1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MAY 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-27612 MEADE INSTRUMENTS CORP. - ------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 95-2988062 - ---------------------------------------- ------------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 16542 MILLIKAN AVE. IRVINE, CA 92606 - ---------------------------------------- ------------------------ (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 756-2291 Indicate by check mark whether 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 --- --- Number of shares of common stock outstanding as of May 31, 1997 is 7,875,500 =============================================================================== 2 MEADE INSTRUMENTS CORP. TABLE OF CONTENTS Page No. -------- PART I - FINANCIAL INFORMATION Statements of Operations (Unaudited) - Three Months Ended May 31, 1997 and 1996 .............................................. 3 Balance Sheets (Unaudited) - May 31, 1997 and 1996 ................... 4 Statements of Cash Flows (Unaudited) - Three Months Ended May 31, 1997 and 1996 .............................................. 5 Notes to Financial Statements (Unaudited) ............................ 6 Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................... 7-8 PART II - OTHER INFORMATION Other Information .................................................... 9 SIGNATURES ................................................................ 10 EXHIBITS .................................................................. 11 2 3 MEADE INSTRUMENTS CORP. STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED MAY 31, --------------------------- 1997 1996 ----------- ----------- Net sales ..................................... $12,735,000 $ 7,166,000 Cost of sales ................................. 8,526,000 5,012,000 ----------- ----------- Gross profit .................................. 4,209,000 2,154,000 Selling expenses .............................. 1,414,000 834,000 General and administrative expenses ........... 1,119,000 803,000 Research and development expenses ............. 194,000 118,000 ESOP contribution ............................. 250,000 250,000 ----------- ----------- Operating income .............................. 1,232,000 149,000 Interest expense .............................. 594,000 249,000 ----------- ----------- Income (loss) before income taxes ............. 638,000 (100,000) Provision (benefit) for income taxes .......... 262,000 (42,000) ----------- ----------- Net income (loss) ............................. 376,000 (58,000) Deductions for accretion of redeemable preferred stock ............................. 374,000 65,000 ----------- ----------- Net income (loss) available to common stockholders ......................... $ 2,000 $ (123,000) =========== =========== Net income (loss) per share ................... $ 0.00 $ (0.03) =========== =========== Weighted average number of shares outstanding ................................. 5,424,200 4,015,800 =========== =========== See accompanying notes to financial statements. 3 4 MEADE INSTRUMENTS CORP. BALANCE SHEETS (UNAUDITED) MAY 31, MAY 31, 1997 1996 ------------ ------------ ASSETS Current assets: Cash ................................................ $ 26,000 $ 53,000 Accounts receivable, less allowance for doubtful accounts of $258,000 in 1997 and $185,000 in 1996.. 6,245,000 5,603,000 Inventories ......................................... 11,530,000 9,902,000 Deferred income taxes ............................... 885,000 330,000 Prepaid expenses and other current assets ........... 170,000 37,000 ------------ ------------ Total current assets .......................... 18,856,000 15,925,000 Other assets .......................................... 549,000 1,387,000 Property and equipment, net of accumulated depreciation of $1,126,000 in 1997 and $719,000 in 1996 ............................................. 1,485,000 1,182,000 ------------ ------------ $ 20,890,000 $ 18,494,000 ============ ============ LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Bank line of credit ................................. $ 1,498,000 $ 4,788,000 Current portion of long-term debt ................... 1,584,000 Current portion of capital lease obligations ........ 218,000 146,000 Accounts payable .................................... 2,166,000 2,899,000 Accrued liabilities ................................. 1,724,000 1,053,000 Income taxes payable ................................ 766,000 224,000 ------------ ------------ Total current liabilities ................... 6,372,000 10,694,000 ------------ ------------ Long-term debt, net of current portion ................ 