.1†+    Amended and Restated Employment Agreement effective as of August 14, 2012 between Meade Instruments Corp. and Steven Murdock incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 14, 2012
  10.2†+    Amended and Restated Employment Agreement effective as of August 14, 2012 between Meade Instruments Corp. and John Elwood incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 14, 2012
  10.3†+    Meade Instruments Corp. Amended and Restated 2008 Stock Incentive Plan incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 18, 2012
  10.4†+    Form Non-Qualified Stock Option Agreement between the Company and recipients of non-qualified options granted pursuant to the Meade Instruments Corp. Amended and Restated 2008 Stock Incentive Plan incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 18, 2012
  10.5†+    Form Non-Qualified Stock Option Agreement between the Company and non-employee directors of the Company receiving options granted pursuant to Section 8 of the Meade Instruments Corp. Amended and Restated 2008 Stock Incentive Plan incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 18, 2012
  10.6†+    Form Restricted Stock Agreement between the Company and recipients of restricted shares of the Company’s Common Stock granted pursuant to the Company’s Amended and Restated 2008 Stock Incentive Plan incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 18, 2012
  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.
Previously filed with the Securities Exchange Commission.
+ Management contract or compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    MEADE INSTRUMENTS CORP.
Dated: October 12, 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 and Secretary

 

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EXHIBIT INDEX

 

Exhibit

  

Exhibit Title or Description

  10.1†+    Amended and Restated Employment Agreement effective as of August 14, 2012 between Meade Instruments Corp. and Steven Murdock incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 14, 2012
  10.2†+    Amended and Restated Employment Agreement effective as of August 14, 2012 between Meade Instruments Corp. and John Elwood incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 14, 2012
  10.3†+    Meade Instruments Corp. Amended and Restated 2008 Stock Incentive Plan incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 18, 2012
  10.4†+    Form Non-Qualified Stock Option Agreement between the Company and recipients of non-qualified options granted pursuant to the Meade Instruments Corp. Amended and Restated 2008 Stock Incentive Plan incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 18, 2012
  10.5†+    Form Non-Qualified Stock Option Agreement between the Company and non-employee directors of the Company receiving options granted pursuant to Section 8 of the Meade Instruments Corp. Amended and Restated 2008 Stock Incentive Plan incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 18, 2012
  10.6†+    Form Restricted Stock Agreement between the Company and recipients of restricted shares of the Company’s Common Stock granted pursuant to the Company’s Amended and Restated 2008 Stock Incentive Plan incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 18, 2012
  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.
Previously filed with the Securities Exchange Commission.
+ Management contract or compensatory plan or arrangement.

 

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