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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 December 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 December 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
December 29, 2002 and March 31, 2002
December 29 March31,
Dollar amounts in thousands 2002 2002 *
(unaudited)
- ------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 235 $ 388
Accounts receivable (net of allowances of $3,422 at December 29, 2002
and $1,841 at March 31, 2002):
Due from factor 7,936 11,549
Other 1,050 983
Inventories, net 17,420 16,451
Income tax receivable - 1,820
Other current assets 2,363 2,466
- ------------------------------------------------------------------------------------------------------
Total current assets 29,004 33,657
- ------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT -AT COST:
Land, buildings and improvements 1,895 2,863
Machinery and equipment 3,568 3,915
Furniture and fixtures 679 617
- ------------------------------------------------------------------------------------------------------
6,142 7,395
Less accumulated depreciation 3,788 4,065
- ------------------------------------------------------------------------------------------------------
Property, plant and equipment - net 2,354 3,330
- ------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill (net of amortization of $6,261 at December 29, 2002
and March 31, 2002) 22,974 23,034
Other 91 179
- ------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 23,065 23,213
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 54,423 $ 60,200
- ------------------------------------------------------------------------------------------------------
A-2
* The Consolidated Balance Sheet at March 31, 2002 has been taken from the
audited balance sheet at that date.
See notes to unaudited interim consolidated financial statements.
Crown Crafts,Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 29, 2002 (unaudited) and March 31, 2002
December 29, March 31,
Dollar amounts in thousands 2002 2002
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------- -- ---- -----------------
CURRENT LIABILITIES:
Accounts payable $ 4,057 $ 3,695
Accrued wages and benefits 1,020 1,459
Accrued royalties 1,277 1,015
Other accrued liabilities 1,244 1,421
Current maturities of long-term debt 3,013 3,000
- ----------------------------------------------------------------------------------------- -- ---- ------------------
Total current liabilities 10,611 10,590
- --------------------------------------------------------------------------- ------------- -- ---- ------------------
NON-CURRENT LIABILITIES:
Long-term debt 30,609 36,773
Deferred income taxes 24 24
- --------------------------------------------------------------------------- ------------- -- ---- ------------------
Total non-current liabilities 30,633 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 December 29, 2002 and March 31, 2002 9,421 9,421
Additional paid-in capital 28,857 28,857
Accumulated deficit (25,080) (25,475)
Cumulative currency translation adjustment (19) 10
- --------------------------------------------------------------------------- ------------- -- ---- ------------------
Total shareholders' equity 13,179 12,813
- --------------------------------------------------------------------------- ------------- -- ---- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 54,423 $ 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 Nine-Month Periods Ended December 29, 2002 and
December 30, 2001
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
Amounts in thousands, except per December 29, December 30, December 29, December 30,
share amounts 2002 2001 2002 2001
- --------------------------------------------- -------------- ------------- -------------- -------------
Net sales $ 21,636 $ 23,869 $ 67,962 $ 93,906
Cost of products sold 17,023 18,628 52,963 73,407
- --------------------------------------------- -------------- ------------- -------------- ------------
Gross profit 4,613 5,241 14,999 20,499
Marketing and administrative expenses 2,843 3,784 9,458 16,511
Gain on disposition of assets - (4) - (4)
Restructuring charge 1,775 - 1,775 -
- --------------------------------------------- ------------- ------------- -------------- ------------
Income (loss) from operations (5) 1,461 3,766 3,992
Other income (expense):
Interest expense (1,122) (1,360) (3,479) (5,740)
Gain on extinguishment of debt - - - 25,008
Other - net 302 514 378 1,653
- --------------------------------------------- -------------- ------------- -------------- ------------
Income (loss) before income taxes (825) 615 665 24,913
Income tax (benefit) expense 166 (121) 270 (83)
- --------------------------------------------- -------------- ------------- -------------- ------------
Net income (loss) (991) 736 395 24,996
- --------------------------------------------- -------------- ------------- -------------- ------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 2 55 (29) 137
- --------------------------------------------- -------------- ------------- -------------- ------------
Comprehensive income (loss) $ (989) $ 791 $ 366 $ 25,133
- ---------------------------------------------- -------------- ------------- -------------- ------------
Basic income (loss) per share $ (0.11) $ 0.08 $ 0.04 $ 2.75
- ---------------------------------------------- -------------- ------------- -------------- ------------
Diluted income (loss) per share $ (0.11) $ 0.03 $ 0.02 $ 0.94
- ---------------------------------------------- -------------- ------------- -------------- ------------
Weighted average shares outstanding - basic 9,421 9,421 9,421 9,083
- ---------------------------------------------- -------------- ------------- -------------- ------------
Weighted average shares outstanding - diluted 9,421 26,917 21,645 26,551
- ---------------------------------------------- -------------- ------------- -------------- ------------
See notes to unaudited interim consolidated financial statements.
