The Wynnefield Group, the largest stockholder in Crown Crafts, Inc.
(NASDAQ: CRWS), today sent the following letter to Crown Crafts
stockholders in connection with the Company’s August 10, 2010 annual
meeting of stockholders:
450 SEVENTH AVENUE, SUITE 509
NEW YORK, NY 10123
July 19, 2010
VOTE THE ENCLOSED
Dear Fellow Crown Crafts Stockholder:
We are writing to urge you to take action
to protect your investment in Crown Crafts stock from a
management-endorsed Board majority who seems more interested in
status quo than growing the value of your
We are the Wynnefield Group, Crown Crafts’
, owning 1,573,573 shares or approximately
of the Company’s outstanding shares. As Crown Crafts stockholders for
14 years, we have had enough
We are nominating two highly qualified independent directors,
Biro and Melvin L. Keating
, to the Company’s Board of Directors.
Although they will only constitute a minority of the Board, our Nominees
are committed to working constructively to design and implement both a
changes necessary to increase value for
proxy card for nominees who will work to enhance
stockholders and not merely serve the interests of
management and the management-endorsed Board majority.
THE CURRENT BOARD AND MANAGEMENT ARE RUNNING THE COMPANY FOR THEIR
OWN BENEFIT…TO THE DETRIMENT OF STOCKHOLDERS
While the Board awards itself and management with lavish compensation
and severance arrangements, Crown Crafts’ stock has
The Company faces pressing business and governance issues which the
management-endorsed Board majority has failed to address.
you act, we believe stockholders face potentially even more lost value
As a Crown Crafts stockholder for 14 years, we have had enough.
believe all stockholders deserve Board members who will put
stockholders’ interests first
, conduct a transparent
strategic review process and disclose its results to stockholders –
rather than leave them in the dark.
Our Nominees, Jon Biro and Melvin Keating, are committed to creating
stockholder value by encouraging the Board to: (i) form a standing
Strategic Review Committee; (ii) hire a qualified independent consultant
to assist management and the Board in determining a future strategic
path; (iii) publicly communicate to its stockholders the nature and
extent of its strategic review; and (iv) cause the Company to
participate in investor or industry conferences commonly attended by its
peers in the infant and toddler products industry.
LAVISH BOARD AND MANAGEMENT PAY AND SEVERANCE PACKAGES INCENTIVIZE
QUO RATHER THAN CREATING STOCKHOLDER VALUE
Current Board Maintains
to Benefit Itself and Management
. We believe the current
management-endorsed Board majority has
to effectively oversee management, while instead supporting
management’s self-serving agenda of
. This Board has neither publicly
disclosed the results of a strategic review nor has it implemented any
strategic plan which has resulted in growing stockholder value. The
Company’s recent announcement that it will enter the highly
competitive pet products industry, in which it has no proven
disingenuously hailed by
management as a major strategic initiative. In our view, this small
pet product line diversification is not likely to have any significant
positive impact on revenues, profits or stockholder value.
Board’s Interests Not Aligned with
Although many current management-endorsed
non-employee Board members have been on the Board for over eight
they only hold approximately 2%
of the outstanding voting stock, mostly the result of free
Notwithstanding the Company’s policy, as outlined in its recent
proxy statement, that with respect to executive compensation,
“there should be a significant equity-based component because it
best aligns the executives’ interests with those of the Company’s
none of the fiscal
year 2010 compensation paid to the Company’s CEO consisted of
equity-based awards and only 11% of the fiscal year 2010
compensation paid to the Company’s other named executives
consisted of equity-based awards.
No Articulated Strategic Plan.
At our urging in 2008, the Company created a Strategic Review
but the Board never publicly
communicated to stockholders the results, nature or extent of its
review, whether it retained an independent qualified financial advisor
or if it’s work had been completed – let alone whether a serious
review was ever conducted. The Board has left stockholders in
Now, only in the wake of the Wynnefield Group’s announced
intention to nominate independent directors to the Board, the
Company has proclaimed that the Board had adopted a strategic plan
in “early 2009” –
but it still
hasn’t disclosed anything else about this purported “plan” or the
process by which it was allegedly devised. If indeed they
have such a plan, we only know that it has not been successful, as
evidenced by the Company’s continued underperformance. This is the
first that stockholders heard of this secret plan. Would the
Company have disclosed anything in the absence of the Wynnefield
Group’s efforts? We wonder.
Meanwhile, the Company has continued to engage in a variety of
micro-acquisitions that merely serve to mask the risks of its
steadily declining core infant-toddler products business and
dependence on two customers.
No value has been created for stockholders by the Company’s
For more than five years, we have urged the Company to fully
explore and consider a broad range of strategic opportunities to
broaden its business and grow stockholder value, including:
possible strategic combinations or alliances; acquisitions of
competitors or equals; joint ventures with customers, suppliers or
strategic partners; or a sale of all or part of the Company’s
business to a strategic or financial buyer – to no avail.
Stock Price Underperforms Market
Indices and Peers.
status quo approach
the Company’s stock price to
substantially underperform its industry peer group and stock indices.
