##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from___ to ___
 Commission File No. 1-7604
 CROWN CRAFTS, INC.
  Delaware
    
    58-0678148(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
  
   
   þ o
  o o þ
  o þ




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TABLE OF CONTENTS  ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4  CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONItem 1  Legal ProceedingsItem 1A  Risk FactorsItem 2  Unregistered Sales of Equity Securities and Use of ProceedsItem 3  Defaults Upon Senior SecuritiesItem 4  Submission of Matters to a Vote of Security HoldersItem 5  Other InformationItem 6  ExhibitsSIGNATURESIndex to ExhibitsRule 13a-14(a)/15d-14(a) Certification by the CEORule 13a-14(a)/15d-14(a) Certification by the CFOSection 1350 Certification by the CEOSection 1350 Certification by the CFO    Table of Contents  
 December 31, 2006
    
    
    April 2, 2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    19
    
    
    $
    3,790Accounts receivable (net of allowances of
$1,249 at December 31, 2006 and $1,164 at
April 2, 2006)Due from factor
    
    
    8,285
    
    
    
    12,465Other
    
    
    2,484
    
    
    
    1,992Inventories, net
    
    
    11,622
    
    
    
    9,742Prepaid expenses
    
    
    1,381
    
    
    
    1,177Deferred income taxes
    
    
    990
    
    
    
    990Total current assets
    
    
    24,781
    
    
    
    30,156Property, plant and equipment  at cost:Land, buildings and improvements
    
    
    1,350
    
    
    
    1,375Machinery and equipment
    
    
    2,578
    
    
    
    2,459Furniture and fixtures
    
    
    659
    
    
    
    6494,587
    
    
    
    4,483Less accumulated depreciation
    
    
    3,230
    
    
    
    2,945Property, plant and equipment  net
    
    
    1,357
    
    
    
    1,538Other assets:Goodwill, net
    
    
    22,884
    
    
    
    22,974Deferred income taxes
    
    
    1,502
    
    
    
    3,397Other
    
    
    765
    
    
    
    114Total other assets
    
    
    25,151
    
    
    
    26,485Total Assets
    
    $
    51,289
    
    
    $
    58,179LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,205
    
    
    $
    3,511Accrued wages and benefits
    
    
    1,351
    
    
    
    942Accrued royalties
    
    
    1,037
    
    
    
    559Other accrued liabilities
    
    
    279
    
    
    
    367Current maturities of long-term debt
    
    
    23
    
    
    
    36Total current liabilities
    
    
    8,895
    
    
    
    5,415Non-current liabilities:Long-term debt
    
    
    6,456
    
    
    
    23,922Total non-current liabilities
    
    
    6,456
    
    
    
    23,922Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock  par value $0.01 per share;
74,000,000 shares authorized; 9,959,690 shares
outstanding at December 31, 2006 and 9,505,937
outstanding at April 2, 2006
    
    
    100
    
    
    
    95Additional paid-in capital
    
    
    38,456
    
    
    
    38,244Accumulated deficit
    
    
    (2,618
    )
    
    
    (9,497
    )Total shareholders equity
    
    
    35,938
    
    
    
    28,842Total Liabilities and Shareholders Equity
    
    $
    51,289
    
    
    $
    58,179
 See notes to unaudited condensed consolidated financial statements.
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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    January 1,
    
    
    December 31,
    
    
    January 1,2006
    
    
    2006
    
    
    2006
    
    
    2006Net sales
    
    $
    16,453
    
    
    $
    17,882
    
    
    $
    54,191
    
    
    $
    52,826Cost of products sold
    
    
    12,831
    
    
    
    13,557
    
    
    
    40,236
    
    
    
    40,925Gross profit
    
    
    3,622
    
    
    
    4,325
    
    
    
    13,955
    
    
    
    11,901Marketing and administrative expenses
    
    
    2,623
    
    
    
    2,479
    
    
    
    7,802
    
    
    
    7,542Income from operations
    
    
    999
    
    
    
    1,846
    
    
    
    6,153
    
    
    
    4,359Other income (expense):Interest expense
    
    
    (195
    )
    
    
    (773
    )
    
    
    (1,204
    )
    
    
    (2,315
    )Gain on debt refinancing
    
    
    
