<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- -------
Commission File No. 1-7604
CROWN CRAFTS, INC
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-0678148
- ------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1600 RiverEdge Parkway, Suite 200, Atlanta, Georgia 30328
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(Address of principal executive offices)
(770) 644-6400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of common Stock, $1.00 par value, of the
Registrant outstanding as of November 12, 1999 was 8,608,843.
-----------------------------
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FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 26, 1999 (UNAUDITED) AND MARCH 28, 1999
<TABLE>
<CAPTION>
September 26, March 28,
(in thousands) 1999 1999
- ------------- ------------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 605 $ 744
Accounts receivable, net:
Due from factor 32,176 48,042
Other 5,841 7,355
Inventories 91,101 87,287
Deferred income taxes 776 776
Income tax recoverable 7,853 4,422
Other current assets 6,863 7,258
-------- --------
Total Current Assets 145,215 155,884
-------- --------
PROPERTY, PLANT AND EQUIPMENT - at cost:
Land, buildings and improvements 45,224 45,190
Machinery and equipment 97,830 92,689
Furniture and fixtures 2,115 2,100
-------- --------
145,169 139,979
Less accumulated depreciation 66,970 60,858
-------- --------
Property, Plant and Equipment - net 78,199 79,121
-------- --------
OTHER ASSETS:
Goodwill 25,043 25,558
Other 4,664 4,288
-------- --------
Total Other Assets 29,707 29,846
-------- --------
TOTAL ASSETS $253,121 $264,851
======== ========
</TABLE>
See notes to interim consolidated financial statements.
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<PAGE> 3
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 26, 1999 (UNAUDITED) AND MARCH 28, 1999
<TABLE>
<CAPTION>
September 26, March 28,
(in thousands, except par value per share) 1999 1999
- ----------------------------------------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 52,736 $ 56,150
Accounts payable 20,078 25,339
Income taxes payable 20 8
Accrued wages and benefits 5,920 5,017
Accrued royalties 1,873 833
Other accrued liabilities 6,048 5,104
Dividends payable 258
Current maturities of long-term debt 37,243 7,243
--------- ---------
Total Current Liabilities 124,176 99,694
--------- ---------
NON-CURRENT LIABILITIES:
Long-term debt 42,857 72,857
Deferred income taxes 4,776 4,776
Other 745 745
--------- ---------
Total Non-Current Liabilities 48,378 78,378
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock - par value $1.00 per share;
50,000,000 shares authorized; 9,983,305 and
9,983,305 shares issued 9,983 9,983
Additional paid-in capital 46,096 46,096
Retained earnings 44,797 51,009
Less: 1,374,462 and 1,374,462 shares of common
stock held in treasury (20,309) (20,309)
--------- ---------
Total Shareholders' Equity 80,567 86,779
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 253,121 $ 264,851
========= =========
</TABLE>
See notes to interim consolidated financial statements.
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<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS
SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
(in thousands, except per share data) 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 84,162 $ 92,901 $ 149,949 $ 154,609
COST OF PRODUCTS SOLD 70,497 76,486 127,339 128,140
---------- ---------- ---------- ----------
GROSS PROFIT 13,665 16,415 22,610 26,469
MARKETING AND
ADMINISTRATIVE EXPENSES 13,254 13,899 25,317 26,159
---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM OPERATIONS 411 2,516 (2,707) 310
OTHER INCOME (EXPENSE):
Interest expense (3,429) (2,506) (6,431) (4,394)
Other - net 176 15 195 97
---------- ---------- ---------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES (2,842) 25 (8,943) (3,987)
INCOME TAX PROVISIONS (CREDITS) (1,025) 11 (3,299) (1,679)
----------- ---------- ---------- ----------
NET EARNINGS (LOSS) $ (1,817) $ 14 $ (5,644) $ (2,308)
=========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE - BASIC $ (0.21) $ 0.00 $ (0.66) $ (0.27)
EARNINGS (LOSS) PER SHARE - DILUTED $ (0.21) $ 0.00 $ (0.66) $ (0.27)
AVERAGE SHARES OUTSTANDING
BASIC 8,608,843 8,607,571 8,608,843 8,576,427
========== ========== ========== ==========
DILUTED 8,608,843 8,619,696 8,608,843 8,576,427
========== ========== ========== ==========
DIVIDENDS DECLARED PER
SHARE $ 0.03 $ 0.03 $ 0.06 $ 0.06
========== ========== ========== ==========
</TABLE>
See notes to interim consolidated financial statements.
