annual report
Crown Crafts Incorporated
916 South Burnside Avenue
Gonzales, Louisiana 70737
(800)433-9560 (225)647-9100
www.crowncrafts.com
TO O U R F E LLOW S TO CKH O LD E RS
COR POR ATE I N F OR M AT I O N
Throughout the past year, Crown Crafts was tested by tough market conditions and
major disruptions in the retail landscape. We are extremely proud to report that the
Company has not only persevered through these conditions, but we have performed
exceptionally well. Our solid fi nancial results refl ect the impact of many initiatives we
put in place in fi scal year 2019 and point toward a bright future for the business.
At start of the 2019 fi scal year, Crown Crafts faced
and communicates the value of our brands to
challenges posed by the bankruptcy and subsequent
investors, consumers and retail partners. Our new
liquidation of one of our largest customers. We can
mobile-optimized site also offers quick access to
confi dently say that we navigated these rough waters
important investor information, such as fi nancial and
by sticking to the core values and guiding theme of
stock information, recent press releases, investor
our Company: “doing the right thing.” Over the years,
presentations and SEC fi lings. We encourage visitors
this is what our investors, retail customers, consumers
to explore the new website at www.crowncrafts.com.
and employees have come to expect from Crown
Crafts. We have made it a priority to remain a trusted
partner to all of our stakeholders, and that cannot be
achieved without consistently doing the right thing.
This includes responsibly and conservatively operating
our business, providing safe, quality products, and
serving our customers, vendors and employees well.
Finally, it’s worth mentioning that this year we also
celebrated 62 years of being in business. This is a
signifi cant milestone that not many in our industry
have been able to achieve. The longevity of our
Company and our workforce, whose average time
with Crown Crafts is almost 14 years, is one of our
proudest achievements. This consistency has allowed
I’m exceptionally proud of our staff members, who
us to create value and continue to serve our investors
worked diligently and nimbly to adapt to a changing
well over the years.
retail environment. By keeping innovation at the core
of what we do, our team was able to introduce new
products that are desired by millennial parents, and
grow new channels of distribution – international,
online and direct to the consumer.
Our newest acquisitions, Carousel Designs and
Sassy, offi cially marked their fi rst full year as a part of
the Crown Crafts family. These brands added new,
unique product lines and a diverse customer base
to our business. We are pleased with the expanded
Thank you to our customers, employees and
stockholders for your support. We could not be
prouder of the enduring legacy of Crown Crafts and
the many exciting opportunities for fi scal year 2020
and beyond.
Sincerely,
growth opportunities we are seeing as a result of the
E. Randall Chestnut
acquisitions and the exciting new mix of products
Chairman, President and Chief Executive Offi cer
we’ve added to the Crown Crafts portfolio.
Another highlight this year was an update to
our brand identity, refl ecting our relevance and
longevity in this shifting industry. We introduced a
new Crown Crafts logo and a redesigned website
that better represents the breadth of our portfolio
Board of Directors
Independent Registered
Stockholder Information
Public Accountant
KPMG LLP
One American Place
301 Main Street
Suite 2150
Baton Rouge, Louisiana 70801
Annual Meeting
The Annual Meeting of
Stockholders will take place
on Tuesday, August 13, 2019, at
10 a.m. CDT at the Company’s
Corporate Headquarters, 916
South Burnside Avenue, Gonzales,
Louisiana.
Stock Listing
The Company’s common stock
is listed on The NASDAQ Capital
Market under the trading symbol
“CRWS.”
& Form 10-K
A copy of the Company’s Annual
Report on Form 10-K as fi led with
the Securities and Exchange
Commission may be obtained
without charge by contacting:
Crown Crafts, Inc.
Investor Relations Department
P.O. Box 1028
Gonzales, Louisiana 70707-1028
Phone: (225) 647-9100
e-mail: investor@crowncrafts.com
Investor Relations Counsel
Halliburton Investor Relations
2140 Lake Park Blvd.
Suite 112
Richardson, Texas 75080
Phone: (972) 458-8000
www.halliburtonir.com
Twitter: HIR_Group
Transfer Agent and Registrar
Broadridge Corporate Issuer
Solutions
1155 Long Island Avenue
Edgewood, New York 11717
Phone: (877) 830-4936
Crown Crafts on the Internet
Quarterly and annual fi nancial
information and company
information may
be accessed at
www.crowncrafts.com.
E. Randall Chestnut
Chairman of the Board, President
and Chief Executive Offi cer
Crown Crafts, Inc.
Zenon S. Nie
Lead Independent Director
Chairman of the Board and
Chief Executive Offi cer
The C.E.O. Advisory Board
Sidney Kirschner
Executive Vice President
Piedmont Healthcare
Chief Philanthropy Offi cer
Piedmont Healthcare Foundation
Donald Ratajczak
Consulting Economist - Retired
Patricia Stensrud
Managing Director
Avalon Net Worth
Founder and Managing Partner
Hudson River Partners LLC
Executive Offi cers
E. Randall Chestnut
President and
Chief Executive Offi cer
Olivia W. Elliott
Vice President and
Chief Financial Offi cer
Donna E. Sheridan
President and
Chief Executive Offi cer
NoJo Baby & Kids, Inc.
Cover Design by Krista Clement, Sassy Baby, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
Form 10-K
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-7604
Crown Crafts, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
58-0678148
(I.R.S. Employer Identification No.)
916 S. Burnside Ave.
Gonzales, Louisiana
(Address of principal executive offices)
70737
(Zip Code)
Title of class
Common Stock, $0.01 par value
Registrant's Telephone Number, including area code: (225) 647-9100
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
CRWS
Securities registered pursuant to Section 12(g) of the Act: None
Name of exchange on which registered
Nasdaq Capital Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act. Yes ☐ No ☑
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
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 such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-Accelerated filer
☐
☑
Accelerated filer
Smaller Reporting Company
Emerging Growth Company
☐
☑
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of September 28, 2018 (the last
business day of the registrant’s most recently completed second fiscal quarter) was $43.6 million.
As of May 10, 2019, 10,119,355 shares of the registrant’s common stock were outstanding.
Documents Incorporated by Reference:
Portions of the registrant’s Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated into Part III hereof by
reference.
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TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business.....................................................................................................................................................................................
Risk Factors. .............................................................................................................................................................................
Unresolved Staff Comments. .............................................................................................................................................
Properties. ................................................................................................................................................................................
Legal Proceedings. ................................................................................................................................................................
Mine Safety Disclosures. ......................................................................................................................................................
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities. .............................................................................................................................................................................
Selected Financial Data. ......................................................................................................................................................
Item 6.
Management’s Discussion and Analysis of Financial Condition and Results of Operations. .......................
Item 7.
Financial Statements and Supplementary Data. .........................................................................................................
Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. ...................
Item 9.
Item 9A.
Controls and Procedures. ....................................................................................................................................................
Item 9B. Other Information..................................................................................................................................................................
PART III
Item 10.
Item 11.
Item 12.
Directors, Executive Officers and Corporate Governance. .......................................................................................
Executive Compensation. ...................................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 13.
Item 14.
Matters. .................................................................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence. ...............................................
Principal Accountant Fees and Services. .......................................................................................................................
Page
1
4
9
10
10
10
10
11
12
17
17
17
17
18
18
18
18
18
Item 15.
Exhibits and Financial Statement Schedules. ...............................................................................................................
19
PART IV
i
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Cautionary Notice Regarding Forward-Looking Statements
Certain of the statements made herein under the caption “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and elsewhere, including information incorporated herein by reference to other
documents, are “forward-looking statements” within the meaning of, and subject to the protections of, Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans,
objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance and involve
known and unknown risks, uncertainties and other factors, many of which may be beyond our control and which may
cause the actual results, performance or achievements of Crown Crafts, Inc. to be materially different from future results,
performance or achievements expressed or implied by such forward-looking statements.
All statements other than statements of historical fact are statements that could be forward-looking statements.
One can identify these forward-looking statements through our use of words such as “may,” “anticipate,” “assume,”
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,”
“predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future. These forward-
looking statements may not be realized due to a variety of factors, including, without limitation, those described in Part
I, Item 1A. “Risk Factors,” and elsewhere in this report and those described from time to time in our future reports filed
with the Securities and Exchange Commission (the “SEC”) under the Exchange Act.
All written or oral forward-looking statements that are made by or are attributable to us are expressly qualified
in their entirety by this cautionary notice. Our forward-looking statements apply only as of the date of this report or the
respective date of the document from which they are incorporated herein by reference. We have no obligation and do
not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the
respective dates on which such statements otherwise are made, whether as a result of new information, future events or
otherwise.
ITEM 1. Business
Description of Business
PART I
Crown Crafts, Inc. (the “Company”) was originally formed as a Georgia corporation in 1957. The Company was
reincorporated as a Delaware corporation in 2003. The Company’s executive offices are located at 916 South Burnside
is
Avenue, Gonzales, Louisiana 70737,
www.crowncrafts.com.
is (225) 647-9100 and
its telephone number
internet address
its
The Company operates indirectly through its wholly-owned subsidiaries, Sassy Baby, Inc. (formerly known as
Hamco, Inc.) (“Sassy Baby”); NoJo Baby & Kids, Inc. (formerly known as Crown Crafts Infant Products, Inc.) (“NoJo”); and
Carousel Designs, LLC (“Carousel”), in the infant, toddler and juvenile products segment within the consumer products
industry. The infant, toddler and juvenile products segment consists of infant and toddler bedding and blankets, bibs,
soft bath products, disposable products, developmental toys and accessories. Sales of the Company’s 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, wholesale clubs and internet-based retailers, as well as directly to
consumers through www.babybedding.com. The Company’s products are marketed under a variety of Company-owned
trademarks, under trademarks licensed from others and as private label goods.
The Company's fiscal year ends on the Sunday nearest to or on March 31. References herein to “fiscal year 2019”
or “2019” represent the 52-week period ended March 31, 2019 and “fiscal year 2018” or “2018” represent the 52-week
period ended April 1, 2018.
The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available
free of charge on its website at www.crowncrafts.com as soon as reasonably practicable after such material has been
electronically filed with the SEC. These reports are also available without charge on the SEC’s website at www.sec.gov.
1
Competition
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 Company’s ability to compete depends principally on styling, price, service to
the retailer and continued high regard for the Company’s products and trade names.
Trademarks, Copyrights and Patents
The Company considers its intellectual property to be of material importance to its business. Sales of products
marketed under the Company’s trademarks, including NoJo®, Neat Solutions®, Carousel Designs® and Sassy®, accounted
for 38% and 30% of the Company’s total gross sales during fiscal years 2019 and 2018, respectively. Protection for these
trademarks is obtained through domestic and foreign registrations. The Company also markets designs which are
subject to copyrights and design patents owned by the Company.
International Sales
Sales to customers in countries other than the U.S. represented 4% and 3% of the Company’s total gross sales
during fiscal years 2019 and 2018, respectively, which included 0.1% of sales to the customers set forth below that
represented at least 10% of the Company’s gross sales during fiscal year 2019. International sales are based upon the
location that predominately represents what the Company believes to be the final destination of the products delivered
to the Company’s customers.
Products
The Company's primary focus is on infant, toddler and juvenile products, including the following:
room décor
reusable and disposable bibs
●
infant and toddler bedding
● blankets and swaddle blankets
● nursery and toddler accessories
●
●
● burp cloths
● hooded bath towels and washcloths
●
● disposable toilet seat covers and changing mats
● developmental toys
●
● other infant, toddler and juvenile soft goods
feeding and care goods
reusable and disposable placemats and floor mats
Government Regulation and Environmental Control
The Company is subject to various federal, state and local environmental laws and regulations, which regulate,
among other things, product safety and the discharge, storage, handling and disposal of a variety of substances and
wastes, and to laws and regulations relating to employee safety and health, principally the Occupational Safety and
Health Administration Act and regulations thereunder. The Company believes that it currently complies in all material
respects with applicable environmental, health and safety laws and regulations and that future compliance with such
existing laws or regulations will not have a material adverse effect on its capital expenditures, earnings or competitive
position. However, there is no assurance that such requirements will not become more stringent in the future or that the
Company will not have to incur significant costs to comply with such requirements.
Sales and Marketing
The Company’s products are marketed through a national sales force consisting of salaried sales executives and
employees located in Compton, California; Gonzales, Louisiana; Grand Rapids, Michigan; and Bentonville, Arkansas.
Products are also marketed by independent commissioned sales representatives located throughout the U.S.
2
Substantially all products are sold to retailers for resale to consumers. The Company's subsidiaries introduce new
products throughout the year and participate at the Kind + Jugend international trade fair for premium baby and toddler
products in Cologne, Germany.
Product Sourcing
Foreign and domestic contract manufacturers produce most of the Company’s products, with the largest
concentration being in China. The Company makes sourcing decisions on the basis of quality, timeliness of delivery and
price, including the impact of ocean freight and duties. Although the Company maintains relationships with a limited
number of suppliers, the Company believes that its products may be readily manufactured by several alternative sources
in quantities sufficient to meet the Company's requirements. The Company’s management and quality assurance
personnel visit the third-party facilities regularly to monitor and audit product quality and to ensure compliance with
labor requirements and social and environmental standards. In addition, the Company closely monitors the currency
exchange rate. The impact of future fluctuations in the exchange rate or changes in safeguards cannot be predicted with
certainty. The Company also produces some of its products domestically at a Company facility located in Douglasville,
Georgia.
The Company maintains a foreign representative office located in Shanghai, China, which is responsible for the
coordination of production, purchases and shipments, seeking out new vendors and overseeing inspections for social
compliance and quality.
The Company’s products are warehoused and distributed from leased facilities located in Compton, California
and Douglasville, Georgia.
Product Design and Styling
The Company believes that its creative team is one of its key strengths. The Company’s product designs are
primarily created internally and are supplemented by numerous additional sources, including independent artists,
decorative fabric manufacturers and apparel designers. Ideas for product design creations are drawn from various
sources and are reviewed and modified by the design staff to ensure consistency within the Company’s existing product
offerings and the themes and images associated with such existing products. In order to respond effectively to changing
consumer preferences, the Company’s designers and stylists attempt to stay abreast of emerging lifestyle trends in color,
fashion and design. When designing products under the Company’s various licensed brands, the Company’s designers
coordinate their efforts with the licensors’ design teams to provide for a more fluid design approval process and to
effectively incorporate the image of the licensed brand into the product. The Company’s designs include traditional,
contemporary, textured and whimsical patterns across a broad spectrum of retail price points. Utilizing state of the art
computer technology, the Company continually develops new designs throughout the year for all of its product groups.
This continual development cycle affords the Company design flexibility, multiple opportunities to present new products
to customers and the ability to provide timely responses to customer demands and changing market trends. The
Company also creates designs for exclusive sale by certain of its customers under the Company’s brands, as well as the
customers’ private label brands.
Seasonality and Inventory Management
There are no significant variations in the seasonal demand for the Company’s products from year to year. Sales
are generally higher in periods when customers take initial shipments of new products, as these orders typically include
enough products for initial sets for each store and additional quantities for the customer’s distribution centers. The
timing of these initial shipments varies by customer and depends on when the customer finalizes store layouts for the
upcoming year and whether the customer has any mid-year introductions of products. Sales may also be higher or lower,
as the case may be, in periods when customers are restricting internal inventory levels. Consistent with the expected
introduction of specific product offerings, the Company carries necessary levels of inventory to meet the anticipated
delivery requirements of its customers. Customer returns of merchandise shipped are historically less than 1% of gross
sales.
3
Customers
The Company's customers consist principally of mass merchants, mid-tier retailers, juvenile specialty stores,
value channel stores, grocery and drug stores, restaurants, internet accounts and wholesale clubs. The Company does
not enter into long-term or other purchase agreements with its customers. The table below sets forth those customers
that represented at least 10% of the Company’s gross sales in fiscal years 2019 and 2018.
Walmart Inc. ....................................................................................................................
Amazon.com, Inc. ..........................................................................................................
Target Corporation .......................................................................................................
Toys "R" Us, Inc. ..............................................................................................................
Fiscal Year
2018
39%
11%
*
15%
2019
41%
16%
10%
*
* Amount represented less than 10% of the Company's gross sales for this fiscal year.
Employees
At May 10, 2019, the Company had 163 employees, none of whom is represented by a labor union or is otherwise
a party to a collective bargaining agreement. The Company attracts and maintains qualified personnel by paying
competitive salaries and benefits and offering opportunities for advancement. The Company considers its relationship
with its employees to be good.
Licensed Products
Certain products are manufactured and sold pursuant to licensing agreements for trademarks. Also, many of
the designs used by the Company are copyrighted by other parties, including trademark licensors, and are available to
the Company through copyright license agreements. The licensing agreements are generally for an initial term of one to
three years and may or may not be subject to renewal or extension. Sales of licensed products represented 41% of the
Company’s gross sales in fiscal year 2019, which included 29% of sales under the Company's license agreements with
affiliated companies of The Walt Disney Company (“Disney”), which expire as set forth below:
License Agreement
Expiration
Infant Feeding and Bath........................................................................................................................................... December 31, 2019
Toddler Bedding ......................................................................................................................................................... December 31, 2019
FROZEN Toddler Bedding ........................................................................................................................................ December 31, 2020
Infant Bedding ............................................................................................................................................................. December 31, 2020
ITEM 1A. Risk Factors
The following risk factors as well as the other information contained in this report and other filings made by the
Company with the SEC should be considered in evaluating the Company’s business. Additional risks and uncertainties not
presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following
risks actually occur, operating results may be affected in future periods.
