##### 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 October 1, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto
 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)
 916 South Burnside Avenue, Gonzales, Louisiana 70737
 (Registrants telephone number, including area code)
 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 of CEORule 13a-14(a)/15d-14(a) Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO    Table of Contents  
 October 1, 2006
    
    
    April 2, 2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    42
    
    
    $
    3,790Accounts receivable (net of allowances of $1,334 at October 1, 2006 and $1,164 at April 2, 2006)Due from factor
    
    
    11,661
    
    
    
    12,465Other
    
    
    3,487
    
    
    
    1,992Inventories, net
    
    
    12,046
    
    
    
    9,742Prepaid expenses
    
    
    991
    
    
    
    1,177Deferred income taxes
    
    
    990
    
    
    
    990Total current assets
    
    
    29,217
    
    
    
    30,156Property, plant and equipment  at cost:Land, buildings and improvements
    
    
    1,349
    
    
    
    1,375Machinery and equipment
    
    
    2,534
    
    
    
    2,459Furniture and fixtures
    
    
    659
    
    
    
    6494,542
    
    
    
    4,483Less accumulated depreciation
    
    
    3,118
    
    
    
    2,945Property, plant and equipment  net
    
    
    1,424
    
    
    
    1,538Other assets:Goodwill, net
    
    
    22,884
    
    
    
    22,974Deferred income taxes
    
    
    1,708
    
    
    
    3,397Other
    
    
    220
    
    
    
    114Total other assets
    
    
    24,812
    
    
    
    26,485Total Assets
    
    $
    55,453
    
    
    $
    58,179LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,647
    
    
    $
    3,511Accrued wages and benefits
    
    
    992
    
    
    
    942Accrued royalties
    
    
    1,578
    
    
    
    559Other accrued liabilities
    
    
    439
    
    
    
    367Current maturities of long-term debt
    
    
    28
    
    
    
    36Total current liabilities
    
    
    9,684
    
    
    
    5,415Non-current liabilities:Long-term debt
    
    
    10,586
    
    
    
    23,922Total non-current liabilities
    
    
    10,586
    
    
    
    23,922Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock  par value $0.01 per share; 74,000,000 shares authorized; 9,934,188 shares
outstanding at October 1, 2006 and 9,505,937 outstanding at April 2, 2006
    
    
    99
    
    
    
    95Additional paid-in capital
    
    
    38,317
    
    
    
    38,244Accumulated deficit
    
    
    (3,233
    )
    
    
    (9,497
    )Total shareholders equity
    
    
    35,183
    
    
    
    28,842Total Liabilities and Shareholders Equity
    
    $
    55,453
    
    
    $
    58,179
 See notes to unaudited condensed consolidated financial statements.
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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedOctober 1,
    
    
    October 2,
    
    
    October 1,
    
    
    October 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    21,574
    
    
    $
    21,285
    
    
    $
    37,738
    
    
    $
    34,944Cost of products sold
    
    
    15,821
    
    
    
    16,676
    
    
    
    27,405
    
    
    
    27,368Gross profit
    
    
    5,753
    
    
    
    4,609
    
    
    
    10,333
    
    
    
    7,576Marketing and administrative expenses
    
    
    2,729
    
    
    
    2,596
    
    
    
    5,179
    
    
    
    5,064Income from operations
    
    
    3,024
    
    
    
    2,013
    
    
    
    5,154
    
    
    
    2,512Other income (expense):Interest expense
    
    
    (286
    )
    
    
    (740
    )
    
    
    (1,010
    )
    
    
    (1,541
    )Gain on debt refinancing
    
    
    4,069
    
    
    
    
    
    
    
    4,069
    
    
    
    Other  net
    
    
    21
    
    
    
    (25
    )
    
    
    140
    
    
    
    17Income before income taxes
    
    
    6,828
    
    
    
    1,248
    
    
    
    8,353
    
    
    
    988Income tax expense
    
    
    1,475
    
    
    
    97
    
    
    
    2,089
    
    
    
    105Net income
    
    $
    5,353
    
    
    $
    1,151
    
    
    $
    6,264
    
    
    $
    883Basic income per share
    
    $
    0.55
    
    
    $
    0.12
    
    
    $
    0.65
    
    
    $
    0.09Diluted income per share
    
    $
    0.54
    
    
    $
    0.05
    
    
    $
    0.64
    
    
    $
    0.04Weighted average shares
outstanding  basic
    
    
    9,690
    
    
    
    9,506
    
    
    
    9,598
    
    
    
    9,506Weighted average shares
outstanding  diluted
    
    
    9,990
    
    
    
