##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended August 31, 2006
 or
 o
    
    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
    
    (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)
  þ o
  o o þ
  o þ




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Explanatory Note
Restatement of Consolidated Financial Statements




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##### 



MEADE INSTRUMENTS CORP.
 TABLE OF CONTENTS
  
 Page No.PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets (Unaudited)  August 31, 2006 and February 28, 2006
    
    
    1Consolidated Statements of Operations (Unaudited)  Three and Six Months Ended
August 31, 2006 and 2005
    
    
    2Consolidated Statements of Cash Flows (Unaudited)  Six Months Ended August 31, 2006 and 2005
    
    
    3Notes to Consolidated Financial Statements (Unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3. Defaults Upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    25Signatures
    
    
    26EXHIBIT 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 28,2006
    
    
    2006ASSETSCurrent assets:Cash
    
    $
    3,108,000
    
    
    $
    7,589,000Accounts receivable, less allowance for doubtful accounts of
$658,000 at August 31, 2006 and $483,000 at February 28, 2006
    
    
    15,901,000
    
    
    
    16,822,000Inventories
    
    
    39,859,000
    
    
    
    34,359,000Prepaid expenses and other current assets
    
    
    635,000
    
    
    
    395,000Total current assets
    
    
    59,503,000
    
    
    
    59,165,000Goodwill
    
    
    3,141,000
    
    
    
    2,115,000Acquisition-related intangible assets, net
    
    
    4,850,000
    
    
    
    5,018,000Property and equipment, net
    
    
    5,175,000
    
    
    
    5,371,000Other assets, net
    
    
    186,000
    
    
    
    571,000$
    72,856,000
    
    
    $
    72,240,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank lines of credit
    
    $
    3,972,000
    
    
    $
    4,229,000Accounts payable
    
    
    14,541,000
    
    
    
    5,899,000Accrued liabilities
    
    
    7,784,000
    
    
    
    5,773,000Income taxes payable
    
    
    753,000
    
    
    
    133,000Current portion of long-term debt and capital lease obligations
    
    
    242,000
    
    
    
    1,306,000Total current liabilities
    
    
    27,292,000
    
    
    
    17,340,000Long-term debt and capital lease obligations
    
    
    1,239,000
    
    
    
    1,410,000Deferred income taxes
    
    
    1,540,000
    
    
    
    1,540,000Deferred rent
    
    
    155,000
    
    
    
    222,000Commitments and contingenciesStockholders equity:Common stock; $0.01 par value; 50,000,000 shares authorized;
20,090,000 and 20,004,000 shares issued and outstanding at
August 31, 2006 and February 28, 2006, respectively
    
    
    201,000
    
    
    
    200,000Additional paid-in capital
    
    
    44,919,000
    
    
    
    44,890,000Retained earnings
    
    
    (1,423,000
    )
    
    
    8,086,000Deferred stock compensation
    
    
    (246,000
    )
    
    
    (507,000
    )Accumulated other comprehensive (loss) income
    
    
    582,000
    
    
    
    682,00044,033,000
    
    
    
    53,351,000Unearned ESOP shares
    
    
    (1,403,000
    )
    
    
    (1,623,000
    )Total stockholders equity
    
    
    42,630,000
    
    
    
    51,728,000$
    72,856,000
    
    
    $
    72,240,000




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MEADE INSTRUMENTS CORP.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2006
    
    
    2005as restated
    
    
    
    
    
    
    as restatedNet sales
    
    $
    18,585,000
    
    
    $
    21,877,000
    
    
    $
    37,331,000
    
    
    $
    43,402,000Cost of sales
    
    
    15,674,000
    
    
    
    16,870,000
    
    
    
    30,971,000
    
    
    
    32,403,000Gross profit
    
    
    2,911,000
    
    
    
    5,007,000
    
    
    
    6,360,000
    
    
    
    10,999,000Selling expenses
    
    
    4,423,000
    
    
    
    4,106,000
    
    
    
    7,782,000
    
    
    
    7,799,000General and administrative
expenses
    
    
    3,994,000
    
    
    
    3,041,000
    
    
    
    7,039,000
    
    
    
    5,921,000ESOP expense
    
    
    72,000
    
    
    
    79,000
    
    
    
    150,000
    
    
    
    171,000Research and development expenses
    
    
    379,000
    
    
    
    302,000
    
    
    
    706,000
    
    
    
    671,000Operating loss
    
    
    (5,957,000
    )
    
    
    (2,521,000
    )
    
    
    (9,317,000
    )
    
    
    (3,563,000
    )Interest expense
    
    
    116,000
    
    
    
    231,000
    
    
    
    215,000
    
    
    
    435,000Loss before income taxes
    
    
    (6,073,000
    )
    
    
    (2,752,000
    )
    