7,916,000 ------------ ------------ Long-term capital lease obligations, net of current portion ............................................. 495,000 332,000 ------------ ------------ Deferred rent ......................................... 60,000 79,000 ------------ ------------ Commitments Redeemable Series A preferred stock; 1,000 shares authorized, issued and outstanding .................. 2,565,000 ------------ ------------ Stockholders' equity (deficit): Preferred stock; 999,000 shares authorized, none issued and outstanding............................. Common stock, $0.01 par value, 20,000,000 shares authorized; issued and outstanding 7,875,500 shares at May 31, 1997 ............................ 79,000 Series A common stock; 15,000,000 shares authorized; issued and outstanding 3,500,000 shares at May 31, 1996 ............................ 3,511,000 Series B common stock; 5,000,000 shares authorized; 1,500,000 shares issued and outstanding at May 31, 1996 ....................... Additional paid-in capital .......................... 21,345,000 Retained earnings ................................... 1,544,000 4,397,000 ------------ ------------ 22,968,000 7,908,000 Unearned ESOP shares ................................ (9,005,000) (11,000,000) ------------ ------------ Total stockholders' equity (deficit) ........ 13,963,000 (3,092,000) ------------ ------------ $ 20,890,000 $ 18,494,000 ============ ============ See accompanying notes to financial statements. 4 5 MEADE INSTRUMENTS CORP. STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MAY 31, ---------------------------- 1997 1996 ------------- ------------ Cash flows from operating activities: Net income (loss) ....................... $ 376,000 $ (58,000) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ......... 543,000 84,000 ESOP contribution ..................... 250,000 250,000 Changes in assets and liabilities: Increase in accounts receivable ....... (1,415,000) (1,064,000) Decrease (increase) in inventories .... 547,000 (3,440,000) Decrease in prepaid expenses and other current assets ................ 61,000 176,000 Decrease (increase) in other assets ... 57,000 (1,124,000) (Decrease) increase in accounts payable ............................. (29,000) 1,493,000 Increase (decrease) in accrued liabilities ......................... 111,000 (63,000) Decrease in income taxes payable ...... (296,000) (398,000) ------------ ------------ Total adjustments .................. (171,000) (4,086,000) ------------ ------------ Net cash provided by (used in) operating activities ........... 205,000 (4,144,000) ------------ ------------ Cash flows from investing activities: Capital expenditures .................... (137,000) (41,000) ------------ ------------ Net cash used in investing activities ... (137,000) (41,000) ------------ ------------ Cash flows from financing activities: Payments on long-term debt ................ (8,183,000) (650,000) Proceeds from long-term debt .............. 9,500,000 Net borrowings (payments) under bank line of credit ............................... (2,860,000) 2,661,000 Payments on notes payable to related parties ................................. (2,000,000) Redemption of common stock ................ (250,000) Issuance of preferred stock ............... 2,500,000 Net proceeds from the issuance of common stock ................................... 17,913,000 Redemption of preferred stock ............. (6,864,000) Purchase and exercise of warrant for common stock ............................ 3,510,000 Unearned ESOP shares ...................... (11,000,000) Payments under capital lease obligations .. (52,000) (36,000) ------------ ------------ Net cash provided by (used in) financing activities ................ (46,000) 4,235,000 ------------ ------------ Net increase (decrease) in cash ........... 22,000 50,000 Cash at beginning of period ............... 4,000 3,000 ------------ ------------ Cash at end of period ..................... $ 26,000 $ 53,000 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest .............................. $ 154,000 $ 219,000 Income taxes .......................... $ 525,000 $ 355,000 Non-cash financing activities: Accretion on redeemable preferred stock 374,000 $ 65,000 See accompanying notes to financial statements. 5 6 MEADE INSTRUMENTS CORP. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) A. The financial statements have been prepared by the Company and are unaudited. In management's opinion, the information and amounts furnished in this report reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation 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, 1997. 