Crown Crafts’ share price has
declined by 32% (as of July 13, 2010) since reaching its
ten-year high of $6.10 on February 6, 2007,
twice the decline of the Russell 2000 index over that time.
And, from January 1, 2009 through July 13, 2010, Crown Crafts has
also significantly underperformed its industry peers: nearly 60%
worse than Summer Infant, Inc. and more than 43% worse than Kids
Clearly, this is a
Crown Crafts problem, not an industry or market problem.
Lack of Liquidity in Common Stock.
failure to undertake
efforts to broaden its stockholder base in the investment
community has squeezed the liquidity out of the Company’s shares,
while trapping current investors and discouraging new ones. However,
when Chairman/CEO E. Randall Chestnut was unable to sell some of his
shares on the open market, the Board authorized the Company to
purchase them from him – another example of the management-endorsed
Board majority digging deeper into the Company’s financial resources
for the benefit of management. Unfortunately, unaffiliated
stockholders remained constrained by the illiquid market for the
lavish executive compensation
and severance plans
fail to align management and the Board with
the interests of stockholders. It is apparent to us that the lavish
employment contracts and golden parachutes for management approved by
this Board demonstrate that Crown Crafts is being run for the benefit of
the Board and management, and not stockholders.
In our view, the management-endorsed Board
majority has approved change-in-control agreements for management that
include golden parachute payments and tax gross-ups, among other
executive compensation schemes. Further, the Board-approved employment
and change-in-control contracts allow the remainder of top management
to quit and receive golden parachutes if the CEO leaves.
golden parachute payments could cost the Company approximately $5
million plus the costs of tax gross-ups which together could exceed
Crown Crafts’ annual net income. We believe that such payments
serve to entrench management by deterring potential suitors from
considering a strategic transaction, potentially denying stockholders
an important value opportunity.
Lavish Director Compensation.
Annual cash retainers paid to non-employee members of the Board
doubled in 2008 even as the Company’s income from operations remained
flat. With committee retainers and equity awards, one director
received total annual compensation of
in 2009. This rich compensation encourages the Board simply to
continue along the current path – especially given that directors are
paid primarily in cash.
Board compensation has totaled
$1,367,575 for the past three years, while stockholders saw
Crafts’ market value decline by $10.6 million (or 22%) from
April 2007 to July 13, 2010.
We view these compensation levels as lavish, especially in light of the
Company’s small size, stagnant business and flat financial performance –
as well as the destruction of stockholder value. The Board is
incentivized to approve management’s lavish compensation and severance
in return for management’s endorsement of the Board’s compensation –
heavy incentive for both of them to maintain the
rather than pursue the path of greatest stockholder value.
Our Nominees have pledged to accept only 50% of the annual cash
retainer currently paid to directors and have pledged to donate any cash
compensation the Company may compel them to accept in excess of $20,000
(after payment of taxes) to the American SIDS Institute, a national
nonprofit organization dedicated to the prevention of Sudden Infant
THE CURRENT BOARD’S POOR GOVERNANCE PRACTICES ENTRENCH ITSELF AT
The management-endorsed Board majority has entrenched management and
itself at the expense of stockholders by erecting a “picket fence” of
Our Nominees, Jon Biro and Melvin Keating, are committed to
“best practices” by
supporting: (i) the elimination of the staggered Board; (ii) adopting
and publicly disclosing emergency and non-emergency CEO succession
plans; (iii) termination of the Company’s poison pill; (iv) linking
executive compensation to Company performance through the grant of
equity-related compensation with appropriate financial targets and
vesting schedules in order to better align executive compensation with
stockholder interests; (v) splitting the roles of CEO and Chairman; (vi)
amending the non-employee director fee structure by reducing the annual
cash retainer currently paid to non-employee directors; and (vii)
modifying management’s change-in-control agreements to align them with
CROWN CRAFTS FAILS TO ADDRESS SIGNIFICANT BUSINESS RISKS
Board has maintained the Company’s practice of staggered board
elections, although an increasing number of companies have
embraced annual elections for the entire Board as a best practice in
management-endorsed Board majority
the Company’s “poison pill” in 2009 without stockholder approval,
even though that provision was adopted in 2003 purportedly to protect
the Company’s ability to carry forward its net operating losses
(“NOL’s”) for tax purposes – and even though those NOL’s are no longer
available to the Company.
No CEO Succession Plan.
Although the SEC has declared poor succession planning a significant
business risk, this management-endorsed Board majority still has not
fulfilled its responsibility to provide stockholders with either an
emergency or non-emergency CEO succession plan – and has
to identify, develop and promote viable internal candidates.
Additionally the Board-approved executive contracts allow the
remainder of top management to resign and receive significant
severance packages if the CEO leaves. As a result, the Company can
suddenly be left without any management leadership.
this the type of situation stockholders should be able to count on
their Board to prevent?
Chairman Serves as CEO.
