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CROWN CRAFTS INC - Quarter Report: 2004 December (Form 10-Q)

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 26, 2004

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.

(Exact name of registrant as specified in its charter)
     
Delaware   58-0678148

 
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    

916 South Burnside Avenue, Gonzales, Louisiana 70737


(Address of principal executive offices)

(225) 647-9100


(Registrant’s telephone number, including area code)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ  No o 

     Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No  þ

      The number of shares of common stock, $0.01 par value, of the Registrant outstanding as of December 26, 2004 was 9,504,937.

 




TABLE OF CONTENTS

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits
SIGNATURES
Index to Exhibits
7th Amendment to Credit Agreement
5th Amendment to Subordinated Note and Warrant Purchase Agreement
Certification by the Company's CEO
Certification by the Company's CFO
Certification by the Company's CEO
Certification by the Company's CFO


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CROWN CRAFTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 26, 2004 and March 28, 2004
(UNAUDITED)
(dollar amounts in thousands, except share and per share amounts)
                 
    December 26, 2004     March 28, 2004  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 66     $ 7  
Accounts receivable, net of allowances of $4,335 at December 26, 2004 and $2,058 at March 28, 2004
               
Due from factor
    10,746       16,259  
Other
    1,234       962  
Inventories, net
    18,240       14,394  
Prepaid expense
    2,160       1,622  
Other current assets
    50       94  
 
           
Total current assets
    32,496       33,338  
Property, plant and equipment — at cost:
               
Land, buildings and improvements
    1,803       1,803  
Machinery and equipment
    2,888       2,802  
Furniture and fixtures
    672       664  
 
           
 
    5,363       5,269  
Less accumulated depreciation
    3,765       3,435  
Property, plant and equipment — net
    1,598       1,834  
Other assets:
               
Goodwill, net
    22,974       22,974  
Other
    214       241  
 
           
Total other assets
    23,188       23,215  
 
           
Total Assets
  $ 57,282     $ 58,387  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 5,201     $ 5,117  
Accrued wages and benefits
    742       1,408  
Accrued royalties
    1,335       1,274  
Other accrued liabilities
    514       688  
Current maturities of long-term debt
    4,184       3,016  
 
           
Total current liabilities
    11,976       11,503  
Non-current liabilities:
               
Long-term debt
    25,211       28,447  
 
           
Total non-current liabilities
    25,211       28,447  
 
               
Commitments and contingencies
           
 
               
Shareholders’ equity:
               
Common stock — par value $0.01 per share, 74,000,000 shares authorized, 9,505,000 shares outstanding
    95       95  
Additional paid-in capital
    38,244       38,244  
Accumulated deficit
    (18,244 )     (19,902 )
 
           
Total shareholders’ equity
    20,095       18,437  
 
           
Total Liabilities and Shareholders’ Equity
  $ 57,282     $ 58,387  
 
           

See notes to unaudited consolidated financial statements.

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Crown Crafts, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three and Nine-Month Periods Ended December 26, 2004 and December 28, 2003
(UNAUDITED)
(amounts in thousands, except per share amounts)
                                 
    Three Months Ended     Nine Months Ended  
    December 26,     December 28,     December 26,     December 28,  
    2004     2003     2004     2003  
Net sales
  $ 20,664     $ 20,717     $ 60,597     $ 61,183  
Cost of products sold
    16,262       16,228       48,083       47,661  
 
                       
Gross profit
    4,402       4,489       12,514       13,522  
Marketing and administrative expenses
    2,706       2,882       8,089       8,868  
 
                       
Income from operations
    1,696       1,607       4,425       4,654  
Other income (expense):
                               
Interest expense
    (932 )     (986 )     (2,814 )     (3,049 )
Other — net
    83       5       88        
 
                       
Income before income taxes
    847       626       1,699       1,605  
Income tax expense (benefit)
    (71 )     (93 )     41       75  
 
                       
Net income
    918       719       1,658       1,530  
 
                       
Other comprehensive income, net of tax:
                               
Foreign currency translation adjustment
          19             25  
 
                       
Comprehensive income
  $ 918     $ 738     $ 1,658     $ 1,555  
 
                       
 
                               
Basic income per share
  $ 0.10     $ 0.08     $ 0.17     $ 0.16  
 
                       
 
                               
Diluted income per share
  $ 0.04     $ 0.03     $ 0.08     $ 0.07  
 
                       
 
                               
Weighted average shares outstanding — basic
    9,505       9,505       9,505       9,479  
 
                       
 
                               
Weighted average shares outstanding — diluted
    21,154       22,182       21,935       22,443  
 
                       

See notes to unaudited consolidated financial statements.