    
    (9,532,000
    )
    
    
    (3,998,000
    )Benefit for income taxes
    
    
    (140,000
    )
    
    
    (1,288,000
    )
    
    
    (23,000
    )
    
    
    (1,752,000
    )Net loss
    
    $
    (5,933,000
    )
    
    $
    (1,464,000
    )
    
    $
    (9,509,000
    )
    
    $
    (2,246,000
    )Basic and diluted loss per share
    
    $
    (0.30
    )
    
    $
    (0.08
    )
    
    $
    (0.49
    )
    
    $
    (0.12
    )Weighted average number of shares
outstanding  basic and diluted
    
    
    19,610,000
    
    
    
    19,317,000
    
    
    
    19,557,000
    
    
    
    19,285,000
  2




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MEADE INSTRUMENTS CORP.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months EndedAugust 31,2006
    
    
    2005as restatedCash flows from operating activities:Net loss
    
    $
    (9,509,000
    )
    
    $
    (2,246,000
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization expense
    
    
    902,000
    
    
    
    1,149,000Deferred rent amortization
    
    
    (67,000
    )
    
    
    (62,000
    )ESOP contribution
    
    
    150,000
    
    
    
    171,000Stock-based compensation
    
    
    234,000
    
    
    
    2,000Changes in assets and liabilities:Decrease in accounts receivable
    
    
    1,111,000
    
    
    
    (4,931,000
    )Increase in inventories
    
    
    (5,021,000
    )
    
    
    (6,824,000
    )Decrease (increase) in prepaid expenses and other assets
    
    
    211,000
    
    
    
    (402,000
    )Increase in accounts payable
    
    
    8,445,000
    
    
    
    9,319,000Increase in accrued liabilities
    
    
    1,323,000
    
    
    
    805,000Increase (decrease) in income taxes payable
    
    
    494,000
    
    
    
    (2,729,000
    )Net cash used in operating activities
    
    
    (1,727,000
    )
    
    
    (5,748,000
    )Cash flows from investing activities:Additional consideration paid for Coronado acquisition
    
    
    (1,026,000
    )
    
    
    Capital expenditures
    
    
    (290,000
    )
    
    
    (2,542,000
    )Net cash used in investing activities
    
    
    (1,316,000
    )
    
    
    (2,542,000
    )Cash flows from financing activities:Net (payments) borrowings under bank lines of credit
    
    
    (257,000
    )
    
    
    5,590,000Payments on long-term bank notes
    
    
    (1,388,000
    )
    
    
    (438,000
    )Payments under capital lease obligations
    
    
    (16,000
    )
    
    
    (7,000
    )Net cash (used in) provided by financing activities
    
    
    (1,661,000
    )
    
    
    5,145,000Effect of exchange rate changes on cash
    
    
    223,000
    
    
    
    178,000Net decrease in cash
    
    
    (4,481,000
    )
    
    
    (2,967,000
    )Cash at beginning of period
    
    
    7,589,000
    
    
    
    3,929,000Cash at end of period
    
    $
    3,108,000
    
    
    $
    962,000Noncash investing and financing activities:Issuance of restricted stock
    
    
    
    
    
    $
    681,000Financed purchase of equipment under capital lease
    
    
    
    
    
    
    21,000
  3




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MEADE INSTRUMENTS CORP.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 A. The Consolidated Financial Statements Have Been Prepared by the Company and are Unaudited.
   B. Restatement of Previously Issued Financial Statements
     C. Stock Based Compensation
  4




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For the three and six months ended August 31, 2006
 Expected life (1)
    
    6.2 yearsExpected volatility (2)
    
    
    73
    %Risk-free interest rate (3)
    
    
    5.0
    %Expected dividends
    
    None
 
 (1)
    
    The option term was determined using the simplified method for estimating expected option
life, which qualify as plain-vanilla options.(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.   Three months ended
    
    
    Six months endedAugust 31,
    
    
    August 31,2005
    
    
    2005
    
    
    2005
    
    
    2005as reported
    
    
    as restated
    
    
    as reported
    
    
    as restatedReported net loss
    
    $
    (1,474,000
    )
    
    $
    (1,464,000
    )
    
    $
    (2,267,000
    )
    
    $
    (2,246,000
    )Compensation cost, net of tax under APB 25
    
    
    31,000
    
    
    
    40,000
    
    
    
    35,000
    
    
    
    49,000Compensation cost, net of tax under SFAS 123
    
    
    (118,000
    )
    
    
    (87,000
    )
    
    
    (213,000
    )
    
    
    (353,000
    )Pro forma net loss
    
    $
    (1,561,000
    )
    
    $
    (1,511,000
    )
    
    $
    (2,445,000
    )
    
    $
    (2,550,000
    )Reported net loss per share  basic
and diluted
    
    $
    (0.08
    )
    
