Note 2 - Summary of Significant Accounting Policies
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Apr. 01, 2012
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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 in accordance with accounting principles
generally accepted in the United States (“GAAP”)
as promulgated by the Financial Accounting Standards Board
(“FASB”) and the rules and regulations of the
Securities and Exchange Commission
(“SEC”). 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 the FASB periodically revises
through the issuance of an Accounting Standards Update
(“ASU”) and which has been established by the
FASB as the authoritative source for GAAP recognized by the
FASB to be applied by nongovernmental entities.
Fiscal
Year: The Company's fiscal year ends on the
Sunday nearest March 31. References herein to
“fiscal year 2012” or “2012”, and
“fiscal year 2011” or “2011”
represent the 52- and 53-week periods ended April 1, 2012 and
April 3, 2011, respectively.
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 at the date of the
consolidated balance sheets and the reported amounts of
revenues and expenses during the reporting
period. 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”). 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: The following methods and
assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to
estimate such value:
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 one to sixteen 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, Identifiable Intangible Assets and
Goodwill: 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. Assets
to be disposed of, if any, are recorded at the lower of net
book value or fair market value, less estimated costs to sell
at the date management commits to a plan of disposal, and are
classified as assets held for sale on the accompanying
consolidated balance sheets.
The Company tests
the carrying value of its goodwill of its reporting units
annually as of the first day of the Company’s fiscal
year. An additional impairment test is performed
during the year whenever an event or change in circumstances
suggest that the fair value of the goodwill of either of the
reporting units of the Company has more likely than not
fallen below its carrying 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, disposable products, soft goods and
accessories. Net sales of bedding, blankets and
accessories amounted to $63.8 million and $66.3 million in
fiscal years 2012 and 2011, respectively. Net
sales of bibs, bath and disposable products amounted to $21.5
million and $23.7 million in fiscal years 2012 and 2011,
respectively.
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, advertising allowances, warehouse allowances and
volume rebates are recorded commensurate with sales activity
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 advertising and warehouse allowances and volume
rebates. These deductions are recorded throughout
the year commensurate with sales activity. 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 advertising support, 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. 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
customer-initiated 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.
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 when evaluating the adequacy
of its allowance for doubtful accounts, 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’s accounts
receivable at April 1, 2012 amounted to $20.3 million, net of
allowances of $1.1 million. Of this amount, $19.4
million was due from CIT under the factoring agreements, and
$18,000 was due from CIT as a negative balance outstanding
under the revolving line of credit, which combined amounts
represent 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.
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. 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. Based on its recent evaluation, the
Company has concluded that there are no significant uncertain
tax positions requiring recognition in the accompanying
consolidated financial statements.
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 general examination or other adjustment
as of April 1, 2012 were the tax years ended March 29, 2009,
March 28, 2010, April 3, 2011 and April 1, 2012, as well as
the tax year ended March 30, 2008 for several
states. 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.
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
sales and amounted to $6.9 million and $7.3 million in 2012
and 2011, 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 goods 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 is the sum
of expenditures and charges, both direct and indirect,
incurred to acquire inventory, bring it to a condition
suitable for sale and store it 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 goods 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 goods
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.
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
12, 2011, the FASB issued ASU No. 2011-04, Fair Value
Measurement (Topic 820): Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs. This ASU is intended
to improve consistency across jurisdictions to ensure that
U.S. GAAP and International Financial Reporting Standards
(“IFRSs”) fair value measurement and disclosure
requirements are described in the same way. For
public entities, the amendments in this ASU are to be applied
prospectively effective for annual periods beginning after
December 15, 2011, and early application is not
permitted. The Company does not anticipate that
its adoption of ASU No. 2011-04 on April 2, 2012 will impact
its consolidated financial statements.
On
September 15, 2011, the FASB issued FASB ASU No. 2011-08,
Intangibles
– Goodwill and Other (Topic 350): Testing
Goodwill for Impairment. This ASU will give
an entity the option to first assess qualitative factors to
determine whether it is more likely than not (defined as
having a likelihood of greater than 50%) that the fair value
of the goodwill of a reporting unit is less than its carrying
amount as a basis for determining whether it is necessary to
perform the two-step impairment test as described
above. The ASU is intended to reduce the cost and
complexity associated with the test for goodwill
impairment. The amendments in this ASU are
effective for annual and interim goodwill impairment tests
performed for fiscal years beginning after December 15, 2011,
and early application is permitted. Because the
annual impairment test of the fair value of the goodwill of
the Company’s reporting units was performed as of April
4, 2011, the Company will adopt ASU No. 2011-08 on April 2,
2012. The Company does not anticipate that such
adoption will impact its consolidated financial
statements.
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