The loss of one or more of the Company’s key customers could result in a material loss of revenues.
The Company’s top three customers represented approximately 67% of gross sales in fiscal year 2019. Although
the Company does not enter into contracts with its key customers, it expects its key customers to continue to be a
significant portion of its gross sales in the future. The loss of, or a decline in orders from, one or more of these customers
could result in a material decrease in the Company’s revenue and operating income.
The loss of one or more of the Company’s licenses could result in a material loss of revenues.
Sales of licensed products represented 41% of the Company’s gross sales in fiscal year 2019, which included
29% of sales associated with the Company’s license agreements with Disney. The Company could experience a material
4
loss of revenues if it is unable to renew its major license agreements or obtain new licenses. The volume of sales of
licensed products is inherently tied to the success of the characters, films and other licensed programs of the Company’s
licensors. A decline in the popularity of these licensed programs or the inability of the licensors to develop new properties
for licensing could also result in a material loss of revenues to the Company. Additionally, the Company’s license
agreements with Disney and others require a material amount of minimum guaranteed royalty payments. The failure by
the Company to achieve the sales envisioned by the license agreements could result in the payment by the Company of
shortfalls in the minimum guaranteed royalty payments, which would adversely impact the Company’s operating results.
The Company’s business is impacted by general economic conditions and related uncertainties, including a
declining birthrate, affecting markets in which the Company operates.
The Company’s growth is largely dependent upon growth in the birthrate, and in particular, the rate of first
births. Economic conditions, including the real and perceived threat of a recession, could lead individuals to decide to
forgo or delay having children. Even under optimal economic conditions, shifts in demographic trends and preferences
could have the consequence of individuals starting to have children later in life and/or having fewer children. In recent
years, the birthrate in the United States has steadily declined. These conditions could result in reduced demand for some
of the Company’s products, increased order cancellations and returns, an increased risk of excess and obsolete
inventories and increased pressure on the prices of the Company’s products. Also, although the Company’s use of a
commercial factor significantly reduces the risk associated with collecting accounts receivable, the factor may at any
time terminate or limit its approval of shipments to a particular customer, and the likelihood of the factor doing so may
increase due to a change in economic conditions. Such an action by the factor could result in the loss of future sales to
the affected customer.
The Company’s success is dependent upon retaining key management personnel.
Certain of the Company’s executive management and other key personnel have been integral to the Company’s
operations and the execution of its growth strategy. The departure from the Company of one or more of these
individuals, along with the inability of the Company to attract qualified and suitable individuals to fill the Company’s
open positions, could adversely impact the Company’s growth and operating results.
The Company may need to write down or write off inventory.
If product programs end before the inventory is completely sold, then the remaining inventory may have to be
sold at less than carrying value. The market value of certain inventory items could drop to below carrying value after a
decline in sales, at the end of programs, or when management makes the decision to exit a product group. Such
inventory would then need to be written down to the lower of carrying or market value, or possibly completely written
off, which would adversely affect the Company’s operating results.
Recalls or product liability claims could increase costs or reduce sales.
The Company must comply with the Consumer Product Safety Improvement Act, which imposes strict
standards to protect children from potentially harmful products and which requires that the Company’s products be
tested to ensure that they are within acceptable levels for lead and phthalates. The Company must also comply with
related regulations developed by the Consumer Product Safety Commission and similar state regulatory authorities. The
Company’s products could be subject to involuntary recalls and other actions by these authorities, and concerns about
product safety may lead the Company to voluntarily recall, accept returns or discontinue the sale of select products.
Product liability claims could exceed or fall outside the scope of the Company’s insurance coverage. Recalls or product
liability claims could result in decreased consumer demand for the Company’s products, damage to the Company’s
reputation, a diversion of management’s attention from its business and increased customer service and support costs,
any or all of which could adversely affect the Company’s operating results.
Disruptions to the Company’s information technology systems could negatively affect the Company’s results of
operations.
The Company’s operations are highly dependent upon computer hardware and software systems, including
customized information technology systems and cloud-based applications. The Company also employs third-party
systems and software that are integral to its operations. These systems are vulnerable to cybersecurity incidents,
5
including disruptions and security breaches, which can result from unintentional events or deliberate attacks by insiders
or third parties, such as cybercriminals, competitors, nation-states, computer hackers and other cyber terrorists. The
Company faces an evolving landscape of cybersecurity threats in which evildoers use a complex array of means to
perpetrate attacks, including the use of stolen access credentials, malware, ransomware, phishing, structured query
language injection attacks and distributed denial-of-service attacks. The Company has implemented security measures
to securely maintain confidential and proprietary information stored on the Company’s information systems and
continually invests in maintaining and upgrading the systems and applications to mitigate these risks. There can be no
assurance that these measures and technology will adequately prevent an intrusion or that a third party that is relied
upon by the Company will not suffer an intrusion, that unauthorized individuals will not gain access to confidential or
proprietary information or that any such incident will be timely detected and effectively countered. A significant data
security breach could result in negative consequences, including a disruption to the Company’s operations and
substantial remediation costs, such as liability for stolen assets or information, repairs of system damage, and incentives
to customers or other business partners in an effort to maintain relationships after an attack. An assault against the
Company’s information technology infrastructure could also lead to other adverse impacts to its results of operations
such as increased future cybersecurity protection costs, which may include the costs of making organizational changes,
deploying additional personnel and protection technologies, and engaging third-party experts and consultants.
The strength of the Company’s competitors may impact the Company’s ability to maintain and grow its sales,
which could decrease the Company’s revenues.
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. The Company’s ability to compete successfully
depends principally on styling, price, service to the retailer and continued high regard for the Company’s products and
trade names. Several of these competitors are larger than the Company and have greater financial resources than the
Company, and some have experienced financial challenges from time to time, including servicing significant levels of
debt. Those facing financial pressures could choose to make particularly aggressive pricing decisions in an attempt to
increase revenue. The effects of increased competition could result in a material decrease in the Company’s revenues.
The Company’s ability to identify, consummate and integrate acquisitions, divestitures and other significant
transactions successfully could have an adverse impact on the Company’s financial results, business and
prospects.
As part of its business strategy, the Company has made acquisitions of businesses, divestitures of businesses
and assets, and has entered into other transactions to further the interests of the Company’s business and its
stockholders. Risks associated with such activities include the following, any of which could adversely affect the
Company’s financial results:
● The active management of acquisitions, divestitures and other significant transactions requires varying
levels of Company resources, including the efforts of the Company’s key management personnel, which
could divert attention from the Company’s ongoing business operations.
● The Company may not fully realize the anticipated benefits and expected synergies of any particular
acquisition or investment, or may experience a prolonged timeframe for realizing such benefits and
synergies.
Increased or unexpected costs, unanticipated delays or failure to meet contractual obligations could make
acquisitions and investments less profitable or unprofitable.
●
● The failure to retain executive management members and other key personnel of the acquired business
that may have been integral to the operations and the execution of the growth strategy of the acquired
business.
The Company could experience losses associated with its intellectual property.
The Company relies upon the fair interpretation and enforcement of patent, copyright, trademark and trade
secret laws in the U.S., similar laws in other countries, and agreements with employees, customers, suppliers, licensors
and other parties. Such reliance serves to establish and maintain the intellectual property rights associated with the
products that the Company develops and sells. However, the laws and courts of certain countries at times do not protect
intellectual property rights or respect contractual agreements to the same extent as the laws of the U.S. Therefore, in
certain jurisdictions the Company may not be able to protect its intellectual property rights against counterfeiting or
6
enforce its contractual agreements with other parties. In addition, another party could claim that the Company is
infringing upon such party’s intellectual property rights, and claims of this type could lead to a civil complaint.
An unfavorable outcome in litigation involving intellectual property could result in any or all of the following:
(i) civil judgments against the Company, which could require the payment of royalties on both past and future sales of
certain products, as well as plaintiff’s attorneys’ fees and other litigation costs; (ii) impairment charges of up to the
carrying value of the Company’s intellectual property rights; (iii) restrictions on the ability of the Company to sell certain
of its products; (iv) legal and other costs associated with investigations and litigation; and (v) the Company’s competitive
position could be adversely affected.
A significant disruption to the Company’s distribution network or to the timely receipt of inventory could
adversely impact sales or increase transportation costs, which would decrease the Company’s profits.
Nearly all of the Company’s products are imported from China into the Port of Long Beach in Southern California.
There are many links in the distribution chain, including the availability of ocean freight, cranes, dockworkers, containers,
tractors, chassis and drivers. The timely receipt of the Company’s products is also dependent upon efficient operations
at the Port of Long Beach. Any shortages in the availability of any of these links or disruptions in port operations,
including strikes, lockouts or other work stoppages or slowdowns, could cause bottlenecks and other congestion in the
distribution network, which could adversely impact the Company’s ability to obtain adequate inventory on a timely basis
and result in lost sales, increased transportation costs and an overall decrease of the Company’s profits.
The Company’s sourcing and marketing operations in foreign countries are subject to anti-corruption laws.
The Company’s foreign operations are subject to laws prohibiting improper payments and bribery, including
the U.S. Foreign Corrupt Practices Act and similar laws and regulations in foreign jurisdictions, which apply to the
Company’s directors, officers, employees and agents acting on behalf of the Company. Failure to comply with these laws
could result in damage to the Company’s reputation, a diversion of management’s attention from its business, increased
legal and investigative costs, and civil and criminal penalties, any or all of which could adversely affect the Company’s
operating results.
Customer pricing pressures could result in lower selling prices, which could negatively affect the Company’s
operating results.
The Company’s customers could place pressure on the Company to reduce the prices of its products. The
Company continuously strives to stay ahead of its competition in sourcing, which allows the Company to obtain lower
cost products while maintaining high standards for quality. There can be no assurance that the Company could respond
to a decrease in sales prices by proportionately reducing its costs, which could adversely affect the Company’s operating
results.
The Company’s inability to anticipate and respond to consumers’ tastes and preferences could adversely affect
the Company’s revenues.
Sales are driven by consumer demand for the Company’s products. There can be no assurance that the demand
for the Company’s products will not decline or that the Company will be able to anticipate and respond to changes in
demand. The Company’s failure to adapt to these changes could lead to lower sales and excess inventory, which could
have a material adverse effect on the Company’s financial condition and operating results.
Changes in international trade regulations and other risks associated with foreign trade could adversely affect
the Company’s sourcing.
The Company sources its products primarily from foreign contract manufacturers, with the largest
concentration being in China. Difficulties encountered by these suppliers, such as the instability inherent in operating
within an authoritarian political structure, could halt or disrupt production and shipment of the Company’s products.
The Chinese government could make allegations against the Company of corruption or antitrust violations, or could
adopt regulations related to the manufacture of products within China, including quotas, duties, taxes and other charges
or restrictions on the exportation of goods produced in China. Alternatively, the U.S. government could impose similar
actions on the importation of goods manufactured in China. Any of these actions could result in an increase in the cost
7
of the Company’s products. Also, an arbitrary strengthening of the Chinese currency versus the U.S. Dollar could increase
the prices at which the Company purchases finished goods. Any event causing a disruption of the flow of products
manufactured on behalf of the Company, whether within the Chinese interior or at the point of embarkation, could result
in delays in the receipt of the Company’s inventory and an increase in the cost of the Company’s products. In addition,
changes in U.S. customs procedures or delays in the clearance of goods through customs could result in the Company
being unable to deliver goods to customers in a timely manner or the potential loss of sales altogether. The occurrence
of any of these events could adversely affect the Company’s profitability.
The Company could experience adjustments to its effective tax rate or its prior tax obligations, either of which
could adversely affect its results of operations.
The Company is subject to income taxes in the many jurisdictions in which it operates, including the U.S., several
U.S. states and China. At any particular point in time, several tax years are subject to general examination or other
adjustment by these various jurisdictions. In December 2016, the Company received notification from the State of
California of its intention to examine the Company’s consolidated income tax returns for the fiscal years ended April 3,
2011, April 1, 2012, March 31, 2013 and March 30, 2014. The ultimate resolution of the examination could include
administrative or legal proceedings. Although the Company believes that the calculations and positions taken on its
original and amended filed returns are reasonable and justifiable, negotiations or litigation leading to the final outcome
of any examination or claim for refund could result in an adjustment to the position that the Company has taken. Such
adjustment could result in further adjustment to one or more income tax returns for other jurisdictions, or to income tax
returns for prior or subsequent tax years, or both. To the extent that the Company’s reserve for unrecognized tax benefits
is not adequate to support the cumulative effect of such adjustments, the Company could experience a material adverse
impact on operating results.
The Company’s provision for income taxes is based on its effective tax rate, which in any given financial
statement period could fluctuate based on changes in tax laws or regulations, changes in the mix and level of earnings
by taxing jurisdiction, changes in the amount of certain expenses within the consolidated statements of income that will
never be deductible on the Company’s income tax returns and certain charges deducted on the Company’s income tax
returns that are not included within the consolidated statements of income. These changes could cause fluctuations in
the Company’s effective tax rate either on an absolute basis, or in relation to varying levels of the Company’s pre-tax
income. Such fluctuations in the Company’s effective tax rate could adversely affect its results of operations.
Economic conditions could result in an increase in the amounts paid for the Company’s products.
Significant increases in the price of raw materials that are components of the Company’s products, including
cotton, oil and labor, could adversely affect the amounts that the Company must pay its suppliers for its finished goods.
If the Company is unable to pass these cost increases along to its customers, its profitability could be adversely affected.
The Company’s ability to comply with its credit facility is subject to future performance and other factors.
The Company’s ability to make required payments of principal and interest on its debts, to refinance its maturing
indebtedness, to fund capital expenditures or to comply with its debt covenants will depend upon future performance.
The Company’s future performance is, to a certain extent, subject to general economic, financial, competitive, legislative,
regulatory and other factors beyond its control. The breach of any of the debt covenants could result in a default under
the Company’s credit facility. Upon the occurrence of an event of default, the Company’s lender could make an
immediate demand of the amount outstanding under the credit facility. If a default was to occur and such a demand was
to be made, there can be no assurance that the Company’s assets would be sufficient to repay the indebtedness in full.
The Company’s debt covenants may affect its liquidity or limit its ability to pursue acquisitions, incur debt, make
investments, sell assets or complete other significant transactions.
The Company’s credit facility contains usual and customary covenants regarding significant transactions,
including restrictions on other indebtedness, liens, transfers of assets, investments and acquisitions, merger or
consolidation transactions, transactions with affiliates and changes in or amendments to the organizational documents
for the Company and its subsidiaries. Unless waived by the Company’s lender, these covenants could limit the Company’s
ability to pursue opportunities to expand its business operations, respond to changes in business and economic
conditions and obtain additional financing, or otherwise engage in transactions that the Company considers beneficial.
8
Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by the
Company to adequately comply with new laws and regulations could substantially harm its results of operations.
The Company is subject to laws and regulations governing the Internet and e-commerce. On June 21, 2018, the
U.S. Supreme Court issued its decision in South Dakota v. Wayfair, Inc., et al. The Court held that a state may require a
business to collect and remit sales taxes even if the business has no physical presence within the state. In response, most
states have enacted laws or otherwise issued administrative guidance regarding their intent to require the collection and
remittance of sales tax on orders of products that are made through the Internet and are subsequently shipped to
customers within their states. The Company routinely makes shipments of its products into thousands of jurisdictions
throughout the U.S. within which the Company does not have a physical presence. The Wayfair decision is central to an
evolving framework of laws and regulations that is subject to interpretation and application in a manner that is
inconsistent from one jurisdiction to another. The Company cannot assure that its practices have complied, are currently
complying, or will comply fully and adequately with all such laws and regulations. Any failure to comply with any of these
laws or regulations could result in damage to the Company’s reputation or a loss or reduction of orders. As the Company
complies with such laws and regulations by charging, collecting and remitting sales tax, its customers will see an
immediate and significant increase in the total order cost of the Company’s products as such taxes are imposed, which
will make the pricing of the Company’s products less competitive when compared with a business that might not be
required to charge, collect and remit sales taxes. Also, the Company’s application for registration for sales tax within a
jurisdiction will often trigger obligations for other licensing and filing requirements within the jurisdiction. Compliance
with such laws and regulations will place an additional burden on the Company by requiring a significant investment
and continuing costs, as well as efforts of the Company’s key management personnel. Also, the Company at any time
could be subjected to examinations by any of the jurisdictions into which the Company may have at one time or another
shipped its products, which could result in the assessment on the Company of a significant accumulation of uncollected
taxes, along with penalties and interest. The occurrence of any of these events could adversely affect the Company’s
financial position and operating results.
A stockholder could lose all or a portion of his or her investment in the Company.
The Company’s common stock has historically experienced a degree of price variability, and the price could be
subject to rapid and substantial fluctuations. The Company’s common stock has also historically been thinly traded, a
circumstance that exists when there is a relatively small volume of buy and sell orders for the Company’s common stock
at any given point in time. In such situations, a stockholder may be unable to liquidate his or her position in the
Company’s common stock at the desired price. Also, as an equity investment, a stockholder’s investment in the Company
is subordinate to the interests of the Company’s creditors, and a stockholder could lose all or a substantial portion of his
or her investment in the Company in the event of a voluntary or involuntary bankruptcy filing or liquidation.
ITEM 1B. Unresolved Staff Comments
None.
9
ITEM 2. Properties
The Company's headquarters are located in Gonzales, Louisiana. The Company rents 17,761 square feet at this
location under a lease that expires January 31, 2021. Management believes that its properties are suitable for the
purposes for which they are used, are in generally good condition and provide adequate capacity for current and
anticipated future operations. The table below sets forth certain information regarding the Company's principal real
property as of May 10, 2019.
