Summary of Significant Accounting Policies

12 Months Ended

Feb. 28, 2013

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

3. Summary of Significant Accounting Policies

Basis of presentation and consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, and include the accounts of the Company and all of its subsidiaries and reflect the elimination of all significant intercompany account balances and transactions.

Recent accounting pronouncements

There have been no recent accounting pronouncements which have had or are expected to have a material effect on the Company’s financial statements.

Revenue recognition

The Company’s revenue recognition policy complies with ASC No. 605, Revenue Recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss have passed to the customer, typically at the time of shipment, the price to the buyer is fixed or determinable and collectibility is reasonably assured. Revenue is not recognized at the time of shipment if these criteria are not met. Under certain circumstances, the Company accepts product returns or offers markdown incentives. Material management judgments must be made and used in connection with establishing sales returns and allowances estimates. The Company continuously monitors and tracks returns and allowances and records revenues net of provisions for returns and allowances. The Company’s estimate of sales returns and allowances is based upon several factors including historical experience, current market and economic conditions, customer demand and acceptance of the Company’s products and/or any notification received by the Company of such a return. Historically, sales returns and allowances have been within management’s estimates; however, actual returns may differ significantly, either favorably or unfavorably, from management’s estimates depending on actual market conditions at the time of the return.

Allowance for doubtful accounts

Management analyzes specific customer accounts receivable, customer credit-worthiness, historical bad debt expenses, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of any of the Company’s customers were to deteriorate to the point of impairing the customer’s ability to make payments on its account, additional allowances may be required. While credit losses have historically been within management’s expectations and the provisions established, significant deterioration in the liquidity or financial position of any of the Company’s major customers or any group of customers could have a material adverse impact on the collectibility of accounts receivable and future operating results.

Inventories

Inventories are stated at the lower of cost or market value. Cost is determined principally by the first-in, first-out method (“FIFO”). Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Any write-down of inventory to the lower of cost or market at the close of a fiscal period creates a new cost basis that subsequently would not be marked up based on changes in underlying facts and circumstances. On an on-going basis, the Company evaluates inventory for obsolescence and slow-moving items. This evaluation includes analysis of sales levels, sales projections, and purchases by item, as well as raw material usage related to the Company’s manufacturing facilities. If the Company’s review indicates a reduction in utility below carrying value, it reduces inventory to a new cost basis. If future demand or market conditions are different than the Company’s current estimates, an inventory adjustment may be required, and would be reflected in cost of goods sold in the period the revision is made.

Property and equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Buildings and related improvements, including leasehold improvements, are depreciated over seven to twenty-five years or through the end of the related lease term, whichever is shorter. All other property and equipment, except property held under capital leases, is depreciated over three to seven years. Properties held under capital leases are recorded at the present value of the noncancellable lease payments over the term of the lease and are amortized over the shorter of the lease term or the estimated useful lives of the assets.

Intangible assets

The Company accounts for acquisition-related intangible assets in accordance with FASB Accounting Standards Codification (“ASC”) No. 805-10, Business Combinations, and ASC No. 350-20, Goodwill and Other Intangible Assets. A portion of the remaining difference between the purchase price and the fair value of net tangible assets at the date of acquisition is included in the balance sheet as acquisition-related intangible assets. Amortization periods for the intangible assets subject to amortization range from seven to fifteen years depending on the nature of the assets acquired. The carrying value of acquisition-related intangible assets, including the related amortization period, is evaluated in the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount exceeds the fair value, which is determined based upon estimated discounted future cash flows based upon our estimated cost of capital, an impairment loss is reflected in loss from operations. Such estimates are subject to change and we may be required to recognize an impairment loss in the future.

Income taxes

In accordance with ASC 740, Accounting for Income Taxes the Company determined that there was sufficient uncertainty surrounding the future realization of its deferred tax assets to warrant the recording of a full valuation allowance. The valuation allowance was recorded based upon the Company’s determination that there was insufficient objective evidence, at the time, to recognize those assets for financial reporting purposes. For the fiscal year ended February 28, 2013, the Company has not changed its assessment regarding the recoverability of its deferred tax assets. Ultimate realization of the benefit of the deferred tax assets is dependent upon the Company generating sufficient taxable income in future periods, including periods prior to the expiration of certain underlying tax credits.

The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. At February 28, 2013, there were no accrued interest and penalties related to uncertain tax positions.

The provision for income taxes consists of minimum tax in various U.S. states and income taxes on the Company’s operations in Mexico.

