10-Q 1 meade_10q-113003.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED NOVEMBER 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-22183 ________________ MEADE INSTRUMENTS CORP. -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) DELAWARE 95-2988062 -------- ---------- (State or Other Jurisdiction (I.R.S. Employer of 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) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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 December 31, 2003 is 19,985,107. ================================================================================ MEADE INSTRUMENTS CORP. TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION

Page No. -------- Consolidated Balance Sheets (Unaudited) -- November 30, 2003 and February 28, 2003....................... 1 Consolidated Statements of Income (Unaudited) -- Three and Nine Months Ended November 30, 2003 and 2002............................................................................... 2 Consolidated Statements of Cash Flows (Unaudited) -- Nine Months Ended November 30, 2003 and 2002........ 3 Notes to Consolidated Financial Statements (Unaudited)................................................... 4 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 7 Quantitative and Qualitative Disclosures about Market Risk............................................... 10 Controls and Procedures.................................................................................. 11 PART II -- OTHER INFORMATION Legal Proceedings........................................................................................ 12 Changes in Securities and Use of Proceeds................................................................ 13 Defaults Upon Senior Securities.......................................................................... 13 Submission of Matters to a Vote of Security Holders...................................................... 13 Other Information........................................................................................ 13 Exhibits and Reports on Form 8-K......................................................................... 14 Signatures............................................................................................... 15 i

ITEM 1. FINANCIAL STATEMENTS. MEADE INSTRUMENTS CORP. CONSOLIDATED BALANCE SHEETS (UNAUDITED)

ASSETS NOVEMBER 30, FEBRUARY 28, 2003 2003 -------------- -------------- Cash ...................................................................... $ 2,167,000 $ 2,445,000 Accounts receivable, less allowance for doubtful accounts of $1,033,000 at November 30, 2003 and $714,000 at February 28, 2003 ................ 50,126,000 22,364,000 Inventories ............................................................... 47,409,000 40,050,000 Deferred income taxes ..................................................... 4,356,000 5,240,000 Prepaid income taxes ...................................................... -- 818,000 Prepaid expenses and other current assets ................................. 467,000 563,000 -------------- -------------- Total current assets ........................................ 104,525,000 71,480,000 Other assets .............................................................. 488,000 818,000 Goodwill and acquisition-related intangible assets, net ................... 5,486,000 5,657,000 Property and equipment, net of accumulated depreciation of $10,736,000 at November 30, 2003 and $9,286,000 at February 28, 2003 .............. 4,663,000 5,842,000 -------------- -------------- $ 115,162,000 $ 83,797,000 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank line of credit ................................................... $ 31,275,000 $ 9,063,000 Accounts payable ...................................................... 9,292,000 5,464,000 Accrued liabilities ................................................... 6,983,000 6,293,000 Income taxes payable .................................................. 702,000 -- Current portion, long-term debt and capital lease obligations ......... 585,000 583,000 -------------- -------------- Total current liabilities ................................... 48,837,000 21,403,000 Long-term bank debt ....................................................... 1,818,000 2,139,000 Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value, 50,000,000 shares authorized; 19,985,000 and 19,806,000 shares issued and outstanding at November 30, 2003 and at February 28, 2003, respectively ........ 200,000 198,000 Additional paid-in capital ............................................ 40,504,000 39,979,000 Retained earnings ..................................................... 26,143,000 23,439,000 Accumulated other comprehensive income ................................ 420,000 96,000 -------------- -------------- 67,267,000 63,712,000 Unearned ESOP shares .................................................. (2,760,000) (3,457,000) -------------- -------------- Total stockholders' equity .................................. 64,507,000 60,255,000 -------------- -------------- $ 115,162,000 $ 83,797,000 ============== ============== See accompanying notes to consolidated financial statements. 1