Location
Use
Gonzales, Louisiana .............................................. Administrative and sales office..............................
Compton, California ............................................. Offices, warehouse and distribution center ......
Douglasville, Georgia ........................................... Offices, manufacturing and warehouse .............
Grand Rapids, Michigan ...................................... Product design offices ..............................................
Bentonville, Arkansas ........................................... Sales office ....................................................................
Shanghai, People’s Republic of China ............ Office ..............................................................................
Approximate
Square Feet
17,761
157,400
23,800
3,600
1,376
1,912
Owned/
Leased
Leased
Leased
Leased
Leased
Leased
Leased
ITEM 3. Legal Proceedings
The Company is, from time to time, involved in various legal proceedings relating to claims arising in the
ordinary course of its business. Neither the Company nor any of its subsidiaries is a party to any such legal proceeding
the outcome of which, individually or in the aggregate, is expected to have a material adverse effect on the Company’s
financial position, results of operations or cash flows.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The Company's common stock is traded on the Nasdaq Capital Market under the symbol “CRWS”. As of May 10,
2019, there were 156 record holders of the Company’s common stock.
The Company has historically paid cash dividends. The Company’s payment of dividends is and will continue to
be restricted by or subject to, among other limitations, applicable provisions of federal and state laws, the Company’s
earnings and various business considerations, including the Company’s financial condition, results of operations, cash
flow, level of capital expenditures, future business prospects and such other matters as the Company’s Board of Directors
deems relevant. The Company’s credit facility permits the Company to pay cash dividends on its common stock without
limitation, provided there is no default under the credit facility before or as a result of the payment of such dividends.
For information regarding securities of the Company that have been authorized for issuance under equity
compensation plans, refer to “Securities Authorized for Issuance under Equity Compensation Plans” in Item 12. of Part III
of this Annual Report on Form 10-K.
10
ITEM 6. Selected Financial Data
The information set forth below is not necessarily indicative of the Company’s future financial position or
operating results and should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the consolidated financial statements and notes thereto included in this
Annual Report on Form 10-K.
2019
2018
2017
2016
2015
(amounts in thousands, except per share amounts)
Fiscal Years
Operating results:
Net sales ........................................................................ $ 76,381 $ 70,270 $ 65,978 $ 84,342 $ 85,978
23,550
Gross profit ...................................................................
Gross profit percentage ...........................................
Income from operations ..........................................
Income before income tax expense .....................
Income tax expense...................................................
Net income ...................................................................
Basic earnings per share .......................................... $
Diluted earnings per share ...................................... $
Cash dividends declared per share ...................... $
23,813
28.2 %
10,788
10,744
3,915
6,829
0.68 $
0.68 $
0.57 $
19,411
29.4 %
8,700
8,796
3,224
5,572
0.56 $
0.55 $
0.72 $
19,779
28.1 %
5,507
5,421
2,400
3,021
0.30 $
0.30 $
0.32 $
22,307
29.2 %
7,113
6,791
1,772
5,019
0.50 $
0.50 $
0.32 $
9,220
9,160
3,442
5,718
0.57
0.57
0.32
27.4 %
Financial position at year-end:
Cash and cash equivalents ...................................... $
Accounts receivable, net of allowances ..............
Inventories ....................................................................
Total current assets ....................................................
Finite-lived intangible assets – net .......................
Goodwill ........................................................................
Total assets ...................................................................
143 $
17,772
19,534
38,679
6,432
7,125
54,779
215 $
18,498
19,788
39,754
7,272
7,125
56,581
7,892 $
15,614
15,821
41,110
3,128
1,126
47,184
7,574 $
20,796
14,785
45,732
3,882
1,126
52,415
1,807
22,370
15,468
42,519
4,507
1,126
49,946
Total current liabilities ..............................................
Long-term debt ...........................................................
7,711
4,486
6,788
9,458
7,573
-
12,185
-
10,374
-
Shareholders’ equity .................................................
39,572
Total liabilities and shareholders’ equity ............ $ 54,779 $ 56,581 $ 47,184 $ 52,415 $ 49,946
38,923
40,019
39,318
41,388
11
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to provide information concerning certain factors that management
considers important in reviewing the Company’s results of operations, financial position, liquidity and capital resources.
This discussion should be read in conjunction with the consolidated financial statements and notes thereto included
elsewhere in this Annual Report on Form 10-K.
Results of Operations
The following table contains results of operations for fiscal years 2019 and 2018 and the dollar and percentage
changes for those periods (in thousands, except percentages).
2019
2018
$
%
Change
Net sales by category:
Bedding, blankets and accessories ............................................... $
Bibs, bath, developmental toy, feeding, baby care and
disposable products ......................................................................
Total net sales ...........................................................................................
Cost of products sold .............................................................................
Gross profit ................................................................................................
% of net sales .............................................................................................
Marketing and administrative expenses .........................................
% of net sales .............................................................................................
Interest expense ......................................................................................
Other income ............................................................................................
Income tax expense................................................................................
Net income ................................................................................................
% of net sales .............................................................................................
40,690 $
43,486 $
(2,796 )
-6.4 %
35,691
76,381
54,074
22,307
29.2 %
15,194
19.9 %
325
3
1,772
5,019
6.6 %
26,784
70,270
50,491
19,779
28.1 %
14,272
20.3 %
162
76
2,400
3,021
4.3 %
8,907
6,111
3,583
2,528
33.3 %
8.7 %
7.1 %
12.8 %
922
6.5 %
163
(73 )
(628 )
1,998
100.6 %
-96.1 %
-26.2 %
66.1 %
Net Sales:
Sales of $76.4 million for 2019 were $6.1 million higher than 2018, an increase of 8.7%. The increase is primarily
due to sales that resulted from acquisitions the Company made in fiscal 2018. On August 4, 2017, the Company, through
Carousel, acquired substantially all of the assets and business, and assumed certain specified liabilities, of a privately held
manufacturer and online retailer of premium infant and toddler bedding and nursery décor based in Douglasville,
Georgia (the “Carousel Acquisition”). In addition, on December 15, 2017, the Company, through a wholly-owned
subsidiary, acquired certain assets and assumed certain related liabilities associated with a line of developmental toy,
feeding and baby care products (the “Sassy Acquisition”). The Carousel Acquisition and the Sassy Acquisition added $6.5
million and $11.8 million of sales during fiscal 2019, respectively, compared with $5.4 million and $2.1 million of sales
added from the Carousel Acquisition and the Sassy Acquisition during fiscal 2018, respectively. These increases were
partially offset by the elimination of sales in the current year to affiliated companies of Toys “R” Us, Inc. (“TRU”), which in
the prior year filed bankruptcy petitions, and which ultimately filed motions to liquidate. The sales to TRU amounted to
$9.7 million in the prior year period. During the three-month period ended July 1, 2018, most of the sales that ordinarily
would have been made to TRU had not yet shifted to other customers of the Company, as TRU actually became a major
competitor of the Company as it conducted liquidation sales during this entire period, which included deep discounts
on in-line merchandise.
Gross Profit:
Gross profit increased by $2.5 million and increased from 28.1% of net sales for 2018 to 29.2% of net sales for
2019. The increase in amount is due to higher sales that resulted from the Carousel Acquisition and the Sassy Acquisition.
In addition, sales in the current year were made at overall higher gross profit percentages, as sales to TRU during the
prior year leading up to and continuing through TRU’s bankruptcy and liquidation resulted in a shift to a less profitable
product mix and shortfalls of minimum guaranteed royalties.
12
Marketing and Administrative Expenses:
Marketing and administrative expenses increased by $922,000 for fiscal year 2019 compared with fiscal year
2018. Contributing to the increase is $3.1 million in costs incurred during the current year that were associated with
Carousel, compared with $2.6 million in such costs during the prior year, which included $347,000 in acquisition costs.
Costs in the current year also included $210,000 in charges associated with transferring most of the inventory acquired
in the Sassy Acquisition from Grand Rapids, Michigan to the Company’s distribution facility in Compton, California.
Offsetting the increase in the current year is the elimination of credit coverage fees of $653,000 and a bad debt charge
of $218,000 that occurred in the prior year and that were associated with the bankruptcy and liquidation of TRU.
Income Tax Expense:
The Company’s provision for income taxes is based upon an annual effective tax rate (“ETR”) on continuing
operations, which decreased from 32.7% during 2018 to 24.4% in 2019.
On December 22, 2017, the President of the United States signed into law comprehensive tax legislation
commonly referred to as the Tax Cuts and Jobs Act (“the TCJA”), which includes a provision to lower the federal corporate
income tax rate to 21% effective as of January 1, 2018. As the Company’s fiscal year 2018 ended on April 1, 2018, the
lower corporate income tax rate was phased in, resulting in a blended federal statutory rate of 30.75% for fiscal year 2018.
The Company provides for deferred income taxes based on the difference between the financial statement and tax bases
of the Company’s assets and liabilities. The Company’s net deferred income tax assets had previously been recorded
based upon the enacted composite federal, state and foreign income tax rate of approximately 37.5% that would have
been applied as the financial statement-tax differences began to reverse. Because these differences are now expected
to reverse at a composite rate of approximately 24.5%, the Company was required to revalue its net deferred income tax
assets. This revaluation resulted in a discrete charge to income tax expense of $377,000 during fiscal year 2018.
Management evaluates items of income, deductions and credits reported on the Company’s various federal and
state income tax returns filed and recognizes the effect of positions taken on those income tax returns only if those
positions are more likely than not to be sustained. The Company applies the provisions of accounting guidelines that
require a minimum recognition threshold that a tax benefit must meet before being recognized in the financial
statements. 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.
In evaluating the process regarding the calculation of the state portion of its income tax provision, the Company
has taken a tax position that reflects opportunities for more favorable state apportionment percentages, which were
applied to several prior fiscal years and to succeeding fiscal years. After considering all relevant information, the
Company believes that the technical merits of this tax position would more likely than not be sustained. However, the
Company also believes that the ultimate resolution of the tax position will result in a tax benefit that is less than the full
amount realized through the application of the more favorable state apportionment percentages. Therefore, the
Company’s measurement regarding the tax impact of the revised state apportionment percentages resulted in the
Company recording discrete reserves for unrecognized tax liabilities during fiscal years 2019 and 2018 of $87,000 and
$113,000, respectively. Because the tax impact of the revised state apportionment percentages are measured net of
federal income taxes, the provision in the TCJA that lowered the federal corporate income tax rate to 21% required the
Company to revalue its reserve for unrecognized tax liabilities. This revaluation resulted in a net discrete charge to
income tax expense of $120,000 during fiscal 2018.
The ETR on continuing operations and the discrete income tax charges and benefits discussed above
contributed to an overall provision for income taxes of 26.1% and 44.3% for fiscal years 2019 and 2018, respectively.
Known Trends and Uncertainties
The Company’s financial results are closely tied to sales to the Company’s top three customers, which
represented approximately 67% of the Company’s gross sales in fiscal year 2019. A significant downturn experienced by
any or all of these customers could lead to pressure on the Company’s revenues. During fiscal years 2019 and 2018, the
Company at times faced higher raw material costs, as well as increases in labor and transportation costs associated with
the Company’s sourcing activities in China. Future increases in these costs could adversely affect the profitability of the
13
Company if it cannot pass the cost increases along to its customers in the form of price increases or if the timing of price
increases does not closely match the cost increases. For an additional discussion of trends, uncertainties and other factors
that could impact the Company’s operating results, refer to “Risk Factors” in Item 1A. of Part I. of this Annual Report on
Form 10-K.
Financial Position, Liquidity and Capital Resources
Net cash provided by operating activities increased from $2.5 million for the fiscal year ended April 1, 2018 to
$9.0 million for the fiscal year ended March 31, 2019. In the current year, the Company experienced a decrease in its
accounts receivable balances that was $3.6 million higher than the increase in the prior year. In addition, the Company
in the current year experienced an increase in its accounts payable balances that was $2.1 million higher than the
decrease in the prior year.
Net cash used in investing activities was $751,000 in fiscal year 2019 compared with $15.5 million in fiscal year
2018. The decrease in fiscal year 2019 was due primarily to the payment of the purchase price of $8.7 million for the
Carousel Acquisition and $6.5 million for the Sassy Acquisition in fiscal year 2018.
Net cash provided by financing activities was $5.3 million in fiscal 2018 as compared with $8.3 million used in
financing activities in the fiscal 2019, for an overall swing of $13.6 million. The change was primarily associated with net
repayments on the Company’s revolving line of credit during the current year that were $14.4 million higher than the
net borrowings during the prior year.
The Company’s future performance is, to a certain extent, subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond its control. Based upon the current level of operations, the Company
believes that its cash flow from operations and availability on its revolving line of credit will be adequate to meet its
liquidity needs.
The Company’s credit facility at March 31, 2019 consisted of a revolving line of credit under a financing
agreement with The CIT Group/Commercial Services, Inc. (“CIT”), a subsidiary of CIT Group Inc., of up to $26.0 million,
which includes a $1.5 million sub-limit for letters of credit, bearing interest at the rate of prime minus 0.5% or LIBOR plus
1.75%. The financing agreement matures on July 11, 2022 and is secured by a first lien on all assets of the Company. As
of March 31, 2019, the Company had elected to pay interest on balances owed under the revolving line of credit under
the LIBOR option, which was 4.24% as of March 31, 2019. The financing agreement also provides for the payment by CIT
to the Company of interest at the rate of prime as of the beginning of the calendar month minus 2.0%, which was 3.5%
as of March 31, 2019, on daily negative balances, if any, held at CIT.
As of March 31, 2019, there was a balance of $4.5 million owed on the revolving line of credit, there was no letter
of credit outstanding and $19.4 million was available under the revolving line of credit based on the Company’s eligible
accounts receivable and inventory balances. As of April 1, 2018, there was a balance of $9.5 million owed on the revolving
line of credit, there was no letter of credit outstanding and $13.2 million was available under the revolving line of credit
based on the Company’s eligible accounts receivable and inventory balances.
The financing agreement 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, transactions with affiliates, and changes in or amendments to the organizational documents for the
Company and its subsidiaries. The Company believes it was in compliance with these covenants as of March 31, 2019.
To reduce its exposure to credit losses, the Company assigns the majority of its trade accounts receivable to CIT
pursuant to factoring agreements, which have expiration dates that are coterminous with that of the financing
agreement described above. Under the terms of the factoring agreements, CIT remits customer payments to the
Company as such payments are received by CIT.
CIT bears credit losses with respect to assigned accounts receivable from approved shipments, while 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 or
limitation occurs, the Company either assumes (and may seek to mitigate) the credit risk for shipments to the customer
after the date of such termination or limitation or discontinues shipments to the customer. Factoring fees, which are
14
included in marketing and administrative expenses in the accompanying consolidated statements of income, were
$261,000 and $223,000 during fiscal years 2019 and 2018, respectively. There were no advances on the factoring
agreements at March 31, 2019 or April 1, 2018.
Critical Accounting Policies and Estimates
The Company prepares its financial statements to conform with accounting principles generally accepted in the
U.S. (“GAAP”) as promulgated by the Financial Accounting Standards Board (“FASB”). References herein to GAAP are to
topics within the FASB Accounting Standards Codification (the “FASB ASC”), which the FASB periodically revises through
the issuance of an Accounting Standards Update (“ASU”) and which has been established by the FASB as the
authoritative source for GAAP recognized by the FASB to be applied by nongovernmental entities.
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 disclosure of contingent
assets and liabilities at the date of the consolidated balance sheets and the reported amounts of revenues and expenses
during the reporting period. The listing below, while not inclusive of all of the Company's accounting policies, sets forth
those accounting policies which the Company's management believes embody the most significant judgments due to
the uncertainties affecting their application and the likelihood that materially different amounts would be reported
under different conditions or using different assumptions.
Revenue Recognition: Revenue is recognized upon the satisfaction of all contractual performance obligations
and the transfer of control of the products sold to the customer. The majority of the Company’s sales consists of single
performance obligation arrangements for which the transaction price for a given product sold is equivalent to the price
quoted for the product, net of any stated discounts applicable at a point in time. Each sales transaction results in an
implicit contract with the customer to deliver a product as directed by the customer. Shipping and handling costs that
are charged to customers are included in net sales, and the Company’s costs associated with shipping and handling
activities are included in cost of products sold.
A provision for anticipated returns, which are based upon historical returns and claims, is provided through a
reduction of net sales and cost of products sold in the reporting period within which the related sales are recorded.
Actual returns and claims experienced in a future period may differ from historical experience, and thus, the Company’s
provision for anticipated returns at any given point in time may be over-funded or under-funded. The Company
recognizes revenue associated with unredeemed store credits and gift certificates at the earlier of their redemption by
customers, their expiration or when their likelihood of redemption becomes remote, which is generally two years from
the date of issuance.
Revenue from sales made directly to consumers is recorded when the shipped products have been received by
customers, and excludes sales taxes collected on behalf of governmental entities. Revenue from sales made to retailers
is recorded when legal title has been passed to the customer based upon the terms of the customer’s purchase order,
the Company’s sales invoice, or other associated relevant documents. Such terms usually stipulate that legal title will
pass when the shipped products are no longer under the control of the Company, such as when the products are picked
up at the Company’s facility by the customer or by a common carrier. Payment terms can vary from prepayment for sales
made directly to consumers to payment due in arrears (generally, 60 days of being invoiced) for sales made to retailers.
