##### 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 November 30, 2004
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
(State or other jurisdiction
of incorporation or organization)
    
    95-2988062
(I.R.S. Employer
Identification No.)6001 Oak Canyon, Irvine, CA
(Address of principal executive offices)
    
    92618
(Zip Code)
 (949) 451-1450
(Registrants telephone number, including area code) 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ Number of shares of common stock outstanding as of December 31, 2004 is 20,001,855, $0.01 par
value per share.




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MEADE INSTRUMENTS CORP. TABLE OF CONTENTS PART I  FINANCIAL INFORMATION Page No. Item 1.
    
    Financial StatementsConsolidated Balance Sheets (Unaudited) -- November 30, 2004 and February 29, 2004
    
    
    1Consolidated Statements of Operations (Unaudited) -- Three and Nine Months EndedNovember 30, 2004 and 2003
    
    
    2Consolidated Statements of Cash Flows (Unaudited) -- Nine Months EndedNovember 30, 2004 and 2003
    
    
    3Notes to Consolidated Financial Statements (Unaudited)
    
    
    4Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    8Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    11Item 4.
    
    Controls and Procedures
    
    
    12PART II -- OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    13Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    13Item 3.
    
    Defaults Upon Senior Securities
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13Item 5.
    
    Other Information
    
    
    13Item 6.
    
    Exhibits
    
    
    14Signatures
    
    
    15EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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ITEM 1. FINANCIAL STATEMENTS. MEADE INSTRUMENTS CORP. 
 CONSOLIDATED BALANCE SHEETS
(Unaudited) ASSETS November 30,
    
    
    February 29,2004
    
    
    2004Current assets:Cash
    
    $
    894,000
    
    
    $
    7,806,000Accounts receivable, less allowance for doubtful accounts of $742,000
at November 30, 2004 and $704,000 at February 29, 2004
    
    
    43,948,000
    
    
    
    22,462,000Inventories
    
    
    49,678,000
    
    
    
    39,777,000Deferred income taxes
    
    
    6,629,000
    
    
    
    7,888,000Prepaid expenses and other current assets
    
    
    714,000
    
    
    
    491,000Total current assets
    
    
    101,863,000
    
    
    
    78,424,000Goodwill
    
    
    1,548,000
    
    
    
    1,548,000Acquisition-related intangible assets, net
    
    
    3,466,000
    
    
    
    3,742,000Property and equipment, net
    
    
    4,107,000
    
    
    
    4,551,000Other assets, net
    
    
    89,000
    
    
    
    297,000$
    111,073,000
    
    
    $
    88,562,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank line of credit
    
    $
    21,402,000
    
    
    $
    5,059,000Accounts payable
    
    
    11,259,000
    
    
    
    5,319,000Accrued liabilities
    
    
    7,484,000
    
    
    
    6,884,000Income taxes payable
    
    
    2,185,000
    
    
    
    3,059,000Current portion long-term debt
    
    
    590,000
    
    
    
    580,000Total current liabilities
    
    
    42,920,000
    
    
    
    20,901,000Long-term bank debt
    
    
    1,354,000
    
    
    
    1,729,000Deferred income taxes
    
    
    1,054,000
    
    
    
    1,054,000Total long-term liabilities
    
    
    2,408,000
    
    
    
    2,783,000Commitments and contingencies
Stockholders equity:Common stock, $0.01 par value, 50,000,000 shares authorized;
20,002,000 shares issued and outstanding at November 30, 2004
and 19,989,000 at February 29, 2004, respectively
    
    
    200,000
    
    
    
    200,000Additional paid-in capital
    
    
    40,452,000
    
    
    
    40,445,000Retained earnings
    
    
    26,650,000
    
    
    
    25,891,000Accumulated other comprehensive income
    
    
    617,000
    
    
    
    882,00067,919,000
    
    
    
    67,418,000Unearned ESOP shares
    
    
    (2,174,000
    )
    
    
    (2,540,000
    )Total stockholders equity
    
    
    65,745,000
    
    
    
    64,878,000$
    111,073,000
    
    
    $
    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
    
    
    Nine months EndedNovember 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Net sales
    
    $
    49,687,000
    
    
    $
    54,448,000
    
    
    $
    92,060,000
    
    
    $
    107,223,000Cost of sales
    
    
    35,775,000
    
    
    
    37,892,000
    
    
    
    67,626,000
    
    
    
    76,773,000Gross profit
    
    
    13,912,000
    
    
    
    16,556,000
    
    
    
