e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2007
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-26667
Craftmade International, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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75-2057054
(I.R.S. Employer
Identification No.) |
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650 South Royal Lane, Suite 100
Coppell, Texas
(Address of Principal Executive Offices)
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75019
(Zip Code) |
(972) 393-3800
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of each exchange on which registered |
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Common Stock, par value $0.01
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NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer þ Non-accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant as of December 31, 2006 was approximately $93,247,000 based upon the closing price of
the common stock on the NASDAQ Global Market reported for such date. The number of shares
outstanding of the Registrants Common Stock on December 31, 2006 was 5,203,500.
The number of shares outstanding of the registrants $.01 par value common stock as of August 31,
2007 was 5,204,500.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for its 2007 Annual Meeting of Stockholders (the
Proxy Statement) to be filed with the Securities and Exchange Commission are incorporated by
reference into Part III of this Form 10-K.
Disclosure Regarding Forward-Looking Statements
In this Form 10-K, references to Craftmade, ourselves, we, our, us, its, itself,
and the Company refer to Craftmade International, Inc., Trade Source International, Inc., their
wholly-owned subsidiaries, and the Companys 50% owned limited liability company (LLC) unless
the context requires otherwise.
Various statements in this Form 10-K or incorporated by reference into this Form 10-K, in
future filings with the SEC, in press releases, and in oral statements made by or with the approval
of authorized personnel constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are based on current
expectations and are indicated by words or phrases such as may, will, should, could,
might, expects, plans, anticipates, believes, estimates, projects, predicts,
forecasts, intends, potential, continue, and similar words or phrases and involve known and
unknown risks, uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from the future results, performance or achievements
expressed in or implied by such forward-looking statements. These forward-looking statements
include statements or predictions regarding among other items:
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Revenues and profits; |
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Gross margin; |
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Customer concentration; |
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Customer buying patterns; |
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Sales and marketing expenses; |
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General and administrative expenses; |
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Pricing and cost reduction activities; |
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Income tax provision and effective tax rate; |
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Realization of deferred tax assets; |
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Liquidity and sufficiency of existing cash, cash equivalents, and investments for
near-term requirements; |
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Purchase commitments; |
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Product development and transitions; |
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Competition and competing technology; |
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Outcomes of pending or threatened litigation; and |
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Financial condition and results of operations as a result of recent accounting pronouncements. |
These forward-looking statements are based largely on expectations and judgments and are
subject to a number of risks and uncertainties, many of which are beyond our control. Significant
factors that cause our actual results to differ materially from our expectations are described in
this Form 10-K under the heading of Risk Factors. We undertake no obligation to publicly update
or revise these Risk Factors or any forward-looking statements, whether as a result of new
information, future events or otherwise.
PART I
Item 1. Business.
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(a) |
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General Development of Business |
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Acquisition of Marketing Impressions, Inc. |
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Effective July 1, 2006, the Companys Trade Source International, Inc. (TSI) subsidiary
acquired Marketing Impressions, Inc., a Georgia corporation (Marketing Impressions).
Marketing Impressions owned the remaining 50% interest in the Companys limited liability
company Prime/Home Impressions, Inc. (PHI) and also supplied the Company with certain fan
accessory products. This acquisition increased the Companys effective ownership of PHI to
100%. The transaction enables the Company to benefit from 100% of PHIs earnings, gives the
Company complete control over the operations of PHI and also allows it to source certain of its
fan accessory products directly. The acquisition was immediately accretive to the Companys
earnings. |
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Current Market Conditions |
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At the beginning of the 2007 fiscal year, the slowing of housing-related demand affected our
business. The decline in housing turnover was compounded by the corresponding decline in home
improvement demand which impacted both our showroom and mass retail segments. Management
believes that consumers chose to delay home improvement projects due to well-publicized reports
of a slowing housing marketing and declining home values. As the year progressed, housing
