ITEM 1. BUSINESS
Crown Crafts, Inc., a Georgia corporation founded in 1957, operates, both directly and indirectly through its subsidiaries, in two principal business segments within the textile industry: Adult Home Furnishing and Juvenile Products, and Infant Products. Adult Home Furnishing and Juvenile Products consists of Bedroom Products (adult comforters and accessories), Throws and Decorative Home Accessories (primarily jacquard-woven throws in cotton, acrylic, rayon or chenille), and Juvenile Products (primarily Pillow Buddies(R)). The Infant Products segment consists of infant bedding, bibs, infant soft goods and accessories. Sales are generally made directly to retailers, primarily department and specialty stores, mass merchants, large chain stores and gift stores.
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 in three product groups: bedroom products, throws and decorative home accessories, and infant and juvenile products.
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., operates in Mexico as a contract manufacturer of consumer textile products. The Company utilizes all of Burgundy's productive capacity in the manufacture of its own infant and other products, moving production from independent domestic and foreign manufacturers into Burgundy.
PRODUCTS
The Company's products fall into three groups: 1) bedroom products, 2) throws and decorative home accessories, and 3) infant and juvenile products.
The Company's bedroom products include comforters, comforter sets, sheets, pillowcases, sheet sets, 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 comforters and duvets with coordinated sheets and accessories. During the fiscal year ended March 28, 1999, the Company began manufacturing and selling bedroom products under the Calvin Klein trademark under a license agreement with Calvin Klein, Inc.
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 pillows, bell pulls and other items.
Infant products include crib bedding, diaper stackers, mobiles, bibs, receiving blankets, burp cloths, bathing accessories and other infant soft goods and accessories.
During the fiscal years ended April 2, 2000, March 28, 1999 and March 29, 1998, bedroom products represented 43%, 40% and 40% of consolidated net sales; throws and decorative home accessories represented 22%, 27% and 30% of consolidated net sales; and infant and juvenile products represented 35%, 33% and 30%, respectively, 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. 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 and is continually developing new designs for all 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, its employees and museums. The Company utilizes computer aided design systems to increase its design flexibility and reduce costs. In addition, these systems significantly shorten the time for responding to customer demands 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 April 2, 2000, March 28, 1999, and March 29, 1998, sales to Wal-Mart Stores, Inc. accounted for 13%, 18% and 19% of net sales, respectively. Sales to Federated Department Stores were 14% in 2000 and sales to Toys R Us and Target Stores were each 11% in 2000 whereas in prior years each of these three companies represented less than 10% of total net sales. 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 continued to purchase these products from the Company during most of the fiscal year ended March 28, 1999, the full impact on net sales of this decision was not felt until the fiscal year that ended April 2, 2000.
The Company's primary showroom and sales office is located in New York City, where there is also a showroom at the Calvin Klein building. Sales offices are also maintained in Chicago, Atlanta, Dallas, Huntington Beach, California and Rogers, Arkansas.
The Company sells substantially all 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. Substantial 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 shows in October. 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 "outlet" stores located in Calhoun, Georgia, Roxboro, North Carolina, Berea, Kentucky and Rancho Santa Margarita, California. In fiscal 2000, approximately 1.3% 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 improve physical control over inventories, reduce order fulfillment lead times, and provide enhanced levels of service.
The Company produces jacquard-woven bedspreads and throws at its weaving mills in Dalton, Georgia. 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 and Prairieville, Louisiana.
RAW MATERIALS
The principal raw materials used in the manufacture of adult and infant comforters, sheets and accessories are 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 principal raw materials used in the production of infant bibs 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 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, which in the last two years has become more pronounced. Sales are lowest in the first fiscal quarter and peak in the third fiscal quarter.
The Company carries normal inventory levels to meet delivery requirements of customers. Customer returns of merchandise shipped are approximately 2% of net sales.
ORDER BACKLOG
The Company's backlogs of unfilled customer orders believed by management to be firm were $40.1 million and $58.0 million at July 28, 2000 and July 25, 1999, respectively. The majority of these unfilled orders are shipped within approximately eight weeks, and none is expected to be shipped beyond the completion of the current fiscal year ending April 1, 2001. 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) or Goodwin Weavers(R). Infant products carry the trademarks Red Calliope(R), Little Bedding(R), NoJo(R), Hamco(R) and Pinky Baby(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 North America.
In addition, certain products are manufactured and sold pursuant to licensing agreements for trademarks that include, among others: Calvin Klein(R), Disney(R), Tracy Porter(R), Colonial Williamsburg(R), Warner Bros.(R), and Thomas Kinkade(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 renewal or extension. Sales of product under the Company's licenses with Calvin Klein, Inc. and The Walt Disney Company accounted for 15% and 13%, respectively, of the Company's total sales volume during fiscal 2000. Although revenue has not been material, pursuant to its license agreements, 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.
