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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q  [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THESECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 2004
or  [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THESECURITIES 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
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)6001 Oak Canyon, Irvine, CA
    
    92618(Address of principal executive offices)
    
    (Zip Code)
 (949) 451-1450
(Registrants telephone number, including area code)  Yes [X]     No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ]     No [X] Number of shares of common stock outstanding as of September 30, 2004 is
19,988,857, $0.01 par value per share.




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MEADE INSTRUMENTS CORP. TABLE OF CONTENTS Page No.PART I  FINANCIAL INFORMATIONConsolidated Balance Sheets (Unaudited)  August 31, 2004 and February 29, 2004
    
    
    1Consolidated Statements of Operations (Unaudited)  Three and Six Months Ended
August 31, 2004 and 2003
    
    
    2Consolidated Statements of Cash Flows (Unaudited)  Six Months Ended August 31, 2004 and 2003
    
    
    3Notes to Consolidated Financial Statements (Unaudited)
    
    
    4Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    8Quantitative and Qualitative Disclosures about Market Risk
    
    
    11Controls and Procedures
    
    
    11PART II  OTHER INFORMATIONLegal Proceedings
    
    
    12Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    12Defaults Upon Senior Securities
    
    
    12Submission of Matters to a Vote of Security Holders
    
    
    12Other Information
    
    
    12Exhibits
    
    
    13Signatures
    
    
    14EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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ITEM 1. FINANCIAL STATEMENTS. MEADE INSTRUMENTS CORP. 
 CONSOLIDATED BALANCE SHEETS (Unaudited)
 August 31,
    
    February 29,2004
    
    2004ASSETSCash
    
    $
    6,001,000
    
    
    $
    7,806,000Accounts receivable, less allowance for doubtful accounts of $800,000
at August 31, 2004 and $704,000 at February 29, 2004
    
    
    20,257,000
    
    
    
    22,462,000Inventories
    
    
    55,726,000
    
    
    
    39,777,000Deferred income taxes
    
    
    8,755,000
    
    
    
    7,888,000Prepaid expenses and other current assets
    
    
    777,000
    
    
    
    491,000Total current assets
    
    
    91,516,000
    
    
    
    78,424,000Goodwill
    
    
    1,548,000
    
    
    
    1,548,000Acquisition-related intangible assets, net
    
    
    3,558,000
    
    
    
    3,742,000Property and equipment, net
    
    
    3,970,000
    
    
    
    4,551,000Other assets, net
    
    
    144,000
    
    
    
    297,000$
    100,736,000
    
    
    $
    88,562,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank line of credit
    
    $
    15,349,000
    
    
    $
    5,059,000Accounts payable
    
    
    12,349,000
    
    
    
    5,319,000Accrued liabilities
    
    
    6,230,000
    
    
    
    6,884,000Income taxes payable
    
    
    1,407,000
    
    
    
    3,059,000Current portion long-term debt
    
    
    580,000
    
    
    
    580,000Total current liabilities
    
    
    35,915,000
    
    
    
    20,901,000Long-term bank debt
    
    
    1,399,000
    
    
    
    1,729,000Deferred income taxes
    
    
    1,349,000
    
    
    
    1,054,000Total long-term liabilities
    
    
    2,748,000
    
    
    
    2,783,000Commitments and contingenciesStockholders equity:Common stock, $0.01 par value, 50,000,000 shares authorized;
19,989,000 shares issued and outstanding at August 31, 2004
and at February 29, 2004, respectively
    
    
    200,000
    
    
    
    200,000Additional paid-in capital
    
    
    40,432,000
    
    
    
    40,445,000Retained earnings
    
    
    23,851,000
    
    
    
    25,891,000Accumulated other comprehensive (loss) income
    
    
    (90,000
    )
    
    
    882,00064,393,000
    
    
    
    67,418,000Unearned ESOP shares
    
    
    (2,320,000
    )
    
    
    (2,540,000
    )Total stockholders equity
    
    
    62,073,000
    
    
    
    64,878,000$
    100,736,000
    
    
    $
    88,562,000
 See accompanying notes to consolidated financial statements. 1




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MEADE INSTRUMENTS CORP. 
 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    22,511,000
    
