FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____to_____
Commission File No. 1-7604
CROWN CRAFTS, INC
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-0678148
------------------------------ ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
916 South Burnside Avenue, Gonzales, Louisiana 70737
----------------------------------------------------
(Address of principal executive offices)
(225) 647-9100
--------------------------------------------------
(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
--- ---
The number of shares of common stock, $1.00 par value, of the Registrant
outstanding as of September 29, 2002 was 9,421,437.
A-1
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 29, 2002 (unaudited) and March 31, 2002
September 29, March 31,
Dollar amounts in thousands 2002 2002
- --------------------------- ------------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 280 $ 388
Accounts receivable (net of allowances of
$3,378 at September 29, 2002
and $1,841 at March 31, 2002):
Due from factor 15,287 11,549
Other 2,306 983
Inventories, net 16,149 16,451
Income tax receivable -- 1,820
Other current assets 3,167 2,466
------------ ---------
Total current assets 37,189 33,657
------------ ---------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Land, buildings and improvements 2,029 2,863
Machinery and equipment 4,019 3,915
Furniture and fixtures 694 617
------------ ---------
6,742 7,395
Less accumulated depreciation 3,618 4,065
------------ ---------
Property, plant and equipment - net 3,124 3,330
OTHER ASSETS:
Goodwill (net of amortization of $6,261 at
September 29, 2002 and March 31, 2002) 23,034 23,034
Other 90 179
------------ ---------
Total other assets 23,124 23,213
------------ ---------
TOTAL ASSETS $ 63,437 $ 60,200
============ =========
See notes to unaudited interim consolidated financial statements.
A-2
Crown Crafts, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 29, 2002 (unaudited) and March 31, 2002
September 29, March 31,
Dollar amounts in thousands 2002 2002
- --------------------------- ------------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,737 $ 3,695
Accrued wages and benefits 1,115 1,459
Accrued royalties 1,369 1,015
Other accrued liabilities 1,187 1,421
Current maturities of long-term debt 3,262 3,000
------------- ---------
Total current liabilities 11,670 10,590
------------- ---------
NON-CURRENT LIABILITIES:
Long-term debt 37,575 36,773
Deferred income taxes 24 24
-------------- --------
Total non-current liabilities 37,599 36,797
-------------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock - par value $1.00 per share, 50,000,000
shares authorized
Outstanding: 9,421,437 at September 29, 2002
and March 31, 2002 9,421 9,421
Additional paid-in capital 28,857 28,857
Accumulated deficit (24,089) (25,475)
Cumulative currency translation adjustment (21) 10
------------- --------
Total shareholders' equity 14,168 12,813
------------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 63,437 $ 60,200
============= =========
See notes to unaudited interim consolidated financial statements.
A-3
Crown Crafts, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For The Three- and Six-Month Periods Ended
September 29, 2002 and September 30, 2001
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
Amounts in thousands, except per September 29, September 30, September 29, September 30,
share amounts 2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales $ 28,399 $ 31,338 $ 46,326 $ 70,037
Cost of products sold 21,631 23,604 35,940 54,779
-------- -------- -------- --------
Gross profit 6,768 7,734 10,386 15,258
Marketing and administrative expenses 3,456 4,759 6,616 12,727
-------- -------- -------- --------
Income from operations 3,312 2,975 3,770 2,531
Other income (expense):
Interest expense (1,183) (1,080) (2,357) (4,380)
Gain on extinguishment of debt -- 25,008 -- 25,008
Other - net 33 212 77 1,139
-------- -------- -------- --------
Income before income taxes 2,162 27,115 1,490 24,298
Income tax (benefit) expense 83 (4) 104 38
-------- -------- -------- --------
Net income 2,079 27,119 1,386 24,260
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 3 (54) (31) 82
-------- -------- -------- --------
Comprehensive income $ 2,082 $ 27,065 $ 1,355 $ 24,342
-------- -------- -------- --------
Basic income per share $ 0.22 $ 2.94 $ 0.15 $ 2.72
-------- -------- -------- --------
Diluted income per share $ 0.09 $ 1.21 $ 0.06 $ 1.56
-------- -------- -------- --------
Weighted average shares outstanding - basic 9,421 9,222 9,421 8,913
-------- -------- -------- --------
Weighted average shares outstanding - diluted 22,715 22,437 22,007 15,521
-------- -------- -------- --------
See notes to unaudited interim consolidated financial statements.
