| RE: | Crown Crafts, Inc. Form 10-K for Fiscal Year Ended March 29, 2009 Filed June 29, 2009 Form 10-Q for Fiscal Quarter Ended December 27, 2009 Filed February 10, 2010 Form 8-K Filed February 10, 2010 File No. 1-7604 |
| 1. | If material, please disclose the estimated amount spent during the last two years on research
and development activities and disclose your accounting policy in the summary of significant
accounting policies on page F-7. |
Response: The Company does not engage in research and development activities as such terms
are defined in FASB ASC 730-10-20, which defines research as “planned search or critical
investigation aimed at discovery of new knowledge with the hope that such knowledge will be
useful in developing a new product or service (referred to as product) or a new process or
technique (referred to as a process) or in bringing about a significant improvement to an
existing product or process.” Development is defined in the FASB ASC as “the translation of
research findings or other knowledge into a plan or design for a new product or process or
for a significant improvement to an existing product or process whether intended for sale or
use.” The Company’s designers and stylists are not engaged in a search for the discovery of
new knowledge. These individuals create new designs from the existing body of knowledge
within the industry. Furthermore, when designing products under the Company’s various
licensed brands, the Company’s designers must coordinate their efforts with the licensors’
design teams, which have final approval authority for such designs. In addition, several of
the Company’s customers prescribe and must approve many of the Company’s new designs as they
relate to private label brands. |
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Upon further consideration in connection with the Comment Letter, the Company intends to
clarify its disclosure related to product design and styling in future filings and avoid the
characterization of the expenditures associated with its product design and styling
activities as research and development. The Company anticipates that such disclosure in
future filings will include, but not necessarily be limited to, the following: |
| 2. | Please include a discussion and analysis of any known trends and uncertainties that have had
or that you reasonably expect will have a material favorable or unfavorable impact on net
revenue or income from continuing operations. For example, discuss your reliance on
significant customers and licensing agreements and the risks and uncertainties that would
cause reported financial information not to be necessarily indicative of future operating
performance or financial condition, such as your ability to maintain relationships with
significant customers and renew license agreements as well as known trends in replacement
orders. In addition, disclose known events that will cause a material change in the
relationship between costs and revenues such as your program of cost reductions and
outsourcing your manufacturing to foreign contract manufacturers. Refer to Item 303(a)(3) of
Regulation S-K. |
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Response: With regard to the Commission’s reference to the Company’s program of cost
reductions and the outsourcing of its manufacturing to foreign contract manufacturers, the
Company has substantially completed these activities and does not anticipate that there will
be a further material change in the relationship between costs and revenues resulting from
these activities. Upon further consideration in connection with the Comment Letter, the
Company intends to clarify its disclosure in future filings by eliminating the references to
these activities. In addition, the Company offers the following proposed revised
disclosure, as a separate paragraph on page 11, immediately preceding the section titled
“Financial Position, Liquidity and Capital Resources”: |
| 3. | Please tell us why you present inventory valuation accounts in the schedule when a reduction
in the carrying amount of inventory from cost to market is viewed as creating a new “cost
basis.” Also, please confirm to us that write-downs of inventory to the lower of cost or
market are recovered only through sale or disposition of the inventory and not restored if
market value recovers prior to sale or disposition. |
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Response: Upon further consideration in connection with the Comment Letter, the Company
believes that the Company’s inventory valuation accounts should not be presented in Schedule
II, and the Company will therefore omit such presentation of its inventory valuation
accounts in future filings. The Company confirms to the Staff that its write-downs of
inventory to market value are recovered only through sale or disposition of the inventory
and not restored if market value recovers prior to sale or disposition. Accordingly, the
Company in future filings will clarify its disclosure related to inventory by eliminating
reference to the allowances for inventory classified as irregular or discontinued, as these
amounts represent an adjustment to reflect the inventory at the lower of cost or market. |
| 4. | Please confirm to us that you received manually signed copies of the reports and that the
reports include the city and state where issued. Refer to Rule 2-02(a) of Regulation S-X. In
future filings the reports of independent registered public firms included in the document
should comply with Rule 2-02 of Regulation S-X. |
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Response: The Company confirms that it received manually signed copies of the reports. The
Company further confirms that the manually signed copies of the reports include the city and
state where issued, and the Company intends to include the city and state where issued in
the electronic version of the report that is included in future filings. |
| 5. | Please disclose sales for each product or group of similar products as required by FASB ASC
280-10-50-40 or disclose why presenting such information is impracticable. If you believe
disclosure of sales for each product or group of similar products is not applicable to your
facts and circumstances, please advise. |
Response: Pursuant to FASB ASC 280-10-50-40, the Company offers the following proposed
revised disclosure, and intends to make similar disclosure in future filings, appended to
the end of the section titled “Segments and Related Information”: |
| 6. | Please tell us the amount of royalty income offset against royalty expense for each year
presented, and your basis in GAAP for classifying royalty income in cost of sales. |
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Response: The Company received no royalty income in fiscal year 2009 and received $7,000 of
royalty income in fiscal year 2008, and has thus justified the presentation of royalty
income as a reduction of royalty expense on the basis that the amount of royalty income is