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<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 26, 1999 AND
SEPTEMBER 27, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Sept 26, Sept 27,
(dollars in thousands) 1999 1998
- ---------------------- -------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (5,644) $ (2,308)
Adjustments to reconcile net loss to net
cash used for operating activities;
Depreciation and amortization of property,
plant and equipment 6,268 5,692
Amortization of goodwill 515 642
loss on sale of property, plant and equipment 7 29
Changes in assets and liabilities:
Accounts receivable 1,167 (11,674)
Inventories (3,814) (25,229)
Other current assets 395 (6,854)
Other assets (376) 690
Accounts payable (5,261) 12,078
Income taxes payable 12 (86)
Accrued liabilities 2,887 209
-------- --------
Net Cash Used for Operating Activities (3,844) (26,811)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (5,755) (10,179)
Acquisitions, net of cash acquired (8,833)
Proceeds from sale of property, plant
and equipment 402 39
Other (52)
-------- --------
Net Cash Used for Investing Activities (5,405) (18,973)
-------- --------
FINANCING ACTIVITIES:
Increase (decrease) in notes payable (3,414) 29,820
Increase in advances from factor 12,782 14,124
Exercise of stock options 0 2,183
Cash dividends (258) (516)
-------- --------
Net Cash Provided by Financing Activities 9,110 45,611
-------- --------
NET DECREASE IN CASH (139) (173)
CASH, beginning of period 744 809
-------- --------
CASH, end of period $ 605 $ 636
======== ========
Supplemental Cash Flow Information:
Income taxes paid $ 57 $ 57
======== ========
Interest paid net of amounts capitalized $ 3,338 $ 2,019
======== ========
</TABLE>
See notes to interim consolidated financial statements.
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FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
applicable to interim financial information and the rules and
regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and disclosures required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, such interim consolidated
financial statements contain all adjustments necessary to present
fairly the Company's financial position as of September 26, 1999 and
the results of its operations and its cash flows for the periods ended
September 26, 1999 and September 27, 1998. Such adjustments include
normal recurring accruals and a pro rata portion of certain estimated
annual expenses. Operating results for the six-month period ended
September 26, 1999, are not necessarily indicative of the results that
may be expected for the year ending April 2, 2000. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the annual report of Form 10-K for the
year ended March 28, 1999 of Crown Crafts, Inc. (the "Company").
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results may differ
from those estimates.
Recently Issued Accounting Standards: In 1998, 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. SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999. In June 1999, FASB
issued Statement 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 June 15,
2000. The effect on the financial statements upon adoption of SFAS No.
133 has not been determined.
2. 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). 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.
Financial information attributable to the Company's business segments
for the quarters and six months ended September 26, 1999 and September
27, 1998, was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
Revenues: 1999 1998 1999 1998
---------------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
Adult home furnishing
and juvenile products $56,876 $67,809 $100,952 $108,731
Infant products 27,286 25,092 48,997 45,878
------- ------- -------- --------
Total $84,162 $92,901 $149,949 $154,609
======= ======= ======== ========
</TABLE>
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<PAGE> 7
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
Operating income (loss): 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Adult home furnishing
and juvenile products $(2,177) $ (173) $(7,362) $(3,311)
Infant products 2,588 2,689 4,655 3,621
------- ------- ------- -------
Total $ 411 $ 2,516 $(2,707) $ 310
======= ======= ======= =======
</TABLE>
Net sales by individual product groups within these business segments
were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Bedroom products $ 35,428 $ 33,867 $ 69,189 $ 62,137
Throws and decorative
home accessories 17,718 24,311 26,283 35,079
Infant and juvenile
products 30,964 34,475 54,355 56,987
Other 52 248 122 406
---------- ---------- --------- -----------
Total net sales $ 84,162 $ 92,901 $ 149,949 $ 154,609
========== ========== =========== ===========
</TABLE>
3. Interest costs of $69,000 and $27,000, respectively, were capitalized
during the six months ended September 26, 1999 and September 27, 1998.