Allowances Against Accounts Receivable: Revenue from sales made to retailers is reported net of allowances for
anticipated returns and other allowances, including cooperative advertising allowances, warehouse allowances,
placement fees, volume rebates, coupons and discounts. Such allowances are recorded commensurate with sales activity
or using the straight-line method, as appropriate, and the cost of such allowances is netted against sales in reporting the
results of operations. The provision for the majority of the Company’s allowances occurs on a per-invoice basis. When a
customer requests to have an agreed-upon deduction applied against the customer’s outstanding balance due to the
Company, the allowances are correspondingly reduced to reflect such payments or credits issued against the customer’s
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 funding requests for advertising support can cause the
net balance in the allowance account to fluctuate from period to period. The timing of such funding requests should
have no impact on the consolidated statements of income since such costs are accrued commensurate with sales activity
or using the straight-line method, as appropriate.
15
Purchase Price Allocations and the Resulting Goodwill: From time to time, the Company has entered into
transactions accounted for as business combinations. In connection with a business combination, the Company must
prepare an allocation of the cost of the acquisition to the identifiable assets acquired and liabilities assumed, based on
estimated fair values as of the acquisition date. The excess of the purchase price over the estimated fair value of the
identifiable net assets acquired is recorded as goodwill.
The amount of goodwill recorded in a business combination can vary significantly depending upon the values
attributed to the assets acquired and liabilities assumed. Although goodwill has no useful life and is not subject to a
systematic annual amortization against earnings, the Company performs a measurement for impairment of the carrying
value of its goodwill annually on the first day of the Company’s fiscal year. An additional impairment test is performed
during the year whenever an event or change in circumstances 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
measurement for impairment of goodwill is performed at the reporting unit level. A reporting unit is either an operating
segment or one level below an operating segment. In its annual or interim measurement for impairment of goodwill, the
Company conducts a qualitative assessment by examining relevant events and circumstances which could have a
negative impact on the Company’s goodwill, which includes macroeconomic conditions, industry and market
conditions, commodity prices, cost factors, overall financial performance, reporting unit dispositions and acquisitions,
the market capitalization of the Company and other relevant events specific to the Company.
If, after assessing the totality of events or circumstances described above, the Company determines that it is
more likely than not that the fair value of either of the Company’s reporting units is less than its carrying amount, then a
quantitative goodwill test is performed. The quantitative goodwill impairment test is also performed whenever events
or changes in circumstances indicate that the carrying value may not be recoverable. If, after performing the quantitative
goodwill test, it is determined that the carrying value of goodwill is impaired, the amount of goodwill is reduced and a
corresponding charge is made to earnings in the period in which the goodwill is determined to be impaired.
Preparing a purchase price allocation requires estimating the fair values of assets acquired and liabilities
assumed in a business combination, a process that requires the Company to make various assumptions. The most
significant assumptions relate to the estimated fair values assigned to the assets acquired and liabilities assumed as of
the acquisition date. The resulting estimated fair values assigned to assets acquired and liabilities assumed in a purchase
price allocation can have a significant effect on results of operations in the future. A future impairment to goodwill would
have no effect on the Company’s cash flows, but would result in a decrease in net income for the period in which the
impairment is recorded.
Valuation of Long-Lived Assets and Identifiable Intangible Assets: In addition to the systematic annual depreciation
and amortization of the Company’s fixed assets and identifiable intangible assets, the Company reviews for impairment
long-lived assets and 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 consolidated balance sheets.
Inventory Valuation: On a periodic basis, management reviews its 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 Company’s normal operating cycle. 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 products sold in the
Company's 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 management's
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
Company's financial position and results of operations.
16
ITEM 8. Financial Statements and Supplementary Data
Refer to pages 21 and F-1 through F-22 hereof.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the
reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time
period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange
Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report,
the Company carried out an evaluation, under the supervision and with the participation of the Company’s
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures. Based upon and as of the date of that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are
effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining for the Company adequate
internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act
(“ICFR”). With the participation of the Chief Executive Officer and the Chief Financial Officer, management conducted an
evaluation of the effectiveness of internal control over financial reporting based on the framework and the criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on management’s evaluation of ICFR, management has concluded that internal
control over financial reporting was effective as of March 31, 2019.
The Company’s internal control system has been designed to provide reasonable assurance to the Company’s
management and the Board of Directors regarding the reliability of financial reporting and the preparation and fair
presentation of financial statements in accordance with GAAP. All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined to be effective can provide only a reasonable, rather
than absolute, assurance that the Company’s financial statements are free of any material misstatement, whether caused
by error or fraud.
Changes in Internal Control over Financial Reporting
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the Company’s ICFR as required by Rule 13a-15(d) under the Exchange Act
and, in connection with such evaluation, determined that no changes occurred during the Company’s fiscal quarter
ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR.
ITEM 9B. Other Information
Not applicable.
17
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
The information with respect to the Company's directors and executive officers will be set forth in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held in 2019 (the "Proxy Statement") under
the captions "Proposal 1 – Election of Directors" and “Executive Officers” and is incorporated herein by reference. The
information with respect to Item 405 of Regulation S-K will be set forth in the Proxy Statement under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. The information with respect
to Item 406 of Regulation S-K will be set forth in the Proxy Statement under the caption “Code of Business Conduct and
Ethics” and is incorporated herein by reference. The information with respect to Item 407 of Regulation S-K will be set
forth in the Proxy Statement under the captions “Board Committees and Meetings” and “Report of the Audit Committee”
and is incorporated herein by reference.
ITEM 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated
herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
The table below sets forth information regarding shares of the Company’s common stock that may be issued
upon the exercise of options, warrants and other rights granted to employees, consultants or directors under all of the
Company’s existing equity compensation plans as of March 31, 2019.
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants
and rights
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
Equity compensation plans approved by security
Plan Category
holders:
2006 Omnibus Incentive Plan ................................................
97,500 $
6.87
0
2014 Omnibus Equity Compensation Plan........................
360,000 $
7.60
556,013
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth under the captions “Director Independence” and "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
The information set forth under the caption “Proposal 2 – Ratification of Appointment of Independent
Registered Public Accounting Firm” in the Proxy Statement is incorporated herein by reference.
18
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1). Financial Statements
PART IV
The following consolidated financial statements of the Company are filed with this report and included in Part
II, Item 8.:
- Report of Independent Registered Public Accounting Firm
- Consolidated Balance Sheets as of March 31, 2019 and April 1, 2018
- Consolidated Statements of Income for the Fiscal Years Ended March 31, 2019 and April 1, 2018
- Consolidated Statements of Changes in Shareholders' Equity for the Fiscal Years Ended March 31, 2019 and April 1,
2018
- Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2019 and April 1, 2018
- Notes to Consolidated Financial Statements
(a)(2). Financial Statement Schedule
The following financial statement schedule of the Company is filed with this report:
Schedule II — Valuation and Qualifying Accounts ................................................................................................................ Page 20
All other schedules not listed above have been omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
19
CROWN CRAFTS, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
SCHEDULE II
Column A
Valuation and Qualifying Accounts
Column C
Column D
Column B
Balance at
Beginning Charged to
of Period
Expenses
Deductions
Column E
Balance at
End of
Period
Accounts Receivable Valuation Accounts:
Year Ended April 1, 2018
Allowance for customer deductions .................................... $
Allowance for doubtful accounts.......................................... $
Year Ended March 31, 2019
Allowance for customer deductions .................................... $
(in thousands)
775 $
0 $
3,749 $
218 $
3,959 $
218 $
565
0
565 $
3,629 $
3,787 $
407
20
(a)(3). Exhibits
Exhibits required to be filed by Item 601 of SEC Regulation S-K are included as Exhibits to this report as follows:
Exhibit
Number Description of Exhibits
3.1 — Amended and Restated Certificate of Incorporation of the Company. (2)
3.2 —
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company.
(12)
10.2* —
3.3 — Bylaws of the Company, as amended and restated through November 15, 2016. (22)
4.1* — Crown Crafts, Inc. 2006 Omnibus Incentive Plan (As Amended August 14, 2012). (15)
4.2* — Form of Non-Qualified Stock Option Agreement (Employees). (5)
4.3* — Crown Crafts, Inc. 2014 Omnibus Equity Compensation Plan. (17)
4.4* — Form of Incentive Stock Option Grant Agreement. (18)
4.5* — Form of Non-Qualified Stock Option Grant Agreement. (18)
4.6* — Form of Restricted Stock Grant Agreement. (18)
10.1* — Employment Agreement dated July 23, 2001 by and between the Company and E. Randall Chestnut. (1)
Amended and Restated Severance Protection Agreement dated April 20, 2004 by and between the
Company and E. Randall Chestnut. (3)
Amended and Restated Employment Agreement dated April 20, 2004 by and between the Company and
Nanci Freeman. (3)
Financing Agreement dated as of July 11, 2006 by and among the Company, Churchill Weavers, Inc.,
Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (4)
Stock Pledge Agreement dated as of July 11, 2006 by and among the Company, Churchill Weavers, Inc.,
Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (4)
First Amendment to Financing Agreement dated as of November 5, 2007 by and among the Company,
Churchill Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial
Services, Inc. (6)
10.3* —
10.4 —
10.5 —
10.6
—
10.10* —
10.11
10.12
—
10.8* —
10.9* —
10.7* — Employment Agreement dated November 6, 2008 by and between the Company and Olivia W. Elliott (7)
First Amendment to Employment Agreement dated November 6, 2008 by and between the Company
and E. Randall Chestnut. (8)
First Amendment to Amended and Restated Severance Protection Agreement dated November 6, 2008
by and between the Company and E. Randall Chestnut. (8)
First Amendment to Amended and Restated Employment Agreement dated November 6, 2008 by and
between the Company and Nanci Freeman. (8)
Third Amendment to Financing Agreement dated as of July 2, 2009 by and among the Company,
Churchill Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial
Services, Inc. (9)
Sixth Amendment to Financing Agreement dated as of March 5, 2010 by and among the Company,
Churchill Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial
Services, Inc. (10)
Seventh Amendment to Financing Agreement dated as of May 27, 2010 by and among the Company,
Churchill Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial
Services, Inc. (11)
Eighth Amendment to Financing Agreement dated as of March 26, 2012 by and among the Company,
Churchill Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial
Services, Inc. (13)
Second Amendment to Amended and Restated Employment Agreement dated March 26, 2012 by and
between the Company and Nanci Freeman. (14)
Ninth Amendment to Financing Agreement dated May 21, 2013 by and among the Company, Hamco,
Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (16)
—
—
—
—
10.16
10.14
10.13
10.15* —
21
10.17
10.18
—
—
Tenth Amendment to Financing Agreement dated as of December 28, 2015 by and among the Company,
Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (19)
Eleventh Amendment to Financing Agreement dated as of March 31, 2016 by and among the Company,
Hamco, Inc., Crown Crafts Infant Products, Inc. and The CIT Group/Commercial Services, Inc. (20)
10.19* — Amendment No. 1 to the Crown Crafts, Inc. 2014 Omnibus Equity Compensation Plan. (21)
10.20* — Form of Incentive Stock Option Grant Agreement (effective November 2016). (21)
10.21* — Form of Nonqualified Stock Option Grant Agreement (effective November 2016). (21)
10.22* — Form of Restricted Stock Grant Agreement (effective November 2016). (21)
10.23 —
10.24 —
10.25 —
10.26* —
Joinder Agreement, dated as of August 4, 2017, by and among the Company, Hamco, Inc., Crown Crafts
Infant Products, Inc., Carousel Acquisition, LLC and The CIT Group/Commercial Services, Inc. (23)
Twelfth Amendment to Financing Agreement dated as of December 15, 2017 by and among the
Company, Hamco, Inc., Carousel Designs, LLC, Crown Crafts Infant Products, Inc. and The CIT
Group/Commercial Services, Inc. (24)
Thirteenth Amendment to Financing Agreement dated as of August 7, 2018 by and among the Company,
Hamco, Inc., Carousel Designs, LLC, Crown Crafts Infant Products, Inc. and The CIT Group/Commercial
Services, Inc. (25)
Employment Agreement dated January 18, 2019 by and between NoJo Baby & Kids, Inc. and Donna
Sheridan (26)
14.1 — Code of Ethics. (3)
21.1 — Subsidiaries of the Company. (27)
23.1 — Consent of KPMG LLP. (27)
31.1 — Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Executive Officer. (27)
31.2 — Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Financial Officer. (27)
32.1 — Section 1350 Certification by the Company’s Chief Executive Officer. (28)
32.2 — Section 1350 Certification by the Company’s Chief Financial Officer. (28)
101 — The following information from the Registrant’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2019, formatted as interactive data files in XBRL (eXtensible Business Reporting Language):
(i) Consolidated Statements of Income;
(ii) Consolidated Balance Sheets;
(iii) Consolidated Statements of Changes in Shareholders’ Equity;
(iv) Consolidated Statements of Cash Flows; and
(v) Notes to Consolidated Financial Statements.
_______________
* Management contract or a compensatory plan or arrangement.
(1)
(2)
(3)
Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated July 23, 2001.
Incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended December
28, 2003.
Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended March 28,
2004.
Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated July 17, 2006.
Incorporated herein by reference to Registrant’s Registration Statement on Form S-8 dated August 24, 2006.
Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated November 9, 2007.
Incorporated herein by reference to Registrant’s Current Report on Form 8-K/A dated November 7, 2008.
Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated November 7, 2008.
Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated July 6, 2009.
(4)
(5)
(6)
(7)
(8)
(9)
(10) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated March 8, 2010.
(11) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated May 27, 2010.
(12) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated August 9, 2011.
(13) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated March 27, 2012.
(14) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated March 30, 2012.
(15) Incorporated herein by reference to Registrant’s Registration Statement on Form S-8 dated August 14, 2012.
(16) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated May 21, 2013.
22
(17) Incorporated herein by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A
filed on June 27, 2014.
(18) Incorporated herein by reference to Registrant’s Registration Statement on Form S-8 dated November 10, 2014.
(19) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated December 28, 2015.
(20) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated April 4, 2016.
(21) Incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2,
2016.
(22) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated November 16, 2016.
(23) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated August 7, 2017.
(24) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated December 18, 2017.
(25) Incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2018.
(26) Incorporated herein by reference to Registrant’s Current Report on Form 8-K dated January 22, 2019.
(27) Filed herewith.
(28) Furnished herewith.
23
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CROWN CRAFTS, INC.
By: /s/ E. Randall Chestnut
E. Randall Chestnut
Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signatures
Title
Date
/s/ E. Randall Chestnut
E. Randall Chestnut
Chairman of the Board, President and Chief Executive Officer
June 13, 2019
(Principal Executive Officer)
/s/ Olivia W. Elliott
Olivia W. Elliott
Vice President and Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
June 13, 2019
/s/ Sidney Kirschner
Sidney Kirschner
/s/ Zenon S. Nie
Zenon S. Nie
/s/ Donald Ratajczak
Donald Ratajczak
/s/ Patricia Stensrud
Patricia Stensrud
Director
Director
Director
Director
June 13, 2019
June 13, 2019
June 13, 2019
June 13, 2019
24
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Financial Statements:
Report of Independent Registered Public Accounting Firm ................................................................................
Consolidated Balance Sheets as of March 31, 2019 and April 1, 2018 .................................................................
Consolidated Statements of Income for the Fiscal Years Ended March 31, 2019 and April 1, 2018 ...................
Consolidated Statements of Changes in Shareholders' Equity for the Fiscal Years Ended March 31, 2019 and
April 1, 2018 .........................................................................................................................................................
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2019 and April 1, 2018 .............
Notes to Consolidated Financial Statements ........................................................................................................
F-1
F-2
F-3
F-4
F-5
F-6
Page
25
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Crown Crafts, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Crown Crafts, Inc. and subsidiaries (the Company)
as of March 31, 2019 and April 1, 2018, the related consolidated statements of income, changes in shareholders’ equity,
and cash flows for each of the years in the two-year period ended March 31, 2019, and the related notes and financial
statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and April 1,
2018, and the results of its operations and its cash flows for each of the years in the two-year period ended March 31,
2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2009.
Baton Rouge, Louisiana
June 13, 2019
F-1
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2019 AND APRIL 1, 2018
(amounts in thousands, except share and per share amounts)
March 31, 2019
April 1, 2018
ASSETS
Current assets:
Cash and cash equivalents ......................................................................................................................................................... $
Accounts receivable (net of allowances of $407 at March 31, 2019 and $565 at April 1, 2018):
Due from factor ...................................................................................................................................................................
Other .......................................................................................................................................................................................
Inventories .......................................................................................................................................................................................
Prepaid expenses ..........................................................................................................................................................................
Total current assets ....................................................................................................................................................
Property, plant and equipment - at cost:
Vehicles .............................................................................................................................................................................................
Leasehold improvements ...........................................................................................................................................................
Machinery and equipment .........................................................................................................................................................
Furniture and fixtures ..................................................................................................................................................................
Property, plant and equipment – gross ............................................................................................................................
Less accumulated depreciation ................................................................................................................................................
Property, plant and equipment – net ................................................................................................................
Finite-lived intangible assets - at cost:
Tradename and trademarks .......................................................................................................................................................
Customer relationships ...............................................................................................................................................................
Other finite-lived intangible assets .........................................................................................................................................
Finite-lived intangible assets – gross ................................................................................................................................
Less accumulated amortization ................................................................................................................................................
Finite-lived intangible assets – net .....................................................................................................................
Goodwill ...........................................................................................................................................................................................
Deferred income taxes ................................................................................................................................................................
Other ..................................................................................................................................................................................................
Total Assets ......................................................................................................................................................................... $
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................................................................................................................................... $
Accrued wages and benefits .....................................................................................................................................................
Accrued royalties ...........................................................................................................................................................................