    24,434,000
    
    
    
    30,450,000Selling expenses
    
    
    5,911,000
    
    
    
    6,573,000
    
    
    
    13,163,000
    
    
    
    14,158,000General and administrative
expenses
    
    
    2,223,000
    
    
    
    3,275,000
    
    
    
    7,410,000
    
    
    
    8,970,000ESOP expense
    
    
    130,000
    
    
    
    341,000
    
    
    
    318,000
    
    
    
    635,000Research and development expenses
    
    
    672,000
    
    
    
    462,000
    
    
    
    1,639,000
    
    
    
    1,451,000Operating income
    
    
    4,976,000
    
    
    
    5,905,000
    
    
    
    1,904,000
    
    
    
    5,236,000Interest expense
    
    
    283,000
    
    
    
    325,000
    
    
    
    633,000
    
    
    
    761,000Income before income taxes
    
    
    4,693,000
    
    
    
    5,580,000
    
    
    
    1,271,000
    
    
    
    4,475,000Provision for income taxes
    
    
    1,894,000
    
    
    
    2,204,000
    
    
    
    512,000
    
    
    
    1,771,000Net income
    
    $
    2,799,000
    
    
    $
    3,376,000
    
    
    $
    759,000
    
    
    $
    2,704,000Basic earnings per share
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    0.04
    
    
    $
    0.14Diluted earnings per share
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.04
    
    
    $
    0.14Weighted average number of shares
outstanding  basic
    
    
    19,312,000
    
    
    
    19,070,000
    
    
    
    19,269,000
    
    
    
    18,911,000Weighted average number of shares
outstanding  diluted
    
    
    19,477,000
    
    
    
    19,335,000
    
    
    
    19,445,000
    
    
    
    19,068,000
 See accompanying notes to consolidated financial statements. 2




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MEADE INSTRUMENTS CORP. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Nine months EndedNovember 30,2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    759,000
    
    
    $
    2,704,000Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization expense
    
    
    1,346,000
    
    
    
    1,541,000ESOP contribution
    
    
    318,000
    
    
    
    635,000Changes in assets and liabilities:Increase in accounts receivable
    
    
    (20,292,000
    )
    
    
    (27,344,000
    )Increase in inventories
    
    
    (9,585,000
    )
    
    
    (6,955,000
    )Decrease in prepaid expenses and other assets
    
    
    940,000
    
    
    
    1,224,000Increase in accounts payable
    
    
    5,603,000
    
    
    
    3,683,000Increase (decrease) in accrued liabilities
    
    
    (571,000
    )
    
    
    783,000Increase (decrease) in income taxes payable
    
    
    (190,000
    )
    
    
    1,468,000Net cash used in operating activities
    
    
    (21,672,000
    )
    
    
    (22,261,000
    )Cash flows from investing activities:Capital expenditures
    
    
    (562,000
    )
    
    
    (323,000
    )Net cash used in investing activities
    
    
    (562,000
    )
    
    
    (323,000
    )Cash flows from financing activities:Net borrowings under bank lines of credit
    
    
    16,032,000
    
    
    
    22,012,000Payments on long-term bank notes
    
    
    (431,000
    )
    
    
    (398,000
    )Proceeds from the exercise of stock options
    
    
    32,000
    
    
    
    410,000Payments under capital lease obligations
    
    
    
    
    
    
    (25,000
    )Net cash provided by financing activities
    
    
    15,633,000
    
    
    
    21,999,000Effect of exchange rate changes on cash
    
    
    (311,000
    )
    
    
    307,000Net increase (decrease) in cash
    
    
    (6,912,000
    )
    
    
    (278,000
    )Cash at beginning of period
    
    
    7,806,000
    
    
    
    2,445,000Cash at end of period
    
    $
    894,000
    
    
    $
    2,167,000
 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
products during the holiday season. The results of operations for the quarters ended November 30,
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 net income per share would have been adjusted to the pro forma amounts indicated
below. Three months ended
    
    
    Nine months endedNovember 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Reported income
    
    $
    2,799,000
    
    
    $
    3,376,000
    
    
    $
    759,000
    
    
    $
    2,704,000Compensation expense determined under fair value
method, net of tax
    
    
    (268,000
    )
    
    
    (45,000
    )
    
    
    (781,000
    )
    
    
    (583,000
    )Pro forma net income (loss)
    
    $
    2,531,000
    
    
    $
    3,331,000
    )
    
    $
    (22,000
    )
    
    $
    2,121,000Reported net income per share  basic
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    0.04
    
