FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2005
o 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)
|
|
|
Delaware
|
|
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
(Registrants 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
þ No o
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o No
þ
The number of shares of common stock, $0.01 par value, of the Registrant outstanding as of July
3, 2005 was 9,505,937.
TABLE OF CONTENTS
CROWN
CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 3, 2005 and April 3, 2005
(UNAUDITED)
(dollar amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
July 3, 2005 |
|
April 3, 2005 |
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
393 |
|
|
$ |
955 |
|
Accounts receivable, net of allowances of $1,603 at July
3, 2005 and $1,411 at April 3, 2005 |
|
|
|
|
|
|
|
|
Due from factor |
|
|
7,817 |
|
|
|
13,258 |
|
Other |
|
|
1,440 |
|
|
|
1,110 |
|
Inventories, net |
|
|
15,739 |
|
|
|
12,544 |
|
Prepaid expense |
|
|
1,340 |
|
|
|
1,450 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
26,729 |
|
|
|
29,317 |
|
Property, plant and equipment at cost: |
|
|
|
|
|
|
|
|
Land, buildings and improvements |
|
|
1,452 |
|
|
|
1,447 |
|
Machinery and equipment |
|
|
2,843 |
|
|
|
2,657 |
|
Furniture and fixtures |
|
|
665 |
|
|
|
661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4,960 |
|
|
|
4,765 |
|
Less accumulated depreciation |
|
|
3,288 |
|
|
|
3,179 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment net |
|
|
1,672 |
|
|
|
1,586 |
|
Other assets: |
|
|
|
|
|
|
|
|
Goodwill, net |
|
|
22,974 |
|
|
|
22,974 |
|
Other |
|
|
253 |
|
|
|
247 |
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
23,227 |
|
|
|
23,221 |
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
51,628 |
|
|
$ |
54,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
5,686 |
|
|
$ |
3,729 |
|
Accrued wages and benefits |
|
|
809 |
|
|
|
669 |
|
Accrued royalties |
|
|
1,121 |
|
|
|
1,051 |
|
Other accrued liabilities |
|
|
324 |
|
|
|
398 |
|
Current maturities of long-term debt |
|
|
18 |
|
|
|
2,317 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
7,958 |
|
|
|
8,164 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
23,064 |
|
|
|
25,085 |
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
23,064 |
|
|
|
25,085 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock par value $0.01 per share, 74,000,000 shares
authorized, 9,505,937 shares outstanding |
|
|
95 |
|
|
|
95 |
|
Additional paid-in capital |
|
|
38,244 |
|
|
|
38,244 |
|
Accumulated deficit |
|
|
(17,733 |
) |
|
|
(17,464 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
20,606 |
|
|
|
20,875 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
51,628 |
|
|
$ |
54,124 |
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
1
Crown
Crafts, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Three-Month Periods Ended July 3, 2005 and June 27, 2004
(UNAUDITED)
(amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
July 3, |
|
June 27, |
|
|
2005 |
|
2004 |
Net sales |
|
$ |
13,659 |
|
|
$ |
16,908 |
|
Cost of products sold |
|
|
10,692 |
|
|
|
13,434 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,967 |
|
|
|
3,474 |
|
Marketing and administrative expenses |
|
|
2,468 |
|
|
|
2,622 |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
499 |
|
|
|
852 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(802 |
) |
|
|
(946 |
) |
Other net |
|
|
42 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
(Loss) before income taxes |
|
|
(261 |
) |
|
|
(78 |
) |
Income tax expense |
|
|
8 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
|
(269 |
) |
|
|
(102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) per share |
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) per share |
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
9,506 |
|
|
|
9,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
9,506 |
|
|
|
9,505 |
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
2
Crown
Crafts, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three-Month Periods Ended July 3, 2005 and June 27, 2004
(UNAUDITED)
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
July 3, |
|
June 27, |
|
|
2005 |
|
2004 |
Operating activities: |
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(269 |
) |
|
$ |
(102 |
) |
Adjustments to reconcile net (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment |
|
|
109 |
|
|
|
137 |
|
Discount accretion |
|
|
183 |
|
|
|
163 |
|
Changes in assets
and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
5,111 |
|
|
|
7,506 |
|
Inventories, net |
|
|
(3,195 |
) |
|
|
(4,805 |
) |
Prepaid expenses |
|
|
110 |
|
|
|
188 |
|
Other assets |
|
|
(6 |
) |
|
|
(10 |
) |
Accounts payable |
|
|
1,957 |
|
|
|
1,013 |
|
Accrued liabilities |
|
|
136 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,136 |
|
|
|
4,171 |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(195 |
) |
|
|
(45 |
) |
Proceeds from disposition of assets |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(195 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Payment of long-term borrowing |
|
|
(4,503 |
) |
|
|
(3,945 |
) |
Long-term borrowing |
|
|
|
|
|
|
1,946 |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities |
|
|
(4,503 |
) |
|
|
(1,999 |
) |
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(562 |
) |
|
|
2,130 |
|
Cash and cash equivalents at beginning of period |
|
|
955 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
393 |
|
|
$ |
2,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes received |
|
$ |
(41 |
) |
|
$ |
(2 |
) |
Interest paid |
|
|
679 |
|
|
|
685 |
|
See notes to unaudited consolidated financial statements.