Dividends payable ........................................................................................................................................................................
Income taxes payable ..................................................................................................................................................................
Other accrued liabilities ..............................................................................................................................................................
Total current liabilities .............................................................................................................................................
Non-current liabilities:
Long-term debt ..............................................................................................................................................................................
Reserve for unrecognized tax liabilities .................................................................................................................................
Total non-current liabilities ...................................................................................................................................
Shareholders' equity:
Common stock - $0.01 par value per share; Authorized 40,000,000 shares at March 31, 2019 and April 1,
2018; Issued 12,546,789 shares at March 31, 2019 and 12,493,789 shares at April 1, 2018 ............................
Additional paid-in capital ...........................................................................................................................................................
Treasury stock - at cost - 2,424,231 shares at March 31, 2019 and 2,408,025 shares at April 1, 2018 ...............
Retained Earnings (Accumulated Deficit) .............................................................................................................................
Total shareholders' equity ......................................................................................................................................
Total Liabilities and Shareholders' Equity ............................................................................................................ $
See notes to consolidated financial statements.
F-2
143 $
215
17,250
522
19,534
1,230
38,679
323
282
4,269
799
5,673
3,751
1,922
3,667
7,374
3,159
14,200
7,768
6,432
7,125
524
97
54,779 $
4,201 $
1,819
398
810
76
407
7,711
4,486
1,194
5,680
15,447
3,051
19,788
1,253
39,754
268
272
4,010
799
5,349
3,571
1,778
3,667
7,374
3,159
14,200
6,928
7,272
7,125
532
120
56,581
3,766
842
793
807
40
540
6,788
9,458
1,017
10,475
125
53,251
(12,326 )
338
41,388
54,779 $
125
52,874
(12,231 )
(1,450 )
39,318
56,581
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ENDED MARCH 31, 2019 AND APRIL 1, 2018
(amounts in thousands, except per share amounts)
2019
2018
Net sales ................................................................................................................................................. $
Cost of products sold .........................................................................................................................
Gross profit ............................................................................................................................................
Marketing and administrative expenses .....................................................................................
Income from operations ...................................................................................................................
Other income (expense):
Interest expense ..........................................................................................................................
Interest income............................................................................................................................
Other – net ....................................................................................................................................
Income before income tax expense ..............................................................................................
Income tax expense............................................................................................................................
Net income ............................................................................................................................................ $
76,381 $
54,074
22,307
15,194
7,113
(325 )
-
3
6,791
1,772
5,019 $
Weighted average shares outstanding:
Basic .....................................................................................................................................................
Effect of dilutive securities ...........................................................................................................
Diluted ................................................................................................................................................
10,092
2
10,094
Earnings per share:
Basic ..................................................................................................................................................... $
0.50 $
Diluted ................................................................................................................................................ $
0.50 $
70,270
50,491
19,779
14,272
5,507
(162 )
79
(3 )
5,421
2,400
3,021
10,072
7
10,079
0.30
0.30
See notes to consolidated financial statements.
F-3
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED MARCH 31, 2019 AND APRIL 1, 2018
Common Shares
Treasury Shares
Number of
Shares
Amount
Number of
Shares
Amount
Additional
Paid-in
Capital
(Accumulated
Deficit)
Retained
Earnings
Total
Shareholders'
Equity
Balances - April 2,
2017 .............................. 12,423,539 $
124 (2,401,066 ) $ (12,175 ) $ 52,220 $
(1,246 ) $
38,923
(Dollar amounts in thousands)
Issuance of shares .........
Stock-based
compensation ............
Acquisition of treasury
stock ..............................
Net income ......................
Dividends declared on
common stock -
$0.32 per share ...........
Balances - April 1,
70,250
1
115
539
(6,959 )
(56 )
3,021
116
539
(56 )
3,021
(3,225 )
(3,225 )
2018 .............................. 12,493,789
125 (2,408,025 ) (12,231 )
52,874
(1,450 )
39,318
Issuance of shares .........
Stock-based
compensation ............
Acquisition of treasury
stock ..............................
Net income ......................
Dividends declared on
common stock -
$0.32 per share ...........
Balances - March 31,
53,000
-
-
377
(16,206 )
(95 )
5,019
-
377
(95 )
5,019
(3,231 )
(3,231 )
2019 .............................. 12,546,789 $
125 (2,424,231 ) $ (12,326 ) $ 53,251 $
338 $
41,388
See notes to consolidated financial statements.
F-4
CROWN CRAFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED MARCH 31, 2019 AND APRIL 1, 2018
(amounts in thousands)
Operating activities:
Net income ............................................................................................................................................ $
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment ..................................................................
Amortization of intangibles .........................................................................................................
Deferred income taxes ..................................................................................................................
Loss on sale of property, plant and equipment ....................................................................
Reserve for unrecognized tax liabilities ...................................................................................
Stock-based compensation .........................................................................................................
Changes in assets and liabilities:
Accounts receivable ...................................................................................................................
Inventories ....................................................................................................................................
Prepaid expenses ........................................................................................................................
Other assets ..................................................................................................................................
Accounts payable .......................................................................................................................
Accrued liabilities........................................................................................................................
Net cash provided by operating activities ............................................................................
Investing activities:
Capital expenditures for property, plant and equipment .....................................................
Payments for acquisitions, net of liabilities assumed .............................................................
Net cash used in investing activities ........................................................................................
Financing activities:
Repayments under revolving line of credit ................................................................................
Borrowings under revolving line of credit ..................................................................................
Purchase of treasury stock ...............................................................................................................
Payments on capital leases ..............................................................................................................
Dividends paid .....................................................................................................................................
Net cash (used in) provided by financing activities ..........................................................
Net decrease in cash and cash equivalents ...........................................................................
Cash and cash equivalents at beginning of period .................................................................
Cash and cash equivalents at end of period ......................................................................... $
2019
2018
5,019 $
3,021
640
840
8
-
177
377
726
254
23
23
402
485
8,974
(751 )
-
(751 )
(63,134 )
58,162
(95 )
-
(3,228 )
(8,295 )
(72 )
215
143 $
333
836
708
2
329
539
(2,884 )
297
655
19
(1,702 )
300
2,453
(221 )
(15,245 )
(15,466 )
(15,913 )
25,371
(56 )
(845 )
(3,221 )
5,336
(7,677 )
7,892
215
Supplemental cash flow information:
Income taxes paid ............................................................................................................................... $
Interest paid ..........................................................................................................................................
1,673 $
237
1,671
67
Noncash financing activities:
Property, plant and equipment purchased but unpaid .........................................................
Dividends declared but unpaid ......................................................................................................
Compensation paid as common stock ........................................................................................
(33 )
(810 )
-
-
(807 )
116
See notes to consolidated financial statements.
F-5
Crown Crafts, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Description of Business
Crown Crafts, Inc. (the “Company”) was originally formed as a Georgia corporation in 1957 and was
reincorporated as a Delaware corporation in 2003. The Company operates indirectly through its wholly-owned
subsidiaries, NoJo Baby & Kids, Inc. (formerly known as Crown Crafts Infant Products, Inc.) (“NoJo”), Sassy Baby, Inc.
(formerly known as Hamco, Inc.) (“Sassy Baby”) and Carousel Designs, LLC (“Carousel”) in the infant, toddler and juvenile
products segment within the consumer products industry. The infant, toddler and juvenile products segment consists
of infant and toddler bedding and blankets, bibs, soft bath products, disposable products, developmental toys and
accessories. Sales of the Company’s 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,
wholesale clubs and internet-based retailers, as well as directly to consumers through www.babybedding.com. The
Company’s products marketed under a variety of Company-owned trademarks, under trademarks licensed from others
and as private label goods.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation: The accompanying consolidated financial statements include the accounts of the
Company and have been prepared pursuant to accounting principles generally accepted in the U.S. (“GAAP”) as
promulgated by the Financial Accounting Standards Board (“FASB”). References herein to GAAP are to topics within the
FASB Accounting Standards Codification (the “FASB ASC”), which the FASB periodically revises through the issuance of
an Accounting Standards Update (“ASU”) and which has been established by the FASB as the authoritative source for
GAAP recognized by the FASB to be applied by nongovernmental entities.
Reclassifications: The Company has classified certain prior year information to conform to the amounts
presented in the current year. None of the changes impact the Company’s previously reported financial position or
results of operations.
Fiscal Year: The Company's fiscal year ends on the Sunday nearest to or on March 31. References herein to “fiscal
year 2019” or “2019” represent the 52-week period ended March 31, 2019 and references to “fiscal year 2018” or “2018”
represent the 52-week period ended April 1, 2018.
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 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 also has a certain amount of discontinued finished goods which necessitates the
establishment of inventory reserves that are highly subjective. Actual results could differ materially from those estimates.
Cash and Cash Equivalents: The Company’s credit facility consists of a revolving line of credit under a financing
agreement with The CIT Group/Commercial Services, Inc. (“CIT”), a subsidiary of CIT Group Inc. 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 are immediately available to be drawn upon by the Company. There are no compensating balance
requirements or other restrictions on the transfer of amounts associated with the Company’s depository accounts.
Financial Instruments: For short-term instruments such as cash and cash equivalents, accounts receivable and
accounts payable, the Company uses carrying value as a reasonable estimate of fair value.
F-6
Segments and Related Information: The Company operates primarily in one principal segment, infant and toddler
products. These products consist of infant and toddler bedding, bibs, soft bath products, disposable products and
accessories. Net sales of bedding, blankets and accessories and net sales of bibs, bath and disposable products for fiscal
years 2019 and 2018 are as follows (in thousands):
Bedding, blankets and accessories ................................................................................... $
Bibs, bath, developmental toy, feeding, baby care and disposable products ...
Total net sales .............................................................................................................. $
40,690 $
35,691
76,381 $
43,486
26,784
70,270
2019
2018
Revenue Recognition: Revenue is recognized upon the satisfaction of all contractual performance obligations
and the transfer of control of the products sold to the customer. The majority of the Company’s sales consists of single
performance obligation arrangements for which the transaction price for a given product sold is equivalent to the price
quoted for the product, net of any stated discounts applicable at a point in time. Each sales transaction results in an
implicit contract with the customer to deliver a product as directed by the customer. Shipping and handling costs that
are charged to customers are included in net sales, and the Company’s costs associated with shipping and handling
activities are included in cost of products sold.
A provision for anticipated returns, which are based upon historical returns and claims, is provided through a
reduction of net sales and cost of products sold in the reporting period within which the related sales are recorded.
Actual returns and claims experienced in a future period may differ from historical experience, and thus, the Company’s
provision for anticipated returns at any given point in time may be over-funded or under-funded.
The Company recognizes revenue associated with unredeemed store credits and gift certificates at the earlier
of their redemption by customers, their expiration or when their likelihood of redemption becomes remote, which is
generally two years from the date of issuance.
Revenue from sales made directly to consumers is recorded when the shipped products have been received by
customers, and excludes sales taxes collected on behalf of governmental entities. Revenue from sales made to retailers
is recorded when legal title has been passed to the customer based upon the terms of the customer’s purchase order,
the Company’s sales invoice, or other associated relevant documents. Such terms usually stipulate that legal title will
pass when the shipped products are no longer under the control of the Company, such as when the products are picked
up at the Company’s facility by the customer or by a common carrier. Payment terms can vary from prepayment for sales
made directly to consumers to payment due in arrears (generally, 60 days of being invoiced) for sales made to retailers.
Allowances Against Accounts Receivable: Revenue from sales made to retailers is reported net of allowances for
anticipated returns and other allowances, including cooperative advertising allowances, warehouse allowances,
placement fees, volume rebates, coupons and discounts. Such allowances are recorded commensurate with sales activity
or using the straight-line method, as appropriate, and the cost of such allowances is netted against sales in reporting the
results of operations. The provision for the majority of the Company’s allowances occurs on a per-invoice basis. When a
customer requests to have an agreed-upon deduction applied against the customer’s outstanding balance due to the
Company, the allowances are correspondingly reduced to reflect such payments or credits issued against the customer’s
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 funding requests for advertising support can cause the
net balance in the allowance account to fluctuate from period to period. The timing of such funding requests should
have no impact on the consolidated statements of income since such costs are accrued commensurate with sales activity
or using the straight-line method, as appropriate.
Uncollectible Accounts: To reduce the exposure to credit losses and to enhance the predictability of its cash
flows, the Company assigns the majority of its receivables under factoring agreements with CIT. In the event a factored
receivable becomes uncollectible due to creditworthiness, CIT bears the risk of loss. For fiscal years beginning on and
after April 2, 2018, the Company recognizes revenue net of the amount that is expected to be uncollectible on accounts
receivable, if any, that are not assigned under the factoring agreements with CIT. The Company’s management makes
estimates of the uncollectiblity of its non-factored accounts receivable by specifically analyzing the accounts receivable,
historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in its
customers’ payment terms.
F-7
For reporting periods that ended prior to April 2, 2018, the Company instead recorded a provision for its
expected uncollectible accounts in the form of a bad debt expense, which was included in marketing and administrative
expenses in the consolidated statements of income. On September 18, 2017, Toys “R” Us, Inc. (“TRU”) filed a voluntary
petition for relief under Chapter 11 of Title 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Eastern
District of Virginia (the “Court”). On March 14, 2018, TRU filed a motion with the Court seeking authority to close its
remaining stores and distribution centers in the U.S., and to otherwise discontinue, liquidate and wind-down all U.S.
operations.
As described below in Note 3 – Financing Arrangements, the Company entered into a series of agreements with
JPMorgan Chase Bank, N.A. (“Chase”) wherein the Company had the right to sell, and Chase had the obligation to
purchase, certain claims that could arise if accounts receivable amounts owed by an affiliate company of TRU to the
Company became uncollectible (subject to certain specified limits). As a result of the TRU bankruptcy and liquidation,
the Company during fiscal year 2018 exercised its rights under these agreements and simultaneously recorded and
charged off provisions for doubtful accounts for a portion of the amounts owed that were in excess of the limits covered
by the agreements that the Company estimated to be uncollectible in the amount of $218,000.
Credit Concentration: The Company’s accounts receivable at March 31, 2019 amounted to $17.8 million, net of
allowances of $407,000. Of this amount, $17.3 million was due from CIT under the factoring agreements, which amount
represents the maximum loss that the Company could incur if CIT failed completely to perform its obligations under the
factoring agreements.
Other Accrued Liabilities: An amount of $407,000 was recorded as other accrued liabilities as of March 31, 2019.
Of this amount, $241,000 reflected unearned revenue recorded for payments from customers that were received before
the products ordered were received by the customers. Other accrued liabilities as of March 31, 2019 also includes a
reserve for customer returns of $6,000 and unredeemed store credits and gift certificates totaling $19,000.
Inventory Valuation: The preparation of the Company's financial statements requires careful determination of
the appropriate value of the Company's inventory balances. Such amounts are presented as a current asset in the
accompanying consolidated balance sheets and are a direct determinant of cost of products sold in the accompanying
consolidated statements of income and, therefore, have a significant impact on the amount of net income reported in
the accounting periods. The basis of accounting for inventories is cost, which includes the direct supplier acquisition
cost, duties, taxes and freight, and the indirect costs to design, develop, source and store the product until it is sold. Once
cost has been determined, the Company’s inventory is then stated at the lower of cost or net realizable value, 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, and the average cost method for a portion of the Company’s inventory.
The determination of the indirect charges and their allocation to the Company's 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 Company's inventories and in the
amount and timing of the Company's cost of products sold and the resulting net income for the reporting period.
On a periodic basis, management reviews its 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 Company’s normal operating cycle. 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 products sold in the Company's
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 management's 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 Company's
financial position and results of operations.
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 royalty amounts are accrued based upon
historical sales rates adjusted for current sales trends by customers. Royalty expense is included in cost of products sold
F-8
in the accompanying consolidated statements of income and amounted to $5.2 million and $7.2 million for fiscal years
2019 and 2018, respectively.
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 five to twenty 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 and Identifiable Intangible Assets: 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.
Patent Costs: The Company incurs certain legal and related costs in connection with patent applications. The
Company capitalizes such costs to be amortized over the expected life of the patent to the extent that an economic
benefit is anticipated from the resulting patent or an alternative future use is available to the Company. The Company
also capitalizes legal and other costs incurred in the protection or defense of the Company’s patents when it is believed
that the future economic benefit of the patent will be maintained or increased and a successful defense is probable.
Capitalized patent defense costs are amortized over the remaining expected life of the related patent. The Company’s
assessment of future economic benefit of its patents involves considerable management judgment, and a different
conclusion could result in a material impairment charge up to the carrying value of these assets.
Purchase Price Allocations and the Resulting Goodwill: The Company’s strategy includes, when appropriate,
entering into transactions accounted for as business combinations. In connection with a business combination, the
Company prepares an allocation of the cost of the acquisition to the identifiable assets acquired and liabilities assumed,
based on estimated fair values as of the acquisition date. The excess of the purchase price over the estimated fair value
of the identifiable net assets acquired is recorded as goodwill.
The amount of goodwill recorded in a business combination can vary significantly depending upon the values
attributed to the assets acquired and liabilities assumed. Although goodwill has no useful life and is not subject to a
systematic annual amortization against earnings, the Company performs a measurement for impairment of the carrying
value of its goodwill annually on the first day of the Company’s fiscal year. An additional impairment test is performed
during the year whenever an event or change in circumstances 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
measurement for impairment of goodwill is performed at the reporting unit level. A reporting unit is either an operating
segment or one level below an operating segment. In its annual or interim measurement for impairment of goodwill, the
Company conducts a qualitative assessment by examining relevant events and circumstances which could have a
negative impact on the Company’s goodwill, which includes macroeconomic conditions, industry and market
conditions, commodity prices, cost factors, overall financial performance, reporting unit dispositions and acquisitions,
the market capitalization of the Company and other relevant events specific to the Company.