    
    $
    0.14Reported net income per share  diluted
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.04
    
    
    $
    0.14Pro forma income (loss) per share  basic and diluted
    
    $
    0.13
    
    
    $
    0.17
    
    
    $
    (0.00
    )
    
    $
    0.11
 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
    
    
    Nine months endedNovember 30,
    
    
    November 30,2004
    
    
    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
    
    $
    2.01
    
    
    $
    2.34
    
    
    $
    2.01
    
    
    $
    2.34
 4




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C. Composition of Certain Balance Sheet Accounts The composition of inventories is as follows: November 30,
    
    
    February 29,2004
    
    
    2004Raw materials
    
    $
    6,695,000
    
    
    $
    7,691,000Work-in-process
    
    
    5,764,000
    
    
    
    6,193,000Finished goods.
    
    
    37,219,000
    
    
    
    25,893,000$
    49,678,000
    
    
    $
    39,777,000
 The composition of acquisition-related intangible assets is as follows: November 30,
    
    
    February 29,2004
    
    
    2004Brand names  non-amortizing
    
    $
    2,041,000
    
    
    $
    2,041,000Trademarks (7-15 year life)
    
    
    1,398,000
    
    
    
    1,398,000Customer relationships (10 year life)
    
    
    1,390,000
    
    
    
    1,390,000Accumulated amortization
    
    
    (1,363,000
    )
    
    
    (1,087,000
    )Total amortizing acquisition-related intangible assets
    
    
    1,425,000
    
    
    
    1,701,000Total acquisition-related intangible assets
    
    $
    3,466,000
    
    
    $
    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. Included in net sales
for the three and nine months ended November 30, 2004 was approximately $23,000 for royalties
received. 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 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 Per Share Basic earnings per share amounts exclude the dilutive effect of potential shares of common
stock. Basic earnings per share is based upon the weighted-average number of shares of common stock
outstanding which excludes unallocated ESOP shares. Diluted earnings 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 and nine month periods ended November 30, 2004 and 2003 reflects
additional potential shares of common stock for outstanding stock options. F. Comprehensive Income Comprehensive income 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 November
30, 2004, includes foreign currency translation adjustments and adjustments to the fair value of
highly effective derivative instruments. For the periods ended November 30, 2004, the Company had
other comprehensive income as follows: Three months ended
    
    
    Nine months endedNovember 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income
    
    $
    2,799,000
    
    
    $
    3,376,000
    
    
    $
    759,000
    
    
    $
    2,704,000Currency translation adjustments, net of tax
    
    
    540,000
    
    
    
    412,000
    
    
    
    392,000
    
    
    
    408,000Change in fair value of foreign currency forward
contracts, net of tax
    
    
    165,000
    
    
    
    392,000
    
    
    
    (674,000
    )
    
    
    (13,000
    )Unrealized loss in marketable securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97,000
    )Change in fair value of interest rate swap
    
    
    2,000
    
    
    
    9,000
    
    
    
    17,000
    
    
    
    26,000Total other comprehensive income
    
    $
    3,506,000
    
    
    $
    4,189,000
    
    
    $
    494,000
    
    
    $
    3,028,000
 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 or two-year limited
warranty. Many of the Simmons products, principally riflescopes and binoculars, have lifetime
limited warranties. The following are changes in the warranty liability, which is included as a
component of accrued liabilities on the accompanying Consolidated Balance Sheets. Three months ended
    
    
    Nine months endedNovember 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Beginning balance
    
    $
    1,159,000
    
    
    $
    1,560,000
    
    
    $
    1,427,000
    
    
    $
    1,794,000Warranty accrual
    
    
    70,000
    
    
    
    507,000
    
    
    
    326,000
    
    
    
    714,000Labor and material usage
    
    
    (151,000
    )
    
    
    (231,000
    )
    
    
    (675,000
    )
    
    
    (672,000
    )Ending balance
    
    $
    1,078,000
    
    
    $
    1,836,000
    
    
    $
    1,078,000
    
    
    $
    1,836,000
 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. November 30, 2004
    
    
    February 29, 2004Notional amount
    
    
    Fair Value
    
    
    Notional amount
    
    
    Fair ValueInterest rate swap agreement
    
    $
    
    
    
    $
    
    
    
    $
    1,085,000
    
    
    $
    (17,000
    )Cash flow forward currency contracts
    
    $
    3,400,000
    
    
    $
    (1,123,000
    )
    
    
    
    
    
    
    
