CROWN CRAFTS INC - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

( ) 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
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(Exact name of registrant as specified in its charter)

Georgia 58-0678148
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

916 South Burnside Avenue, Gonzales, Louisiana 70737
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(Address of principal executive offices)

(225) 647-9100
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(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 X No
--- ---

The number of shares of common stock, $1.00 par value, of the
Registrant outstanding as of June 30, 2002 was 9,421,437.

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FORM 10-Q

CROWN CRAFTS, INC. AND SUBSIDIARIES

PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
June 30, 2002 (unaudited) and March 31, 2002

See notes to unaudited interim consolidated financial statements.

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Crown Crafts, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, 2002 (unaudited) and March 31, 2002

See notes to unaudited interim consolidated financial statements.

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Crown Crafts, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)
For the Three Months ended June 30, 2002 and July 1, 2001
(UNAUDITED)

See notes to unaudited interim consolidated financial statements.

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Crown Crafts, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months ended June 30, 2002 and July 1, 2001
(UNAUDITED)

See notes to unaudited interim consolidated financial statements.

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FORM 10-Q

CROWN CRAFTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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 June 30, 2002 and the results of its
operations and its cash flows for the three-month periods ended June
30, 2002 and July 1, 2001. Such adjustments include normal recurring
accruals and a pro rata portion of certain estimated annual expenses.
Operating results for the three-month period ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the
year ending March 30, 2003. 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 31, 2002 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.

Recently Issued Accounting Standards: 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
instead, the carrying value of goodwill be evaluated using an
impairment approach. Identifiable intangible assets will 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 is
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 continued to amortize
other long-lived intangible assets. The Company has performed a
transitional fair value based impairment test on its goodwill in
accordance with SFAS 142 and has determined that the fair value
exceeded the recorded value at April 1, 2002. Following is a
reconciliation of previously reported net loss and basic and diluted
net loss per share to the amounts that would have been reported if SFAS
142 had been effective as of April 2, 2001 and the amortization of
goodwill had been discontinued as of that date.

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In August 2001, the FASB issued SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Although SFAS 144 supersedes SFAS
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, it retains most of the concepts of
that standard, except that it eliminates the requirement that goodwill
be allocated to long-lived assets for impairment testing purposes and
it requires that a long-lived asset to be abandoned or exchanged for a
similar asset be considered held and used until it is disposed of
(i.e., the depreciable life should be revised until the asset is
actually abandoned or exchanged). Also, SFAS 144 includes the basic
provisions of Accounting Principles Board ("APB") Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for presentation of discontinued
operations in the income statement but broadens that presentation to
include a component of an entity rather than a segment of a business,
where that component can be clearly distinguished from the rest of the
entity. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and was implemented by the Company on April 1, 2002. The
adoption of SFAS 144 did not have a significant effect on the Company's
financial statements on the date of adoption.

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 provides, among other things, that gains on the
extinguishments of debt will generally no longer be classified as
extraordinary items in the statements of operations. It also provides
that gains on extinguishments be reclassified in prior years financial
statements presented for comparative purposes. SFAS 145 is effective
for fiscal years beginning after May 15, 2002 with earlier adoption
encouraged. The Company expects to early adopt SFAS 145 effective
July 1, 2002. The adoption of SFAS 145 will require that a gain on debt
refinancing of $25,008,000 realized in the second quarter of fiscal
2002 be reclassified into income before extraordinary items.

In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities, which is effective for fiscal periods
after December 31, 2002. SFAS 146 requires companies to recognize costs
associated with restructurings, discontinued operations, plant
closings, or other exit or disposal activities, when incurred rather
than at the date a plan is committed to. The Company is presently
reviewing this statement and plans to adopt it as of its effective date
and will implement its provisions on a prospective basis.

Reclassifications: Certain prior period financial statement balances
have been reclassified to conform to the current period's presentation.

2. Segment and Related Information: In 1999, the Company adopted SFAS 131,
Disclosures about Segments of an Enterprise and Related Information. At
the date of adoption, the Company's principal segments included adult
home furnishing and juvenile products, consisting of bedroom and bath
products (adult comforters, sheets and towels), throws and juvenile
products (primarily Pillow Buddies(R)). An additional segment was
infant products, consisting of infant bedding, bibs, and infant soft
goods. Following the sale of the Adult Bedding and Bath business as of
July 23, 2001 as described in Note 4 below, the Company is primarily in
the infant and juvenile products business.

Financial information attributable to the Company's business segments
for the three months ended June 30, 2002 and July 1, 2001 was as
follows (in thousands):

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Net sales by individual product groups within these business segments
were as follows (in thousands):

3. Inventory: Major classes of inventory were as follows (in thousands):

Inventory is net of reserves for inventories classified as irregular or
discontinued of $1.7 million and $2.2 million at June 30, 2002 and
March 31, 2002, respectively.

4. Discontinuance of Certain Businesses: During the quarter ended July 1,
2001, the Company sold property, plant and equipment (primarily at
Timberlake, North Carolina) with net proceeds of $9.2 million and a
gain on sale of $802,000. The net proceeds were used to reduce debt.

As part of the plan to reduce debt and restore profitability, the
Company made a decision to exit the Adult Bedding and Bath Business,
and its net assets related to that business of $12.4 million were sold
effective July 23, 2001. Proceeds of the sale were $8.5 million cash
plus assumption of liabilities of $3.4 million as well as assumption of
certain contingent liabilities. Cash from the sale was used to reduce
debt. The sale included inventory, buildings, machinery and equipment
located at Roxboro, North Carolina as well as various sales offices.
The Adult Bedding and Bath Business had annual sales of approximately
$24.8 million and $76.5 million in fiscal 2002 and fiscal 2001,
respectively, and was included in the adult home furnishing and
juvenile products segment. The Adult Bedding and Bath Business includes
the remainder of the bedroom products group following the sale of the
Wovens division.