3
CROWN
CRAFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE THREE -MONTH PERIODS ENDED JULY 3, 2005 AND JUNE 27, 2004
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 July 3, 2005 and the results of
its operations and cash flows for the periods presented. Such adjustments include normal
recurring accruals. Operating results for the three-month period ended July 3, 2005 are not
necessarily indicative of the results that may be expected for the year ending April 2, 2006.
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 April 3, 2005 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. Significant
estimates are made with respect to the allowances related to accounts receivable for customer
deductions for returns, allowances, and disputes. The Company has a certain amount of
discontinued and irregular raw materials and finished goods which necessitate the
establishment of inventory reserves which are highly subjective. Actual results could differ
from those estimates. |
|
|
|
Segment and Related Information: The Company operates primarily in one principal segment,
infant and juvenile products. These products consist of infant bedding, bibs, soft goods and
juvenile products (primarily Pillow Buddies®). |
|
|
|
Impairment of Long-lived Assets, Identifiable Intangibles and Goodwill: The Company reviews for
impairment long-lived assets and certain identifiable intangibles 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 are recorded at the lower of net book value or fair market value less cost to sell at the
date management commits to a plan of disposal and are classified as assets held for sale on the
consolidated balance sheet. |
|
|
|
Goodwill, which represents the unamortized excess of purchase price over fair value of net
identifiable assets acquired in business combinations, was amortized through March 31, 2002
using the straight-line method over periods of up to 30 years. The Company discontinued
amortization of goodwill effective April 1, 2002. The Company reviews the carrying value of
goodwill annually and sooner if facts and circumstances suggest that the asset may be impaired.
Impairment of goodwill and write-downs, if any, are measured based on estimates of future cash
flows. Goodwill is stated net of accumulated amortization of $6.3 million at July 3, 2005 and
April 3, 2005. The Company performed fair value based impairment tests on its goodwill in
accordance with SFAS 142, Goodwill and Other Intangible Assets and determined that the fair
value exceeded the recorded value at March 29, 2004 and April 4, 2005. |
|
|
|
Provision for Income Taxes: The provisions for income taxes include all currently payable
federal, state and local taxes that are based upon the Companys 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. Deferred tax assets have been reduced by a valuation allowance, if
necessary, in the amount of any tax benefits that based on available evidence, are not expected
to be realized. Since the Company has federal income tax net operating loss carryforwards, the
future benefits of which are largely offset by a valuation allowance, provisions for income
taxes relate primarily to state and local income taxes. |
|
|
|
Allowances Against Accounts Receivable: The Companys 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. Historically, funding occurred in the fourth quarter of the fiscal year
causing the balance to be highest in the third quarter. However, beginning in fiscal year 2006,
funding of the majority of the Companys allowances will occur on a per-invoice basis.
|
4
|
|
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 royalty amounts
are accrued based upon historical sales rates adjusted for current sales trends by customers.
