Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 27, 2010
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o |
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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)
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Delaware
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58-0678148 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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916 South Burnside Avenue, Gonzales, Louisiana 70737
(Address of principal executive offices)
(225) 647-9100
(Registrants 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 þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one)
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Large accelerated filer o
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Accelerated filer o
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Non-Accelerated filer o
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Smaller Reporting Company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of common stock, $0.01 par value, of the registrant outstanding as of July 30,
2010 was 9,603,726.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 27, 2010 and March 28, 2010
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June 27, 2010 |
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(Unaudited) |
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March 28, 2010 |
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(amounts in thousands, except |
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share and per share amounts) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
918 |
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$ |
75 |
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Accounts receivable (net of allowances of
$1,015 at June 27, 2010 and $1,238 at March
28, 2010): |
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Due from factor |
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12,890 |
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17,633 |
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Other |
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252 |
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388 |
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Inventories |
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16,717 |
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10,453 |
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Prepaid expenses |
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1,439 |
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1,625 |
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Temporary investments restricted |
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505 |
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Assets held for sale |
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396 |
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396 |
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Deferred income taxes |
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460 |
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399 |
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Total current assets |
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33,072 |
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31,474 |
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Property, plant and equipment at cost: |
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Vehicles |
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58 |
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58 |
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Land, buildings and improvements |
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215 |
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212 |
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Machinery and equipment |
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2,568 |
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2,537 |
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Furniture and fixtures |
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764 |
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764 |
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3,605 |
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3,571 |
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Less accumulated depreciation |
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3,064 |
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3,020 |
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Property, plant and equipment net |
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541 |
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551 |
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Intangible assets at cost: |
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Goodwill |
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1,154 |
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864 |
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Customer relationships |
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5,411 |
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5,083 |
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Other intangible assets |
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6,686 |
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5,496 |
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13,251 |
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11,443 |
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Less accumulated amortization |
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4,375 |
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4,086 |
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Intangible assets net |
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8,876 |
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7,357 |
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Other assets: |
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Deferred income taxes |
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1,943 |
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1,904 |
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Other |
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107 |
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106 |
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Total other assets |
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2,050 |
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2,010 |
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Total Assets |
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$ |
44,539 |
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$ |
41,392 |
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities: |
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Accounts payable |
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$ |
9,526 |
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$ |
5,563 |
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Accrued wages and benefits |
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1,158 |
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838 |
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Accrued royalties |
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1,208 |
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1,051 |
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Income taxes currently payable |
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430 |
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1,048 |
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Other accrued liabilities |
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177 |
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205 |
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Current maturities of long-term debt |
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1,988 |
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1,952 |
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Total current liabilities |
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14,487 |
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10,657 |
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Non-current liabilities: |
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Long-term debt |
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1,849 |
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3,238 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock $0.01 par value per share;
Authorized 1,000,000 shares; No shares issued
at June 27, 2010 and March 28, 2010 |
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Common stock $0.01 par value per share;
Authorized 74,000,000 shares; Issued
10,719,272 shares at June 27, 2010 and
10,288,940 shares at March 28, 2010 |
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107 |
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103 |
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Additional paid-in capital |
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41,335 |
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41,007 |
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Treasury stock at cost - 1,116,582 shares at
June 27, 2010 and 1,074,025 shares at March
28, 2010 |
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(3,747 |
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(3,580 |
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Accumulated deficit |
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(9,492 |
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(10,033 |
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Total shareholders equity |
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28,203 |
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27,497 |
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Total Liabilities and Shareholders Equity |
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$ |
44,539 |
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$ |
41,392 |
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See notes to unaudited condensed consolidated financial statements.
1
CROWN CRAFTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three-Month Periods Ended June 27, 2010 and June 28, 2009
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Three-Month Periods Ended |
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June 27, 2010 |
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June 28, 2009 |
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(amounts in thousands, |
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except per share amounts) |
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Net sales |
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$ |
17,167 |
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$ |
17,735 |
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Cost of products sold |
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12,876 |
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13,760 |
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Gross profit |
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4,291 |
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3,975 |
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Marketing and administrative expenses |
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3,015 |
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2,886 |
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Income from operations |
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1,276 |
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1,089 |
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Other income (expense): |
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Interest and amortization of debt discount and
expense |
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(97 |
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(196 |
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Other net |
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7 |
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6 |
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Income before income tax expense |
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1,186 |
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899 |
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Income tax expense |
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455 |
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340 |
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Income from continuing operations |
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731 |
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559 |
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Loss from discontinued operations net of income taxes |
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(5 |
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(21 |
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Net income |
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$ |
726 |
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$ |
538 |
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Weighted average shares outstanding basic |
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9,246 |
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9,209 |
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Weighted average shares outstanding diluted |
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9,349 |
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9,379 |
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Basic earnings per share: |
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Income from continuing operations |
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$ |
0.08 |
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$ |
0.06 |
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Loss from discontinued operations net of income taxes |
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Total basic earnings per share |
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$ |
0.08 |
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$ |
0.06 |
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Diluted earnings per share: |
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Income from continuing operations |
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$ |
0.08 |
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$ |
0.06 |
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Loss from discontinued operations net of income taxes |
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Total diluted earnings per share |
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$ |
0.08 |
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$ |
0.06 |
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Cash dividends declared per share |
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$ |
0.02 |
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$ |
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See notes to unaudited condensed consolidated financial statements.
2
CROWN CRAFTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Month Periods Ended June 27, 2010 and June 28, 2009
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Three-Month Periods Ended |
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June 27, 2010 |
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June 28, 2009 |
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(amounts in thousands) |
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Operating activities: |
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Net income |
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$ |
726 |
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$ |
538 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation of property, plant and equipment |
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64 |
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73 |
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Amortization of intangibles |
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289 |
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434 |
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Deferred income taxes |
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(100 |
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(221 |
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Gain on sale of property, plant and equipment |
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(2 |
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Accretion of interest expense to original issue discount |
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69 |
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64 |
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Stock-based compensation |
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163 |
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178 |
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Changes in assets and liabilities: |
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Accounts receivable |
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4,879 |
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5,415 |
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Inventories |
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(5,992 |
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(4,538 |
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Prepaid expenses |
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186 |
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228 |
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Other assets |
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(9 |
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Accounts payable |
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3,962 |
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2,198 |
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Accrued liabilities |
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(169 |
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373 |
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Net cash provided by operating activities |
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4,066 |
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4,742 |
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Investing activities: |
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Capital expenditures |
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(54 |
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(69 |
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Maturity (purchase) of temporary investments |
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505 |
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(500 |
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Proceeds from disposition of assets |
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2 |
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Payment to acquire the Bibsters product line |
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(2,072 |
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Net cash used in investing activities |
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(1,619 |
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(569 |
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Financing activities: |
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Payments on long-term debt |
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(625 |
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Repayments under revolving line of credit, net |
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(1,422 |
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(3,914 |
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Purchase of treasury stock |
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(167 |
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Issuance of common stock |
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65 |
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Excess tax benefit from stock-based compensation |
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104 |
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Dividends paid |
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(184 |
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Net cash used in financing activities |
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(1,604 |
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(4,539 |
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Net increase (decrease) in cash and cash equivalents |
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843 |
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(366 |
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Cash and cash equivalents at beginning of period |
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75 |
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15,249 |
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Cash and cash equivalents at end of period |
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$ |
918 |
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$ |
14,883 |
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Supplemental cash flow information: |
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Income taxes paid |
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$ |
1,065 |
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$ |
758 |
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Interest paid, net of interest received |
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33 |
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127 |
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Noncash financing activity: |
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Dividends declared but unpaid |
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(185 |
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See notes to unaudited condensed consolidated financial statements.