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Crown Crafts, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine-Month Periods Ended December 26, 2004 and December 28, 2003
(UNAUDITED)
(amounts in thousands)
                 
    December 26,     December 28,  
    2004     2003  
Operating activities:
               
 
               
Net income
  $ 1,658     $ 1,530  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation of property, plant and equipment
    354       398  
(Gain) on sale of property, plant, and equipment
    (2 )     (3 )
Discount accretion
    503       447  
Changes in assets and liabilities
               
Accounts receivable
    5,241       5,452  
Inventories, net
    (3,846 )     (406 )
Other current assets
    (494 )     (138 )
Other assets
    27       (72 )
Accounts payable
    84       (1,119 )
Accrued liabilities
    (511 )     (701 )
 
           
Net cash provided by operating activities
    3,014       5,388  
 
           
Investing activities:
               
Capital expenditures
    (122 )     (319 )
Proceeds from disposition of assets
    6       282  
Other
          6  
 
           
Net cash (used in) investing activities
    (116 )     (31 )
 
           
Financing activities:
               
Payment of long-term borrowing
    (23,471 )     (30,793 )
Long-term borrowing
    20,632       26,483  
Issuance of common stock
          61  
 
           
Net cash (used in) financing activities
    (2,839 )     (4,249 )
 
           
Net increase in cash and cash equivalents
    59       1,108  
Cash and cash equivalents at beginning of period
    7       194  
 
           
 
               
Cash and cash equivalents at end of period
  $ 66     $ 1,302  
 
           
Supplemental cash flow information:
               
 
               
Income taxes paid
  $ 16     $ 266  
Interest paid
    2,241       2,586  
Accrued interest converted to long-term debt
    268       268  

See notes to unaudited consolidated financial statements.

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CROWN CRAFTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE THREE AND NINE-MONTH PERIODS ENDED DECEMBER 26, 2004 AND DECEMBER 28, 2003

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 December 26, 2004 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 26, 2004 are not necessarily indicative of the results that may be expected for the year ending April 3, 2005. 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 March 28, 2004 of the Company.
 
    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. Actual results could differ from those estimates.
 
    Goodwill, net: In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and eliminates the use of the pooling-of-interests method. The application of SFAS 141 did not affect any of the Company’s previously reported amounts included in goodwill or other intangible assets. SFAS 142 requires that the amortization of goodwill cease prospectively upon adoption and that instead the carrying value of goodwill be evaluated using an impairment approach. Identifiable intangible assets continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS 142 was effective for fiscal years beginning after December 15, 2001, and was implemented by the Company on April 1, 2002. Beginning in fiscal 2003, the Company discontinued amortizing goodwill but continues to amortize other long-lived intangible assets. The Company performed fair value based impairment tests on its goodwill in accordance with SFAS 142 and determined that the fair value exceeded the recorded value at March 31, 2003 and March 29, 2004.
 
    Provision for Income Taxes: 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.
 
    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 occurs in the fourth quarter of the fiscal year causing the balance to be highest in the third quarter.
 
    Stock Options: 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 Statements No. 123 and 95 (SFAS 123R), which will require all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value and will be effective for public companies for interim or annual periods beginning after June 15, 2005. This Statement will eliminate the ability to account for stock-based compensation transactions using APB 25 and, generally, will require instead that such transactions be accounted for using a fair-value based method. The Company will be required to begin expensing stock options in the second quarter of fiscal year 2006.

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    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, the Company’s net earnings and earnings per share would have been as indicated below:
                                 
    Three months ended     Nine months ended  
    December 26, 2004     December 28, 2003     December 26, 2004     December 28, 2003  
Net income, as reported
  $ 918     $ 719     $ 1,658     $ 1,530  
 
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards
    (5 )     (8 )     (23 )     (21 )
 
                       
Pro forma net income
  $ 913     $ 711     $ 1,635     $ 1,509  
 
                       
 
                               
Income per share:
                               
Basic — as reported
  $ 0.10     $ 0.08     $ 0.17     $ 0.16  
 
                       
Basic — pro forma
  $ 0.10     $ 0.07     $ 0.17     $ 0.16  
 
                       
Diluted — as reported
  $ 0.04     $ 0.03     $ 0.08     $ 0.07  
 
                       
Diluted — pro forma
  $ 0.04     $ 0.03     $ 0.07     $ 0.07  
 
                       

2.   Segment and Related Information: The Company operates primarily in one principal segment, infant and juvenile products. These products consist of infant bedding, bibs, soft goods and juvenile products (primarily Pillow Buddies®).
 