    
    $
    28,284,000
    
    
    $
    42,128,000
    
    
    $
    52,775,000Cost of sales
    
    
    16,939,000
    
    
    
    20,123,000
    
    
    
    31,851,000
    
    
    
    38,881,000Gross profit
    
    
    5,572,000
    
    
    
    8,161,000
    
    
    
    10,277,000
    
    
    
    13,894,000Selling expenses
    
    
    3,850,000
    
    
    
    4,258,000
    
    
    
    7,252,000
    
    
    
    7,585,000General and administrative expenses
    
    
    2,456,000
    
    
    
    3,026,000
    
    
    
    4,932,000
    
    
    
    5,695,000ESOP expense
    
    
    95,000
    
    
    
    125,000
    
    
    
    198,000
    
    
    
    294,000Research and development expenses
    
    
    442,000
    
    
    
    455,000
    
    
    
    967,000
    
    
    
    989,000Operating (loss) income
    
    
    (1,271,000
    )
    
    
    297,000
    
    
    
    (3,072,000
    )
    
    
    (669,000
    )Interest expense
    
    
    199,000
    
    
    
    220,000
    
    
    
    350,000
    
    
    
    436,000(Loss) income before income taxes
    
    
    (1,470,000
    )
    
    
    77,000
    
    
    
    (3,422,000
    )
    
    
    (1,105,000
    )(Benefit) provision for income taxes
    
    
    (589,000
    )
    
    
    37,000
    
    
    
    (1,382,000
    )
    
    
    (433,000
    )Net (loss) income
    
    $
    (881,000
    )
    
    $
    40,000
    
    
    $
    (2,040,000
    )
    
    $
    (672,000
    )Basic and diluted (loss) earnings
per share
    
    $
    (0.05
    )
    
    $
    0.00
    
    
    $
    (0.11
    )
    
    $
    (0.04
    )Weighted average number of shares
outstanding  basic
    
    
    19,262,000
    
    
    
    18,876,000
    
    
    
    19,247,000
    
    
    
    18,832,000Weighted average number of shares
outstanding  diluted
    
    
    19,262,000
    
    
    
    19,026,000
    
    
    
    19,247,000
    
    
    
    18,832,000
 See accompanying notes to consolidated financial statements. 2




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MEADE INSTRUMENTS CORP. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Six Months EndedAugust 31,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (2,040,000
    )
    
    $
    (672,000
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization expense
    
    
    998,000
    
    
    
    989,000ESOP contribution
    
    
    198,000
    
    
    
    294,000Changes in assets and liabilities:Decrease (increase) in accounts receivable
    
    
    2,162,000
    
    
    
    (5,005,000
    )Increase in inventories
    
    
    (16,068,000
    )
    
    
    (8,566,000
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (80,000
    )
    
    
    362,000Increase in accounts payable
    
    
    7,164,000
    
    
    
    8,910,000Decrease in accrued liabilities
    
    
    (1,966,000
    )
    
    
    (593,000
    )Decrease in income taxes payable
    
    
    (1,630,000
    )
    
    
    Net cash used in operating activities
    
    
    (11,262,000
    )
    
    
    (4,281,000
    )Cash flows from investing activities:Capital expenditures
    
    
    (216,000
    )
    
    
    (282,000
    )Net cash used in investing activities
    
    
    (216,000
    )
    
    
    (282,000
    )Cash flows from financing activities:Net borrowings under bank lines of credit
    
    
    10,290,000
    
    
    
    5,733,000Payments on long-term bank notes
    
    
    (285,000
    )
    
    
    (256,000
    )Payments under capital lease obligations
    
    
    
    
    
    
    (25,000
    )Net cash provided by financing activities
    
    
    10,005,000
    
    
    
    5,452,000Effect of exchange rate changes on cash
    
    
    (332,000
    )
    
    
    71,000Net increase (decrease) in cash
    
    
    (1,805,000
    )
    
    
    960,000Cash at beginning of period
    
    
    7,806,000
    
    
    
