WYNNEFIELD
GROUP
450
SEVENTH AVENUE, SUITE 509
NEW
YORK,
NY 10123
July
20,
2007
VOTE
THE GOLD PROXY CARD TODAY!
Dear
Fellow Crown Crafts Stockholder:
Sometimes
when people are faced with challenges they can’t manage they go into DENIAL! -
So they resort to personal attacks.
So
when a group of entrenched management and directors tries to distract
stockholders, the owners of the Company, with inflammatory rhetoric instead
of
providing legitimate answers to important issues of business strategy
and
corporate governance, they have to be stopped. For the good of the
Company.
There
are critical issues facing Crown Crafts that must be addressed. Stockholders
can’t afford to be distracted.
Here
are the facts:
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Sales
continue to decline;
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Operating
incoming is flat for the past four
years;
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Shareholder
value for the past six months has
deteriorated;
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And
the Company faces numerous hurdles going
forward.
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WE
DON’T BELIEVE THE EXISTING BOARD AS CURRENTLY CONSTITUTED HAS THE WHEREWITHAL
TO
SOLVE THESE PROBLEMS!
Our
Company is at a crossroads today.
It
faces a challenging business environment, shrinking revenues, stiff competition
and hard questions about succession, governance and strategic direction.
We
outside stockholders need to know that the company has a constructive
and
forward-looking vision to provide value.
Unfortunately,
rather than addressing these issues, the entrenched Company Board seeks
to
distract and distort.
Here’s
the truth.
The
Wynnefield Group is a long-term investor in the Company. For eight
years,
as the
Company’s largest stockholder (we hold about 14.6% of the outstanding shares),
we have worked constructively with management to enhance value for all
shareholders. Unfortunately, now that the Company has begun to address
some of
the capital structure issues we’ve been urging them to fix, management’s
attitude toward outside stockholders appears to have changed. Wynnefield
was not
anxious to conduct a proxy campaign to nominate two of the Board’s seven
directors. Rather, this has been forced upon us as a last resort to preserve
and
protect value for all shareholders because the Company has rejected our
repeated
requests for full voting representation on the Board.
Recently,
you may have received a letter from the Company that attacked me personally.
This is a “red herring”! Crown
Crafts is trying to reinvent “old-time justice” - declaring me guilty before
I’ve had my day in court. More importantly, it has nothing to do with the
business at hand.
However,
I will address those attacks directly, up front right now, so that we
can move
on to the real issues facing this company. It is true that there is a
civil
lawsuit filed against me by the SEC, based on allegations surrounding
a trade
made over six years ago. It is also true that in that lawsuit they use
terms
like “fraud” and “deceit” - which are terms of art that are required in order to
satisfy legal pleading requirements. However, the filing of a suit does
not make
the allegations true. And just because the plaintiffs use those terms,
does not
give them any merit.
In
fact,
as a matter of principle, I have rejected multiple entreaties by the
plaintiffs
to settle the case. While most parties settle, I steadfastly refuse to
settle
because I have done nothing wrong and the evidence demonstrates that.
I am
actively defending myself and look forward to my day in court.
THE
BOARD’S PERSONAL ATTACK ON ME IS INTENDED TO DISTRACT OUTSIDE STOCKHOLDERS
FROM
THE REAL ISSUES FACING OUR COMPANY.
LET’S
ADDRESS THOSE ISSUES.
Challenging
Business Environment and Declining Results.
The
Company’s sales have continued to shrink over the past two fiscal years. Net
sales - which fell by some 13.4% from FY 2005 to FY 2006 - continue their
seven-year decline in 2007. Operating
income remains essentially flat over the past four years, ranging from
$7.4
million in FY 2004 to $7.9 million in 2007, and is trending downwards
over the
last six months of FY 2007 compared to the year-before period. The market
has so
little confidence in the Company’s prospects, or the current Board’s ability to
improve them, that while the Company’s principal publicly traded competitors
trade at multiples between 7.9 and 21.8 times earnings, according to
Bloomberg,
the Company’s stock trades at a multiple of only 4.1 times
earnings.
Stiff
Competition Puts Business at Risk.