E. Randall Chestnut – one of the Company’s nominees to the Board –
simultaneously holds both the positions of CEO and Chairman, a
practice not endorsed by leading corporate governance advocates. We
believe the Board has engaged in little or no foresight by putting
Crown Crafts in a position where, coupled with the Board-approved
unreasonable employment and severance contracts, the
three executives (including the CEO and Board Chairman) could exit the
Company at once and receive approximately $5 million in
severance plus the costs of tax gross-ups which together could exceed
Crown Crafts’ annual net income.
Failed to Broaden Investor Base.
In our view, the Company’s failure to undertake any effective efforts
to broaden its stockholder base or appear at investor conferences
attended by its peers and competitors,
to the poor liquidity and underperforming price of the Company’s stock,
we believe. Crown Crafts’ closest public competitors are each covered
by several analysts, which may explain why those companies trade at
multiples to EBITDA that far exceed the Company’s.
this Board’s policy appears consistent with poor governance practices,
collectively designed to insulate the Board and management from
scrutiny by investors and industry analysts who might voice many of
the same concerns we have.
In our view, the stock’s depressed value reflects investor concern about
management’s failure to develop a sound plan addressing the substantial
risks facing the Company.
alone doesn’t generate stockholder value
– you can’t profitably
grow a business simply by cutting costs. The Board must either implement
a plan that profitably grows the business or adopt a strategy creating
CROWN CRAFTS HAS NOT DELIVERED VALUE FOR STOCKHOLDERS –THE NUMBERS
Small Acquisitions Mask Declining
The Company’s core infant and toddler
products business continues to shrink. Over the past three years,
Crown Crafts has completed
tuck-in acquisitions, yet operating income has remained flat.
We believe these micro-acquisitions are intended to mask its declining
Dependence on Two Large Customers
and Disney Licenses.
Crown Crafts is dependent on its two
largest customers for approximately 64% of its gross sales and has
the loss of either of
these customers would result in a material decrease in revenue and
operating income. Also, the sale of licensed goods made up more
than half of the Company’s gross sales in 2009. The Company’s current
infant and toddler licensing agreements with the Disney Company, its
largest licensor, are currently scheduled to end in December 2010 and
2011, respectively. Entering the pet industry is not the answer!
Crown Crafts has lagged both the market and its competitors in creating
value for all stockholders. We believe there is a clear reason why:
Board and management have little incentive to increase value for
stockholders, only to maintain the lucrative
status quo primarily
for their own material benefit.
Stock Price Underperforms Market
Indices and Peers.
As noted above,
Crafts’ share price has fallen 32% (as of July 13, 2010) since
reaching its ten-year high on February 6, 2007. That is nearly
the decline of the Russell 2000 Index over that time. And from
January 1, 2009 through July 13, 2010, the Company’s stock also
underperformed its industry peers – nearly 60% worse than
Summer Infant, Inc. and over 43% worse than Kids Brands, Inc.
Core Business Is Stagnant.
The Company’s core business is stagnant and its approach of using
tuck-in acquisitions to maintain revenue has not delivered stockholder
value. Over the past seven years,
income from operations (excluding write-offs of goodwill) has remained
virtually flat – from $7.4 million in FY2004 to $8.0 million in
FY2009. Apparently, according to company documents the entire increase
in FY 2010 (exalted by Mr. Chestnut as a “banner year”), resulted
primarily from a reduction in amortization expense, a reduction in
expenditures on R&D for new product development and a one-time
overhead reduction from a small acquisition.
Management “Dis-Incentive” Plan.
Crown Crafts’ stock trades at an EBITDA multiple of 3.5x, compared to
a multiple of 9x for Summer Infant and 6.4x for Kid Brands. However,
the management-endorsed Board majority approved a new incentive plan
that rewards management with approximately 3.7% of the Company if,
the next five years, they merely match the multiple at which its
competitors already trade.
not believe management should be richly rewarded for achieving in the
future the average performance of its competitors – which it should
have already achieved.
Company’s Decision to Enter Pet
Products Industry Is a Smokescreen.
The Company has failed
to provide any metrics, projections or strategic analysis to justify
its recent decision to enter the highly competitive pet products
industry – an industry in which it has no experience or expertise –
announced only in the wake of the Wynnefield Group’s announced
intention to nominate two independent directors to the Company’s
Board. According to the Company’s Chairman/CEO, E. Randall Chestnut,
the Company’s acquisition of Neat Solutions last year for $4.4 million
would increase annual net sales by $4.6 million. Have these sales
materialized? Now he is attempting to justify the acquisition of Neat
Solutions as the foundation for the Company’s venture into the pet
appears to be just another smokescreen intended to hide the
erosion of the Company’s core business, the Company’s poor financial
performance and deteriorating stockholder value, while allowing
management and the Board to maintain the
status quo – we
believe running the Company primarily for their own benefit at the
expense of stockholders.
As stockholders in Crown Crafts for the last 14 years, we have had
enough. We believe that stockholders deserve Board members who will put
the stockholders’ interests first – directors who will conduct a
transparent strategic review process and disclose the results to