    
    
    
    
    
    
    
    4,069
    
    
    
    Other  net
    
    
    4
    
    
    
    3
    
    
    
    144
    
    
    
    20Income before income taxes
    
    
    808
    
    
    
    1,076
    
    
    
    9,162
    
    
    
    2,064Income tax expense
    
    
    194
    
    
    
    13
    
    
    
    2,283
    
    
    
    118Net income
    
    $
    614
    
    
    $
    1,063
    
    
    $
    6,879
    
    
    $
    1,946Basic income per share
    
    $
    0.06
    
    
    $
    0.11
    
    
    $
    0.71
    
    
    $
    0.20Diluted income per share
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.69
    
    
    $
    0.09Weighted average shares
outstanding  basic
    
    
    9,953
    
    
    
    9,506
    
    
    
    9,716
    
    
    
    9,506Weighted average shares
outstanding  diluted
    
    
    10,269
    
    
    
    21,749
    
    
    
    9,973
    
    
    
    21,513
 See notes to unaudited condensed consolidated financial statements.
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Nine Months EndedDecember 31,
    
    
    January 1,2006
    
    
    2006Operating activities:Net income
    
    $
    6,879
    
    
    $
    1,946Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property, plant and equipment
    
    
    342
    
    
    
    353Goodwill write-off
    
    
    90
    
    
    
    Deferred income taxes
    
    
    1,895
    
    
    
    (Gain) loss on sale of property, plant and equipment
    
    
    (11
    )
    
    
    14Discount accretion
    
    
    295
    
    
    
    567Gain on debt refinancing
    
    
    (4,069
    )
    
    
    Stock-based compensation
    
    
    171
    
    
    
    Changes in assets and liabilitiesAccounts receivable
    
    
    3,688
    
    
    
    2,335Inventories, net
    
    
    (1,880
    )
    
    
    (186
    )Prepaid expenses
    
    
    (204
    )
    
    
    (848
    )Other assets
    
    
    (101
    )
    
    
    33Accounts payable
    
    
    2,694
    
    
    
    2,102Accrued liabilities
    
    
    800
    
    
    
    478Net cash provided by operating activities
    
    
    10,589
    
    
    
    6,794Investing activities:Capital expenditures
    
    
    (161
    )
    
    
    (435
    )Payment to acquire Kimberly Grant brand
    
    
    (550
    )
    
    
    Proceeds from disposition of assets
    
    
    11
    
    
    
    1Net cash used in investing activities
    
    
    (700
    )
    
    
    (434
    )Financing activities:Retirement of debt
    
    
    (17,077
    )
    
    
    (4,500
    )Payments on long-term debt
    
    
    (27
    )
    
    
    (12
    )Borrowings (repayments) under line of credit, net
    
    
    3,468
    
    
    
    Debt issuance costs
    
    
    (70
    )
    
    
    Issuance of common stock
    
    
    46
    
    
    
    Net cash used in financing activities
    
    
    (13,660
    )
    
    
    (4,512
    )Net (decrease) increase in cash and cash equivalents
    
    
    (3,771
    )
    
    
    1,848Cash and cash equivalents at beginning of period
    
    
    3,790
    
    
    
    955Cash and cash equivalents at end of period
    
    $
    19
    
    
    $
    2,803Supplemental cash flow information:Income taxes paid (received)
    
    $
    294
    
    
    $
    (17
    )Interest paid
    
    
    765
    
    
    
    1,606Accrued interest converted to long-term debt
    
    
    
    
    
    
    268
 See notes to unaudited condensed consolidated financial statements.
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1.
    