3
CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE-MONTH PERIODS ENDED JUNE 27, 2010 AND JUNE 28, 2009
Note 1 Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited consolidated financial statements
include the accounts of Crown Crafts, Inc. and its subsidiaries (collectively, the Company)
and have been prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP) applicable to interim financial information as promulgated by the
Financial Accounting Standards Board (FASB) and the rules and regulations of the Securities
and Exchange Commission (SEC). Accordingly, they do not include all of the information and
disclosures required by GAAP for complete financial statements. In the opinion of management,
these interim consolidated financial statements contain all adjustments necessary to present
fairly the financial position of the Company as of June 27, 2010 and the results of its
operations and cash flows for the period presented. Such adjustments include normal, recurring
accruals, as well as the elimination of all significant intercompany balances and transactions.
Operating results for the three-month period ended June 27, 2010 are not necessarily indicative
of the results that may be expected for the fiscal year ending April 3, 2011. For further
information, refer to the Companys consolidated financial statements and notes thereto included
in the annual report on Form 10-K for the year ended March 28, 2010.
Fiscal Year: The Companys fiscal year ends on the Sunday nearest March 31. References
herein to fiscal year 2011 represent the 53-week period ending April 3, 2011, references
herein to fiscal year 2010 represent the 52-week period ended March 28, 2010 and references
herein to fiscal year 2009 represent the 52-week period ended March 29, 2009.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the date of the
consolidated balance sheets and the reported amounts of revenues and expenses during the periods
presented on the consolidated statements of income and cash flows. Significant estimates are
made with respect to the allowances related to accounts receivable for customer deductions for
returns, allowances and disputes. The Company has a certain amount of discontinued finished
goods which necessitate the establishment of inventory reserves that are highly subjective.
Actual results could differ from those estimates.
Cash and Cash Equivalents: The Company considers all highly-liquid investments purchased
with original maturities of three months or less to be cash equivalents. The Companys credit
facilities include a revolving line of credit under a financing agreement with The CIT
Group/Commercial Services, Inc., a subsidiary of CIT Group, Inc. (CIT). The Company
classifies a negative balance outstanding under this revolving line of credit as cash, as these
amounts are legally owed to the Company and immediately available to be drawn upon by the
Company.
Financial Instruments: The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is practicable to estimate such
value:
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Cash and cash equivalents, accounts receivable and accounts payable For those
short-term instruments, the carrying value is a reasonable estimate of fair value. |
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Long-term debt The carrying value of the Companys long-term debt approximates fair
value because interest rates under the Companys borrowings are variable, based on
prevailing market rates. |
Royalty Payments: The Company has entered into agreements that provide for royalty payments
based on a percentage of sales with certain minimum guaranteed amounts. These royalties are
accrued based upon historical sales rates adjusted for current sales trends by customers. Total
royalty expense included in cost of sales amounted to $1.3 million and $1.4 million for the
three-month periods ended June 27, 2010 and June 28, 2009, respectively.
Segment and Related Information: The Company operates primarily in one principal segment,
infant and toddler products. These products consist of infant and toddler bedding, infant bibs
and related soft goods. Net sales of bedding, blankets and accessories amounted to $12.5
million and $14.6 million for the three-month periods ended June 27, 2010 and June 28, 2009,
respectively. Net sales of bibs, bath and disposable products amounted to $4.6 million and
$3.2 million for the three-month periods ended June 27, 2010 and June 28, 2009, respectively.
4
Revenue Recognition: Sales are recorded when goods are shipped to customers and are
reported net of allowances for estimated returns and allowances in the accompanying consolidated
statements of income. Allowances for returns are estimated based on historical rates.
Allowances for returns, advertising allowances, warehouse allowances and volume rebates are
recorded commensurate with sales activity and the cost of such allowances is netted against
sales in reporting the results of operations. Shipping and handling costs, net of amounts
reimbursed by customers, are not material and are included in net sales.
Allowances Against Accounts Receivable: The Companys allowances against accounts
receivable are primarily contractually agreed-upon deductions for items such as advertising and
warehouse allowances and volume rebates. These deductions are recorded throughout the year
commensurate with sales activity. Funding of the majority of the Companys allowances occurs on
a per-invoice basis. The allowances for customer deductions, which are netted against accounts
receivable in the consolidated balance sheets, consist of agreed upon advertising support,
markdowns and warehouse and other allowances. All such allowances are recorded as direct
offsets to sales and such costs are accrued commensurate with sales activities. When a customer
requests deductions, the allowances are reduced to reflect such payments or credits issued
against the customers account balance. The Company analyzes the components of the allowances
for customer deductions monthly and adjusts the allowances to the appropriate levels. The
timing of customer-initiated funding requests for advertising support can cause the net balance
in the allowance account to fluctuate from period to period. The timing of funding requests
should have no impact on the consolidated statements of income since such costs are accrued
commensurate with sales activity.
To reduce the exposure to credit losses and to enhance the predictability of its cash
flows, the Company assigns the majority of its trade accounts receivable to CIT pursuant to
factoring agreements. In the event a factored receivable becomes uncollectible due to
creditworthiness, CIT bears the risk of loss. The Company must make estimates of the
uncollectibility of its non-factored accounts receivable, which it accomplishes by specifically
analyzing accounts receivable, historical bad debts, customer concentrations, customer
creditworthiness, current economic trends and changes in its customers payment terms to
evaluate the adequacy of its allowance for doubtful accounts. The Companys accounts receivable
at June 27, 2010 totaled $13.1 million, net of allowances of $1.0 million. Of this amount,
$12.9 million is due from CIT under the factoring agreements, which amount represents the
maximum amount of loss that the Company could incur under the factoring agreements if CIT failed
completely to perform its obligations thereunder.
Inventory Valuation: The preparation of the Companys financial statements requires careful
determination of the appropriate dollar amount of the Companys inventory balances. Such amount
is presented as a current asset in the accompanying consolidated balance sheets and is a direct
determinant of cost of goods sold in the accompanying consolidated statements of income and,
therefore, has a significant impact on the amount of net income in the accounting periods
reported. The basis of accounting for inventories is cost, which is the sum of expenditures and
charges, both direct and indirect, incurred to acquire inventory, bring it to a condition
suitable for sale, and store it until it is sold. Once cost has been determined, the Companys
inventory is then stated at the lower of cost or market, with cost determined using the
first-in, first-out (FIFO) method, which assumes that inventory quantities are sold in the
order in which they are acquired. The determination of the indirect charges and their
allocation to the Companys finished goods inventories is complex and requires significant
management judgment and estimates. If management made different judgments or utilized different
estimates, then differences would result in the valuation of the Companys inventories, the
amount and timing of the Companys cost of goods sold and the resulting net income for any
accounting period
On a periodic basis, management reviews the Companys inventory quantities on hand for
obsolescence, physical deterioration, changes in price levels and the existence of quantities on
hand which may not reasonably be expected to be sold within the normal operating cycle of the
Companys operations. To the extent that any of these conditions is believed to exist or the
market value of the inventory expected to be realized in the ordinary course of business is
otherwise no longer as great as its carrying value, an allowance against the inventory value is
established. To the extent that this allowance is established or increased during an accounting
period, an expense is recorded in cost of goods sold in the Companys consolidated statements of
income. Only when inventory for which an allowance has been established is later sold or is
otherwise disposed is the allowance reduced accordingly. Significant management judgment is
required in determining the amount and adequacy of this allowance. In the event that actual
results differ from managements estimates or these estimates and judgments are revised in
future periods, the Company may not fully realize the carrying value of its inventory or may
need to establish additional allowances, either of which could materially impact the Companys
financial position and results of operations.
5
Depreciation and Amortization: The accompanying consolidated balance sheets reflect
property, plant and equipment, and certain intangible assets at cost less accumulated
depreciation or amortization. The Company capitalizes additions and improvements and expenses
maintenance and repairs as incurred. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets, which are three to eight
years for property, plant and equipment, and one to sixteen years for intangible assets other
than goodwill. The Company amortizes improvements to its leased facilities over the term of the
lease or the estimated useful life of the asset, whichever is shorter.