A-4
Crown Crafts, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine-Month Periods Ended December 29, 2002 and December 30, 2001
(UNAUDITED)
December 29, December 30,
Amounts in thousands 2002 2001
- --------------------------------------------------------------- -------------- -------------
OPERATING ACTIVITIES:
Net income $ 395 $ 24,996
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on debt refinancing - (25,008)
Depreciation of property, plant and equipment 576 661
Amortization of goodwill - 790
Gain on sale of property, plant, and equipment - (4)
Restructuring charge 1,775 -
Changes in assets and liabilities
Accounts receivable 3,546 7,801
Inventories, net (1,572) 1,096
Income tax receivable 1,820 -
Other current assets 103 468
Other assets 88 310
Accounts payable 362 (3,174)
Accrued liabilities (792) (2,575)
Other long term liabilities - (745)
Liabilities assumed by purchaser of adult bedding - 3,372
Assets held for sale - 73
-------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,301 8,061
-------------- -------------
INVESTING ACTIVITIES:
Capital expenditures (274) (261)
Proceeds from disposition of assets - 18,216
Other (29) 137
-------------- -------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (303) 18,092
-------------- -------------
FINANCING ACTIVITIES:
Net change in long term borrowing (6,151) (26,880)
Increase in advances from factor - 299
Issuance of common stock - 127
-------------- -------------
NET CASH (USED FOR) FINANCING ACTIVITIES (6,151) (26,454)
-------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (153) (301)
Cash and cash equivalents at beginning of period 388 588
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 235 $ 287
============== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes (received) paid $ (1,703) $ 73
Interest paid 2,649 6,428
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 December 29, 2002 and the results of
its operations for the three- and nine-month periods ended December 29,
2002 and December 30, 2001 and its cash flows for the nine-month
periods ended December 29, 2002 and December 30, 2001. Such adjustments
include normal recurring accruals and a pro rata portion of certain
estimated annual expenses. Operating results for the three- and
nine-month periods ended December 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 NINE MONTHS ENDED
December 29, December 30, December 29, December 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income (loss) $ (991) $ 736 $ 395 $ 24,996
Goodwill amortization - 263 - 790
----------- ----------- ------------ ------------
Adjusted net income (loss) $ (991) $ 999 $ 395 $ 25,786
=========== =========== ============ ============
Basic income (loss) per share:
Reported net income (loss) $ (0.11) $ 0.08 $ 0.04 $ 2.75
Goodwill amortization - 0.03 - 0.09
----------- ----------- ------------ ------------
Adjusted net income (loss) $ (0.11) $ 0.11 $ 0.04 $ 2.84
=========== =========== ============ ============
Diluted income (loss) per share:
Reported net income (loss) $ (0.11) $ 0.03 $ 0.02 $ 0.94
Goodwill amortization - 0.01 - 0.03
----------- ----------- ------------ ------------
Adjusted net income (loss) $ (0.11) $ 0.04 $ 0.02 $ 0.97
=========== =========== ============ ============
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 years
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 to have a material impact on its
consolidated financial statements.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123. SFAS 148 amends FASB 123 to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, FASB 148 amends the disclosure requirements of FASB 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
SFAS 148 is effective for the Company's fiscal period ending March 30,
2003 and management is in the process of evaluating this new standard.
A-7
Reclassifications: Certain prior period financial statement balances
have been reclassified to conform to the current period's presentation.