A-4
Crown Crafts, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six-Month Periods Ended September 29, 2002 and September 30, 2001
(UNAUDITED)
September 29, September 30,
Amounts in thousands 2002 2001
- -------------------- ------------- -------------
OPERATING ACTIVITIES:
Net income $ 1,386 $ 24,260
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
Gain on debt refinancing -- (25,008)
Depreciation of property, plant and equipment 408 410
Amortization of goodwill -- 527
Gain on sale of property, plant, and equipment -- (4)
Changes in assets and liabilities
Accounts receivable (5,060) (281)
Inventories, net 302 2,918
Income tax receivable 1,820 --
Other current assets (702) 406
Other assets 88 310
Accounts payable 1,042 (4,175)
Accrued liabilities (224) (1,698)
Other long term liabilities -- (745)
Liabilities assumed by purchaser of adult bedding -- 3,372
Assets held for sale -- 73
-------- --------
Net cash (used for) provided by operating activities (940) 365
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (202) (163)
Proceeds from disposition of assets -- 18,216
Other (31) 75
-------- --------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (233) 18,128
-------- --------
FINANCING ACTIVITIES:
Net change in long term borrowing 1,065 (18,979)
Increase in advances from factor -- 299
Issuance of common stock -- 127
-------- --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,065 (18,553)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS
(108) (60)
Cash and cash equivalents at beginning of period 388 588
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 280 $ 528
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes (received) paid $ (1,762) $ 89
Interest paid 1,468 4,759
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Forgiveness of indebtedness -- $ 25,008
Issuance of warrants -- 2,381
-------- --------
See notes to unaudited interim consolidated financial statements.
A-5
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation: The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
applicable to interim financial information and the rules and
regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and disclosures required by
accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of
management, such interim consolidated financial statements contain all
adjustments necessary to present fairly the financial position of Crown
Crafts, Inc. (the "Company") as of September 29, 2002 and the results
of its operations for the three- and six-month periods ended September
29, 2002 and September 30, 2001 and its cash flows for the six-month
periods ended September 29, 2002 and September 30, 2001. Such
adjustments include normal recurring accruals and a pro rata portion of
certain estimated annual expenses. Operating results for the three- and
six-month periods ended September 29, 2002 are not necessarily
indicative of the results that may be expected for the year ending
March 30, 2003. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual
report on Form 10-K for the year ended March 31, 2002 of the Company.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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
reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Standards: In July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS 141, Business
Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS
141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting and eliminates
the use of the pooling-of-interests method. The application of SFAS 141
did not affect any of the Company's previously reported amounts
included in goodwill or other intangible assets. SFAS 142 requires that
the amortization of goodwill cease prospectively upon adoption and
instead, the carrying value of goodwill be evaluated using an
impairment approach. Identifiable intangible assets will continue to be
amortized over their useful lives and reviewed for impairment in
accordance with SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. SFAS 142 is
effective for fiscal years beginning after December 15, 2001, and was
implemented by the Company on April 1, 2002. Beginning in fiscal 2003,
the Company discontinued amortizing goodwill but continued to amortize
other long-lived intangible assets. The Company has performed a
transitional fair value based impairment test on its goodwill in
accordance with SFAS 142 and has determined that the fair value
exceeded the recorded value at April 1, 2002. Following is a
reconciliation of previously reported net income and basic and diluted
net income per share to the amounts that would have been reported if
SFAS 142 had been effective as of April 2, 2001 and the amortization of
goodwill had been discontinued as of that date.