    Basis of Presentation:The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of
America applicable to interim financial information and the rules and regulations of the
Securities and Exchange Commission (the SEC). Accordingly, they do not include all of the
information and disclosures required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of management, such
interim consolidated financial statements contain all adjustments necessary to present fairly
the financial position of Crown Crafts, Inc. (the Company) as of December 31, 2006 and the
results of its operations and cash flows for the periods presented. Such adjustments include
normal, recurring accruals. Operating results for the three and nine-month periods ended
December 31, 2006 are not necessarily indicative of the results that may be expected for the
year ending April 1, 2007. For further information, refer to the Companys consolidated
financial statements and notes thereto included in the annual report on Form 10-K for the year
ended April 2, 2006.Revenue Recognition:Sales are recorded when goods are shipped to customers and are reported net
of allowances for estimated returns and allowances in the consolidated statements of income.
Allowances for returns are estimated based on historical rates. Allowances for returns,
advertising allowances, warehouse allowances and volume rebates are netted against sales. These
allowances are recorded commensurate with sales activity, and the cost of such allowances is
netted against sales in reporting the results of operations. Shipping and handling costs, net
of amounts reimbursed by customers, are relatively insignificant and are included in net sales.Use of Estimates:The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 financial statements and the
reported amounts of revenues and expenses during the reporting period. Significant estimates
are made with respect to the allowances related to accounts receivable for customer deductions
for returns, allowances, and disputes. The Company has a certain amount of discontinued and
irregular raw materials and finished goods, which necessitate the establishment of inventory
reserves that are highly subjective. Actual results could differ from those estimates.Segment and Related Information:The Company operates primarily in one principal segment,
infant and juvenile products. These products consist of infant bedding, bibs and soft goods.Impairment of Long-lived Assets, Identifiable Intangibles and Goodwill:The Company reviews for
impairment of long-lived assets and certain identifiable intangibles 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 cost to sell
at the date management commits to a plan of disposal and are classified as assets held for sale
on the consolidated balance sheet.Goodwill, which represents the unamortized excess of purchase price over fair value of net
identifiable assets acquired in business combinations, was amortized through March 31, 2002
using the straight-line method over periods of up to 30 years. The Company discontinued
amortization of goodwill effective April 1, 2002. The Company reviews the carrying value of
goodwill annually and sooner if facts and circumstances suggest that the asset may be impaired.
Impairment of goodwill and write-downs, if any, are measured based on estimates of future cash
flows. Goodwill is stated net of accumulated amortization of $6.4 million and $6.3 million at
December 31, 2006 and April 2, 2006, respectively. The Company performed fair value based
impairment tests on its goodwill in accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets. With the exception of goodwill
related to Churchill Weavers, Inc. (Churchill), the Company determined that the fair value
exceeded the recorded value at April 4, 2005 and April 3, 2006. Churchills goodwill of
$90,000 was written off in June 2006 due to an impairment indicator, the decline in sales volume
and decline in profitability in recent years.
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Provision for Income Taxes:The provisions for income taxes include all currently payable
federal, state and local taxes that are based upon the Companys taxable income and the change
during the fiscal year in net deferred income tax assets and liabilities. The Company provides
for deferred income taxes based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates that will be in effect when the differences
are expected to reverse. For the three and nine-month periods ended January 1, 2006, deferred
tax assets were fully offset by a valuation allowance as available evidence did not indicate
that the assets would be realized. In the fourth quarter of fiscal 2006, the Company determined
that, due to taxable earnings generated in recent years, it is more likely than not that the
benefit would be realized prior to the expiration of its net operating loss carryforward, and
consequently the valuation allowance was removed. As a result of the removal of the deferred
tax valuation allowance, the Companys net income tax expense in periods subsequent to the third
quarter of fiscal year 2006 will include federal as well as state and local income taxes.Allowances Against Accounts Receivable:The Companys allowances against accounts receivable are
primarily contractually agreed upon deductions for items such as advertising and warehouse
allowances and volume rebates. These deductions are recorded throughout the year commensurate
with sales activity. Funding of the majority of the Companys allowances occurs on a
per-invoice basis.The allowances for customer deductions, which are netted against accounts receivable in the
consolidated balance sheets, consist of agreed upon advertising support, markdowns and warehouse
and other allowances. Consistent with the guidance provided in EITF 01-9, all such allowances
are recorded as direct offsets to sales, and such costs are accrued commensurate with sales
activities. When a customer requests deductions, the allowances are reduced to reflect such
payments.The Company analyzes the components of the allowances for customer deductions monthly and
adjusts the allowances to the appropriate levels. The timing of the customer-initiated funding
requests for advertising support can cause the net balance in the allowance account to fluctuate
from period to period. The timing of such funding requests should have no impact on the
consolidated statements of income since such costs are accrued commensurate with sales activity.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.
Total royalty expenses included in cost of sales amounted to $3.2 million and $3.7 million in
the nine-month periods ended December 31, 2006 and January 1, 2006, respectively.Recently Issued Accounting Standards:In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections. This statement is a replacement of APB Opinion No. 20,
Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of a change in
accounting principle. This statement applies to all voluntary changes in accounting principle
and to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This statement requires
retrospective application to prior periods financial statements of changes in accounting
principle, unless it is impracticable to determine period-specific effects of an accounting
change on one or more individual prior periods presented. In such circumstances the new
accounting principle would be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is practicable with a
corresponding adjustment made to the opening balance of retained earnings for that period rather
than being reported in an income statement. Further, the accounting principle is to be applied
prospectively from the earliest date when it is impracticable to determine the effect to all
prior periods. This statement is effective for the Company as of April 3, 2006. Adoption of
this statement had no impact on the results of operations for the three and nine-month periods
ended December 31, 2006. Adoption of this statement could have an impact if there are future
voluntary accounting changes and error corrections.In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting
and disclosure for uncertain tax positions, as defined. FIN 48 seeks to reduce the diversity in
practice associated with certain aspects of the recognition and measurement related to
accounting for income taxes. This interpretation is effective for fiscal years beginning after
December 15, 2006. The Company has not yet determined the impact this interpretation will have
on its results from operations or financial position.
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2.
    
