##### 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 January 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
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
  
   
   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 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 CEORule 13a-14(a)/15d-14(a) Certification by CFOSection 1350 Certification by CEOSection 1350 Certification by CFO    Table of Contents  
 January 1, 2006
    
    
    April 3, 2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,803
    
    
    $
    955Accounts receivable (net of allowances of $1,623 at
January 1, 2006 and $1,411 at April 3, 2005)Due from factor
    
    
    9,576
    
    
    
    13,258Other
    
    
    2,457
    
    
    
    1,110Inventories, net
    
    
    12,730
    
    
    
    12,544Prepaid expense
    
    
    2,298
    
    
    
    1,450Total current assets
    
    
    29,864
    
    
    
    29,317Property, plant and equipment  at cost:Land, buildings and improvements
    
    
    1,380
    
    
    
    1,447Machinery and equipment
    
    
    3,043
    
    
    
    2,657Furniture and fixtures
    
    
    651
    
    
    
    6615,074
    
    
    
    4,765Less accumulated depreciation
    
    
    3,421
    
    
    
    3,179Property, plant and equipment  net
    
    
    1,653
    
    
    
    1,586Other assets:Goodwill, net
    
    
    22,974
    
    
    
    22,974Other
    
    
    214
    
    
    
    247Total other assets
    
    
    23,188
    
    
    
    23,221Total Assets
    
    $
    54,705
    
    
    $
    54,124LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,831
    
    
    $
    3,729Accrued wages and benefits
    
    
    907
    
    
    
    669Accrued royalties
    
    
    1,264
    
    
    
    1,051Other accrued liabilities
    
    
    157
    
    
    
    398Current maturities of long-term debt
    
    
    19
    
    
    
    2,317Total current liabilities
    
    
    8,178
    
    
    
    8,164Non-current liabilities:Long-term debt
    
    
    23,706
    
    
    
    25,085Total non-current liabilities
    
    
    23,706
    
    
    
    25,085Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock  par value $0.01 per share, 74,000,000 shares
authorized, 9,505,937 shares outstanding
    
    
    95
    
    
    
    95Additional paid-in capital
    
    
    38,244
    
    
    
    38,244Accumulated deficit
    
    
    (15,518
    )
    
    
    (17,464
    )Total shareholders equity
    
    
    22,821
    
    
    
    20,875Total Liabilities and Shareholders Equity
    
    $
    54,705
    
    
    $
    54,124
 See notes to unaudited condensed consolidated financial statements.
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Three Months Ended
    
    
    Nine Months EndedJanuary 1,
    
    
    December 26,
    
    
    January 1,
    
    
    December 26,2006
    
    
    2004
    
    
    2006
    
    
    2004Net sales
    
    $
    17,882
    
    
    $
    20,664
    
    
    $
    52,826
    
    
    $
    60,597Cost of products sold
    
    
    13,557
    
    
    
    16,262
    
    
    
    40,925
    
    
    
    48,083Gross profit
    
    
    4,325
    
    
    
    4,402
    
    
    
    11,901
    
    
    
    12,514Marketing and administrative expenses
    
    
    2,479
    
    
    
    2,706
    
    
    
    7,542
    
    
    
    8,089Income from operations
    
    
    1,846
    
    
    
    1,696
    
    
    
    4,359
    
    
    
    4,425Other income (expense):Interest expense
    
    
    (773
    )
    
    
    (932
    )
    
    
    (2,315
    )
    
    
    (2,814
    )Other  net
    
    
    3
    
    
    
    83
    
    
    
    20
    
    
    
    88Income before income taxes
    
    
    1,076
    
    
    
    847
    
    
    
    2,064
    
    
    
    1,699Income tax expense (benefit)
    
    
    13
    
    
    
    (71
    )
    
    
    118
    
    
    
    41Net income
    
    $
    1,063
    
    
    $
    918
    
    
    $
    1,946
    
    
    $
    1,658Basic income per share
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.20
    
