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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
SECURITIES ACT OF 1934
COMMISSION FILE NO. 1-7604
CROWN CRAFTS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-0678148
(State of Incorporation) (I.R.S. Employer Identification No.)
1600 RIVEREDGE PARKWAY, 30328
SUITE 200 (Zip Code)
ATLANTA, GEORGIA
(Address of principal executive offices)
Registrant's Telephone Number, including area code: (770) 644-6400
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $1.00 PAR VALUE
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [ ] No [X].
As of June 15, 1998, 8,599,967 shares of Common Stock were outstanding, and
the aggregate market value of the Common Stock (based upon the NYSE closing
price of these shares on that date) held by persons other than Officers,
Directors, the Company's Employee Stock Option Plan, and 5% shareholders was
approximately $74,864,000.
DOCUMENTS INCORPORATED BY REFERENCE:
Crown Crafts, Inc., Proxy Statement in connection with its Annual Meeting
of Shareholders on August 25, 1998 (Part III).
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PART I
ITEM 1. BUSINESS
Crown Crafts, Inc., a Georgia corporation founded in 1957, operates, both
directly and indirectly through its subsidiaries, in a single business segment
within the textile industry. Crown Crafts, Inc. and its subsidiaries
(individually and collectively, the "Company") design, manufacture, market and
distribute home furnishings products. These 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.
During the fiscal year ended March 29, 1998, the Company completed four
acquisitions. Three of the acquired entities, Hamco, Inc., Noel Joanna, Inc. and
Pinky Baby Products, are engaged in the design, manufacture, marketing and
distribution of infant products. The fourth acquisition, Burgundy
Interamericana, S.A. de C.V., operated in Mexico as a contract manufacturer of
consumer textile products. The Company expects to utilize all of Burgundy's
productive capacity in the manufacture of its own infant and other products,
moving production from independent foreign manufacturers into Burgundy.
PRODUCTS
The Company's products fall into three groups: bedroom products, throws and
decorative home accessories, and infant and juvenile products.
The Company's bedroom products include comforters, comforter sets, sheets,
pillowcases, pillow shams, bed skirts, duvets, daybed sets, window treatments,
decorative pillows, coverlets and jacquard-woven bedspreads. These products are
made from a variety of natural and man-made fibers.
The Company offers its bedroom products in a wide variety of styles and
patterns, from comforters to woven bedspreads and from solid colors to designer
prints. The Company believes the trend toward coordination of the bedroom will
remain strong and expects to continue its emphasis on comforter sets with
coordinated sheets and accessories.
Throws are manufactured and imported in a variety of colors, designs and
fabrics, including cotton, acrylic, cotton/acrylic blends, rayon, wool, fleece
and chenille. Coordinated decorative home accessories include table runners,
doorknob pillows, bell pulls and other items.
Infant and juvenile products include crib bedding, diaper stackers,
mobiles, bibs, receiving blankets, burp cloths, bathing accessories and other
infant soft goods.
During the fiscal years ended March 29, 1998, March 30, 1997 and March 31,
1996, respectively, bedroom products represented 40%, 45% and 56% of
consolidated net sales, throws and decorative home accessories represented 30%,
34% and 37% of consolidated net sales, and infant and juvenile products
represented 30%, 20% and 6% of consolidated net sales.
PRODUCT DESIGN AND STYLING
The Company's research and development expenditures focus primarily on
product design and styling. The Company believes styling and design are key
components to its success. In recent years the Company has significantly
increased the number of people and other resources dedicated to this area. The
Company's designs include traditional, contemporary, textured and whimsical
patterns. The Company designs and manufactures products across a broad spectrum
of retail price points. The Company is continually developing new designs for
all three of its product groups.
The Company's designers and stylists work closely with the marketing staff
to develop new designs. The Company develops internally and obtains designs from
numerous sources, including graphic artists, decorative fabric manufacturers,
apparel designers, the Company's employees and museums. The Company utilizes
computer aided design systems to increase its design flexibility and reduce
costs. In addition, these systems
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significantly shorten the time for responding to customer needs and changing
market trends. The Company also creates designs for exclusive sale by certain of
its customers.
SALES AND MARKETING, CUSTOMERS
The Company markets its products through a national sales force consisting
of salaried sales executives and employees and independent commissioned sales
representatives. Independent representatives are used most significantly in
sales to the gift trade through Goodwin Weavers and Churchill Weavers, and to
the infant markets. Sales outside the United States and Canada are made
primarily through distributors.
The Company's customers consist principally of department stores, chain
stores, mass merchants, specialty home furnishings stores, wholesale clubs, gift
stores and catalogue and direct mail houses. During the fiscal years ended March
29, 1998, March 30, 1997, and March 31, 1996, sales to Wal-Mart Stores, Inc.
accounted for 19%, 17% and 18% of net sales, respectively. In June 1998,
Wal-Mart informed the Company that effective February 1, 1999, it would
discontinue the Company's "Signature Series" line of bedding and accessories.
Sales of all products in this line represented 9% of the Company's net sales in
the fiscal year ended March 29, 1998. Because Wal-Mart will continue to purchase
these products from the Company during most of the current fiscal year, the full
impact on net sales of this decision will not be felt until the fiscal year
which begins March 29, 1999.
The Company's primary showroom and sales office is located in New York
City. Sales offices are also maintained in Chicago, Atlanta, Boston, Los
Angeles, Dallas, and Tyler, Texas. An additional showroom is located in the
Company's Atlanta corporate headquarters location.
The Company sells the majority of its products to retailers for resale to
consumers. The Company generally introduces new products to the retail trade
during the industry's April and October home textile markets. Initial shipments
of successful new designs generally occur at least six months after the product
introduction as more conservative buyers follow the lead of market innovators.
New product introductions for the gift trade are concentrated in January-March
and June-August when Goodwin Weavers and Churchill Weavers participate in
numerous local and regional gift shows. The Company's infant product
subsidiaries generally introduce new products once each year during the annual
Juvenile Products Manufacturers' Association trade show. Private label products
manufactured by the Company are introduced throughout the year.
The Company uses visually appealing and informative packaging,
point-of-sale displays and advertising materials for retailers. Most of these
are produced in the Company's own print shop, which offers design, typesetting
and finishing services. The Company also regularly advertises its products in
publications directed to the trade.
The Company also markets primarily close-out and irregular products through
its own retail stores located in Calhoun, Georgia, Roxboro, North Carolina,
Blowing Rock, North Carolina, Berea, Kentucky, Rancho Santa Margarita,
California and in several outlet malls and resort areas located primarily in the
southeastern United States. In fiscal 1998, less than 2.5% of the Company's
sales were made through its outlet stores.
MANUFACTURING
The Company has made significant investments in modernization and expansion
to lower manufacturing costs, maximize design flexibility, improve quality and
service, and increase productive capacity.
The Company produces adult comforters and accessories at its owned facility
in Roxboro, North Carolina. The Roxboro Plant utilizes an automated warehouse
and distribution system which allows the Company to reduce inventories, improve
physical control over inventories, reduce order fulfillment lead times, and
provide enhanced levels of service.
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The Company produces jacquard-woven bedspreads and throws at its weaving
mills in Dalton, Georgia, and Ronda, North Carolina. These products are then
finished, packed and shipped from the Calhoun, Georgia, facilities. The Company
also utilizes a warehouse and distribution center in Chatsworth, Georgia.
The Company's infant products are produced primarily by domestic and
foreign contract manufacturers. These products are then warehoused and shipped
from facilities in Compton, California, Rancho Santa Margarita, California and
Prairieville, Louisiana.
RAW MATERIALS
The principal raw materials used in the manufacture of adult and infant
comforters, sheets and accessories are wide-width and narrow printed and solid
color cotton and polycotton fabrics, and polyester fibers used as filling
material. The principal raw materials used in the manufacture of jacquard-woven
bedspreads, throws and other products are natural-color and pre-dyed 100% cotton
yarns and acrylic yarns. The principle raw materials used in the production of
infant bibbs are knit-terry polycotton, woven polycotton and vinyl fabrics.
Although the Company usually maintains supply relationships with only a limited
number of suppliers, the Company believes these raw materials presently are
available from several sources in quantities sufficient to meet the Company's
requirements.
The Company uses significant quantities of cotton, either in the form of
cotton yarn, cotton fabric or polycotton fabric. Cotton is subject to ongoing
price fluctuations. The price fluctuations are a result of cotton being an
agricultural product subject to weather patterns, disease and other factors as
well as supply and demand considerations, both domestically and internationally.
To reduce the effect of potential price fluctuations, the Company often makes
commitments for future purchases of cotton yarns and fabrics up to a year before
delivery. Nonetheless, significant increases in the price of cotton could
adversely affect the Company's operations.
SEASONALITY, INVENTORY MANAGEMENT
Historically, the Company has experienced a seasonal sales pattern, with a
greater sales volume in each of the last three fiscal quarters of the year (July
through March). This seasonality results from retailers having higher sales in
the second half of the year.
The Company carries normal inventory levels to meet delivery requirements
of customers. Customer returns of merchandise shipped are not material.
ORDER BACKLOG
The Company's backlogs of unfilled customer orders believed by management
to be firm were $34,503,000 and $26,518,000 at May 31, 1998 and June 1, 1997
respectively. The majority of these unfilled orders are scheduled to be shipped
within approximately eight weeks, and none are expected to be shipped beyond the
completion of the current fiscal year ending March 28, 1999. Due to the
prevalence of quick-ship programs adopted by its customers, the Company does not
believe that its backlogs are a meaningful indicator of future business.
TRADEMARKS, COPYRIGHTS AND PATENTS
The Company's products are marketed in part under well-known trademarks.