3.   Inventory: Major classes of inventory were as follows (in thousands):
                 
    December 26, 2004     March 28, 2004  
Raw Materials
  $ 727     $ 1,116  
Work in Process
    168       1,028  
Finished Goods
    17,345       12,250  
 
           
 
  $ 18,240     $ 14,394  
 
           

    Inventory is net of reserves for inventories classified as irregular or discontinued of $0.7 million and $1.0 million at December 26, 2004 and March 28, 2004, respectively.
 
4.   Financing Arrangements
 
    Factoring 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.

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Notes Payable and Other Credit Facilities: At December 26, 2004 and March 28, 2004, long-term debt consisted of:

                 
    December 26,     March 28,  
    2004     2004  
Promissory notes
  $ 21,541     $ 24,054  
Floating rate revolving credit facilities
    1,167       1,495  
Non-interest bearing notes
    8,810       8,541  
Original issue discount
    (2,123 )     (2,627 )
 
           
 
    29,395       31,463  
Less current maturities
    4,184       3,016  
 
           
 
  $ 25,211     $ 28,447  
 
           

At December 26, 2004, the Company’s credit facilities included the following:

Revolving Credit of up to $19 million including a $3 million sub-limit for letters of credit. The interest rate is prime plus 1.00% (6.25% at December 26, 2004) for base rate borrowings and LIBOR plus 2.75% (5.17% at December 26, 2004) for Euro-dollar borrowings. The maturity date is June 30, 2005. The facility is secured by a first lien on all assets. The balance at December 26, 2004 was $1.2 million. The Company had $12.1 million available at December 26, 2004. As of December 26, 2004, letters of credit of $1.325 million were outstanding against the $3 million sub-limit for letters of credit associated with the revolving credit facility.

Senior Notes of $5.5 million with a fixed interest rate of 10% plus additional interest of 3% contingent upon cash flow availability. The maturity date is June 30, 2006 and the notes are secured by a first lien on all assets. Minimum principal payments of $500,000 are due at the end of each calendar quarter. In the event that required debt service exceeds 85% of free cash flow (EBITDA (as hereinafter defined) less capital expenditures and cash taxes paid), the excess of contingent interest and principal amortization over 85% will be deferred until maturity of the Senior Notes in June 2006. Contingent interest plus additional principal payments will be due annually up to 85% of free cash flow. On each of September 30, 2003 and September 30, 2004, the Company made payments to the lenders of $1.3 million related to excess cash flow.

Senior Subordinated Notes of $16 million with a fixed interest rate of 10% plus an additional 1.65% payable by delivery of promissory notes due July 23, 2007 (PIK Notes). The maturity date is July 23, 2007 and the notes are secured by a second lien on all assets. In addition to principal and interest, a payment of $8 million is due on the earliest of (i) maturity of the notes, (ii) prepayment of the notes, or (iii) sale of the Company. The original issue discount of $4.1 million on this non-interest bearing note at a market interest rate of 12% is being amortized over the life of the notes. The remaining balance of $2.1 million is included in the Consolidated Balance Sheet as of December 26, 2004.

These credit facilities contain covenants regarding minimum levels of Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”), maximum total debt to EBITDA, maximum senior debt to EBITDA, minimum EBITDA to cash interest and minimum shareholders’ equity. The bank facilities also place restrictions on the amounts the Company may expend on acquisitions and purchases of treasury stock and currently prohibit the payment of dividends.

The Company also has an equipment lease which expires in May 2007. The balance outstanding was $41,000 as of December 26, 2004.