    21,441
    
    
    
    9,821
    
    
    
    21,386
 See notes to unaudited condensed consolidated financial statements.
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October 1,
    
    
    October 2,2006
    
    
    2005Operating activities:Net income
    
    $
    6,264
    
    
    $
    883Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property, plant and equipment
    
    
    231
    
    
    
    230Goodwill write-off
    
    
    90
    
    
    
    Deferred income taxes
    
    
    1,688
    
    
    
    Gain on sale of property, plant and equipment
    
    
    (11
    )
    
    
    14Discount accretion
    
    
    242
    
    
    
    372Gain on debt restructuring
    
    
    (4,069
    )
    
    
    Stock-based compensation
    
    
    47
    
    
    
    Changes in assets and liabilitiesAccounts receivable
    
    
    (691
    )
    
    
    98Inventories, net
    
    
    (2,304
    )
    
    
    445Prepaid expenses
    
    
    186
    
    
    
    446Other assets
    
    
    (105
    )
    
    
    (15
    )Accounts payable
    
    
    3,136
    
    
    
    1,420Accrued liabilities
    
    
    1,142
    
    
    
    424Net cash provided by operating activities
    
    
    5,846
    
    
    
    4,317Investing activities:Capital expenditures
    
    
    (117
    )
    
    
    (339
    )Proceeds from disposition of assets
    
    
    11
    
    
    
    1Net cash used in investing activities
    
    
    (106
    )
    
    
    (338
    )Financing activities:Retirement of debt
    
    
    (17,077
    )
    
    
    (4,500
    )Payments on long-term debt
    
    
    (19
    )
    
    
    (8
    )Borrowings (repayments) under line of credit, net
    
    
    7,647
    
    
    
    Debt issuance costs
    
    
    (69
    )
    
    
    Issuance of common stock
    
    
    30
    
    
    
    Net cash used in financing activities
    
    
    (9,488
    )
    
    
    (4,508
    )Net (decrease) in cash and cash equivalents
    
    
    (3,748
    )
    
    
    (529
    )Cash and cash equivalents at beginning of period
    
    
    3,790
    
    
    
    955Cash and cash equivalents at end of period
    
    $
    42
    
    
    $
    426Supplemental cash flow information:Income taxes paid (received)
    
    $
    136
    
    
    $
    (33
    )Interest paid
    
    
    624
    
    
    
    1,159Accrued 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 October 1, 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 six-month periods ended
October 1, 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 consolidated financial
statements and footnotes thereto included in the annual report on Form 10-K for the year ended
April 2, 2006 of the Company.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 statement 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 which 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
October 1, 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 its decline in sales volume and profitability in
recent years which were indicative of an impairment.
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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 six-month periods ended October 2, 2005, deferred
tax assets were 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 account was removed. As a result of the removal of the deferred tax
valuation allowance, the Companys 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 $2.3 million and $2.4 million in
the six-month periods ended October 1, 2006 and October 2, 2005, 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 six-month periods
ended October 1, 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 our 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, who 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 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 123 (R).The Company uses the Black-Scholes option-pricing model to determine the fair-value of
stock-based awards under SFAS 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 123 (R). Under the modified prospective method, SFAS 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 six-month periods ended October 1, 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 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 six-month periods ended October 2, 2005 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
    
    
    Six months endedOctober 2, 2005
    
    
    October 2, 2005Net income, as reported
    
    $
    1,151
    
    
    $
    883Deduct: Total stock-based
employee compensation expense
determined under the fair
value based method for all
awards
    
    
    (11
    )
    
    
    (22
    )Pro forma net income
    
    $
    1,140
    
    
    $
    861Income per share:Basic  as reported
    
    $
    0.12
    
    
    $
    0.09Basic  pro forma
    
    $
    0.12
    
    
    $
    0.09Diluted  as reported
    
    $
    0.05
    
    
    $
    0.04Diluted  pro forma
    
    $
    0.05
    
    
    $
    0.04
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The Company recorded $47,000 of stock-based compensation during the three and six-month
periods ended October 1, 2006 as a result of the adoption of SFAS 123 (R), which had no effect
on basic or diluted earnings per share. No stock-based compensation costs were capitalized as
part of the cost of an asset as of October 1, 2006.
 Stock Options:
 Weighted-average
    
    
    Number of OptionsExercise Price
    
    
    OutstandingOutstanding, April 3, 2006
    
    $
    0.80
    
    
    
    536,100Granted
    
    
    3.15
    
    
    