The Company considers its trademarks to be of material importance to its
business. Adult comforters and accessories primarily carry the trademark Crown
Crafts(R). The majority of throws carry the trademarks Crown Crafts(R) and
Goodwin Weavers(R). Infant products carry the trademarks Red Calliope(R), Little
Bedding(R), NoJo(R), Hamco(R) and Pinky(R). Protection for these marks is
obtained through domestic and foreign registrations. Also important to the
Company is the trademark Royal Sateen(R), which was developed in a joint effort
with Kitan Textile Industries Ltd. of Israel. Kitan is the registered owner of
the mark and the Company is the exclusive marketer of Royal Sateen products in
the United States and other parts of the Western Hemisphere.
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In addition, certain products are manufactured and sold pursuant to
licensing agreements that include, among others: Disney(R), Bob Timberlake(TM),
Colonial Williamsburg(R), Warner Bros.(R), Hallmark(R), and Raymond Waites(R).
The licensing agreements for the Company's designer brands generally are for a
term of 2 to 6 years, and may or may not be subject to automatic renewal or
extension. Sales of product under the Company's license with The Walt Disney
Company accounted for 14% of the Company's total sales volume during fiscal
1998. Although revenue has not been material, the Company has licensed and has
sold fabric for certain of its more successful designs to manufacturers of other
products such as bath accessories, table linens, wallpaper borders and rugs. The
Company believes that its licensing activities, both as a licensee and licensor,
will continue to increase in importance as the Company grows.
Many of the designs used by the Company are copyrighted by other parties
including trademark licensors and are available to the Company through copyright
licenses. Other designs are the subject of copyrights and design patents owned
by the Company.
Following the end of the March 29, 1998 fiscal year, the Company entered
into licensing agreements with Calvin Klein, Inc. and Disney Enterprises, Inc.
The Calvin Klein license grants the Company the right to produce and sell
bedcoverings and associated products under the Calvin Klein Home name. The
Disney license expands the Company's right to produce and sell products
featuring Disney characters.
The Company's commitment for minimum guaranteed royalty payments under all
license agreements is $4,200,000, 13,500,000, 11,900,000, $5,000,000, 5,000,000
and 4,200,000 respectively for fiscal 1999, 2000, 2001, 2002, 2003 and 2004. The
Company believes that future sales of royalty products will exceed amounts
required to cover the minimum royalty guarantees. The Company's total royalty
expense, net of royalty income, was $8,687,000, $7,336,000 and $3,404,000 for
fiscal 1998, 1997 and 1996 respectively.
COMPETITION
The textile industry, including the market for home furnishings products,
is highly competitive. The Company competes with a variety of manufacturers,
many of which are vertically integrated textile companies with substantially
greater resources than the Company, and many of which are of similar size to the
Company. Competitors may have customer relationships that may be superior to
those of the Company and may have substantially greater resources. The Company
believes that it is the fifth largest domestic manufacturer of bed coverings,
including comforters, comforter sets and jacquard-woven bedspreads, with a total
market share of less than 10%. The Company also believes that it is the largest
domestic manufacturer of throws controlling about one-third of this market, and
it is the largest producer of infant bed coverings and bibs controlling about
one-fourth of these markets.
The Company competes on the basis of quality, design, price, service and
packaging. Except for acrylic throws, luxury linens, and matelasse coverlets and
bedspreads, the Company's products have not experienced significant competition
from imports. The Company believes that its ability to implement future price
increases for its products may be limited by current or future overcapacity in
the domestic textile industry.
GOVERNMENT REGULATION; ENVIRONMENTAL CONTROL
The Company is subject to various federal, state and local environmental
laws and regulations which regulate, among other things, the discharge, storage,
handling and disposal of a variety of substances and wastes. The Company's
operations are also governed by laws and regulations relating to employee safety
and health, principally the Occupational Safety and Health Administration Act
and regulations thereunder.
The Company believes that it currently complies in all material respects
with applicable environmental, health and safety laws and regulations. Although
the Company believes that future compliance with such existing laws or
regulations will not have a material adverse effect on its capital expenditures,
earnings or competitive position, there can be no assurances that such
requirements will not become more stringent in the future or that the Company
will not incur significant costs in the future to comply with such requirements.
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EMPLOYEES
At June 15, 1998, the Company had 2,559 employees. None of the Company's
employees is represented by a labor union, and the Company considers its
relationship with its employees to be good. The Company attracts and maintains
qualified personnel by paying competitive salaries and benefits and offering
opportunities for advancement.
INTERNATIONAL SALES
Sales to customers in foreign countries are not currently material to the
Company's business. The Company believes, however, its presence in foreign
countries will increase in the future as a result of, among other factors, the
passage of NAFTA, its acquisition of a business located in Mexico, and its sales
efforts in Europe, Japan and Australia.
ITEM 2. PROPERTIES
The Company's headquarters are located in executive offices in Atlanta,
Georgia. A showroom is also located in these offices. The Company occupies
approximately 41,200 square feet at this location under leases that expire June
29, 2002 and September 30, 2000.
The following table summarizes certain information regarding the Company's
principal properties.
APPROXIMATE OWNED/
LOCATION USE SQUARE FEET LEASED
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Berea, Kentucky......... Offices, manufacturing, warehouse, and 38,000 Owned
distribution facilities and retail store
Calhoun, Georgia........ Two buildings, housing offices, manufacturing 267,000 Owned
facilities, sample department, print shop and
factory outlet store
Calhoun, Georgia........ Warehouse and distribution center 233,000 Owned
Chatsworth, Georgia..... Manufacturing facility, warehouse and 115,000 Owned
distribution center
Compton, California..... Offices, warehouse and distribution center 157,400 Leased(1)
Dalton, Georgia......... Two buildings housing manufacturing facilities 161,000 Owned
Ronda, North Carolina... Two buildings, housing offices, manufacturing 62,800 Owned
facility and warehouse
Atlanta, Georgia........ Executive offices and showroom 41,200 Leased(2)
Roxboro, North Three buildings, housing manufacturing 424,000 Owned
Carolina.............. facilities, warehouse and distribution centers,
administrative offices and factory outlet store
Roxboro, North Seven buildings, housing manufacturing 453,000 Leased(3)
Carolina.............. facilities, warehouses and distribution
facilities
Blowing Rock, North Three buildings, housing administrative and 21,000 Owned
Carolina.............. sales offices, and factory outlet store
New York, New York...... Sales and design offices and show-room 41,600 Leased(4)
Rancho Santa Margarita, Offices, warehouse, and distribution center 51,900 Leased(5)
California............
Prairieville, Offices, warehouse, and distribution center 33,000 Leased(6)
Louisiana.............
Houston, Texas.......... Offices, warehouse, and distribution center 32,900 Leased(7)
Aguascalientes, Offices, warehouse, and distribution center 86,000 Leased(8)
Mexico................
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(1) Lease expires May 31, 2001 (renewable for one two-year period and one
three-year period).
(2) Leases expire June 29, 2002 and September 30, 2000.
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(3) Leases expire as follows: (a) 75,000 square feet on February 28, 2005; (b)
50,000 square feet on September 30, 1998 (renewable for one five-year
period); (c) a lease for 223,000 square feet expired on April 30, 1998 and
is currently a month to month lease; and (d) two month to month leases of
105,000 square feet.
(4) Lease expires April 30, 2007 (renewable for up to two additional five-year
periods).
(5) Lease expires July 31, 2001.
(6) Leases expire March 30, 2000.
(7) Leases expire March 31, 2001 and November 30, 1998.
(8) Leases expire January 31, 2000 (renewable for one two year period).
The Company also leases space for it's various sales offices and outlet
stores.
Management believes that its properties are suitable for the purposes for
which they are used, are in generally good condition and provide adequate
production capacity for current and anticipated future operations. The Company's
business is somewhat seasonal so that during the late summer and fall months
these facilities are fully utilized, while at other times of the year the
Company has excess capacity.
ITEM 3. LEGAL PROCEEDINGS
The Company, one of its subsidiaries, and Calvin Klein, Inc. are defendants
in a lawsuit filed on June 8, 1998 by Decorative Home Accents, Inc. and related
companies (hereinafter "DHA"). Because DHA is under the protection of the
Bankruptcy Court in the Southern District of New York, the suit was brought as
an adversary proceeding in that court. DHA complains that the grant by Calvin
Klein, Inc. of a license for soft home products to the Company's subsidiary,
instead of renewing DHA's license, which expired on April 30, 1998, was wrongful
on various legal theories. DHA seeks to have the new license to the Company's
subsidiary declared invalid, and to have the old license restored to DHA, and
seeks actual and punitive damages. On June 12, 1998, the Bankruptcy Court denied
DHA's motion for a temporary restraining order and indicated its intention not
to grant a preliminary injunction based, inter alia, on a finding that DHA had
not established the requisite probability of success on the merits. The Company
believes that it is entitled to retain and operate under the Calvin Klein
license and that its conduct in competing for and obtaining the license was
lawful. The Company intends to defend the suit vigorously and expects to prevail
on the merits. The suit was filed in the midst of negotiations among DHA, the
Company, and Calvin Klein, Inc. for the Company to acquire from DHA its
inventory and other assets used in the licensed business after the defendants
refused a further extension of a standstill agreement that had been in effect
since April 30, 1998. The acquisition negotiations are continuing.
In the Company's pending arbitration with Kitan Textile Industries Ltd. of
Israel, the Company's supplier of the Royal Sateen(R) bedding line, all claims
and counterclaims for monetary damages have been settled on terms not involving
any cash payments. Both companies have agreed to spend additional money in
developing the U.S. market for the Royal Sateen(R) brand of bedding. The
arbitration remains pending for interpretation of certain contract terms.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended March 29, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company is authorized by its Articles of Incorporation to issue up to
50,000,000 shares of capital stock, all of which are designated Common Stock,
par value $1.00 per share.
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COMMON STOCK
The Company's common stock (the "Common Stock") is traded on the New York
Stock Exchange ("NYSE") under the symbol "CRW". The following table presents
quarterly information on the price range of the Company's Common Stock for the
fiscal years ended March 29, 1998 and March 30, 1997. This information indicates
the high and low sale prices as reported by the NYSE.