In a
highly competitive industry in which it is pitted against larger competitors,
Crown Crafts’ small size puts it at a significant disadvantage in winning
customer shelf space and market penetration. The
Company is still reliant on its same top three customers for approximately
78%
of its gross sales - a significant and dangerous business risk.
And it
remains dependent on the sale of licensed products for 39% of its gross
sales,
which risks substantial loss of revenue in the event it is unable to
renew or
win new licenses.
Share
Performance Down Significantly.
The
Company’s share price declined approximately 33% from its February 2007 high
over the past few months before rebounding somewhat after we announced
our
intent to nominate nominees to the Board. We believe the stock price
reflects
the Company’s continued operational vulnerability. While the Company completed a
financial restructuring in 2006, that does not replace the need for improved
operating performance and additional measures. In
fact, the Company only announced the $6 million share repurchase program
that
Wynnefield had long championed following our announcement that we would
conduct
a proxy campaign to help effectuate such measures.
We
remain concerned that, while the buy-back program has been authorized,
it
may
be a program that is never implemented
following the 2007 Annual Meeting without outside stockholder representation
on
the Board.
No
Strategic Plan.
The
Company is at a crossroads today. However, the current Board has failed
to
develop or implement a plan to systematically grow the Company’s business -
neither developing significant new products, improving market penetration
of
existing products, nor making inroads with major new customers. Further,
the
Board has not articulated a plan for capital allocation.
The
danger is that the balance sheet that took the Company five years to
repair with
Wynnefield’s help will now be once again destroyed. As the Company's largest
shareholder, Wynnefield should be part of the development of a strategic
plan
for the Company instead of being frozen out by an arrogant Board and
management
that thinks they know what is better for the outside stockholders than
the
stockholders themselves. We have recommended that the Company engage
a
recognized financial advisor to help identify and analyze appropriate
strategy
options.
Deficient
Corporate Governance Practices.
In order
to address these issues and protect shareholder value, outside stockholders
need
effective Board governance. Yet, Crown Crafts’ corporate governance practices
are deficient and inconsistent with modern trends in corporate
governance.
Specifically:
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The
Board does not have a nominating committee to screen and recommend
nominees to the Board;
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The
Compensation Committee includes Mr. Steven E. Fox, one of the
Board’s
nominees, who Institutional Shareholder Services (ISS), a leading
independent shareholder advisory service, calls an “affiliated” outsider,
because his law firm receives an undisclosed amount of legal
fees from the
Company;
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The
Board is classified, so incumbent Board members need to face
re-election
only once every 3 years;
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Mr.
Randall Chestnut, another one of the Board’s nominees, holds both
positions of Chairman and CEO; and
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The
Board does not have a governance committee or publicly disclosed
governance guidelines.
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The
Board’s Corporate Governance Quotient (CGQ) score is a “2” - the second-lowest
ranking given by ISS - and its CGQ ranking in comparison to its peers
is 17.1%,
the lowest quartile of companies ranked by ISS, as of July 17, 2007.
Only after
we nominated our candidates for election to the Board did the Company
belatedly
announce it would name a “lead” director. Too little! Too late!
Staggered
Board Entrenchment Device and Economic Harm.
The most
obvious deficiency in the Company’s corporate governance practices is its
staggered board structure, which serves only to entrench existing directors
and
management, rather than benefiting stockholders. As noted by Harvard
Law School
Professors Lucian A. Bebchuk and Alma Cohen regarding U.S. public companies
with
staggered or classified boards instead of annually elected boards, “Dissidents
must wage proxy contests for at least two election cycles to win a majority
on
staggered boards. The
difficulty of doing so makes staggered boards a strong takeover defense
that can
serve to entrench incumbent management.”
[CGQ
View, October, 2004, emphasis added]. Studies conducted by SEC economists
and
academics support the view that classified boards are contrary to shareholder
interests. A 2001 academic study found that firms with weak shareholder
rights
(including classified board structures) exhibited lower net profit margins
and
sales growth than firms with a higher degree of shareholder rights. Our
Board
nominees will support annual elections of the entire Board and repeal
of the
staggered Board provisions in the Company’s charter.
Lack
of Transparency in Financial Arrangements for Compensation Committee
Member.