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Minimum annual maturities are as follows: (in thousands)

                                                         
            Senior     Sub             PIK              
Fiscal   Revolver     Notes     Notes             Notes     Other     Total  
2005
  $     $ 1,000     $             $     $ 3     $ 1,003  
2006
    1,167       2,000                           17       3,184  
2007
          2,500                           19       2,519  
2008
                24,000  *             810       2       24,812  
 
                                           
Total
  $ 1,167     $ 5,500     $ 24,000             $ 810     $ 41     $ 31,518  
 
                                           


      *Includes $8 million non-interest bearing note issued at an original issue discount of $4.1 million.

As part of its refinancing in July 2001, the Company issued to its lenders warrants for non-voting common stock that are 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. The warrants are non-callable and expire six years from their date of issuance. The value of the warrants of $2.4 million using the Black-Scholes option pricing model was credited to additional paid-in capital in the second quarter of fiscal 2002.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company operates indirectly through its subsidiaries, Crown Crafts Infant Products, Inc., Hamco, Inc. and Churchill Weavers, Inc., primarily in the Infant and Juvenile Products segments within the Consumer Products industry. The Company’s offices are located in Huntington Beach and Compton, California; Gonzales, Louisiana; Berea, Kentucky and Rogers, Arkansas.

The Infant and Juvenile Products segments consist of bedding, bibs, soft goods, Pillow Buddies® and accessories. The infant and juvenile products are marketed under a variety of Company-owned trademarks, under trademarks licensed from others, without trademarks as unbranded merchandise and with customers’ private labels. The products are produced primarily by foreign contract manufacturers, then warehoused and shipped from facilities in Compton, California and Gonzales, Louisiana. Sales are generally made directly to retailers, primarily mass merchants, large chain stores and gift stores.

The Company also produces hand-woven adult throws, adult scarves and infant blankets. Sales are generally made to major department stores, specialty shops and designer showrooms.

The infant and juvenile consumer products industry is highly competitive. The Company competes with a variety of distributors and manufacturers and believes that it is the largest producer of infant bed coverings and bibs, enjoying approximately one-third of the infant bedding market and one-half of the infant bib market within these segments. The Company competes on the basis of quality, design, price, service and packaging.

RESULTS OF OPERATIONS

THREE-MONTH PERIOD ENDED DECEMBER 26, 2004 COMPARED TO THE THREE-MONTH PERIOD ENDED DECEMBER 28, 2003

Total net sales of $20.7 million for the third quarter of fiscal year 2005 were stable as compared to $20.7 million for the third quarter of fiscal year 2004. Increased bib sales were partially offset by decreased bath sales for a net increase of $248,000. This increase in bib sales was further offset by decreases in sales of bedding and luxury throws and blankets of $235,000 and $66,000, respectively. The increase in bib sales is primarily due to sales of a new license and increased modular replenishment, whereas the decrease in bath sales is due to the loss of a bath program at a major customer. The transition of the Company’s Classic Pooh license to direct-to-retail has had a deflationary effect on bedding sales. Although replacement programs and the direct-to-retail program were awarded to the Company, the Company’s average selling price per unit was lower in fiscal year 2005 than in the prior year because of market

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changes in anticipation of the removal of quotas from several of the Company’s bedding products, which was effective in January 2005. Sales of high-end luxury throws continue to be negatively impacted by a slow economy.

During the third quarter of fiscal year 2005, cost of sales were 78.7% of net sales as compared to 78.3% for the same period in fiscal year 2004. The slightly lower gross margin is due to the decrease in the average selling price per unit as previously discussed above.

Marketing and administrative expenses decreased by $176,000, or 6.1%, in the third quarter of fiscal year 2005 compared to the same quarter in the prior year and were 13.1% of net sales for such quarter compared to 13.9% of net sales for the corresponding quarter of the prior year. These expenses were greater in the prior year primarily because of legal fees associated with the reincorporation of the Company in Delaware, which was completed in fiscal year 2004.

Interest expense for the third quarter of fiscal year 2005 decreased by $54,000 compared to the third quarter of fiscal year 2004 because of the Company’s lower average debt balance. Total debt was $29.4 million at December 26, 2004 compared to $30.3 million at December 28, 2003. Included in the balance in the current fiscal year was revolving credit of $1.2 million, whereas there was no revolving credit balance outstanding at December 28, 2003.

Income tax benefit for the quarter ended December 26, 2004 includes a credit for state and local income taxes of $71,000. Income tax benefit for the quarter ended December 28, 2003 included a credit of $130,000 for a revision of federal alternative minimum taxes and state and local income taxes of $37,000. The Company has net operating loss carryforwards of $13.5 million that begin to expire in 2021.