During the fiscal year ended March 28, 1999, 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 bedroom products under the Calvin Klein brand. The Disney license expands the Company's right to produce and sell products featuring Disney characters.
The Company's aggregate commitment for minimum guaranteed royalty payments under all of its license agreements is $8.2 million, $3.2 million, $2.3 million, $2.3 million and $0 for fiscal 2001, 2002, 2003, 2004 and 2005 and thereafter, respectively. 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 $15.8 million, $13.4 million and $8.7 million, for fiscal 2000, 1999, and 1998, 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 sixth 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 one of the largest domestic manufacturer of throws enjoying approximately one-quarter of this segment and that it is the largest producer of infant bed coverings and bibs, enjoying approximately one-third of these segments.
The Company competes on the basis of quality, design, price, service and packaging. The Company's products face significant competition from imports, especially in matelasse coverlets and throws. The availability of imports at low prices has increased importing at the expense of the domestic textile industry and this trend will continue. 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.
EMPLOYEES
At July 28, 2000, the Company had approximately 1,850 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 other than the United States are not currently material to the Company's business.
ITEM 2.
ITEM 2. PROPERTIES
The Company's headquarters are located in executive offices in Atlanta, Georgia. The Company occupies approximately 41,200 square feet at this location under leases that expire June 29, 2002 and September 30, 2000, with renewal options for two five-year periods.
The following table summarizes certain information regarding the Company's principal properties.
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(1) Leases expire June 29, 2002 and September 30, 2000 (renewable for two five-year periods). (2) Leases expire January 15, 2001 and February 1, 2001 (renewable for one two-year period). (3) Leases expire as follows: (a) 40,000 square feet on April 1, 2001 and (b) 80,000 square feet on April 30, 2002. (4) Lease expires May 31, 2001 (renewable for one two-year period and one three-year period). (5) Lease expires May 31, 2004. (6) Lease expires March 31, 2001. (7) Leases expire December 31, 2001. (8) Lease expires April 30, 2007 (renewable for up to two additional five-year periods). (9) Leases expire March 31, 2003. (10) Lease expires July 31, 2001. (11) Leases expire as follows: (a) 76,500 square feet on February 28, 2005; (b) 285,700 square feet on month to month leases.
The Company also leases space for its various sales offices, retail stores, and showrooms around the country.
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.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings relating to claims arising in the ordinary course of its business. Neither the Company nor any of its subsidiaries is a party to any such legal proceeding the outcome of which, individually or in the aggregate, is expected to have a material adverse effect on the Company's financial condition or results of operations.
ITEM 4.
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 April 2, 2000.
PART II
ITEM 5.
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.
COMMON STOCK
The Company's common stock (the "Common Stock") is traded on the New York Stock Exchange ("NYSE") under the symbol "CRW". The Company is currently below the minimum standards of market capitalization for continued listing by the NYSE. The Company has submitted to the NYSE a confidential plan to improve profitability and increase its market capitalization. If the NYSE accepts the Company's plan, the Company will have 18 months to attain the minimum standards for continued listing. The following table presents quarterly information on the price range of the Company's Common Stock for the fiscal years ended April 2, 2000 and March 28, 1999. This information indicates the high and low sale prices as reported by the NYSE.
As of July 28, 2000 there were issued and outstanding 8,608,843 shares of the Company's Common Stock held by approximately 498 registered holders. The estimated number of beneficial holders does not reflect the approximately 2,000 individual employee accounts in the Company's Employee Stock Ownership Plan. At July 28, 2000, the Company's Common Stock closed at $0.625 (5/8).
In fiscal 2000, the Company paid a dividend of $0.03 per share on its Common Stock on June 27, 1999, September 26, 1999, and December 26, 1999. As part of the conditions under the amendment of its loan agreements and to conserve liquidity, the Company did not pay a dividend in the fourth quarter of fiscal 2000. Any dividends paid by the Company on its Common Stock in the future will depend upon the earnings and financial condition of the Company as well as restrictions in the loan agreements which currently prohibit the payment of dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the five years ended April 2, 2000 is from the Company's financial statements. 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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACQUISITIONS AND DISPOSITIONS
During the fiscal year ended March 28, 1999, the Company acquired inventory and certain other assets associated with the Calvin Klein Home business from DHA Home, Inc., the former Calvin Klein Home licensee, and began integrating this business into its Roxboro, North Carolina facilities. In the fourth quarter of the fiscal year ended March 28, 1999, the Company sold its wholly-owned subsidiary, Textile, Inc., located in Ronda, North Carolina. Textile, Inc. manufactured woven throws and decorative home products. The effect of these transactions on fiscal 1999 operating results is discussed below in the section "Results of Operations: Fiscal 1999 Compared to Fiscal 1998."