4. Major classes of inventory were as follows (in thousands):
<TABLE>
<CAPTION>
September 26, March 28,
1999 1999
------------- ----------
<S> <C> <C>
Raw materials $ 28,656 $ 34,300
Work in process 5,696 4,738
Finished goods 56,749 48,249
---------- ----------
$ 91,101 $ 87,287
========== ==========
</TABLE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ERP SOFTWARE
At the beginning of the second fiscal quarter, the Company's financial reporting
system and its woven products division converted from its legacy computer
systems to the new enterprise resource planning ("ERP") software package that
had been in preparation for 13 months. The conversion encountered more
difficulty than had been anticipated and is still not complete. The most
significant problems have been an impaired ability to ship and bill orders on a
timely basis, especially in the pick and pack operations that support the
Goodwin Weavers division and certain of the Crown Crafts operations. The Company
has identified a number of operational and system issues contributing to the
problems and is addressing them with a plan that is scheduled to result in
satisfactory shipping and billing performance using the ERP system by the end of
January 2000. However, the Company cannot be sure that all of the significant
problems have been identified or that the current plan will correct all known
problems by the planned completion date.
Meanwhile, because the post-conversion problems could not be fixed quickly
enough to support the business during the peak Fall shipping season, the Company
has implemented a number of manual work-arounds in order to ship as many
customer orders as
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<PAGE> 8
possible despite the difficulties with the new system. This has resulted in
steady improvement in weekly shipping volumes from the beginning of the
conversion to date. As of October 31, 1999, weekly shipping volumes in the woven
products division had risen to about 60 percent of the prior year week. However,
in some parts of the business shipping has been substantially below that. As a
result, during the second fiscal quarter, total billings by the woven division
were approximately $8 million less than during the prior year quarter, and it is
estimated that there will be an additional $7 million of lost sales in the third
fiscal quarter. Because of the Company's inability to provide good service, some
customers may switch to other suppliers. The Company may also incur significant
write-downs on inventory it is not able to ship soon enough to meet customers'
delivery date requirements.
Plans to convert the Company's adult bedding division to the ERP system,
previously scheduled to occur before the end of December 1999, are on hold
pending satisfactory resolution of problems with the system as implemented in
the woven division. Because of the conversion delay, the Company has tested its
legacy systems to confirm that they will accurately process orders with
post-1999 dates that abbreviate the year to two digits. These tests have
confirmed that orders with such dates can be entered, shipped and billed. The
Company has identified the reports most important to its business and has
modified the legacy code to report properly data with post-1999 two-digit year
dates. Testing of these revised reporting programs is expected to be completed
by the end of November 1999. This additional work has cost approximately
$50,000, and there will be additional costs of supporting the legacy system
until it is decommissioned. The Company does not believe that the legacy system
modifications it has made are an efficient or appropriate long-term solution to
its information system needs.
The Company continues to contemplate that the infant products division will be
converted to the ERP system at an unspecified future date, following successful
implementation in the adult bedding division. All mission-critical software
packages used in the infant products division are certified by their vendors as
being Y2K compliant.
YEAR 2000 ISSUE
In the latter portion of the 1990s, an issue affecting most companies has
emerged regarding the ability of computer applications and systems to properly
interpret dates later than December 31, 1999. This issue arises because, until
recently, many computer applications were written using only the two right-most
digits to define the applicable year. Accordingly, when the need arises to enter
a date after December 31, 1999, it is unclear how any particular application
will interpret the digits 00. The so-called "Year 2000 Problem" might cause
programs that perform arithmetic operations, comparisons or date sorts to
generate erroneous results when the program is required to process dates from
both centuries, and this might result in incorrect data, system failure and
other business disruptions, including, among other things, a temporary inability
to procure materials, process transactions, send invoices and service customers.