    Stock-Based Compensation:The Company has two incentive stock plans, the 1995 Stock Option
Plan (1995 Plan) and the 2006 Omnibus Incentive Plan (2006 Plan). The Company granted
non-qualified stock options to employees and non-employee directors from the 1995 Plan through
the fiscal year ended April 2, 2006. In conjunction with the approval of the 2006 Plan by the
Companys stockholders at its Annual Meeting in August 2006, options may no longer be issued
from the 1995 Plan.The 2006 Plan is intended to attract and retain directors, officers and employees of the
Company and its subsidiaries and to motivate these persons to achieve performance objectives
related to the Companys overall goal of increasing stockholder value. The principal reason
for adopting the 2006 Plan is to ensure that the Company has a mechanism for long-term,
equity-based incentive compensation to directors, officers and employees. Awards granted under
the 2006 Plan may be in the form of qualified or non-qualified stock options, restricted stock,
stock appreciation rights (SARs), long-term incentive compensation units consisting of a
combination of cash and shares of the Companys common stock, or any combination thereof within
the limitations set forth in the 2006 Plan. The 2006 Plan is administered by the compensation
committee of the board of directors, which selects eligible employees and non-employee
directors to participate in the 2006 Plan and determines the type, amount and duration of
individual awards.On April 3, 2006, the Company adopted SFAS No. 123(R), Share Based Payment.This standard
requires expensing of stock options and other share-based payments and supersedes SFAS No. 123,
Accounting for Stock-Based Compensation, and Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related implementation guidance that had
previously allowed companies to choose between expensing stock options or providing pro-forma
disclosure only. SFAS No. 123(R) eliminates the ability to account for stock-based
compensation transactions using the intrinsic value method under APB Opinion No. 25 and instead
requires that such transactions be accounted for using a fair-value-based method. In addition,
the SEC issued Staff Accounting Bulletin 107 in April 2005, which provides supplemental
implementation guidance for SFAS No. 123(R).The Company uses the Black-Scholes option-pricing model to determine the fair-value of
stock-based awards under SFAS No. 123(R), consistent with the method previously used for pro
forma disclosures under SFAS No. 123. The Company elected to use the modified prospective
transition method permitted by SFAS No. 123(R). Under the modified prospective method, SFAS
No. 123(R) applies to new awards issued on or after April 3, 2006 as well as the unvested
portion of awards that were outstanding as of April 2, 2006, including those that are
subsequently modified, repurchased or cancelled. Under the modified prospective approach,
compensation cost recognized in the three and nine-month periods ended December 31, 2006
includes compensation cost for all share-based payments granted prior to, but not yet vested as
of, April 2, 2006 in accordance with the original provisions of SFAS No. 123. Prior periods
were not restated to reflect the impact of adopting the new standard.Prior to adoption of SFAS No. 123(R), the Company measured compensation expense for its
stock-based compensation plan using the intrinsic value recognition and measurement principles
as prescribed by APB Opinion No. 25 and related interpretations. The Company also used the
disclosure provision of SFAS No. 123. The following table illustrates the effect on net
earnings and earnings per share for the three and nine-month periods ended January 1, 2006 had
the Company determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123(R).
 Three months ended
    