    
    $
    0.17Diluted income per share
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.08Weighted average shares
outstanding  basic
    
    
    9,506
    
    
    
    9,505
    
    
    
    9,506
    
    
    
    9,505Weighted average shares
outstanding  diluted
    
    
    21,749
    
    
    
    21,154
    
    
    
    21,513
    
    
    
    21,935
 See notes to unaudited condensed consolidated financial statements.
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January 1,
    
    
    December 26,2006
    
    
    2004Operating activities:Net income
    
    $
    1,946
    
    
    $
    1,658Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property, plant and equipment
    
    
    353
    
    
    
    354Loss (gain) on sale of property, plant and equipment
    
    
    14
    
    
    
    (2
    )Discount accretion
    
    
    567
    
    
    
    503Changes in assets and liabilitiesAccounts receivable
    
    
    2,335
    
    
    
    5,241Inventories, net
    
    
    (186
    )
    
    
    (3,846
    )Prepaid expenses
    
    
    (848
    )
    
    
    (494
    )Other assets
    
    
    33
    
    
    
    27Accounts payable
    
    
    2,102
    
    
    
    84Accrued liabilities
    
    
    478
    
    
    
    (511
    )Net cash provided by operating activities
    
    
    6,794
    
    
    
    3,014Investing activities:Capital expenditures
    
    
    (435
    )
    
    
    (122
    )Proceeds from disposition of assets
    
    
    1
    
    
    
    6Net cash (used in) investing activities
    
    
    (434
    )
    
    
    (116
    )Financing activities:Payment of long-term borrowing
    
    
    (13,136
    )
    
    
    (23,471
    )Borrowings against line of credit
    
    
    8,624
    
    
    
    20,632Net cash (used in) financing activities
    
    
    (4,512
    )
    
    
    (2,839
    )Net increase in cash and cash equivalents
    
    
    1,848
    
    
    
    59Cash and cash equivalents at beginning of period
    
    
    955
    
    
    
    7Cash and cash equivalents at end of period
    
    $
    2,803
    
    
    $
    66Supplemental cash flow information:Income taxes (received) paid
    
    $
    (17
    )
    
    $
    16Interest paid
    
    
    1,606
    
    
    
    2,241Accrued interest converted to long-term debt
    
    
    268
    
    
    
    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. 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 January 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 nine-month periods ended January 1,
2006 are not necessarily indicative of the results that may be expected for the year ending
April 2, 2006. 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 3, 2005
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 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 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 $6.3 million at January 1, 2006
and April 3, 2005. The Company performed fair value based impairment tests on its goodwill in
accordance with SFAS 142, Goodwill and Other Intangible Assets, and determined that the fair
value exceeded the recorded value at March 29, 2004 and April 4, 2005.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. Deferred tax assets have been reduced by a valuation allowance, if
necessary, in the amount of any tax benefits that, based on available evidence, are not expected
to be realized. Since the Company has federal income tax net operating loss carryforwards, the
future benefits of which are largely offset by a valuation allowance, provisions for income
taxes relate primarily to state and local income taxes.
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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. Historically, funding occurred in the fourth quarter of the fiscal year
causing the balance to be highest in the third quarter. However, beginning in fiscal year 2006,
funding of the majority of the Companys allowances will occur 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 $3.7 million and $3.9 million for
the nine-month periods ended January 1, 2006 and December 26, 2004, respectively.Stock-Based Compensation:The Company accounts for its stock option plans using the intrinsic
value method established by APB Opinion 25, Accounting for Stock Issued to Employees, and its
related interpretations. Accordingly, no compensation cost has been recognized in the Companys
financial statements for its stock-based compensation plans. The Company complies with the
disclosure requirements of SFAS 123, Accounting for Stock Based-Compensation, as amended by SFAS
148, Accounting for Stock-Based Compensation  Transition and Disclosure, which requires pro
forma disclosure regarding net earnings and earnings per share determined as if the Company had
accounted for employee stock options using the fair value method of that statement.In December 2004, the FASB issued Statement 123R, Share-Based Payment, an Amendment of FASB
Statement No. 123, which requires all companies to measure compensation cost for all
share-based payments (including employee stock options) at fair value and is effective for
public companies for annual periods beginning after June 15, 2005. This Statement eliminates
the ability to account for stock-based compensation transactions using APB 25 and, generally,
requires instead that such transactions be accounted for using a fair-value based method. Had
the Company adopted SFAS 123R in prior periods, the impact of the standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro-forma net income
and earnings per share as set forth below. The Company will be required to begin expensing
stock options in the first quarter of fiscal year 2007.For purposes of the pro forma disclosure, the fair value of each option was estimated as of the
date of grant using the Black-Scholes option-pricing model and is amortized to expense ratably
as the option vests. Had compensation costs for the Companys stock option plans been
determined based on the fair value at the grant date, consistent with the method under SFAS 123,
as amended, the Companys net income and income per share would have been as indicated below:
 5