MEADE INSTRUMENTS CORP. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

THREE MONTHS ENDED NINE MONTHS ENDED NOVEMBER 30, NOVEMBER 30, 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Net sales ............................. $ 54,448,000 $ 44,519,000 $107,223,000 $ 88,607,000 Cost of sales ......................... 37,892,000 29,558,000 76,773,000 60,077,000 ------------- ------------- ------------- ------------- Gross profit ........................ 16,556,000 14,961,000 30,450,000 28,530,000 Selling expenses ...................... 6,573,000 5,107,000 14,158,000 11,188,000 General and administrative expenses ... 3,275,000 3,645,000 8,970,000 9,368,000 ESOP expense .......................... 341,000 303,000 635,000 731,000 Research and development expenses ..... 462,000 730,000 1,451,000 2,210,000 ------------- ------------- ------------- ------------- Operating income .................... 5,905,000 5,176,000 5,236,000 5,033,000 Interest expense ...................... 325,000 293,000 761,000 728,000 ------------- ------------- ------------- ------------- Income before income taxes .......... 5,580,000 4,883,000 4,475,000 4,305,000 Provision for income taxes ............ 2,204,000 1,987,000 1,771,000 1,782,000 ------------- ------------- ------------- ------------- Net income ............................ $ 3,376,000 $ 2,896,000 $ 2,704,000 $ 2,523,000 ============= ============= ============= ============= Basic earnings per share .............. $ 0.18 $ 0.17 $ 0.14 $ 0.16 ============= ============= ============= ============= Diluted earnings per share ............ $ 0.17 $ 0.17 $ 0.14 $ 0.16 ============= ============= ============= ============= Weighted average number of shares outstanding-- basic ................. 19,070,000 16,611,000 18,911,000 15,608,000 ============= ============= ============= ============= Weighted average number of shares outstanding-- diluted ............... 19,335,000 16,755,000 19,068,000 15,852,000 ============= ============= ============= ============= See accompanying notes to consolidated financial statements. 2

MEADE INSTRUMENTS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED NOVEMBER 30, ----------------------------- 2003 2002 ------------- ------------- Cash flows from operating activities: Net income .......................................................... $ 2,704,000 $ 2,523,000 Adjustments to reconcile net income to net cash provided by (used by) operating activities: Depreciation and amortization ....................................... 1,541,000 1,409,000 ESOP contribution ................................................... 635,000 731,000 Changes in assets and liabilities, net of effects of acquisition: Increase in accounts receivable .................................. (27,344,000) (27,048,000) (Increase) decrease in inventories ............................... (6,955,000) 7,146,000 Decrease in prepaid expenses and other assets .................... 1,224,000 4,411,000 Increase in accounts payable ..................................... 3,683,000 3,957,000 Increase in accrued liabilities .................................. 783,000 2,104,000 Increase in income taxes payable ................................. 1,468,000 1,523,000 ------------- ------------- Net cash used in operating activities ..................... (22,261,000) (3,244,000) ------------- ------------- Cash flows from investing activities: Capital expenditures ................................................ (323,000) (679,000) Acquisition of Simmons, net of cash acquired ........................ -- (16,000,000) ------------- ------------- Net cash used in investing activities ..................... (323,000) (16,679,000) ------------- ------------- Cash flows from financing activities: Net borrowings under bank lines of credit ........................... 22,012,000 12,941,000 Payments on long-term bank notes .................................... (398,000) (407,000) Net proceeds from the sale of common stock .......................... -- 7,344,000 Proceeds from the exercise of stock options ......................... 410,000 -- Payments under capital lease obligations ............................ (25,000) (118,000) ------------- ------------- Net cash provided by financing activities ................. 21,999,000 19,760,000 ------------- ------------- Effect of exchange rate changes on cash ................................. 307,000 230,000 ------------- ------------- Net increase (decrease) in cash ......................................... (278,000) 67,000 Cash at beginning of period ............................................. 2,445,000 1,249,000 ------------- ------------- Cash at end of period ................................................... $ 2,167,000 $ 1,316,000 ============= ============= See accompanying notes to consolidated financial statements. 3