QUARTER HIGH LOW
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FISCAL 1998
First Quarter............................................... $12 1/8 $10 1/4
Second Quarter.............................................. 14 15/16 10 3/16
Third Quarter............................................... 17 5/16 13 3/4
Fourth Quarter.............................................. 22 1/16 14 7/16
FISCAL 1997
First Quarter............................................... $11 5/8 $ 9
Second Quarter.............................................. 10 1/8 7 3/4
Third Quarter............................................... 10 8 3/8
Fourth Quarter.............................................. 12 9 1/4
As of June 15, 1998 there were issued and outstanding 8,599,967 shares of
the Company's Common Stock held by approximately 1,425 beneficial holders. The
estimated number of beneficial holders does not reflect the approximately 1,925
individual employee accounts in the Company's Employee Stock Ownership Plan. At
June 15, 1998, the Company's Common Stock closed at $14 7/16.
In fiscal 1998, the Company continued its policy, begun in February 1989,
of paying dividends on a quarterly basis. The Company paid a dividend of $0.03
per share on its Common Stock on June 4, 1997, September 23, 1997, December 23,
1997 and March 24, 1998. Dividends paid by the Company on its Common Stock in
the future will depend upon the earnings and financial condition of the Company.
The Company presently anticipates paying dividends for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below are derived from the Company's
financial statements for the five years ended March 29, 1998. The data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes included elsewhere in this Annual Report.
YEAR ENDED
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MARCH 29, MARCH 30, MARCH 31, APRIL 2, APRIL 3,
1998 1997 1996 1995 1994*
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($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS.)
FOR THE YEAR
Net sales................................... $319,238 $256,385 $219,002 $210,963 $187,335
Gross profit................................ 71,089 51,737 42,452 46,731 37,998
Earnings from operations.................... 18,993 11,641 10,625 18,878 15,374
Net earnings................................ 7,806 3,631 3,947 11,050 9,010
Basic earnings per share.................... 0.97 0.46 0.49 1.31 1.08
Diluted earnings per share.................. 0.92 0.45 0.48 1.29 1.06
Cash dividends per share.................... 0.12 0.12 0.12 0.12 0.12
AT YEAR END
Total assets................................ $241,666 $189,556 $185,698 $134,031 $123,348
Long-term debt.............................. 50,100 71,200 69,300 5,000 10,000
Shareholders' equity........................ 97,323 85,695 83,017 87,000 75,385
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* Fiscal 1994 contained 53 weeks of operations
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ACQUISITIONS AND DISPOSITIONS
During the fiscal year ended March 29, 1998, the Company acquired four
companies, Hamco, Inc., Pinky Baby Products, Noel Joanna, Inc. and Burgundy
Interamericana, S.A. de C.V. Hamco and Pinky design, manufacture, market and
distribute bibs and other infant soft goods. Noel Joanna designs, markets and
distributes infant bedding and accessories. Burgundy, located in Aguascalientes,
Mexico, is a contract manufacturer of consumer textile products.
Post-acquisition, Burgundy's production capacity is expected to be utilized
exclusively for the manufacture of the Company's products. The effect of these
acquisitions on fiscal 1998 operating results is discussed below in the section
"Results of Operations: Fiscal 1998 Compared to Fiscal 1997."
During the fiscal year ended March 30, 1997, Hans Benjamin Furniture, Inc.,
a 51-percent owned subsidiary of the Company, announced a nationwide voluntary
recall of all furniture products it manufactured following a determination that
many of its products had been mislabeled. Subsequent to the recall, the Company
decided to terminate the operations of Hans Benjamin and to dispose of Benn
Corporation, a wholly-owned subsidiary engaged in the manufacture of textile
machinery.
During fiscal 1997, the Company recorded an after-tax loss of approximately
$1.3 million for costs associated with the product recall and the disposition of
the two subsidiaries. The recorded loss includes a settlement reached with the
Office of the District Attorney in Sacramento, California, related to mislabeled
product shipped into that state. The loss is reflected in the Consolidated
Statement of Earnings for fiscal 1997 as follows:
Reduction in net sales.................................... $ 407,000
Increase in cost of products sold......................... 894,000
Increase in marketing and administrative expenses......... 213,000
Increase in other expenses -- net......................... 74,000
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Reduction in earnings before income taxes................. 1,588,000
Reduction in provisions for income taxes.................. 325,000
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Reduction in net earnings................................. $1,263,000
==========
Hans Benjamin was liquidated on March 27, 1997. Benn Corporation was sold
during the fourth quarter of fiscal 1998, resulting in a reduction of costs and
expenses of $335,000, net of related taxes.
During the fiscal year ended March 31, 1996, the Company acquired four
companies, The Red Calliope and Associates, Inc., KKH Corporation, Churchill
Weavers, Inc. and Textile, Inc. Red Calliope designs, markets and distributes
infant bedding and accessories. KKH designs, markets and distributes
animal-shaped pillows for the juvenile market. Churchill designs, manufactures,
markets and distributes hand-woven throws and other luxury woven textile
products. The effect of owning these three companies throughout fiscal 1997 and
for only a portion of fiscal 1996 is discussed below in the section "Results of
Operations: Fiscal 1997 Compared to Fiscal 1996." Textile, Inc., a contract
manufacturer of jacquard-woven products, was acquired on the first day of fiscal
1996 to supplement internal production capacity.
ERP SOFTWARE
From October through December 1997, the Company conducted an assessment of
its computer applications and systems in order to determine whether existing
systems were sufficient to meet the Company's future business information needs.
As a result, the Company decided to install new Enterprise Resource Planning
(ERP) software programs. The ERP programs are expected to replace substantially
all of the Company's existing applications software and to result in significant
improvements in the functionality and efficiency of the Company's business
processes.
From January through March 1998, the Company developed a more detailed
assessment of its current business processes and systems, identified potentially
appropriate software packages, prepared requests for
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proposals, interviewed software vendors and evaluated alternatives. All costs
and expenses associated with this process were expensed as incurred.
In April 1998, the Company selected its ERP vendor and began to develop
implementation schedules. The Company presently estimates that the ERP systems
will be implemented at the parent company over a period of eighteen months at a
total cost of $14.3 million, of which $12.0 million is expected to be
capitalized. Of the total amount, $10.9 million is expected to be expended in
the fiscal year ended March 28, 1999, and $3.4 million is expected to be
expended in the fiscal year ended April 2, 2000. Following such implementation,
the Company expects to develop budgets for extending the new systems to its
operating subsidiaries.
YEAR 2000 ISSUE
In the latter portion of the 1990s, an issue affecting most companies has
emerged regarding the ability of computer applications and systems to properly
interpret dates later than December 31, 1999. This issue arises because, until
recently, many computer applications were written using only the two rightmost
digits to define the applicable year. Accordingly, when the need arises to enter
a date after December 31, 1999, it is unclear how any particular application
will interpret the digits 00. Unless corrective measures are taken, applications
that are not Year 2000 compliant may create erroneous results or, in the worst
case, fail to operate.
Prior to its decision to install new ERP software, the Company had begun
investigating the impact of the Year 2000 on its operations. The ERP vendor has
advised the Company that the software selected for implementation is Year 2000
compliant. Because the Company expects to complete its conversion to the new
software at the parent company before any Year 2000 issues arise, the Company
has greatly reduced the effort needed to correct existing programs.
The Company intends to review the progress of its ERP conversion project in
September 1998 to determine whether it should begin to execute a contingency
plan under which certain of the programs currently in use will be assessed and,
if necessary, upgraded to become Year 2000 compliant. Both internal and external
resources will be utilized to make any such assessment, to make necessary
modifications and to test the results.
In addition, the Company has begun communicating with others with whom it
does business to determine their Year 2000 compliance readiness and the extent
to which the Company is vulnerable to any third-party Year 2000 issues. All
costs associated with Year 2000 compliance activities have been expensed as
incurred. The total cost to the Company of these Year 2000 compliance activities
has not been and is not expected to be material to its financial position or
results of operations in any given year.
RESULTS OF OPERATIONS: FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for fiscal 1998 increased $62.9 million, or 24.5%, to $319.2
million. Net sales of bedroom products increased $12.5 million to $128.0
million, net sales of throws and decorative home accessories increased $6.5
million to $94.2 million, and net sales of infant and juvenile products
increased $43.3 million to $94.3 million. The four companies acquired during
fiscal 1998 accounted for $25.4 million of the sales increase, all in the infant
and juvenile products group.
The increase in sales of bedroom products was primarily attributable to
increased sales of imported sheets. The increase in sales of throws and
decorative home accessories was primarily attributable to increased sales of
imported fleece throws.
Cost of sales declined to 77.7% of sales in fiscal 1998 from 79.8% in
fiscal 1997, primarily due to increased sales of higher-margin products. Gross
margin increased to 22.3% in fiscal 1998 from 20.2% in fiscal 1997. The unusual
charges related to Hans Benjamin and Benn Corporation referred to above
increased the ratio of cost of sales to sales and reduced the gross margin by
0.5 percentage points in fiscal 1997.
Marketing and administrative expenses increased by $12.0 million, or 29.9%,
for fiscal 1998. Of this increase, $4.9 million is attributable to the companies
acquired during fiscal 1998. The balance of the increase is primarily due to
increases in personnel costs, legal expenses and other professional fees.
9
11
Interest expense increased by $1.7 million in fiscal 1998. Approximately
$1.2 million of this increase is the result of debt incurred or assumed in
acquisition transactions.
The effective income tax rate declined to 37.6% in fiscal 1998 from 47.4%
in fiscal 1997 due to lower effective state income tax rates in the current year
as a result of various state employment and investment tax credits earned. The
fiscal 1997 effective tax rate was unusually high due to nondeductible expenses
associated with the Hans Benjamin and Benn Corporation charges referred to
above.
