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 29, 2003

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

For the transition period from to
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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 29, 2003 was 9,503,687.

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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 29, 2003 and March 30, 2003
(Unaudited)

* The Consolidated Balance Sheet at March 30, 2003 has been derived from the
audited balance sheet at that date.

See notes to unaudited condensed consolidated financial statements.

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Crown Crafts, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 29, 2003 and March 30, 2003
(Unaudited)

* The Consolidated Balance Sheet at March 30, 2003 has been derived from the
audited balance sheet at that date.

See notes to unaudited condensed consolidated financial statements.

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Crown Crafts, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)
For The Three-Month Periods Ended June 29, 2003 and June 30, 2002
(UNAUDITED)

See notes to unaudited condensed consolidated financial statements.

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Crown Crafts, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three-Month Periods ended June 29, 2003 and June 30, 2002
(UNAUDITED)

See notes to unaudited condensed consolidated financial statements.

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CROWN CRAFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE THREE-MONTH PERIODS ENDED JUNE 29, 2003 AND JUNE 30, 2002

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 29,
2003 and the results of its operations and cash flows for the three-month
periods ended June 29, 2003 and June 30, 2002. Such adjustments include
normal recurring accruals. Operating results for the three-month periods
ended June 29, 2003 are not necessarily indicative of the results that may
be expected for the year ending March 28, 2004. 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 30,
2003 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 December 2002, the FASB issued
SFAS 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123. SFAS 148 amends FASB
123 to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, FASB 148 amends the disclosure requirements of
FASB 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for the Company's fiscal period ending March
30, 2003. The Company adopted this standard on that date and determined
that they would continue to utilize the intrinsic method of accounting and
included the additional disclosures in the current year financial
statements.

2. Segment and Related Information: The Company's principal segments include
adult home furnishing products, consisting primarily of hand-woven throws,
and infant and juvenile products, consisting of infant bedding, bibs,
infant soft goods and juvenile products (primarily Pillow Buddies(R)).
Financial information attributable to the Company's business segments for
the three-month periods ended June 29, 2003 and June 30, 2002 was as
follows (in thousands):

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

Inventory is net of reserves for inventories classified as irregular or
discontinued of $1.0 million and $1.6 million at June 29, 2003 and March
30, 2003, respectively.

4. Restructuring Charge In December 2002, the Company adopted a formal plan to
change its sourcing strategy for certain products and close the Mexican
manufacturing facility operated by its majority-owned subsidiary, Burgundy
Interamericana ("Burgundy"). This decision was based on extensive research
by management which indicated that, due to lower wages and the elimination
of the quota on bibs, outsourcing the supply of products currently
manufactured by Burgundy to Asian manufacturers was more cost-effective and
competitive than maintaining existing operations in Mexico. Under the plan,
Burgundy continued to operate through the first quarter of fiscal 2004, at
which time the Company began to liquidate Burgundy's assets. As a result of
the decision of the Company to discontinue its Mexican operations, the
Company recorded a $1.8 million restructuring charge to operations in the
quarter ended December 29, 2002, which consisted primarily of a write-down
of the property and equipment at the Mexican facility of approximately
$800,000, inventory items deemed to be in excess of production requirements
of approximately $600,000, an accrual for contractual termination benefits
of approximately $300,000 due Burgundy's entire workforce (approximately
130 employees) under the provisions of Mexico's labor regulations and the
write-off of goodwill of approximately $60,000. The Company paid
approximately $129,000 of the severance benefits in the first quarter of
fiscal 2004 and will pay the remainder through October 2003. The Company
continued to charge the ongoing operating costs associated with Burgundy's
production in the period in which the costs were incurred. The Company
incurred a loss of approximately $85,000 related to the operation and
closure of this facility for the three-month period ended June 29, 2003, at
which time the closure was substantially complete.

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, which expires July 2005, 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 June 29, 2003 and March 30,
2003, long-term debt consisted of:

At June 29, 2003, the Company's credit facilities include 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% (5.00% at
June 29, 2003) for base rate borrowings and LIBOR plus 2.75% (3.77% at
June 29, 2003) for Euro-dollar borrowings. The maturity date is June
30, 2005. The facility is secured by a first lien on all assets. The
balance was $0.7 million at June 29, 2003. The Company had $13.3
million available at June 29, 2003. As of June 29, 2003, letters of
credit of $1.35 million were outstanding against the $3 million
sub-limit for letters of credit associated with the $19 million
revolving credit facility.

Senior Notes of $10.5 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. Minimum principal payments of $500,000 are due at
the end of each calendar quarter thereafter. 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. The Company anticipates that it will make an
excess cash flow payment of $1.4 million on September 30, 2003.

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% is being
amortized over the life of the notes. The remaining balance of $3.1
million is included in the Consolidated Balance Sheet as of June 29,
2003.

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. Certain covenants
included in the credit facilities were amended in conjunction with the
liquidation of Burgundy, as discussed in Note 4, in order to account for
the recording of the related restructuring charge. The Company is in
compliance with its covenants at June 29, 2003. 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.

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.