MEADE INSTRUMENTS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. THE CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED BY THE COMPANY AND ARE UNAUDITED. In management's opinion, the information and amounts furnished in this report reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation of the financial position and results of operations for the interim periods presented. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2003. 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 certain of the Company's less-expensive products during the holiday season. The results of operations for the quarters ended November 30, 2003 and 2002, respectively, are not necessarily indicative of the operating results for the entire fiscal year. B. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS The composition of inventories is as follows: NOVEMBER 30, FEBRUARY 28, 2003 2003 -------------- -------------- Raw materials................................. $ 8,746,000 $ 7,442,000 Work-in-process............................... 5,723,000 4,972,000 Finished goods................................ 32,940,000 27,636,000 -------------- -------------- $ 47,409,000 $ 40,050,000 ============== ============== The composition of goodwill and acquisition-related intangible assets is as follows: NOVEMBER 30, FEBRUARY 28, 2003 2003 -------------- -------------- Goodwill...................................... $ 1,548,000 $ 1,548,000 Brand names and other......................... 3,431,000 3,431,000 -------------- -------------- Total non-amortizing acquisition-related intangible assets....................... 4,979,000 4,979,000 -------------- -------------- Trademarks.................................... 1,398,000 1,398,000 Accumulated amortization...................... (891,000) (720,000) -------------- -------------- Total amortizing acquisition-related intangible assets....................... 507,000 678,000 -------------- -------------- Total goodwill and acquisition-related intangible assets....................... $ 5,486,000 $ 5,657,000 ============== ============== Goodwill in the above table is shown net of $418,000 of amortization accumulated prior to the Company's adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") 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. The Company adopted SFAS No. 142 effective March 1, 2002. C. 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 allege that a number of Tasco's and Celestron's consumer telescopes willfully infringe certain of the Company's U.S. patents. In addition to seeking compensation for damages incurred, the suits seek to enjoin Tasco and Celestron from continuing to manufacture or sell products that infringe certain of the Company's patents. Tasco and Celestron filed answers and certain counterclaims which deny the Company's allegations. The counterclaim also alleges, among other things, that the Company is infringing a Celestron design patent. In February and May 2003, Celestron prevailed on partial summary judgments in which the court held that Celestron did not literally or equivalently infringe one of the Company's patents. Meade subsequently filed a notice of appeal in connection with the partial summary judgments obtained by Celestron. Due to the uncertainties of litigation, the Company is unable to provide an evaluation of the likelihood of either a favorable or unfavorable outcome in these matters. 4 In September 2003, the Company and Celestron agreed to pursue non-binding mediation of the outstanding litigation between the parties. The mediation is currently scheduled to take place in March 2004. 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. 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 are generally covered by a one-year limited warranty. Many of the Simmons products have lifetime limited warranties. Changes in the warranty liability during the period ended November 30, 2003 follows. Balance at February 28, 2003............................. $ 1,794,000 Warranty accrual......................................... 714,000 Labor and material usage................................. (672,000) --------------- Balance at November 30, 2003............................. $ 1,836,000 =============== D. NET INCOME PER SHARE Basic earnings per share amounts exclude the dilutive effect of potential shares of common stock. Basic earnings per share are based upon the weighted-average number of shares of common stock outstanding. Diluted earnings per share are based upon the weighted-average number of shares of common stock and dilutive potential shares of common stock outstanding for each period presented. Potential shares of common stock include outstanding stock options 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 months ended November 30, 2003 and 2002, reflects additional potential shares of common stock for outstanding stock options. E. COMPREHENSIVE INCOME 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 November 30, 2003, includes foreign currency translation adjustments and adjustments to the fair value of highly effective derivative instruments. For the periods ended November 30, 2003, the Company had other comprehensive income (loss) as follows:

THREE MONTHS ENDED NINE MONTHS ENDED NOVEMBER 30, NOVEMBER 30, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net income ............................................. $ 3,376,000 $ 2,896,000 $ 2,704,000 $ 2,523,000 Currency translation adjustment ........................ 412,000 28,000 408,000 380,000 Change in fair value of foreign currency forward contracts, net of tax ............................... 392,000 140,000 (13,000) (53,000) Unrealized loss in marketable securities, net of tax ... -- -- (97,000) -- Change in fair value of interest rate swap ............. 9,000 -- 26,000 (21,000) ------------ ------------ ------------ ------------ Total other comprehensive income ....................... $ 4,189,000 $ 3,064,000 $ 3,028,000 $ 2,829,000 ============ ============ ============ ============

5 F. 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, 2003 FEBRUARY 28, 2003 --------------------------------------- -------------------------------------- NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE ------------------ -------------------- - ------------------- ------------------ Interest rate swap agreement $ 1,190,000 $ (23,000) $ 1,505,000 $ (49,000) Cash flow forward currency contracts $ 1,316,000 $ (22,000) -- --

At November 30, 2003, the fair values of forward currency contracts and interest rate swap agreements are recorded in accrued liabilities on the accompanying 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 March 2004. G. 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 cost 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 income and income per share would have been decreased to the pro forma amounts indicated below.

THREE MONTHS ENDED NINE MONTHS ENDED NOVEMBER 30, NOVEMBER 30, 2003 2002 2003 2002 ------------ -------------- -------------- -------------- Reported net income..................................... $ 3,376,000 $ 2,896,000 $ 2,704,000 $ 2,523,000 Pro forma compensation cost, net of income taxes......... (45,000) (365,000) (583,000) (1,228,000) ------------ -------------- -------------- -------------- Pro forma net income.................................... $ 3,331,000 $ 2,531,000 $ 2,121,000 $ 1,295,000 ============ ============== ============== ============== Reported income per share - basic....................... $ 0.18 $ 0.17 $ 0.14 $ 0.16 ============ ============== ============== ============== Reported income per share - diluted..................... $ 0.17 $ 0.17 $ 0.14 $ 0.16 ============ ============== ============== ============== Pro forma income per share - basic and diluted.......... $ 0.17 $ 0.15 $ 0.11 $ 0.08 ============ ============== ============== ==============

6 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, 2003 COMPARED TO THREE MONTHS ENDED NOVEMBER 30, 2002 Net sales for the third quarter of fiscal 2004 were $54.4 million compared to $44.5 million for the second quarter of fiscal 2003, an increase of 22.3%. The Simmons subsidiary, acquired on October 25, 2002, contributed approximately $9.7 million to third quarter fiscal 2004 sales compared to approximately $3.4 million in the prior year period. Sales at the Company's European subsidiary contributed approximately $2 million to the increase over last year with the balance coming from improved telescope sales in the U.S. Gross profit increased from $15.0 million (33.6% of net sales) for the third quarter of fiscal 2003 to $16.6 million (30.4 % of net sales) for the third quarter of fiscal 2004, an increase of 10.7%. The increase was due to increased sales over the prior year quarter. The decrease in gross margin (gross profit as a percent of net sales) was due to continuing pricing pressure on many of the Meade product lines, principally small and mid-range telescopes during the third quarter. Also negatively affecting gross margins was the approximately $8 million of the revenue increase over the prior year quarter attributable to the European and Simmons subsidiaries. These subsidiaries, as distribution companies, typically produce gross margins that are less than the historical gross margins at Meade. Selling expenses increased from $5.1 million (11.5% of net sales) for the third quarter of fiscal 2003 to $6.6 million (12.1% of net sales) for the third quarter of fiscal 2004. The increase was primarily attributed to selling expenses at Simmons. General and administrative expenses decreased from $3.6 million (8.2% of net sales) for the third quarter of fiscal 2003, to $3.3 million (6.0% of net sales) for the third quarter of fiscal 2004, a decrease of 10.2%. The majority of this decrease was due to lower consulting and professional fees (approximately $0.5 million less in the current quarter compared to the prior year quarter) which was partially offset by an increase in compensation costs. ESOP contribution expense was flat at $0.3 million (0.7% of net sales in the prior year compared to 0.6% of net sales in the current quarter). 