Total royalty expenses incurred in cost of sales amounted to $1 million in each of the three
months ended July 3, 2005 and June 27, 2004. |
|
|
|
Stock-Based Compensation: The Company accounts for its stock option plans using the intrinsic
value method established by APB Opinion 25, Accounting for Stock Issued to Employees, and its
related interpretations. Accordingly, no compensation cost has been recognized in the Companys
financial statements for its stock-based compensation plans. The Company complies with the
disclosure requirements of SFAS 123, Accounting for Stock Based-Compensation, as amended by SFAS
148, Accounting for Stock-Based Compensation Transition and Disclosure, which requires pro
forma disclosure regarding net earnings and earnings per share determined as if the Company had
accounted for employee stock options using the fair value method of that statement. |
|
|
|
In December 2004, the FASB issued Statement 123R, Share-Based Payment, an Amendment of FASB
Statement No. 123, which will require all companies to measure compensation cost for all
share-based payments (including employee stock options) at fair value and will be effective for
public companies for annual periods beginning after June 15, 2005. This Statement will
eliminate the ability to account for stock-based compensation transactions using APB 25 and,
generally, will require instead that such transactions be accounted for using a fair-value based
method. Had the Company adopted SFAS 123R in prior periods, the impact of the standard would
have approximated the impact of SFAS No. 123 as described in the disclosure of pro-forma net
income and earnings per share as set forth below. The Company will be required to begin
expensing stock options in the first quarter of fiscal year 2007. |
|
|
|
For purposes of the pro forma disclosure, the fair value of each option was estimated as of the
date of grant using the Black-Scholes option-pricing model and is amortized to expense ratably
as the option vests. Had compensation costs for the Companys stock option plans been
determined based on the fair value at the grant date, consistent with the method under SFAS 123,
the Companys net loss and loss per share would have been as indicated below: |
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
July 3, 2005 |
|
June 27, 2004 |
Net (loss), as reported |
|
$ |
(269 |
) |
|
$ |
(102 |
) |
Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards |
|
|
(5 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
Pro forma net (loss) |
|
$ |
(274 |
) |
|
$ |
(111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
2. Inventory: Major classes of inventory were as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
July 3, 2005 |
|
April 3, 2005 |
Raw Materials |
|
$ |
796 |
|
|
$ |
633 |
|
Work in Process |
|
|
309 |
|
|
|
210 |
|
Finished Goods |
|
|
14,634 |
|
|
|
11,701 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,739 |
|
|
$ |
12,544 |
|
|
|
|
|
|
|
|
|
|
Inventory is net of reserves for inventories classified as irregular or discontinued of $0.8
million and $0.7 million at July 3, 2005 and April 3, 2005, respectively.
5
3. |
|
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, the factor remits payments to
the Company on the average due date of each group of invoices assigned. 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 July 3, 2005 and April 3, 2005, long-term debt
consisted of: |
|
|
|
|
|
|
|
|
|
|
|
July 3, |
|
April 3, |
|
|
2005 |
|
2005 |
Senior notes and senior subordinated notes |
|
$ |
16,034 |
|
|
$ |
20,538 |
|
Floating rate revolving credit facilities |
|
|
|
|
|
|
|
|
Non-interest bearing notes |
|
|
8,810 |
|
|
|
8,809 |
|
Original issue discount |
|
|
(1,762 |
) |
|
|
(1,945 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
23,082 |
|
|
|
27,402 |
|
Less current maturities |
|
|
18 |
|
|
|
2,317 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,064 |
|
|
$ |
25,085 |
|
|
|
|
|
|
|
|
|
|
The Companys existing credit facilities include the following:
Revolving Credit of up to $7.5 million, including a $1.5 million sub-limit for letters of
credit. The interest rate is prime plus 1.00% (7.25% at July 3, 2005) for base rate
borrowings and LIBOR plus 2.75% (6.09% at July 3, 2005) for Euro-dollar borrowings. The
maturity date is July 23, 2007. The facility is secured by a first lien on all assets.
There was no balance outstanding at July 3, 2005. The Company had $6.2 million available at
July 3, 2005. As of July 3, 2005, letters of credit of $1.3 million were outstanding against
the $1.5 million sub-limit for letters of credit associated with the $7.5 million revolving
credit facility.