not material to the line item. In future filings, the Company intends to omit any reference
to royalty income, or in the event that such amounts reach a level of materiality,
appropriately reclassify it as royalty income elsewhere in the Company’s consolidated
financial statements. |
| 7. | Please disclose securities that could potentially dilute basic (loss) earnings per share in
the future that were not included in the computation of diluted (loss) earnings per share
because to do so would have been anti-dilutive for the periods presented. Refer to FASB ASC
260-10-10-50-1(c). |
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Response: Pursuant to FASB ASC 260-10-50-1(c), the Company offers the following proposed
revised disclosure, and intends to make similar disclosure in future filings, appended at
the end of the section titled “(Loss) Earnings Per Share”, immediately preceding the table
on page F-10: |
| 8. | We note your disclosure in Form 8-K/A filed January 22, 2008 that the pro forma adjustment to
acquired inventories reflects estimated selling prices less the sum of the costs of disposal
and a reasonable profit, and that the adjustment reduced the carrying value of acquired
inventories. Please tell us how you compute the estimated costs of disposal and a reasonable
profit allowance for the selling effort. |
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Response: The Company valued the acquired inventory pursuant to Paragraph 37(c) of Statement
of Financial Standards No. 141, Business Combinations, which was the relevant accounting
standard in use on the acquisition date. The Company, in its evaluation of estimated
selling prices, relied heavily upon its sales management personnel, who have extensive
experience in properly pricing and moving closeout products. The Company then reduced the
estimated selling prices by the estimated costs of disposal, consisting of the Company’s 18%
rate for its standard overhead, which included the costs of distribution, design,
procurement, royalties and other administrative costs. The Company further reduced the
selling price by an estimate of customer allowances of 4%, and a profit of approximately 5%. |
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The Company believes that it arrived at a valuation amount of the acquired inventory that
differed from the amount arrived at by Springs Global US, Inc. (“Springs”) mainly because
the Company’s plans for the ultimate disposal of the acquired inventory were demonstrably
different than such plans that had served as the basis for Springs in its valuation of such
inventory. In particular, the Company believes that if the acquisition had not occurred,
Springs’ intent would have been to sell the inventory at its regular selling prices and
during the normal course of its operations. Because of the magnitude of the acquired
inventory in relation to the anticipated increase in sales resulting from the acquisition,
the Company’s intent was to discount the selling prices of the acquired inventory in order
to sell the inventory at a more accelerated rate, which is precisely what the Company
successfully did. |
| 9. | Please expand your disclosure to include the information required by FASB ASC 805-10-50-2(h).
In particular, disclose the following: |
| • | the amount of revenue and earnings of the acquiree since the acquisition date
included in the consolidated statement of income; |
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| • | the revenue and earnings of the combined entity for the current reporting period
as though the acquisition had been as of the beginning of the annual reporting
period; and |
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| • | the revenue and earnings of the combined entity for the comparable prior
reporting period as though the acquisition had occurred as of the beginning of the
comparable prior annual reporting period. |
If disclosure of any of the information is impracticable, then disclose that fact and
explain why the disclosure is impracticable. |
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Response: Upon further consideration in connection with the Comment Letter, it is the
Company’s view that the revenue of Neat Solutions, Inc. (“Neat Solutions”) since the
acquisition date should be disclosed pursuant to FASB ASC 805-10-50-2(h)(1). However,
because the operations of Neat Solutions have been integrated with those of Hamco, Inc., a
wholly-owned subsidiary of the Company, and because the assets acquired from Neat Solutions
do not exist as a discrete entity within the Company’s internal corporate structure, it is
impracticable to determine the earnings generated by the assets acquired from Neat Solutions
since the acquisition date. The Company further believes that the pro forma impact of the
acquisition is not material. |
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In consideration of the response set forth above, the Company offers the following proposed
revised disclosure, and intends to make similar disclosure in future filings, appended below
the table on page 7, immediately preceding “Note 3 — Temporary Investments — Restricted”: |
| 10. | We note that your calculation of EBITDA in the press release furnished as an exhibit includes
an adjustment for goodwill impairment charges. As such, the non-GAAP measure should not be
characterized as EBITDA. When you include an adjustment that is not included in the
definition of EBITDA as set forth in Item 10(e) of Regulation S-K, please revise the title of
the non-GAAP measure to clearly identify the earnings measure being used and all adjustments.
Refer to question 103.01 of the Division’s Compliance & Disclosure Interpretations on the use
of non-GAAP measures available on our website at
http://sec.gov/divisions/corpfin/guidance/nongaapinterp.htm. |
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Response: In future filings, if the Company includes an adjustment to EBITDA, then the
Company intends to use the title “Adjusted EBITDA” instead of “EBITDA”; and in such
instance, the Company also intends to appropriately define the non-GAAP measure (e.g.
“Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization
and the goodwill impairment charge.”). |
| i. | the Company is responsible for the adequacy and accuracy of the disclosure in the
filings referenced herein; |
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| ii. | Staff comments or changes to disclosure in response to Staff comments do not foreclose
the Commission from taking any action with respect to the filings referenced herein; and |
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| iii. | the Company may not assert Staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of the United States. |
| Sincerely, |
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| /s/ E. Randall Chestnut | ||||
| E. Randall Chestnut | ||||
| President and Chief Executive Officer | ||||