Valuation of Long-Lived Assets, Identifiable Intangible Assets and Goodwill: In addition
to the depreciation and amortization procedures set forth above, the Company reviews for
impairment long-lived assets and certain identifiable intangible assets whenever events or
changes in circumstances indicate that the carrying amount of any asset may not be recoverable.
In the event of impairment, the asset is written down to its fair market value. Assets to be
disposed of, if any, are recorded at the lower of net book value or fair market value, less
estimated costs to sell at the date management commits to a plan of disposal, and are classified
as assets held for sale on the accompanying consolidated balance sheets.
The Company tests the fair value of the goodwill of its reporting units annually as of the
first day of the Companys fiscal year. An additional interim impairment test is performed
during the year whenever an event or change in circumstances occurs that suggest that the fair
value of the goodwill of either of the reporting units of the Company has more likely than not
fallen below its carrying value. The annual or interim impairment test is performed in a
two-step approach. The first step is the estimation of the fair value of each reporting unit to
ensure that its fair value exceeds its carrying value. If step one indicates that a potential
impairment exists, then the second step is performed to measure the amount of an impairment
charge, if any. In the second step, these estimated fair values are used as the hypothetical
purchase price for the reporting units, and an allocation of such hypothetical purchase price is
made to the identifiable tangible and intangible assets and assigned liabilities of the
reporting units. The impairment charge is calculated as the amount, if any, by which the
carrying value of the goodwill exceeds the implied amount of goodwill that results from this
hypothetical purchase price allocation.
Provisions for Income Taxes: The Companys provisions for income taxes include all
currently payable federal, state, local and foreign taxes that are based upon the Companys
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. The Companys policy is to recognize
the effect that a change in enacted tax rates would have on net deferred income tax assets and
liabilities in the period that the tax rates are changed.
The Company recognizes the effect of income tax positions only if those positions are more
likely than not to be sustained. Recognized income tax positions are measured at the largest
amount that has a greater than 50% likelihood of being realized. Changes in recognition or
measurement are reflected in the period in which the change in judgment occurs. Based on its
recent evaluation, the Company has concluded that there are no significant uncertain tax
positions requiring recognition in the accompanying consolidated financial statements. Tax
years still open to federal or state general examination or other adjustment as of June 27, 2010
include tax years ended April 1, 2007, March 30, 2008, March 29, 2009 and March 28, 2010, as
well as the tax year ended April 2, 2006 for several states. The Companys policy is to accrue
interest expense and penalties as appropriate on any estimated unrecognized tax benefits as a
charge to interest expense in the Companys consolidated statements of income.
Earnings Per Share: The Company calculates basic earnings per share by using a weighted
average of the number of shares outstanding during the reporting periods. Diluted shares
outstanding are calculated in accordance with the treasury stock method, which assumes that the
proceeds from the exercise of all exercisable options would be used to repurchase shares at
market value. The net number of shares issued after the exercise proceeds are exhausted
represents the potentially dilutive effect of the options, which are added to basic shares to
arrive at diluted shares.
6
The following table sets forth the computation of basic and diluted net income per common
share for the three-month periods ended June 27, 2010 and June 28, 2009.
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
June 27, 2010 |
|
|
June 28, 2009 |
|
|
|
(Amounts in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
731 |
|
|
$ |
559 |
|
Loss from discontinued operations |
|
|
(5 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
726 |
|
|
$ |
538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
9,246 |
|
|
|
9,209 |
|
Effect of dilutive securities |
|
|
103 |
|
|
|
170 |
|
|
|
|
|
|
|
|
Diluted |
|
|
9,349 |
|
|
|
9,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.08 |
|
|
$ |
0.06 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.08 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.08 |
|
|
$ |
0.06 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.08 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
Recently Issued Accounting Standards: In June 2009, the FASB issued Statement of Financial
Accounting Standards Number 168, The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles (SFAS No. 168), which established the FASB Accounting
Standards Codification (the FASB ASC) as the authoritative source for GAAP recognized by the
FASB to be applied by nongovernmental entities. SFAS No. 168 also provides that rules and
interpretive releases of the SEC under authority of U.S. securities laws are also sources of
authoritative GAAP for SEC registrants. Under SFAS No. 168, which became effective for interim
and annual periods ending after September 15, 2009, specific citations of GAAP must be to Topics
contained within the FASB ASC. SFAS No. 168 became FASB ASC Topic 105, Generally Accepted
Accounting Principles.
Under FASB ASC Topic 105-10-05-5, the FASB revises GAAP by issuing an Accounting Standards
Update (ASU) to the FASB ASC. An ASU is not considered as authoritative in its own right, but
serves only to update the FASB ASC, provide background information and provide the basis for
conclusion on the change in the FASB ASC. The Companys adoption on June 29, 2009 of FASB ASC
Topic 105 did not impact the Companys consolidated financial statements.
In September 2006, the FASB issued FASB ASC Topic 820, Fair Value Measurements and
Disclosures, which defines fair value, establishes a framework for measuring fair value in GAAP,
and expands disclosure requirements about fair value measurements. This topic became effective
for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal
years. In February 2008, the FASB delayed the effective date of FASB ASC Topic 820 for
non-financial assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis, to fiscal years
beginning after November 15, 2008. The Companys adoption of FASB ASC Topic 820 on March 29,
2009 did not materially impact the Companys consolidated financial statements.
On January 21, 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires
new disclosures and clarifies existing disclosure requirements about fair value measurement as
set forth in FASB ASC Topic 820-10, and generally became effective for interim and annual
reporting periods beginning after December 15, 2009. The Companys adoption of ASU No. 2010-06
on December 28, 2009 did not materially impact the Companys consolidated financial statements.
7
In December 2007, the FASB issued FASB ASC Topic 805-10-65-1, which contains revisions to
FASB ASC Topic 805, Business Combinations, and which was to be applied prospectively to business
combinations for which the acquisition date
was on or after annual reporting periods beginning on or after December 15, 2008, and interim
periods within those annual reporting periods. Early adoption was prohibited. FASB ASC Topic
805, as revised, establishes principles and requirements for the reporting entity in a business
combination, including recognition and measurement in the financial statements of the
identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the
acquiree. This Topic also establishes disclosure requirements to enable financial statement
users to evaluate the nature and financial effects of the business combination. The Companys
adoption of FASB ASC Topic 805, as revised, on March 30, 2009 resulted in the application of its
provisions to the acquisitions of Neat Solutions and Bibsters® described in Note 4
below. Relative to these acquisitions, the FASB ASC Topic 805 revisions impacted the
consolidated financial statements in that the Company was required to recognize the following
amounts as expense:
|
|
|
$195,000 of direct costs associated with the acquisition of Neat Solutions during
fiscal year 2010, $44,000 of which were recognized during the three-month period ended
June 28, 2009, and |
|
|
|
|
$60,000 of direct costs associated with the acquisition of Bibsters®
during the three-months ended June 27, 2010. |
The direct costs associated with these acquisitions would have previously been capitalized
under FASB ASC Topic 805 prior to its revision.
In May 2009, the FASB issued FASB ASC Topic 855, Subsequent Events, which establishes
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued. FASB ASC Topic
855 became effective for financial statements issued for interim and annual periods ending after
June 15, 2009 and was to be applied prospectively. This standard originally required the
Company to disclose the date through which subsequent events have been evaluated, which was
intended to provide guidance to readers of the Companys financial statements that the Company
has not evaluated subsequent events after that date. However, the FASB on February 24, 2010
issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and
Disclosure Requirements, which became effective upon issuance and which removed the requirement
for an SEC registrant to disclose the date through which subsequent events have been evaluated.
The Companys adoption of FASB ASC Topic 855 on March 30, 2009 and the adoption of ASU No.
2010-09 on February 24, 2010 did not impact the Companys consolidated financial statements.