    212,000Exercised
    
    
    0.58
    
    
    
    53,251Forfeited
    
    
    0.78
    
    
    
    31,999Outstanding, October 1, 2006
    
    $
    1.57
    
    
    
    662,850Exercisable, October 1, 2006
    
    $
    0.84
    
    
    
    434,860
 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 Company recognized $20,000 of compensation expense of which $5,000 was
included in cost of products sold and $15,000 was included in marketing and administrative
expenses in the accompanying Consolidated Statements of Operations related to these stock
option grants for the three and six-month periods ended October 1, 2006.The following weighted-average assumptions were used for grants issued during the three and
six-month periods ended October 1, 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
    %
 A summary of stock options outstanding and exercisable at October 1, 2006 is as follows:
 Weighted Avg.
    
    Weighted Avg.
    
    
    
    
    
    Weighted Avg.Number of
    
    Remaining
    
    Exercise Price
    
    Number of
    
    Exercise PriceRange of
    
    Options
    
    Contractual
    
    of Options
    
    Shares
    
    of SharesExercise Prices
    
    Outstanding
    
    Life
    
    Outstanding
    
    Exercisable
    
    Exercisable$
    0.18-0.41
    
    
    
    28,500
    
    
    3.83 years
    
    $
    0.23
    
    
    
    28,500
    
    
    $
    0.23$
    0.65
    
    
    
    131,000
    
    
    6.25 years
    
    
    0.65
    
    
    
    123,008
    
    
    
    0.65$
    0.66
    
    
    
    12,000
    
    
    3.86 years
    
    
    0.66
    
    
    
    4,002
    
    
    
    0.66$
    0.71
    
    
    
    174,750
    
    
    5.57 years
    
    
    0.71
    
    
    
    174,750
    
    
    
    0.71$
    1.06-2.31
    
    
    
    104,600
    
    
    3.68 years
    
    
    1.45
    
    
    
    104,600
    
    
    
    1.45$
    3.15
    
    
    
    212,000
    
    
    9.62 years
    
    
    3.15
    
    
    
    
    
    
    
    0.00662,850
    
    
    
    
    
    
    
    
    
    
    
    434,860
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As of October 1, 2006, total unrecognized stock-option compensation costs amounted to $416,000.
Unvested stock option compensation costs will be recognized as the underlying stock options
vest over a period of up to two years. The amount of unrecognized stock-option compensation
will be affected by any future stock option grants and by the termination of any employee that
has received stock options that are unvested as of such employees termination date. The
aggregate intrinsic value of both the options outstanding and the options exercisable at
October 1, 2006 was $1.0 million.Non-vested Stock:The fair value of non-vested stock is determined based on the number of
shares granted and the quoted closing price of the Companys common stock on the date of grant.
All non-vested stock awards issued under the 2006 Plan vest based upon continued service.During the three-month period ended October 1, 2006, the Company granted 375,000 shares of
non-vested stock with a weighted-average grant date fair value of $3.15. These shares have
four-year cliff vesting. The Company recognized $25,000 of compensation expense that was
included in marketing and administrative expenses in the accompanying Consolidated Statements
of Operations. The deferred amount is being amortized by monthly charges to earnings over the
four-year vesting period.As of October 1, 2006, the amount of unrecognized non-vested stock compensation costs amounted
to $1.2 million. The amount of unrecognized non-vested stock compensation will be affected by
any future non-vested stock grants and by the separation from the Company of any employee who
has received non-vested stock grants that are unvested as of such employees separation date.3.
    
    Inventory:Major classes of inventory were as follows (in thousands):
 October 1, 2006
    
    
    April 2, 2006Raw Materials
    
    $
    344
    
    
    $
    442Work in Process
    
    
    73
    
    
    
    73Finished Goods
    
    
    11,629
    
    
    
    9,227$
    12,046
    
    
    $
    9,742
 Inventory is net of reserves for inventories classified as irregular or discontinued of $0.5
million at October 1, 2006 and at April 2, 2006.4.
    