turnover slowed more quickly and deeply. |
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Despite the housing related pressures, the Company has continued to introduce innovative and
distinctive products that reflect emerging consumer trends, including new lines of interior
lighting fixtures (e.g., chandeliers) and the addition of clocks and weather gauges marketed
under the Durocraft brand name through a new distribution channel of independent lawn and
garden retailers. We also expanded Teiber accounts with existing and new customers and
completed the transition of all ceiling fan production from Taiwan to a state-of-the-art
manufacturer in China. This transition has enabled us to offer more competitive pricing to our
customers. |
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Additional information regarding current market conditions are detailed in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operation. |
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Relationship with Lowes Companies, Inc. |
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In November 2006, the Companys 50% owned subsidiary, Design Trends, LLC (Design Trends)
began supplying mix and match portable lamps to four additional Lowes regional distribution
centers and stores serviced by the distribution centers. As a result, Design Trends currently
supplies mix and match portable lamps to all of Lowes regional distribution centers and
supplies approximately 60% of the SKUs in each display set. |
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In November 2006, Lowes also notified TSI that it will no longer source the 14 indoor and
outdoor lighting SKUs previously sold to Lowes via direct import. Management has been told
that Lowes will be sourcing these products directly from various overseas manufacturers. TSI
shipped all outstanding orders of discontinued products as of January 31, 2007. |
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Exploration of Strategic Alternatives |
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On May 9, 2007, the Company announced that it retained Mazzone & Associates to assist the
Company in evaluating its strategic alternatives to enhance shareholder value. With input from
management, a committee of independent directors performed a comprehensive review of our
strategic alternatives. At the completion of this process, the Board of Directors determined
that at this time the best alternative to maximize shareholder value is to continue to
implement the Companys strategic plan for growth. This plan includes the pursuit of selective
and opportunistic acquisitions with the potential to expand into adjacent product categories
and sales channels, although there can be no assurances that any transaction will be
consummated. |
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Financial Information About Reportable Segments |
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The Company is organized by product type and customer base into two operating segments:
Craftmade International, Inc. (Craftmade) and Trade Source International, Inc. (TSI). The
Craftmade segment primarily derives its revenue from home furnishings including ceiling fans,
light kits, bath-strip lighting, light bulbs, door chimes, ventilation systems, clocks, weather
gauges and other lighting accessories offered primarily through lighting showrooms, certain
major retail chains, electrical wholesalers, and lawn and garden stores. Hereafter, Craftmade
International, Inc. refers to the Company and Craftmade to the segment. The TSI segment
derives its revenue from indoor and outdoor lighting, portable lamps, and fan accessories
marketed solely to mass merchandisers. |
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Financial information with respect to the Companys segments is found in Note 11 Segment
Information in the Companys Consolidated Financial Statements. |
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Narrative Description of Business |
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Craftmade International, Inc. was incorporated in the state of Texas in July 1985 and
reincorporated in the state of Delaware in December 1991. |
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Craftmade Craftmade is principally engaged in the design, distribution and marketing of
ceiling fans, light kits, bath-strip lighting, interior lighting fixtures, light bulbs, door
chimes, ventilation systems and related accessories to a nationwide network of over 1,600
lighting showrooms, electrical wholesalers specializing in sales to the remodeling, new home
construction and replacement markets. |
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Craftmades ceiling fan product line consists of over 50 premium priced to lower priced ceiling
fans and is distributed under the Craftmade® trade name. Craftmade also markets nearly eighty
light kit models in various colors for attachment and use with its ceiling fans or other
ceiling fans, along with parts and accessories for its ceiling fans and light kits. In
addition, nearly two dozen styles of bath-strip lighting and over 40 designs of outdoor
lighting are marketed under its Accolade® trade name. |
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The combination of design and functional features which characterize Craftmade ceiling fans
have made them, in managements judgment, one of the most reliable, durable, energy efficient
and cost effective ceiling fans in the marketplace. |
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TSI TSI is the reporting segment for the portion of the Company that is principally engaged
in the design, distribution and marketing of outdoor and indoor lighting, various fan
accessories and lamp parts, and home décor items to mass merchandisers. TSIs outdoor lighting
consists of numerous lighting programs distributed to mass merchandisers in a variety of
designs and decorative finishes. The indoor lighting product line primarily includes portable
lamps. |
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The TSI segment includes three subsidiaries: Trade Source International (Trade Source), PHI
and Design Trends. Trade Source and PHI are wholly-owned and Design Trends is 50% owned.