If, after assessing the totality of events or circumstances described above, the Company determines that it is
more likely than not that the fair value of either of the Company’s reporting units is less than its carrying amount, then a
quantitative goodwill test is performed. The quantitative goodwill impairment test is also performed whenever events
or changes in circumstances indicate that the carrying value may not be recoverable. If, after performing the quantitative
goodwill test, it is determined that the carrying value of goodwill is impaired, the amount of goodwill is reduced and a
corresponding charge is made to earnings in the period in which the goodwill is determined to be impaired.
Preparing a purchase price allocation requires estimating the fair values of assets acquired and liabilities
assumed in a business combination, a process that requires the Company to make various assumptions. The most
significant assumptions relate to the estimated fair values assigned to the assets acquired and liabilities assumed as of
the acquisition date. The resulting estimated fair values assigned to assets acquired and liabilities assumed in a purchase
price allocation can have a significant effect on results of operations in the future. A future impairment to goodwill would
F-9
have no effect on the Company’s cash flows, but would result in a decrease in net income for the period in which the
impairment is recorded.
Provision for Income Taxes: The Company’s provision for income taxes includes all currently payable federal,
state, local and foreign taxes and is based upon the Company’s estimated annual effective tax rate, which is based on
the Company’s forecasted annual pre-tax income, as adjusted for certain expenses within the consolidated statements
of income that will never be deductible on the Company’s tax returns and certain charges expected to be deducted on
the Company’s tax returns that will never be deducted on the consolidated statements of income, multiplied by the
statutory tax rates for the various jurisdictions in which the Company operates and reduced by certain anticipated tax
credits.
The Company files income tax returns in the many jurisdictions in which it operates, including the U.S., several
U.S. states and the People’s Republic of China. The statute of limitations varies by jurisdiction; tax years open to federal
or state audit or other adjustment as of March 31, 2019 were the tax years ended March 31, 2019, April 1, 2018, April 2,
2017, April 3, 2016, March 29, 2015, March 30, 2014, March 31, 2013, April 1, 2012 and April 3, 2011.
The Company’s 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 in which the tax rates are changed. On December 22, 2017, the President
of the United States signed into law comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “TCJA”), which included a provision to lower the federal corporate income tax rate to 21% effective as of January 1,
2018. Because the Company’s fiscal year 2018 ended on April 1, 2018, the lower corporate income tax rate was phased
in, resulting in a blended federal statutory rate of 30.75% for fiscal 2018.
The Company’s policy is to provide 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 Company recognized the effect of the TCJA on the Company’s net deferred income tax assets,
which had previously been recorded based upon the pre-TCJA enacted composite federal, state and foreign income tax
rate of approximately 37.5% that would have been applied as the financial statement and tax differences began to
reverse. Because most of these differences are now estimated to reverse at a composite rate of approximately 24.5%, the
Company was required to revalue its net deferred income tax assets. This revaluation resulted in a discrete charge to
income tax expense of $377,000 during fiscal year 2018.
Management evaluates items of income, deductions and credits reported on the Company’s various federal and
state income tax returns filed and recognizes the effect of positions taken on those income tax returns only if those
positions are more likely than not to be sustained. The Company applies the provisions of FASB ASC Sub-topic 740-10-
25, which requires a minimum recognition threshold that a tax benefit must meet before being recognized in the
financial statements. 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.
In evaluating the process regarding the calculation of the state portion of its income tax provision, the Company
has taken a tax position that reflects opportunities for more favorable state apportionment percentages, which were
applied to several prior fiscal years and to succeeding fiscal years. After considering all relevant information, the
Company believes that the technical merits of this tax position would more likely than not be sustained. However, the
Company also believes that the ultimate resolution of the tax position will result in a tax benefit that is less than the full
amount realized through the application of the more favorable state apportionment percentages. Therefore, the
Company’s measurement regarding the tax impact of the revised state apportionment percentages resulted in the
Company recording discrete reserves for unrecognized tax liabilities during fiscal years 2019 and 2018 of $87,000 and
$113,000, respectively. Because the tax impact of the revised state apportionment percentages are measured net of
federal income taxes, the provision in the TCJA that lowered the federal corporate income tax rate to 21% required the
Company to revalue its reserve for unrecognized tax liabilities. This revaluation resulted in a net discrete charge to
income tax expense of $120,000 during fiscal 2018.
The Company’s policy is to accrue interest expense and penalties as appropriate on any estimated unrecognized
tax liabilities as a charge to interest expense in the Company’s consolidated statements of income. During fiscal years
2019 and 2018, the Company accrued $90,000 and $96,000, respectively, for interest expense and penalties on the
portion of the unrecognized tax liabilities that has been refunded to the Company but for which the relevant statute of
F-10
limitations remained unexpired. No interest expense or penalties are accrued with respect to estimated unrecognized
tax liabilities that are associated with state income tax overpayments that remain receivable.
In December 2016, the Company received notification from the State of California of its intention to examine
the Company’s consolidated income tax returns for the fiscal years ended March 30, 2014, March 31, 2013, April 1, 2012
and April 3, 2011. The ultimate resolution of the examination could include administrative or legal proceedings.
Although management believes that the calculations and positions taken on these and all other filed income tax returns
are reasonable and justifiable, the outcome of this or any other examination could result in an adjustment to the position
that the Company took on such income tax returns. Such adjustment could also lead to adjustments to one or more
other state income tax returns, or to income tax returns for subsequent fiscal years, or both. To the extent that the
Company’s reserve for unrecognized tax liabilities is not adequate to support the cumulative effect of such adjustments,
the Company could experience a material adverse impact on its future results of operations. Conversely, to the extent
that the calculations and positions taken by the Company on the filed income tax returns under examination are
sustained, the reversal of all or a portion of the Company’s reserve for unrecognized tax liabilities could result in a
favorable impact on its future results of operations.
Advertising Costs: The Company’s advertising costs are primarily associated with cooperative advertising
arrangements with certain of the Company’s customers and are recognized using the straight-line method based upon
aggregate annual estimated amounts for these customers, with periodic adjustments to the actual amounts of
authorized agreements. Costs associated with advertising on websites such as Facebook and Google and which are
associated with the Company’s online business are recorded as incurred. Advertising expense is included in other
marketing and administrative expenses in the consolidated statements of income and amounted to $1.3 million for each
of fiscal years 2019 and 2018.
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 exercisable options, which are added to basic shares to arrive at diluted shares.
Recently Issued Accounting Standards: On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers (Topic 606), which has replaced most previous GAAP guidance on revenue recognition, and
which now requires the use of more estimates and judgments. When issued, the ASU was to become effective in the
fiscal year beginning after December 15, 2016, but on August 12, 2015 the FASB issued ASU No. 2015-14, Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective Date, which provided for a one-year deferral of ASU No. 2014-
09. Thus, the Company adopted ASU No. 2014-09 effective as of April 2, 2018 on a modified retrospective basis.
ASU No. 2014-09 requires revenue to be recognized by an entity when a customer obtains control of promised
products in an amount that reflects the consideration that the entity expects to receive in exchange for those products.
A further description of the GAAP guidance in effect subsequent to the adoption of ASU No. 2014-09 is set forth above
under the headings “Revenue Recognition,” “Allowances Against Accounts Receivable” and “Uncollectible Accounts” in this
Note 2 disclosure. The Company performed an evaluation of its revenue contract arrangements and has determined
that, although the disclosures related to the Company’s accounting policies and practices associated with the amount
and timing of revenue recognition have been enhanced, the adoption of the ASU did not have a material impact on the
Company’s financial position or results of operations.
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will increase transparency and
comparability by requiring an entity to recognize lease assets and lease liabilities on its balance sheet and by requiring
the disclosure of key information about leasing arrangements. Under the provisions of ASU No. 2016-02, the Company
will be required to capitalize most of its current operating lease obligations as right-of-use assets with corresponding
liabilities based upon the present value of the future cash outflows associated with such operating lease obligations.
ASU No. 2016-02 will become effective for the first interim period of the fiscal year beginning after December 15, 2018.
When issued, ASU No. 2016-02 was to have been applied using a modified retrospective approach, but on July
30, 2018 the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which will allow an alternative
optional transition method with which to adopt ASU No. 2016-02. Upon adoption, in lieu of the modified retrospective
F-11
approach, an entity will be allowed to recognize a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption.
Although early adoption of ASU No. 2016-02 (as modified by ASU No. 2018-11) is permitted, the Company
intends to adopt ASU No. 2016-02 effective as of April 1, 2019. ASU No. 2016-02 contains a number of optional practical
expedients available to be used in transition. The Company expects to elect to use the “package of practical expedients,”
which will permit the Company to avoid a reassessment of prior conclusions about lease identification, lease
classification and initial direct costs. The Company also expects to elect the practical expedient that will permit the
Company to exclude short-term agreements of less than 12 months from capitalization. The Company expects to use
the modified retrospective approach and further expects that the adoption of ASU No. 2016-02 will have a material effect
on the Company’s financial position and related disclosures. Upon its adoption of ASU No. 2016-02, the Company expects
to recognize operating lease liabilities and corresponding right-of-use assets of $1.9 million based on the present value
of the remaining minimum rental payments under the Company’s operating leases.
On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, the objective of which is to provide financial statement users with
more information about the expected credit losses on financial instruments and other commitments to extend credit
held by an entity. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays
recognition until it is probable that a loss has been incurred. Because this methodology restricted the recognition of
credit losses that are expected, but did not yet meet the “probable” threshold, ASU No. 2016-13 was issued to require
the consideration of a broader range of reasonable and supportable information when determining estimates of credit
losses. The ASU will become effective for the first interim period of the fiscal year beginning after December 15, 2019.
The ASU is to be applied using a modified retrospective approach, and the ASU may be early-adopted as of the first
interim period of the fiscal year beginning after December 15, 2018. Although the Company has not decided whether to
adopt ASU No. 2016-13 early or determined the full impact of the adoption of the ASU, because the Company assigns
the majority of its trade accounts receivable under factoring agreements with CIT, the Company does not believe that
the adoption of ASU No. 2016-13 will have a significant impact on the Company’s financial position, results of operations
and related disclosures.
The Company has determined that all other ASU’s issued which had become effective as of May 10, 2019, or
which will become effective at some future date, are not expected to have a material impact on the Company’s
consolidated financial statements.
Note 3 - Financing Arrangements
Master Stand-by Claims Purchase Agreements: On May 16, 2017, the Company entered into an agreement (the
“First Agreement”) with Chase wherein the Company had the right to sell, and Chase had the obligation to purchase,
certain claims that could arise if accounts receivable amounts owed by Toys R Us-Delaware, Inc. (“Toys-Delaware”), an
affiliated company of TRU, to the Company became uncollectible. The First Agreement would have expired on
September 20, 2018 and carried a fee of 1.65% per month of the limit of $1.8 million of accounts receivable due from
Toys-Delaware. On September 18, 2017, TRU and Toys-Delaware filed voluntary petitions for relief under Chapter 11 of
Title 11 of the U.S. Bankruptcy Code (the “Bankruptcy Filing”). Pursuant to the terms of the First Agreement, the
Bankruptcy Filing allowed the Company to exercise its right to sell to Chase the claim that arose as a result of the
Bankruptcy Filing (the “First Exercise”), which amounted to $866,000 and which was paid in full to the Company by Chase.
The First Exercise resulted in the acceleration of the recognition of the remaining unpaid fees owed under the First
Agreement. During fiscal year 2018, the Company recognized $480,000 in fees under the First Agreement, which are
included in marketing and administrative expenses in the accompanying consolidated statements of income.
On September 19, 2017, the Company entered into an agreement (the “Second Agreement”) with Chase
wherein the Company had the right to sell, and Chase had the obligation to purchase, certain accounts receivable claims
that could arise if Toys-Delaware converted its Chapter 11 case to Chapter 7 of the U.S. Bankruptcy Code or had taken
certain other specified actions. The Second Agreement would have expired on March 31, 2018 and carried a fee of 1.50%
per month of the limit of $1.8 million of accounts receivable due from Toys-Delaware. During fiscal year 2018, the
Company recognized $173,000 in fees under the Second Agreement, which are included in marketing and administrative
expenses in the accompanying consolidated statements of income.
F-12
The Second Agreement was scheduled to have expired on March 31, 2018 but on March 14, 2018, TRU filed a
motion with the Court seeking authority to close the remaining Toys-Delaware stores and distribution centers in the U.S.,
and to otherwise discontinue, liquidate and wind-down all U.S. operations of Toys-Delaware. Pursuant to the terms of
the Second Agreement, the liquidation filing allowed the Company to exercise its right to sell to Chase the claim under
the Second Agreement that arose as a result of the liquidation filing, which amounted to $1.8 million and which was paid
in full to the Company by Chase during fiscal year 2019.
Factoring Agreements: The Company assigns the majority of its trade accounts receivable to CIT pursuant to
factoring agreements, which have expiration dates that are coterminous with that of the financing agreement described
below. Under the terms of the factoring agreements, CIT remits customer payments to the Company as such payments
are received by CIT. Credit losses are borne by CIT with respect to assigned accounts receivable from approved
shipments, while 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 or limitation occurs, the Company either assumes (and may seek to mitigate) the credit risk for shipments to
the customer after the date of such termination or limitation or discontinues shipments to the customer. Factoring fees,
which are included in marketing and administrative expenses in the accompanying consolidated statements of income,
were $261,000 and $223,000 during fiscal years 2019 and 2018, respectively. There were no advances on the factoring
agreements at either March 31, 2019 or April 1, 2018.
Credit Facility: The Company’s credit facility at March 31, 2019 consisted of a 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, bearing
interest at the rate of prime minus 0.5% or LIBOR plus 1.75%. The financing agreement matures on July 11, 2022 and is
secured by a first lien on all assets of the Company. As of March 31, 2019, the Company had elected to pay interest on
balances owed under the revolving line of credit under the LIBOR option, which was 4.24% as of March 31, 2019. The
financing agreement also provides for the payment by CIT of interest at the rate of prime as of the beginning of the
calendar month minus 2.0%, which was 3.5% as of March 31, 2019, on daily negative balances, if any, held at CIT.
As of March 31, 2019, there was a balance of $4.5 million owed on the revolving line of credit, there was no letter
of credit outstanding and $19.4 million was available under the revolving line of credit based on the Company’s eligible
accounts receivable and inventory balances. As of April 1, 2018, there was a balance of $9.5 million owed on the revolving
line of credit, there was no letter of credit outstanding and $13.2 million was available under the revolving line of credit
based on the Company’s eligible accounts receivable and inventory balances.
The financing agreement 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, transactions with affiliates, and changes in or amendments to the organizational documents for the
Company and its subsidiaries. The Company believes it was in compliance with these covenants as of March 31, 2019.
Note 4 – Acquisitions
Carousel: On August 4, 2017, Carousel Acquisition, LLC, a then newly-formed and wholly-owned subsidiary of
the Company, acquired substantially all of the assets and business of a privately held manufacturer and online retailer of
infant and toddler bedding and nursery décor based in Douglasville, Georgia, which was at that time named Carousel
Designs, LLC (the “Carousel Acquisition”). On August 11, 2017, the seller of such assets having relinquished its rights to
its name as part of the terms of the acquisition transaction, Carousel Acquisition, LLC changed its name to Carousel
Designs, LLC.
The Company anticipates that certain synergies, including administrative and capital efficiencies, may be
achieved as a result of the Company’s control of the combined assets and that the Company will benefit from the direct-
to-consumer opportunities that will result from the Carousel Acquisition. Carousel paid an acquisition cost of $8.7 million
from cash on hand and assumed certain specified liabilities relating to the business. In connection with the Carousel
Acquisition, Carousel paid off capital leases amounting to $845,000 that were associated with certain fixed assets that
were acquired and recognized as expense $347,000 of costs associated with the acquisition during fiscal year 2018, which
is included in marketing and administrative expenses in the accompanying consolidated statements of income.
F-13
The Carousel Acquisition has been accounted for in accordance with FASB ASC Topic 805, Business
Combinations. The Company determined the allocation of the acquisition cost with the assistance of an independent
third party. The identifiable assets acquired were recorded at their estimated fair value, which was determined based on
available information and the use of multiple valuation approaches. The estimated useful lives of the identifiable
intangible assets acquired were determined based upon the remaining time that these assets are expected to directly or
indirectly contribute to the future cash flow of the Company. In its allocation of the acquisition cost, the Company has
recognized $5.7 million of goodwill, the entirety of which has been assigned to the reporting unit of the Company that
produces and markets infant and toddler bedding, blankets and accessories, and the entirety of which is expected to be
deductible for income tax purposes.
The following table represents the Company’s allocation of the acquisition cost (in thousands) to the identifiable
assets acquired and the liabilities assumed based on their respective estimated fair values as of the acquisition date. The
excess of the acquisition cost over the estimated fair value of the identifiable net assets acquired is reflected as goodwill.
Tangible assets:
Inventory .................................................................................................................................................................... $
Prepaid expenses.....................................................................................................................................................
Fixed assets ................................................................................................................................................................
Total tangible assets .......................................................................................................................................................
Amortizable intangible assets:
Tradename .................................................................................................................................................................
Developed technology ..........................................................................................................................................
Non-compete covenants ......................................................................................................................................
Total amortizable intangible assets ...........................................................................................................................
Goodwill ..............................................................................................................................................................................