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 decreased from $0.7 million (1.6% of net sales) for the third quarter of fiscal 2003 to $0.5 million (0.8% of net sales) for the third quarter of fiscal 2004, a decrease of 36.7%. This decrease was due to a reduction in engineering personnel and outside consulting costs principally in response to diminished demand for the Company's industrial optical products. 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 of the quarters presented. Increases in average borrowings over the prior year were offset by lower borrowing rates. NINE MONTHS ENDED NOVEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED NOVEMBER 30, 2002 Net sales for the nine months ended November 30, 2003 were $107.2 million compared to $88.6 million for the comparable prior year period, an increase of 21.0%. The increase in net sales over the prior year was due to sales of over $25 million at the Simmons subsidiary (acquired in October 2002), increases at Meade's European subsidiary of over $3 million and an approximately $3 million increase in sales of mid-priced and higher-priced telescopes in the U.S. Offsetting these increases was a reduction of approximately $4 million in net sales of the Company's lower-priced telescopes, primarily consisting of a model sold at a specialty mass merchant in the prior year that was not sold in the current year. Also offsetting the sales increases was a decrease of approximately $2 million in binocular sales, and approximately $2 million in accessory and other related product sales. 7 Gross profit increased from $28.5 million (32.2% of net sales) for the nine months ended November 30, 2002 to $30.5 million (28.4% of net sales) for the comparable current year period, an increase of 6.7%. The increase was due to increased sales over the prior year period. The decrease in gross margin (gross profit as a percent of net sales) was due to continuing pricing pressure on many of the Meade product lines. Also negatively affecting gross margins was the revenue increase over the prior year attributable to the European and Simmons subsidiaries. These subsidiaries, as distribution companies, typically produce gross margins that are less than the historical gross margins at Meade. Selling expenses increased from $11.2 million (12.6% of net sales) for the nine months ended November 30, 2002 to $14.2 million (13.2% of net sales) for the comparable current year period, an increase of 26.6%. This increase was primarily due to selling expenses at Simmons (approximately $3.5 million for the nine month period) partially offset by a decrease in advertising expenses. During the prior year period, the Company spent approximately $1.0 million in television, radio and print advertising costs related to the introduction and promotion of CaptureView, the Company's binocular with an integrated digital camera that were not duplicated during the current year. Any future promotional expenses relating to CaptureView binoculars will be incurred as the products are sold into the market. General and administrative expenses decreased from $9.4 million (10.6% of net sales) for the nine months ended November 30, 2002 to $9.0 million (8.4% of net sales) for the comparable current year period, a decrease of 4.2%. Simmons general and administrative expenses for the nine month period were approximately $1.0 million. The prior year period included approximately $0.7 million incurred in connection with the Company's effort to acquire certain of the assets of Tasco and Celestron. Those acquisition costs did not recur in the current year period. The Company did not consummate the proposed acquisition of Tasco and Celestron assets. In addition to the $0.7 million previously discussed, consulting and professional fees were approximately $0.5 million less in the current period compared to the prior year period, partially offset by an increase in compensation costs. ESOP contribution expense decreased from $0.7 million (0.8% of net sales) for the nine months ended November 30, 2002 to $0.6 million (0.6% of net sales) for the comparable current year period, a decrease of 13.1%. The decrease in this non-cash charge was principally due to decreases in the average market price of the Company's stock allocated to the Employee Stock Ownership Plan during the period. 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 decreased from $2.2 million (2.5% of net sales) for the nine months ended November 30, 2002 to $1.5 million (1.4% of net sales) for the comparable current year period, a decrease of 34.3%. This decrease was due to a reduction in engineering personnel and outside consulting costs principally in response to diminished demand for the Company's industrial optical products. 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 $0.8 million for each of the periods presented. Increases in average borrowings over the prior year were offset by lower borrowing rates. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended November 30, 2003 the Company funded its operations with short-term bank borrowings. Internally generated cash flow from net income adjusted for non-cash charges was used by increases in accounts receivable and inventories, partially offset by an increase in accounts payable. Accounts receivable increased as expected with increased sales during the quarter. Inventories increased as expected to support a full cycle of sales at the Company's Simmons subsidiary. Accounts payable increased with the increase in inventories. Net working capital totaled approximately $55.7 million at November 30, 2003, compared to $50.1 million at February 28, 2003. 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, 2003 was approximately $9.0 million. 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. 8 Capital expenditures, including financed purchases of equipment, aggregated $0.3 million and $0.7 million for the nine months ended November 30, 2003 and 2002, respectively. The Company had no material capital expenditure commitments at November 30, 2003. 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 are generally covered by a one-year limited warranty. Many of the Simmons products have lifetime limited warranties. Changes in the warranty liability during the period ended November 30, 2003 follows. Balance at February 28, 2003............................. $ 1,794,000 Warranty accrual......................................... 714,000 Labor and material usage................................. (672,000) --------------- Balance at November 30, 2003............................. $ 1,836,000 =============== NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the Company adopted SFAS 146, which addresses accounting for costs associated with exit or disposal activities. In addition, the FASB issued FIN 46, which requires that certain variable interest entities be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have a controlling financial interest or do not have sufficient equity at risk. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003. For all such entities created prior to February 1, 2003, FIN 46 is effective for interim or annual fiscal periods ending after December 15, 2003. The adoption of these statements did not have a material effect on the Company's financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. It amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS 149 amends SFAS 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendments to SFAS 133, in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative. The application of this statement did not have an impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes standards for how a company clarifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires a company to classify such instruments as liabilities, whereas they previously may have been classified as equity. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective July 1, 2003. The application of this statement did not have an impact on the Company's consolidated financial statements. 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, microscope and other optical products; the Company's ability to continue to develop and bring to market new and innovative products, including, without limitation the new line of CaptureView binoculars, at competitive prices; 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 experiencing fluctuations in its sales, gross margins and profitability from quarter to quarter consistent with prior periods; the Company's expectation that its contingent liabilities will not have a material effect on the Company's financial position or results of operations; 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. 9 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: o a decline in general economic conditions; o uncertainties affecting consumer spending; and o 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: o the potential that we may be unable to obtain and maintain patents and copyrights to protect our computerized telescope and other product technology; o competitors' infringement upon Meade's existing intellectual property; and o approval of competitors' patent applications that may restrict our ability to compete effectively. Our business is subject to other risks, including: o a general decline in demand for the Company's products; o an inability to continue to design and manufacture products that will achieve and maintain commercial success; o the potential that we may fail to penetrate the binocular and riflescope markets and achieve meaningful sales; o any significant interruption of our manufacturing abilities in our domestic or Mexican facilities or in any of our suppliers located in the Far East; o greater than anticipated competition; o discovery of facts not presently known to Meade or determinations by judges, juries or other finders of fact which do not accord with Meade's evaluation