On October 7, 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements. This ASU addresses the accounting for companies that
provide for revenue arrangements to its customers that contain components of both the sale of a
product and the sale of a service in a single contractually binding agreement. The ASU will
become effective prospectively for such revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company
does not typically enter into these types of revenue arrangements, and therefore does not
anticipate that the adoption by the Company of ASU No. 2009-13 on April 4, 2011 will materially
impact its consolidated financial statements.
On July 21, 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU
is intended to provide additional information to assist readers of the Companys financial
statements in assessing the Companys credit risk exposures and evaluating the adequacy of its
allowance for credit losses. For the Companys disclosures to be required as of the end of a
reporting period, this ASU will become effective as of the end of the first interim or annual
reporting period ending or after December 15, 2010. For the Companys disclosures to be
required about activity that occurs during a reporting period, this ASU will become effective
for interim or annual reporting periods beginning on or after December 15, 2010. Because the
Company assigns the majority of its trade accounts receivable to CIT pursuant to factoring
agreements, and further because CIT bears the risk of credit loss with respect to trade accounts
receivable assigned to them, the Company does not anticipate that the adoption by the Company of
ASU No. 2010-20 on December 26, 2010 will materially impact its consolidated financial
statements.
Note 2 Discontinued Operations
During the first quarter of fiscal year 2008, the operations of Churchill Weavers, Inc.
(Churchill), a wholly-owned subsidiary of the Company, ceased and all employees were
terminated. The Company is actively marketing Churchills land and building for sale. The
Churchill property is recorded at fair value, less cost to sell, and is classified as assets
held for sale in the accompanying consolidated balance sheets. The operations of Churchill are
classified as discontinued operations in the accompanying consolidated statements of income.
8
Note 3 Subsequent Events
Except as set forth below, the Company has determined that there are no subsequent
events that require disclosure pursuant to FASB ASC Topic 855, as revised.
As described in more detail in Note 5 below, as of July 29, 2010 the Company amended
the non-vested stock awards that had been granted to certain employees on June 23, 2010.
The stock grants, as amended, now require as a condition to vesting a five-year period of
continuous service after July 29, 2010 in addition to the achievement of certain events
related to the closing price of the Companys common stock. The amendment of the stock
grants allows for a period of expense recognition for the compensation associated with these
grants that will be longer than the period of expense recognition that would have been
required under the original grants, which had not required the five-year period of
continuous service as a condition to vesting.
Note 4 Acquisitions
Neat Solutions: On July 2, 2009, Hamco, Inc. (Hamco), a wholly-owned subsidiary of
the Company, acquired substantially all of the assets of Neat Solutions, Inc. (Neat
Solutions), the privately-held developer of the Table Topper® Stay-in-Place
Mat® (the Neat Solutions Acquisition). Hamco paid a purchase price of $4.4
million, net of certain specified liabilities assumed. In accordance with FASB ASC Topic
805, as revised, Hamco also recognized as expense $195,000 of direct costs associated with
the acquisition, which were included in marketing and administrative expenses in interim
reporting periods during the fiscal year ended March 28, 2010, $44,000 of which were
recognized during the three-month period ended June 28, 2009.
The Neat Solutions Acquisition resulted in an increase of $1.2 million in net sales of
bibs, bath and disposable products for the three-month period ended June 27, 2010. Because
the operations of Neat Solutions have been integrated with those of Hamco, and because the
assets acquired from Neat Solutions do not exist as a discrete entity within the Companys
internal corporate structure, it is impracticable to determine the earnings generated by the
assets acquired from Neat Solutions since the acquisition date. The Company believes that
the pro forma impact of the acquisition is not material.
The fair values of the assets acquired and liabilities assumed were determined by the
Company with the assistance of an independent third party. The Companys allocation of the
acquisition cost is as follows (in thousands):
|
|
|
|
|
|
|
Amount |
|
Tangible assets: |
|
|
|
|
Accounts receivable |
|
$ |
837 |
|
Inventory |
|
|
548 |
|
Prepaid expenses |
|
|
52 |
|
Fixed assets |
|
|
12 |
|
Other assets |
|
|
2 |
|
|
|
|
|
Total tangible assets |
|
|
1,451 |
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
Trademarks |
|
|
892 |
|
Designs |
|
|
33 |
|
Non-compete covenant |
|
|
241 |
|
Customer relationships |
|
|
1,302 |
|
|
|
|
|
Total amortizable intangible assets |
|
|
2,468 |
|
Goodwill |
|
|
864 |
|
|
|
|
|
|
|
|
|
|
Total acquired assets |
|
|
4,783 |
|
Liabilities assumed accounts payable |
|
|
349 |
|
|
|
|
|
|
|
|
|
|
Net acquisition cost |
|
$ |
4,434 |
|
|
|
|
|
9
Bibsters®: On May 27, 2010, Hamco paid $1.8 million to The Procter & Gamble
Company (P&G) to acquire certain intellectual property related to P&Gs line of
Bibsters® disposable infant bibs. In a separate but related transaction, Hamco
also acquired the inventory associated with the Bibsters® product line from the
exclusive licensee of Bibsters® for P&G, whose license was terminated to coincide
with the closing (collectively, the two transactions represent the Bibsters®
Acquisition). In accordance with FASB ASC Topic 805, as revised, Hamco also recognized as
expense $60,000 of direct costs associated with the acquisition, which were included in
marketing and administrative expenses during the three-month period ended June 27, 2010.
The Bibsters® Acquisition resulted in an increase of $234,000 in net sales
of bibs, bath and disposable products for the three-month period ended June 27, 2010.
Because the operations of the Bibsters® product line have been integrated with
Hamco, and because the assets acquired do not exist as a discrete entity within the
Companys internal corporate structure, it is impracticable to determine the earnings
generated by the assets acquired from the Bibsters® product line since the
acquisition date. The Company believes that the pro forma impact of the acquisition is not
material.
The fair values of the assets acquired were determined by the Company with the
assistance of an independent third party. The Companys allocation of the acquisition cost
is as follows (in thousands):
|
|
|
|
|
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
Trademarks |
|
$ |
629 |
|
Patents |
|
|
553 |
|
Customer relationships |
|
|
328 |
|
|
|
|
|
Total amortizable intangible assets |
|
|
1,510 |
|
Goodwill |
|
|
290 |
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
1,800 |
|
Tangible assets inventory |
|
|
272 |
|
|
|
|
|
|
|
|
|
|
Total acquisition cost |
|
$ |
2,072 |
|
|
|
|
|
Note 5 Stock-based Compensation
The Company has two incentive stock plans, the 1995 Stock Option Plan (1995 Plan) and the
2006 Omnibus Incentive Plan (2006 Plan). The Company granted non-qualified stock options to
employees and non-employee directors from the 1995 Plan through the fiscal year ended April 2,
2006. In conjunction with the approval of the 2006 Plan by the Companys stockholders at its
Annual Meeting in August 2006, options may no longer be issued from the 1995 Plan.
The 2006 Plan is intended to attract and retain directors, officers and employees of the
Company and to motivate these persons to achieve performance objectives related to the Companys
overall goal of increasing stockholder value. The principal reason for adopting the 2006 Plan
was to ensure that the Company has a mechanism for long-term, equity-based incentive
compensation to directors, officers and employees. Awards granted under the 2006 Plan may be in
the form of qualified or non-qualified stock options, restricted stock, stock appreciation
rights, long-term incentive compensation units consisting of a combination of cash and shares of
the Companys common stock, or any combination thereof within the limitations set forth in the
2006 Plan. The 2006 Plan is administered by the compensation committee of the Companys Board
of Directors (the Board), which selects eligible employees and non-employee directors to
participate in the 2006 Plan and determines the type, amount and duration of individual awards.
At June 27, 2010, 349,000 shares of the Companys common stock were available for future
issuance under the 2006 Plan.