A-6
THREE MONTHS ENDED SIX MONTHS ENDED
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Reported net income $ 2,079 $ 27,119 $ 1,386 $ 24,260
Goodwill amortization -- 264 -- 527
------------- ------------- ------------- -------------
Adjusted net income $ 2,079 $ 27,383 $ 1,386 $ 24,787
============= ============= ============= =============
Basic income per share:
Reported net income $ 0.22 $ 2.94 $ 0.15 $ 2.72
Goodwill amortization -- 0.03 -- 0.06
------------- ------------- ------------- -------------
Adjusted net income $ 0.22 $ 2.97 $ 0.15 $ 2.78
============= ============= ============= =============
Diluted income per share:
Reported net income $ 0.09 $ 1.21 $ 0.06 $ 1.56
Goodwill amortization -- 0.01 -- 0.03
------------- ------------- ------------- -------------
Adjusted net income $ 0.09 $ 1.22 $ 0.06 $ 1.60
============= ============= ============= =============
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Although SFAS 144 supersedes SFAS 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, it retains most of the concepts of that standard, except that it eliminates
the requirement that goodwill be allocated to long-lived assets for impairment
testing purposes and it requires that a long-lived asset to be abandoned or
exchanged for a similar asset be considered held and used until it is disposed
of (i.e., the depreciable life should be revised until the asset is actually
abandoned or exchanged). Also, SFAS 144 includes the basic provisions of
Accounting Principles Board ("APB") Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
presentation of discontinued operations in the income statement but broadens
that presentation to include a component of an entity rather than a segment of a
business, where that component can be clearly distinguished from the rest of the
entity. SFAS 144 is effective for fiscal years beginning after December 15, 2001
and was implemented by the Company on April 1, 2002. The adoption of SFAS 144
did not have a significant effect on the Company's financial statements on the
date of adoption.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS
145 provides, among other things, that gains on the extinguishments of debt will
generally no longer be classified as extraordinary items in the statements of
operations. It also provides that gains on extinguishments be reclassified in
prior years financial statements presented for comparative purposes. SFAS 145 is
effective for fiscal years beginning after May 15, 2002 with earlier adoption
encouraged. The Company adopted SFAS 145 effective July 1, 2002. The adoption of
SFAS 145 required that a gain on debt refinancing of $25 million realized in the
second quarter of fiscal 2002 be reclassified into income before extraordinary
items.
In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, which is effective for fiscal periods after
December 31, 2002. SFAS 146 requires companies to recognize costs associated
with restructurings, discontinued operations, plant closings, or other exit or
disposal activities, when incurred rather than at the date a plan is committed
to. The Company is presently reviewing this statement and plans to adopt it as
of its effective date and will implement its provisions on a prospective basis.
The Company does not expect the adoption of SFAS 146 to have a material impact
on its consolidated financial statements.
Reclassifications: Certain prior period financial statement balances have been
reclassified to conform to the current period's presentation.
A-7
2. Segment and Related Information: In 1999, the Company adopted SFAS 131,
Disclosures about Segments of an Enterprise and Related Information. At
the date of adoption, the Company's principal segments included adult
home furnishing and juvenile products, consisting of bedroom and bath
products (adult comforters, sheets and towels), throws and juvenile
products (primarily Pillow Buddies(R)). An additional segment was
infant products, consisting of infant bedding, bibs, and infant soft
goods. Following the sale of the Adult Bedding and Bath business as of
July 23, 2001 as described in Note 4 below, the Company is primarily in
the infant and juvenile products business.