Hereafter, TSI refers to the segment and Trade Source to the entity. |
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Prior to the beginning of this fiscal year, PHI was 50% owned. Effective July 1, 2006, TSI
acquired Marketing Impressions. Marketing Impressions owned the remaining 50% interest in PHI
and also supplied the Company with certain fan accessory products. This acquisition increased
the Companys effective ownership of PHI to 100% and has been accounted for using the purchase
method of accounting. The transaction enables the Company to benefit from 100% of PHIs
earnings, gives the Company complete control over the operations of PHI and also allows it to
source certain of its fan accessory products directly. |
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50% Owned Limited Liability Company The Company has a 50% ownership interest in Design
Trends, a Delaware limited liability company, which is part of the TSI segment. Design Trends
was formed in 1999 to market indoor lighting, including portable table lamps, floor lamps,
chandeliers and wall sconces designed by Patrick Dolan of Dolan Northwest, LLC, an unaffiliated
Oregon limited liability company, which owns the remaining 50% of Design Trends. Substantially
all of Design Trends sales are to mass merchandisers. As a part of the operating agreement,
Patrick Dolan is responsible for designing and sourcing Design Trends products and the Company
is responsible for sales, distribution and accounting for Design Trends. |
2
Products
The following table summarizes net sales by product category (defined below) as a percentage of
consolidated net sales:
Net Sales by Product Category
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Fiscal Year Ended |
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June 30, |
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June 30, |
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June 30, |
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2007 |
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2006 |
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2005 |
Craftmade |
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Ceiling fans, light kits and blades |
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37 |
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36 |
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37 |
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Teiber lighting products |
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10 |
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8 |
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2 |
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Durocraft clocks and weather gauges |
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3 |
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1 |
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0 |
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Accolade lighting |
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8 |
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8 |
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8 |
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58 |
% |
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53 |
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47 |
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TSI |
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Indoor lighting |
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23 |
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29 |
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36 |
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Outdoor lighting |
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2 |
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6 |
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7 |
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Accessories |
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17 |
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12 |
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10 |
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42 |
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47 |
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53 |
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100 |
% |
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100 |
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100 |
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Craftmade Products
The Craftmade family of products is organized around four distinctive brands each with numerous
product offerings:
Craftmade Family of Products
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Craftmade® |
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Teiber |
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Durocraft® |
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Accolade® |
Decorative ceiling fans
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Light bulbs
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Clocks
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Bath-strip lighting |
Builder ceiling fans
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Door chimes
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Weather gauges
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Outdoor lighting |
Light kits and blades
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Smoke alarms
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Interior lighting fixtures |
Chandeliers and flushmounts
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Ventilation systems |
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Ceiling fan accessories |
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Craftmade® Craftmades ceiling fan product line consists of over 50 premium fan series
for sale to the new home construction, remodeling and replacement markets. These series are
differentiated on the basis of cost, air movement and appearance. Craftmades fans are
manufactured and assembled in a variety of colors, styles and finishes and can be used either in
conjunction with or independent of Craftmades light kits. Series lines include Early American,
Traditional and Modern High-Tech Decor and, depending on the size, finish and other features, range
in price from the premium Cameo, Constantina, Crescent and Presidential series to various lower-end
builder series.
Craftmades fans come in five motor sizes, five blade sizes and over two dozen different decorative
finishes. The range of styles and colors gives consumers the ability to select ceiling fans for any
style of house, interior decoration or living and working area, including outdoor patios.
Craftmade also markets nearly eighty light kit models in various colors for attachment and use with
its ceiling fans or other ceiling fans, along with parts and accessories for its ceiling fans and
light kits.
Teiber Through the acquisition of Bill Teiber Co., Inc. (Teiber) on March 1, 2005, Craftmade
offers 2,000 different light bulbs and complimentary lighting products as well as an extensive line
of door chimes, pushbuttons, ventilation systems and smoke alarms. These products are typically
offered via a proprietary Teiber display which displays numerous Teiber products and consumes a
minimal amount of floor space.
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Durocraft® Craftmades Durocraft brand markets numerous decorative clocks and weather
gauges, mini-post lanterns, tabletop and freestanding candle lanterns, oil lanterns and special
order items. The items are primarily distributed to independent lawn and garden retailers.
Accolade® Craftmade markets nearly two dozen series of bath-strip lighting in
different lengths and decorative finishes under the Accolade® trade name. In addition, Accolade
products include over forty designs of outdoor lighting in different decorative finishes.
Craftmade adds finishes and designs from time to time based on customer demand.
TSI Products
TSIs products are organized into three groups: indoor lighting, outdoor lighting and accessories:
Indoor Lighting During fiscal year 2000, the Company began marketing floor and table lamps,
chandeliers and wall sconces designed by Patrick Dolan to various mass merchandisers through Design
Trends. TSIs portable lamp program, which is a significant part of the TSIs indoor lighting
program, is merchandised in a mix and match system that enables the consumer to customize a lamp
base and shade combination. Selections of lamp bases include large, medium, buffet, small and mini
lamps and are offered in a variety of styles and finishes.