Stock-based compensation is calculated according to FASB ASC Topic 718, Compensation
Stock Compensation, which requires stock-based compensation to be accounted for using a
fair-value-based measurement. The Company recorded $163,000 and $178,000 of stock-based
compensation expense during the three-month periods ended June 27, 2010 and June 28, 2009,
respectively. The Company records the compensation expense associated with stock-based awards
to individuals in the same expense classifications as the cash compensation paid to those same
individuals. No stock-based compensation costs have been capitalized as part of the cost of
an asset as of June 27, 2010.
10
Stock Options: The following table represents stock option activity for the three-month
period ended June 27, 2010:
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Number of Options |
|
|
|
Exercise Price |
|
|
Outstanding |
|
Outstanding at March 28, 2010 |
|
$ |
2.94 |
|
|
|
825,832 |
|
Granted |
|
|
4.23 |
|
|
|
110,000 |
|
Exercised |
|
|
(0.77 |
) |
|
|
(85,332 |
) |
Forfeited |
|
|
(3.62 |
) |
|
|
(4,000 |
) |
|
|
|
|
|
|
|
|
Outstanding at June 27, 2010 |
|
|
3.32 |
|
|
|
846,500 |
|
|
|
|
|
|
|
|
|
Exercisable at June 27, 2010 |
|
|
3.24 |
|
|
|
566,500 |
|
|
|
|
|
|
|
|
|
The total intrinsic value of the stock options exercised during the three-month period
ended June 27, 2010 was $271,000. The intrinsic value of outstanding and exercisable stock
options at June 27, 2010 amounted to $793,000 and $579,000, respectively.
To determine the estimated fair value of stock options granted, the Company uses the
Black-Scholes-Merton valuation formula, which is a closed-form model that uses an equation to
estimate fair value. The following table sets forth the assumptions used to determine the fair
value, and the resulting grant-date fair value per option, of the non-qualified stock options
which were awarded to certain employees during the three-month period ended June 27, 2010, which
options vest over a two-year period, assuming continued service.
|
|
|
|
|
Options issued |
|
|
110,000 |
|
Grant Date |
|
|
June 23, 2010 |
|
Dividend yield |
|
|
1.89 |
% |
Expected volatility |
|
|
55.00 |
% |
Risk free interest rate |
|
|
2.17 |
% |
Expected life in years |
|
|
5.75 |
|
Forfeiture rate |
|
|
5.00 |
% |
Exercise price (grant-date closing price) |
|
$ |
4.23 |
|
Fair value |
|
$ |
1.88 |
|
For the three-month periods ended June 27, 2010 and June 28, 2009, the Company recognized
compensation expense associated with stock options as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended |
|
|
|
June 27, 2010 |
|
|
June 28, 2009 |
|
|
|
Cost of |
|
|
Marketing & |
|
|
|
|
|
|
Cost of |
|
|
Marketing & |
|
|
|
|
|
|
Products |
|
|
Administrative |
|
|
Total |
|
|
Products |
|
|
Administrative |
|
|
Total |
|
Options Granted in Fiscal Year |
|
Sold |
|
|
Expenses |
|
|
Expense |
|
|
Sold |
|
|
Expenses |
|
|
Expense |
|
2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9 |
|
|
$ |
22 |
|
|
$ |
31 |
|
2009 |
|
|
13 |
|
|
|
38 |
|
|
|
51 |
|
|
|
15 |
|
|
|
44 |
|
|
|
59 |
|
2010 |
|
|
8 |
|
|
|
21 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock option compensation |
|
$ |
21 |
|
|
$ |
60 |
|
|
$ |
81 |
|
|
$ |
24 |
|
|
$ |
66 |
|
|
$ |
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 27, 2010, total unrecognized stock option compensation expense amounted to
$356,000, which will be recognized as the underlying stock options vest over a period of up to
two years. The amount of future stock option compensation expense could be affected by any
future stock option grants and by the separation from the Company of any individual who has
received stock options that are unvested as of such individuals separation date.
Non-vested Stock: During the quarter ended October 1, 2006, the Board granted 375,000
shares of non-vested stock to certain employees with a fair value of $3.15 per share, which was
the closing price of the Companys common stock on the date of the grant. These shares have
four-year cliff vesting, assuming continued service, except as set forth below. The Company
recognized $42,000 and $74,000 of compensation expense related to these non-vested stock grants
during the quarters ended June 27, 2010 and June 28, 2009, respectively, which was included in
marketing and administrative expenses in the accompanying consolidated statements of income. On
August 11, 2009, the Company amended the non-vested stock grant that had been awarded in 2006 to
E. Randall Chestnut, Chairman, Chief Executive Officer and President of the Company. Under the
terms of the amended non-vested stock grant, the vesting of 160,000 of the 320,000 shares
awarded to Mr. Chestnut was accelerated from August 25, 2010 to August 12, 2009. The
acceleration of the vesting of these shares resulted in the recognition of compensation expense
during the three-month period ended June 27, 2010 of $32,000 under that which would have been
recognized if the acceleration of the vesting had not occurred.
11
The Board granted 30,000 shares of non-vested stock to its non-employee directors during
each of the quarters ended September 27, 2009 and September 28, 2008 with a fair value of $3.02
and $3.87, respectively, which were the closing prices of the Companys common stock on the date
of each of the grants. These shares vest over a two-year period, assuming continued service,
except as set forth below. With respect to the non-vested stock granted in fiscal year 2010,
the Company recognized compensation expense of $25,000 during the three-months ended June 27,
2010, and with respect to the non-vested stock granted in fiscal year 2009, the Company
recognized compensation expense of $15,000 and $14,000 during the quarters ended June 27, 2010
and June 28, 2009, respectively, which was included in marketing and administrative expenses in
the accompanying consolidated statements of income.
On May 27, 2010, to induce Sidney Kirschner to resign from the Board, the Company amended
the portion of these stock grants that had been awarded to Mr. Kirschner. Under the terms of
Mr. Kirschners amended stock grants, the vesting of 2,500 of the 5,000 shares awarded in 2008
and all 5,000 of the shares awarded in 2009 was accelerated to May 27, 2010. The total fair
value of Mr. Kirschners shares that vested on May 27, 2010 amounted to $30,000. No other
shares of non-vested stock vested during either of the three-month periods ended June 27, 2010
or June 28, 2009. The acceleration of the vesting of these shares resulted in the recognition
of net additional compensation expense during the three-month period ended June 27, 2010 of
$14,000 over that which would have been recognized if the acceleration of the vesting had not
occurred.
The Board awarded 345,000 shares of non-vested stock to certain employees as of June 23,
2010 (the Grant Date) in a series of grants which will vest only if the closing price of the
Companys common stock is at or above certain target levels for any ten trading days out of any
period of 30 consecutive trading days (the Market Condition), assuming continued service
through the date the Market Condition is achieved.
As of July 29, 2010 (the Modification Date), the Company amended these non-vested stock
grants to require as a condition to vesting a five-year period of continuous service after the
Modification Date in addition to the achievement of the Market Condition. The amendment of
these non-vested stock grants will be accounted for as a modification. As such, the initial
aggregate Grant Date fair value and the incremental cost resulting from the modification, if
any, will be recognized as compensation expense over the vesting term of the modified awards.
The Company, with the assistance of an independent third party, has determined that the
aggregate Grant Date fair value of the original awards amounted to $1.2 million, and has further
determined that there is no incremental cost resulting from the modification. Therefore, the
aggregate Grant Date fair value of $1.2 million will be recognized as compensation expense over
a period beginning on the Grant Date and ending on the fifth anniversary of the Modification
Date.
As of June 27, 2010, total unrecognized compensation expense related to the Companys
non-vested stock grants amounted to $1.3 million, which will be recognized over the respective
vesting terms associated with each block of grants as indicated above. The amount of future
compensation expense related to the Companys non-vested stock grants could be affected by any
future non-vested stock grants and by the separation from the Company of any individual who has
received non-vested stock grants that remain non-vested as of such individuals separation date.