Total acquired assets ......................................................................................................................................................
Liabilities assumed:
Accounts payable ....................................................................................................................................................
Accrued wages and benefits ...............................................................................................................................
Unearned revenue ..................................................................................................................................................
Other accrued liabilities ........................................................................................................................................
Capital leases ............................................................................................................................................................
Total liabilities assumed .................................................................................................................................................
Net acquisition cost ................................................................................................................................................ $
967
5
1,068
2,040
1,100
1,100
360
2,560
5,679
10,279
319
59
271
60
845
1,554
8,725
The Carousel Acquisition resulted in net sales of $6.5 million and $5.4 million during fiscal years 2019 and 2018,
respectively. Carousel recorded amortization expense associated with the acquired amortizable intangible assets of
$242,000 and $183,000 during fiscal years 2019 and 2018, respectively, which is included in marketing and administrative
expenses in the consolidated statements of income. Amortization is computed for the acquired amortizable intangible
assets using the straight-line method over the estimated useful lives of the assets, which are 15 years for the tradename,
10 years for the developed technology, 5 years for the non-compete agreements and 11 years on a weighted-average
basis for the grouping taken together.
Sassy: On December 15, 2017, Sassy Baby (then known as Hamco, Inc.) acquired assets associated with the
Sassy®-branded developmental toy, feeding and baby care product line from Sassy 14, LLC and assumed related liabilities
(the “Sassy Acquisition”). Sassy Baby paid an acquisition cost of $6.5 million from a combination of cash on hand and the
revolving line of credit. Sassy Baby also recognized as expense $169,000 of costs associated with the acquisition during
fiscal year 2018, which is included in marketing and administrative expenses in the accompanying consolidated
statements of income.
The Company has achieved certain administrative and capital efficiencies as a result of its acquisition of the
Sassy product line. For example, synergies were attained in April 2018 when the Company transferred the inventory
acquired in the Sassy Acquisition from Grand Rapids, Michigan to the Company’s distribution facility in Compton,
California. The Company anticipates that it will further benefit from the added diversity to the Company’s portfolio of
F-14
products and that the Sassy Acquisition will strengthen the Company’s overall position in the infant and juvenile
products market.
The Sassy Acquisition has been accounted for in accordance with FASB ASC Topic 805, Business Combinations.
The Company determined the allocation of the acquisition cost with the assistance of an independent third party. The
identifiable assets acquired were recorded at their estimated fair value, which was determined based on available
information and the use of multiple valuation approaches. The estimated useful lives of the identifiable intangible assets
acquired were determined based upon the remaining time that these assets are expected to directly or indirectly
contribute to the future cash flow of the Company.
The following table represents the Company’s preliminary allocation of the acquisition cost (in thousands) to
the identifiable assets acquired and the liabilities assumed based on their respective estimated fair values as of the
acquisition date. The excess of the acquisition cost over the estimated fair value of the identifiable net assets acquired is
reflected as goodwill.
Tangible assets:
Inventory .................................................................................................................................................................... $
Prepaid expenses.....................................................................................................................................................
Fixed assets ................................................................................................................................................................
Total tangible assets .......................................................................................................................................................
Amortizable intangible assets:
Tradename .................................................................................................................................................................
Customer relationships .........................................................................................................................................
Total amortizable intangible assets ...........................................................................................................................
Goodwill ..............................................................................................................................................................................
Total acquired assets ......................................................................................................................................................
Liabilities assumed:
Accrued wages .........................................................................................................................................................
Net acquisition cost ......................................................................................................................................................... $
3,297
120
383
3,800
580
1,840
2,420
320
6,540
20
6,520
In its allocation of the acquisition cost, the Company recognized $320,000 of goodwill, the entirety of which has
been assigned to the reporting unit of the Company that produces and markets infant and toddler bibs, developmental
toys, bath care and disposable products, and the entirety of which is expected to be deductible for income tax purposes.
The Sassy Acquisition resulted in net sales of $11.8 million and $2.1 million of developmental toy, feeding and
baby care products during fiscal years 2019 and 2018, respectively. Sassy Baby recorded amortization expense associated
with the amortizable intangible assets acquired in the Sassy Acquisition of $223,000 and $56,000 during fiscal years 2019
and 2018, respectively, which is included in marketing and administrative expenses in the consolidated statements of
income. Amortization is computed for the acquired amortizable intangible assets using the straight-line method over
the estimated useful lives of the assets, which are 15 years for the tradename, 10 years for the customer relationships
and 11 years on a weighted-average basis for the grouping taken together.
Note 5 – Retirement Plan
The Company sponsors a defined contribution retirement savings plan with a cash or deferred arrangement
(the “401(k) Plan”), as provided by Section 401(k) of the Internal Revenue Code (“Code”). The 401(k) Plan covers
substantially all employees, who may elect to contribute a portion of their compensation to the 401(k) Plan, subject to
maximum amounts and percentages as prescribed in the Code. Each calendar year, the Company’s Board of Directors
(the “Board”) determines the portion, if any, of employee contributions that will be matched by the Company. For
calendar years 2019, 2018 and 2017, the Board established the employer matching contributions at 100% of the first 2%
of employee contributions and 50% of the next 3% of employee contributions to the 401(k) Plan. If an employee
separates from the Company prior to the full vesting of the funds in their account, then the unvested portion of the
matching employer amount in their account is forfeited when the employee receives a distribution from their account.
The Company utilizes such forfeitures as an offset to the aggregate matching contributions. The Company's matching
F-15
contributions to the 401(k) Plan, net of the utilization of forfeitures, were $284,000 and $223,000 for fiscal years 2019 and
2018, respectively.
Note 6 – Goodwill, Customer Relationships and Other Intangible Assets
Goodwill: Goodwill represents the excess of the purchase price over the fair value of net identifiable assets
acquired in business combinations. For the purpose of presenting and measuring for the impairment of goodwill, the
Company has two reporting units: one that produces and markets infant and toddler bedding, blankets and accessories
and another that produces and markets infant and toddler bibs, developmental toys, bath care and disposable products.
The goodwill of the reporting units of the Company as of March 31, 2019 and April 1, 2018 amounted to $30.0 million,
which is reflected in the accompanying consolidated balance sheets net of accumulated impairment charges of $22.9
million, for a net reported balance of $7.1 million.
The Company measures for impairment the goodwill within its reporting units annually as of the first day of the
Company’s fiscal year. An additional interim measurement for impairment is performed during the year whenever an
event or change in circumstances occurs that suggests that the fair value of either of the reporting units of the Company
has more likely than not (defined as having a likelihood of greater than 50%) fallen below its carrying value. The annual
or interim measurement for impairment is performed by first assessing qualitative factors to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying amount. If such qualitative factors so
indicate, then the measurement for impairment is continued by calculating an estimate of the fair value of each reporting
unit and comparing the estimated fair value to the carrying value of the reporting unit. If the carrying value exceeds the
estimated fair value of the reporting unit, then an impairment charge is calculated as the difference between the carrying
value of the reporting unit and its estimated fair value, not to exceed the goodwill of the reporting unit.
On April 2, 2018, the Company performed the annual measurement for impairment of the goodwill of its
reporting units and concluded that the estimated fair value of each of the Company’s reporting units exceeded their
carrying values, and thus the goodwill of the Company’s reporting units was not impaired as of that date.
Other Intangible Assets: Other intangible assets as of March 31, 2019 and April 1, 2018 consisted primarily of the
fair value of identifiable assets acquired in business combinations other than tangible assets and goodwill. The gross
amount and accumulated amortization of the Company’s other intangible assets as of March 31, 2019 and April 1, 2018,
the amortization expense for fiscal years 2019 and 2018 and the classification of such amortization expense within the
accompanying consolidated statements of income are as follows (in thousands):
Gross Amount
March 31, April 1,
2018
2019
Accumulated Amortization
March 31,
Amortization Expense
Fiscal Year Ended
April 1,
2018
March 31, April 1,
2018
2019
Tradename and trademarks ................................ $
Developed technology .........................................
Non-compete covenants ......................................
Patents ........................................................................
Customer relationships .........................................
Total other intangible assets ..................... $
3,667 $
1,100
458
1,601
7,374
14,200 $
3,667 $
1,100
458
1,601
7,374
14,200 $
Classification within the accompanying
consolidated statements of income:
Cost of products sold ...................................
Marketing and administrative expenses
Total amortization expense .............
2019
1,501 $
183
200
781
5,103
7,768 $
1,270 $
73
122
673
4,790
6,928 $
231 $
110
78
108
313
840 $
204
73
55
108
396
836
$
$
6 $
834
840 $
7
829
836
The Company estimates that its amortization expense will be $854,000, $790,000, $765,000, $689,000 and
$665,000 in fiscal years 2020, 2021, 2022, 2023 and 2024, respectively.
F-16
Note 7 – Inventories
Major classes of inventory were as follows (in thousands):
Raw Materials ..................................................................................................................... $
Work in Process ..................................................................................................................
Finished Goods ..................................................................................................................
Total inventory ............................................................................................................... $
617 $
56
18,861
19,534 $
875
134
18,779
19,788
March 31, 2019
April 1, 2018
Note 8 – Stock-based Compensation
The Company has two incentive stock plans, the 2006 Omnibus Incentive Plan (the “2006 Plan”) and the 2014
Omnibus Equity Compensation Plan (the “2014 Plan”). As a result of the approval of the 2014 Plan by the Company’s
stockholders at the Company’s 2014 annual meeting, grants may no longer be issued under the 2006 Plan.
The Company believes that awards of long-term, equity-based incentive compensation will attract and retain
directors, officers and employees of the Company and will encourage these individuals to contribute to the successful
performance of the Company, which will lead to the achievement of the Company’s overall goal of increasing
stockholder value. Awards granted under the 2014 Plan may be in the form of incentive stock options, non-qualified
stock options, shares of restricted or unrestricted stock, stock units, stock appreciation rights, or other stock-based
awards. Awards may be granted subject to the achievement of performance goals or other conditions, and certain
awards may be payable in stock or cash, or a combination of the two. The 2014 Plan is administered by the Compensation
Committee of the Board, which selects eligible employees, non-employee directors and other individuals to participate
in the 2014 Plan and determines the type, amount, duration (such duration not to exceed a term of ten (10) years for
grants of options) and other terms of individual awards. At March 31, 2019, 556,000 shares of the Company’s common
stock were available for future issuance under the 2014 Plan, which may be issued from authorized and unissued shares
of the Company's common stock or treasury shares.
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. During fiscal years
2019 and 2018, the Company recorded $377,000 and $539,000 of stock-based compensation, respectively. The Company
records the compensation expense associated with stock-based awards granted to individuals in the same expense
classifications as the cash compensation paid to those same individuals. No stock-based compensation costs were
capitalized as part of the cost of an asset as of March 31, 2019.
Stock Options: The following table represents stock option activity for fiscal years 2019 and 2018:
Fiscal Years Ended
March 31, 2019
April 1, 2018
Outstanding at Beginning of Period ............................................. $
Granted ...................................................................................................
Forfeited .................................................................................................
Outstanding at End of Period ..........................................................
Exercisable at End of Period ............................................................
7.93
5.90
7.83
7.45
8.03
395,000 $
110,000
(47,500 )
457,500
292,500
Weighted-
Average Number of Average Number of
Exercise
Price
Options
Outstanding
Weighted-
Exercise
Price
Options
Outstanding
322,500
140,000
(67,500 )
395,000
220,000
8.35
7.35
9.05
7.93
7.94
There were no stock options exercised during either of fiscal years 2019 and 2018. As of March 31, 2019, the
intrinsic value of the outstanding and exercisable stock options was each $2,000.
F-17
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 of the non-qualified stock options awarded to certain employees
during fiscal years 2019 and 2018, which options vest over a two-year period, assuming continued service.
Stock Options Granted to Employees During Fiscal Years Ended
Number of options issued ......
Grant date ....................................
Dividend yield ............................
Expected volatility .....................
Risk free interest rate ................
Contractual term (years) .........
Expected term (years) ..............
Forfeiture rate .............................
Exercise price (grant-date
closing price) per option .... $
Fair value per option ................ $
2019
110,000
June 13, 2018
2018
20,000
10,000
December 18, 2017 August 4, 2017
4.92 %
25.00 %
1.94 %
10.00
3.00
5.00 %
5.77 %
25.00 %
1.51 %
10.00
3.00
5.00 %
5.42 %
25.00 %
2.78 %
10.00
4.00
5.00 %
5.90
0.49
$
$
6.50 $
0.59 $
5.55
0.50
$
$
110,000
June 8, 2017
4.13 %
25.00 %
1.47 %
10.00
3.00
5.00 %
7.75
0.85
For the fiscal years ended March 31, 2019 and April 1, 2018, the Company recognized compensation expense
associated with stock options as follows (in thousands):
Options Granted in Fiscal Year
Fiscal Year Ended March 31, 2019
Cost of
Products
Sold
Marketing &
Administrative
Expenses
Total
Expense
2017 ....................................................... $
2018 .......................................................
2019 .......................................................
6 $
17
7
Total stock option compensation .......................................... $
30 $
4 $
26
13
43 $
Options Granted in Fiscal Year
Fiscal Year Ended April 1, 2018
Cost of
Products
Sold
Marketing &
Administrative
Expenses
Total
Expense
2016 ....................................................... $
2017 .......................................................
2018 .......................................................
6 $
26
17
Total stock option compensation .......................................... $
49 $
1 $
15
19
35 $
10
43
20
73
7
41
36
84
F-18
A summary of stock options outstanding and exercisable as of March 31, 2019 is as follows:
Exercise
Price
Number
of Options
Outstanding
Weighted-
Avg. Remaining
Contractual
Life in Years
$4.00 - 4.99 ........
$5.00 - 5.99 ........
$6.00 - 6.99 ........
$7.00 - 7.99 ........
$8.00 - 8.99 ........
$9.00 - 9.99 ........
5,000
140,000
30,000
142,500
60,000
80,000
457,500
2.20
8.29
5.71
7.09
6.20
7.19
7.21
Weighted-
Avg. Exercise
Price of
Options
Outstanding
$
$
$
$
$
$
$
4.81
5.81
6.26
7.81
8.38
9.60
7.45
Weighted-
Avg. Exercise
Number
of Options
Exercisable
5,000 $
25,000 $
25,000 $
97,500 $
60,000 $
80,000 $
292,500 $
Price of
Options
Exercisable
4.81
5.45
6.21
7.83
8.38
9.60
8.03
As of March 31, 2019, total unrecognized stock-option compensation costs amounted to $47,000, which will be
recognized as the underlying stock options vest over a weighted-average period of 6.6 months. 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 employee or director who has stock options that are unvested as of such individual’s separation date.
Non-vested Stock Granted to Non-Employee Directors: The Board granted the following shares of non-vested stock
to the Company’s non-employee directors:
Number of Shares
28,000 .............................................................................................................................
28,000 .............................................................................................................................
28,000 .............................................................................................................................
28,000 .............................................................................................................................
Fair Value
per Share
$5.43
5.50
10.08
8.20
Grant Date
August 8, 2018
August 9, 2017
August 10, 2016
August 12, 2015
These shares vest over a two-year period, assuming continued service. The fair value of non-vested stock
granted to the Company’s non-employee directors was based on the closing price of the Company’s common stock on
the date of each grant. In each of August 2018 and 2017, 28,000 shares that had been granted to the Company’s non-
employee directors vested, having an aggregate value of $151,000 and $157,000, respectively.
Non-vested Stock Granted to Employees: On January 18, 2019, upon the appointment of Donna Sheridan to
serve as the President and Chief Executive Officer of NoJo, the Board granted 25,000 shares of non-vested stock to Ms.
Sheridan. These shares will vest on January 18, 2021, assuming continued service. The fair value of the non-vested stock
granted to Ms. Sheridan is $5.86 per share, which was based on the closing price of the Company’s common stock on the
date of the grant.
Performance Bonus Plan: The Company maintains a performance bonus plan for certain executive officers that
provides for awards of cash or shares of common stock in the event that the aggregate average market value of the
common stock during the relevant fiscal year, plus the amount of cash dividends paid in respect of the common stock
during such period, increases. These individuals may instead be awarded cash, if and to the extent that an insufficient
number of shares of common stock are available for issuance from all shareholder-approved, equity-based plans or
programs of the Company in effect. The performance bonus plan also imposes individual limits on awards and provides
that shares of common stock that may be awarded will vest over a two-year period. Thus, compensation expense
associated with performance bonus plan awards are recognized over a three-year period – the fiscal year in which the
award is earned, plus the two-year vesting period.
F-19
In connection with the performance bonus plan, the Company granted shares of common stock and recognized
compensation expense as set forth below.
Fiscal
Year
Earned
2016 ............
2017 ............
Shares
Granted
Fiscal
Year
Granted
Fair
Value
Per
Share
41,205
42,250
2017
2018
$
7.865 $
8.271
Compensation expense recognized during fiscal year
2016
108,000 $
-
2017
108,000 $
116,000
2018
108,000 $
116,000
2019
-
116,000
The below table sets forth the vesting of shares issued in connection with the grants of shares set forth in the
above table. Each of the individuals holding shares that vested surrendered to the Company the number of shares
necessary to satisfy the income tax withholding obligations that arose from the vesting of the shares. The below table
also sets forth the taxes remitted to the appropriate taxing authorities on behalf of such individuals.
Vesting of shares during the fiscal year ended
Fiscal
Year
Granted
2017 ....................
2018 ....................