 At November 30, 2004, the fair values of forward currency contracts are recorded in accrued
liabilities on the accompanying Consolidated Balance Sheets. As of November 30, 2004, the interest
rate swap agreement had matured. 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
April 2005. I. Bank Borrowings At November 30, 2004, the Company was in compliance with all restrictive covenants and
required ratios under its U.S. credit agreement, with the exception of its U.S. fixed charge
coverage ratio requirement. On December 15, 2004 the Company executed the Third Amendment to
Amended and Restated Credit Agreement (the Amendment). The Amendment amends the U.S. fixed charge
coverage ratio covenant, the consolidated fixed charge coverage ratio covenant, sets minimum
availability requirements, and makes several other changes, principally adjusting the facilitys
pricing tables. The Company is required to report its covenant calculations to the bank for the
quarter ended November 30, 2004 based upon the terms of the Amendment. The Company was in
compliance with all restrictive covenants and required ratios as of November 30, 2004 after giving
effect to the Amendment. J. Subsequent event On December 1, 2004, Coronado Instruments, Inc., a California corporation (Coronado
Instruments) and wholly-owned subsidiary of Meade signed an agreement to purchase substantially
all of the assets and assume substantially all of the liabilities of Coronado Technology Group LLC
(Coronado), an Arizona limited liability company in the business of manufacturing and selling
solar observation filters and equipment. Meade will account for the purchase as an asset purchase
and will operate the business as Coronado Instruments. Under the terms of the agreement Meade is
to pay an initial payment of $2.5 million to Coronado (payable as prescribed by the agreement).
Meade may also pay an earn-out payment based upon the profitability of Coronado Instruments during
the 2005 calendar year. Any earn-out payment will be accounted for as additional purchase price. K. New Accounting Pronouncements On October 22, 2004, the American Jobs Creation Act of 2004 was enacted in
the United States. The Company is currently evaluating the impact of this
new law on its operations and effective tax rate. In particular, the
Company is evaluating the law's provisions relating to allowable
deductions, beginning in 2005, for income attributable to United States
production activities. At this time, the Company is unable to determine the
effects of this new law and will continue to analyze its potential impact
as guidance is made available. In December 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4."  SFAS No. 151 amends the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) and requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities.  The provisions of SFAS No. 151 are
effective for fiscal years beginning after June 15, 2005.  The Company does
not expect the adoption of SFAS No. 151 to have a material impact on its
results of operations or financial position. On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised), Share-Based Payment. This standard requires expensing of stock options and other
share-based payments and supersedes the FASBs earlier rule (the original SFAS 123) that had
allowed companies to choose between expensing stock options or showing pro forma disclosure only.
The Company will be required to implement the new pronouncement at the beginning of the third
quarter of fiscal 2006. The Company has not yet assessed the impact of adopting this new standard. L. Reclassifications Certain reclassifications have been made to conform prior periods to the current presentation. 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 November 30, 2004 Compared to Three Months Ended November 30, 2003 Net sales for the third quarter of fiscal 2005 were $49.7 million compared to $54.4 million
for the third quarter of fiscal 2004, a decrease of 8.7%. Sales of the Companys mid-priced and
higher-priced telescopes were down approximately $5 million from the prior year quarter. This
decrease in sales reflects current-year weakness in the mid-to-higher priced telescope categories.
In addition, management believes that sales of mid-to-higher priced telescopes in the prior year
were higher because of the Mars opposition. As the effects of the Mars opposition (i.e. high
inventory levels at several of the Companys dealers and distributors and sales pull from a unique
celestial event) continue to diminish, and with the introduction of several new products slated for
the mid-to-higher priced telescope market in the coming months, management believes that the
downward trend in sales of telescopes in this price category will end. Sales of smaller-aperture
telescopes were also down approximately $2 million largely due to decreased sales at one of the
Companys significant customers. Binocular sales were down approximately $2 million primarily due
to continuing price competition in the digital camera/binocular market. Offsetting these
reductions was an increase of approximately $2 million in riflescope sales, principally to one new
customer, an increase of approximately $1 million in the companys new night vision products, and
an increase of over $1 million in microscope sales due to a large order in Europe. The weakened
dollar versus the euro compared to the prior year period also positively affected sales (by
approximately $1 million). Gross profit decreased from $16.6 million (30.4% of net sales) for the third quarter of fiscal
2004 to $13.9 million (28.0% of net sales) for the third quarter of fiscal 2005, a decrease of
16.0%. 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 to sales mix and the
effect of relatively fixed costs on lower sales volume. The weakened dollar versus the euro did
not have a significant effect on gross profit because the European subsidiary utilizes forward
contracts on substantially all of its significant dollar inventory purchases. Selling expenses decreased from $6.6 million (12.1% of net sales) for the third quarter of
fiscal 2004 to $5.9 million (11.9% of net sales) for the third quarter of fiscal 2005, a decrease
of 10.1%. Several expense categories decreased from the prior year. Shipping and sales department
wages, freight, temporary help and allowance for doubtful accounts each decreased approximately
$0.2 million dollars due principally to lower sales. Offsetting those selling expenses was an
increase in marketing and advertising costs of approximately $0.2 million dollars. General and
administrative expenses decreased from $3.3 million (6.0% of net sales) for the third quarter of
fiscal 2004, to $2.2 million (4.5% of net sales) for the third quarter of fiscal 2005, a decrease
of 32.1%. The decrease was principally due to lower performance based compensation, which was down
approximately $1.0 million from the prior year, and consulting and professional fees which were
down approximately $0.3 million. ESOP contribution expense decreased from $0.3 million (0.6% of net sales) for the third
quarter of fiscal 2004 to $0.1 million (0.3% of net sales) for the third quarter of fiscal 2005, a
decrease of 61.9%. 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 increased from $0.5 million (0.8% of net sales) for the
third quarter of fiscal 2004 to $0.7 million (1.3% of net sales) for the third quarter of fiscal
2005, an increase of 45.5%. Outsourced expenditures affected the increase. 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 $0.3 million for each quarter presented.
Average borrowings and borrowing rates were comparable during the periods presented. 8