    2,445,000Cash at end of period
    
    $
    6,001,000
    
    
    $
    3,405,000
 See accompanying notes to consolidated financial statements. 3




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MEADE INSTRUMENTS CORP. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 A. Basis of Presentation 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 29, 2004. 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 demand and delivery schedules and the timing and
extent of research and development expenses, marketing expenses and 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 holiday season. The results of
operations for the quarters ended August 31, 2004 and 2003, respectively, are
not necessarily indicative of the operating results for the entire fiscal year. B. Stock Based Compensation The Company accounts for employee stock-based compensation in accordance
with the intrinsic value method described in Accounting Principles Board
Opinion No. 25 and related interpretations. The Company has adopted the
disclosure only provisions of SFAS No. 123. Accordingly, no compensation cost
has been recognized for the fixed stock option plans. Had compensation expense
for the Companys stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans, consistent with the
method prescribed by SFAS No. 123, the Companys loss and loss per share would
have been increased to the pro forma amounts indicated below. Three months ended
    
    Six months endedAugust 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003Reported income (loss)
    
    $
    (881,000
    )
    
    $
    40,000
    
    
    $
    (2,040,000
    )
    
    $
    (672,000
    )Compensation expense determined under fair
value method, net of tax
    
    
    (275,000
    )
    
    
    (281,000
    )
    
    
    (513,000
    )
    
    
    (540,000
    )Pro forma net loss
    
    $
    (1,156,000
    )
    
    $
    (241,000
    )
    
    $
    (2,553,000
    )
    
    $
    (1,212,000
    )Reported net (loss) income per share 
basic and diluted
    
    $
    (0.05
    )
    
    $
    0.00
    
    
    $
    (0.11
    )
    
    $
    (0.04
    )Pro forma loss per share  basic and diluted
    
    $
    (0.06
    )
    
    $
    (0.01
    )
    
    $
    (0.13
    )
    
    $
    (0.06
    )
 The fair value of the Companys stock options used to compute pro forma
net income and earnings per share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with the following
assumptions: Three months ended
    
    Six months endedAugust 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003Weighted average expected life (years)
    
    
    6.0
    
    
    
    6.0
    
    
    
    6.0
    
    
    
    6.0Volatility
    
    
    69.3
    %
    
    
    100.9
    %
    
    
    69.3
    %
    
    
    100.9
    %Risk-free interest rate
    
    
    3.38
    %
    
    
    3.75
    %
    
    
    3.38
    %
    
    
    3.75
    %Expected dividends
    
    
    None
    
    
    
    None
    
    
    
    None
    
    
    
    NoneWeighted average fair value of options granted
    
    $
    1.99
    
    
    $
    2.33
    
    
    $
    1.99
    
    
    $
    2.33
 4




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C. Composition of Certain Balance Sheet Accounts The composition of inventories is as follows: August 31,
    
    February 29,2004
    
    2004Raw materials
    
    $
    6,323,000
    
    
    $
    7,691,000Work-in-process
    
    
    4,389,000
    
    
    
    6,193,000Finished goods
    
    
    45,014,000
    
    
    
    25,893,000$
    55,726,000
    
    
    $
    39,777,000
 The composition of acquisition-related intangible assets is as follows: August 31,
    
    February 29,2004
    
    2004Brand names  non-amortizing
    
    $
    2,041,000
    
    
    $
    2,041,000Trademarks
    
    
    1,398,000
    
    
    
    1,398,000Customer relationships
    
    
    1,390,000
    
    
    
    1,390,000Accumulated amortization
    
    
    (1,271,000
    )
    
    
    (1,087,000
    )Total amortizing acquisition-related intangible assets
    
    
    1,517,000
    
    
    
    1,701,000Total acquisition-related intangible assets
    
    $
    3,558,000
    
    
    $
    3,742,000
 Amortization of trademarks and customer relationships over the next five
fiscal years is estimated as follows: Fiscal Year
    