Senior Notes of $4.5 million with a fixed interest rate of 10% and provisions for contingent
additional interest existed at April 3, 2005. The entire balance was paid in full in the
first quarter of fiscal year 2006.
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 (PIK Notes). 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 to occur 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 obligation at a market
interest rate of 12% is being amortized over the life of the notes. The remaining balance of
$1.8 million is included in the Consolidated Balance Sheet as of July 3, 2005.
These 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, as well as
limitations on annual capital expenditures and operating lease commitments. 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. The Company was in compliance with
these covenants as of July 3, 2005.
The Company also has an equipment lease which expires in May 2007. The balance outstanding
was $34,000 as of July 3, 2005.
6
Minimum annual maturities are as follows: (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub |
|
PIK |
|
|
|
|
Fiscal |
|
Revolver |
|
Notes |
|
Notes |
|
Other |
|
Total |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
13 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
19 |
|
2008 |
|
|
|
|
|
|
24,000 |
* |
|
|
810 |
|
|
|
2 |
|
|
|
24,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
24,000 |
|
|
$ |
810 |
|
|
$ |
34 |
|
|
$ |
24,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Includes $8 million non-interest bearing note issued at an original issue discount of $4.1
million. |
As part of its refinancing in July 2001, the Company issued to its 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 six years from their date of issuance. 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.
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company operates indirectly through its subsidiaries, Crown Crafts Infant Products, Inc.,
Hamco, Inc. and Churchill Weavers, Inc., primarily in the Infant and Juvenile Products segments
within the Consumer Products industry. The Companys offices are located in Huntington Beach and
Compton, California; Gonzales, Louisiana; Berea, Kentucky; Rogers, Arkansas and Lynn Haven,
Florida.
The Infant and Juvenile Products segments consist of bedding, bibs, soft goods, Pillow Buddies® and
accessories. The infant and juvenile products are marketed under a variety of Company-owned
trademarks, under trademarks licensed from others, without trademarks as unbranded merchandise and
with customers private labels. The products are produced primarily by foreign contract
manufacturers, then warehoused and shipped from a facility in Compton, California and Gonzales,
Louisiana. The Company intends to close the Gonzales, Louisiana facility during the second quarter
of fiscal year 2006, after which all subsequent shipments will be made from Compton, California.
Sales are generally made directly to retailers, primarily mass merchants, large chain stores and
gift stores.
The Company also produces hand-woven adult throws, adult scarves and infant blankets. Sales are
generally made to major department stores, specialty shops and designer showrooms.
The infant consumer products industry is highly competitive. The Company competes with a variety of
distributors and manufacturers (both branded and private label), including Kids Line, LLC; Springs
Industries; Dolly Inc.; Co Ca Lo, Inc.; Carters, Inc.; Riegel Textile Corporation; Danara
International, Ltd.; Luv n Care, Ltd.; The First Years Inc.; Sassy Inc.; Triboro Quilt
Manufacturing Inc. and Gerber Childrenswear, Inc. The Company competes on the basis of quality,
design, price, brand name recognition, service and packaging. The Companys ability to compete
depends principally on styling, price, service to the retailer and continued high regard for the
Companys products and trade names.