of the possible liability or outcome of existing litigation; o any loss of, or the failure to replace, any significant portion of the sales made to any significant customer of the Company; o currency exchange rate fluctuations greater than the Company has experienced which could hinder the Company's ability to remain price competitive; and o 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 currencies, principally in Europe. These currencies have been relatively stable against the U.S. dollar for the past several years. As a result, foreign currency fluctuations have not had a material impact historically on Meade's revenues or results of operations. There can be no assurance that foreign 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, revenues and financial condition. 10 The Company has adopted a foreign currency hedging program that utilizes foreign currency forward contracts to hedge variable cash flows associated with recognized liabilities and to hedge exposure to changes in the fair value of unrecognized firm commitments. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The instruments that Meade uses for hedging are readily marketable traded forward contracts with financial institutions. Meade expects that the changes in fair value of such contracts will have a high correlation to the price changes in the related hedged cash flow. Any gains and losses on these hedge contracts are expected to offset changes in the value of the related exposures. During the nine months ended November 30, 2003, the Company entered into cash flow forward currency contracts with notional amounts aggregating $1.3 million. The fair value of these contracts at November 30, 2003 was ($22,000). Under the terms of the U.S. 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, 2003 was a gain of $26,000 which is included in other comprehensive income for the nine months then ended. 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 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 17, 2001, the Company filed suit against Tasco Sales, Inc. ("Tasco") and Celestron International, Inc. ("Celestron"), charging the two companies with patent infringement and unfair competition. The complaint, filed in the United States District Court, Central District of California, Southern Division (Case No. SA-CV 01-976 (GLT)), alleges that Tasco and Celestron willfully infringed Meade's Patent No. 6,304,376, entitled "Fully Automated Telescope System With Distributed Intelligence." In addition to seeking compensation for damages incurred, including enhanced damages, the suit seeks to enjoin Tasco and Celestron from continuing to manufacture or sell products that infringe Meade's patent. On or around November 7, 2001, the defendants filed an answer, subsequently amended, to the complaint in which it denied the Company's allegations and set forth various affirmative defenses. On or around November 19, 2001, Defendants filed a counterclaim, also subsequently amended, against the Company for declaratory judgment of non-infringement of the Company's patent, for declaratory judgment that the Company's patent is unenforceable and invalid, and for claims that the Company is infringing a Celestron design patent, U.S. Patent No. D438,221, and Celestron's trade dress. The counterclaim further alleges that the Company has willfully infringed Celestron's design patent and seeks an unspecified amount of damages, enhanced damages, and an injunction and other unspecified relief against the Company. However, Celestron subsequently dismissed its design-patent counterclaim with prejudice as to Meade products on sale up to that time. On February 28, 2003, a partial Summary Judgment issued in favor of Celestron in which the Court held that Celestron did not literally infringe Meade's `376 patent. On May 23, 2003, a further partial Summary Judgment was issued in favor of Celestron in which the Court held that Celestron did not infringe Meade's `376 patent under the doctrine of equivalents. The parties dismissed their remaining claims against each other, and Meade filed an appeal of the court's two summary judgment orders on September 18, 2003. The appeal will be decided by the Court of Appeals for the Federal Circuit. Due to the uncertainties of litigation, the Company is unable to provide an evaluation of the likelihood of either a favorable or unfavorable outcome in these cases. On June 4, 2002, the Company filed suit against Celestron, Tasco and other related or affiliated parties charging the defendant with patent infringement. The complaint, ("the `799 lawsuit") filed in the United States District Court, Central District of California, Southern Division (Case No. SA CV 02-544 (GLT)), alleges that the defendants willfully infringed Meade's Patent No. 6,392,799, entitled "Fully Automated Telescope System With Distributed Intelligence." The patent covers the Company's "level the telescope and point it North" alignment technology (the "Telescope Alignment Technology"), which allows a telescope