Shares
Granted
Shares
Vested
March 31, 2019
Aggregate
Value
Taxes
Shares
Remitted Vested
39,000
56,000
20,604 $
-
April 1, 2018
Aggregate
Value
Taxes
Remitted
56,000
-
167,000 $
-
41,205
42,250
20,601 $
21,125
122,000 $
124,000
Total
41,726 $
246,000 $
95,000
20,604 $
167,000 $
56,000
For the fiscal year ended March 31, 2019, the Company recognized compensation expense associated with non-
vested stock grants, which is included in marketing and administrative expenses in the accompanying consolidated
statements of income, as follows (in thousands):
Stock Granted in Fiscal Year
Employees
Directors
Non-employee
2017 ....................................................... $
2018 .......................................................
2019 .......................................................
- $
116
13
47 $
77
51
Total stock grant compensation ..................................... $
129 $
175 $
Total
Expense
47
193
64
304
For the fiscal year ended April 1, 2018, the Company recognized compensation expense associated with non-
vested stock grants, which is included in marketing and administrative expenses in the accompanying consolidated
statements of income, as follows (in thousands):
Stock Granted in Fiscal Year
2016 .......................................................... $
2017 ..........................................................
2018 ..........................................................
Total stock grant compensation ....................................... $
Non-employee
Employees
Directors
Total
Expense
- $
108
116
224 $
38 $
141
52
231 $
38
249
168
455
As of March 31, 2019, total unrecognized compensation expense related to the Company’s non-vested stock
grants was $261,000, which will be recognized over the remaining portion of the respective vesting periods associated
with each block of grants, such grants having a weighted average vesting term of 10.1 months. The amount of future
compensation expense related to 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 unvested grants as of such individual’s separation date.
F-20
Note 9 – Income Taxes
The Company’s income tax provision for the fiscal years ended March 31, 2019 and April 1, 2018 is summarized
below (in thousands):
Fiscal year ended March 31, 2019
Current
Deferred
Total
Income tax expense on current year income:
Federal ................................................................................................ $
State ....................................................................................................
Foreign ...............................................................................................
Total income tax expense on current year income .................
Income tax expense (benefit) - discrete items:
Reserve for unrecognized tax benefits ....................................
Adjustment to prior year provision ..........................................
Net excess tax shortfall related to stock-based
compensation ..............................................................................
Income tax expense (benefit) - discrete items ..........................
Total income tax expense ................................................................ $
1,282 $
287
11
1,580
87
85
12
184
1,764 $
61 $
18
-
79
-
(71 )
-
(71 )
8 $
Fiscal year ended April 1, 2018
Current
Deferred
Total
Income tax expense on current year income:
Federal ................................................................................................ $
State ....................................................................................................
Foreign ...............................................................................................
Total income tax expense on current year income .................
Income tax expense (benefit) - discrete items:
Reserve for unrecognized tax benefits ....................................
Revaluations due to change in enacted tax rates ................
Adjustment to prior year provision ..........................................
Net excess tax benefit related to stock-based
compensation ..............................................................................
Income tax expense (benefit) - discrete items ..........................
Total income tax expense ................................................................ $
1,219 $
177
12
1,408
113
120
74
(23 )
284
1,692 $
325 $
41
-
366
-
377
(35 )
-
342
708 $
1,343
305
11
1,659
87
14
12
113
1,772
1,544
218
12
1,774
113
497
39
(23 )
626
2,400
F-21
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities as of March 31, 2019 and April 1, 2018 are as follows (in thousands):
March 31, 2019 April 1, 2018
Deferred tax assets:
Employee wage and benefit accruals ........................................................................ $
Accounts receivable and inventory reserves ...........................................................
Deferred rent ......................................................................................................................
Intangible assets ................................................................................................................
State net operating loss carryforwards ......................................................................
Accrued interest and penalty on unrecognized tax liabilities ...........................
Stock-based compensation ...........................................................................................
Total gross deferred tax assets .................................................................................
Less valuation allowance ...........................................................................................
Deferred tax assets after valuation allowance ....................................................
Deferred tax liabilities:
Prepaid expenses ..............................................................................................................
Property, plant and equipment ....................................................................................
Total deferred tax liabilities .......................................................................................
Net deferred income tax assets ............................................................................... $
441 $
129
25
184
710
55
148
1,692
(710 )
982
(175 )
(283 )
(458 )
524 $
197
180
40
391
724
36
208
1,776
(724 )
1,052
(186 )
(334 )
(520 )
532
In assessing the probability that the Company’s deferred tax assets will be realized, management of the
Company has considered whether it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income during the
future periods in which the temporary differences giving rise to the deferred tax assets will become deductible. The
Company has also considered the scheduled inclusion into taxable income in future periods of the temporary differences
giving rise to the Company’s deferred tax liabilities. The valuation allowance as of March 31, 2019 and April 1, 2018 was
related to state net operating loss carryforwards that the Company does not expect to be realized. Based upon the
Company’s expectations of the generation of sufficient taxable income during future periods, the Company believes that
it is more likely than not that the Company will realize its deferred tax assets, net of the valuation allowance and the
deferred tax liabilities.
The Company’s 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 in which the tax rates are changed. On December 22, 2017, the President
of the United States signed into law the TCJA, which includes a provision to lower the federal corporate income tax rate
to 21% effective as of January 1, 2018. As the Company’s fiscal year 2018 ended on April 1, 2018, the lower corporate
income tax rate was phased in, resulting in a blended federal statutory rate of 30.75% for fiscal year 2018.
The Company’s policy is to provide 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 Company has recognized the effect of the TCJA on the Company’s net deferred income tax
assets, which as of October 2, 2017 and April 2, 2017 had been recorded based upon the pre-TCJA enacted composite
federal, state and foreign income tax rate of approximately 37.5% that would have been applied as the financial
statement and tax differences began to reverse. Because most of these differences are now estimated to reverse at a
composite rate of approximately 24.5%, the Company was required to revalue its net deferred income tax assets. This
revaluation resulted in a discrete charge to income tax expense of $377,000 during fiscal year 2018.
Management evaluates items of income, deductions and credits reported on the Company’s various federal and
state income tax returns filed and recognizes the effect of positions taken on those income tax returns only if those
positions are more likely than not to be sustained. The Company applies the provisions of FASB ASC Sub-topic 740-10-
25, which requires a minimum recognition threshold that a tax benefit must meet before being recognized in the
financial statements. 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.
F-22
The following table sets forth the reconciliation of the beginning and ending amounts of unrecognized tax
benefits for fiscal years 2019 and 2018 (in thousands):
Balance at beginning of period ......................................................................................................... $
Additions related to current year positions...................................................................................
Additions related to prior year positions .......................................................................................
Revaluations due to change in enacted tax rates .......................................................................
Reductions for tax positions of prior years ....................................................................................
Reductions due to the lapse of the statute of limitations ........................................................
Payments pursuant to judgements and settlements ................................................................
Balance at end of period ...................................................................................................................... $
2019
2018
1,017 $
87
90
-
-
-
-
1,194 $
688
113
96
120
-
-
-
1,017
In evaluating the process regarding the calculation of the state portion of its income tax provision, the Company
has taken a tax position that reflects opportunities for more favorable state apportionment percentages, which were
applied to several prior fiscal years and to succeeding fiscal years. After considering all relevant information, the
Company believes that the technical merits of this tax position would more likely than not be sustained. However, the
Company also believes that the ultimate resolution of the tax position will result in a tax benefit that is less than the full
amount realized through the application of the more favorable state apportionment percentages. Therefore, the
Company’s measurement regarding the tax impact of the revised state apportionment percentages resulted in the
Company recording discrete reserves for unrecognized tax liabilities during fiscal years 2019 and 2018 of $87,000 and
$113,000, respectively. Because the tax impact of the revised state apportionment percentages are measured net of
federal income taxes, the provision in the TCJA that lowered the federal corporate income tax rate to 21% required the
Company to revalue its reserve for unrecognized tax liabilities. This revaluation resulted in a net discrete charge to
income tax expense of $120,000 during fiscal 2018.
The Company’s policy is to accrue interest expense and penalties as appropriate on any estimated unrecognized
tax liabilities as a charge to interest expense in the Company’s consolidated statements of income. During fiscal years
2019 and 2018, the Company accrued $90,000 and $96,000, respectively, for interest expense and penalties on the
portion of the unrecognized tax liabilities that has been refunded to the Company but for which the relevant statute of
limitations remained unexpired. No interest expense or penalties are accrued with respect to estimated unrecognized
tax liabilities that are associated with state income tax overpayments that remain receivable.
The Company's provision for income taxes is based upon effective tax rates of 26.1% and 44.3% in fiscal years
2019 and 2018, respectively. These effective tax rates are the sum of the top U.S. statutory federal income tax rate and a
composite rate for state income taxes, net of federal tax benefit, in the various states in which the Company operates,
plus the net effect of various discrete items.
The following table reconciles income tax expense on income from continuing operations at the U.S. federal
income tax statutory rate to the net income tax provision reported for fiscal years 2019 and 2018 (in thousands):
Federal statutory rate ........................................................................................................................
Tax expense at federal statutory rate .......................................................................................... $
State income taxes, net of Federal income tax benefit .........................................................
Tax credits .............................................................................................................................................
Discrete items ......................................................................................................................................
Other - net, including foreign ........................................................................................................
Income tax expense........................................................................................................................... $
21.00 %
$
1,426
241
(11 )
113
3
1,772
$
30.75 %
1,662
126
(12 )
626
(2 )
2,400
2019
2018
Note 10 – Shareholders’ Equity
Dividends: The holders of shares of the Company’s common stock are entitled to receive dividends when and as
declared by the Board. Cash dividends of $0.32 per share, amounting to $3.2 million, were declared during each of fiscal
years 2019 and 2018. The Company’s financing agreement with CIT permits the payment by the Company of cash
F-23
dividends on its common stock without limitation, provided there is no default before or as a result of the payment of
such dividends.
Stock Repurchases: The Company acquired treasury shares by way of the surrender to the Company from several
employees shares of common stock to satisfy the income tax withholding obligations relating to the vesting of stock. In
this manner, the Company acquired 16,000 treasury shares during the fiscal year ended March 31, 2019 at a weighted-
average market value of $5.87 per share and acquired 7,000 treasury shares during the fiscal year ended April 1, 2018 at
a weighted-average market value of $8.10 per share.
Note 11 - Major Customers
The table below sets forth those customers that represented more than 10% of the Company’s gross sales
during fiscal years ended March 31, 2019 and April 1, 2018.
Walmart Inc. ......................................................................................................................
Amazon.com, Inc. ............................................................................................................
Target Corporation .........................................................................................................
Toys "R" Us, Inc. ................................................................................................................
2019
41%
16%
10%
*
2018
39%
11%
*
15%
* Amount represented less than 10% of the Company's gross sales for this fiscal year.
Note 12 – Commitments and Contingencies
Total rent expense was $1.7 million and $1.6 million during fiscal years 2019 and 2018, respectively. The
Company’s commitment for minimum guaranteed rental payments under its lease agreements as of March 31, 2019 is
$1.9 million, consisting of $1.4 million, $497,000 and $42,000 due in fiscal years 2020, 2021 and 2022, respectively.
Total royalty expense was $5.2 million and $7.2 million for fiscal years 2019 and 2018, respectively. The
Company’s commitment for minimum guaranteed royalty payments under its license agreements as of March 31, 2019
is $3.2 million, consisting of $2.5 million, $549,000 and $147,000 due in fiscal years 2020, 2021 and 2022, respectively.
The Company is, from time to time, involved in various legal proceedings relating to claims arising in the
ordinary course of its business. Neither the Company nor any of its subsidiaries is a party to any such legal proceeding
the outcome of which, individually or in the aggregate, is expected to have a material adverse effect on the Company’s
financial position, results of operations or cash flows.
Note 13 – Related Party Transaction
On August 4, 2017, Carousel entered into a lease of the Carousel facilities with JST Capital, LLC (“JST”), a wholly-
owned subsidiary of Pritech, Inc., which is owned by the Chief Executive Officer and the former President of Carousel.
Carousel made lease payments of $96,000 and $63,000 to JST during fiscal years 2019 and 2018, respectively. During
fiscal years 2019 and 2018, $82,000 and $55,000, respectively, of the lease payments were included in cost of products
sold and $14,000 and $8,000, respectively, were included in marketing and administrative expenses in the accompanying
consolidated statements of income.
Note 14 – Subsequent Events
The Company has evaluated events that have occurred between March 31, 2019 and the date that the
accompanying financial statements were issued, and has determined that there are no material subsequent events that
require disclosure.
F-24
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TO O U R F E LLOW S TO CKH O LD E RS
COR POR ATE I N F OR M AT I O N
Throughout the past year, Crown Crafts was tested by tough market conditions and
Board of Directors
major disruptions in the retail landscape. We are extremely proud to report that the
Company has not only persevered through these conditions, but we have performed
exceptionally well. Our solid fi nancial results refl ect the impact of many initiatives we
put in place in fi scal year 2019 and point toward a bright future for the business.
At start of the 2019 fi scal year, Crown Crafts faced
and communicates the value of our brands to
challenges posed by the bankruptcy and subsequent
investors, consumers and retail partners. Our new
liquidation of one of our largest customers. We can
mobile-optimized site also offers quick access to
confi dently say that we navigated these rough waters
important investor information, such as fi nancial and
by sticking to the core values and guiding theme of
stock information, recent press releases, investor
our Company: “doing the right thing.” Over the years,
presentations and SEC fi lings. We encourage visitors
this is what our investors, retail customers, consumers
to explore the new website at www.crowncrafts.com.
and employees have come to expect from Crown
Crafts. We have made it a priority to remain a trusted
partner to all of our stakeholders, and that cannot be
achieved without consistently doing the right thing.
This includes responsibly and conservatively operating
our business, providing safe, quality products, and
serving our customers, vendors and employees well.
Finally, it’s worth mentioning that this year we also
celebrated 62 years of being in business. This is a
signifi cant milestone that not many in our industry
have been able to achieve. The longevity of our
Company and our workforce, whose average time
with Crown Crafts is almost 14 years, is one of our
proudest achievements. This consistency has allowed
I’m exceptionally proud of our staff members, who
us to create value and continue to serve our investors
worked diligently and nimbly to adapt to a changing
well over the years.
Thank you to our customers, employees and
stockholders for your support. We could not be
prouder of the enduring legacy of Crown Crafts and
the many exciting opportunities for fi scal year 2020
and beyond.
Sincerely,
retail environment. By keeping innovation at the core
of what we do, our team was able to introduce new
products that are desired by millennial parents, and
grow new channels of distribution – international,
online and direct to the consumer.
Our newest acquisitions, Carousel Designs and
Sassy, offi cially marked their fi rst full year as a part of
the Crown Crafts family. These brands added new,
unique product lines and a diverse customer base
to our business. We are pleased with the expanded
we’ve added to the Crown Crafts portfolio.
Another highlight this year was an update to
our brand identity, refl ecting our relevance and
longevity in this shifting industry. We introduced a
new Crown Crafts logo and a redesigned website
that better represents the breadth of our portfolio
growth opportunities we are seeing as a result of the
E. Randall Chestnut
acquisitions and the exciting new mix of products
Chairman, President and Chief Executive Offi cer
E. Randall Chestnut
Chairman of the Board, President
and Chief Executive Offi cer
Crown Crafts, Inc.
Zenon S. Nie
Lead Independent Director
Chairman of the Board and
Chief Executive Offi cer
The C.E.O. Advisory Board
Sidney Kirschner
Executive Vice President
Piedmont Healthcare
Chief Philanthropy Offi cer
Piedmont Healthcare Foundation
Donald Ratajczak
Consulting Economist - Retired
Patricia Stensrud
Managing Director
Avalon Net Worth
Founder and Managing Partner
Hudson River Partners LLC
Executive Offi cers
E. Randall Chestnut
President and
Chief Executive Offi cer
Olivia W. Elliott
Vice President and
Chief Financial Offi cer
Donna E. Sheridan
President and
Chief Executive Offi cer
NoJo Baby & Kids, Inc.
Independent Registered
Public Accountant
KPMG LLP
One American Place
301 Main Street
Suite 2150
Baton Rouge, Louisiana 70801
Annual Meeting
The Annual Meeting of
Stockholders will take place
on Tuesday, August 13, 2019, at
10 a.m. CDT at the Company’s
Corporate Headquarters, 916
South Burnside Avenue, Gonzales,
Louisiana.
Stock Listing
The Company’s common stock
is listed on The NASDAQ Capital
Market under the trading symbol
“CRWS.”
Stockholder Information
& Form 10-K
A copy of the Company’s Annual
Report on Form 10-K as fi led with
the Securities and Exchange
Commission may be obtained
without charge by contacting:
Crown Crafts, Inc.
Investor Relations Department
P.O. Box 1028
Gonzales, Louisiana 70707-1028
Phone: (225) 647-9100
e-mail: investor@crowncrafts.com
Investor Relations Counsel
Halliburton Investor Relations
2140 Lake Park Blvd.
Suite 112
Richardson, Texas 75080
Phone: (972) 458-8000
www.halliburtonir.com
Twitter: HIR_Group
Transfer Agent and Registrar
Broadridge Corporate Issuer
Solutions
1155 Long Island Avenue
Edgewood, New York 11717
Phone: (877) 830-4936
Crown Crafts on the Internet
Quarterly and annual fi nancial
information and company
information may
be accessed at
www.crowncrafts.com.
Cover Design by Krista Clement, Sassy Baby, Inc.
annual report
Crown Crafts Incorporated
916 South Burnside Avenue
Gonzales, Louisiana 70737
(800)433-9560 (225)647-9100
www.crowncrafts.com