Outdoor Lighting TSI markets over sixty designs of outdoor lighting in a variety of decorative
finishes, colors and sizes to various mass merchandisers under the TSI Prime brand, as well as the
retailers private label brands. The outdoor lighting is designed for either wall mounting or as a
post-mounted fixture.
Accessories TSI also markets programs of fan accessories and lamp parts, including universal
downrods, pull-chains and ceiling medallions, to various mass merchandisers through PHI.
Accessories also include non-core products.
Product Sourcing
Craftmade. Craftmades ceiling fans, bath-strip lighting and substantially all of its light kits
and certain accessories are produced by multiple manufacturers in China. Light kit and other
product orders are typically placed independently of ceiling fan orders, but are also received in
container-size lots generally consisting of up to 4,500 light kit units. Craftmade offers a
variety of light kits in various finishes and colors, as well as a variety of fixtures designed for
ceiling fans. Craftmade also offers a variety of glass selections for the various light fixtures,
including blown glass, beveled glass and crystal. Fixtures and glass are shipped in the light kit
containers. Craftmades wall controls, timers and switches as well as a portion of its ceiling fan
blades, are manufactured by companies based in the United States. Craftmade offers a variety of
custom blade sets in various sizes and finishes. The finished products are packaged and labeled
under the Craftmade brand name.
Craftmade purchases Teiber light bulbs, door chimes, pushbuttons, ventilation systems, smoke alarms
and complimentary lighting products as well as Durocraft clocks and weather gauges from several
manufacturers located in China and the United States.
Craftmade and TSI purchase outdoor lighting from several manufacturers located in China. Outdoor
lighting orders are received in container-size lots, similar to light kit and ceiling fan orders.
Craftmade and TSI offer a wide variety of outdoor lighting styles in various finishes, colors and
sizes and are designed for either wall mounting or as post-mounted fixtures.
TSI. TSI purchases indoor lighting products, including flush mounts and bath-strip lights from
many of the same manufacturers that produce outdoor lighting for Craftmade.
PHI purchases most of its ceiling fan accessories and all of its lamp replacement parts from
several manufacturers located in China, with the exception of ceiling medallions, which are
purchased from a distributor located in the United States.
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Design Trends purchases its lamps and shades from multiple manufacturers located in China. Design
Trends offers several different styles and sizes of table and floor lamps, either pre-packaged with
shades or glass, or with shades sold separately, allowing customers to mix and match components.
These products are also shipped on containers, either to the Companys facility in Coppell, Texas
or directly to the customer.
All of TSI, PHI and Design Trends foreign vendors require payment 30 to 60 days after notification
of shipment of product from Asia.
Distribution
Craftmade. Craftmades products are marketed through more than 1,600 lighting showrooms, certain
major retail chains and electrical wholesaler locations specializing in sales to the new home
construction, remodeling and replacement markets. Its ceiling fans, light kits, bath strips,
outdoor lighting and accessories are distributed through 35 independent sales groups on a national
basis. Each sales group is selected to represent Craftmade in a specific market area. The
independent sales groups comprise a sales force of approximately 54 sales representatives, who
represent Craftmade exclusively in the sale of ceiling fans in return for commissions on such
sales. During each of three fiscal years ended June 30, 2007, no single lighting showroom or
electrical wholesaler accounted for more than 3% of Craftmades net sales and 1.5% of consolidated
net sales.
Sales representatives are carefully selected and continually evaluated in order to promote
high-level representation of Craftmades products. Craftmade employees provide initial field
training to new sales representatives covering features, styles, operation and other attributes of
Craftmade products to enable representatives to more effectively market Craftmades products.
Additional training, especially for a new product series, is provided on a regular basis at
semi-annual trade shows held at the Companys showroom at Dallas Market Center. Management
believes it has assembled a highly motivated and effective sales representative organization that
has demonstrated a strong commitment to Craftmade and its products. Management further believes
that the strength of its sales representative organization is primarily attributable to the quality
and competitive pricing of Craftmades products, as well as the ongoing administrative and
marketing support that Craftmade provides to its sales representatives.
TSI. All of TSIs sales are to mass merchandisers with Lowes Companies, Inc. (Lowes) comprising
70% of TSIs and 29% of the Companys net sales.
The majority of TSIs sales are by direct shipment. The remaining sales are shipped from the
Companys 378,000 square foot warehouse and distribution facility in Coppell, Texas. TSI utilizes
an internal sales force to market its products to service specific mass merchandiser locations.