RESULTS OF OPERATIONS: FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 increased $37.4 million, or 17.1%, to $256.4
million. The increase was largely attributable to incremental net sales of $34.6
million from businesses acquired in fiscal 1996. Net sales of bedroom products
declined $6.8 million to $115.5 million, net sales of throws and decorative home
accessories increased $7.0 million to $87.8 million, and net sales of infant and
juvenile products increased $37.2 million to $51.0 million.
Cost of sales declined to 79.8% in fiscal 1997 from 80.6% in fiscal 1996,
primarily due to increased sales of higher-margin products. Gross margin
increased to 20.2% in fiscal 1997 from 19.4% in fiscal 1996. Fiscal 1997 gross
margin would have been 20.7% absent the unusual charges related to Hans Benjamin
and Benn Corporation referred to above.
Marketing and administrative expenses increased by $8.3 million, or 26.0%,
in fiscal 1997. Incremental marketing and administrative expenses of companies
acquired in fiscal 1996 accounted for $4.5 million of the increase. The
remainder of the increase was due to increases in promotional expenses, sales
personnel costs, legal and other professional fees, and bad debts expense.
Interest costs increased to $4.9 million in 1997 from $4.2 million
(including capitalized interest of $402,000) in 1996. The increase in interest
expense was primarily the result of higher levels of debt outstanding during the
first and second quarters of the fiscal year. The higher debt levels were
primarily the result of significant investment spending in 1996 including
capital expenditures of $23.7 million, acquisitions of $20.5 million, and
treasury stock purchases of $7.5 million.
The fiscal 1997 effective income tax rate increased to 47.4% from 39.6% in
fiscal 1996 due to non-deductible losses recorded in conjunction with the Hans
Benjamin and Benn Corporation costs discussed above.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the Company expended $19.6 million on acquisitions, net
of cash acquired, and another $8.3 million on capital additions. The cash
necessary for these expenditures and for operating needs was provided primarily
by increases in notes payable of $20.3 million and increases in borrowings under
revolving credit agreements of $9.0 million. The Company maintains unsecured
committed revolving credit facilities totaling $30 million with two banks at
interest rates which vary based upon the London Interbank Offered Rate (LIBOR).
At March 29, 1998, the maximum amount was outstanding under these committed
facilities. The facilities are scheduled to expire on August 25, 1998. The
Company expects to negotiate new revolving credit facilities to provide greater
borrowing capacity prior to such expiration. In addition to its committed
revolving credit lines, the Company currently has uncommitted lines of credit
totaling $50 million with two commercial banks at floating interest rates.
Borrowings of $24.9 million were outstanding under these lines at March 29,
1998.
The Company expects that its total expenditures for property, plant and
equipment will exceed $20 million in fiscal 1999, with about half of this amount
resulting from the ERP project referred to above. The Company may also make
additional strategic acquisitions. The Company does not believe that cash
provided by operations and by its committed and uncommitted bank facilities will
be sufficient to cover these needs. The Company anticipates that, in addition to
increasing its borrowing capacity under revolving credit agreements, it will
also obtain additional long-term debt financing to meet its anticipated
requirements for cash.
10
12
To reduce its exposure to credit losses and to enhance its cash flow
forecasts, 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
due dates of the factored invoices. The Company does not take advances against
its factored receivable balances. 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.
During fiscal 1996, the Company's Board of Directors authorized the
purchase of up to 1,000,000 shares of outstanding common stock. During 1996, the
Company purchased a total of 636,200 shares of its stock for a total of $7.5
million. No shares were purchased in fiscal 1997 or in fiscal 1998, and no
decision has been made as to whether the Company will acquire the remaining
363,800 shares covered under this authorization.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, FASB issued Statement No. 130, "Reporting Comprehensive Income,"
and Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These statements, which are effective for periods beginning after
December 15, 1997, expand or modify disclosures and, accordingly, will have no
impact on the Company's reported financial position, results of operations, or
cash flows.
FORWARD-LOOKING INFORMATION
This annual report 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, such as Indonesia, 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 operational improvements in its acquired
businesses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-14 herein.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has neither changed its independent accountants nor had any
disagreements on accounting or financial disclosure with such accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the Company's directors is set forth in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
August 25, 1998 (the "Proxy Statement") under the
11
13
caption "Election of Directors" and is incorporated herein by reference. The
Information with respect to the Company's executive officers is set forth in the
Proxy Statement under the caption "Executive Officers" and is incorporated
herein by reference. The information with respect to Item 405 of Registration
S-K is set forth in the Proxy Statement under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Voting Rights and Principle
Shareholders" in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(A)1. FINANCIAL STATEMENTS
The following consolidated financial statements of Registrant are filed
with this report and included in Part II, Item 8:
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of March 29, 1998 and March
30, 1997.................................................. F-3
Consolidated Statements of Earnings for the Three Fiscal
Years in the Period Ended March 29, 1998.................. F-4
Consolidated Statements of Changes in Shareholders' Equity
for the Three Fiscal Years in the Period Ended March 29,
1998...................................................... F-5
Consolidated Statements of Cash Flows for the Three Fiscal
Years in the Period Ended March 29, 1998.................. F-6
Notes to Consolidated Financial Statements.................. F-7
(A)2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of Registrant is filed with this
report:
Schedule VIII -- Valuation and Qualifying Accounts.......... Page 13
All other schedules not listed above have been omitted because they are not
applicable or the required information is included in the financial statements
or notes thereto.
12
14
CROWN CRAFTS, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
--------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ---------- ---------- ----------- ----------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS* PERIOD
---------- ---------- ----------- ----------
(IN THOUSANDS)
Accounts Receivable Valuation Accounts:
Year Ended March 31, 1996............................ $ 30 $ 67 $ 18 $ 79
Reserve for doubtful accounts........................ 723 453 1,176
Reserve for customer deductions......................
Year Ended March 30, 1997
Reserve for doubtful accounts........................ $ 79 $1,123 $ (18) $1,220
Reserve for customer deductions...................... 1,176 169 1,345
Year Ended March 29, 1998
Reserve for doubtful accounts........................ $1,220 $ 951 $1,472 $ 699
Reserve for customer deductions...................... 1,345 357 1,702
- ---------------
* Deductions from the reserve for doubtful accounts represent the amount of
accounts written off reduced by any subsequent recoveries.
13
15
(A)3. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following Executive Compensation Plans and Arrangements are filed with
this Form 10-K or have been previously filed as indicated below:
1. Crown Crafts, Inc. 1976 Non-Qualified Stock Option Plan.
(6)(Exhibit 10(b)(i))
2. Philip Bernstein Death Benefits Agreement dated March 30, 1992 (5)
(Exhibit 10(b)(ii))
3. Description of Crown Crafts, Inc. Executive Incentive Bonus Plan
(5) (Exhibit 10(b)(iii))
4. Crown Crafts, Inc. 1995 Stock Option Plan (1) (Exhibit 10(b)(iv))
5. Form of Nonstatutory Stock Option Agreement (pursuant to 1995 Stock
Option Plan) (1) (Exhibit 10(b)(v))
6. Form of Nonstatutory Stock Option Agreement for Nonemployee
Directors (pursuant to 1995 Stock Option Plan) (1)
(Exhibit 10(b)(vi))
(A)5. EXHIBITS
Exhibits required to be filed by Item 601 of Regulation S-K are included as
Exhibits to this report as follows:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
2(a) -- Merger Agreement dated as of October 8, 1995 between and
among Registrant and CC Acquisition Corp, and Neal Fohrman
and Stanley Glickman and The Red Calliope and Associates,
Inc.(7)
3(a) -- Restated Articles of Incorporation of Registrant.(1)
3(b) -- Bylaws of Registrant.(1)
4(a) -- Instruments defining the rights of security holders are
contained in the Restated Articles of Incorporation of
Registrant, and Article I of the Restated Bylaws of
Registrant.(1)
4(b) -- Form of Rights Agreement dated as of August 11, 1995 between
the Registrant and Trust Company Bank, including Form of
Right Certificate and Summary of Rights to Purchase Common
Shares.(2)
10(a)(i) -- 9.22% Note Agreement with The Prudential Insurance Company
of America.(3)
10(a)(ii) -- Letter Agreement with The Prudential Insurance Company of
America dated July 23, 1991.(4)
10(a)(iii) -- Letter Agreement with The Prudential Insurance Company of
America dated April 9, 1992.(4)
10(a)(iv) -- Letter Agreement with The Prudential Insurance Company of
America dated May 21, 1993.(5)
10(a)(v) -- Letter Agreement with The Prudential Insurance Company of
America dated July 14, 1994.(8)
10(a)(vi) -- Letter Agreement with The Prudential Insurance Company of
America dated July 29, 1994(8)
10(a)(vii) -- Letter Agreement with The Prudential Insurance Company of
America dated March 31, 1995.(8)
10(a)(viii) -- Letter Agreement with The Prudential Insurance Company of
America dated October 12, 1995.(1)
14
16
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
10(b)(i) -- Crown Crafts, Inc. Non-Qualified Stock Option Plan.(6)
10(b)(ii) -- Philip Bernstein Death Benefits Agreement dated March 30,
1992.(5)
10(b)(iii) -- Description of Crown Crafts, Inc. Executive Incentive Bonus
Plan.(5)
10(b)(iv) -- Crown Crafts, Inc. 1995 Stock Option Plan.(1)
10(b)(v) -- Form of Nonstatutory Stock Option Agreement (pursuant to
1995 Stock Option Plan).(1)
10(b)(vi) -- Form of Nonstatutory Stock Option Agreement for Nonemployee
Directors (pursuant to 1995 Stock Option Plan).(1)
10(c)(i) -- Revolving Credit Agreement dated August 25, 1995 with
NationsBank, National Association (Carolinas).(1)
10(c)(ii) -- Amendment No. 1 to Revolving Credit Agreement dated May 1,
1996 with NationsBank, National Association (Carolinas).(9)
10(c)(iii) -- Amendment No. 2 to Revolving Credit Agreement dated June 28,
1996 with Nationsbank, National Association (Carolinas).(10)
10(c)(iv) -- Letter Agreement with Nationsbank, N.A. dated December 23,
1996.(10)
10(c)(v) -- Letter Agreement with Nationsbank, N.A. dated January 23,
1997.(10)
10(c)(vi) -- Letter Agreement with Nationsbank, N.A. dated May 22,
1997.(10)
10(c)(vii) -- Letter Agreement with Nationsbank, N.A. dated November 6,
1997.