We also
remain concerned about the lack of transparency in the financial arrangements
between certain members of the Company’s Compensation Committee and its
executive officers. Steven E. Fox (a Company nominee for director) is
a member
of the Board’s Compensation Committee determining the compensation of CEO
Randall Chestnut. In turn, Mr. Chestnut has selected as the Company’s outside
counsel, the law firm of Rogers & Hardin, LLP, of which Mr. Fox is a
partner. The amount of legal fees that the Company pays to Mr. Fox’s law firm is
not disclosed in the Company’s proxy statement. The governance policy of the
Compensation Committee requires that its members be independent in order
to
avoid conflicts of interest. Suddenly, after we notified the Company
of our
intent to nominate candidates to the Board, the Company announced that
Mr. Fox
would resign from the Compensation Committee, if he is re-elected. Too
little!
Too late! Wynnefield
believes that the amount of fees paid to Mr. Fox’s law firm should be fully
disclosed and that Mr. Fox should immediately be replaced on the Compensation
Committee by a truly independent director.
Lack
of Succession Plan.
One of a
corporate board’s most important responsibilities is the selection of a Chief
Executive Officer. Small companies are particularly reliant on chief
executives,
who are typically the only managers experienced in leading a public company
and
the primary link to key customers and other important constituents. No
individual, especially of Mr. Chestnut’s age, is immune from health problems or
emergency medical procedures. Wynnefield
is concerned that the Company has not publicly disclosed any succession
plan to
address the possibility of the current CEO being unable to carry out
his duties
or obligations. Nor
has
the Company made public Mr. Chestnut’s health history. Failure to do so, we
believe is evidence of the Board’s failure to fulfill its fiduciary duties to
stockholders. Also, by creating a succession vacuum, the Board essentially
prevents stockholders from challenging the CEO’s actions for fear that he would
resign - thus leaving the Company leaderless.
OUR
DIRECTOR NOMINEES ARE COMMITTED TO EXPLORING STRATEGIC OPTIONS TO MAXIMIZE
SHAREHOLDER VALUE, IMPLEMENTING BEST PRACTICES IN CORPORATE GOVERNANCE,
AND
ELECTING TRULY INDEPENDENT MEMBERS TO THE BOARD.
We
believe that it
is
time for a change.
At the
Company’s upcoming Annual Meeting of Shareholders, we seek your support for two
independent and highly qualified candidates for election to Crown Crafts’ Board
of Directors. Messrs. Obus and Wasserman will work constructively with
the Board
and urge them to fulfill the Board’s fiduciary duty to explore the Company’s
options for
maximizing shareholder value and to implement best practices in corporate
governance. We need your support to bring about these changes for the
benefit of
all shareholders.
The
Wynnefield Group believes that the current Board has grown stale and
needs an
infusion of new blood and fresh thinking. Until we were reluctantly forced
to
initiate our proxy solicitation, the current Board failed to take constructive
steps to improve corporate governance or enhance stockholder value. The
election
of our nominees to the Board will add to the Board persons with the financial
expertise, business acumen and commitment to stockholders, necessary
to provide
new ideas for improving the Company’s performance and building stockholder
value.
Our
nominees, if elected, will constitute a minority of the Board. Thus,
even if
voting together, our nominees will not be able to adopt any measures
without the
support of the other directors of the current Board. Nevertheless, our
nominees
will have an opportunity to articulate and raise their concerns about
the
Company’s business practices and strategic plans with the rest of the Board
members.
VOTE
FOR THE ELECTION OF NELSON OBUS AND FREDERICK G. WASSERMAN BY USING THE
GOLD
PROXY CARD. FOR YOUR CONVENIENCE, WE HAVE MADE ARRANGEMENTS FOR TELEPHONE
AND
INTERNET VOTING. SIMPLY FOLLOW THE INSTRUCTIONS ON THE GOLD PROXY
CARD.
We
urge
you to read our proxy material carefully. If you have any questions or
require
assistance in voting your proxy, please call:
MacKenzie
Partners, Inc.
(800)
322-2885 (Toll Free)
(212)
929-5500 (Call Collect)
Thank
you
for your support.
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Very
truly yours,
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/s/
Nelson Obus
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Nelson
Obus
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