    
    Nine months endedJanuary 1, 2006
    
    
    January 1, 2006Net income, as reported
    
    $
    1,063
    
    
    $
    1,946Deduct: Total stock-based
employee compensation
expense determined under the
fair value based method for
all awards
    
    
    (5
    )
    
    
    (27
    )Pro forma net income
    
    $
    1,058
    
    
    $
    1,919Income per share:Basic  as reported
    
    $
    0.11
    
    
    $
    0.20Basic  pro forma
    
    $
    0.11
    
    
    $
    0.20Diluted  as reported
    
    $
    0.05
    
    
    $
    0.09Diluted  pro forma
    
    $
    0.05
    
    
    $
    0.09
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The Company recorded $123,000 and $171,000 of stock-based compensation during the three
and nine-month periods ended December 31, 2006, respectively, as a result of the adoption of
SFAS No. 123(R), which affected basic and diluted earnings per share by $0.01 and $0.02 for the
three and nine-month periods, respectively. No stock-based compensation costs were capitalized
as part of the cost of an asset as of December 31, 2006.
 Stock Options:
 Weighted-average
    
    
    Number of OptionsExercise Price
    
    
    OutstandingOutstanding, April 2, 2006
    
    $
    0.80
    
    
    
    536,100Granted
    
    
    3.15
    
    
    
    212,000Exercised
    
    
    0.59
    
    
    
    78,753Forfeited
    
    
    0.78
    
    
    
    31,999Outstanding, December 31, 2006
    
    $
    1.61
    
    
    
    637,348Exercisable, December 31, 2006
    
    $
    0.85
    
    
    
    413,354
 During the quarter ended October 1, 2006, the Company granted 212,000 non-qualified options at
the market price at the date of grant, which options vest over a two-year period, assuming
continued service. The following weighted-average assumptions were used for grants issued
during the quarter ended October 1, 2006. No options were granted during the quarter ended
December 31, 2006.
 Options
    
    OptionsIssued to
    
    Issued toEmployees
    
    DirectorsOptions Issued
    
    
    200,000
    
    
    
    12,000Dividend Yield
    
    
    
    
    
    
    Expected Volatility
    
    
    70.00
    %
    
    
    70.00
    %Risk free interest rate
    
    
    4.76
    %
    
    
    4.79
    %Expected life, years
    
    
    5.75
    
    
    
    3.25Forfeiture rate
    
    
    5.00
    %
    
    
    5.00
    %
 For the three-month period ended December 31, 2006, the Company recognized $48,000 of
compensation expense associated with the stock option grants of which $11,000 was included in
cost of products sold and $37,000 was included in marketing and administrative expenses in the
accompanying consolidated statements of income. For the nine-month period ended December 31,
2006, the Company recognized $68,000 of compensation expense associated with the stock option
grants of which $16,000 was included in cost of products sold and $52,000 was included in
marketing and administrative expenses in the accompanying statements of income. The Company
recognized $1,000 and $4,000 of compensation expense associated with unvested stock options
outstanding at April 2, 2006.
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WeightedAvg.
    
    Weighted Avg.
    
    
    
    
    
    Weighted Avg.Range of
    
    Number of
    
    Remaining
    
    Exercise Price
    
    Number of
    
    Exercise PriceExercise
    
    Options
    
    Contractual
    
    of Options
    
    Shares
    
    of SharesPrices
    
    Outstanding
    
    Life
    
    Outstanding
    
    Exercisable
    
    Exercisable$0.18
    
    
    20,000
    
    
    4.56 years
    
    $
    0.18
    
    
    
    20,000
    
    
    $
    0.18$0.65
    
    
    123,165
    
    
    6.16 years
    
    
    0.65
    
    
    
    119,169
    
    
    
    0.65$0.66
    
    
    11,333
    
    
    3.61 years
    
    
    0.66
    
    
    
    3,335
    
    
    
    0.66$0.71
    
    
    167,750
    
    
    5.42 years
    
    
    0.71
    
    
    
    167,750
    
    
    
    0.71$1.06-2.31
    
    
    103,100
    
    
    3.43 years
    
    
    1.45
    
    
    
    103,100
    
    
    
    1.45$3.15
    
    
    212,000
    
    
    9.37 years
    
    
    3.15
    
    
    
    
    
    
    
    0.00637,348
    
    
    
    
    
    
    
    
    
    
    
    413,354
  Non-vested Stock:
   3.
    