7
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED JULY 3, 2005 COMPARED TO THE THREE-MONTH PERIOD ENDED JUNE 27, 2004
The following table contains results of operations data for the three months ended July 3, 2005
and June 27, 2004 and the dollar and percentage variances among those periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months ended |
|
|
|
|
|
|
July 3, 2005 |
|
June 27, 2004 |
|
$ change |
|
% change |
|
|
Dollars in thousands |
Net Sales by Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedding, Blankets and Accessories |
|
$ |
8,984 |
|
|
$ |
11,060 |
|
|
$ |
(2,076 |
) |
|
|
-18.8 |
% |
Bibs and Bath |
|
|
4,159 |
|
|
|
5,334 |
|
|
|
(1,175 |
) |
|
|
-22.0 |
% |
Handwoven Products |
|
|
516 |
|
|
|
514 |
|
|
|
2 |
|
|
|
0.4 |
% |
Total Net Sales |
|
|
13,659 |
|
|
|
16,908 |
|
|
|
(3,249 |
) |
|
|
-19.2 |
% |
Cost of Products Sold |
|
|
10,692 |
|
|
|
13,434 |
|
|
|
(2,742 |
) |
|
|
-20.4 |
% |
Gross Profit |
|
|
2,967 |
|
|
|
3,474 |
|
|
|
(507 |
) |
|
|
-14.6 |
% |
% of Net Sales |
|
|
21.7 |
% |
|
|
20.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and Administrative Expenses |
|
|
2,468 |
|
|
|
2,622 |
|
|
|
(154 |
) |
|
|
-5.9 |
% |
% of Net Sales |
|
|
18.1 |
% |
|
|
15.5 |
% |
|
|
|
|
|
|
|
|
Interest Expense |
|
|
802 |
|
|
|
946 |
|
|
|
(144 |
) |
|
|
-15.3 |
% |
Other net |
|
|
42 |
|
|
|
16 |
|
|
|
26 |
|
|
|
162.6 |
% |
Income Tax Expense |
|
|
8 |
|
|
|
24 |
|
|
|
(16 |
) |
|
|
66.7 |
% |
Net (Loss) |
|
|
(269 |
) |
|
|
(102 |
) |
|
|
(167 |
) |
|
|
163.5 |
% |
% of Net Sales |
|
|
-2.0 |
% |
|
|
-0.6 |
% |
|
|
|
|
|
|
|
|
Net Sales: Sales of bedding, blankets and accessories decreased in the first quarter of fiscal
year 2006 as compared to the first quarter of fiscal year 2005 largely due to customer-driven
shifting of sales between quarters and a significant customers reducing its on-hand inventory
levels and thereby decreasing replenishment orders. Bib and bath sales decreased primarily as a
result of decreased replenishment orders due to programs ending and preparations made for new
programs to ship in the second quarter and the loss of a bath program at a significant customer in
fiscal year 2005. In addition, the elimination of quota on goods from China effective January 1,
2005 led to a reduction in the Companys top line sales volume. These decreases were partially
offset by an increase in a brand due to an increased number of stores that carry the brand. The
level of receivables at July 3, 2005 was consistent with the lower level of sales in the first
quarter while the increase in inventory corresponds to the typical build-up in inventory in
anticipation of the normal seasonal pattern of higher second quarter sales.
Gross Profit: Gross profit as a percentage of sales increased in the first quarter of fiscal year
2006 as compared to the first quarter of fiscal year 2005 because the Company has begun shipping
merchandise that is benefiting from the removal of quota.
Marketing and Administrative Expenses: Marketing and administrative expenses decreased slightly in
the first quarter of fiscal year 2006 as compared to the first quarter of fiscal year 2005 as a
result of reductions in labor and commissions expenses. The increase in marketing and
administrative expenses as a percentage of sales is a direct result of the decrease in net sales.
Interest Expense: The decrease in interest expense for the first quarter of fiscal year 2006 as
compared to the first quarter of fiscal year 2005 is due to a lower average debt balance. The
Company had $23.1 million in total debt at July 3, 2005, compared to $29.6 million at June 27,
2004. The decrease in debt reflects quarterly payments on the Companys senior notes through March
2005 followed by a pay-off in full of the senior notes in June 2005 for a total reduction of senior
debt of $7.5 million over the twelve month period. Such decrease has been offset by an increase in
debt related to the amortization of the discount discussed in Note 3 to the financial statements
included in this report and the annual issuance of promissory notes related to the payment of
interest on the Companys senior subordinated notes.
8
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4.1 million for the first three months of fiscal
year 2006 compared to net cash provided by operating activities of $4.2 million for the first three
months of fiscal year 2005. Net cash used in investing activities was $195,000 in the first three
months of fiscal year 2006 and $42,000 in the prior year period. The increase in cash used for
investing activities is due to capital expenditures related to the conversion of one of the
Companys subsidiaries to a software system currently used by other locations. Net cash used in
financing activities was $4.5 million compared to net cash used in financing activities of $2.0
million in the prior year period. The increase in cash used in financing activities was due to the
payment in full of the Companys $4.5 million senior notes in June, 2005 offset by a decrease in
draws against the Companys revolving line of credit.