With assistance from consultants and vendors, the Company has undertaken a
comprehensive review of the "Year 2000 compliance" of the Company's various
computer systems. Because the Company has recently concluded a general upgrade
of its computer infrastructure, and because the Company is in the process of
implementing an ERP project affecting many significant business modules, many of
the Company's computer systems have been designed and deployed with "Year 2000
compliance" as a specific requirement.
The costs incurred by the Company in assessing "Year 2000 compliance" and
performing remedial or conversion work indicated by such assessments have been
expensed as incurred. The Company estimates that the total amount of such costs
incurred through September 26, 1999 to be approximately $150,000. This amount
includes the costs of the services of outside vendors and consultants
specifically to address "Year 2000 compliance." This amount does not include any
imputed amounts for the time and effort of the Company's own employees or for
computer services, equipment and software purchased principally for reasons
other than "Year 2000 compliance." For example, the systems installed as part of
the Company's recent general computer infrastructure upgrade and the ERP systems
being partly deployed this year are certified by the vendors to be Year 2000
compliant, but the Company has not attempted to allocate some portion of the
costs of those entire systems to "Year 2000 compliance." The Company does not
believe that the total costs of "Year 2000 compliance" will materially adversely
affect the Company's business operations, consolidated results of operations,
liquidity or capital resources.
The Company's business activities that rely on computer applications include
principally the following: word processing, communications and network
operations, accounting and finance, manufacturing, distribution and order entry.
With the completion in 1998 of the Company's computer infrastructure upgrade,
the Company's word processing, communications and network operations operate
based on Microsoft products including Windows NT, Windows 95 and Microsoft
Office, all of which are certified
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<PAGE> 9
by the vendor to be Year 2000 compliant. The Company deployed in July 1999, ERP
software applications supporting the Company's accounting, finance and order
entry functions, and its Georgia manufacturing and distribution operations. SAP
America, Inc. is the vendor of these software products and certifies that they
are Year 2000 compliant. The Company's two main distribution facilities in
Calhoun, Georgia, and Roxboro, North Carolina, have "warehouse management
system" software packages, each of which has been certified by its vendor to be
Year 2000 compliant. Order entry is one of the business functions that will be
performed by the ERP software. Additionally, the Company has "electronic data
interchange" ("EDI") links with several of its major customers, and each of
these has been designed and deployed to be Year 2000 compliant.
In fiscal years 1998 and 1999 the Company invested substantial sums of money and
devoted substantial time and resources to the upgrade of its computer systems
and applications, including Year 2000 compliance. Nevertheless, there may be
isolated computers or microprocessors that are not Year 2000 compliant. However,
based on the Company's on-going diligent review, the Company does not believe
that any of these will materially adversely affect the Company's business
operations, consolidated results of operations, liquidity or capital resources.
In addition, the Company has developed and is implementing a plan for reviewing
the Year 2000 compliance of each of its significant vendors, suppliers,
financial service organizations, service providers and customers to confirm that
the Company's operations will not be materially adversely affected by the
failure of any such third party to have Year 2000 compliant computer systems.
Where appropriate, the Company intends to request assurances from such third
parties that they are addressing the Year 2000 issue and that the products and
services procured or used by the Company will function properly or will be
available without interruption in the Year 2000. Detailed questionnaires
regarding Year 2000 readiness were submitted to such third parties during the
summer of 1998, and the responses to these questionnaires have been evaluated.
Nevertheless, it will be impossible to assess fully the potential consequences
if service interruptions occur from suppliers or in infrastructure areas such as
utilities, communications, transportation, banking and government.
As a result, the Company also is developing a business continuity plan to
minimize the impact of such external events. The Company's "Year 2000
compliance" efforts are ongoing and its overall plan, as well as its development
of a business continuity plan, will continue to evolve as new information
becomes available.