    Inventory:Major classes of inventory were as follows (in thousands):
 December 31, 2006
    
    
    April 2, 2006Raw Materials
    
    $
    45
    
    
    $
    442Work in Process
    
    
    73
    
    
    
    73Finished Goods
    
    
    11,504
    
    
    
    9,227$
    11,622
    
    
    $
    9,742
 Inventory is net of reserves for inventories classified as irregular or discontinued of $0.8
million at December 31, 2006 and $0.5 million at April 2, 2006.
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4.
    
    Financing ArrangementsFactoring Agreement:The Company assigns the majority of its trade accounts receivable to a
commercial factor. Under the terms of the factoring agreement, the factor remits payments to
the Company on the average due date of each group of invoices assigned. The factor bears credit
losses with respect to assigned accounts receivable that are within approved credit limits. The
Company bears losses resulting from returns, allowances, claims and discounts.Notes Payable and Other Credit Facilities: At December 31, 2006 and April 2, 2006, long-term
debt consisted of:
 December 31,
    
    
    April 2,2006
    
    
    2006Revolving credit facility
    
    $
    3,468
    
    
    $
    Senior subordinated notes
    
    
    
    
    
    
    16,000Non-interest bearing notes
    
    
    4,000
    
    
    
    8,000Capital leases
    
    
    31
    
    
    
    58PIK notes
    
    
    
    
    
    
    1,077Original issue discount
    
    
    (1,020
    )
    
    
    (1,177
    )6,479
    
    
    
    23,958Less current maturities
    
    
    23
    
    
    
    36$
    6,456
    
    
    $
    23,922
 The Companys credit facilities at December 31, 2006 include the following:Revolving Creditof up to $22 million, including a $1.5 million sub-limit for letters of credit.
The interest rate is prime minus 1.00% (7.25% at December 31, 2006) for base rate borrowings or
LIBOR plus 2.25% (7.57% at December 31, 2006). The maturity date is July 11, 2009. The facility
is secured by a first lien on all assets. There was $3.5 million outstanding at December 31,
2006. The Company had $11.6 million available at December 31, 2006. As of December 31, 2006,
letters of credit of $655,000 were outstanding against the $1.5 million sub-limit for letters of
credit.The financing agreement for the $22 million revolving credit facility contains usual and
customary covenants for transactions of this type, including limitations on other indebtedness,
liens, transfers of assets, investments and acquisitions, merger or consolidation transactions,
dividends, transactions with affiliates and changes in or amendments to the organizational
documents for the Company and its subsidiaries. The Company was in compliance with these
covenants as of December 31, 2006.Subordinated Notesof $4 million. The notes do not bear interest and are due in two equal
installments of $2 million each, the first of which is payable on July 11, 2010 and the second of
which is payable on July 11, 2011. The original issue discount of $1.1 million on this
non-interest bearing obligation at a market interest rate of 7.25% is being amortized over the
life of the notes. The remaining unamortized balance of $1.0 million is included in the
consolidated balance sheet as of December 31, 2006.The Company also had other obligations at December 31, 2006 of $6,000 and $25,000, which expire
in May 2007 and July 2008, respectively.As of April 2, 2006, the Company had senior subordinated notes of $16 million with a fixed
interest rate of 10% plus an additional 1.65% payable by delivery of a promissory note for which
$1.1 million had been accrued and a non-interest bearing note of $8 million carried at a book
value of $6.8 million, net of unamortized original issue discount. These balances were
refinanced on July 11, 2006 using internally generated cash and funds available under the
revolving credit line described above. Concurrent with the refinancing of the senior
subordinated notes, the Company settled the $8 million non-interest bearing note and extinguished
related common stock purchase warrants by issuance of the $4 million subordinated notes described
above. The refinancing resulted in a gain of $4.1 million ($3.7 million net of tax) reported in
the quarter ended October 1, 2006. Approximately $3.1 million of the gain was not subject to
federal income tax.
 9