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As part of its refinancing on July 23, 2001, the Company issued to the
lenders warrants for non-voting common stock that are convertible into
common stock equivalent to approximately 65% of the shares of the Company
on a fully diluted basis at a price of 11.3 cents per share. The warrants
are exercisable, 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.

6. Stock Options The Company accounts for its stock option plans using the
intrinsic value method established by APB Opinion No. 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 No. 123, "Accounting for Stock
Based Compensation", as amended by SFAS No. 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.

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 No. 123, the Company's net loss and loss per share would have been as
indicated below:

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

RESULTS OF OPERATIONS

THREE-MONTH PERIOD ENDED JUNE 29, 2003 COMPARED TO THE THREE-MONTH PERIOD ENDED
JUNE 30, 2002

Total net sales for the first quarter of fiscal year 2004 increased $537,000, or
3.0%, to $18.5 million from $17.9 million for the first quarter of fiscal year
2003. Net sales of throws decreased $115,000, or 21.6%, to $416,000 because
sales volumes of high-end luxury throws have been negatively impacted by the
recent downturn in the economy. Net sales of infant and juvenile products
increased $652,000, or 3.7%, to $18.0 million due to an increase in the number
of SKUs placed with customers.

During the first quarter of fiscal year 2004, cost of sales decreased to 77.5%
of net sales from 79.8% for the same period in fiscal year 2003. The increase in
infant products' gross margin is attributable to improvements in global sourcing
as the Company has moved additional production to Asia.

Marketing and administrative expenses decreased by $6,000, or 0.03%, in the
current year quarter compared to the same quarter in the prior fiscal year and
were 17.1% of net sales for the current quarter compared to 17.6% for the
corresponding quarter of the prior year. Savings in labor and commissions
expenses were offset by costs related to the liquidation of Burgundy
Interamericana of approximately $139,000.

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Interest expense for the first quarter of fiscal year 2004 decreased by $138,000
because of a lower average debt balance and reduced interest rates.

Income tax expense for the quarter ended June 29, 2003 includes a provision for
federal alternative minimum taxes and state and local income taxes of $80,000.
For the quarter ended June 30, 2002, the Company recorded income tax expense of
$22,000 related to estimated state and local taxes.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $1.1 million for the quarter ended
June 29, 2003 compared to net cash provided by operating activities of $0.6
million for the quarter ended June 30, 2002. Net cash provided by investing
activities was $0.2 million compared to net cash used in investing activities of
$0.2 million in the prior year period. Net cash used in financing activities
increased to $1.4 million compared to net cash used in financing activities of
$0.3 million in the prior year period, due to reductions in outstanding debt.

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 for the forseeable future.

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 average 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.

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, 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,
commodity prices and foreign exchange rates. The exposure to interest rate risk
relates to its floating rate debt, $0.7 million of which was outstanding at June
29, 2003 compared to $1.8 million at March 30, 2003. Each 1.0 percentage point
increase in interest rates would impact pretax earnings by $7,000 at the debt
level of June 29, 2003 and $18,000 at the debt level of March 30, 2003. The
exposure to commodity price risk primarily relates to changes in the price of
cotton, which is a principal raw material used 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 30, 2003,
this subsidiary manufactured product for the Company with a value of
approximately $4.5 million. The Company's investment in the subsidiary was
approximately $2.7 million at March 30, 2003. In December 2002, the Company
adopted a formal plan to terminate operations at this facility.

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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-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"). Based on
such evaluation, such officers have concluded that, as of the Evaluation Date,
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 the Evaluation Date, 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 or results of operations.

Item 2 - Changes in 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 and Reports on Form 8-K

(a) Exhibits

10.1 Fourth Amendment to Subordinated Note and Warrant Purchase
Agreement dated as of August 1, 2003, by and among the
Company, 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.)

10.2 Fifth Amendment to Credit Agreement dated as of August 1, 2003
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

10.3 Amended and Restated Support Agreement dated as of August 6,
2003 by and between the Company and Wynnefield Capital
Management, LLC

31.1 Certification of the Company's Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of the Company's Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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32.2 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

The Company filed the following Current Reports on Form 8-K
during the quarter ended June 29, 2003:

(1) The Company's Current Report on Form 8-K filed with the
SEC on May 9, 2003, setting forth under Item 5 of such
report Global Amendment Agreement by and among the
Company, its subsidiaries and its lenders and a Reserved
Shares Agreement by and among the Company and its
lenders.

(2) The Company's Current Report on Form 8-K filed with the
SEC on May 9, 2003, setting forth under Item 5 of such
report a Support Agreement by and between the Company
and Wynnefield Capital Management, LLC.

(3) The Company's Current Report on Form 8-K filed with the
SEC on June 19, 2003, setting forth under Item 9 of such
report a press release discussing the Company's fourth
quarter and year-end earnings for the period ended March
30, 2003.

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 13, 2003 /s/ Amy Vidrine Samson
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AMY VIDRINE SAMSON
Chief Financial Officer
(duly authorized signatory and
Principal Financial and Accounting
Officer)

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Index to Exhibits

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