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 increasing demand and delivery schedules, the timing and extent of research and development expenses and the timing and extent of product development expenses. In addition, a substantial portion of the Company's net sales and operating income typically occur in the third quarter of the Company's fiscal year primarily due to disproportionately higher customer demand for less-expensive telescopes during the Christmas holiday season. The results of operations for the first quarter ended May 31, 1997 and 1996, respectively, are not necessarily indicative of the operating results for the entire fiscal year. B. In April 1997 the Company completed an initial public offering (the "Offering) of 3,875,500 shares of common stock (including the underwriter's over-allotment option). The Offering included 2,875,500 newly issued shares of common stock and 1,000,000 shares of common stock held by the Company's then preferred stockholder. The Offering raised approximately $17.9 million (after underwriting discounts and Offering expenses). Net proceeds from the Offering were used to redeem approximately $6.9 million of outstanding Series A preferred stock, including accrued dividends, and to repay approximately $11.0 million of existing bank term and revolving debt. Prior to the closing of the Offering, the Company reincorporated into a Delaware subsidiary, with the Delaware subsidiary being the surviving corporation. All of the outstanding shares of the Series A and Series B common stock and Series A preferred stock of the Company were exchanged on a ratio of one for one with shares of Series A and Series B common stock and Series A preferred stock of the Delaware subsidiary as part of the reincorporation. All shares of Series A and Series B common stock were converted into shares of common stock upon the completion of the Offering. 6 7 MEADE INSTRUMENTS CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The nature of the Company's business is seasonal. Historically, sales in the third quarter have been higher than sales achieved in the other three fiscal quarters of the year. Thus, expenses and, to a greater extent, operating income vary by quarter. Caution, therefore, 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. FIRST QUARTER ENDED MAY 31, 1997 COMPARED TO FIRST QUARTER ENDED MAY 31, 1996 Net sales for the first quarter of fiscal 1997 were $12.7 million compared to $7.2 million for the first quarter of fiscal 1996, an increase of 76.4%. This increase was primarily due to (i) a combined increase of approximately $3.6 million in net sales of less-expensive telescopes and ETX Astro Telescopes, (ii) an increase of approximately $1.0 million in telescope accessory sales and (iii) increased sales across several other product categories. The Company believes that sales in general, and more specifically less-expensive telescope sales and telescope accessory sales, during the first quarter of fiscal 1998 were positively affected by the Hale-Bopp comet phenomenon. Gross profit increased from $2.2 million (30.5% of net sales) for the first quarter of fiscal 1997 to $4.2 million (33.1% of net sales) for the first quarter of fiscal 1998, an increase of 90.9%. The increase in gross profit as a percent of net sales was principally due to the increased sales of less-expensive telescopes, telescope accessories and ETX Astro Telescopes which generally have a higher gross profit margin than the Company's other products. Selling expenses increased from $834,000 (11.6% of net sales) for the first quarter of fiscal 1997 to $1.4 million (11.0% of net sales) for the first quarter of fiscal 1998, an increase of 67.9%. This increase over the first quarter of fiscal 1997 principally reflects (i) higher advertising and other selling expenses to support higher sales volumes for first quarter of fiscal 1998, (ii) higher freight and other shipping costs due to higher sales volumes for the first quarter of fiscal 1998 and (iii) higher shipping and selling personnel expenses for the first quarter of fiscal 1998. General and administrative expenses increased from $803,000 (11.2 % of net sales) for the first quarter of fiscal 1997 to $1.1 million (8.7% of net sales) for the first quarter of fiscal 1998, an increase of 37.0%. This increase over the first quarter of fiscal 1997 was generally due to increases in personnel related costs, consulting expenses related to the anticipated move to a new facility and general increases across a broad category of expenses to support higher sales volumes during the first quarter of fiscal 1998. Research and development expenses increased from $118,000 (1.6% of net sales) for the first quarter of fiscal 1997 to $194,000 (1.5% of net sales) for the first quarter of fiscal 1998, an increase of 64.4%. This increase was due to increased internal engineering personnel related costs and increased outside engineering consulting expenses. Interest expense increased from $249,000 for the first quarter of fiscal 1997 to $594,000 for the first quarter of fiscal 1998, an increase of 138.6%. The increase was principally due to approximately $400,000 of additional interest expense recognized pursuant to accelerated amortization of previously capitalized debt issuance costs related to bank term debt that was retired with the proceeds of the Offering in April 1997. 