    Amount2005
    
    $
    367,0002006
    
    
    367,0002007
    
    
    139,0002008
    
    
    139,0002009
    
    
    139,000
 The Company accounts for goodwill and acquisition-related intangible
assets in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets which requires that goodwill and
identifiable assets determined to have an indefinite life no longer be
amortized, but instead be tested for impairment at least annually or when an
indicator of impairment exists. D. Commitments and Contingencies In 2001 and 2002, the Company filed suits against Tasco Sales, Inc.
(Tasco) and Celestron International, Inc. (Celestron), charging the two
companies with patent infringement and unfair competition. The complaints
alleged that a number of Tascos and Celestrons consumer telescopes willfully
infringe certain of the Companys U.S. patents. Tasco and Celestron filed
answers and certain counterclaims denying the Companys allegations. The
counterclaims also alleged, among other things, that the Company infringed
certain Celestron patents. On July 8, 2004, the Company announced that it had
reached an agreement, effective May 10, 2004, under which all outstanding
litigation between the parties had been resolved. As stipulated in the agreement, Celestron acknowledges the validity of
Meades claims to two utility patents (Meades Patents), including the
level-North alignment technology for computerized telescopes, as well as a
patented architecture by which several microprocessors in a computerized
telescope optimally communicate with one another. Also as stipulated in the
agreement, Meade acknowledges the validity of Celestrons claim to two design
patents and one utility patent covering certain telescope tripods and mounts
(Celestrons Patents). Celestron also transfers to Meade ownership of a
patent, originally claimed by Celestron, covering level-North technology. The settlement includes a licensing agreement under which, effective
August 15, 2004, and continuing for the life of the Meade Patents, Meade
granted Celestron a non-exclusive license to utilize the patents, and Celestron
will pay to Meade royalties equal to the greater of $100-per-unit or 8% of
Celestrons net revenue from sales of all telescopes that utilize the
level-North technology. Celestron in turn granted Meade royalty-free,
non-exclusive licenses for the rights to use the designs and technology covered
by Celestrons Patents. 5




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In accordance with the terms of the agreement the parties have dismissed
with prejudice all claims and counterclaims in the pending litigation between
them, including for past damages. The Company is also 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. E. Earnings (loss) Per Share Basic earnings (loss) per share amounts exclude the dilutive effect of
potential shares of common stock. Basic earnings (loss) per share is based upon
the weighted-average number of shares of common stock outstanding which
excludes unallocated ESOP shares. Diluted earnings (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 consist of outstanding stock options which are
included under the treasury stock method. The sole difference between the basic
weighted average number of shares outstanding and the diluted weighted average
number of shares outstanding for the three months ended August 31, 2003
reflects additional potential shares of common stock for outstanding stock
options. Due to the net losses for the three and six months ended August 31,
2004 and the six months ended August 31, 2003, potential shares of common stock
of 139,000, 181,000, and 74,000, respectively, have been excluded from diluted
weighted average shares of common stock as the effect would be anti-dilutive. F. Comprehensive Income (Loss) Comprehensive income (loss) is defined as a change in the equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources and, at August 31, 2004, includes foreign
currency translation adjustments and adjustments to the fair value of highly
effective derivative instruments. For the periods ended August 31, 2004, the
Company had other comprehensive income (loss) as follows: Three months ended
    
    Six months endedAugust 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003Net (loss) income
    
    $
    (881,000
    )
    
    $
    40,000
    
    
    $
    (2,040,000
    )
    
    $
    (672,000
    )Currency translation adjustments
    
    
    (117,000
    )
    
    
    (366,000
    )
    
    
    (148,000
    )
    
    
    (4,000
    )Change in fair value of foreign currency forward
contracts, net of tax
    
    
    (441,000
    )
    
    
    471,000
    
    
    
    (839,000
    )
    
    
    (405,000
    )Unrealized loss in marketable securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97,000
    )Change in fair value of interest rate swap
    
    
    7,000
    
    
    
    11,000
    
    
    
    15,000
    
    
    
    17,000Total other comprehensive (loss) income
    
    $
    (1,432,000
    )
    
    $
    156,000
    
    
    $
    (3,012,000
    )
    
    $
    (1,161,000
    )
 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. 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 and Bresser branded products, principally telescopes and
binoculars, are generally covered by a one-year limited warranty. Many of the
Simmons products, principally riflescopes and binoculars, have lifetime limited
warranties. Changes in the warranty liability, which is included as a component
of accrued liabilities on the accompanying Consolidated Balance Sheets,
follows. Three months ended
    