Marketing
Craftmade. Craftmade relies primarily on the reputation of its ceiling fans, outdoor lighting and
light kits for high quality and competitive prices and the efforts of its sales representative
organization in order to promote the sales of its products. The principal markets for Craftmades
products are the new home construction, remodeling and replacement markets. Craftmade utilizes
advertising in home lighting magazines, particularly in special editions devoted to ceiling fans
and lighting fixtures, and broadly distributes its product catalog.
Craftmade also promotes its ceiling fans and light kits at semi-annual trade shows in Dallas (in
January and June) and maintains a showroom at the Dallas Trade Mart. Craftmade provides warranties
ranging from 10 years to lifetime on the fan motor of its ceiling fans, and includes a one year
limited warranty against defects in workmanship and materials to cover the entire ceiling fan.
Craftmade provides a limited lifetime warranty on its higher-end series of fans. The Companys
management believes these warranties are highly attractive to both dealers and consumers.
TSI. TSI relies primarily on the reputation of its products, merchandising concepts and the
relationship it has with its mass merchandiser customers with respect to its sales. TSI
participates in advertising programs and special promotions performed by its customers. TSI also
promotes its product line at select trade shows and line reviews held at its customers.
5
In general, the Company has a 48-hour product shipment policy. In order to meet these policy
delivery requirements and to ensure that it has sufficient goods on hand from its overseas
suppliers, the Company maintains a significant level of inventory. See Managements Discussion
and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
Product Expansion
Craftmade continually expands its ceiling fan product line, providing proprietary products to its
customer base in order to meet current and anticipated demands for unique, innovative products.
During the fiscal year ended June 30, 2007, Craftmade introduced 10 new ceiling fans and three
complete interior lighting families of products, including chandeliers, pendants and sconces. Each
family consists of 6 to 11 individual fixtures and management believes that they have been well
accepted by the Craftmade dealers. In addition, Craftmade increased its selections of
complementary products such as specialty light fixtures, including bath bars and outdoor lighting.
The Companys management will continue to search for opportunities for product expansion that it
considers complementary to the Companys existing product lines. For example, the Company
introduced a broad range of clocks and weather gauges under the Durocraft brand name during the
fiscal year.
Seasonality
The Companys product sales, particularly ceiling fans, are somewhat seasonal with sales in the
warmer first and fourth quarters being historically higher than in the two other fiscal quarters.
Backlog
Backlog is not material to the Companys operations as substantially all of the Companys products
are shipped to customers within 48 hours following receipt of orders.
Competition
The ceiling fan and lighting fixture market is highly competitive at all levels of operation. Some
of the major companies in the ceiling fan industry include Casablanca, Hunter, Minka, Generation
Brands companies, Quorum, Litex Industries, Emerson Electric and Taconi. A number of other
well-established companies are also currently engaged in activities that compete directly with
Craftmade. Some of Craftmades competitors are better established and have longer operating
histories, substantially greater financial resources or greater name recognition than Craftmade.
However, the Companys management believes that the quality of Craftmades products, the strength
of its marketing organization and the growing recognition of the Craftmade name will enable
Craftmade to compete successfully in these highly competitive markets.
The mass merchandiser market is also highly competitive. TSI, PHI, and Design Trends have numerous
competitors, which are located both within the United States and outside of the country,
particularly in Asia. Some of the major companies in the lighting fixture industry include
Designers Fountain, Generation Brands, Catalina, Jimco Lamps, J. Hunt, Westinghouse, Kichler and
Minka. In addition, mass merchandisers themselves will, at times, compete directly against TSI,
PHI, and Design Trends by purchasing private label products directly from Asian factories. More
detail of the impact of this risk is in Item 1A. Risk Factors.
6
Product Warranties
Craftmade ceiling fans are warranted against defects in workmanship and materials depending on
standard offerings of various lengths and terms. Provisions for estimated expenses related to
product warranties are made at the time products are sold. These estimates are established using
historical information on the nature, frequency, and average cost of warranty claims.
