FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 2004
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____to_____
Commission File No. 1-7604
916 South Burnside Avenue, Gonzales, Louisiana 70737
(225) 647-9100
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The number of shares of common stock, $0.01 par value, of the Registrant outstanding as of December 26, 2004 was 9,504,937.
CROWN CRAFTS, INC. AND SUBSIDIARIES
See notes to unaudited consolidated financial statements.
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Crown Crafts, Inc. and Subsidiaries
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Notes Payable and Other Credit Facilities: At December 26, 2004 and March 28, 2004, long-term debt consisted of:
At December 26, 2004, the Company’s credit facilities included the following:
Revolving Credit of up to $19 million including a $3 million sub-limit for letters of credit. The interest rate is prime plus 1.00% (6.25% at December 26, 2004) for base rate borrowings and LIBOR plus 2.75% (5.17% at December 26, 2004) for Euro-dollar borrowings. The maturity date is June 30, 2005. The facility is secured by a first lien on all assets. The balance at December 26, 2004 was $1.2 million. The Company had $12.1 million available at December 26, 2004. As of December 26, 2004, letters of credit of $1.325 million were outstanding against the $3 million sub-limit for letters of credit associated with the revolving credit facility.
Senior Notes of $5.5 million with a fixed interest rate of 10% plus additional interest of 3% contingent upon cash flow availability. The maturity date is June 30, 2006 and the notes are secured by a first lien on all assets. Minimum principal payments of $500,000 are due at the end of each calendar quarter. In the event that required debt service exceeds 85% of free cash flow (EBITDA (as hereinafter defined) less capital expenditures and cash taxes paid), the excess of contingent interest and principal amortization over 85% will be deferred until maturity of the Senior Notes in June 2006. Contingent interest plus additional principal payments will be due annually up to 85% of free cash flow. On each of September 30, 2003 and September 30, 2004, the Company made payments to the lenders of $1.3 million related to excess cash flow.
Senior Subordinated Notes of $16 million with a fixed interest rate of 10% plus an additional 1.65% payable by delivery of promissory notes due July 23, 2007 (PIK Notes). The maturity date is July 23, 2007 and the notes are secured by a second lien on all assets. In addition to principal and interest, a payment of $8 million is due on the earliest of (i) maturity of the notes, (ii) prepayment of the notes, or (iii) sale of the Company. The original issue discount of $4.1 million on this non-interest bearing note at a market interest rate of 12% is being amortized over the life of the notes. The remaining balance of $2.1 million is included in the Consolidated Balance Sheet as of December 26, 2004.
These credit facilities contain covenants regarding minimum levels of Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”), maximum total debt to EBITDA, maximum senior debt to EBITDA, minimum EBITDA to cash interest and minimum shareholders’ equity. The bank facilities also place restrictions on the amounts the Company may expend on acquisitions and purchases of treasury stock and currently prohibit the payment of dividends.
The Company also has an equipment lease which expires in May 2007. The balance outstanding was $41,000 as of December 26, 2004.
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Minimum annual maturities are as follows: (in thousands)
As part of its refinancing in July 2001, the Company issued to its lenders warrants for non-voting common stock that are convertible into common stock equivalent to 65% of the shares of the Company on a fully diluted basis at a price of 11.3 cents per share. The warrants are non-callable and expire six years from their date of issuance. The value of the warrants of $2.4 million using the Black-Scholes option pricing model was credited to additional paid-in capital in the second quarter of fiscal 2002.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company operates indirectly through its subsidiaries, Crown Crafts Infant Products, Inc., Hamco, Inc. and Churchill Weavers, Inc., primarily in the Infant and Juvenile Products segments within the Consumer Products industry. The Company’s offices are located in Huntington Beach and Compton, California; Gonzales, Louisiana; Berea, Kentucky and Rogers, Arkansas.
The Infant and Juvenile Products segments consist of bedding, bibs, soft goods, Pillow Buddies® and accessories. The infant and juvenile products are marketed under a variety of Company-owned trademarks, under trademarks licensed from others, without trademarks as unbranded merchandise and with customers’ private labels. The products are produced primarily by foreign contract manufacturers, then warehoused and shipped from facilities in Compton, California and Gonzales, Louisiana. Sales are generally made directly to retailers, primarily mass merchants, large chain stores and gift stores.