    Six months endedAugust 31,
    
    August 31,2004
    
    2003
    
    2004
    
    2003Beginning balance
    
    $
    1,204,000
    
    
    $
    1,744,000
    
    
    $
    1,427,000
    
    
    $
    1,794,000Warranty accrual
    
    
    126,000
    
    
    
    84,000
    
    
    
    256,000
    
    
    
    207,000Labor and material usage
    
    
    (171,000
    )
    
    
    (268,000
    )
    
    
    (524,000
    )
    
    
    (441,000
    )Ending balance
    
    $
    1,159,000
    
    
    $
    1,560,000
    
    
    $
    1,159,000
    
    
    $
    1,560,000
 6




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H. Derivative instruments and hedging activities The Company utilizes a variety of derivative financial instruments to
manage its currency exchange rate and interest rate risks as summarized below.
The Company does not enter into these arrangements for trading or speculation
purposes. August 31, 2004
    
    February 29, 2004Notional
    
    
    
    
    
    Notionalamount
    
    Fair Value
    
    amount
    
    Fair ValueInterest rate swap agreement
    
    $
    875,000
    
    
    $
    (2,000
    )
    
    $
    1,085,000
    
    
    $
    (17,000
    )Cash flow forward currency
contracts
    
    $
    6,665,000
    
    
    $
    (1,399,000
    )
    
    
    
    
    
    
    
 At August 31, 2004, the fair values of forward currency contracts and
interest rate swap agreements are recorded in accrued liabilities on the
accompanying Consolidated Balance Sheets. Changes in the fair value of the
interest rate swap agreement and the cash flow forward currency contracts have
been recorded as a component of other comprehensive income, net of tax, as
these items have been designated and qualify as cash flow hedges. The
settlement dates on the forward currency contracts vary based on the underlying
instruments through February 2005. 7




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ITEM 2. 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 each of 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. Three Months Ended August 31, 2004 Compared to Three Months Ended August
31, 2003 Net sales for the second quarter of fiscal 2005 were $22.5 million
compared to $28.3 million for the second quarter of fiscal 2004, a decrease of
20.4%. Sales of the Companys mid-priced and higher-priced telescopes were down
approximately $4 million from the prior year quarter. This decrease in sales
reflects current-year weakness in the mid-to-higher price telescope categories.
Management also believes that sales of mid-to-higher priced telescopes in the
prior year were higher because of the Mars opposition. Sales of
smaller-aperture telescopes and binoculars were each down over $1 million, from
the prior year quarter. The decrease in sales of smaller-aperture telescopes
was principally due to a more conservative purchasing pattern at one of the
Companys significant customers. The decrease in sales of binoculars was
primarily the result of lower sales of discontinued products and continuing
price competition in the digital camera/binocular lines. The Simmons
subsidiary was liquidating several discontinued binocular lines in the prior
year quarter. Those sales were not repeated in the current year quarter. Gross profit decreased from $8.2 million (28.9 % of net sales) for the
second quarter of fiscal 2004 to $5.6 million (24.8 % of net sales) for the
second quarter of fiscal 2005, a decrease of 31.7%. The decrease was due to
decreased sales compared to the prior year quarter. The decrease in gross
margin (gross profit as a percent of net sales) was principally due sales mix
and the effect of relatively fixed costs on lower sales volume. Selling expenses decreased from $4.3 million (15.1% of net sales) for the
second quarter of fiscal 2004 to $3.9 million (17.1% of net sales) for the
second quarter of fiscal 2005, a decrease of 9.6%. The net decrease was
primarily attributable to lower freight costs on lower sales volume. General
and administrative expenses decreased from $3.0 million (10.7% of net sales)
for the second quarter of fiscal 2004, to $2.5 million (10.9% of net sales) for
the second quarter of fiscal 2005, a decrease of 18.8%. The net decrease was
principally due to lower consulting and professional fees in the current year
quarter. ESOP contribution expense remained relatively flat at $0.1 million (0.4%
of net sales) for each period presented. The non-cash ESOP contribution expense
may fluctuate as the number of shares allocated and the market value of the
Companys common stock changes. Research and development expenses remained relatively flat, decreasing
from $0.5 million (1.6% of net sales) for the second quarter of fiscal 2004 to
$0.4 million (2.0% of net sales) for the second quarter of fiscal 2005, a
decrease of only 2.9%. The Companys research and development efforts are
principally concentrated on product improvement and new product development for
the Companys core consumer products market. Interest expense remained flat at approximately $0.2 million for each
quarter presented. Average borrowings and borrowing rates were comparable
during the periods presented. Six Months Ended August 31, 2004 Compared to Six Months Ended August 31,
2003 Net sales for the six months ended August 31, 2004 were $42.1 million
compared to $52.8 million for the comparable prior year period, a decrease of
20.2%. Sales of the Companys mid-priced and higher-priced telescopes were
down approximately $7 million from the prior year period. This decrease in
sales reflects current-year weakness in the mid-to-higher price telescope
categories. Management also believes that sales of mid-to-higher priced
telescopes in the prior year were higher because of the Mars opposition. Sales
of smaller-aperture telescopes and binoculars were down approximately $1
million, and $2 million, respectively, from the prior year period. The
decrease in sales of smaller-aperture telescopes was principally due to a more
conservative purchasing pattern at one of the Companys significant customers.
The decrease in sales of binoculars was primarily the result of lower sales of
discontinued products and continuing price competition in the
digital camera/binocular lines. The Simmons subsidiary was liquidating
several discontinued binocular lines in the prior year quarter. Those sales
were not repeated in the current year quarter. 8