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Three months ended
    
    
    Nine months endedJanuary 1,2006
    
    
    December 26, 2004
    
    
    January 1, 2006
    
    
    December 26, 2004Net income, as reported
    
    $
    1,063
    
    
    $
    918
    
    
    $
    1,946
    
    
    $
    1,658Deduct: Total
stock-based employee
compensation expense
determined under the
fair value based
method for all awards
    
    
    (5
    )
    
    
    (11
    )
    
    
    (27
    )
    
    
    (55
    )Pro forma net income
    
    $
    1,058
    
    
    $
    907
    
    
    $
    1,919
    
    
    $
    1,603Income per share:Basic  as reported
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.20
    
    
    $
    0.17Basic  pro forma
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.20
    
    
    $
    0.17Diluted  as reported
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.08Diluted  pro forma
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.07
 2.
    
    Inventory:Major classes of inventory were as follows (in thousands):
 January 1, 2006
    
    
    April 3, 2005Raw Materials
    
    $
    465
    
    
    $
    633Work in Process
    
    
    133
    
    
    
    210Finished Goods
    
    
    12,132
    
    
    
    11,701$
    12,730
    
    
    $
    12,544
 Inventory is net of reserves for inventories classified as irregular or discontinued of $0.6
million at January 1, 2006 and $0.7 million at April 3, 2005.
 3.
    
    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 January 1, 2006 and April 3, 2005, long-term debt
consisted of:
 January 1,
    
    
    April 3,2006
    
    
    2005Senior notes and senior subordinated notes
    
    $
    16,025
    
    
    $
    20,538Floating rate revolving credit facilities
    
    
    
    
    
    
    Non-interest bearing notes
    
    
    8,000
    
    
    
    8,000PIK notes
    
    
    1,078
    
    
    
    809Original issue discount
    
    
    (1,378
    )
    
    
    (1,945
    )23,725
    
    
    
    27,402Less current maturities
    
    
    19
    
    
    
    2,317$
    23,706
    
    
    $
    25,085
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Revolving Credit
 Senior Notes
 Senior Subordinated Notes
    Sub
    
    
    PIKFiscal
    
    Revolver
    
    
    Notes
    
    
    Notes
    
    
    Other
    
    
    Total2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    52007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    182008
    
    
    
    
    
    
    24,000
    *
    
    
    1,078
    
    
    
    2
    
    
    
    25,080Total
    
    $
    
    
    
    $
    24,000
    
    
    $
    1,078
    
    
    $
    25
    
    
    $
    25,103
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®
    Three months ended
    
    
    Nine months endedJan. 1, 2006
    
    
    Dec. 26, 2004
    
    
    $ change
    
    
    % change
    
    
    Jan. 1, 2006
    
    
    Dec. 26, 2004
    
    
    $ change
    
    
    % changeDollars in thousands
    
    
    