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Nine months Ended November 30, 2004 Compared to Nine months Ended November 30, 2003 Net sales for the nine months ended November 30, 2004 were $92.1 million compared to $107.2
million for the comparable prior year period, a decrease of 14.1%. Sales of the Companys
mid-priced and higher-priced telescopes were down approximately $14 million from the prior year
period. This decrease in sales reflects current-year weakness in the mid-to-higher priced
telescope categories. In addition, management believes that sales of mid-to-higher priced
telescopes in the prior year were higher because of the Mars opposition. As the effects of the
Mars opposition (i.e. high inventory levels at several of the Companys dealers and distributors
and sales pull from a unique celestial event) continue to diminish, and with the introduction of
several new products slated for the mid-to-higher priced telescope market in the coming months,
management believes that the downward trend in sales of telescopes in this price category will end.
Sales of smaller-aperture telescopes were also down approximately $3 million largely due to
decreased sales at one of the Companys significant customers. Binocular sales were down
approximately $3 million, primarily due to continuing price competition in the digital
camera/binocular market. Offsetting these reductions was increase of approximately $2 million in
the companys new night vision products, and an increase of over $1 million in microscope sales due
to a large order in Europe. The weakened dollar versus the euro compared to the prior year period
also positively affected sales (by approximately $2 million). Gross profit decreased from $30.5 million (28.4% of net sales) for the nine months ended
November 30, 2003 to $24.4 million (26.6% of net sales) for the comparable current year period, a
decrease of 19.8%. The decrease was due to decreased sales compared to the prior year period.
Gross margin (gross profit as a percent of net sales) decreased overall due to changes in sales mix
and the effect of relatively fixed costs on lower sales volume. The weakened dollar versus the euro
did not have a significant effect on gross profit because the European subsidiary utilizes forward
contracts on substantially all of its significant dollar inventory purchases. Selling expenses decreased from $14.2 million (13.2% of net sales) for the nine months ended
November 30, 2003 to $13.2 million (14.3% of net sales) for the comparable current year period, a
decrease of 7.0%. The decrease was primarily due to lower in-store advertising costs (approximately
$0.5 million), and lower freight costs on lower sales volume. General and administrative expenses
decreased from $9.0 million (8.4% of net sales) for the nine months ended November 30, 2003 to $7.4
million (8.0% of net sales) for the comparable current year period, a decrease of 17.4%. The
decrease was principally due to lower performance based compensation, which was down approximately
$1.0 million from the prior year, and consulting and professional fees which were down
approximately $0.5 million. ESOP contribution expense decreased from $0.6 million (0.6% of net sales) for the nine months
ended November 30, 2003 to $0.3 million (0.3% of net sales) for the comparable current year period,
a decrease of 49.9%. 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 increased from $1.5 million (1.4% of net sales) for the nine
months ended November 30, 2003 to $1.6 million (1.8% of net sales) for the comparable current year
period, an increase of 13.0%. The increase was largely related to outsourced expenditures. 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 decreased from $0.8 million (0.7% of net sales) for the nine months ended
November 30, 2003 to $0.6 million (0.7% of net sales) for the comparable current year period, a
decrease of 16.8%. Small changes in average borrowings and borrowing rates 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 9