Financial information attributable to the Company's business segments
for the three- and six-month periods ended September 29, 2002 and
September 30, 2001 was as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
September 29, September 30, September 29, September 30,
Net Sales 2002 2001 2002 2001
- -------------------------- ------------- ------------- ------------- -------------
Adult home furnishing
products $ 718 $ 2,936 $ 1,248 $ 21,587
Infant & juvenile products 27,681 28,402 45,078 48,450
------------- ------------- ------------- -------------
Total $ 28,399 $ 31,338 $ 46,326 $ 70,037
============= ============= ============= =============
THREE MONTHS ENDED SIX MONTHS ENDED
September 29, September 30, September 29, September 30,
Operating income (loss): 2002 2001 2002 2001
- -------------------------- ------------- ------------- ------------- -------------
Adult home furnishing
products $ (23) $ 693 $ (77) $ (1,421)
Infant & juvenile products 3,335 2,282 3,847 3,952
------------- ------------- ------------- -------------
Total $ 3,312 $ 2,975 $ 3,770 $ 2,531
============= ============= ============= =============
Net sales by individual product groups within these business segments were as
follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Bedroom products $ -- $ 1,826 $ -- $ 19,937
Throws and decorative
home accessories 718 1,110 1,248 1,650
Infant and juvenile products 27,681 28,402 45,078 48,450
------------- ------------- ------------- -------------
Total $ 28,399 $ 31,338 $ 46,326 $ 70,037
============= ============= ============= =============
A-8
3. Inventory: Major classes of inventory were as follows (in thousands):
September 29, March 31,
2002 2002
------------- -------------
Raw materials $ 3,477 $ 4,567
Work in process 1,034 1,280
Finished goods 11,638 10,604
------------- -------------
$ 16,149 $ 16,451
============= =============
Inventory is net of reserves for inventories classified as irregular or
discontinued of $1.5 million and $2.2 million at September 29, 2002 and
March 31, 2002, respectively.
4. Discontinuance of Certain Businesses: During the quarter ended July 1,
2001, the Company sold property, plant and equipment (primarily at
Timberlake, North Carolina) with net proceeds of $9.2 million and a
gain on sale of $802,000. The net proceeds were used to reduce debt.
As part of the plan to reduce debt and restore profitability, the
Company made a decision to exit the Adult Bedding and Bath Business,
and its net assets related to that business of $12.4 million were sold
effective July 23, 2001. Proceeds of the sale were $8.5 million cash
plus assumption of liabilities of $3.4 million as well as assumption of
certain contingent liabilities. Cash from the sale was used to reduce
debt. The sale included inventory, buildings, machinery and equipment
located at Roxboro, North Carolina as well as various sales offices.
The Adult Bedding and Bath Business had annual sales of approximately
$24.8 million and $76.5 million in fiscal 2002 and fiscal 2001,
respectively, and was included in the adult home furnishing and
juvenile products segment. The Adult Bedding and Bath Business includes
the remainder of the bedroom products group following the sale of the
Wovens division.
5. Financing Arrangements
Factoring Agreement: The Company assigns the majority of its trade
accounts receivable to a commercial factor. Under the terms of the
factoring agreement, which expires July 2003, the factor remits
payments to the Company on the average due date of each group of
invoices assigned. If a customer fails to pay the factor upon the due
date, the Company is charged interest at prime (4.75% at September 29,
2002) until payment is received. The factor bears credit losses with
respect to assigned accounts receivable that are within approved credit
limits. The Company bears losses resulting from returns, allowances,
claims and discounts.
Notes Payable and Other Credit Facilities: At September 29, 2002 and
March 31, 2002, long-term debt consisted of:
September 29, March 31,
2002 2002
------------- -------------
Promissory notes $ 37,325 $ 38,000
Floating rate revolving credit facilities 6,746 5,542
Non-interest bearing notes 274 --
Original issue discount (3,508) (3,769)
------------- -------------
40,837 39,773
Less current maturities (3,262) (3,000)
------------- -------------
$ 37,575 $ 36,773
============= =============
A-9
On July 23, 2001 the Company completed a refinancing of its debt. The new credit
facilities include the following:
Revolving Credit of up to $19 million including a $3 million sub-limit for
letters of credit, $14.0 million drawn at closing. The interest rate is prime
plus 1.00% (5.75% at September 29, 2002) for base rate borrowings and LIBOR plus
2.75% (4.56% at September 29, 2002) for Euro-dollar borrowings. The maturity
date is June 30, 2004. The facility is secured by a first lien on all assets.
