Annual report pursuant to Section 13 and 15(d)

Note 2 - Summary of Significant Accounting Policies

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Note 2 - Summary of Significant Accounting Policies
12 Months Ended
Apr. 02, 2017
Notes to Financial Statements  
Significant Accounting Policies [Text Block]
Note
2
- Summary of Significant Accounting Policies
 
Basis of Presentation:
The accompanying consolidated financial statements include the accounts of the Company and have been prepared pursuant to accounting principles generally accepted in the United States (“GAAP”) as promulgated by the Financial Accounting Standards Board (“FASB”). All significant intercompany balances and transactions have been eliminated in consolidation. References herein to GAAP are to topics within the FASB Accounting Standards Codification (the “FASB ASC”), which has been established by the FASB as the authoritative source for GAAP recognized by the FASB to be applied by nongovernmental entities.
 
Reclassifications:
The Company has reclassified certain prior year information to conform to the amounts presented in the current year.
None
of the changes impact the Company’s previously reported financial position or results of operations.
 
Fiscal Year:
The Company's fiscal year ends on the Sunday nearest to or on
March 31.
References herein to “fiscal year
2017”
or
“2017”
represent the
52
-week period ended
April 2, 2017
and references to “fiscal year
2016”
or
“2016”
represent the
53
-week period ended
April 3, 2016.
 
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and the reported amounts of revenues and expenses during the periods presented on the consolidated statements of income and cash flows. Significant estimates are made with respect to the allowances related to accounts receivable for customer deductions for returns, allowances and disputes. The Company also has a certain amount of discontinued finished goods which necessitates the establishment of inventory reserves that are highly subjective. Actual results could differ materially from those estimates.
 
Cash and Cash Equivalents:
The Company considers all highly-liquid investments purchased with original maturities of
three
months or less to be cash equivalents. The Company’s credit facility consists of a revolving line of credit under a financing agreement with The CIT Group/Commercial Services, Inc. (“CIT”), a subsidiary of CIT Group Inc. The Company classifies a negative balance outstanding under this revolving line of credit as cash, as these amounts are legally owed to the Company and are immediately available to be drawn upon by the Company.
 
Financial Instruments
: For short-term instruments such as cash and cash equivalents, accounts receivable and accounts payable, the Company uses carrying value as a reasonable estimate of fair value.
 
Segments and Related Information:
The Company operates primarily in
one
principal segment, infant and toddler products. These products consist of infant and toddler bedding, bibs, soft bath products, disposable products and accessories. Net sales of bedding, blankets and accessories and net sales of bibs, bath and disposable products for
2017
and
2016
are as follows (in thousands):
 
 
 
2017
 
 
2016
 
Bedding, blankets and accessories
  $
42,381
    $
59,020
 
Bibs, bath and disposable products
   
23,597
     
25,322
 
Total net sales
  $
65,978
    $
84,342
 
 
 
Revenue Recognition:
Sales are recorded when goods are shipped to customers and are reported net of allowances for estimated returns and allowances in the accompanying consolidated statements of income. Allowances for returns are estimated based on historical rates. Allowances for returns, cooperative advertising allowances, warehouse allowances, placement fees and volume rebates are recorded commensurate with sales activity or using the straight-line method, as appropriate, and the cost of such allowances is netted against sales in reporting the results of operations. Shipping and handling costs, net of amounts reimbursed by customers, are
not
material and are included in net sales.
 
Allowances
Against Accounts Receivable:
The Company’s allowances against accounts receivable are primarily contractually agreed-upon deductions for items such as cooperative advertising and warehouse allowances, placement fees and volume rebates. These deductions are recorded throughout the year commensurate with sales activity or using the straight-line method, as appropriate. Funding of the majority of the Company’s allowances occurs on a per-invoice basis. The allowances for customer deductions, which are netted against accounts receivable in the accompanying consolidated balance sheets, consist of agreed-upon cooperative advertising support, placement fees, markdowns and warehouse and other allowances. All such allowances are recorded as direct offsets to sales, and such costs are accrued commensurate with sales activities or as a straight-line amortization charge of an agreed-upon fixed amount, as appropriate to the circumstances for each arrangement. When a customer requests deductions, the allowances are reduced to reflect such payments or credits issued against the customer’s account balance. The Company analyzes the components of the allowances for customer deductions monthly and adjusts the allowances to the appropriate levels. The timing of the funding requests for advertising support can cause the net balance in the allowance account to fluctuate from period to period. The timing of such funding requests should have a minimal impact on the consolidated statements of income since such costs are accrued commensurate with sales activity or using the straight-line method, as appropriate.
 