    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 October 1, 2006 and April 2, 2006, long-term debt
consisted of:
 October 1,
    
    
    April 2,2006
    
    
    2006Revolving credit facility
    
    $
    7,647
    
    
    $
    Senior subordinated notes
    
    
    
    
    
    
    16,000Non-interest bearing notes
    
    
    4,000
    
    
    
    8,000Capital leases
    
    
    41
    
    
    
    58PIK notes
    
    
    
    
    
    
    1,077Original issue discount
    
    
    (1,074
    )
    
    
    (1,177
    )10,614
    
    
    
    23,958Less current maturities
    
    
    28
    
    
    
    36$
    10,586
    
    
    $
    23,922
 8




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##### Table of Contents



The Companys credit facilities at October 1, 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 October 1, 2006) for base rate borrowings or
LIBOR plus 2.25% (7.57% at October 1, 2006). The maturity date is July 11, 2009. The facility
is secured by a first lien on all assets. There was $7.6 million outstanding at October 1, 2006.
The Company had $11 million available at October 1, 2006. As of October 1, 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 October 1, 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 $1.1 million is included in the
Consolidated Balance Sheet as of October 1, 2006.The Company also had other obligations at October 1, 2006 of $11,000 and $29,000, 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 three and six-month periods ended October 1, 2006. Approximately $3.1 million of the gain
was not subject to federal income tax.Minimum annual maturities are as follows (in thousands):
 Fiscal
    
    Revolver
    
    
    Sub Notes
    
    
    Other
    
    
    Total2007
    
    $
    
    
    
    $
    
    
    
    $
    19
    
    
    $
    192008
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    192009
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    32010
    
    
    7,647
    
    
    
    
    
    
    
    
    
    
    
    7,6472011
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    2,0002012
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    2,000Total
    
    $
    7,647
    
    
    $
    4,000
    
    
    $
    41
    
    
    $
    11,688
 5.
    
    Earnings per Share:The weighted average number of shares outstanding on a fully diluted
basis were 9,990,000 and 9,821,000 for the three and six-month periods ended October 1, 2006,
respectively compared to 21,441,000 and 21,386,000 for the three and six-month periods ended
October 2, 2005, 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, these warrants were
extinguished and are, therefore, no longer included in the Companys calculation of diluted
earnings per share.
 9




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##### Table of Contents



Three months ended
    
    Six months endedOctober 2,
    
    
    
    
    
    %
    
    October 1,
    
    October 2,
    
    
    
    
    
    %October 1, 2006
    
    2005
    
    $ change
    
    change
    
    2006
    
    2005
    
    $ change
    
    changeDollars in thousands
    
    
    
    
    
    Dollars in thousandsNet Sales by CategoryBedding, Blankets
and Accessories
    
    $
    15,150
    
    
    $
    14,786
    
    
    $
    364
    
    
    
    2.5
    %
    
    $
    26,056
    
    
    $
    23,770
    
    
    $
    2,286
    
    
    
    9.6
    %Bibs and Bath
    
    
    5,769
    
    
    
    5,770
    
    
    
    (1
    )
    
    
    0.0
    %
    
    
    10,617
    
    
    
    9,929
    
    
    
    688
    
    
    
    6.9
    %Handwoven Products
    
    
    655
    
    
    
    729
    
    
    
    (74
    )
    
    
    -10.2
    %
    
    
    1,065
    
    
    
    1,245
    
    
    
    (180
    )
    
    
    -14.5
    %Total Net Sales
    
    
    21,574
    
    
    
    21,285
    
    
    
    289
    
    
    
    1.4
    %
    
    
    37,738
    
    
    
    34,944
    
    
    
    2,794
    
    
    
    8.0
    %Cost of Products Sold
    
    
    15,821
    
    
    
    16,676
    
    
    
    (855
    )
    
    
    -5.1
    %
    
    
    27,405
    
    
    
    27,368
    
    
    
    37
    
    
    
    0.1
    %Gross Profit
    
    
    5,753
    
    
    
    4,609
    
    
    
    1,144
    
    
    
    24.8
    %
    
    
    10,333
    
    
    
    7,576
    
    
    
    2,757
    
    
    
    36.4
    %% of Net Sales
    
    
    26.7
    %
    
    
    21.7
    %
    
    
    
    
    
    
    
    
    
    
    27.4
    %
    
    
    21.7
    %Marketing and Administrative Expenses
    
    
    2,729
    
    
    
    2,596
    
    
    
    133
    
    
    
    5.1
    %
    
    
    5,179
    
    
    
    5,064
    
    
    
    115
    
    
    
    2.3
    %% of Net Sales
    
    
    12.6
    %
    
    
    12.2
    %
    
    
    
    
    
    
    
    
    
    
    13.7
    %
    
    
    14.5
    %Interest Expense
    
    
    286
    
    
    
    740
    
    
    
    (454
    )
    
    
    -61.4
    %
    
    
    1,010
    
    
    
    1,541
    
    
    
    (531
    )
    
    
    -34.5
    %Gain on Debt Refinancing
    
    
    (4,069
    )
    
    
    
    
    