The balance at September 29, 2002 was $6.7 million. The Company had $11.1
million available at September 29, 2002. As of September 29, 2002, letters of
credit of $1.2 million were outstanding against the $3 million sub-limit for
letters of credit associated with the $19 million revolving credit facility.
Senior Notes of $14 million with a fixed interest rate of 10% plus additional
interest contingent upon cash flow availability of 3%. The maturity date is June
30, 2006 and the notes are secured by a first lien on all assets. A minimum
principal payment of $250,000 was paid on April 1, 2002 and minimum principal
payments of $500,000 are due at the end of each calendar quarter thereafter. In
the event that required debt service exceeds 70% of free cash flow (EBITDA (as
hereinafter defined) less capital expenditures and cash taxes paid), the excess
of contingent interest and principal amortization over 70% will be deferred
until maturity of the Senior Notes in June 2006. Contingent interest plus
additional principal payments will be due annually up to 70% of free cash flow.
Subsequent to the end of the second quarter, the Company made a payment to the
lenders of $1.6 million related to excess cash flow, of which $1.25 million was
included in Current Maturities of Long-term Debt and $396,000 was included in
Other Accrued Liabilities in the Company's Consolidated Balance Sheet as of
September 29, 2002.
Senior Subordinated Notes of $16 million with a fixed interest rate of 10% plus
an additional 1.65% payable by delivery of a promissory note due July 23, 2007.
The maturity date is July 23, 2007 and the notes are secured by a second lien on
all assets. In addition to principal and interest, a payment of $8 million is
due on the earliest of (i) maturity of the notes, (ii) prepayment of the notes,
or (iii) sale of the Company. The original issue discount of $4.1 million on
this non-interest bearing note at a market interest rate of 12% will be
amortized over the life of the notes. The remaining balance of $3.5 million is
included in the Consolidated Balance Sheet as of September 29, 2002.
The new credit facilities contain covenants regarding minimum levels of Earnings
before Interest, Taxes, Depreciation and Amortization ("EBITDA"), maximum total
debt to EBITDA, maximum senior debt to EBITDA, minimum EBITDA to cash interest,
and minimum shareholders' equity. The bank facilities also place restrictions on
the amounts the Company may expend on acquisitions and purchases of treasury
stock and currently prohibit the payment of dividends.
Future minimum annual maturities are as follows: (in thousands)
Fiscal Revolver Senior Notes Sub Notes PIK Notes Total
- ------ --------- ------------ ---------- ---------- --------
2003 -- $ 2,250 -- -- $ 2,250
2004 -- 3,000 -- -- 3,000
2005 $ 6,746 2,000 -- -- 8,746
2006 -- 2,500 -- -- 2,500
2007 -- 3,500 -- -- 3,500
2008 -- -- $ 24,000* $ 274 24,274
--------- ----------- ---------- ---------- --------
Total $ 6,746 $ 13,250 $ 24,000 $ 274 $ 44,270
========= =========== ========== ========== ========
*Includes $8 million non-interest bearing note issued at an original issue
discount of $4.1 million.
As part of the refinancing, the Company issued to the lenders warrants for
non-voting common stock that are convertible into common stock equivalent to 65%
of the shares of the Company on a fully diluted basis at a price of 11.3 cents
per share. The warrants are non-callable and expire in six years. The value of
the warrants of $2.4 million using the Black-Scholes option pricing model was
credited to additional paid-in capital in the second quarter of fiscal 2002.