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, was a contract manufacturer of consumer textile products. Post-acquisition, Burgundy's production capacity has been utilized exclusively for the manufacture of the Company's products.
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 an Enterprise Resource Planning (ERP) software program. The ERP program was expected to replace substantially all of the Company's existing business 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 proposals, interviewed software vendors and evaluated alternatives. All costs and expenses associated with this process were expensed as incurred.
During fiscal 1999, the Company, together with its consultants, completed the design of its ERP program, selected certain vendors, began testing of the system and established plans for implementation. The implementation in fiscal 2000 converted the home office, certain sales offices and the Company's Georgia operations to the new ERP system in July 1999. Conversion of the North Carolina operations was planned for December 1999 but was postponed following difficulties in the Georgia implementation. The Company has not yet established plans or begun design for converting its infant product companies to the ERP system. During fiscal years 1999 and 2000, the Company incurred capitalized expenditures of approximately $11 million and $5 million, respectively, pertaining to this project. In the fiscal year ended April 2, 2000, the Company's
operating expenses increased compared to fiscal year 1999 due to costs of the new ERP system in addition to continued legacy system costs.
RESULTS OF OPERATIONS: FISCAL 2000 COMPARED TO FISCAL 1999
Total net sales for fiscal 2000 decreased $42.2 million, or 11.6%, to $320 million. Net sales of bedroom products decreased $10 million to $135.6 million, net sales of throws and decorative home accessories decreased $26.9 million to $71.3 million, and net sales of infant and juvenile products decreased $4.7 million to $112.9 million.
The decrease in sales of bedroom products was the result of decreased sales in the Studio bedding line, partly offset by strong growth in the sales of Calvin Klein Home products. The decrease in sales of throws and decorative home accessories was primarily attributable to decreased sales of woven bedspreads and imported fleece throws. Sales of woven products were adversely affected by problems in the ERP implementation starting in July 1999 that prevented timely shipment and billing of product.
As a result of shipping delays, the Company experienced continued increases in customer claims and closeout inventory. Despite the decrease in sales, sales deductions and allowances increased by $6.4 million, or 2% of net sales. The decrease in sales of infant and juvenile products was primarily attributable to decreased sales of Pillow Buddies(R) as the product matured and to decreased sales of infant bedding, partly offset by an increase in sales of infant bibs and bath.
In fiscal 2000, cost of sales increased to 89.0% of net sales from 85.8% in fiscal 1999. Reasons for the increase include the lower level of sales compared to certain fixed costs, continuing decline in the utilization of the Roxboro, North Carolina facilities and increased royalty expense of $2.4 million.
Marketing and administrative expenses decreased by $1.8 million, or 3.1% for fiscal 2000 as the Company responded to the decline in sales by reducing expenses.
Interest expense increased by $3.6 million as a result of both higher borrowings and higher interest rates. Other expense declined by $1.8 million as prior year expenses included the loss on the sale of Textile, Inc.
In fiscal 2000, the effective tax rate declined to 12.2% from 30.8% in fiscal 1999. Due to the losses incurred, the Company has a net operating loss carryforward of $42 million that is available to offset future taxable income, although a valuation reserve has been established for some of the benefit of the carryforward due to uncertainty regarding realization.
RESULTS OF OPERATIONS: FISCAL 1999 COMPARED TO FISCAL 1998
Total net sales for fiscal 1999 increased $42.8 million, or 13.4%, to $362.1 million. Net sales of bedroom products increased $17.5 million to $145.5 million, net sales of throws and decorative home accessories increased $4 million to $98.2 million, and net sales of infant and juvenile products increased $23.3 million to $117.6 million.
The increase in sales of bedroom products was primarily attributable to increased sales of imported sheets and Calvin Klein Home products. The increase in sales of throws and decorative home accessories was primarily attributable to increased sales of woven bedspreads and imported fleece throws.
The increase in sales of infant and juvenile products was primarily attributable to increased sales of Pillow Buddies(R) and to the full year operation of Noel Joanna, Inc. and Pinky Baby Products acquired during the prior fiscal year on August 18, 1997 and January 2, 1998, respectively.
During the fiscal year ended March 28, 1999, and particularly during the fourth quarter, the Company experienced increasing levels of deductions from payments for products shipped to its customers, particularly large retailers. These deductions were claimed for promotional programs, product placements, shipping errors, and other penalties, some of which were undocumented. Compared to fiscal year 1998, these deductions increased by approximately 34% and had the effect of reducing both net sales and gross profits. Because of this
experience, in the fourth quarter of the fiscal year ended March 28, 1999, the Company increased its reserves against its accounts receivable, further reducing results for the quarter and the fiscal year.