To reduce its exposure to credit losses, the Company assigns the majority of its trade accounts receivable under factoring agreements with CIT. In the event a factored receivable becomes uncollectible due to creditworthiness, CIT bears the risk of loss. The Company’s management must make estimates of the uncollectiblity of its non-factored accounts receivable, which it accomplishes by specifically analyzing accounts receivable, historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in its customers’ payment terms. The Company did
not
record a provision for doubtful accounts for either of fiscal years
2017
or
2016.
 
The Company’s accounts receivable at
April 2, 2017
amounted to
$15.6
million, net of allowances of
$775,000.
Of this amount,
$14.9
million was due from CIT under the factoring agreements and
$7.7
million was due from CIT as a negative balance outstanding under the revolving line of credit. The combined amount of
$22.6
million represents the maximum loss that the Company could incur if CIT failed completely to perform its obligations under the factoring agreements and the revolving line of credit.
 
Depreciation and Amortization
:
The accompanying consolidated balance sheets reflect property, plant and equipment, and certain intangible assets at cost less accumulated depreciation or amortization. The Company capitalizes additions and improvements and expenses maintenance and repairs as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are
three
to
eight
years for property, plant and equipment, and
five
to
twenty
years for intangible assets other than goodwill. The Company amortizes improvements to its leased facilities over the term of the lease or the estimated useful life of the asset, whichever is shorter.
 
Valuation of Long-Lived Assets
and
Identifiable Intangible
A
s
sets
:
In addition to the depreciation and amortization procedures set forth above, the Company reviews for impairment long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount of any asset
may
not
be recoverable. In the event of impairment, the asset is written down to its fair market value.
 
Patent Costs:
The Company incurs certain legal and related costs in connection with patent applications. The Company capitalizes such costs to be amortized over the expected life of the patent to the extent that an economic benefit is anticipated from the resulting patent or an alternative future use is available to the Company. The Company also capitalizes legal and other costs incurred in the protection or 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. Capitalized patent defense costs are amortized over the remaining expected life of the related patent. The Company’s assessment of future economic benefit of its patents involves considerable management judgment, and a different conclusion could result in a material impairment charge up to the carrying value of these assets.
 
Advertising Costs:
The Company’s advertising costs are primarily associated with cooperative advertising arrangements with certain of the Company’s customers and are recognized using the straight-line method based upon aggregate annual estimated amounts for these customers, with periodic adjustments to the actual amounts of authorized agreements. Advertising expense is included in other marketing and administrative expenses in the consolidated statements of income and amounted to
$742,000
and
$931,000
for fiscal years
2017
and
2016,
respectively.
 
Inventory Valuation:
The preparation of the Company's financial statements requires careful determination of the appropriate dollar amount of the Company's inventory balances. Such amount is presented as a current asset in the accompanying consolidated balance sheets and is a direct determinant of cost of products sold in the accompanying consolidated statements of income and, therefore, has a significant impact on the amount of net income in the reported accounting periods. The basis of accounting for inventories is cost, which includes the direct supplier acquisition cost, duties, taxes and freight, and the indirect costs to design, develop, source and store the product until it is sold. Once cost has been determined, the Company’s inventory is then stated at the lower of cost or market, with cost determined using the
first
-in,
first
-out ("FIFO") method, which assumes that inventory quantities are sold in the order in which they are acquired.
 
The determination of the indirect charges and their allocation to the Company's finished goods inventories is complex and requires significant management judgment and estimates. If management made different judgments or utilized different estimates, then differences would result in the valuation of the Company's inventories and in the amount and timing of the Company's cost of products sold and the resulting net income for the reporting period.
 
On a periodic basis, management reviews its inventory quantities on hand for obsolescence, physical deterioration, changes in price levels and the existence of quantities on hand which
may
not
reasonably be expected to be sold within the Company’s normal operating cycle. To the extent that any of these conditions is believed to exist or the market value of the inventory expected to be realized in the ordinary course of business is otherwise
no
longer as great as its carrying value, an allowance against the inventory value is established. To the extent that this allowance is established or increased during an accounting period, an expense is recorded in cost of products sold in the Company's consolidated statements of income. Only when inventory for which an allowance has been established is later sold or is otherwise disposed is the allowance reduced accordingly. Significant management judgment is required in determining the amount and adequacy of this allowance. In the event that actual results differ from management's estimates or these estimates and judgments are revised in future periods, the Company
may
not
fully realize the carrying value of its inventory or
may
need to establish additional allowances, either of which could materially impact the Company's financial position and results of operations.
 