A-10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 29, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
Total net sales for the second quarter of fiscal year 2003 decreased $2.9
million, or 9.4%, to $28.4 million from $31.3 million for the second quarter of
fiscal year 2002. Net sales of bedroom and bath products decreased $1.8 million,
or 100%, net sales of throws decreased $392,000, or 35.4%, to $718,000, and net
sales of infant and juvenile products decreased $721,000, or 2.5%, to $27.7
million.
The decrease in sales of bedroom and bath products was the result of the sale of
the Adult Bedding division on July 23, 2001. Lower sales of infant and juvenile
products were primarily due to a slowdown in product receipts from the West
Coast ports prior to the October lockout and several delays in pickup by our
retail partners as they continue to aggressively manage their supply chains.
During the second quarter of fiscal year 2003, cost of sales increased to 76.2%
of net sales from 75.3% for the same period in fiscal year 2002. Cost of sales
of 75.3% for the second quarter of fiscal year 2002 was impacted favorably by
the allocation of sales proceeds from the sale of the Adult Bedding division on
July 23, 2001.
Marketing and administrative expenses decreased by $1.3 million, or 27.4%, in
the current year quarter compared to the same quarter in the prior fiscal year
and were 12.2% of net sales for the current quarter compared to 15.2% in the
corresponding quarter of the prior year. The decrease is a result of the
divestment referenced above as well as the Company's cost reduction initiatives
and restructuring.
Interest expense for the quarter decreased by $103,000 because of a lower
average debt balance and reduced interest rates.
Due to accumulated losses, the federal income tax provision for the quarter
ended September 29, 2002 only includes a provision for alternative minimum tax
of $28,000, along with a provision for state income taxes of $55,000, for a
total tax provision of $83,000. For the quarter ended September 30, 2001, the
Company recorded a $4,000 income tax benefit.
SIX MONTHS ENDED SEPTEMBER 29, 2002 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 2001
Total net sales for the six months ended September 29, 2002 decreased $23.7
million, or 33.9%, to $46.3 million from $70.0 million for the same period in
fiscal year 2002. Net sales of bedroom and bath products decreased $19.9
million, or 100%, net sales of throws decreased $402,000, or 24.4%, to $1.2
million, and net sales of infant and juvenile products decreased $3.4 million,
or 7%, to $45.1 million.
The decrease in sales of bedroom and bath products was the result of the sale of
the Adult Bedding division on July 23, 2001. Lower sales of infant and juvenile
products were primarily due to changes in buying patterns by major retailers,
the general economic slowdown and a slowdown in product receipts from the West
Coast ports prior to the October lockout.
During the six months ended September 29, 2002, cost of sales decreased to 77.6%
of net sales from 78.2% for the same period in fiscal year 2002. The decrease
relates primarily to changes in product mix as a result of the divestment
referenced above.
Marketing and administrative expenses decreased by $6.1 million, or 48%, in the
current year compared to the same period in the prior fiscal year and were 14.3%
of net sales for the current year compared to 18.2% in the corresponding period
of the prior year. The decrease is a result of the divestment referenced above
as well as the Company's cost reduction initiatives and restructuring.
Interest expense for the six months ended September 29, 2002 decreased by $2.0
million because of a lower average debt balance and reduced interest rates.
A-11
Due to accumulated losses, the federal income tax provision for the six months
ended September 29, 2002 includes a provision of $32,000 including alternative
minimum tax of $28,000, along with a provision for state income taxes of
$72,000, for a total tax provision of $104,000. For the six months ended
September 30, 2001, the Company recorded a state income tax provision of
$38,000.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $940,000 for the six months ended
September 29, 2002 compared to net cash provided by operating activities of
$365,000 for the six months ended September 30, 2001. Net cash used by investing
activities was $233,000 compared to net cash provided by investing activities of
$18.1 million in the prior year period. Net cash provided by financing
activities was $1.1 million compared to net cash used for financing activities
of $18.6 million in the prior year period.