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##### Table of Contents



Minimum annual maturities are as follows (in thousands):
 Fiscal
    
    Revolver
    
    
    Sub Notes
    
    
    Other
    
    
    Total2007
    
    $
    
    
    
    $
    
    
    
    $
    9
    
    
    $
    92008
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    192009
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    32010
    
    
    3,468
    
    
    
    
    
    
    
    
    
    
    
    3,4682011
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    2,0002012
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    2,000Total
    
    $
    3,468
    
    
    $
    4,000
    
    
    $
    31
    
    
    $
    7,499
 5.
    
    Income Taxes:In the fourth quarter of fiscal year 2006, management determined that due to
taxable earnings generated in recent years, it was more likely than not that the benefit of
the Companys net operating loss carryforwards would be realized over time prior to their
expiration; consequently, the deferred tax asset valuation allowance account was removed at
April 2, 2006. As a result of the removal of the deferred tax valuation allowance, the
Companys net income tax expense in periods subsequent to the third quarter of fiscal year
2006 will include federal as well as state and local income taxes.Excluding a true-up of fiscal year 2006 income taxes of $150,000, the effective tax rate for the
three-month period ended December 31, 2006 was approximately 42.6%. The nine-month effective
rate is approximately 40.0%, excluding the true-up and the impact of the gain on debt
refinancing. Approximately $3.1 million of the gain on debt refinancing related to the reversal
of previously recognized debt-related expenses that were not deductible for federal tax purposes;
consequently, the gain from the reversal of such expenses was not taxable. The debt-related
expenses pertained to the amortization of the original issue discount on the previously issued
non-interest bearing subordinated debt. Total tax expense related to the gain on debt
refinancing was $373,000, representing an effective tax rate of 9.2%.6.
    
    Earnings per Share:The weighted average number of shares outstanding on a fully diluted
basis were 10,269,000 and 9,973,000 for the three and nine-month periods ended December 31,
2006, respectively, compared to 21,749,000 and 21,513,000 for the three and nine-month periods
ended January 1, 2006, respectively. The Company had issued to its previous lenders Common
Stock Purchase Warrants for non-voting common stock that were convertible into common stock
equivalent to 65% of the shares of the Company on a fully diluted basis at a price of 11.3
cents per share. As a result of the debt refinancing discussed above in Note 4, these
warrants were extinguished and are, therefore, no longer included in the Companys calculation
of diluted earnings per share.7.
    
    Acquisitions:On December 29, 2006, the Company, through its wholly-owned subsidiary Crown
Crafts Infant Products, Inc., acquired substantially all of the assets of Kimberly Grant,
Inc., a designer of various infant, toddler and juvenile products. The following table
summarizes the preliminary allocation of the $550,000 paid at closing based upon fair values of the assets
acquired assumed at the date of the acquisition. The fair values of certain intangibles were
based upon a third-party valuation of such assets.
 EstimatedAsset
    
    UsefulValue
    
    LifeTradename
    
    
    427,521
    
    
    15 yearsExisting Designs
    
    
    32,931
    
    
    1 yearNon-compete
    
    
    89,548
    
    
    15 years550,000
 In connection with the renewal of the Kimberly Grant trademark registration, the Company paid an
additional $50,000 in the fourth quarter of fiscal year 2007.
 10




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##### Table of Contents



8. Subsequent Event:
 
 
    11




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##### Table of Contents



Three-month period ended
    
    Nine-month period endedDecember 31,
    
    January 1,
    
    
    
    
    
    
    
    
    
    December 31,
    
    January 1,2006
    
    2006
    
    $ change
    
    % change
    
    2006
    
    2006
    
    $ change
    
    % changeDollars in thousands
    
    Dollars in thousandsNet Sales by CategoryBedding, Blankets
and Accessories
    
    $
    10,633
    
    
    $
    11,697
    
    
    $
    (1,064
    )
    
    
    -9.1
    %
    
    $
    36,688
    
    
    $
    35,466
    
    
    $
    1,222
    
    
    