Provision for Income Taxes:
The Company’s provision for income taxes includes all currently payable federal, state, local and foreign taxes that are based on the Company's taxable income and the change during the fiscal year in net deferred income tax assets and liabilities. The Company provides for deferred income taxes based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates that will be in effect when the differences are expected to reverse. The Company’s policy is to recognize the effect that a change in enacted tax rates would have on net deferred income tax assets and liabilities in the period that the tax rates are changed.
 
Management evaluates items of income, deductions and credits reported on the Company’s various federal and state income tax returns filed and recognizes the effect of positions taken on those income tax returns only if those positions are more likely than
not
to be sustained. The Company applies the provisions of FASB ASC Sub-topic
740
-
10
-
25,
which requires a minimum recognition threshold that a tax benefit must meet before being recognized in the financial statements. Recognized income tax positions are measured at the largest amount that has a greater than
50%
likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company’s policy is to accrue interest expense and penalties as appropriate on any estimated unrecognized tax benefits as a charge to interest expense in the Company’s consolidated statements of income.
No
interest expense or penalties is accrued with respect to estimated unrecognized tax benefits that are associated with state income tax overpayments that remain receivable.
 
The Company files income tax returns in the many jurisdictions in which it operates, including the U.S., several U.S. states and the People’s Republic of China. The statute of limitations varies by jurisdiction; tax years open to federal or state audit or other adjustment as of
April 2, 2017
were the tax years ended
March 30, 2014,
March 29, 2015,
April 3, 2016
and
April 2, 2017,
as well as the tax years ended
March 31, 2013,
April 1, 2012
and
April 3, 2011
for several states.
 
In
December 2016,
the Company received notification from the State of California of its intention to examine the Company’s consolidated income tax returns for the fiscal years ended
April 3, 2011,
April 1, 2012,
March 31, 2013
and
March 30, 2014.
The ultimate resolution of the examination could include administrative or legal proceedings. Although management believes that the calculations and positions taken on these and all other filed income tax returns are reasonable and justifiable, the outcome of this or any other examination could result in an adjustment to the position that the Company took on such income tax returns. Such adjustment could also lead to adjustments to
one
or more other state income tax returns, or to income tax returns for subsequent fiscal years, or both. To the extent that the Company’s reserve for unrecognized tax benefits is
not
adequate to support the cumulative effect of such adjustments, the Company could experience a material adverse impact on its future results of operations. Conversely, to the extent that the calculations and positions taken by the Company on the filed income tax returns under examination are sustained, the reversal of all or a portion of the Company’s reserve for unrecognized tax benefits could result in a favorable impact on its future results of operations.
 
Royalty Payments:
The Company has entered into agreements that provide for royalty payments based on a percentage of sales with certain minimum guaranteed amounts. These royalties are accrued based upon historical sales rates adjusted for current sales trends by customers. Royalty expense is included in cost of products sold and amounted to
$7.0
million and
$9.0
million for fiscal years
2017
and
2016,
respectively.
 
Earnings
Per Share:
The Company calculates basic earnings per share by using a weighted average of the number of shares outstanding during the reporting periods. Diluted shares outstanding are calculated in accordance with the treasury stock method, which assumes that the proceeds from the exercise of all exercisable options would be used to repurchase shares at market value. The net number of shares issued after the exercise proceeds are exhausted represents the potentially dilutive effect of the exercisable options, which are added to basic shares to arrive at diluted shares.
 