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 nine-month periods ended December 29, 2002 and
December 30, 2001 was as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
December 29, December 30, December 29, December 30,
Net Sales: 2002 2001 2002 2001
- ------------------------------- ---------------- ----------------- ----------------- ----------------
Adult home furnishing
products $ 871 $ 996 $ 2,119 $ 23,624
Infant & juvenile products 20,765 22,873 65,843 70,282
---------------- ----------------- ----------------- ----------------
Total $ 21,636 $ 23,869 $ 67,962 $ 93,906
================ ================= ================= ================
THREE MONTHS ENDED NINE MONTHS ENDED
December 29, December 30, December 29, December 30,
Operating income (loss): 2002 2001 2002 2001
- ------------------------------- ---------------- ----------------- ----------------- ----------------
Adult home furnishing
products $ 54 $ (864) $ (23) $ (2,285)
Infant & juvenile products (59) 2,325 3,788 6,277
---------------- ----------------- ----------------- -----------------
Total $ (5) $ 1,461 $ 3,766 $ 3,992
================ ================= ================= ================
Net sales by individual product groups within these business segments were as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
December 29, December 30, December 29, December 30,
2002 2001 2002 2001
---------------- ----------------- ----------------- -----------------
Bedroom products $ - $ - $ - $ 19,937
Throws and decorative
home accessories 871 944 2,119 2,594
Infant and juvenile products 20,765 22,925 65,843 71,375
---------------- ----------------- ----------------- -----------------
Total $ 21,636 $ 23,869 $ 67,962 $ 93,906
================ ================= ================= =================
A-8
3. Inventory: Major classes of inventory were as follows (in thousands):
December 29, March 31,
2002 2002
----------- ---------
Raw materials $ 3,605 $ 4,567
Work in process 757 1,280
Finished goods 13,058 10,604
---------- ---------
$ 17,420 $ 16,451
========== =========
Inventory is net of reserves for inventories classified as irregular or
discontinued of $2.1 million and $2.2 million at December 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 the assumption of liabilities of $3.4 million as well as the
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. Restructuring Charge: In December 2002, the Company adopted a formal
plan to change its sourcing strategy for certain products and close the
Mexican manufacturing facility operated by its majority-owned
subsidiary, Burgundy Interamericana ("Burgundy"). This decision was
based on extensive research by management which indicated that, due to
lower wages and the elimination of the quota on bibs, outsourcing the
supply of products currently manufactured by Burgundy to Asian
manufacturers was more cost effective and competitive than maintaining
existing operations in Mexico. Under the plan, Burgundy will continue
to operate through the fourth quarter of fiscal year 2003, at which
time the Company will begin to liquidate Burgundy's assets. As a result
of the decision, the Company recorded a $1.8 million restructuring
charge to operations in the quarter ended December 29, 2002, which
consists primarily of a write-down of the property and equipment at the
Mexican facility of approximately $800,000, inventory items deemed to
be in excess of production requirements of approximately $600,000, an
accrual for contractual termination benefits of approximately $300,000
due Burgundy's entire workforce (approximately 130 employees) under the
provisions of Mexico's labor regulations and the write-off of goodwill
of approximately $60,000. The Company expects to pay approximately 65%
of the severance benefits in the first quarter of fiscal year 2004 and
the remaining 35% in the second quarter of fiscal year 2004. The
Company will continue to charge the ongoing operating costs associated
with Burgundy's production in the period in which the costs are
incurred. The Company estimates the total cost of liquidation,
including costs to be incurred to operate until closure, to be
approximately $2.2 million.
6. 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 (4.25% at December 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.
A-9
Notes Payable and Other Credit Facilities: At December 29, 2002 and March 31,
2002, long-term debt consisted of:
December 29, March 31,
2002 2002
------------- -----------
Promissory notes $ 35,572 $ 38,000
Floating rate revolving credit facilities 1,148 5,542
Non-interest bearing notes 274 -
Original issue discount (3,372) (3,769)
------------- -----------
33,622 39,773
Less current maturities (3,013) (3,000)
------------- -----------
$ 30,609 $ 36,773
============= ===========
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% (5.25% at December 29, 2002) for base rate
borrowings and LIBOR plus 2.75% (4.17% at December 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
December 29, 2002 was $1.1 million. The Company had $10.6 million
available at December 29, 2002. As of December 29, 2002, letters of
credit of $1.4 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 85% of free cash flow (EBITDA (as hereinafter
defined) less capital expenditures and cash taxes paid), the excess of
contingent interest and principal amortization over 85% will be
deferred until maturity of the Senior Notes in June 2006. Contingent
interest plus additional principal payments will be due annually up to
85% of free cash flow. On September 30, 2002, the Company made a
payment to the lenders of $1.6 million related to excess cash flow.
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 $3.4
million is included in the Consolidated Balance Sheet as of December
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. Certain covenants included in the credit facilities were
amended in conjunction with the liquidation of Burgundy, as discussed
in Note 5 above, in order to account for the recording of the related
restructuring charge. 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.