7 8 For the first quarter of fiscal 1998, income tax expense totaled $262,000, an effective rate of 41.1%. For the first quarter of fiscal 1997, the Company recognized a tax benefit of $42,000 on a pretax loss of $100,000, an effective rate of 42.0%. For the first quarter of fiscal 1998, net income was adjusted by $374,000 for accretion of redeemable preferred stock to arrive at net income available to common stockholders of $2,000. For the first quarter of fiscal 1997, net income was adjusted by $65,000 for accretion of redeemable preferred stock to arrive at a net loss available to common stockholders of $123,000. There will be no further accretion adjustments related to the redeemable preferred stock as it was redeemed in full with the proceeds of the Offering in April 1997. LIQUIDITY AND CAPITAL RESOURCES For the first quarter of fiscal 1998, the Company funded its operations with proceeds from the Offering as well as internally generated cash flow and borrowings on its bank line of credit. Net working capital (current assets less current liabilities) totaled approximately $12.5 million at May 31, 1997, representing an increase of 140% from the May 31, 1996 level of approximately $5.2 million. The increase was principally due to the repayment of bank debt with the proceeds of the Offering. Working capital requirements fluctuate during the year due to the seasonal nature of the business. These requirements are typically financed through a combination of internally generated cash flow from operating activities and short-term bank borrowings. In April 1996, the Company entered into a five-year Loan and Security Agreement with Fleet Capital Corporation (the "Loan Agreement") which provides for (i) a $10.0 million revolving line of credit facility, secured by the Company's accounts receivable and inventories and (ii) a $9.5 million term note (the "term note") secured by the assets of the Company. The term note was repaid on April 14, 1997 with the proceeds of the Offering. Capital expenditures aggregated $137,000 and $41,000 for the quarters ended May 31, 1997 and 1996, respectively. The Company had no material capital expenditure commitments as of May 31, 1997. The Company believes that the proceeds of the Offering, together with internally generated cash flow and borrowing ability, will be sufficient to meet its operating, working capital and capital expenditure requirements through the next twelve months. In the event the Company's plans require more capital than is presently anticipated, the Company's remaining cash balances may be consumed and additional sources of liquidity, such as debt or equity financings, may be required to meet its capital needs. There can be no assurance that additional capital beyond the amounts the Company currently requires will be available on reasonable terms, if at all. 8 9 PART II - OTHER INFORMATION Item 1. Legal proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders On April 1, 1997, in connection with the Offering, the stockholders of the Company took action by Unanimous Written Consent to approve the merger of Meade Instruments Corp., a California corporation, with and into the Company, with the Company being the surviving corporation. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K 6(a) Exhibits filed with this Form 10-Q Exhibit No. 27 Financial Data Schedule for the quarter ended May 31, 1997. 6(b) Reports on Form 8-K None. 9 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: July 15, 1997 MEADE INSTRUMENTS CORP. By: /s/ JOHN C. DIEBEL ------------------------------ John C. Diebel Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ JOHN C. DIEBEL Chairman of the Board and July 15, 1997 - ------------------------- Chief Executive Officer John C. Diebel (Principal Executive Officer) /s/ STEVEN G. MURDOCK Director, President and July 15, 1997 - ------------------------- Chief Operating Officer Steven G. Murdock /s/ BRENT W. CHRISTENSEN Vice President -- Finance and July 15, 1997 - ------------------------- Chief Financial Officer Brent W. Christensen (Principal Financial and Accounting Officer) /s/ JOSEPH A. GORDON, JR. Director and Senior Vice July 15, 1997 - ------------------------- President of North American Joseph A. Gordon, Jr. Sales Director - ------------------------- Timothy C. McQuay Director - ------------------------- Harry L. Casari 10