In fiscal 1999, cost of sales increased to 85.8% of net sales from 77.8% in fiscal 1998. There were four principal reasons for the increase in cost of sales as a percent of net sales. First was the reduction in net sales because of higher sales deductions, described above. Second, the Company experienced a decline in the utilization of its Roxboro, North Carolina facilities because of the phase-out of a bedding program manufactured for a major retailer, discussed in Item 1, and delays in the start-up of the Calvin Klein Home product line. Third, in the fourth quarter, the Company established pre-tax reserves of approximately $6.2 million against certain inventories classified as irregular or discontinued. Lastly, and also in the fourth quarter, as a result of a routine physical count, the Company discovered certain discrepancies in its inventory accounts, primarily at its Roxboro, North Carolina operations. This resulted in a pre-tax increase to cost of sales of approximately $2.6 million.
Marketing and administrative expenses increased by $4.4 million, or 8.4%, for fiscal 1999, primarily because of the full year effect of companies acquired during the prior fiscal year and because of higher marketing expenses associated with the Calvin Klein Home line of products. As a percent of net sales, however, operating expenses declined to 15.6% in fiscal 1999 from 16.3% in fiscal 1998.
Interest expense increased by approximately $3.4 million in fiscal 1999 because of higher borrowings and higher effective interest rates. Other expense increased in fiscal year 1999 primarily because of a loss on the sale of Textile, Inc.
In fiscal 1999, the effective tax rate declined to 30.8% from 37.6% in fiscal 1998. This decline resulted from losses incurred by the Company's Mexican subsidiary, Burgundy Interamericana, S.A. de C.V., not includable for United States tax purposes, and a capital loss from the sale of Textile, Inc. without off-setting capital income.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3.2 million for the year ended April 2, 2000 compared to net cash used of $3.7 million for the year ended March 28, 1999. Cash of approximately $23.1 million from decreased working capital more than offset the increased loss of $17.4 million. Net cash used in investing activities was $6.5 million for the year ended April 2, 2000 compared to $28.8 million for the year ended March 28, 1999. The decrease in cash used for investing activities reflects the absence of acquisitions as well as a decline in expenditures for new equipment following a decrease in sales growth. Cash provided by financing activities was $4.0 million for the year ended April 2, 2000 compared to $32.4 million for the year ended March 28, 1999. The decrease in cash provided by financing activities was partly due to changes in the Company's business plans as well as limits on available credit.
The Company's ability to make scheduled payments of principal, to pay the interest on, or to refinance its maturing indebtedness by April 2, 2001 to fund capital expenditures or to comply with its debt covenants, will depend upon future performance. The Company's future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Based upon the current level of operations and anticipated increases in cash flow from improved inventory management, cost reduction initiatives, as well as the planned withdrawal from under-performing product lines, the Company believes that cash flow from operations together with advances available from factored accounts receivable will be adequate to meet liquidity needs through April 1, 2001.
The Company's notes in the amount of $42.9 million placed with an insurance company and the revolving credit facilities 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 and currently prohibit the payment of dividends. Other covenants of these revolving credit facilities require the Company to maintain certain
financial ratios and place restriction on the amounts the Company may expend on acquisitions and purchases of treasury stock.
On August 11, 1999, the Company executed agreements with its two commercial banks and with the holder of its notes to restructure certain provisions of its borrowing arrangements. Among other things, the agreement extended the maturity of the $30 million revolving credit facilities to April 3, 2000, and of the additional revolving credit facility, in the reduced amount of $15 million, to March 31, 2000, and adjusted financial and other covenants based on the Company's projections. In exchange, the Company has granted security interests in substantially all of its assets and adjusted the interest rate on its bank facilities to each bank's Base Rate plus 1%. These agreements were subsequently amended to extend the maturity of the loans to August 31, 2000 and revise certain of the covenants.
On August 31, 2000, the Company concluded a restructuring of its debt. The agreements extend the maturity of the debt to April 3, 2001 and adjust financial and other covenants based on the Company's projections. The restructured loan covenants limit capital expenditures for fiscal 2001 to $4.4 million, limit the level of advances on factored accounts receivable to $36 million, require certain levels of borrowing base assets relative to the debt, and require certain levels of cash flow on a monthly basis, totaling $14.5 million for fiscal 2001. Compliance and reporting to the lenders is daily with respect to the level of factor advances and borrowing base assets, and monthly with respect to other covenants. In exchange, the Company has agreed to issue to the lenders warrants exercisable for 10% of the Company's issued and outstanding stock exercisable not later than December 31, 2005. The warrants will be extinguished at the rate of 2% for each 1% reduction in the Company's debt. The interest rate on the credit facilities was increased by 1% to each bank's Base Rate plus 2% and on the notes placed with an insurance company to 11.77%. The margin over Base Rate is subject to change after January 1, 2001 depending upon the level of debt. The principal payment on the notes was deferred until April 3, 2001, but the Company is required to make repayments of $19 million on its debt between December 8, 2000 and April 1, 2001. The Company believes that it has adequate cash flow from operations and factor advances to make these payments. The available factor advance was $8 million at September 1, 2000.