The Company also produces hand-woven adult throws, adult scarves and infant blankets. Sales are generally made to major department stores, specialty shops and designer showrooms.
The infant and juvenile consumer products industry is highly competitive. The Company competes with a variety of distributors and manufacturers and believes that it is the largest producer of infant bed coverings and bibs, enjoying approximately one-third of the infant bedding market and one-half of the infant bib market within these segments. The Company competes on the basis of quality, design, price, service and packaging.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED DECEMBER 26, 2004 COMPARED TO THE THREE-MONTH PERIOD ENDED DECEMBER 28, 2003
Total net sales of $20.7 million for the third quarter of fiscal year 2005 were stable as compared to $20.7 million for the third quarter of fiscal year 2004. Increased bib sales were partially offset by decreased bath sales for a net increase of $248,000. This increase in bib sales was further offset by decreases in sales of bedding and luxury throws and blankets of $235,000 and $66,000, respectively. The increase in bib sales is primarily due to sales of a new license and increased modular replenishment, whereas the decrease in bath sales is due to the loss of a bath program at a major customer. The transition of the Company’s Classic Pooh license to direct-to-retail has had a deflationary effect on bedding sales. Although replacement programs and the direct-to-retail program were awarded to the Company, the Company’s average selling price per unit was lower in fiscal year 2005 than in the prior year because of market
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changes in anticipation of the removal of quotas from several of the Company’s bedding products, which was effective in January 2005. Sales of high-end luxury throws continue to be negatively impacted by a slow economy.
During the third quarter of fiscal year 2005, cost of sales were 78.7% of net sales as compared to 78.3% for the same period in fiscal year 2004. The slightly lower gross margin is due to the decrease in the average selling price per unit as previously discussed above.
Marketing and administrative expenses decreased by $176,000, or 6.1%, in the third quarter of fiscal year 2005 compared to the same quarter in the prior year and were 13.1% of net sales for such quarter compared to 13.9% of net sales for the corresponding quarter of the prior year. These expenses were greater in the prior year primarily because of legal fees associated with the reincorporation of the Company in Delaware, which was completed in fiscal year 2004.
Interest expense for the third quarter of fiscal year 2005 decreased by $54,000 compared to the third quarter of fiscal year 2004 because of the Company’s lower average debt balance. Total debt was $29.4 million at December 26, 2004 compared to $30.3 million at December 28, 2003. Included in the balance in the current fiscal year was revolving credit of $1.2 million, whereas there was no revolving credit balance outstanding at December 28, 2003.
Income tax benefit for the quarter ended December 26, 2004 includes a credit for state and local income taxes of $71,000. Income tax benefit for the quarter ended December 28, 2003 included a credit of $130,000 for a revision of federal alternative minimum taxes and state and local income taxes of $37,000. The Company has net operating loss carryforwards of $13.5 million that begin to expire in 2021.
NINE-MONTH PERIOD ENDED DECEMBER 26, 2004 COMPARED TO THE NINE-MONTH PERIOD ENDED DECEMBER 28, 2003
Total net sales for the first nine months of fiscal year 2005 decreased by $0.6 million, or 1.0%, to $60.6 million from $61.2 million for the same period of fiscal year 2004 as a result of decreases in bib and bath sales of $1.2 million and luxury throws and blankets of $192,000, offset in part by an increase in bedding sales of $853,000. The decrease in bib and bath sales is primarily due to the loss of a bath program at a major customer. The increase in bedding sales resulted from additional and new modular placement shipments, which were partially offset by the transition of the Company’s Classic Pooh license to direct-to-retail.
During the first nine months of fiscal year 2005, cost of sales increased to 79.3% of net sales from 77.9% for the same period in fiscal year 2004 primarily as a result of a shift from sales of higher margin blankets and NoJo and Classic Pooh brands to sales of a greater volume of lower margin merchandise. The lower margins are a direct result of pricing pressures from customers coupled with demand for enhanced products and market reaction to the removal of quotas from certain products effective in January 2005.
Marketing and administrative expenses decreased by $779,000, or 8.8%, for the first nine months of fiscal year 2005 compared to the same period in the prior year and were 13.3% of net sales for such period compared to 14.5% of net sales for the corresponding period of the prior year. These expenses were greater in the prior year primarily because of legal fees associated with the reincorporation of the Company in Delaware and costs associated with the closing of the Company’s Mexican production facility, both of which were completed in fiscal year 2004.