Note 6 Inventories
Major classes of inventory were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 27, 2010 |
|
|
March 28, 2010 |
|
Raw Materials |
|
$ |
52 |
|
|
$ |
66 |
|
Finished Goods |
|
|
16,665 |
|
|
|
10,387 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
16,717 |
|
|
$ |
10,453 |
|
|
|
|
|
|
|
|
12
Note 7 Financing Arrangements
Factoring Agreement: The Company assigns the majority of its trade accounts receivable
to CIT under factoring agreements. Under the terms of the factoring agreements, which expire
in July 2013, CIT remits payments to the Company on the average due date of each group of
invoices assigned. If a customer fails to pay CIT on the due date, then the Company is
charged interest at prime less 1.0%, which was 2.25% at June 27, 2010, until payment is
received. The Company incurred interest expense of $17,000 and $16,000 for the three-month
periods ended June 27, 2010 and June 28, 2009, respectively, as a result of the failure of the
Companys customers to pay CIT by the due date. CIT bears credit losses with respect to
assigned accounts receivable from approved customers that are within approved credit limits.
The Company bears the responsibility for adjustments from customers related to returns,
allowances, claims and discounts. CIT may at any time terminate or limit its approval of
shipments to a particular customer. If such a termination were to occur, the Company must
either assume the credit risk for shipments after the date of such termination or cease
shipments to such customer. Factoring fees, which are included in marketing and
administrative expenses in the consolidated statements of income, were $134,000 and $129,000
for the three-month periods ended June 27, 2010 and June 28, 2009, respectively. There were
no advances from the factor at either June 27, 2010 or June 28, 2009.
Notes Payable and Other Credit Facilities: At June 27, 2010 and March 28, 2010, long-term
debt of the Company consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 27, 2010 |
|
|
March 28, 2010 |
|
Revolving line of credit |
|
$ |
|
|
|
$ |
1,422 |
|
Non-interest bearing notes |
|
|
4,000 |
|
|
|
4,000 |
|
Original issue discount |
|
|
(163 |
) |
|
|
(232 |
) |
|
|
|
|
|
|
|
|
|
|
3,837 |
|
|
|
5,190 |
|
Less current maturities |
|
|
1,988 |
|
|
|
1,952 |
|
|
|
|
|
|
|
|
|
|
$ |
1,849 |
|
|
$ |
3,238 |
|
|
|
|
|
|
|
|
The Companys credit facilities at June 27, 2010 consisted of the following:
Revolving Line of Credit under a financing agreement with CIT of up to $26.0 million,
which includes a $1.5 million sub-limit for letters of credit, with an interest rate of prime
minus 1.00% (2.25% at June 27, 2010) for base rate borrowings or LIBOR plus 2.25% (2.60% at
June 27, 2010), maturing on July 11, 2013 and secured by a first lien on all assets of the
Company. Also under the financing agreement, a monthly fee is assessed based on 0.15% of the
average unused portion of the $26.0 million revolving line of credit, less any outstanding
letters of credit. This unused line fee amounted to $10,000 and $3,000 for the quarters
ended June 27, 2010 and June 28, 2009, respectively. At June 27, 2010, there was no balance
due on the revolving line of credit, there was a $500,000 letter of credit outstanding and
the Company had $20.9 million available under the revolving line of credit based on its
eligible accounts receivable and inventory balances.
The financing agreement for the revolving line of credit contains usual and customary
covenants for agreements of that type, including limitations on other indebtedness, liens,
transfers of assets, investments and acquisitions, merger or consolidation transactions,
dividends, transactions with affiliates and amendments to the organizational documents for
the Company and its subsidiaries. The Company was in compliance with these covenants as of
June 27, 2010.
Subordinated Notes of $4.0 million. The notes do not bear interest and are due in two
installments of $2.0 million each, the first of which is payable on July 11, 2010, and the
second of which is payable on July 11, 2011. The original issue discount of $163,000 on this
non-interest bearing obligation at a market interest rate of 7.25% is being amortized over
the life of the notes.
Minimum annual maturities as of June 27, 2010 are as follows (in thousands):
|
|
|
|
|
Fiscal |
|
|
|
Year |
|
Sub Notes |
|
2011 |
|
$ |
2,000 |
|
2012 |
|
|
2,000 |
|
2013 |
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
Total |
|
$ |
4,000 |
|
|
|
|
|
13
Note 8 Goodwill, Customer Relationships and Other Intangible Assets
Goodwill: The Company reported goodwill of $864,000 at March 28, 2010. The Company
tests the fair value of the goodwill of its reporting units annually as of the first day of
the Companys fiscal year. An additional interim impairment test is performed during the
year whenever an event or change in circumstances occurs that suggests that the fair value
of the goodwill of either of the reporting units of the Company has more likely than not
fallen below its carrying value. The annual or interim impairment test is performed in a
two-step approach. The first step is the estimation of the fair value of each reporting
unit to ensure that its fair value exceeds its carrying value. If step one indicates that a
potential impairment exists, then the second step is performed to measure the amount of an
impairment charge, if any. In the second step, these estimated fair values are used as the
hypothetical purchase price for the reporting units, and an allocation of such hypothetical
purchase price is made to the identifiable tangible and intangible assets and assigned
liabilities of the reporting units. The impairment charge is calculated as the amount, if
any, by which the carrying value of the goodwill exceeds the implied amount of goodwill that
results from this hypothetical purchase price allocation.
The Company has performed the annual impairment test of the fair value of the goodwill
of its reporting units as of March 29, 2010, and has concluded that the fair value of the
goodwill of the Companys reporting units exceeded their carrying values as of that date.
During the three-month period ended June 27, 2010, the Company recorded goodwill of $290,000
in connection with the Bibsters® Acquisition as the excess of the consideration
paid over the fair value of the identifiable tangible and intangible assets acquired, the
entirety of which is expected to be amortizable for tax purposes.
Customer Relationships and Other Intangible Assets: Other intangible assets at June
27, 2010 consisted primarily of the capitalized costs of recent acquisitions, other than
tangible assets, goodwill and assumed liabilities. The carrying amount and accumulated
amortization of the Companys other intangible assets as of June 27, 2010, their estimated
useful life and amortization expense for each of the three-month periods ended June 27, 2010
and June 28, 2009 are as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Amortization Expense |
|
|
|
Carrying |
|
|
Useful |
|
|
Accumulated |
|
|
Three-month periods ended |
|
|
|
Amount |
|
|
Life |
|
|
Amortization |
|
|
June 27, 2010 |
|
|
June 28, 2009 |
|
Kimberly Grant Acquisition on December 29, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename |
|
$ |
466 |
|
|
15 years |
|
$ |
109 |
|
|
$ |
8 |
|
|
$ |
8 |
|
Existing designs |
|
|
36 |
|
|
1 year |
|
|
36 |
|
|
|
|
|
|
|
|
|
Non-compete covenant |
|
|
98 |
|
|
15 years |
|
|
23 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Kimberly Grant Acquisition |
|
|
600 |
|
|
|
14 years* |
|
|
168 |
|
|
|
10 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Springs Baby Products Acquisition on November 5, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses & existing designs |
|
|
1,655 |
|
|
2 years |
|
|
1,655 |
|
|
|
|
|
|
|
207 |
|
Licenses & future designs |
|
|
1,847 |
|
|
4 years |
|
|
1,231 |
|
|
|
115 |
|
|
|
115 |
|
Non-compete covenant |
|
|
115 |
|
|
4 years |
|
|
76 |
|
|
|
7 |
|
|
|
7 |
|
Customer relationships |
|
|
3,781 |
|
|
10 years |
|
|
1,009 |
|
|
|
95 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Springs Baby Acquisition |
|
|
7,398 |
|
|
|
7 years* |
|
|
3,971 |
|
|
|
217 |
|
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neat Solutions Acquisition on July 2, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
892 |
|
|
15 years |
|
|
60 |
|
|
|
15 |
|
|
|
|
|
Designs |
|
|
33 |
|
|
4 years |
|
|
8 |
|
|
|
2 |
|
|
|
|
|
Non-compete covenant |
|
|
241 |
|
|
5 years |
|
|
48 |
|
|
|
12 |
|
|
|
|
|
Customer relationships |
|
|
1,302 |
|
|
16 years |
|
|
81 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Neat Solutions Acquisition |
|
|
2,468 |
|
|
|
14 years* |
|
|
197 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bibsters® Acquistion on May 27, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
629 |
|
|
15 years |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
Patents |
|
|
553 |
|
|
10 years |
|
|
5 |
|
|
|
5 |
|
|
|
|
|
Customer relationships |
|
|
328 |
|
|
14 years |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Bibsters® Acquistion |
|
|
1,510 |
|
|
|
13 years* |
|
|
11 |
|
|
|
11 |
|
|
|
|
|
Internally developed intangible assets |
|
|
121 |
|
|
10 years |
|
|
28 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets |
|
$ |
12,097 |
|
|
|
|
|
|
$ |
4,375 |
|
|
$ |
289 |
|
|
$ |
434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Weighted-Average
14
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company operates indirectly through its subsidiaries, Crown Crafts Infant Products,
Inc. and Hamco, in the infant and toddler products segment within the consumer products
industry. The infant and toddler products segment consists of infant and toddler bedding,
bibs, disposable products, soft goods and accessories. Sales of the Companys products are
generally made directly to retailers, which are primarily mass merchants, mid-tier
retailers, juvenile specialty stores, value channel stores, grocery and drug stores,
restaurants, internet accounts, wholesale clubs and catalog retailers. The Companys
products are manufactured primarily in Asia and marketed under a variety of Company-owned
trademarks, under trademarks licensed from others and as private label goods.