10(c)(viii) -- Letter Agreement with Nationsbank, N.A. dated January 14,
1998.
10(d)(i) -- Revolving Credit Agreement dated August 25, 1995 with
Wachovia Bank of Georgia, N.A.(1)
10(d)(ii) -- Amendment No. 1 to Revolving Credit Agreement dated May 1,
1996 with Wachovia Bank of Georgia, N.A.(9)
10(d)(iii) -- Amendment No. 2 to Revolving Credit Agreement dated June 28,
1996 with Wachovia Bank of Georgia, N.A.(10)
10(d)(iv) -- Letter Agreement with Wachovia Bank of Georgia, N.A. dated
December 24, 1996.(10)
10(d)(v) -- Letter Agreement with Wachovia Bank of Georgia, N.A. dated
January 22, 1997.(10)
10(d)(vi) -- Letter Agreement with Wachovia Bank of Georgia, N.A. dated
May 22, 1997.(10)
10(d)(vii) -- Letter Agreement with Wachovia Bank of Georgia, N.A. dated
November 7, 1997.
10(d)(viii) -- Letter Agreement with Wachovia Bank of Georgia, N.A. dated
January 22, 1998.
10(e)(i) -- Note Purchase and Private Shelf Facility dated October 12,
1995 with The Prudential Insurance Company of America.(1)
10(e)(ii) -- Letter Agreement dated April 4, 1996 with The Prudential
Insurance Company of America.(9)
10(f) -- Lease Agreement dated June 28, 1996 between 1185 Avenue of
the Americas Associates as Lessor and Crown Crafts Home
Furnishings, Inc. as Lessee.(9)
10(g) -- License Agreement dated January 1, 1998 between Disney
Enterprises, Inc. as Licensor and Crown Crafts, Inc. as
Licensee
10(h) -- License Agreement dated May 11, 1998 between Calvin Klein,
Inc. as Licensor, and Crown Crafts Designer, Inc. as
Licensee a wholly-owned subsidiary of Crown Crafts, Inc. as
Guarantor.
21 -- Subsidiaries of the Registrant
15
17
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
23 -- Consent of Deloitte & Touche LLP
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Restated Financial Data Schedule, March 30, 1997 (for SEC
use only)
27.3 -- Restated Financial Data Schedule, March 31, 1996 (for SEC
use only)
27.4 -- Restated Financial Data Schedule, June 30, 1996 (for SEC use
only)
27.5 -- Restated Financial Data Schedule, September 29, 1996 (for
SEC use only)
27.6 -- Restated Financial Data Schedule, December 29, 1996 (for SEC
use only)
27.7 -- Restated Financial Data Schedule, June 29, 1997 (for SEC use
only)
27.8 -- Restated Financial Data Schedule, September 28, 1997 (for
SEC use only)
There were no reports on Form 8-K during the quarter ended March 29, 1998.
- ---------------
(1) Incorporated herein by reference to exhibit of same number to Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 1, 1995.
(2) Incorporated herein by reference to exhibit of same number to Registrant's
Report on Current Form 8-K dated August 22, 1995.
(3) Incorporated herein by reference to exhibit of same number to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1991.
(4) Incorporated herein by reference to exhibit of same number to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 29, 1992.
(5) Incorporated herein by reference to exhibit of same number to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 28, 1993.
(6) Incorporated herein by reference to exhibit of same number to Registrant's
Registration Statement on Form S-8, filed April 8, 1994. (Reg. No.
33-77558).
(7) Incorporated herein by reference to exhibit of same number to Registrants
Report on Current Form 8-K dated November 13, 1995.
(8) Incorporated herein by reference to exhibit of same number to Registrant's
Annual Report on Form 10-K for the fiscal year ended April 2, 1995.
(9) Incorporated herein by reference to exhibit of the same number to
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31,
1996.
(10) Incorporated herein by reference to exhibit of the same number to
Registrant's Annual Report on Form 10-K for the fiscal year ended March 30,
1997.
16
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ MICHAEL H. BERNSTEIN
------------------------------------
Michael H. Bernstein
President and Chief Executive
Officer
Date: July 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURES TITLE DATE
---------- ----- ----
/s/ MICHAEL H. BERNSTEIN President and Chief Executive July 13, 1998
- ----------------------------------------------------- Officer, Director
Michael H. Bernstein
/s/ PHILIP BERNSTEIN Chairman of the Board July 13, 1998
- -----------------------------------------------------
Philip Bernstein
/s/ E. RANDALL CHESTNUT Director July 13, 1998
- -----------------------------------------------------
E. Randall Chestnut
/s/ ROGER D. CHITTUM Director July 13, 1998
- -----------------------------------------------------
Roger D. Chittum
/s/ PAUL A. CRISCILLIS, JR. Director and Chief Financial July 13, 1998
- ----------------------------------------------------- Officer
Paul A. Criscillis, Jr.
/s/ MARVIN A. DAVIS Director July 13, 1998
- -----------------------------------------------------
Marvin A. Davis
/s/ RUDOLPH J. SCHMATZ Director July 13, 1998
- -----------------------------------------------------
Rudolph J. Schmatz
/s/ JANE E. SHIVERS Director July 13, 1998
- -----------------------------------------------------
Jane E. Shivers
/s/ ALFRED M. SWIREN Director July 13, 1998
- -----------------------------------------------------
Alfred M. Swiren
/s/ RICHARD N. TOUB Director July 13, 1998
- -----------------------------------------------------
Richard N. Toub
/s/ ROBERT E. SCHNELLE Chief Accounting Officer, July 13, 1998
- ----------------------------------------------------- Treasurer
Robert E. Schnelle
17
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Audited Financial Statements:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of March 29, 1998 and March
30, 1997............................................... F-3
Consolidated Statements of Earnings for the Three Fiscal
Years in the Period Ended March 29, 1998............... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the Three Fiscal Years in the Period Ended March
29, 1998............................................... F-5
Consolidated Statements of Cash Flows for the Three Fiscal
Years in the Period Ended March 29, 1998............... F-6
Notes to Consolidated Financial Statements................ F-7
Note # 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Note # 2 -- ACQUISITIONS
Note # 3 -- DISCONTINUANCE OF CERTAIN BUSINESSES
Note # 4 -- INVENTORIES
Note # 5 -- FINANCING ARRANGEMENTS
Note # 6 -- INCOME TAXES
Note # 7 -- RETIREMENT PLANS
Note # 8 -- STOCK OPTIONS
Note # 9 -- EARNINGS PER SHARE
Note #10 -- MAJOR CUSTOMERS
Note #11 -- COMMITMENTS AND CONTINGENCIES
Supplemental Financial Information:
Selected Quarterly Financial Information (unaudited)...... F-14
F-1
20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Crown Crafts, Inc.:
We have audited the accompanying consolidated balance sheets of Crown
Crafts, Inc. and subsidiaries as of March 29, 1998 and March 30, 1997, and the
related consolidated statements of earnings, changes in shareholders' equity and
cash flows for each of the three years in the period ended March 29, 1998. Our
audits also included the financial statement schedule listed at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Crown Crafts, Inc. and
subsidiaries as of March 29, 1998 and March 30, 1997, and the results of their
operations and their cash flow for each of the three years in the period ended
March 29, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 29, 1998
F-2
21
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1998 AND MARCH 30, 1997
1998 1997
--------- ---------
(DOLLAR AMOUNTS IN
THOUSANDS, EXCEPT
PAR VALUE PER SHARE)
ASSETS
CURRENT ASSETS:
Cash........................................................ $ 809 $ 602
Accounts receivable (less allowances of $3,407 in 1998 and
$3,502 in 1997):
Due from factor........................................... 32,234 30,866
Other..................................................... 16,192 7,496
Inventories................................................. 82,432 56,860
Deferred income taxes....................................... 1,943 2,392
Other current assets........................................ 4,938 3,307
-------- --------
Total current assets.............................. 138,548 101,523
-------- --------
PROPERTY, PLANT AND EQUIPMENT -- at cost:
Land, buildings and improvements............................ 45,496 44,903
Machinery and equipment..................................... 76,053 68,435
Furniture and fixtures...................................... 1,774 1,487
-------- --------
123,323 114,825
Less accumulated depreciation............................... 51,361 41,809
-------- --------
Property, plant and equipment -- net.............. 71,962 73,016
-------- --------
OTHER ASSETS:
Goodwill.................................................... 28,747 13,192
Other....................................................... 2,409 1,825
-------- --------
Total other assets................................ 31,156 15,017
-------- --------
Total Assets...................................... $241,666 $189,556
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable............................................... $ 24,850
Accounts payable............................................ 20,831 $ 13,212
Income taxes payable........................................ 86 1,336
Accrued wages and benefits.................................. 5,091 4,312
Accrued royalties........................................... 1,758 1,369
Other accrued liabilities................................... 2,930 3,429
Current maturities of long-term debt........................ 30,100 100
-------- --------
Total current liabilities......................... 85,646 23,758
-------- --------
NON-CURRENT LIABILITIES:
Long-term debt.............................................. 50,100 71,200
Deferred income taxes....................................... 7,852 7,877
Other....................................................... 745 1,026
-------- --------
Total non-current liabilities..................... 58,697 80,103
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock -- par value $1.00 per share; 50,000,000 shares
authorized................................................ 9,654 9,051
Additional paid-in capital.................................. 41,800 34,438
Retained earnings........................................... 63,838 57,005
Common stock held in treasury -- at cost.................... (17,969) (14,799)
-------- --------
Total shareholders' equity........................ 97,323 85,695
-------- --------
Total Liabilities and Shareholders' Equity........ $241,666 $189,556
======== ========
See notes to consolidated financial statements.