While its efforts to address Year 2000 issues will involve additional costs and
the time and effort of a number of employees, the Company believes, based on
currently available information, that it will be able to manage properly its
total Year 2000 exposure. There can be no assurance, however, that it will be
successful in its effort or that the computer systems of other companies on
which the Company will rely will be timely modified, or that a failure to modify
such systems by another company or modifications that are incompatible with its
systems would not have a material adverse effect on the Company's business
operations, consolidated results of operations, liquidity and capital resources.
Even though the software systems being installed by the Company have been
certified to be Year 2000 compliant, the software vendors may issue software
patches to address additional Year 2000 issues that may manifest themselves
later that are not covered in the current versions of the software.
At this time, the Company believes that the most likely worst-case scenario
would result from disruptions experienced by third parties such as suppliers,
utilities, and banking institutions. Such disruptions could have a material
adverse effect on the Company's operations, liquidity and financial condition.
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<PAGE> 10
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 26, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 27, 1998
Net sales declined $8.7 million, or 9.4%, to $84.2 million in the current year
quarter compared to $92.9 million in the second quarter last fiscal year. The
largest decline, from $24.3 million to $17.7 million (27.1%), was in the throws
and decorative home accessories products group. There were three factors
affecting revenues for this product group in the quarter: First, in March, 1999,
the Company sold Textile, Inc., a weaving facility in Ronda, North Carolina, as
a planned reduction in capacity for this group; second, in the current fiscal
year, manufacturing capacity was shifted to woven bedspreads which are sold by
the bedroom products group; the third factor in the decline in sales of throws
and decorative home accessories products in the quarter was related to
implementation of the ERP software system discussed above. The Company estimates
that this factor resulted in approximately $10 million of lost revenues.
In the infant and juvenile products group, sales in the current quarter declined
by 10.2%, or $3.5 million, to $31 million from $34.5 million in the prior year
quarter. The sales decline was all related to a repositioning of the Pillow
Buddies product line to the direct shipment of licensed products and is
transitional in nature. This resulted in $5.7 million of lower revenues compared
to the prior year quarter. Accordingly, revenues of infant products in this
group were up by approximately $2.2 million, or by 8.7%. Sales of bedroom
products increased by $1.5 million, or 4.6%, in the current year quarter to
$35.4 million from $33.9 million in last year's second quarter. The increase in
bedroom products resulted from the addition of the Calvin Klein Home product
line and from an increase in the sales of woven bedcoverings, offset by a
decline of the Company's in-house studio line of bedroom products.
For the second quarter, gross profit as a percentage of net sales decreased to
16.2% compared to 17.7% in the prior year quarter. This decline in gross margin,
the decline in revenues and a $1.6 million increase in customer deductions from
payments, led to decrease in gross profits of approximately $2.7 million. This
decline was partly the result of the lower absorption of fixed overhead costs
due to the decline in volume related to the ERP project and capacity issues at
the Company's Roxboro, North Carolina manufacturing facilities due to the
transition of the Calvin Klein Home product line from outside manufacturers into
this plant. Also affecting margins in the quarter was the sale of close-out
inventory of about $6 million, resulting from a program to reduce inventories
established in March, 1999.
Marketing and administrative expenses decreased by $645,000 in the quarter
compared to the second quarter last fiscal year, but were 15.7% of a lower level
of net sales, compared to 15% of net sales in the prior year. The decline in
expenses occurred in marketing and retail store expenses, offset by a net
increase of $111,000 in administrative expenses because of the ERP project.
Interest expense increased by $923,000 compared to the prior year quarter
because of higher effective interest rates in the Company's loan agreements,
compared to the rates in the prior loan agreements. The increase in other income
was principally due to gains on the sale of fixed assets no longer needed in the
business.
The effective income tax rate at 36.1%, returned to normal levels in the quarter
compared to the prior year quarter. In the quarter ended September 27, 1998, the
effective tax rate at 44% was affected by non-deductible expenses associated
with acquisitions and by higher effective state income tax rates.