The Companys products are marketed through a national sales force consisting of
salaried sales executives and employees located in Compton, California; Gonzales, Louisiana;
and Rogers, Arkansas. Products are also marketed by independent commissioned sales
representatives located throughout the United States and Canada. Sales outside the United
States and Canada are made primarily through distributors.
The Company maintains a foreign representative office in Shanghai, China for the
coordination of production, purchases and shipments, seeking out new vendors and inspections
for social compliance and quality.
The infant and toddler consumer products industry is highly competitive. The Company
competes with a variety of distributors and manufacturers (both branded and private label),
including large infant and juvenile product companies and specialty infant and juvenile
product manufacturers, on the basis of quality, design, price, brand name recognition,
service and packaging. The Companys ability to compete depends principally on styling,
price, service to the retailer and continued high regard for the Companys products and
trade names.
The following discussion is a summary of certain factors that management considers
important in reviewing the Companys results of operations, financial position, liquidity
and capital resources. This discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this report.
RESULTS OF OPERATIONS
The following table contains results of operations for the three-month periods ended
June 27, 2010 and June 28, 2009 and the dollar and percentage changes for those periods (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
|
|
|
|
|
|
June 27, 2010 |
|
|
June 28, 2009 |
|
|
Change |
|
|
Change |
|
Net sales by category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedding, blankets and accessories |
|
$ |
12,547 |
|
|
$ |
14,573 |
|
|
$ |
(2,026 |
) |
|
|
-13.9 |
% |
Bibs, bath and disposable products |
|
|
4,620 |
|
|
|
3,162 |
|
|
|
1,458 |
|
|
|
46.1 |
% |
Total net sales |
|
|
17,167 |
|
|
|
17,735 |
|
|
|
(568 |
) |
|
|
-3.2 |
% |
Cost of products sold |
|
|
12,876 |
|
|
|
13,760 |
|
|
|
(884 |
) |
|
|
-6.4 |
% |
Gross profit |
|
|
4,291 |
|
|
|
3,975 |
|
|
|
316 |
|
|
|
7.9 |
% |
% of net sales |
|
|
25.0 |
% |
|
|
22.4 |
% |
|
|
|
|
|
|
|
|
Marketing and administrative expenses |
|
|
3,015 |
|
|
|
2,886 |
|
|
|
129 |
|
|
|
4.5 |
% |
% of net sales |
|
|
17.6 |
% |
|
|
16.3 |
% |
|
|
|
|
|
|
|
|
Interest expense |
|
|
97 |
|
|
|
196 |
|
|
|
(99 |
) |
|
|
-50.5 |
% |
Other income |
|
|
7 |
|
|
|
6 |
|
|
|
1 |
|
|
|
16.7 |
% |
Income tax expense |
|
|
455 |
|
|
|
340 |
|
|
|
115 |
|
|
|
33.8 |
% |
Income from continuing operations after taxes |
|
|
731 |
|
|
|
559 |
|
|
|
172 |
|
|
|
30.8 |
% |
Discontinued operations net of taxes |
|
|
(5 |
) |
|
|
(21 |
) |
|
|
16 |
|
|
|
-76.2 |
% |
Net income |
|
|
726 |
|
|
|
538 |
|
|
|
188 |
|
|
|
34.9 |
% |
% of net sales |
|
|
4.2 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
15
Net Sales: Sales of bedding, blankets and accessories decreased for the
three-month period of fiscal year 2011 as compared to the same period in fiscal year 2010.
Sales decreased by $4.9 million due to discontinued programs and lower replenishment orders.
These decreases were offset by $2.9 million in shipments of new bedding and blanket
programs.
Sales of bib, bath and disposable products increased for the three-month period of
fiscal year 2011 as compared to the same period in fiscal year 2010. Sales increased by
$1.4 million due in the aggregate due to the Neat Solutions Acquisition and the
Bibsters® Acquisition. Sales also increased by $1.0 million due to sales of new
designs and promotions. Offsetting these increases were decreases of $959,000 related to
programs that were discontinued and lower replenishment orders.
Gross Profit: Gross profit increased in amount and as a percentage of net sales for the
quarterly period of fiscal year 2011 as compared to the same period of fiscal year 2010.
The increase in gross profit is due to decreased amortization costs of $207,000 associated
with the Springs Global acquisition and a shift in the product mix toward more sales of
disposable products, which have generally higher margins.
Marketing and Administrative Expenses: Marketing and administrative expenses for the
three-month period of fiscal year 2011 increased as compared to the same period of fiscal
year 2010. In the current year, the Company incurred costs of $81,000 associated with the
Companys proxy contest that were not incurred in the prior year. The Company also incurred
increased advertising costs of $48,000 in the current year and incurred amortization costs
of $48,000 in the current year that were associated with the Neat Solutions Acquisition and
the Bibsters® Acquisition. These increases were offset by decreased accounting
costs of $56,000 in the current year as compared to the prior year.
Interest Expense: The decrease in interest expense for the three-month period of fiscal
year 2011 as compared to the same period in fiscal year 2010 is due to lower balances on the
Companys revolving line of credit and term loan.
Management does not believe that inflation has had a material effect on the Companys
operations. The Company has traditionally attempted to increase its prices to offset
inflation. There is no assurance, however, that the Company will be able to adequately
increase its prices in response to inflation.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4.1 million for the three-month period
ended June 27, 2010, compared to $4.7 million for the three-month period ended June 28,
2009. The decrease in cash provided by operating activities in the current year was due to
a higher increase in inventory balances, a lower reduction of accounts receivable balances
and changes in accrued liability balances, offset by a higher increase in accounts payable
balances. Net cash used in investing activities was $1.6 million in the current year
compared to $569,000 in the prior year. Cash used in investing activities in the current
year amounted to $2.1 million associated with the Bibsters® Acquisition, offset
by proceeds of $505,000 from the maturity of a certificate of deposit purchased in the prior
year in connection with the issuance on behalf of the Company of a standby letter of credit
to guarantee the payment of certain of the Companys royalty obligations. Net cash used in
financing activities in the current year was $1.6 million compared to $4.5 million in the
prior year. The decrease in net cash used in financing activities in the current year was
primarily due to lower net repayments on the Companys revolving line of credit.