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 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.
The agreement with its lenders, described above, provides for the Company to finance its seasonal working capital needs by taking advances against its factored receivables of up to $36 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities" ("SFAS No. 133"). This statement requires that all derivatives be recognized in the statement of financial position as either assets or liabilities and measured at fair value. In addition, all hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which amends the effective date of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which amends SFAS No. 133 and addresses a limited number of issues causing implementation difficulties for a large number of entities preparing to implement SFAS No. 133. The effect on the Company's financial statements upon adoption of SFAS No. 133 has not been determined. SFAS 133 and its amendments are effective for the Company beginning in the first quarter of fiscal 2002.
The SEC recently issued Staff Accounting Bulletin 101 ("SAB 101"), Revenue Recognition. The Company is currently evaluating the effect of this pronouncement on its financial statements.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on debt, commodity prices and foreign exchange rates.
The Company's exposure to interest rate risk relates to its floating rate debt, $82.7 million of which was outstanding at April 2, 2000.
The Company's exposure to commodity price risk primarily relates to changes in the price of cotton, which is a principal raw material in a substantial number of the Company's products. To manage this risk, from time to time the Company enters into commodity future contracts and forward purchase contracts. No such contracts were outstanding at April 2, 2000.
The Company's exposure to foreign exchange rates relates to its Mexican manufacturing subsidiary. During the fiscal year ended April 2, 2000, this subsidiary manufactured products for the Company with a value of approximately $7.5 million. The Company's investment in the subsidiary was approximately $4.4 million at April 2, 2000.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages through herein.
ITEM 9.
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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the Company's directors and executive officers is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on October 18, 2000 (the "Proxy Statement") under the captions "Election of Directors" and "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.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Voting Rights and Principal Shareholders" in the Proxy Statement is incorporated herein by reference.
ITEM 13.
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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE, 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:
(A)2. FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of Registrant is filed with this report:
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.
CROWN CRAFTS, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
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* Deductions from the reserve for doubtful accounts represent the amount of accounts written off reduced by any subsequent recoveries.
(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:
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(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 Registrant's 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. (11) 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 29, 1998. (12) Incorporated herein by reference to exhibit of same number to Registrant's Report on Current Form 8-K dated August 4, 1999. (13) Incorporated herein by reference to exhibit of same number to Registrant's Report on Current Form 8-K dated February 23, 2000. (14) Incorporated herein by reference to exhibit of same number to Registrant's Report on Current Form 8-K dated March 13, 2000.
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 Chief Executive Officer
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:
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders Crown Crafts, Inc.
We have audited the accompanying consolidated balance sheets of Crown Crafts, Inc. and subsidiaries as of April 2, 2000 and March 28, 1999 and the related consolidated statements of operations and comprehensive (loss) income, changes in shareholders' equity, and cash flows for each of the three years in the period ended April 2, 2000. 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 on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 April 2, 2000 and March 28, 1999, and the results of their operations and their cash flows for each of the three years in the period ended April 2, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 August 15, 2000 (August 31, 2000 as to Note 6)
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS APRIL 2, 2000 AND MARCH 28, 1999
See notes to consolidated financial statements.
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME FISCAL YEARS ENDED APRIL 2, 2000, MARCH 28, 1999 AND MARCH 29, 1998
See notes to consolidated financial statements.
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FISCAL YEARS ENDED APRIL 2, 2000, MARCH 28, 1999 AND MARCH 29, 1998
Number of shares of common stock issued: 9,983,305 at April 2, 2000 and March 28, 1999.
See notes to consolidated financial statements.
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED APRIL 2, 2000, MARCH 28, 1999 AND MARCH 29, 1998
See notes to consolidated financial statements.
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED APRIL 2, 2000, MARCH 28, 1999 AND MARCH 29, 1998
1. DESCRIPTION OF BUSINESS
Crown Crafts, Inc. and its subsidiaries (collectively, the "Company") operate in two principal business segments within the textile industry, which are adult home furnishing and juvenile products, and infant products. Adult home furnishing and juvenile products consists of bedroom products (adult comforters and accessories), throws and decorative home accessories (primarily jacquard-woven throws in cotton, acrylic, rayon or chenille), and juvenile products (primarily Pillow Buddies(R)). The infant products segment consists of infant bedding, bibs, and infant soft goods. Sales are generally made directly to retailers, primarily department and specialty stores, mass merchants, large chain stores and gift stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 53 weeks of operations for fiscal year 2000 and 52 weeks for fiscal years 1999 and 1998.