    $
    (0.08
    )
    
    $
    (0.12
    )
    
    $
    (0.12
    )Pro forma net loss per share  basic and diluted
    
    $
    (0.08
    )
    
    $
    (0.08
    )
    
    $
    (0.13
    )
    
    $
    (0.13
    )
 5




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For the three and six months ended August 31, 2005
 Expected life
    
    6.0 yearsExpected volatility
    
    
    33
    %Risk-free interest rate
    
    
    4.0
    %Expected dividends
    
    None
  D. Composition of Certain Balance Sheet Accounts
  August 31,
    
    
    February 28,2006
    
    
    2006Raw materials
    
    $
    5,677,000
    
    
    $
    6,895,000Work-in-process
    
    
    4,722,000
    
    
    
    4,871,000Finished goods
    
    
    29,460,000
    
    
    
    22,593,000$
    39,859,000
    
    
    $
    34,359,000
  August 31,
    
    
    February 28,2006
    
    
    2006Brand names  non-amortizing
    
    $
    2,041,000
    
    
    $
    2,041,000Trademarks
    
    
    1,938,000
    
    
    
    1,938,000Customer relationships
    
    
    1,390,000
    
    
    
    1,390,000Completed technologies
    
    
    1,620,000
    
    
    
    1,620,000Other
    
    
    56,000
    
    
    
    56,000Accumulated amortization
    
    
    (2,195,000
    )
    
    
    (2,027,000
    )Total amortizing acquisition-related intangible assets
    
    
    2,809,000
    
    
    
    2,977,000Total acquisition-related intangible assets
    
    $
    4,850,000
    
    
    $
    5,018,000
  Fiscal Year
    
    Amount2007
    
    $
    336,0002008
    
    
    336,0002009
    
    
    336,0002010
    
    
    336,0002011
    
    
    336,000
   6




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E. Commitments and Contingencies
     F. Earnings (Loss) Per Share
   August 31,
    
    February 28,2006
    
    2006Stock options outstanding
    
    
    3,688,000
    
    
    
    3,844,000Restricted shares outstanding
    
    
    105,000
    
    
    
    247,500
  Three months ended
    
    
    Six months endedAugust 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic weighted average number of shares
    
    
    19,610,000
    
    
    
    19,317,000
    
    
    
    19,557,000
    
    
    
    19,285,000Dilutive potential shares of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average number of
shares outstanding
    
    
    19,610,000
    
    
    
    19,317,000
    
    
    
    19,557,000
    
    
    
    19,285,000Number of options excluded from the
calculation of weighted average shares
because the exercise prices were greater
than the average market price of the
Companys common stock
    
    
    3,688,000
    
    
    
    3,327,000
    
    
    
    3,688,000
    
    
    
    3,325,000Potential shares of common stock
excluded from the calculation
of weighted average shares
    
    
    203,000
    
    
    
    41,000
    
    
    
    168,000
    
    
    
    47,000
 7




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G. Comprehensive Income (Loss)
  For the three months ended August 31,
    
    
    For the six months ended August 312006
    
    
    2005
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2005as reported
    
    
    as restated
    
    
    
    
    
    
    as reported
    
    
    as restatedNet loss
    
    $
    (5,933,000
    )
    
    $
    (1,474,000
    )
    
    $
    (1,464,000
    )
    
    $
    (9,509,000
    )
    
    $
    (2,267,000
    )
    
    $
    (2,246,000
    )Currency translation
adjustments
    
    
    1,000
    
    
    
    (122,000
    )
    
    
    (122,000
    )
    
    
    481,000
    
    
    
    (514,000
    )
    
    
    (514,000
    )Change in fair value of
foreign currency forward
contracts, net of tax
    
    
    243,000
    
    
    
    539,000
    
    
    
    539,000
    
    
    
    (581,000
    )
    
    
    (1,358,000
    )
    
    
    (1,358,000
    )Total other
comprehensive loss
    
    $
    (5,689,000
    )
    
    $
    (1,057,000
    )
    
    $
    (1,047,000
    )
    
    $
    (9,609,000
    )
    
    $
    (4,139,000
    )
    
    $
    (4,118,000
    )
 H. Product Warranties
  Three months ended
    
    
    Six months endedAugust 31,
    
    
    August 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning balance
    
    $
    1,110,000
    
    
    $
    1,183,000
    
    
    $
    1,053,000
    
    
    $
    1,173,000Warranty accrual
    
    
    185,000
    
    
    
    24,000
    
    
    
    442,000
    
    
    
    186,000Labor and material usage
    
    
    (162,000
    )
    
    
    (105,000
    )
    
    
    (362,000
    )
    