    
    (4,069
    )
    
    
    100.0
    %
    
    
    (4,069
    )
    
    
    
    
    
    
    (4,069
    )
    
    
    100.0
    %Other Income  net
    
    
    (21
    )
    
    
    25
    
    
    
    (46
    )
    
    
    -184.0
    %
    
    
    (140
    )
    
    
    (17
    )
    
    
    (123
    )
    
    
    723.5
    %Income Tax Expense
    
    
    1,475
    
    
    
    97
    
    
    
    1,378
    
    
    
    1420.6
    %
    
    
    2,089
    
    
    
    105
    
    
    
    1,984
    
    
    
    1889.5
    %Net Income
    
    
    5,353
    
    
    
    1,151
    
    
    
    4,202
    
    
    
    365.1
    %
    
    
    6,264
    
    
    
    883
    
    
    
    5,381
    
    
    
    609.4
    %% of Net Sales
    
    
    24.8
    %
    
    
    5.4
    %
    
    
    
    
    
    
    
    
    
    
    16.6
    %
    
    
    2.5
    %
 10




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##### Table of Contents



Net Sales:
    Gross Profit:
 Marketing and Administrative Expenses
 Interest Expense:
 11




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##### Table of Contents



Gain on Debt Refinancing:
 Other Income  Net:
 Income Tax Expense:
  Net Income:
    12




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13




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14




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##### Table of Contents



ExhibitNo.
    
    Exhibit4.1
    
    Amendment No. 1 to Amended and Restated Rights Agreement dated as of July 12,
2006 between the Company and Computershare Investor Services, LLC (1)10.1
    
    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. (1)10.2
    
    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. (1)10.3
    
    Mortgage, Assignment of Leases and Rents, Fixture Filing and Security
Agreement dated July 11, 2006 from Churchill Weavers, Inc. to The CIT
Group/Commercial Services, Inc. (1)10.4
    
    Secured Subordinated Promissory Note dated July 11, 2006 issued by the Company
to Wachovia Bank, National Association (1)10.5
    
    Secured Subordinated Promissory Note dated July 11, 2006 issued by the Company
to Banc of America Strategic Solutions, Inc. (1)10.6
    
    Secured Subordinated Promissory Note dated July 11, 2006 issued by the Company
to The Prudential Insurance Company of America (1)10.7
    
    Security Agreement dated as of July 11, 2006 by and among the Company,
Churchill Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and
Wachovia Bank, National Association, as Agent (1)10.8
    
    Mortgage, Assignment of Leases and Rents, Fixture Filing and Security
Agreement dated July 11, 2006 from Churchill Weavers, Inc. to Wachovia Bank,
National Association, as Agent (1)31.1
    
    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
 
 (1)
    
    Incorporated herein by reference to the Companys Current Report on Form 8-K dated July 17,
2006. 15




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##### Table of Contents



CROWN CRAFTS, INC.Date: November 15, 2006
    /s/ Amy Vidrine SamsonAMY VIDRINE SAMSONChief Financial Officer
(duly authorized signatory and
Principal Financial and Accounting
Officer) 16




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##### Table of Contents



Index to Exhibits
 ExhibitNo.
    
    Exhibit4.1
    
    Amendment No. 1 to Amended and Restated Rights Agreement dated as of July 12,
2006 between the Company and Computershare Investor Services, LLC (1)10.1
    
    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. (1)10.2
    
    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. (1)10.3
    
    Mortgage, Assignment of Leases and Rents, Fixture Filing and Security
Agreement dated July 11, 2006 from Churchill Weavers, Inc. to The CIT
Group/Commercial Services, Inc. (1)10.4
    
    Secured Subordinated Promissory Note dated July 11, 2006 issued by the Company
to Wachovia Bank, National Association (1)10.5
    
    Secured Subordinated Promissory Note dated July 11, 2006 issued by the Company
to Banc of America Strategic Solutions, Inc. (1)10.6
    
    Secured Subordinated Promissory Note dated July 11, 2006 issued by the Company
to The Prudential Insurance Company of America (1)10.7
    
    Security Agreement dated as of July 11, 2006 by and among the Company,
Churchill Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc. and
Wachovia Bank, National Association, as Agent (1)10.8
    
    Mortgage, Assignment of Leases and Rents, Fixture Filing and Security
Agreement dated July 11, 2006 from Churchill Weavers, Inc. to Wachovia Bank,
National Association, as Agent (1)31.1
    
    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
 
 (1)
    
    Incorporated herein by reference to the Companys Current Report on Form 8-K dated July 17,
2006. 17