5. 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.

Notes Payable and Other Credit Facilities: At June 30, 2002 and March
31, 2002, long term debt consisted of:

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On July 23, 2001 the Company completed a refinancing of its debt. The
new credit facilities include the following:

Revolving Credit of up to $19 million including a $3 million sub-limit
for letters of credit, $14.0 million drawn at closing. The interest
rate is prime plus 1.00% (5.75% at June 30, 2002) for base rate
borrowings and LIBOR plus 2.75% (4.59% at June 30, 2002) for
Euro-dollar borrowings. The maturity date is June 30, 2004. The
facility is secured by a first lien on all assets. The balance at June
30, 2002 was $5.3 million. The Company had $6.8 million available at
June 30, 2002. As of June 30, 2002, letters of credit of $1.3 million
were outstanding against the $3 million sublimit for letters of credit
associated with the $19 million revolving credit facility.

Senior Notes of $14 million with a fixed interest rate of 10% plus
additional interest contingent upon cash flow availability of 3%. The
maturity date is June 30, 2006 and the notes are secured by a first
lien on all assets. A minimum principal payment of $250,000 was paid on
April 1, 2002 and minimum principal payments of $500,000 are due at the
end of each calendar quarter thereafter. In the event that required
debt service exceeds 70% of free cash flow (EBITDA (as hereinafter
defined) less capital expenditures and cash taxes paid), the excess of
contingent interest and principal amortization over 70% will be
deferred until maturity of the Senior Notes in June 2006. Contingent
interest plus additional principal payments will be due annually up to
70% of free cash flow.

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
due July 23, 2007. 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% will be
amortized over the life of the notes. The remaining balance of $3.6
million is included in the Consolidated Balance Sheet as of June 30,
2002.

The new 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.

Future minimum annual maturities are as follows: (in thousands)

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

As part of the refinancing, the Company issued to the 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 in six years. 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.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JULY 1, 2001

Total net sales for the first quarter of fiscal 2003 decreased $20.8 million, or
53.7%, to $17.9 million from $38.7 million for the first quarter of fiscal 2002.
Net sales of bedroom and bath products decreased $18.1 million, or 100%, net
sales of throws decreased $9,000, or 2%, to $531,000, and net sales of infant
and juvenile products decreased $2.7 million, or 13.2%, to $17.4 million.

The decrease in sales of bedroom and bath products was the result of the sale of
the Adult Bedding division on July 23, 2001. Lower sales of infant and juvenile
products were primarily due to changes in buying patterns by major retailers.

During the first quarter of fiscal 2003, cost of sales decreased to 79.8% of net
sales from 80.6% for the same period in fiscal 2002. The decrease relates
primarily to changes in product mix as a result of the divestment referenced
above.

Marketing and administrative expenses decreased by $4.8 million, or 60.3%, in
the current year quarter compared to the same quarter in the prior fiscal year
and were 17.6% of net sales for the current quarter compared to 20.6% in the
corresponding quarter of the prior year. The decrease is a result of the
divestment referenced above as well as the Company's cost reduction initiatives
and restructuring.

Interest expense for the quarter decreased by $2.1 million because of lower debt
and reduced interest rates.

Due to the accumulated losses, no federal income tax provision has been included
for the quarters ended June 30, 2002 and July 1, 2001. A provision for estimated
state and local taxes of $22,000 and $42,000 was included for the quarters ended
June 30, 2002 and July 1, 2001, respectively.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $552,000 for the three months
ended June 30, 2002 compared to cash used by operating activities of $4.7
million for the three months ended July 1, 2001. Net cash used by investing
activities was $175,000 compared to net cash provided by investing activities of
$9.1 million in the prior year period. Net cash used for financing activities
was $307,000 compared to net cash used for financing activities of $4.9 million
in the prior year period.

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 factors the majority of its trade accounts receivable. The Company's
factor establishes customer credit lines, and accounts for and collects
receivable balances. The factor remits payment to the Company on the due dates
of the factored invoices. The factor assumes all responsibility for credit
losses on sales within approved credit lines, but may deduct from its
remittances to the Company the amounts of customer deductions for returns,
allowances, disputes 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.

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FORWARD-LOOKING INFORMATION

This Form 10-Q contains forward-looking statements within the meaning of the
federal securities law. 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
are intended to 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 anticipated. 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, the Company's ability to successfully implement
new information technologies, the Company's ability to integrate its
acquisitions and new licenses, and the Company's ability to implement
improvements in its acquired businesses.

ITEM 3 - QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates on debt,
commodity prices and foreign exchange rates. The exposure to interest rate risk
relates to its floating rate debt, $5.3 million of which was outstanding at June
30, 2002 compared to $5.5 million at March 31, 2002. Each 1.0 percentage point
increase in interest rates would impact annual pretax earnings by $53,000 at the
debt level of June 30, 2002 and $55,000 at the debt level of March 31, 2002. The
exposure to commodity price risk primarily relates to changes in the price of
cotton, which is a principal raw material in a substantial number of the
Company's products. The exposure to foreign exchange rates relates to its
Mexican manufacturing subsidiary. During the fiscal year ended March 31, 2002,
this subsidiary manufactured products for the Company with a value of
approximately $3.9 million. The Company's investment in the subsidiary was
approximately $2.6 million at March 31, 2002.

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 or results of operations.

Item 2 - Changes in Securities

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

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Item 6 - Exhibits and Reports on Form 8-K

(a) Exhibits

99.1 Certification of the Company's Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.2 Certification of the Company's Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

(b) Reports on Form 8-K

None

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: August 14, 2002 /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