F-3
22
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FISCAL YEARS ENDED MARCH 29, 1998, MARCH 30, 1997 AND MARCH 31, 1996
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net Sales................................................... $319,238 $256,385 $219,002
Cost of products sold....................................... 248,149 204,648 176,550
-------- -------- --------
Gross profit................................................ 71,089 51,737 42,452
Marketing and administrative expenses....................... 52,096 40,096 31,827
-------- -------- --------
Earnings from operations.................................... 18,993 11,641 10,625
Other income (expense):
Interest expense.......................................... (6,562) (4,887) (3,807)
Cotton futures transactions............................... (847)
Other -- net.............................................. 84 151 568
-------- -------- --------
Earnings before income taxes................................ 12,515 6,905 6,539
Provisions for income taxes................................. 4,709 3,274 2,592
-------- -------- --------
Net earnings...................................... $ 7,806 $ 3,631 $ 3,947
======== ======== ========
Basic earnings per share.................................... $ 0.97 $ 0.46 $ 0.49
======== ======== ========
Diluted earnings per share.................................. $ 0.92 $ 0.45 $ 0.48
======== ======== ========
Average shares outstanding -- basic......................... 8,065 7,944 8,125
======== ======== ========
Average shares outstanding -- diluted....................... 8,495 8,018 8,156
======== ======== ========
See notes to consolidated financial statements.
F-4
23
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED MARCH 29, 1998, MARCH 30, 1997 AND MARCH 31, 1996
TREASURY STOCK
ADDITIONAL -------------------
COMMON PAID-IN RETAINED NUMBER OF
STOCK CAPITAL EARNINGS SHARES COST
------ ---------- -------- --------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
BALANCES -- APRIL 2, 1995...................... $9,004 $33,811 $51,352 464,188 $ 7,167
Net earnings................................... 3,947
Cash dividends ($0.12 per share)............... (972)
Exercises of stock options..................... 47 557
Treasury stock acquired in conjunction with
exercises of stock options................... 6,047 97
Tax benefits realized from exercises of stock
options...................................... 70
Treasury stock purchases....................... 636,200 7,535
------ ------- ------- --------- -------
BALANCES -- MARCH 31, 1996..................... 9,051 34,438 54,327 1,106,435 14,799
Net Earnings................................... 3,631
Cash Dividends ($0.12 per share)............... (953)
------ ------- ------- --------- -------
BALANCES -- MARCH 30, 1997..................... 9,051 34,438 57,005 1,106,435 14,799
Net earnings................................... 7,806
Cash dividends ($0.12 per share)............... (973)
Exercises of stock options..................... 536 4,608
Treasury stock acquired in conjunction with
exercises of stock options................... 154,504 3,170
Tax benefits realized from exercises of stock
options...................................... 1,821
Stock issued in connection with an
acquisition.................................. 67 933
------ ------- ------- --------- -------
BALANCES -- MARCH 29, 1998..................... $9,654 $41,800 $63,838 1,260,939 $17,969
====== ======= ======= ========= =======
Number of shares of common stock issued: 9,654,043 at March 29, 1998, and
9,050,636 at March 30, 1997.
See notes to consolidated financial statements.
F-5
24
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED MARCH 29, 1998, MARCH 30, 1997 AND MARCH 31, 1996
1998 1997 1996
-------- ------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings................................................ $ 7,806 $ 3,631 $ 3,947
Adjustments to reconcile net earnings to net cash provided
by (used for) operating activities:
Depreciation and amortization of property, plant and
equipment.............................................. 10,193 9,798 8,885
Amortization of goodwill.................................. 998 618 357
Deferred income tax provisions............................ 629 59 767
Loss (gain) on sale of property, plant and equipment...... 51 11 (10)
Changes in assets and liabilities, net of effects of
acquisitions of businesses:
Accounts receivable.................................... (5,230) 2,617 (7,792)
Inventories............................................ (18,471) (9,476) 4,756
Other current assets................................... (1,067) 167 (1,171)
Other assets........................................... (454) (321) (86)
Accounts payable....................................... 4,750 669 (1,311)
Income taxes payable................................... (1,662) 1,290 (1,078)
Accrued liabilities.................................... (664) 2,169 27
Other liabilities...................................... (281) 45 51
-------- ------- --------
Net Cash Provided by (Used for) Operating Activities........ (3,402) 11,277 7,342
-------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures........................................ (8,300) (5,702) (23,650)
Acquisitions, net of cash acquired.......................... (19,611) (459) (20,471)
Proceeds from sale of property, plant and equipment......... 200 372 444
-------- ------- --------
Net Cash Used for Investing Activities...................... (27,711) (5,789) (43,677)
-------- ------- --------
FINANCING ACTIVITIES:
Long-term borrowings........................................ 50,400
Payment of long-term debt................................... (775) (5,100) (6,564)
Increase in bank revolving credit........................... 9,000 2,000 19,000
Increase (decrease) in notes payable........................ 20,273 (1,350) (18,621)
Purchases of treasury stock................................. (7,535)
Stock options exercised..................................... 3,795 577
Cash dividends.............................................. (973) (953) (972)
-------- ------- --------
Net Cash Provided by (Used for) Financing Activities........ 31,320 (5,403) 36,285
-------- ------- --------
NET INCREASE (DECREASE) IN CASH............................. 207 85 (50)
CASH AT BEGINNING OF YEAR................................... 602 517 567
-------- ------- --------
CASH AT END OF YEAR......................................... $ 809 $ 602 $ 517
======== ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid........................................... $ 5,368 $ 2,534 $ 3,541
======== ======= ========
Interest paid, net of interest capitalized of $402 (1996)... $ 6,452 $ 4,773 $ 3,172
======== ======= ========
See notes to consolidated financial statements.
F-6
25
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED MARCH 29, 1998, MARCH 30, 1997 AND MARCH 31, 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Crown Crafts, Inc. and its subsidiaries
(collectively, the "Company") operate in a single business segment within the
textiles industry and are principally engaged in the design, manufacture and
sale of home furnishing products. The Company's three principal product groups
are bedroom products, throws and decorative home accessories, and infant and
juvenile products. Sales are generally made directly to retailers, primarily
department and specialty stores, mass merchants, large chain stores and gift
stores.
Basis of Presentation: The consolidated financial statements include the
accounts of Crown Crafts, Inc. and its subsidiaries. All significant
intercompany balances and transactions are eliminated in consolidation.
The Company's fiscal year ends on the Sunday nearest March 31. Fiscal years
are designated in the consolidated financial statements and notes thereto by
reference to the calendar year within which the fiscal year ends. The
consolidated financial statements encompass 52 weeks of operations for each of
the three years presented.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
Revenue Recognition: Sales are recorded when goods are shipped to
customers, and are reported net of returns and allowances in the consolidated
statements of earnings.
Inventory Valuation: Inventories are valued at the lower of first-in,
first-out cost or market.
Depreciation and Amortization: Depreciation of property, plant and
equipment is computed using the straight-line method over the estimated useful
lives of the respective assets. Estimated useful lives are 15 to 40 years for
buildings, 3 to 7 1/2 years for machinery and equipment, and 8 years for
furniture and fixtures. The cost of improvements to leased premises is amortized
over the shorter of the estimated life of the improvement or the term of the
lease.
Goodwill, which represents the unamortized excess of purchase price over
fair value of net identifiable assets acquired in business combinations, is
amortized using the straight-line method over periods of up to 30 years. The
Company reviews the carrying value of goodwill and other long-lived assets if
the facts and circumstances suggest that their recoverability may have been
impaired. The Company believes that no impairment of goodwill exists at March
29, 1998.
Futures Transactions: Realized and unrealized gains and losses in the fair
values of cotton futures contracts are recognized in earnings during the periods
in which such changes occur. The Company did not enter into any futures
contracts during 1997 or 1998.
Provisions for Income Taxes: The provisions for income taxes include all
currently payable federal, state and local taxes that are based upon the
Company's taxable income and the change during the fiscal year in net deferred
income tax assets and liabilities. The Company provides for deferred income
taxes based on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates that will be in effect when the
differences are expected to reverse.
Earnings Per Share: In 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128
replaced previously reported primary and fully-diluted earnings per share
amounts with basic and diluted earnings per share. Earnings per share for all
prior periods have been restated to conform to the requirements of SFAS 128.
Stock-Based Compensation: The Company accounts for stock option grants
using the intrinsic value method and only issues stock options that have an
exercise price that is equal to or more than the fair value of the underlying
shares at the date of grant. Accordingly, no compensation expense is re-
F-7
26
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
corded in the accompanying statements of earnings
with respect to stock option grants.
2. ACQUISITIONS
During 1998, the Company acquired four businesses: Hamco, Inc. ("Hamco") on
March 31, 1997; Noel Joanna, Inc. ("NoJo") on August 18, 1997; Pinky Baby
Products ("Pinky") on January 2, 1998; and Burgundy Interamericana, S.A.de C.V.
("Burgundy") on January 30, 1998. NoJo designs and markets infant bedding and
accessories. Hamco and Pinky manufacture infant soft goods such as bibs, hooded
towels and burp cloths. Burgundy is a Mexican contract manufacturer of consumer
textile products. The total consideration for these four acquisitions, including
transaction costs, was $20.6 million, of which $19.6 million was paid in cash
with the balance paid through the issuance of approximately 67,000 shares of the
Company's common stock.