Recently
Issued Accounting Standards:
On
May 28, 2014,
the FASB issued ASU
No.
2014
-
09,
Revenue from Contracts wit
h
Customers (Topic
606
)
, which will replace most existing GAAP guidance on revenue recognition and which will require the use of more estimates and judgments, as well as additional disclosures. When issued, ASU
No.
2014
-
09
was to become effective in the fiscal year beginning after
December 15, 2016,
but on
August 12, 2015
the FASB issued ASU
No.
2015
-
14,
Revenue from Contracts with Customers (Topic
606
): Deferral of the Effective Date
, which provided for a
one
-year deferral of the effective date to apply the guidance of ASU
No.
2014
-
09.
Early adoption was originally
not
permitted in ASU
No.
2014
-
09,
but ASU
No.
2015
-
14
permits early adoption in the
first
interim period of the fiscal year beginning after
December 15, 2016.
The ASU permits the use of either the retrospective or cumulative effect transition method. The Company is currently reviewing its existing revenue contract arrangements and expects its review to be complete in fiscal year
2018.
At this time, the Company has
not
yet determined whether it will adopt the provisions of the ASU on a retrospective basis or through a cumulative adjustment to equity.
 
On
July 22, 2015,
the FASB issued ASU
No.
2015
-
11,
Inventory (Topic
330
): Simplifying the Measurement of Inventory
, which will clarify that after an entity determines the cost of its inventory, the subsequent measurement and presentation of such inventory should be at the lower of cost or net realizable value. The ASU will become effective for the
first
interim period of the fiscal year beginning after
December 15, 2016.
The ASU should be applied prospectively, and early adoption is permitted. The Company intends to adopt ASU
No.
2015
-
11
on
April 3, 2017,
and is currently evaluating the effect that the adoption of the ASU will have on its financial position, results of operations and related disclosures.
 
On
November 20, 2015,
the FASB issued ASU
No.
2015
-
17,
Income Taxes (Topic
740
): Balance Sheet Classification of Deferred Taxes
, the intent of which was to simplify the presentation of deferred taxes by requiring all deferred tax assets and liabilities to be classified as noncurrent on an entity’s balance sheet. The ASU was to have become effective for the
first
interim period of the fiscal year beginning after
December 15, 2016,
and early adoption is permitted. Upon adoption, the ASU
may
be applied prospectively or retrospectively. The Company elected to early-adopt ASU
No.
2015
-
17
effective as of
April 4, 2016
using a prospective application. As such, the consolidated balance sheet presented as of
April 3, 2016
in the accompanying consolidated financial statements has
not
been adjusted. The adoption of ASU
No.
2015
-
17
on
April 4, 2016
resulted in the reclassification in the accompanying consolidated balance sheet as of
April 2, 2017
of
$397,000
in net deferred tax assets from current to noncurrent. The adoption of ASU
No.
2015
-
17
did
not
have an impact on the Company’s results of operations and related disclosures.
 
On
February 25, 2016,
the FASB issued ASU
No.
2016
-
02,
Leases (Topic
842
)
, which will increase transparency and comparability by requiring an entity to recognize lease assets and lease liabilities on its balance sheet and by requiring the disclosure of key information about leasing arrangements. Under the provisions of ASU
No.
2016
-
02,
the Company will be required to capitalize most of its current operating lease obligations as right-of-use assets with corresponding liabilities based upon the present value of the future cash outflows associated with such operating lease obligations. The ASU will become effective for the
first
interim period of the fiscal year beginning after
December 15, 2018.
The ASU is to be applied using a modified retrospective approach, and early adoption is permitted. The Company has
not
yet decided if it will early-adopt ASU
No.
2016
-
02
and is currently evaluating the effect that its adoption of the ASU will have on its financial position, results of operations and related disclosures.
 
On
March 30, 2016,
the FASB issued ASU
No.
2016
-
09,
Compensation – Stock Compensation (Topic
718
): Improvements to Employee Share-Based Payment Accounting
, the intent of which was to simplify the accounting for share-based compensation transactions while maintaining or improving the usefulness of the related disclosures. ASU
No.
2016
-
09
was to have become effective for the
first
interim period of the fiscal year beginning after
December 15, 2016,
and early adoption is permitted. Upon adoption, the ASU
may
be applied prospectively or retrospectively. The Company elected to early-adopt the ASU effective as of
April 4, 2016
using a prospective application. Accordingly, the consolidated statement of income, changes in shareholders’ equity and cash flows in the accompanying consoldiated financial statements for the fiscal year ended
April 3, 2016
have
not
been adjusted.
 