NINE-MONTH PERIOD ENDED DECEMBER 26, 2004 COMPARED TO THE NINE-MONTH PERIOD ENDED DECEMBER 28, 2003

Total net sales for the first nine months of fiscal year 2005 decreased by $0.6 million, or 1.0%, to $60.6 million from $61.2 million for the same period of fiscal year 2004 as a result of decreases in bib and bath sales of $1.2 million and luxury throws and blankets of $192,000, offset in part by an increase in bedding sales of $853,000. The decrease in bib and bath sales is primarily due to the loss of a bath program at a major customer. The increase in bedding sales resulted from additional and new modular placement shipments, which were partially offset by the transition of the Company’s Classic Pooh license to direct-to-retail.

During the first nine months of fiscal year 2005, cost of sales increased to 79.3% of net sales from 77.9% for the same period in fiscal year 2004 primarily as a result of a shift from sales of higher margin blankets and NoJo and Classic Pooh brands to sales of a greater volume of lower margin merchandise. The lower margins are a direct result of pricing pressures from customers coupled with demand for enhanced products and market reaction to the removal of quotas from certain products effective in January 2005.

Marketing and administrative expenses decreased by $779,000, or 8.8%, for the first nine months of fiscal year 2005 compared to the same period in the prior year and were 13.3% of net sales for such period compared to 14.5% of net sales for the corresponding period of the prior year. These expenses were greater in the prior year primarily because of legal fees associated with the reincorporation of the Company in Delaware and costs associated with the closing of the Company’s Mexican production facility, both of which were completed in fiscal year 2004.

Interest expense for the first nine months of fiscal year 2005 decreased by $235,000 compared to the first nine months of fiscal year 2004 because of the Company’s lower average debt balance. Total debt was $29.4 million at December 26, 2004 compared to $30.3 million at December 28, 2003. Included in the balance in the current fiscal year was revolving credit of $1.2 million, whereas there was no revolving credit balance outstanding at December 28, 2003.

Income tax expense for the nine months ended December 26, 2004 includes an expense for state and local income taxes of $41,000. Income tax expense for the nine months ended December 28, 2003 included a benefit for revision of federal alternative minimum taxes of $99,000 and an expense for state and local income taxes of $174,000. The Company has net operating loss carryforwards of $13.5 million that begin to expire in 2021.

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FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $3.0 million for the first nine months of fiscal year 2005 compared to net cash provided by operating activities of $5.4 million for the first nine months of fiscal year 2004. The decrease in cash provided by operating activities was primarily due to changes in inventory and accounts payable balances. Net cash used in investing activities was $116,000 in the first nine months of fiscal year 2005 and $31,000 in the prior year period. Net cash used in financing activities was $2.8 million compared to net cash used in financing activities of $4.2 million in the prior year period. The decrease in cash used in financing activities was due to a lower net payment of long-term debt in the current fiscal year as compared to the prior fiscal year.

The Company’s ability to make scheduled payments of principal, to pay the interest on or to refinance its maturing indebtedness, to fund capital expenditures or to comply with its debt covenants will depend upon future performance. The Company’s future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Based upon the current level of operations, the Company believes that cash flow from operations together with revolving credit availability will be adequate to meet liquidity needs.

To reduce its exposure to credit losses and to enhance its cash flow, the Company assigns the majority of its trade accounts receivable to a commercial factor. The Company’s factor establishes customer credit lines and accounts for and collects receivable balances. Under the terms of the factoring agreement, which expires in July, 2005, the factor remits payments to the Company on the average due date of each group of invoices assigned. If a customer fails to pay the factor on the due date, the Company is charged interest at prime minus 0.5% (4.50% at December 26, 2004) until payment is received. 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. The Company’s factor at any time may terminate or limit its approval of shipments to a particular customer. If such a termination occurs, the Company may either assume the credit risks for shipments after the date of such termination or cease shipments to such customer.

FORWARD-LOOKING INFORMATION

This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management’s current expectations, projections, estimates and assumptions. Words such as “expects,” “believes,” “anticipates” and variations of such words and similar expressions identify such forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. These risks include, among others, general economic conditions, changing competition, the level and pricing of future orders from the Company’s customers, the Company’s dependence upon third-party suppliers, including some located in foreign countries with unstable political situations and unstable foreign currency exchanges, the Company’s ability to successfully implement new information technologies and the Company’s dependence upon licenses from third parties.