    
    
    
    
    
    
    
    Dollars in thousandsNet Sales by CategoryBedding, Blankets
and Accessories
    
    $
    11,697
    
    
    $
    13,249
    
    
    $
    (1,552
    )
    
    
    -11.7
    %
    
    $
    35,466
    
    
    $
    40,609
    
    
    $
    (5,143
    )
    
    
    -12.7
    %Bibs and Bath
    
    
    5,182
    
    
    
    6,202
    
    
    
    (1,020
    )
    
    
    -16.4
    %
    
    
    15,111
    
    
    
    17,416
    
    
    
    (2,305
    )
    
    
    -13.2
    %Handwoven Products
    
    
    1,003
    
    
    
    1,213
    
    
    
    (210
    )
    
    
    -17.3
    %
    
    
    2,249
    
    
    
    2,572
    
    
    
    (323
    )
    
    
    -12.6
    %Total Net Sales
    
    
    17,882
    
    
    
    20,664
    
    
    
    (2,782
    )
    
    
    -13.5
    %
    
    
    52,826
    
    
    
    60,597
    
    
    
    (7,771
    )
    
    
    -12.8
    %Cost of Products Sold
    
    
    13,557
    
    
    
    16,262
    
    
    
    (2,705
    )
    
    
    -16.6
    %
    
    
    40,925
    
    
    
    48,083
    
    
    
    (7,158
    )
    
    
    -14.9
    %Gross Profit
    
    
    4,325
    
    
    
    4,402
    
    
    
    (77
    )
    
    
    -1.8
    %
    
    
    11,901
    
    
    
    12,514
    
    
    
    (613
    )
    
    
    -4.9
    %% of Net Sales
    
    
    24.2
    %
    
    
    21.3
    %
    
    
    
    
    
    
    
    
    
    
    22.5
    %
    
    
    20.7
    %Marketing and
Administrative Expenses
    
    
    2,479
    
    
    
    2,706
    
    
    
    (227
    )
    
    
    -8.4
    %
    
    
    7,542
    
    
    
    8,089
    
    
    
    (547
    )
    
    
    -6.8
    %% of Net Sales
    
    
    13.9
    %
    
    
    13.1
    %
    
    
    
    
    
    
    
    
    
    
    14.3
    %
    
    
    13.3
    %Interest Expense
    
    
    773
    
    
    
    932
    
    
    
    (159
    )
    
    
    -17.0
    %
    
    
    2,315
    
    
    
    2,814
    
    
    
    (499
    )
    
    
    -17.7
    %Other - net
    
    
    (3
    )
    
    
    (83
    )
    
    
    80
    
    
    
    -96.8
    %
    
    
    (20
    )
    
    
    (88
    )
    
    
    68
    
    
    
    -77.3
    %Income Tax Expense
(benefit)
    
    
    13
    
    
    
    (71
    )
    
    
    84
    
    
    
    -118.1
    %
    
    
    118
    
    
    
    41
    
    
    
    77
    
    
    
    187.9
    %Net Income
    
    
    1,063
    
    
    
    918
    
    
    
    145
    
    
    
    15.8
    %
    
    
    1,946
    
    
    
    1,658
    
    
    
    288
    
    
    
    17.4
    %% of Net Sales
    
    
    5.9
    %
    
    
    4.4
    %
    
    
    
    
    
    
    
    
    
    
    3.7
    %
    
    
    2.7
    %
 8




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Net Sales: ®
  Gross Profit:
 Marketing and Administrative Expenses
 Interest Expense:
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Exhibits31.1
    
    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
 11




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CROWN CRAFTS, INC.Date: February 15, 2006
    
    
    
    /s/ Amy Vidrine SamsonAMY VIDRINE SAMSONChief Financial Officer(duly authorized signatory andPrincipal Financial and AccountingOfficer)
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Index to Exhibits
 ExhibitNumber
    
    Description31.1
    
    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
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