Note 6 – Contingencies

BreathableBaby, LLC (“BreathableBaby”) filed a complaint against the Company and CCIP on January 11, 2012 in the United States District Court for the District of Minnesota, alleging that CCIP’s mesh crib liner infringes BreathableBaby’s patent rights relating to its air permeable infant bedding technology. During the three-month period ended September 28, 2014, the Company reached a settlement with BreathableBaby to resolve this matter. Under the terms of the settlement, the Company will manufacture and sell a redesigned mesh crib liner product and will make a one-time payment of $850,000 to BreathableBaby. Accordingly, the Company recorded a charge of $850,000 during the three and six-month periods ended September 28, 2014, which has been classified as legal expense in the accompanying unaudited consolidated statements of income. The effect of the recognition of the $850,000 charge was to reduce, on an after-tax basis, the Company’s net income for each of the three and six-month periods ended September 28, 2014 by approximately $530,000, or $0.05 per diluted share. The parties are in process of finalizing a settlement agreement with respect to the foregoing, which the Company will file with the SEC and to which reference is made for a complete description of the terms of the settlement.

CCIP was granted a patent in September 2013 related to its mesh crib liner with the United States Patent and Trademark Office and has capitalized $58,000 of costs associated with this patent application as of September 28, 2014. In addition, the Company’s policy is to capitalize legal and other costs incurred in the defense of the Company’s patents when it is believed that the future economic benefit of the patent will be maintained or increased and a successful defense is probable. In this regard, as of September 28, 2014, CCIP had capitalized legal and other costs in the amount of $990,000 associated with its defense of the BreathableBaby complaint into the intangible asset related to the patent for its own mesh crib liner. The Company is amortizing the combined patent application costs and litigation costs associated with CCIP’s mesh crib liner over the expected life of the patent. Because the Company will be able to manufacture and sell a redesigned mesh crib liner product, the outcome of the BreathableBaby litigation will not result in an impairment charge of the carrying value of CCIP’s mesh crib liner. Therefore, the Company will continue to amortize the costs over the expected life of the patent.