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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 nine months ended November 30, 2004 the Company funded its operations with net income
and short-term bank borrowings. In November 2004, approximately $3 million in cash was transferred
from the Companys European subsidiary to fund the initial payment for the Coronado acquisition.
Payment of the Coronado initial payment is expected to occur during the Companys fourth fiscal
quarter. Until the payment of the Coronado initial payment is made, the cash will be used to pay
down the Companys U.S. revolving line of credit. Internally generated cash flow from net income
adjusted for non-cash charges plus bank borrowings were used to increase accounts receivable and
inventories. Operating cash flows were increased by an increase in accounts payable. Accounts
payable increased with increased inventories. Inventories increased to $49.7 million at November
30, 2004 from $47.4 million at November 30, 2003 an increase of approximately 5%. Inventory levels
have increased over the nine months ended November 30, 2004 on lower than expected sales during the
year. The increase in inventories was partially funded by bank borrowings and partially by an
increase in accounts payable. Net working capital totaled approximately $58.9 million at November
30, 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. 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 November
30, 2004 was approximately $15.4 million. At November 30, 2004, the Company was in compliance with
all restrictive covenants and required ratios under its U.S. credit agreement, with the exception
of its U.S. fixed charge coverage ratio requirement. On December 15, 2004 the Company executed the
Third Amendment to Amended and Restated Credit Agreement (the Amendment). The Amendment amends
the U.S. fixed charge coverage ratio covenant and the consolidated fixed charge coverage ratio
covenant, sets minimum availability requirements, and makes several other changes, principally
adjusting the facilitys pricing tables. The Company is required to report its covenant
calculations to the bank for the quarter ended November 30, 2004 based upon the terms of the
Amendment. The Company was in compliance with all restrictive covenants and required ratios as of
November 30, 2004 after giving effect to the Amendment. 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 $0.6 million and
$0.3 million for the nine months ended November 30, 2004 and 2003, respectively. The Company had no
material capital expenditure commitments at November 30, 2004. New Accounting Pronouncements On October 22, 2004, the American Jobs Creation Act of 2004 was enacted in
the United States. The Company is currently evaluating the impact of this
new law on its operations and effective tax rate. In particular, the
Company is evaluating the law's provisions relating to allowable
deductions, beginning in 2005, for income attributable to United States
production activities. At this time, the Company is unable to determine the
effects of this new law and will continue to analyze its potential impact
as guidance is made available. In December 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4."  SFAS No. 151 amends the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) and requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities.  The provisions of SFAS No. 151 are
effective for fiscal years beginning after June 15, 2005.  The Company does
not expect the adoption of SFAS No. 151 to have a material impact on its
results of operations or financial position. On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised), Share-Based Payment. This standard requires expensing of stock options and other
share-based payments and supersedes the FASBs earlier rule (the original SFAS 123) that had
allowed companies to choose between expensing stock options or showing pro forma disclosure only.
The Company will be required to implement the new pronouncement at the beginning of the third
quarter of fiscal 2006. The Company has not yet assessed the impact of adopting this new standard. 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 and end the downward trend in telescope sales; the
Companys ability to develop and grow the Simmons business; the Companys ability to integrate and
grow the Coronado 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 10




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ability to further develop the business of its European subsidiary; the Companys ability to
recognize any benefits from its engineering and quality control 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. 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, riflescope and solar
observing 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 11




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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 nine
months ended November 30, 2004 was an unrealized gain of $17,000 which is included in other
comprehensive income for the nine months ended November 30, 2004. As of November 30, 2004 the swap
agreement had matured. 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. 12




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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 Not applicable. 
 ITEM 5. OTHER INFORMATION Not applicable. 13




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ITEM 6. EXHIBITS 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 14




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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: January 7, 2005 MEADE INSTRUMENTS CORP.By:
    /s/ STEVEN G. MURDOCKSteven G. MurdockPresident, Chief Executive Officer
and SecretaryBy:
    /s/ BRENT W. CHRISTENSENBrent W. ChristensenSenior Vice President, Finance and
Chief Financial Officer   15




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EXHIBIT INDEX 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