ITEM 3 – QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates on debt, changes in commodity prices, changes in international trade regulations, the concentration of the Company’s customers and the Company’s reliance upon licenses. The Company’s exposure to interest rate risk relates to the Company’s floating rate debt, of which there was a balance outstanding of $1.2 million at December 26, 2004 and a balance outstanding of $1.5 million at March 28, 2004. Each 1.0 percentage point increase in interest rates would impact pretax earnings by $12,000 at the debt level of December 26, 2004. The Company’s exposure to commodity price risk primarily relates to changes in the price of cotton and oil, which are the principal raw materials used in a substantial number of the Company’s products. Also, changes in import quantity allotments can materially impact the availability of the Company’s products and the prices at which those products can be purchased by the Company for resale. Additionally, the Company’s top three customers represent 76% of gross sales, and 42% of the Company’s gross sales is of licensed products. The Company could be materially impacted by the loss of one or more of these customers or licenses.

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ITEM 4 – CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report, as required by paragraph (b) of Rule 13a-15 or 15d-15 of the Exchange Act. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act. Since such evaluation, there have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect such controls.

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

From time to time, the Company is involved in various legal proceedings relating to claims arising in the ordinary course of its business. Neither the Company nor any of its subsidiaries is a party to any such legal proceeding the outcome of which, individually or in the aggregate, is expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

              None

Item 3 - Defaults Upon Senior Securities

              None

Item 4 - Submission of Matters to a Vote of Security Holders

              None

Item 5 - Other Information

              None

Item 6 - Exhibits

     
Exhibits    
10.1   Seventh Amendment to Credit Agreement dated as of February 4, 2005 by and among the Company, Churchill Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc., Wachovia Bank, National Association (successor by merger to Wachovia Bank, N.A.), as Agent, and Wachovia Bank, National Association (successor by merger to Wachovia Bank, N.A.), Banc of America Strategic Solutions, Inc. (assignee of Bank of America, N.A.) and The Prudential Insurance Company of America, as Lenders
 
10.2   Fifth Amendment to Subordinated Note and Warrant Purchase Agreement dated as of February 4, 2005 by and among the Company and Banc of America Strategic Solutions, Inc. (assignee of Bank of America, N.A.), The Prudential Insurance Company of America, and Wachovia Bank, National Association (successor by merger to Wachovia Bank, N.A.), as Lenders
 
31.1   Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Executive Officer
 
31.2   Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Financial Officer
 
32.1   Section 1350 Certification by the Company’s Chief Executive Officer
 
32.2   Section 1350 Certification by the Company’s Chief Financial Officer

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
  CROWN CRAFTS, INC.
 
   
Date: February 9, 2005
  /s/ Amy Vidrine Samson                     
  AMY VIDRINE SAMSON
  Chief Financial Officer
  (duly authorized signatory and
  Principal Financial and Accounting
  Officer)

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Index to Exhibits

     
Exhibit
   
Number
  Description
10.1
  Seventh Amendment to Credit Agreement dated as of February 4, 2005 by and among the Company, Churchill Weavers, Inc., Hamco, Inc., Crown Crafts Infant Products, Inc., Wachovia Bank, National Association (successor by merger to Wachovia Bank, N.A.), as Agent, and Wachovia Bank, National Association (successor by merger to Wachovia Bank, N.A.), Banc of America Strategic Solutions, Inc. (assignee of Bank of America, N.A.) and The Prudential Insurance Company of America, as Lenders
 
10.2
  Fifth Amendment to Subordinated Note and Warrant Purchase Agreement dated as of February 4, 2005 by and among the Company and Banc of America Strategic Solutions, Inc. (assignee of Bank of America, N.A.), The Prudential Insurance Company of America, and Wachovia Bank, National Association (successor by merger to Wachovia Bank, N.A.), as Lenders
 
31.1
  Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Executive Officer
 
31.2
  Rule 13a-14(a)/15d-14(a) Certification by the Company’s Chief Financial Officer
 
32.1
  Section 1350 Certification by the Company’s Chief Executive Officer
 
32.2
  Section 1350 Certification by the Company’s Chief Financial Officer

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