SIX MONTHS ENDED SEPTEMBER 26, 1999 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
27, 1998
For the six months ended September 26, 1999, net sales compared to the prior
year period declined by $4.7 million, or 3%. Sales of bedroom products increased
11.3% from $62.1 million to $69.2 million. The sales increase resulted from the
addition of the Calvin Klein Home line of products and higher volume in woven
bedcoverings. Net Sales of throws and decorative home accessories for the six
months declined by 25.1% at $26.3 million compared to $35.1 million in the first
half of the prior fiscal year. The three factors affecting sales in this product
group are the same as those discussed for the three months ended September 26,
1999. In the infant and juvenile product group, net sales decreased by 4.6%,
from $57 million to $54.4 million. The lower level of sales was solely because
of the repositioning of the Pillow Buddies line of products discussed above.
In the first half of the current fiscal year, gross profit decreased to $22.6
million compared to $26.5 million for the six months ended September 27 of the
prior year and the gross margin declined from 17.1% in the prior year to 15.1%.
The factors affecting gross
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profits and gross margin were four-fold: An increase of $2.8 million in
deductions from and reserves for customer payments; the sale of close-out and
discontinued inventory of approximately $12 million at little or no gross
margin; lower volume to absorb fixed costs in the woven division because of the
ERP project; and underabsorption of overhead costs in the bedding division as
the Calvin Klein Home products are transitioned into the North Carolina
manufacturing plant.
In the six month period ended September 26, 1999, marketing and administrative
expenses were lower by $842,000 compared to the prior year period and were 16.9%
of net sales in both periods. The decline was due to lower selling expenses on
the reduced volume, lower retail expenses because of a reduction in the number
of company-operated outlet stores and reduced goodwill amortization because of
the sale of Textile, Inc.
Interest expense increased by $2 million in the first six months of the current
fiscal year because of higher average borrowings and because of higher effective
interest rates.
The effective income tax rate at 36.7%, returned to normal levels in the six
month period compared to the prior year. For the six months ended September 27,
1998, the effective tax rate at 42.1% was affected by non-deductible expenses
associated with acquisitions and by higher effective state income tax rates.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
At September 26, 1999, the Company had committed credit facilities with two
commercial banks totaling $85 million at interest rates equal to each bank's
base plus 1% to 1 1/2% or the London Interbank Offered Rate (LIBOR) plus 2.75%.
The amounts owed, the interest rate and the maturity of these facilities at
September 26, 1999 is summarized in the following table (in thousands):
<TABLE>
<CAPTION>
Amounts Interest
Owed Rate Maturity
-------- -------- --------
<S> <C> <C>
$ 20,736 9.25% January 15, 2000
17,000 8.24% January 15, 2000
15,000 8.24% March 31, 2000
--------
52,736
30,000 8.24% April 3, 2000
--------
$ 82,736
========
</TABLE>
In addition, approximately $2.1 million of letters of credit were outstanding
under these facilities at September 26, 1999.
Subsequent to September 26, 1999, one of the commercial banks converted its $30
million facility due January 15, 2000 to an uncommitted line of credit, under
provisions of the loan agreement.
The Company's notes in the amount of $50,000,000 are placed with an insurance
company, carry an interest rate of 10.42% and are due in annual installments of
$7,143,857 from October 1999 through October 2005. The installment due on
October 12, 1999 was paid by the Company.
To support the bank facilities and the insurance company notes, the Company has
granted a security interest in substantially all of its assets. These assets
also support a borrowing base which limits the amounts the Company may borrow
under the agreements with its lenders and advances it may take from its factor.
Under the borrowing base, the Company had available $6.4 million at September
26, 1999.
In addition, the agreements with the banks and insurance company contain
covenants requiring the Company to maintain minimum levels of shareholders'
equity and certain financial ratios, and restrict the amounts the Company may
expend on acquisitions and purchases of treasury stock. The agreement with the
insurance company also requires the Company to maintain a ratio of total debt to
total capitalization. The Company was in compliance with all provisions of its
loan agreements at September 26, 1999.