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Gross profit decreased from $13.9 million (26.3% of net sales) for the six
months ended August 31, 2003 to $10.3 million (24.4% of net sales) for the
comparable current year period, a decrease of 26.0%. The decrease was due to
decreased sales compared to the prior year period. Although average selling
prices on many of the Companys products have increased over the prior year,
gross margin (gross profit as a percent of net sales) decreased due to changes
in sales mix and the effect of relatively fixed costs on lower sales volume. Selling expenses decreased from $7.6 million (14.4% of net sales) for the
six months ended August 31, 2003 to $7.3 million (17.2% of net sales) for the
comparable current year period, a decrease of 4.4%. The slight net decrease was
primarily due to lower freight costs on lower sales volume. General and
administrative expenses decreased from $5.7 million (10.8% of net sales) for
the six months ended August 31, 2003 to $4.9 million (11.7% of net sales) for
the comparable current year period, a decrease of 13.4%. The net decrease was
principally due to lower consulting and professional fees in the current year
quarter. ESOP contribution expense decreased from $0.3 million (0.6% of net sales)
for the six months ended August 31, 2003 to $0.2 million (0.5% of net sales)
for the comparable current year period, a decrease of 32.7%. The decrease in
this non-cash charge was principally due to a decrease in the number of shares
allocated to the Employee Stock Ownership Plan during the period as compared to
the prior year. The non-cash ESOP contribution expense may fluctuate as the
number of shares allocated and the market value of the Companys common stock
changes. Research and development expenses remained relatively flat at $1.0 million
for each of the periods presented (representing 1.9% and 2.3% of net sales for
the six months ended August 31, 2003 and 2004, respectively). The Companys
research and development efforts are principally concentrated on product
improvement and new product development for the Companys core consumer
products market. Interest expense remained relatively flat at approximately $0.4 million
for each of the periods presented. A small decrease in average borrowings from
the prior year lowered interest expense slightly. Seasonality 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, the timing and extent of
product development costs and the timing and extent of advertising
expenditures. In addition, a substantial portion of the Companys net sales and
operating income typically occurs 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. The Company continues to
experience significant sales to mass merchandisers. Mass merchandisers, along
with specialty retailers, purchase a considerable amount of their inventories
to satisfy such 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. Liquidity and Capital Resources For the six months ended August 31, 2004 the Company funded its operations
with short-term bank borrowings. Internally generated cash flow from the net
loss adjusted for non-cash charges was used to increase inventories and
decrease accrued liabilities and income taxes payable. Operating cash flows
were increased by a decrease in accounts receivable and an increase in accounts
payable. Inventory levels increased on lower than expected second quarter
sales and in anticipation of seasonally higher third quarter sales.
Historically, sales in the third quarter have been higher than sales achieved
in each of the other three fiscal quarters of the year. The increase in
inventories was partially funded by bank borrowings and partially by a
significant increase in accounts payable. Lower sales and losses during the
period led to decreases in accounts receivable, income taxes and accrued
liabilities. Net working capital totaled approximately $55.6 million at August
31, 2004, compared to $57.5 million at February 29, 2004. 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. 9