    
    (257,000
    )Ending balance
    
    $
    1,133,000
    
    
    $
    1,102,000
    
    
    $
    1,133,000
    
    
    $
    1,102,000
 I. Derivative Instruments and Hedging Activities
  August 31, 2006
    
    February 28, 2006Notional
    
    
    
    
    
    Notionalamount
    
    Fair Value
    
    amount
    
    Fair ValueForward currency contracts
    
    $
    10,452,000
    
    
    $
    (581,000
    )
    
    
    
    
    
    
    
 8




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J. Bank Borrowings
   August 31, 2006
    
    
    February 28, 2006U.S. bank revolving line of credit
    
    $
    3,972,000
    
    
    $
    4,229,000U.S. term loan
    
    $
    35,000
    
    
    $
    245,000European term loans
    
    
    1,411,000
    
    
    
    2,416,000Notes payable and capital lease obligations
    
    
    35,000
    
    
    
    55,000Total debt and capital lease obligations
    
    
    1,481,000
    
    
    
    2,716,000Less current portion
    
    
    (242,000
    )
    
    
    (1,306,000
    )Total long-term debt and capital lease obligations
    
    $
    1,239,000
    
    
    $
    1,410,000
 K.
Income Taxes
  L. New Accounting Pronouncements
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10




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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 contains 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 and elsewhere in this Form 10-Q . 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.
 Restatement of Consolidated Financial Statements
  Critical Accounting Policies and Estimates
  Revenue Recognition
  11




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Inventories
  Goodwill and Intangible Assets
 Goodwill and
Intangible Assets
 Income taxes
  Results of Operations
  Overview
  12




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Three Months Ended August 31, 2006 Compared to Three Months Ended August 31, 2005
         13




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Six Months Ended August 31, 2006 Compared to Six Months Ended August 31, 2005
         Seasonality
  14




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Liquidity and Capital Resources
     New Accounting Pronouncements
  15




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Forward-Looking Information
  16




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   August 31, 2006
    
    February 28, 2006Notional
amount
    
    Fair Value
    
    Notional
amount
    
    Fair ValueForward currency contracts
    
    $
    10,452,000
    
    
    $
    (581,000
    )
    
    
    
    
    
    
    
   
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
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Remediation of Material Weakness in Internal Control over Financial Reporting of Stock-Based
Compensation Expense
  Remediation of Controls over the Preparation, Analysis, documentation, and Review of the Income Tax
Provision Calculation
  Changes in Internal Control over Financial Reporting
  19




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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
          
 ITEM 1.A. RISK FACTORS
  We rely on independent contract manufacturers and, as a result, we are exposed to potential
disruptions in product supply.
  20




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Our future success depends upon our ability to respond to changing consumer demands and
successfully market new products.
  Our business and the success of our products could be harmed if we are unable to maintain our brand
image.
 ® ® ® ® ® ®
 Our business could be harmed if we fail to maintain appropriate inventory levels.
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We face intense competition, including competition from companies with significantly greater
resources, and, if we are unable to compete effectively with these competitors, our market share
may decline and our business could be harmed.
   We depend upon a relatively small group of customers for a large portion of our sales.
  Our international sales and third-party manufacturing operations are subject to the risks of doing
business abroad, particularly in China, which could affect our ability to sell or manufacture our
products in international markets, obtain products from foreign suppliers or control product costs.
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Our business could be harmed if our contract manufacturers or suppliers violate labor, trade or
other laws.
   We may be unable to successfully execute our growth and profitability strategies.
  The disruption, expense and potential liability associated with existing and unanticipated future
litigation against us could have a material adverse effect on our business, results of operations,
financial condition and cash flows.
  23




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Our failure to comply with any of the financial covenants in our U.S. line of credit facility or
other debt agreements could have a material adverse impact on our business.
  Our business may be negatively impacted as a result of changes in the economy.
  Our quarterly revenues and operating results fluctuate as a result of a variety of factors,
including seasonal fluctuations in the demand for consumer optics, delivery date delays and
potential fluctuations in our annualized tax rate, which may result in volatility of our stock
price.
  Changes in currency exchange rates could affect our revenues and operating results.
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Our trademarks, design patents, utility patents and other intellectual property rights may not be
adequately protected outside the United States.
  Our ability to compete could be jeopardized if we are unable to protect our intellectual property
rights or if we are sued for intellectual property infringement.
 ® ® ® ® ® ®
 We are exposed to potential risks from recent legislation requiring public companies to evaluate
controls under Section 404 of the Sarbanes-Oxley Act of 2002.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
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SIGNATURES
   MEADE INSTRUMENTS CORP.By:
    
    /s/ STEVEN L. MUELLNERSteven L. MuellnerPresident and Chief Executive OfficerBy:
    
    /s/ BRENT W. CHRISTENSENBrent W. ChristensenSenior Vice President, Finance andChief Financial Officer
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