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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition: Sales are recorded when goods are shipped to customers, and are reported net of returns and allowances in the consolidated statements of operations and comprehensive (loss) income.
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 values and useful lives of goodwill and other long-lived assets if the facts and circumstances suggest that their recoverability may have been impaired. Goodwill is stated net of accumulated amortization of $4.1 million and $3.0 million at April 2, 2000 and March 28, 1999, respectively. The Company believes that no material impairment of goodwill or other long-lived assets exists at April 2, 2000.
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.
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 recorded in the accompanying statements of earnings with respect to stock option grants.
Segments and Related Information: In 1999, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires certain information to be reported about operating segments on a basis consistent with the Company's internal organizational structure. Management's analysis concluded that the Company operates in two operating segments, adult home furnishings and juvenile products, and infant products. Required disclosures have been made in Note 13. This statement expands and modifies disclosures and, accordingly, had no impact on the Company's reported financial position, results of operations, or cash flows.
Recently Issued Accounting Standards: In 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities" ("SFAS No. 133"). This statement requires that all derivatives be recognized in the statement of financial position as either assets or liabilities and measured at fair value. In addition, all hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," which amends the effective date of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which amends SFAS No. 133 and addresses a limited number of issues causing implementation difficulties for a large number of entities preparing to implement SFAS No. 133. The effect on the Company's financial statements upon adoption of SFAS No. 133 has not been determined. SFAS 133 and its amendments are effective for the Company beginning in the first quarter of fiscal 2002.
The SEC recently issued Staff Accounting Bulletin 101 ("SAB 101"), Revenue Recognition. The Company is currently evaluating the effect of this pronouncement on its financial statements.
Reclassifications: Certain prior period financial statement balances have been reclassified to conform with the current period's presentation.
3. ACQUISITIONS
In May 1998, the Company entered into a license agreement with Calvin Klein, Inc. which gives the Company the right to manufacture and distribute Calvin Klein Home bed, bath and table top collections. In August 1998, the Company purchased inventory and certain other assets from the previous licensee and in December 1998, purchased additional inventory and assets. The total consideration for these transactions, including transaction costs, was $10.1 million.
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-
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date fair market values of assets acquired and liabilities assumed, as follows:
The consolidated statement of operations 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 acquisitions of Hamco, Pinky, NoJo and Burgundy had occurred on the first day of fiscal 1998. 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.
4. DISCONTINUANCE OF CERTAIN BUSINESSES
In March 1999, the Company completed the sale of Textile, Inc. a weaving facility located in Ronda, North Carolina. The sale, which generated $2.3 million in cash, resulted in a $1.8 million pre-tax loss relating to the write-off of goodwill.
5. INVENTORIES
Major classes of inventory were as follows:
Inventory is net of reserves for inventories classified as irregular or discontinued of $6.2 million and $6.0 million in 2000 and 1999, respectively.
6. FINANCING ARRANGEMENTS
Factoring Agreement: The Company assigns the majority of its trade accounts receivable to a commercial factor. Under the terms of the factoring agreement, the factor remits payments to the Company on the average due date of each group of invoices assigned. The factor bears credit losses with respect to assigned accounts receivable that are within approved credit limits. The Company bears losses resulting from returns, allowances, claims and discounts. Factoring fees, which are included in marketing and administrative expenses in the consolidated statements of operations, were $2.8 million, $2.5 million, and $1.9 million, respectively, in 2000, 1999 and 1998. Factor advances were $15.4 million at April 2, 2000 and $0 at the end of 1999 and 1998, respectively.
Notes Payable and Other Credit Facilities: At April 2, 2000, the Company had committed lines of credit totaling $52.7 million with two banks at floating rates of interest. No fees or compensating balances are required under these arrangements, and the lines are fully drawn. Annual average borrowings and weighted average interest rates under these arrangements were $52.9 million at 8.95% in 2000 and $27 million at 7.60% in 1999. Borrowings of $52.7 million were outstanding under these arrangements at April 2, 2000 at an interest rate of 10%. In addition, the Company had outstanding letters of credit, primarily for purchases of inven-
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tory, aggregating $1.4 million which reduced the available credit under these arrangements.