    3.4
    %Bibs and Bath
    
    
    4,735
    
    
    
    5,182
    
    
    
    (447
    )
    
    
    -8.6
    %
    
    
    15,353
    
    
    
    15,111
    
    
    
    242
    
    
    
    1.6
    %Handwoven Products
    
    
    1,085
    
    
    
    1,003
    
    
    
    82
    
    
    
    8.2
    %
    
    
    2,150
    
    
    
    2,249
    
    
    
    (99
    )
    
    
    -4.4
    %Total Net Sales
    
    
    16,453
    
    
    
    17,882
    
    
    
    (1,429
    )
    
    
    -8.0
    %
    
    
    54,191
    
    
    
    52,826
    
    
    
    1,365
    
    
    
    2.6
    %Cost of Products Sold
    
    
    12,831
    
    
    
    13,557
    
    
    
    (726
    )
    
    
    -5.4
    %
    
    
    40,236
    
    
    
    40,925
    
    
    
    (689
    )
    
    
    -1.7
    %Gross Profit
    
    
    3,622
    
    
    
    4,325
    
    
    
    (703
    )
    
    
    -16.3
    %
    
    
    13,955
    
    
    
    11,901
    
    
    
    2,054
    
    
    
    17.3
    %% of Net Sales
    
    
    22.0
    %
    
    
    24.2
    %
    
    
    
    
    
    
    
    
    
    
    25.8
    %
    
    
    22.5
    %Marketing and Administrative Expenses
    
    
    2,623
    
    
    
    2,479
    
    
    
    144
    
    
    
    5.8
    %
    
    
    7,802
    
    
    
    7,542
    
    
    
    260
    
    
    
    3.4
    %% of Net Sales
    
    
    15.9
    %
    
    
    13.9
    %
    
    
    
    
    
    
    
    
    
    
    14.4
    %
    
    
    14.3
    %Interest Expense
    
    
    195
    
    
    
    773
    
    
    
    (578
    )
    
    
    -74.8
    %
    
    
    1,204
    
    
    
    2,315
    
    
    
    (1,111
    )
    
    
    -48.0
    %Gain on Debt Refinancing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    (4,069
    )
    
    
    
    
    
    
    (4,069
    )
    
    
    100.0
    %Other Income  net
    
    
    (4
    )
    
    
    (3
    )
    
    
    (1
    )
    
    
    33.3
    %
    
    
    (144
    )
    
    
    (20
    )
    
    
    (124
    )
    
    
    620.0
    %Income Tax Expense
    
    
    194
    
    
    
    13
    
    
    
    181
    
    
    
    1392.3
    %
    
    
    2,283
    
    
    
    118
    
    
    
    2,165
    
    
    
    1834.7
    %Net Income
    
    
    614
    
    
    
    1,063
    
    
    
    (449
    )
    
    
    -42.2
    %
    
    
    6,879
    
    
    
    1,946
    
    
    
    4,933
    
    
    
    253.5
    %% of Net Sales
    
    
    3.7
    %
    
    
    5.9
    %
    
    
    
    
    
    
    
    
    
    
    12.7
    %
    
    
    3.7
    %
 Net Sales:
    12




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##### Table of Contents



Gross Profit:
  Marketing and Administrative Expenses
 Interest Expense:
 Gain on Debt Refinancing:
 Other Income  Net:
 13




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##### Table of Contents



Income Tax Expense:
  Net Income:
     14




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15




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##### Table of Contents



ExhibitNo.
    
    Exhibit31.1
    
    Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Financial Officer32.1
    
    Section 1350 Certification by the Companys Chief Executive Officer32.2
    
    Section 1350 Certification by the Companys Chief Financial Officer
 16




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##### Table of Contents



CROWN CRAFTS, INC.Date: February 14, 2007
    /s/ Amy Vidrine SamsonAMY VIDRINE SAMSONChief Financial Officer
(duly authorized signatory and
Principal Financial and Accounting Officer) 17




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##### Table of Contents



Index to Exhibits
 ExhibitNo.
    
    Exhibit31.1
    
    Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Financial Officer32.1
    
    Section 1350 Certification by the Companys Chief Executive Officer32.2
    
    Section 1350 Certification by the Companys Chief Financial Officer
 18