user to easily align a computer operated telescope. In addition to seeking compensation for damages incurred, including enhanced damages, the suit seeks to enjoin Tasco, Celestron and the other defendants from continuing to manufacture or sell products that infringe Meade's telescope alignment patent. In July 2003, Celestron and the other defendants filed a motion for Summary Judgment that the defendants' products do not infringe Meade's Telescope Alignment Technology, both literally or under the doctrine of equivalents. Meade has opposed that motion. The motion is not set to be heard until at least December 2003. The Company intends to continue to vigorously assert the `799 patent against Celestron, Tasco, and the other defendants and to vigorously defend against their counterclaims. Due to the uncertainties of litigation, the Company is unable to provide an evaluation of the likelihood of either a favorable or unfavorable outcome in this case. On June 7, 2002, the Company filed suit against Celestron, Tasco and other related or affiliated parties, charging the defendants with correction of patent inventorship, false and misleading representations in violation of the Lanham Act, unfair competition and fraudulent business practices. The complaint, ("the `942 lawsuit) filed in the United States District Court, Central District of California, Southern Division (Case No. SA-CV 02-558 (GLT)), alleges that the defendants misappropriated the Company's Telescope Alignment Technology and subsequently conspired to obtain United States Patent No. 6,369,942, entitled "Auto-alignment tracking telescope mount" ("the `942 Patent"), by fraudulently representing themselves as the inventors and owners of the Telescope Alignment Technology. In addition to other remedies, the suit seeks to establish that Meade invented the Telescope Alignment Technology and that equitable and legal title to the `942 Patent should be vested in the Company. Due to the uncertainties of litigation, the Company is unable to provide an evaluation of the likelihood of either a favorable or unfavorable outcome in this case. On November 21, 2002, Celestron filed an action alleging that Meade products infringe United States Patent No. 6,467,738 entitled "Tripod Structure for Telescopes." The complaint seeks injunctive relief, compensatory and treble damages in an unspecified amount, and attorneys' fees and costs. Meade has filed an answer denying all claims in Celestron's complaint. Celestron had sought a preliminary injunction in this matter, which was denied pursuant to an order entered on December 17, 2002. Due to the uncertainties of litigation, the Company is unable to provide an evaluation of the likelihood of either a favorable or unfavorable outcome in this case. 12 Celestron and Tasco, in May 2002, transferred certain of their assets in an assignment for the benefit of creditors proceeding to James Feltman, an assignee. Assignee James Feltman subsequently sold the assets on or around June 24, 2002 to a new Celestron entity, Celestron Acquisition LLC. Celestron Acquisition LLC, along with Celestron and Tasco, is a defendant in the above-referenced lawsuits. James Feltman is also a named defendant in the `799 lawsuit, but not the `942 lawsuit. On September 9, 2003, the Company, Celestron and James Feltman agreed to pursue non-binding mediation of all outstanding litigation between the parties. As part of the mediation process, the parties agreed to stay all the litigation (including the discovery process) in the above four cases. The mediation is currently scheduled to take place in March 2004. 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. ITEM 2. CHANGES IN 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 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 6(a) Exhibits filed with this Form 10-Q.

1. Exhibit 10.54 First amendment to amended and restated credit agreement 2. Exhibit 31.1 Sarbanes-Oxley Act Section 302 Certification by Steven G. Murdock 3. Exhibit 31.2 Sarbanes-Oxley Act Section 302 Certification by Brent W. Christensen 4. Exhibit 32.1 Sarbanes-Oxley Act Section 906 Certification by Steven G. Murdock 5. Exhibit 32.2 Sarbanes-Oxley Act Section 906 Certification by Brent W. Christensen

6(b) Reports on Form 8-K. The Company filed the following Report with the SEC 1. Form 8-K, filed on September 18, 2003, covering a press release announcing the Company's financial results for the quarterly period ended August 31, 2003. 2. Form 8-K, filed on September 30, 2003, covering a press release announcing the resignation of John C. Diebel from the Company's Board of Directors, effective October 30, 2003. 14 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 14, 2004 MEADE INSTRUMENTS CORP. By: /s/ STEVEN G. MURDOCK -------------------------------------- Steven G. Murdock PRESIDENT, CHIEF EXECUTIVE OFFICER AND SECRETARY By: /s/ BRENT W. CHRISTENSEN -------------------------------------- Brent W. Christensen SENIOR VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER 15