The provisions of ASU
No.
2016
-
09
that are applicable to the Company and the effect of the adoption of the ASU on the Company’s accompanying consolidated financial statements include the following:
 
 
Under previous GAAP, upon the exercise of an option or the vesting of non-vested stock, the Company was required to recognize the tax effect of the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes in additional paid-in capital. The provisions of ASU
No.
2016
-
09
require the recognition of the excess tax deficiency or benefit as an income tax expense or benefit, respectively, in the Company’s statement of income. The Company’s election to early-adopt the ASU effective as of
April 4, 2016
resulted in the recognition of net excess tax benefits amounting to
$248,000
as a reduction to the Company’s reported income tax expense for fiscal year
2017.
If ASU
No.
2016
-
09
had been in effect on
March 30, 2015,
the Company’s income tax expense for fiscal year
2016
would have been
$273,000
lower. The effect of the adoption of the ASU on the Company’s future results of operations will depend on such factors as the timing and extent of the future exercise of stock options and the future vesting of non-vested stock, as well as the closing price per share of the Company’s common stock on the dates of such events. The inherent uncertainty surrounding the details of these factors dictates that the future effects of the adoption of ASU
No.
2016
-
09
on the Company’s results of operations cannot be reasonably estimated.
 
 
Under previous GAAP, excess tax benefits were classified as a financing activity in the Company’s statement of cash flows. The provisions of ASU
No.
2016
-
09
require that excess tax benefits be classified as an operating activity in the Company’s statement of cash flows. The Company’s election to early-adopt ASU
No.
2016
-
09
effective as of
April 4, 2016
resulted in the classification of excess tax benefits amounting to
$250,000
as cash provided by operating activities during fiscal year
2017.
If ASU
No.
2016
-
09
had been in effect on
March 30, 2015,
the amount of the Company’s cash provided by operating activities during fiscal year
2016
would have been
$278,000
higher and its cash used in financing activities would have been
$278,000
higher.
 
 
The provisions of ASU
No.
2016
-
09
clarify that cash paid by the Company to taxing authorities on behalf of an employee to reflect the value of shares withheld from the exercise of options or the vesting of non-vested stock to satisfy the income tax withholding obligations arising from such exercise or vesting should be classified as a financing activity in the Company’s statement of cash flows. As this treatment is consistent with the Company’s long-standing practice, if ASU
No.
2016
-
09
had been in effect beginning on
March 30, 2015,
there would have been
no
difference in the amount of the Company’s cash used in financing activities during either
2017
or
2016
as a result of this provision in the ASU.
 
On
June 16, 2016,
the FASB issued ASU
No.
2016
-
13,
Financial Instruments – Credit Losses (Topic
326
): Measurement of Credit Losses on Financial Instruments
, the objective of which is to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by an entity. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable that a loss has been incurred. Because this methodology restricted the recognition of credit losses that are expected, but did
not
yet meet the “probable” threshhold, ASU
No.
2016
-
13
was issued to require the consideration of a broader range of reasonable and supportable information when determining estimates of credit losses. The ASU will become effective for the
first
interim period of the fiscal year beginning after
December 15, 2019.
The ASU is to be applied using a modified retrospective approach, and the ASU
may
be early-adopted as of the
first
interim period of the fiscal year beginning after
December 15, 2018.
Although the Company has
not
yet decided whether to adopt ASU
No.
2016
-
13
early or determined the full impact of the adoption of the ASU, because the Company assigns the majority of its trade accounts receivable under factoring agreements with CIT, the Company does
not
believe that its adoption of ASU
No.
2016
-
13
will have a significant impact on the Company’s financial position, results of operations and related disclosures.
 
On
January 26, 2017,
the FASB issued ASU
No.
2017
-
04,
Intangibles – Goodwill and Other (Topic
350
): Simplifying the Test for Goodwill Impairment.
Under current GAAP, the test for the impairment of goodwill requires a
two
-step approach, which is outlined in Note
6
to the accompanying consolidated financial statements. The intent of ASU
No.
2017
-
04
is to simplify this process by eliminating the
second
step from the goodwill impairment test. The ASU will become effective for the
first
interim period of the fiscal year beginning after
December 15, 2019.
The ASU is to be applied on a prospective basis, and the ASU
may
be early-adopted as of the
first
interim or annual goodwill impairment test performed on or after
January 1, 2017.
The Company intends to early-adopt the ASU effective as of
April 3, 2017
and is currently evaluating the effect that the adoption of the ASU will have on its financial position, results of operations and related disclosures.
 
The Company has determined that all other ASU’s issued which had become effective as of
May 5, 2017,
or which will become effective at some future date, are
not
expected to have a material impact on the Company’s consolidated financial statements.