All four 1998 acquisitions were accounted for as purchases. Accordingly,
the net purchase price was allocated based upon the respective acquisition-date
fair market values of assets acquired and liabilities assumed, as follows:
(IN THOUSANDS)
Assets acquired, other
than cash............ $14,181
Goodwill............... 16,324
-------
30,505
Less liabilities
assumed.............. 10,121
-------
Purchase price, net of
cash acquired........ $20,384
=======
The consolidated statement of earnings for 1998 includes the revenues,
expenses and operating results for each of these four companies commencing with
its respective acquisition date. The following unaudited pro forma information
presents the Company's consolidated results of operations as though the
acquisition of Hamco, Pinky and NoJo had occurred on the first day of fiscal
1997. Had the acquisition of Burgundy occurred on the first day of fiscal 1997,
the pro forma information would not differ materially from the amounts
presented. These pro forma results do not purport to be indicative of the
results which would have been achieved had the acquisitions been made on that
date, or of future results of operations.
1998 1997
-------- --------
(IN THOUSANDS)
Net sales................ $331,805 $287,681
Net earnings............. 7,436 3,417
Basic earnings per
share.................. 0.92 0.43
Diluted earnings per
share.................. 0.88 0.43
During 1997, the Company acquired Woven Classic Throws, Inc., a small
manufacturer of specialty woven throws, for a cash purchase price of $0.2
million, including transaction costs. The acquisition was accounted for as a
purchase and did not have a material effect on the Company's 1997 operating
results.
During 1996, the Company acquired four businesses: Textile, Inc.
("Textile") on April 3, 1995; The Red Calliope and Associates, Inc. ("Red
Calliope") on October 31, 1995; KKH Corporation ("Pillow Buddies") on December
19, 1995; and Churchill Weavers, Inc. ("Churchill") on January 4, 1996. Red
Calliope designs and markets infant bedding products and related accessories.
Pillow Buddies designs and markets imported patented animal-shaped children's
pillows. Churchill manufactures and markets luxury throws and other hand-woven
textile products. Textile operated as a contract manufacturer of jacquard-woven
throws prior to the acquisition and is now used primarily to provide a portion
of the Company's production capacity for throws. The total consideration for
these four acquisitions, including transaction costs and certain contingent
payments and adjustments that occurred in 1997 and 1998, was $21.3 million, all
of which was paid in cash.
F-8
27
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The four 1996 acquisitions were accounted for as purchases. Accordingly, in
the 1996 financial statements the net purchase price was allocated based upon
the respective acquisition-date fair market values of assets acquired and
liabilities assumed, as follows:
(IN THOUSANDS)
Assets acquired, other
than cash............ $18,899
Goodwill............... 13,829
-------
32,728
Less liabilities
assumed.............. 12,257
-------
Purchase price, net of
cash acquired........ $20,471
=======
The Textile acquisition occurred on the first day of 1996. Had the
remaining three acquisitions also occurred on that date, the Company's earnings
per share would not have differed materially from the amounts reported in the
consolidated financial statements.
3. DISCONTINUANCE OF CERTAIN
BUSINESSES
In 1997, the Company recorded costs and expenses of $1,263,000, net of
related income tax benefits, as a result of plans adopted to liquidate Hans
Benjamin Furniture, Inc. ("Hans Benjamin"), a 51-percent-owned subsidiary, and
to divest itself of Benn Corporation, a wholly-owned manufacturer of textile
machinery.
The decision to liquidate Hans Benjamin was precipitated by the receipt of
notices from two California regulatory agencies stating that a line of juvenile
foam-core furniture manufactured by Hans Benjamin did not comply with a
California flammability standard, that such products were mislabeled, and that
these matters could subject Hans Benjamin to civil penalties. The Company's
subsequent internal investigation revealed that other products manufactured by
Hans Benjamin were not in compliance with the California flammability standard,
were similarly mislabeled and that such mislabeled products had also been
shipped into states other than California. Hans Benjamin responded by announcing
a nationwide voluntary recall of all furniture products it manufactured. During
the fourth fiscal quarter of 1997, Hans Benjamin negotiated a settlement with
California regarding the civil penalties to be paid, and was liquidated.
The decision to sell Benn Corporation was based upon the Company's desire
to concentrate its resources on its consumer products businesses. The sale of
Benn Corporation was consummated in the fourth fiscal quarter of 1998, resulting
in a reduction of costs and expenses of $335,000, net of related income taxes.
4. INVENTORIES
Major classes of inventory were as follows:
1998 1997
------- -------
(IN THOUSANDS)
Raw materials and
supplies........... $34,013 $27,415
Work in process...... 3,441 1,961
Finished goods....... 44,978 27,484
------- -------
$82,432 $56,860
======= =======
5. FINANCING ARRANGEMENTS
Factoring Agreement: The Company assigns the majority of its trade
accounts receivable to a commercial factor. The Company does not borrow funds
from its factor or take advances against accounts receivable so assigned. 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 lines. The Company bears losses resulting from returns,
allowances, claims and discounts. Factoring fees, which are included in
marketing and administrative expenses in the consolidated statements of
earnings, were: $1,944,000, $1,777,000 and $1,477,000, respectively, in 1998,
1997 and 1996.
Notes Payable: At March 29, 1998, the Company had available uncommitted
lines of credit totaling $40,000,000 with two banks at floating rates of
interest. No fees or compensating balances are required under these
arrangements, and the lines are cancelable at the banks' discretion. Annual
average borrowings and weighted average interest rates under these arrangements
were $16,502,000 at 6.3%
F-9
28
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in 1998 and $7,161,000 at 5.8% in 1997. Borrowings of $24,850,000 were
outstanding under these arrangements at March 29, 1998 at an average interest
rate of 6.5%. In addition, the Company had outstanding letters of credit,
primarily for purchases of inventory, aggregating $5.1 million which reduced the
available credit under these arrangements.
Long-Term Debt: At March 29, 1998 and March 30, 1997, long-term debt
consisted of:
1998 1997
------- -------
(IN THOUSANDS)
6.92% unsecured notes due in
annual installments of $7,143
from October 1999 through
October 2005.................. $50,000 $50,000
Floating rate unsecured
revolving credit facilities
maturing August 1998.......... 30,000 21,000
Other........................... 200 300
------- -------
80,200 71,300
Less current maturities......... 30,100 100
------- -------
$50,100 $71,200
======= =======
The Company's unsecured revolving credit facilities provide for a total of
$30 million of committed funds. The interest rate on borrowings under these
lines is based on the London Interbank Offered Rate. At March 29, 1998 and March
30,1997, the weighted average interest rates on amounts outstanding under these
facilities were 6.1% and 6.1%, respectively. The Company pays facility fees at
the rate of 0.15% per annum on the unused portions of the committed credit
lines.
The unsecured notes, which are placed with an insurance company, and the
floating rate unsecured revolving credit facilities, which are placed with two
banks, contain similar restrictive covenants requiring the Company to maintain
certain ratios of earnings to fixed charges and of total debt to total
capitalization. In addition, the bank revolving credit facilities contain
certain covenants requiring the Company to maintain minimum levels of
shareholders' equity and certain ratios of total debt to cash flow. The bank
facilities also place restrictions on the amounts the Company may expend on
acquisitions and purchases of treasury stock. At March 29, 1998, the Company was
in compliance with all restrictive covenants, and retained earnings of
approximately $9.2 million were available for dividend payments.
Scheduled maturities of long-term debt in each of the next five fiscal
years are: $30,100,000 in 1999, $7,243,000 in 2000, $7,143,000 in 2001,
$7,143,000 in 2002 and $7,143,000 in 2003. The fair value at March 29, 1998 of
the Company's long-term obligations, which amount has been estimated by
discounting the projected cash flows using rates currently available to the
Company for loans with similar terms and maturities, approximates their carrying
value.
6. INCOME TAXES
The provisions for income taxes are summarized as follows:
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
Current:
Federal................. $3,870 $2,887 $1,645
State and local......... 210 328 180
------ ------ ------
Total current.... 4,080 3,215 1,825
------ ------ ------
Deferred:
Federal................. 404 (223) 824
State and local......... 225 282 (57)
------ ------ ------
Total deferred... 629 59 767
------ ------ ------
$4,709 $3,274 $2,592
====== ====== ======
The tax effects of temporary differences that comprise the deferred tax
liabilities and assets are as follows:
1998 1997
------ ------
(IN THOUSANDS)
Gross deferred income tax
liabilities:
Property, plant and equipment... $7,318 $7,292
DISC earnings deferral.......... 763 873
Other........................... 922 601
------ ------
Total gross deferred
income tax
liabilities............ 9,003 8,766
------ ------
Gross deferred income tax assets:
Employee benefit accruals....... 1,721 1,512
Accounts receivable reserves.... 917 972
Other........................... 456 797
------ ------
Total gross deferred
income tax assets...... 3,094 3,281
------ ------
Net deferred income tax
liability....................... $5,909 $5,485
====== ======
F-10
29
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the provisions for income taxes computed by
applying the applicable maximum federal statutory rates to earnings before
income taxes and the provisions for income taxes is as follows:
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
Income taxes at federal
statutory rates......... $4,380 $2,417 $2,289
Non-deductible
amortization of
goodwill................ 278 210 125
Operating losses of 51-
percent-owned subsidiary
not deductible in
consolidated federal
income tax return....... 430 80
State income taxes net of
federal income tax
benefit................. 283 403 80
Other..................... (232) (186) 18
------ ------ ------
Provisions for income
taxes................... $4,709 $3,274 $2,592
====== ====== ======
7. RETIREMENT PLANS
The Company maintains an Employee Stock Ownership Plan, which provides for
annual contributions by the Company at the discretion of the Board of Directors
for the benefit of eligible employees. Contributions can be made either in cash
or in shares of the Company's common stock. Participation in the Plan is open to
all Company employees who are at least twenty-one years of age and who have been
employed by the Company for at least one year. The Company recognized expense of
$520,000, $450,000, and $600,000, respectively, for its cash contributions to
the Plan in 1998, 1997 and 1996.