The Companys 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 Companys 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 assigns the
majority of its trade accounts receivable to a commercial factor. The Companys factor establishes
customer credit lines and accounts for and collects receivable balances. Under the terms of the
factoring agreement, which expires in July, 2007, 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 on the
due date, the Company is charged interest at prime minus 0.5% (5.75% at July 3, 2005) 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. The Companys 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 Quarterly Report contains forward-looking statements within the meaning of the Securities Act
of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of
1995. Such statements are based upon managements current expectations, projections, estimates and
assumptions. Words such as expects, believes, anticipates and variations of such words and
similar expressions 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 suggested by the forward-looking statements. These risks include, among others, general
economic conditions, including changes in interest rates, in the overall level of consumer spending
and in the price of oil, cotton and other raw materials used in the Companys products, changing
competition, changes in the retail environment, the level and pricing of future orders from the
Companys customers, the Companys dependence upon third-party suppliers, including some located in
foreign countries with unstable political situations, the Companys ability to successfully
implement new information technologies, customer acceptance of both new designs and
newly-introduced product lines, actions of competitors that may impact the Companys business,
disruptions to transportation systems or shipping lanes used by the Company or its suppliers, and
the Companys dependence upon licenses from third parties. Reference is also made to the Companys
periodic filings with the Securities and Exchange Commission for additional factors that may impact
the Companys results of operations and financial condition.
ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on debt, changes in commodity
prices, changes in international trade regulations, the concentration of the Companys customers
and the Companys reliance upon licenses. The Companys exposure to interest rate risk relates to
the Companys floating rate debt, of which there was no balance outstanding at July 3, 2005 or
April 3, 2005. The Companys exposure to commodity price risk primarily relates to changes in the
price of cotton and oil, which are the principal raw materials used in a substantial number of the
Companys products. Also, changes in import quantity allotments can materially impact the
availability of the Companys products and the prices at which those products can be purchased by
the Company for resale. Additionally, the Companys top three customers represent 75% of gross
sales, and 53% of the Companys gross sales is of licensed products. The Company could be
materially impacted by the loss of one or more of these customers or licenses.
9
ITEM 4
CONTROLS AND PROCEDURES
The Companys Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the
end of the period covered by this report, as required by paragraph (b) of Rule 13a-15 or 15d-15 of
the Exchange Act. Based on such evaluation, such officers have concluded that, as of the end of
the period covered by this report, the Companys 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 Companys periodic filings under the
Exchange Act. Since such evaluation, there have not been any significant changes in the Companys
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 Companys financial condition, results of operations or cash
flows.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on August 9, 2005 at the Companys
corporate headquarters in Gonzales, Louisiana. The proposals set forth below were voted on at the
meeting with the following results:
|
1. |
|
Election of two members to the board of directors to hold office for a three-year
term. The results were as follows : |
|
|
|
|
|
|
|
|
|
Director Nominee |
|
For |
|
Authority Withheld |
Donald Ratajczak |
|
|
6,873,086 |
|
|
|
1,625,881 |
|
James A. Verbrugge |
|
|
6,895,986 |
|
|
|
1,602,981 |
|
|
2. |
|
Transaction of such other business as may properly come before the annual meeting
or any adjournments or postponements thereof. The results were as follows: |
|
|
|
|
|
For |
|
|
6,608,111 |
|
Against |
|
|
1,680,042 |
|
Abstain |
|
|
210,814 |
|
Each of the foregoing proposals was set forth and described in the Notice of Annual Meeting
and Proxy Statement of the Company dated July 8, 2005.
Item 5 Other Information
None
10
Item 6 Exhibits
|
|
|
Exhibits |
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certification by the Companys Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification by the Companys Chief Financial Officer |
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: August 16, 2005
|
|
/s/ Amy Vidrine Samson
|
|
|
|
|
|
|
|
|
|
AMY VIDRINE SAMSON |
|
|
|
|
Chief Financial Officer |
|
|
|
|
(duly authorized signatory and |
|
|
|
|
Principal Financial and Accounting |
|
|
|
|
Officer) |
|
|
11
Index to Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certification by the Companys Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification by the Companys Chief Financial Officer |
12