The tax years 2008 through 2012 remain open to examination by the major taxing jurisdictions to which the Company is subject. However, the amount of a net operating loss carryforward can be adjusted for federal tax purposes for the three years (four years for the major state jurisdictions in which the Company operates) after the net operating loss is utilized.

Shipping and handling costs

The Company records shipping and handling costs in selling expenses. For each of the years ended February 28, 2013 and February 29, 2012, the Company incurred shipping and handling costs of $0.6 million.

Advertising

The Company expenses the costs of advertising, including production costs, as incurred. For each of the years ended February 28, 2013 and February 29, 2012, the Company incurred advertising, including cooperative advertising, and marketing expenses of approximately $0.5 million. Cooperative advertising arrangements exist through which customers receive a certain allowance of the total purchases or an otherwise agreed upon amount from the Company if certain qualitative advertising criteria are met and if specified amounts are spent on the advertisements. To receive the allowance, a customer must deliver to the Company evidence of all advertising performed that includes the Company’s products. Because the Company receives an identifiable advertising benefit from the customer, the Company recognizes the cost of cooperative advertising as an advertising expense in selling expenses.

Research and development

Expenditures for research and development costs are charged to expense as incurred.

Loss per share

For each of the years ended February 28, 2013 and February 29, 2012, the Company incurred a net loss. Other than restricted stock and stock options, the Company has no dilutive securities. Therefore, there is no difference between the number of shares used in the calculation of basic and diluted loss per share with respect to the net losses reported.

Basic loss per share amounts exclude the dilutive effect of potential shares of Common Stock. Basic loss per share is based upon the weighted-average number of shares of Common Stock outstanding. Diluted loss per share is based upon the weighted-average number of shares of Common Stock and dilutive potential shares of Common Stock outstanding for each period presented. Potential shares of Common Stock include outstanding stock options which are included under the treasury stock method. For fiscal years ended February 28, 2013 and February 29, 2012, options to purchase 70,775 and 77,350 shares of Common Stock, respectively, were also excluded from diluted weighted average shares of Common Stock, as the option exercise prices were greater than the average market price of the Company’s Common Stock and, therefore, the effect would be anti-dilutive.

Concentration of credit risk

Financial instruments which potentially subject the Company to concentration of credit risk are principally accounts receivable and cash. The Company maintains an allowance for doubtful accounts at a level deemed appropriate by management based on historical and other factors that affect collectibility. Based upon the Company’s assessment of the recoverability of the receivables from its customers and in the opinion of management, the Company has established adequate reserves related to accounts receivable. The Company maintains cash balances at certain financial institutions in excess of amounts insured by federal agencies. Management does not believe that as a result of this concentration it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.

Fair value of financial instruments

The carrying amounts of accounts receivable, credit facility, accounts payable and accrued liabilities, approximate fair value due to the short maturity of these instruments.

Use of estimates in the preparation of consolidated financial statements

The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, sales returns and reserves, allowances for doubtful accounts, excess and obsolete inventory, income taxes, asset impairment, litigation reserves and contingencies.

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 related to its standard product warranty programs and its extended warranty programs. 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 ^® brand products, principally telescopes and binoculars, are generally covered by a one-year limited warranty. Most of the Coronado ^® products have limited five-year warranties. Included in the warranty accrual as of February 28, 2013 and February 29, 2012, is $0.2 million and $0.5 million, respectively, related to the Company’s former sport optics brands that were sold in 2008 and for which the Company agreed to retain certain warranty liabilities. In June 2012, the Company entered into an agreement with the owner of one of the Company’s former sport optics brands which eliminated the Company’s remaining liability of approximately $0.3 million for any future product warranty claims associated with that brand. The Company reduced its warranty accrual by $0.3 million accordingly.

Changes in the warranty liability, which is included as a component of accrued liabilities on the accompanying Consolidated Balance Sheets, were as follows:

	Fiscal Years Ended
	February 28,			February 29,
	2013			2012
	(In thousands)
Beginning balance	$	736		$	810
Release of warranty liability		(294	)		—
Warranty accrual		243			217
Labor and material		(290	)		(291	)
Ending balance	$	395		$	736

Stock-based compensation

The Company accounts for stock-based compensation in accordance with the provisions of ASC No. 718-10, Share-Based Payment, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of ASC No. 718-10, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Share-based compensation expenses, included in general and administrative expenses in the Company’s consolidated statement of operations for fiscal 2013 and 2012, were approximately $0.1 million. Due to deferred tax valuation allowances provided, no net benefit was recorded against the share-based compensation charged.

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the expected option term, forfeiture rate, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop underlying assumptions are appropriate in calculating the fair values of the Company’s stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.