At April 2, 2000 and March 28, 1999, long term debt consisted of:
Annual maturities of long term debt are:
The Company's notes in the amount of $42.9 million are placed with an insurance company. Effective April 9, 1999, the interest rate on the notes was increased from 6.92% to 10.42%. The interest rate was increased to 11.77% effective August 31, 2000 as discussed below. These notes contain restrictive covenants requiring the Company to maintain certain ratios of earnings to fixed charges and of total debt to total capitalization.
On August 11, 1999 the Company executed agreements extending the maturity of its $30 million revolving credit facilities to April 3, 2000. Pursuant to the agreements the Company granted security interests in substantially all of its assets to the lenders and adjusted the interest rate on the commercial bank facilities to each bank's Base Rate plus 1%.
At April 2, 2000, the Company was not in compliance with certain provisions of its revolving credit facilities and notes which require certain levels of net worth, cash flow, and fixed charge coverage, and limit the level of debt to total capitalization. Subsequent to April 2, 2000, the lenders waived compliance with these provisions through August 31, 2000.
On August 31, 2000, the Company concluded a restructuring of its Senior Debt. Among other things, the agreements extend the maturity of its debt to April 3, 2001 and adjust financial and other covenants based on the Company's projections. The restructured loan covenants limit capital expenditures for fiscal 2001 to $4.4 million, limit the level of advances on factored accounts receivable to $36 million, require certain levels of borrowing base assets relative to debt, and require certain levels of cash flow on a monthly basis, totaling $14.5 million for fiscal 2001. Compliance and reporting to the lenders is daily with respect to the level of factor advances and borrowing base assets and monthly with respect to other covenants. In exchange, the Company has agreed to issue to the lenders warrants exercisable for 10% of the Company's issued and outstanding stock exercisable not later than December 31, 2005. The warrants will be extinguished at the rate of 2% for each 1% reduction in the company's debt. The interest rate on the credit facilities was increased by 1% to each bank's Base Rate plus 2% and on the notes placed with an insurance company to 11.77%. The margin over Base Rate is subject to change after January 1, 2001 depending upon the level of debt. The principal payment on the notes was deferred until April 3, 2001, but the Company is required to make repayments of $19 million on the debt between December 8, 2000 and April 1, 2001.
The Company's ability to make scheduled payments of principal, to pay the interest on, or to refinance its maturing indebtedness by April 2, 2001, to fund capital expenditures, or to comply with its debt covenants will depend upon future performance. The Company's future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Based upon the current level of operations and anticipated increases in cash flow from improved inventory management, cost reduction initiatives, as well as the planned withdrawal from under-performing product lines, the Company believes that cash flow from operations together with advances available from factored accounts receivable will be adequate to meet liquidity needs for the next year.
The agreement with its lenders, described above, provides for the Company to finance its seasonal working capital needs by taking advances against its factored receivables of up to $36 million.
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The (benefits) provisions for income taxes are summarized as follows:
The tax effects of temporary differences that comprise the deferred tax liabilities and assets are as follows:
The net operating loss carryforward expires in 20 years.
The following reconciles the income tax provision at the U.S. federal income tax statutory rate to that in the financial statements (in thousands).
8. 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 $500,000, $480,000, and $520,000, respectively, for its cash contributions to the Plan in 2000, 1999, and 1998.
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. Beginning 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 $814,000, $855,000 and $577,000, respectively, for 2000, 1999 and 1998.
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTIONS
The Company accounts for its stock option plans using the intrinsic value method established by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations. Accordingly, no compensation cost has been recognized in the Company's financial statements for its stock based compensation plans. The Company complies with the disclosure requirements of SFAS No. 123, Accounting for Stock Based Compensation, which requires pro forma disclosure regarding net earnings and earnings per share determined as if the Company had accounted for employee stock options granted after April 2, 1995 using the fair value method of that statement.
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 April 2, 2000, non-qualified options covering a total of 48,000 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, except for the options granted in December 1999 which vest 50% after one year and the balance after two years. The non-qualified options expire on the fifth anniversary of their issuance except for the December 1999 options which expire in ten years. A total of 5,655,000 shares of common stock has been authorized for issuance under the Plans. At April 2, 2000, 357,999 options were reserved for future issuance. The options outstanding at April 2, 2000 expire through December 28, 2009, have a weighted average remaining contractual life of 3.8 years, and include 1,284,274 options exercisable at April 2, 2000 with a weighted average exercise price of $9.91.
The following table summarizes stock option activity during each of the most recent three fiscal years:
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding and exercisable at April 2, 2000 by range of exercise price:
Option holders may pay the option price of options exercised by surrendering to the Company shares of the Company's stock that the option holder has owned for at least six months prior to the date of such exercise. Option holders 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.