Interest expense for the first nine months of fiscal year 2005 decreased by $235,000 compared to the first nine months of fiscal year 2004 because of the Company’s lower average debt balance. Total debt was $29.4 million at December 26, 2004 compared to $30.3 million at December 28, 2003. Included in the balance in the current fiscal year was revolving credit of $1.2 million, whereas there was no revolving credit balance outstanding at December 28, 2003.
Income tax expense for the nine months ended December 26, 2004 includes an expense for state and local income taxes of $41,000. Income tax expense for the nine months ended December 28, 2003 included a benefit for revision of federal alternative minimum taxes of $99,000 and an expense for state and local income taxes of $174,000. The Company has net operating loss carryforwards of $13.5 million that begin to expire in 2021.
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FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3.0 million for the first nine months of fiscal year 2005 compared to net cash provided by operating activities of $5.4 million for the first nine months of fiscal year 2004. The decrease in cash provided by operating activities was primarily due to changes in inventory and accounts payable balances. Net cash used in investing activities was $116,000 in the first nine months of fiscal year 2005 and $31,000 in the prior year period. Net cash used in financing activities was $2.8 million compared to net cash used in financing activities of $4.2 million in the prior year period. The decrease in cash used in financing activities was due to a lower net payment of long-term debt in the current fiscal year as compared to the prior fiscal year.
The Company’s ability to make scheduled payments of principal, to pay the interest on or to refinance its maturing indebtedness, to fund capital expenditures or to comply with its debt covenants will depend upon future performance. The Company’s future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Based upon the current level of operations, the Company believes that cash flow from operations together with revolving credit availability will be adequate to meet liquidity needs.
To reduce its exposure to credit losses and to enhance its cash flow, the Company assigns the majority of its trade accounts receivable to a commercial factor. The Company’s factor establishes customer credit lines and accounts for and collects receivable balances. Under the terms of the factoring agreement, which expires in July, 2005, the factor remits payments to the Company on the average due date of each group of invoices assigned. If a customer fails to pay the factor on the due date, the Company is charged interest at prime minus 0.5% (4.50% at December 26, 2004) until payment is received. The factor bears credit losses with respect to assigned accounts receivable that are within approved credit limits. The Company bears losses resulting from returns, allowances, claims and discounts. The Company’s factor at any time may terminate or limit its approval of shipments to a particular customer. If such a termination occurs, the Company may either assume the credit risks for shipments after the date of such termination or cease shipments to such customer.
FORWARD-LOOKING INFORMATION
This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 identify such forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. These risks include, among others, general economic conditions, changing competition, the level and pricing of future orders from the Company’s customers, the Company’s dependence upon third-party suppliers, including some located in foreign countries with unstable political situations and unstable foreign currency exchanges, the Company’s ability to successfully implement new information technologies and the Company’s dependence upon licenses from third parties.
ITEM 3 – QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on debt, changes in commodity prices, changes in international trade regulations, the concentration of the Company’s customers and the Company’s reliance upon licenses. The Company’s exposure to interest rate risk relates to the Company’s floating rate debt, of which there was a balance outstanding of $1.2 million at December 26, 2004 and a balance outstanding of $1.5 million at March 28, 2004. Each 1.0 percentage point increase in interest rates would impact pretax earnings by $12,000 at the debt level of December 26, 2004. The Company’s exposure to commodity price risk primarily relates to changes in the price of cotton and oil, which are the principal raw materials used in a substantial number of the Company’s products. Also, changes in import quantity allotments can materially impact the availability of the Company’s products and the prices at which those products can be purchased by the Company for resale. Additionally, the Company’s top three customers represent 76% of gross sales, and 42% of the Company’s gross sales is of licensed products. The Company could be materially impacted by the loss of one or more of these customers or licenses.
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ITEM 4 – CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report, as required by paragraph (b) of Rule 13a-15 or 15d-15 of the Exchange Act. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act. Since such evaluation, there have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect such controls.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time, the Company is involved in various legal proceedings relating to claims arising in the ordinary course of its business. Neither the Company nor any of its subsidiaries is a party to any such legal proceeding the outcome of which, individually or in the aggregate, is expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Index to Exhibits
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