The Company's ability to make scheduled payments of principal, to pay the
interest on, or to refinance its maturing indebtedness, to fund capital
expenditures or to comply with its debt covenants will depend upon future
performance. The Company's future performance is, to a certain extent, subject
to general economic, financial, competitive, legislative, regulatory and other
factors beyond its control. Based upon the current level of operations, the
Company believes that cash flow from operations together with revolving credit
availability will be adequate to meet liquidity needs.
To reduce its exposure to credit losses and to enhance its cash flow, the
Company factors the majority of its trade accounts receivable. The Company's
factor establishes customer credit lines, and accounts for and collects
receivable balances. The factor remits payment to the Company on the average due
dates of the factored invoices. The factor assumes all responsibility for credit
losses on sales within approved credit lines, but may deduct from its
remittances to the Company the amounts of customer deductions for returns,
allowances, disputes and discounts. The Company's factor at any time may
terminate or limit its approval of shipments to a particular customer. If such a
termination occurs, the Company may either assume the credit risks for shipments
after the date of such termination or cease shipments to such customer.
FORWARD-LOOKING INFORMATION
This Form 10-Q contains forward-looking statements within the meaning of the
federal securities law. Such statements are based upon management's current
expectations, projections, estimates and assumptions. Words such as "expects,"
"believes," "anticipates" and variations of such words and similar expressions
are intended to identify such forward-looking statements. Forward-looking
statements involve known and unknown risks and uncertainties that may cause
future results to differ materially from those anticipated. These risks include,
among others, general economic conditions, changing competition, the level and
pricing of future orders from the Company's customers, the Company's dependence
upon third-party suppliers, including some located in foreign countries with
unstable political situations, the Company's ability to successfully implement
new information technologies, the Company's ability to integrate its
acquisitions and new licenses, and the Company's ability to implement
improvements in its acquired businesses.
ITEM 3 - QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on debt,
commodity prices and foreign exchange rates. The exposure to interest rate risk
relates to its floating rate debt, $6.7 million of which was outstanding at
September 29, 2002 compared to $5.5 million at March 31, 2002. Each 1.0
percentage point increase in interest rates would impact annual pretax earnings
by $67,000 at the debt level of September 29, 2002 and $55,000 at the debt level
of March 31, 2002. The exposure to commodity price risk primarily relates to
changes in the price of cotton, which is a principal raw material in a
substantial number of the Company's products. The exposure to foreign exchange
rates relates to its Mexican manufacturing subsidiary. During the fiscal year
ended March 31, 2002, this subsidiary manufactured products for the Company with
a value of approximately $3.9 million. The Company's investment in the
subsidiary was approximately $2.6 million at March 31, 2002.
A-12
ITEM 4 - CONTROLS AND PROCEDURES
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-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"). Based on
such evaluation, such officers have concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures are effective in alerting them
on a timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
Since the Evaluation Date, there have not been any significant changes in the
Company's internal controls or in other factors that could significantly affect
such controls.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time, the Company is involved in various legal proceedings relating
to claims arising in the ordinary course of its business. Neither the Company
nor any of its subsidiaries is a party to any such legal proceeding the outcome
of which, individually or in the aggregate, is expected to have a material
adverse effect on the Company's financial condition or results of operations.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of the Company's Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of the Company's Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
A-13
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.
CROWN CRAFTS, INC.
Date: November 13, 2002 /s/ Amy Vidrine Samson
--------------------------- ----------------------------
AMY VIDRINE SAMSON
Chief Financial Officer
(duly authorized signatory and
Principal Financial and Accounting
Officer)
A-14
I, E. Randall Chestnut, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Crown Crafts,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002
/s/ E. Randall Chestnut
---------------------------
E. Randall Chestnut
Chairman of the Board,
President & Chief Executive
Officer
A-15
I, Amy Vidrine Samson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Crown Crafts,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Amy Vidrine Samson
----------------------
Amy Vidrine Samson
Vice President & Chief
Financial Officer
A-16
Index to Exhibits
Exhibit
Number Description
- ------- ------------
99.1 Certification of the Company's Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of the Company's Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
A-17