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The Company continues to depend on operating cash flow and availability
under its bank lines of credit to provide short-term liquidity. Availability
under its bank lines of credit at August 31, 2004 was approximately $14.8
million. At August 31, 2004, the Company was in compliance with all
restrictive covenants and required ratios under its U.S. credit agreement. On
July 9, 2004 the Company executed the Second Amendment to Amended and Restated
Credit Agreement (the Amendment). The Amendment extended the term of the
facility to September 30, 2007, eliminated a U.S. EBITDA covenant, added a U.S.
fixed charge coverage ratio requirement, and made several other changes,
principally improving the facilitys pricing, availability calculations and
reporting requirements. In the event the Companys plans require more capital
than is presently anticipated, additional sources of liquidity such as debt or
equity financings, may be required to meet its capital needs. There can be no
assurance that such additional sources of capital will be available on
reasonable terms, if at all. However, management believes 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. Capital expenditures, including financed purchases of equipment,
aggregated $0.2 million and $0.3 million for the six months ended August 31,
2004 and 2003, respectively. The Company had no material capital expenditure
commitments at August 31, 2004. 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s ability to expand the markets for
telescopes, binoculars, riflescopes, microscopes, night vision and other
optical products; the Companys ability to continue to develop and bring to
market new and innovative products that will be accepted by consumers; the
Companys ability to integrate, develop and grow the Simmons business; the
Companys ability to further develop its wholly owned manufacturing facility in
Mexico in combination with its existing manufacturing capabilities; the Company
expanding its distribution network; the Companys ability to further develop
the business of its European subsidiary; the Companys ability to recognize any
benefits from its engineering office in China; the Company experiencing
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 extent to which the Company
will be able to leverage its design and manufacturing expertise in certain
industrial applications such as digital imaging; and the Companys expectation
that it will have sufficient funds to meet any working capital requirements
during the foreseeable future with internally generated cash flow and borrowing
ability. In addition to other information in this report, the Company cautions that
certain factors, including, without limitation, the following, should be
considered carefully in evaluating the Company and its business and that such
factors may cause the Companys actual operating results to differ materially
from those set forth in the forward looking statements described above or to
otherwise be adversely affected: Our business is vulnerable to changing economic conditions, including:  
    
    a decline in general economic conditions;
    
    uncertainties affecting consumer spending; and
    
    changes in interest rates causing a reduction of investment
income or in the value of market interest rate sensitive instruments. Our intellectual property rights are subject to risks, including:  
    
    the potential that we may be unable to obtain and maintain
patents and copyrights to protect our proprietary technologies;
    
    competitors infringement upon Meades existing and future intellectual property; and
    
    competitors intellectual property rights that may restrict our ability to compete effectively. 10




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Our business is subject to other risks, including:  
    
    a general decline in demand for the Companys products;
    
    an inability to continue to design and manufacture products that will achieve and maintain commercial success;
    
    the potential that we may fail to penetrate the binocular and riflescope markets and achieve meaningful sales;
    
    any significant interruption of our manufacturing abilities in
our domestic or Mexican facilities or in any of our suppliers located
in the Far East;
    
    greater than anticipated competition;
    
    any loss of, or the failure to replace, any significant portion
of the sales made to any significant customer of the Company; and
    