A-11
<PAGE> 12
To reduce its exposure to credit losses and to enhance its cash flow forecasts,
the Company factors the majority of its trade accounts receivable. The Company's
factor establishes customer credit lines, and accounts for and collect
receivable balances. The factor remits payments to the Company on the due dates
of the factored invoices. The factor assumes all responsibility for credit
losses on sales with 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 agreements with its lenders, described above, provide for the Company to
finance its seasonal working capital needs by taking advances against its
factored receivables of up to $30 million. At September 26, 1999, the Company
had taken such advances totaling $12,782,000 compared to similar advances of
$14,124,000 at September 27, 1998. The Company accounts for these advance
payments on its balance sheet as a reduction in Accounts Receivable - Due from
Factor.
At September 26, 1999, total debt outstanding decreased by $2.1 million to
$132.8 million from $134.9 million at September 27, 1998. In addition, during
the same periods, the Company reduced its other current liabilities, principally
accounts payable, by $9.4 million. These reductions in liabilities resulted from
the Company's emphasis on lowering inventories through the disposition of
close-out and discontinued merchandise, discussed above.
FORWARD-LOOKING INFORMATION
This Form 10Q contains forward-looking statements within the meaning of the
federal securities law. Such statements are based upon management's current
expectations, projections, estimates and assumptions. Words such as "expects,"
"believes," "anticipates" and variations of such words and similar expressions
are intended to identify such forward-looking statements. Forward-looking
statements involve known and unknown risks and uncertainties that may cause
future results to differ materially from those anticipated. These risks include,
among others, general economic conditions, changing competition, the level and
pricing of future orders from the Company's customers, the Company's dependence
upon third-party suppliers, including some located in foreign countries with
unstable political situations, the Company's ability to successfully implement
new information technologies, the Company's ability to integrate its
acquisitions and new licenses, and the Company's ability to implement
improvements in its acquired businesses.
ITEM 3 - QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on debt,
commodity prices and foreign exchange rates.
The Company's exposure to interest rate risk relates to its floating rate debt
and advances from its factor, $82,736,000 and $12,782,000, respectively, of
which was outstanding at September 26, 1999.
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 September 26, 1999.
The Company's exposure to foreign exchange rates relates to its Mexican
manufacturing subsidiary. During the fiscal year ended March 28, 1999, this
subsidiary manufactured products for the Company with a value of approximately
$7.2 million. The Company's investment in the subsidiary was approximately $4.5
million at September 26, 1999.
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<PAGE> 13
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time, the Company is involved in various legal
proceedings relating to claims arising in the ordinary course of its
business. Neither the Company nor any of its subsidiaries is a party
to any such legal proceeding the outcome of which, individually or in
the aggregate, is expected to have a material adverse effect on the
Company's financial condition or results of operations.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
On July 16, 1999, the Company filed a report on Form 8-K pertaining to
the delay in filing its Annual Report on Form 10-K.
A-13
<PAGE> 14
FORM 10-Q
CROWN CRAFTS, INC. AND SUBSIDIARIES
SEPTEMBER 26, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN CRAFTS, INC.
Date: November 15, 1999 /s/ David S. Fraser
------------------------ ---------------------------------
DAVID S. FRASER
(Chief Accounting Officer)
A-14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CROWN CRAFTS, INC. FOR THE SIX MONTHS ENDED SEPTEMBER
26, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-02-2000
<PERIOD-START> MAR-29-1999
<PERIOD-END> SEP-26-1999
<CASH> 605
<SECURITIES> 0
<RECEIVABLES> 38,017
<ALLOWANCES> 0
<INVENTORY> 91,101
<CURRENT-ASSETS> 145,215
<PP&E> 145,169
<DEPRECIATION> 66,970
<TOTAL-ASSETS> 253,121
<CURRENT-LIABILITIES> 124,176
<BONDS> 42,857
0
0
<COMMON> 9,983
<OTHER-SE> 70,584
<TOTAL-LIABILITY-AND-EQUITY> 253,121
<SALES> 149,949
<TOTAL-REVENUES> 149,949
<CGS> 127,339
<TOTAL-COSTS> 127,339
<OTHER-EXPENSES> 25,317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,431
<INCOME-PRETAX> (8,943)
<INCOME-TAX> (3,299)
<INCOME-CONTINUING> (5,644)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,644)
<EPS-BASIC> (.66)
<EPS-DILUTED> (.66)
</TABLE>