The weighted-average grant-date fair value of options granted in 2000, 1999 and 1998, respectively, was $2.44, $6.35 and $4.02 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:
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 2000: dividend yield of 1.59%, expected volatility of 32%, risk-free interest rate of 5.36% and expected lives of 4 years. The following assumptions were used for options granted in 1999: dividend yield of 1.15%, expected volatility of 133.55%, risk-free interest rate of 4.9%, and expected lives of 4 years. The following assumptions were used for options granted in 1998: dividend yield of 0.9%, expected volatility of 32.2%, risk-free interest rate of 6.1%, and expected lives of 4 years.
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.
10. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the calculations of basic and diluted (loss) earnings per share for each of the last three years:
11. MAJOR CUSTOMERS
The Company's sales to Wal-Mart Stores, Inc. constituted 13%, 18%, and 19% of net sales, respectively, in 2000, 1999, and 1998. Sales to Federated
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Department Stores were 14% of net sales in 2000 and sales to Toys R Us and Target Stores were each 11% of net sales in 2000.
12. COMMITMENTS AND CONTINGENCIES
Lease Commitments: At April 2, 2000, the Company's minimum annual rentals under noncancelable operating leases, principally for manufacturing, warehousing and office facilities, were as follows:
Total rent expense was $6.2 million, $5.7 million and $4.7 million, respectively, for the years ended April 2, 2000, March 28, 1999 and March 29, 1998.
Subsequent to April 2, 2000 the Company executed an agreement with the landlord of the New York office whereby the Company is to relinquish the office by November 1, 2000 in return for rent abatement, release from future rent payments, and a cash payment from the landlord to the Company. This will reduce the Company's minimum annual rentals by approximately $1.2 million per year in 2001 and thereafter.
Certain of the Company's products are manufactured and sold pursuant to license arrangements that include, among others: Calvin Klein(R), Disney(R), Tracy Porter(R), Colonial Williamsburg(R), Warner Bros.(R), and Thomas Kinkade(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 renewal or extension. At April 2, 2000, the Company's minimum royalty guarantees were as follows:
The Company's total royalty expense, net of royalty income, was $15.8 million, $13.4 million and $8.7 million, for fiscal 2000, 1999 and 1998, respectively.
The Company has outsourced certain information technology services. The minimum annual cost is $1.9 million in fiscal year 2001 and $0 thereafter.
13. SEGMENTS AND RELATED INFORMATION
In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company's principal segments include adult home furnishing and juvenile products, consisting of bedroom products (adult comforters and accessories), throws and decorative home accessories (primarily jacquard-woven throws in cotton, acrylic, rayon or chenille), and juvenile products (primarily Pillow Buddies(R)). The second principal segment is infant products, consisting of infant bedding, bibs, and infant soft goods. The Company tracks revenues and operating profit information for these two business segments.
The Company's manufacturing and distribution operations are also divided into adult home furnishing and juvenile products and infant products. The Company's facilities in Georgia, North Carolina, New Hampshire and Kentucky support the adult home furnishing and juvenile products. The Company's facilities in Louisiana, California and Mexico support the infant products. Assets, capital expenditures and depreciation and amortization are tracked for adult home furnishing and juvenile products as a whole and for infant products.
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information attributable to the Company's business segments for the years ended April 2, 2000, March 28, 1999 and March 29, 1998, is as follows (in thousands):
The key features used by decision makers are the level of operating income relative to revenues and assets.
Revenues for individual product groups within these business segments, as noted in Part I, Item 1 of Form 10-K, are summarized below. The Company's facilities in Georgia, North Carolina, New Hampshire and Kentucky support adult home furnishing and juvenile products.
14. SUBSEQUENT EVENTS
Since April 2, 2000, the Company has reduced its workforce by approximately 460 through a combination of severance and attrition. Also as part of its cost reduction efforts, the Company has negotiated the termination of a number of its lease obligations, the most significant of which is the New York office as described in Note 12.
CROWN CRAFTS, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K SELECTED QUARTERLY FINANCIAL INFORMATION
UNAUDITED QUARTERLY FINANCIAL INFORMATION
Net loss, basic loss per share and diluted loss per share for the fourth quarter of the fiscal year ended March 28, 1999, were increased by $6.4 million, $0.74 and $0.74, respectively, as a result of the sale of a subsidiary and the write-down of certain inventories. In addition, during the fourth quarter of the fiscal year ended March 28, 1999, net loss, basic loss per share and diluted loss per share were increased by $1.7 million, $0.19 and $0.19, respectively, as a result of certain adjustments to inventory accounts
Net loss, basic loss per share and diluted loss per share for the fourth quarter of the fiscal year ended April 2, 2000 were increased by $3.0 million, $0.35 and $0.35, respectively, as a result of certain inventory adjustments, including differences between the books and the physical inventory.