A-10
Future minimum annual maturities are as follows: (in thousands)
FISCAL REVOLVER SENIOR NOTES SUB NOTES PIK NOTES TOTAL
- -------- ---------- ------------- ---------- ---------- ---------
2003 - $ 500 - - $ 500
2004 - 3,000 - - 3,000
2005 $ 1,148 2,000 - - 3,148
2006 - 2,500 - - 2,500
2007 - 3,500 - - 3,500
2008 - - $ 24,000* $ 274 24,274
----------- ------------ --------- ----------- ---------
TOTAL $ 1,148 $ 11,500 $ 24,000 $ 274 $ 36,922
=========== ============ ========= =========== =========
.. *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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 29, 2002 COMPARED TO THE THREE MONTHS ENDED DECEMBER
30, 2001
Total net sales for the third quarter of fiscal year 2003 decreased $2.2
million, or 9.4%, to $21.6 million from $23.9 million for the third quarter of
fiscal year 2002. Net sales of throws decreased $73,000, or 7.7%, to $871,000,
and net sales of infant and juvenile products decreased $2.2 million, or 9.4%,
to $20.8 million.
Of the decrease in sales of infant and juvenile products, management estimates
that approximately $1.9 million was directly attributable to the West Coast port
closure. At the time of the closure, the Company had forty containers in
transit. The last of these containers took up to eight weeks to be received. The
delivery time experienced during the slowdown averaged approximately 36 days
from the Orient to the Company's warehouses compared to an approximate average
of 21 to 24 days prior to the slowdown. In addition, the Company experienced
slowdowns into December after the port re-opened due to problems in shipping
empty containers back to Asia for reloading. This caused the Company's customers
to miss selling days, which resulted in fewer reorders for the Company.
During the third quarter of fiscal year 2003, cost of sales increased to 78.7%
of net sales from 78% for the same period in fiscal year 2002. The decrease in
gross margin is attributable to increases in freight cost due to the West Coast
port closure.
Marketing and administrative expenses decreased by $941,000, or 24.9%, in the
current year quarter compared to the same quarter in the prior fiscal year and
were 13.1% of net sales for the current quarter compared to 15.9% in the
corresponding quarter of the prior year. The decrease is a result of the
elimination of duplicate positions and office locations. In the quarter ended
December 2001, the Atlanta office remained open and overlapping positions
existed between the Company's offices in Gonzales, Louisiana and Atlanta,
Georgia.
As discussed in Note 5 to the Company's Consolidated Financial Statements, the
Company recorded a $1.8 million restructuring charge in the quarter ended
December 29, 2002. In December 2002, the Company adopted a formal plan to change
its sourcing strategy for certain products and close the Mexican manufacturing
facility operated by its majority-owned subsidiary, Burgundy Interamericana
("Burgundy"). This decision was based on extensive research by management which
indicated that, due to lower wages and the elimination of the quota on bibs,
outsourcing the supply of products currently manufactured by Burgundy to Asian
manufacturers was more cost effective and competitive than maintaining existing
operations in Mexico. Under the plan, Burgundy
A-11
will continue to operate through the fourth quarter of fiscal year 2003, at
which time the Company will begin to liquidate Burgundy's assets. As a result of
the decision, the Company recorded a $1.8 million restructuring charge to
operations in the quarter ended December 29, 2002, which consists primarily of a
write-down of the property and equipment at the Mexican facility of
approximately $800,000, inventory items deemed to be in excess of production
requirements of approximately $600,000, an accrual for contractual termination
benefits of approximately $300,000 due Burgundy's entire workforce
(approximately 130 employees) under the provisions of Mexico's labor regulations
and the write-off of goodwill of approximately $60,000. The Company expects to
pay approximately 65% of the severance benefits in the first quarter of fiscal
year 2004 and the remaining 35% in the second quarter of fiscal year 2004. The
Company will continue to charge the ongoing operating costs associated with
Burgundy's production in the period in which the costs are incurred. The Company
estimates the total cost of liquidation, including costs to be incurred to
operate until closure, to be approximately $2.2 million.
Interest expense for the third quarter of fiscal year 2003 decreased by $238,000
because of a lower average debt balance and reduced interest rates.
Income tax expense includes a provision for alternative minimum taxes of $37,000
and applicable state income taxes of $115,000. For the quarter ended December
30, 2001, the Company recorded an income tax benefit of $121,000 due to the
utilization of net operating carryforwards.