Effective January 1, 1996, the Company established an Employee Savings Plan
under Section 401(k) of the Internal Revenue Code. The plan covers substantially
all employees. Under the Plan, employees generally may elect to exclude up to
15% of their compensation from amounts subject to income tax as a salary
deferral contribution. The Board of Directors determines each calendar year the
portion, if any, of employee contributions that will be matched by the Company.
For calendar 1996 and calendar 1997, the Company made a matching contribution to
each employee in an amount equal to the first 2% of such contributions. In
calendar 1998, the Company has made or will make a matching contribution to each
employee in an amount equal to 100% of the first 2% and 50% of the next 1%
contributed by the employee. The Company's matching contributions to the Plan
were approximately $577,000, $550,000 and $118,000, respectively, for 1998, 1997
and 1996.
8. STOCK OPTIONS
The Company's 1976 and 1995 Stock Option Plans provide for the grant of
non-qualified stock options to officers and key employees at prices no less than
the price of the stock on the date of each grant. In addition, the 1995 Stock
Option Plan provides for the grant of incentive stock options to employees and a
fixed annual grant of 2,000 non-qualified stock options to each non-employee
director on the day after each year's annual meeting of shareholders. Through
March 29, 1998, non-qualified options covering a total of 20,000 shares have
been issued to non-employee directors and no incentive options have been issued.
One-third of the non-qualified options become exercisable on each of the first
three anniversaries of their issuance. The non-qualified options expire on the
fifth anniversary of their issuance.
A total of 5,225,000 shares of common stock has been authorized for
issuance under the Plans. At March 29, 1998, 545,276 options were reserved for
future issuance. The options outstanding at March 29, 1998 expire through March
2, 2003, have a weighted average remaining contractual life of 3.5 years, and
include 148,073 options exercisable at March 29, 1998 with a weighted average
exercise price of $9.86.
F-11
30
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes stock option activity during each of the
most recent three fiscal years:
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE EXERCISE
OF SHARES PER SHARE PRICE
---------- --------------- --------
Options outstanding,
April 2, 1995...... 1,385,207 $10.63 -- 20.63 $14.51
Options granted...... 515,209 9.50 -- 17.50 12.57
Options canceled..... (109,629) 11.75 -- 19.50 14.55
Options exercised.... (46,645) 10.63 -- 15.75 12.94
---------- --------------- ------
Options outstanding,
March 31, 1996..... 1,744,142 9.50 -- 20.63 13.97
Options granted...... 2,224,686 7.88 -- 11.75 9.61
Options canceled..... (1,890,076) 7.88 -- 20.63 13.64
---------- --------------- ------
Options outstanding,
March 30, 1997..... 2,078,752 7.88 -- 13.25 9.60
Options granted...... 486,800 10.25 -- 21.31 12.66
Options canceled..... (138,585) 7.88 -- 15.63 9.50
Options exercised.... (536,740) 7.88 -- 11.75 9.59
---------- --------------- ------
Options outstanding
March 29, 1998..... 1,890,227 7.88 -- 21.31 10.39
---------- --------------- ------
The following table summarizes information about stock options outstanding
and exercisable at March 29, 1998 by range of exercise price:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
NUMBER OF REMAINING PRICE OF NUMBER OF PRICE OF
RANGE OF OPTIONS CONTRACTUAL OPTIONS SHARES SHARES
EXERCISE PRICES OUTSTANDING LIFE OUTSTANDING EXERCISABLE EXERCISABLE
---------------- ----------- ----------- ----------- ----------- -----------
$ 7.88 -- $11.75 1,744,627 3.4 years $10.00 144,071 $ 9.79
12.13 -- 15.75 105,600 4.8 years 14.02 4,002 13.25
16.31 -- 21.31 40,000 4.8 years 17.98 -- --
--------- -------
1,890,227 148,073
--------- -------
Optionees may pay the option price of options exercised by surrendering to
the Company shares of the Company's stock that the optionee has owned for at
least six months prior to the date of such exercise. Optionees may also satisfy
their required income tax withholding obligations upon the exercise of options
by requesting the Company to withhold the number of otherwise issuable shares
with a market value equal to such tax withholding obligation.
Activity for 1997 includes 1,569,936 and 1,613,474 options granted and
canceled, respectively, on April 12, 1996 as the result of an exchange offer
which was authorized by the Compensation Committee of the Company's Board of
Directors under which the Company issued new stock options in exchange for
options which had been issued after December 31, 1991, were held by active
employees who elected to participate in the exchange, and for which the closing
market price on April 12, 1996 was at least $0.25 below the option exercise
price. The number of repriced options so issued was equal to 80% of options
exchanged which had originally been issued in calendar 1992 and 100% of options
exchanged which had originally been issued after December 31, 1992. The average
price of the options surrendered for cancellation under this exchange offer was
$14.14. Options granted under the offer have an exercise price of $10.25 per
share, or $0.25 in excess of the closing market price of the Company's stock on
April 12, 1996. The repriced options vest and expire on the same basis as any
other options issued by the Company.
The weighted-average grant-date fair value of options granted in 1998, 1997
and 1996, respectively, was $4.02, $2.60 and $4.04 per share. Had compensation
cost for the Company's stock option grants been determined and recorded as
expense at the grant dates, the Company's pro forma net income and earnings per
share would have been as follows:
1998 1997 1996
---------- ---------- ----------
Net income........... $6,305,000 $2,371,000 $3,713,000
Basic earnings per
share.............. 0.78 0.30 0.46
Diluted earnings per
share.............. 0.74 0.30 0.46
---------- ---------- ----------
The pro forma information for 1997 considers repriced options which were
originally issured prior to 1996 as newly-issued options.
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. The following
assumptions were used for options granted in 1998: dividend yield of 0.9
percent, expected volatility of 32.2 percent, risk-free interest rate of 6.1
percent, and expected lives of 4 years. The following assumptions were used for
options granted in 1997: dividend yield of 0.9 percent, expected volatility of
31.7 percent, risk-free interest rate of 6.2 percent, and expected lives of 4
years. The following assumptions were used for options granted in 1996: dividend
yield of 0.9 percent, expected volatility of 31.8 percent, risk-free interest
rate of 6.1 percent, and expected lives of 4 years.
F-12
31
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option valuation models require the use of highly subjective assumptions
including the stock price volatility. Because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable measure of the
fair value of its employee stock options.
9. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the
calculations of basic and diluted earnings per share for each of the last three
years:
1998 1997 1996
---------- ---------- ----------
Numerators:
Numerator for both
basic and diluted
earnings per share,
net income.......... $7,806,000 $3,631,000 $3,947,000
---------- ---------- ----------
Denominators:
Denominators for basic
earnings per share,
weighted average
common shares
outstanding......... 8,064,559 7,944,201 8,125,048
Potential dilutive
shares resulting from
stock option plans.... 430,219 73,666 30,843
---------- ---------- ----------
Denominator for diluted
earnings per share.... 8,494,778 8,017,867 8,155,891
---------- ---------- ----------
Earnings per share:
Basic................... $ 0.97 $ 0.46 $ 0.49
Diluted................. $ 0.92 $ 0.45 $ 0.48
---------- ---------- ----------
10. MAJOR CUSTOMERS
The Company's sales to Wal-Mart Stores, Inc. constituted 19%, 17% and 18%
of net sales, respectively, in 1998, 1997 and 1996.
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments: At March 29, 1998, the Company's minimum annual rentals
under noncancelable operating leases, principally for manufacturing, warehousing
and office facilities, were as follows:
(IN THOUSANDS)
1999................. $ 3,759
2000................. 3,573
2001................. 3,166
2002................. 2,399
2003................. 1,513
Thereafter........... 5,557
-------
$19,967
=======
Total rent expense was $4,718,000, $3,710,000, and $3,123,000,
respectively, for 1998, 1997, and 1996.
Contingencies: In order to resolve certain disputes which have arisen
between them, the Company and its Israeli supplier of ROYAL SATEEN(R) fabric and
products, Kitan Textile Industries Ltd. ("Kitan"), have entered into a binding
arbitration proceeding. In connection with the arbitration, the Company made a
claim against Kitan for payment of $9.9 million in damages stemming primarily
from Kitan's failure to make timely deliveries over a three-year period, and
Kitan made a claim against the Company for payment of $8.5 million for damages
allegedly suffered primarily as a result of differences between the Company's
forecasts of demand and its actual orders for Kitan's fabric and products. On
April 9, 1998, the Company and Kitan entered into a settlement agreement
concerning all claims and counterclaims for monetary damages. The settlement
agreement did not involve a cash payment by either party. Within the framework
of the settlement agreement, both companies have agreed to spend an additional
amount of money in developing the U.S. market for ROYAL SATEEN(R) bedding. The
arbitration remains pending for interpretation of certain contract terms. Normal
commerce between the companies has continued during the arbitration process.
The Company is party to other legal proceedings arising in the ordinary
course of business. In management's opinion, the outcome of these proceedings
will not have a material adverse effect on the Company's financial position or
results of operations.
F-13
32
CROWN CRAFTS, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
SELECTED QUARTERLY FINANCIAL INFORMATION
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- --------- --------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FISCAL YEAR ENDED MARCH 29, 1998
Net sales................................................ $52,644 $86,334 $103,037 $77,223
Gross profit............................................. 10,565 20,856 24,698 14,970
Net earnings (loss)...................................... (194) 3,440 4,481 79
Basic earnings (loss) per share.......................... (0.02) 0.43 0.55 0.01
Diluted earnings (loss) per share........................ (0.02) 0.41 0.52 0.01
FISCAL YEAR ENDED MARCH 30, 1997
Net sales................................................ $44,400 $74,848 $ 72,887 $64,250
Gross profit............................................. 6,912 15,379 14,766 14,680
Net earnings (loss)...................................... (1,343) 1,921 1,425 1,628
Basic earnings (loss) per share.......................... (0.17) 0.24 0.18 0.21
Diluted earnings (loss) per share........................ (0.17) 0.24 0.18 0.20
F-14