    increasing ESOP charges in the event the market price of the Companys stock increases. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain levels of market risks, including
changes in foreign currency exchange rates and interest rates. Market risk is
the potential loss arising from adverse changes in market rates and prices,
such as foreign currency exchange and interest rates. The Company conducts
business in a number of foreign countries and is primarily exposed to currency
exchange-rate risk with respect to its transactions and net assets denominated
in the Euro. Business activities in various currencies expose the Company to
the risk that the eventual net United States dollar cash inflows resulting from
transactions with foreign customers and suppliers denominated in foreign
currencies may be adversely affected by changes in currency exchange rates. In
prior years foreign currency fluctuations have not had a material impact on
Meades revenues or results of operations. There can be no assurance that
European or other currencies will remain stable relative to the U.S. dollar or
that future fluctuations in the value of foreign currencies will not have a
material adverse effect on the Companys business, operating results, financial
condition or cash flows. The Company has adopted a hedging program to manage its foreign currency
exchange rate and interest rate risks. Upon continuing evaluation and when
deemed appropriate by management, the Company may enter into hedging
instruments to manage its foreign currency exchange and interest rate risks. Under the terms of its credit agreement, the Company was required to enter
into an interest-rate swap to convert the variable interest rate on its U.S.
Term Loan to a fixed interest rate. The resulting cost of funds (7.9% per
annum) is currently higher than that which would have been available if the
variable rate had been applied during the period. Under the interest-rate swap
contract, the Company has agreed with the bank to exchange, at specified
intervals, the difference between variable-rate and fixed-rate interest
amounts, calculated by reference to agreed-upon notional amounts. The change in
the fair value of the interest rate swap for the six months ended August 31,
2004 was an unrealized gain of $15,000 which is included in other comprehensive
income for the six months ended August 31, 2004. The Companys financial instruments consist of cash, accounts receivable,
accounts payable, and long-term obligations. The Companys exposure to market
risk for changes in interest rates relates primarily to short-term investments
and short-term obligations. As a result, the Company does not expect
fluctuations in interest rates to have a material impact on the fair value of
these instruments. 
 ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Companys chief
executive officer and chief financial officer have evaluated the effectiveness
of the Companys disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act). These disclosure
controls and procedures are designed to ensure that the information required to
be disclosed by the Company in the reports it files under the Exchange Act is
gathered, analyzed and disclosed with adequate timeliness, accuracy and
completeness. 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, taking into consideration the
size and nature of the Companys business and operations. No change in the Companys internal control over financial reporting
occurred during the last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting. 11




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PART II  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS 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. 
 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 In connection with the Companys Annual Meeting of Stockholders, held on
July 8, 2004, the stockholders of the Company re-elected Timothy C. McQuay as a
director for a three-year term expiring at the Companys Annual Meeting to be
held in 2007. The voting results were as follows: For
    
    WithheldRe-election of Timothy C. McQuay to the Companys Board
of Directors
    
    
    14,613,496
    
    
    
    100,703
 
 ITEM 5. OTHER INFORMATION Not applicable. 12




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ITEM 6. EXHIBITS 6(a) Exhibits filed with this Form 10-Q.  1.
    
    Exhibit 31.1 Sarbanes-Oxley Act Section 302 Certification by Steven G. Murdock2.
    
    Exhibit 31.2 Sarbanes-Oxley Act Section 302 Certification by Brent W. Christensen3.
    
    Exhibit 32.1 Sarbanes-Oxley Act Section 906 Certification by Steven G. Murdock4.
    
    Exhibit 32.2 Sarbanes-Oxley Act Section 906 Certification by Brent W. Christensen 13




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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. Date: October 15, 2004MEADE INSTRUMENTS CORP.By:
    
    /s/ STEVEN G. MURDOCKSteven G. MurdockPresident, Chief Executive Officerand SecretaryBy:
    
    /s/ BRENT W. CHRISTENSENBrent W. ChristensenSenior Vice President, Finance andChief Financial Officer
 14




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EXHIBIT INDEX Exhibit No.
    
    DescriptionExhibit 31.1
    
    Sarbanes-Oxley Act Section 302 Certification by Steven G. MurdockExhibit 31.2
    
    Sarbanes-Oxley Act Section 302 Certification by Brent W. ChristensenExhibit 32.1
    
    Sarbanes-Oxley Act Section 906 Certification by Steven G. MurdockExhibit 32.2
    
    Sarbanes-Oxley Act Section 906 Certification by Brent W. Christensen
 15