NINE MONTHS ENDED DECEMBER 29, 2002 COMPARED TO THE NINE MONTHS ENDED DECEMBER
30, 2001
Total net sales for the nine months ended December 29, 2002 decreased $25.9
million, or 27.6%, to $68.0 million from $93.9 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 $475,000, or 18.3%, to $2.1
million, and net sales of infant and juvenile products decreased $5.5 million,
or 7.8%, to $65.8 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. Of the decrease in sales of infant
and juvenile products, management estimates that approximately $3 million was
due to lost sales resulting from the West Coast port slowdown in September 2002
and the subsequent closure in October 2002 discussed above. The remaining
decrease is attributable to lower reorders in ongoing business due to SKU
reduction by certain major customers.
During the nine months ended December 29, 2002, cost of sales decreased to 77.9%
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 $7.1 million, or 42.7%, in
the current year compared to the same period in the prior fiscal year and were
13.9% of net sales for the current year compared to 17.6% in the corresponding
period of the prior year. The decrease is a result of the divestment referenced
above as well as the elimination of duplicate positions and locations.
As discussed above and in Note 5 to the Company's Consolidated Financial
Statements, the Company recorded a $1.8 million restructuring charge in the
quarter ended December 29, 2002.
Interest expense for the nine months ended December 29, 2002 decreased by $2.3
million because of a lower average debt balance and reduced interest rates.
Due to accumulated losses, the income tax provision for the nine months ended
December 29, 2002 includes a provision for federal alternative minimum tax of
$75,000, along with a provision for state income taxes of $195,000, for a total
tax provision of $270,000. For the nine months ended December 30, 2001, the
Company recorded an income tax benefit of $83,000.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $6.3 million for the nine months
ended December 29, 2002 compared to net cash provided by operating activities of
$8.1 million for the nine months ended December 30, 2001. Net cash used for
investing activities was $303,000 compared to net cash provided by investing
activities of $18.1 million in the prior year period. Net cash used for
financing activities was $6.2 million compared to net cash used for financing
activities of $26.5 million in the prior year period.
A-12
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, $1.1 million of which was outstanding at
December 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 $11,000 at the debt level of December 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. In December 2002,
the Company adopted a formal plan to liquidate this facility.
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.
A-13
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
10.1 Second Amendment to Subordinated Note and Warrant Purchase
Agreement dated as of February 10, 2003, by and among the
Company, Banc of America Strategic Solutions, Inc. (assignee
of Bank of America, N.A.), The Prudential Insurance Company of
America and Wachovia Bank, National Association (successor by
merger to Wachovia Bank, N.A.)
10.2 Third Amendment to Credit Agreement dated as of February 10,
2003 by and among the Company, Churchill Weavers, Inc., Hamco,
Inc., Crown Crafts Infant Products, Inc., Wachovia Bank,
National Association (successor by merger to Wachovia Bank,
N.A.), as Agent, and Wachovia Bank, National Association
(successor by merger to Wachovia Bank, N.A.), Banc of America
Strategic Solutions, Inc. (assignee of Bank of America, N.A.)
and The Prudential Insurance Company of America, as Lenders
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-14
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: February 12, 2003 /s/ Amy Vidrine Samson
_________________ ______________________________________
AMY VIDRINE SAMSON
Chief Financial Officer
(duly authorized signatory and
Principal Financial and Accounting
Officer)
A-15
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: February 12, 2003
----------------
/s/ E. Randall Chestnut
-----------------------------------------
E. Randall Chestnut
Chairman of the Board, President & Chief
Executive Officer
A-16
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: February 12, 2003
-----------------
/s/ Amy Vidrine Samson
----------------------------------------------
Amy Vidrine Samson
Vice President & Chief Financial Officer
A-17
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Second Amendment to Subordinated Note and Warrant Purchase
Agreement dated as of February 10, 2003, by and among the
Company, Banc of America Strategic Solutions, Inc. (assignee
of Bank of America, N.A.), The Prudential Insurance Company of
America and Wachovia Bank, National Association (successor by
merger to Wachovia Bank, N.A.)
10.2 Third Amendment to Credit Agreement dated as of February 10,
2003 by and among the Company, Churchill Weavers, Inc., Hamco,
Inc., Crown Crafts Infant Products, Inc., Wachovia Bank,
National Association (successor by merger to Wachovia Bank,
N.A.), as Agent, and Wachovia Bank, National Association
(successor by merger to Wachovia Bank, N.A.), Banc of America
Strategic Solutions, Inc. (assignee of Bank of America, N.A.)
and The Prudential Insurance Company of America, as Lenders
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-18