Total debt outstanding under the Companys credit facilities before the reduction for
the original issue discount on the non-interest bearing notes decreased from $21.2 million
at June 28, 2009 to $4.0 million at June 27, 2010. The decrease is due primarily to net
repayments on the revolving line of credit, the largest portion of which came from a
reduction of the Companys cash reserves in December 2009, which were $14.9 million at June
28, 2009. The Company had built up its cash reserves in the prior year by drawing upon its
revolving line of credit in order to preserve the Companys ability to meet its working
capital needs in the event that the Companys primary lender should suffer an adverse
liquidity event that would jeopardize the Companys ability to draw upon its revolving line
of credit. The Company on June 27, 2010 had $918,000 in cash, there was a $500,000 letter
of credit outstanding and the Company had $20.9 million available under the revolving line
of credit based on its eligible accounts receivable and inventory balances.
16
The Companys 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 Companys 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 its cash balance, its cash flow from operations, and
its availability from the revolving line of credit will be adequate to meet its liquidity
needs.
To reduce its exposure to credit losses and to enhance the predictability of its cash
flow, the Company assigns the majority of its trade accounts receivable to CIT pursuant to
factoring agreements. CIT approves customer accounts and credit lines and collects the
Companys accounts receivable balances. Under the terms of the factoring agreements, which
expire in July 2013, CIT remits payments to the Company on the average due date of each
group of invoices assigned. If a customer fails to pay CIT on the due date, the Company is
charged interest on the unpaid balance at prime less 1.0%, which was 2.25% at June 27, 2010,
until payment is received. The Company incurred interest expense of $17,000 and $16,000 for
the three-month periods ended June 27, 2010 and June 28, 2009, respectively, as a result of
the failure of the Companys customers to pay CIT by the due date. CIT bears credit losses
with respect to assigned accounts receivable from approved customers that are within
approved credit limits. The Company bears the responsibility for adjustments related to
returns, allowances, claims and discounts. CIT may at any time terminate or limit its
approval of shipments to a particular customer. If such a termination were to occur, the
Company must either assume the credit risk for shipments after the date of such termination
or cease shipments to such customer.
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of the Securities
Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation
Reform Act of 1995. Such statements are based upon managements 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,
including changes in interest rates, in the overall level of consumer spending and in the
price of oil, cotton and other raw materials used in the Companys products, changing
competition, changes in the retail environment, the level and pricing of future orders from
the Companys customers, the Companys dependence upon third-party suppliers, including some
located in foreign countries with unstable political situations, the Companys ability to
successfully implement new information technologies, customer acceptance of both new designs
and newly-introduced product lines, actions of competitors that may impact the Companys
business, disruptions to transportation systems or shipping lanes used by the Company or its
suppliers, and the Companys dependence upon licenses from third parties. Reference is also
made to the Companys periodic filings with the SEC for additional factors that may impact
the Companys results of operations and financial condition. The Company does not undertake
to update the forward-looking statements contained herein to conform to actual results or
changes in the Companys explanations, whether as a result of new information, future events
or otherwise.
ITEM 4. CONTROLS AND PROCEDURES
The Companys Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Companys 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 Rules 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
Companys disclosure controls and procedures are effective.
During the three-month period ended June 27, 2010, there was not any change in the
Companys internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has
materially affected, or is reasonably likely to materially affect, the Companys control
over financial reporting.
17
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 Companys financial
condition, results of operations or cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A. of Part 1
in the Companys annual report on Form 10-K for the year ended March 28, 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Purchases of Equity Securities.
The table below sets forth information regarding the Companys repurchase of its
outstanding common stock during the three-month period ended June 27, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Value of Shares That |
|
|
|
Total Number |
|
|
|
|
|
|
Part of Publicly |
|
|
May Yet be Purchased |
|
|
|
of Shares |
|
|
Average Price |
|
|
Announced Plans or |
|
|
Under the Plans or |
|
Period |
|
Purchased (1) |
|
|
Paid Per Share |
|
|
Programs |
|
|
Programs |
|
March 29, 2010 through May 2, 2010 |
|
|
4,453 |
|
|
$ |
3.23 |
|
|
|
0 |
|
|
$ |
0 |
|
May 3, 2010 through May 30, 2010 |
|
|
35,308 |
|
|
$ |
4.02 |
|
|
|
0 |
|
|
$ |
0 |
|
May 31, 2010 through June 27, 2010 |
|
|
2,796 |
|
|
$ |
3.90 |
|
|
|
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
42,557 |
|
|
$ |
3.93 |
|
|
|
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The shares purchased from March 29, 2010 through June 27, 2010 consist of
shares of common stock surrendered to the Company in payment of the exercise price and
income tax withholding obligations relating to the exercise of stock options. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
18
ITEM 6. EXHIBITS
Exhibits required to be filed by Item 601 of Regulation S-K are included as Exhibits to
this report as follows:
|
|
|
|
|
Exhibit |
|
|
No. |
|
Exhibit |
|
|
|
|
|
|
2.1 |
|
|
Purchase Agreement for Bibsters Intellectual Property dated as of May 27, 2010 by
and between Hamco., Inc. and The Procter & Gamble Company. (1) |
|
|
|
|
|
|
4.1 |
|
|
Amendment No. 4 to Amended and Restated Rights Agreement dated as of July 27, 2010
between the Company and Computershare Trust Company, N.A. (2) |
|
|
|
|
|
|
10.1 |
|
|
Seventh Amendment to Financing Agreement dated as of May 27, 2010 by and among
Crown Crafts, Inc., Churchill Weavers, Inc., Hamco, Inc., Crown Crafts Infant
Products, Inc. and The CIT Group/Commercial Services, Inc. (1) |
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Executive Officer (3) |
|
|
|
|
|
|
31.2 |
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Financial Officer (3) |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certification by the Companys Chief Executive Officer (3) |
|
|
|
|
|
|
32.2 |
|
|
Section 1350 Certification by the Companys Chief Financial Officer (3) |
|
|
|
(1) |
|
Incorporated herein by reference to Registrants Current Report on Form 8-K dated
May 27, 2010. |
|
(2) |
|
Incorporated herein by reference to Registrants Current Report on Form 8-K dated
July 27, 2010. |
|
(3) |
|
Filed herewith. |
SIGNATURE
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: August 11, 2010 |
/s/ Olivia W. Elliott
|
|
|
OLIVIA W. ELLIOTT |
|
|
Chief Financial Officer
(Principal Financial
Officer and
Principal
Accounting Officer) |
|
19
Index to Exhibits
|
|
|
|
|
Exhibit |
|
|
No. |
|
Exhibit |
|
|
|
|
|
|
2.1 |
|
|
Purchase Agreement for Bibsters Intellectual Property dated as of May 27, 2010 by
and between Hamco., Inc. and The Procter & Gamble Company. (1) |
|
|
|
|
|
|
4.1 |
|
|
Amendment No. 4 to Amended and Restated Rights Agreement dated as of July 27, 2010
between the Company and Computershare Trust Company, N.A. (2) |
|
|
|
|
|
|
10.1 |
|
|
Seventh Amendment to Financing Agreement dated as of May 27, 2010 by and among
Crown Crafts, Inc., Churchill Weavers, Inc., Hamco, Inc., Crown Crafts Infant
Products, Inc. and The CIT Group/Commercial Services, Inc. (1) |
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Executive Officer (3) |
|
|
|
|
|
|
31.2 |
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Financial Officer (3) |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certification by the Companys Chief Executive Officer (3) |
|
|
|
|
|
|
32.2 |
|
|
Section 1350 Certification by the Companys Chief Financial Officer (3) |
|
|
|
(1) |
|
Incorporated herein by reference to Registrants Current Report on Form 8-K
dated May 27, 2010. |
|
(2) |
|
Incorporated herein by reference to Registrants Current Report on Form 8-K
dated July 27, 2010. |
|
(3) |
|
Filed herewith. |
20