Product Warranty Costs
(Dollars in thousands)
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Fiscal Year Ended |
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June 30, |
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June 30, |
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June 30, |
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2007 |
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2006 |
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2005 |
Product warranty costs |
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$ |
1,147 |
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$ |
1,037 |
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$ |
1,009 |
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Research and Development
Research, development and engineering expenditures for the creation and application of new products
and processes, as summarized in the following table (excluding related salaries and legal
expenses):
Research and Development
(Dollars in thousands)
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|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2005 |
Research and development |
|
$ |
265 |
|
|
$ |
217 |
|
|
$ |
202 |
|
Independent Safety Testing
All of the ceiling fans, outdoor lighting, light kits and lamps sold by the Company in the United
States are tested by Underwriters Laboratories (UL), which is an independent non-profit
corporation which tests certain products, including ceiling fans and lighting fixtures, for public
safety. Under its agreement with UL, the Company voluntarily submits its products to UL, and UL
tests the products for safety. If the product is acceptable, UL issues a listing report that
provides a technical description of the product. UL provides the manufacturers with procedures to
follow in manufacturing the products. Electrical products that are manufactured in accordance with
the designated procedures display the UL listing mark, which is generally recognized by consumers
as an indication of a safe product and which is often required by various governmental authorities
to comply with local codes and ordinances. The contract between the Company and UL provides for
automatic renewal unless either party cancels as a result of default or gives applicable prior
notice.
Product Liability
The Company is engaged in businesses that could expose it to possible claims for injury resulting
from the failure of its products sold. While no material claims have been made against the Company
since its inception and the Company maintains product liability insurance, there can be no
assurance that claims will not arise in the future or that the coverage of the policy will be
sufficient to pay any claims.
Patents and Trademarks
The Company has patented certain of its product designs and the functional features of some of its
products. The expiration dates of Craftmades patents (excluding pending applications) currently
range from 2008 to 2024. From time to time, the Company also enters into license agreements with
various designers of the Companys products, including license agreements concerning licenses on
patents for eight series of fans and certain other license agreements entered into in the ordinary
course of its business. The Company has registered the trademarks Craftmade ®, Accolade ® and
Durocraft ®, along with the product names of certain of its designs, with the United States Patent
and Trademark Office.
7
|
|
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Employees |
|
|
|
|
As of June 30, 2007, the Company employed a total of 141 full time employees, compared to 138
employees as of June 30, 2006. Substantially all employees are based in the U.S. and are
primarily located at the Companys headquarters and distribution center in Coppell, Texas.
There were six employees based in Hong Kong. The Company believes that its relationship with
its employees is excellent. None of the Companys employees is represented by a labor union or
is a member of a collective bargaining unit. |
|
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(d) |
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Financial Information by Geographic Area |
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|
Net sales are attributed to geographic areas based on the location of the customer to which
products are shipped. Substantially all of the Companys net sales are to customers in North
America, principally the United States. In addition, substantially all of the Companys assets
are attributable to its operations in the United States with the exception of a small product
sourcing and international sales office in Hong Kong. |
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(e) |
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Available Information |
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Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to those reports filed or furnished to the Securities and Exchange Commission
(the SEC) pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934,
as amended (the Exchange Act), are available on the investor relations section of our website
at www.craftmade.com under the caption SEC promptly after we electronically file such
materials with, or furnish such materials to, the SEC. The Investor Relations section of our
website also contains corporate governance documentation, including the Audit Committee
Charter, Compensation Committee Charter, Disclosure Review Committee Charter, Nominating and
Corporate Governance Committee Charter, and our Business Ethics Policy. |
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|
We will provide a copy of our Form 10-K annual report upon written request of any shareholder.
The SEC maintains an Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC at
www.sec.gov. The public may read and copy any materials we file with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. |
Item 1A. Risk Factors.
Described below are certain risks that we believe are applicable to our business and the
industry in which we operate. There may be additional risks applicable to our business that are
not presently material or known. There are also risks within the economy and the capital markets,
both domestically and internationally, that affect business generally, including us and other
companies in our industry, such as the effects of terrorist attacks or other acts of war, including
conflicts or war involving the United States or its allies or trading partners; the general
strength of the economy, levels of consumer spending and consumer confidence; inflation; higher
interest rates; higher fuel and other energy costs; higher transportation, fuel and utility costs;
higher costs of labor, insurance and healthcare; labor strikes, weather conditions or natural
disasters; foreign exchange rate fluctuations; and higher levels of unemployment, which have not
been described. You should carefully consider each of the following risks and all other
information set forth in this Annual Report on Form 10-K.
If any of the events described below occur, our business, financial condition, results of
operations, liquidity or access to the capital markets could be materially adversely affected. The
following risks could cause our actual results to differ materially from our historical experience
and from results predicted by forward-looking statements made by us related to conditions or events
that we anticipate may occur in the future. All of our forward-looking statements made us are
qualified by the risks described below. The following should not be construed as an exhaustive
list of all factors that could cause our actual results to differ materially from those expressed
in our forward-looking statements.
8
Strategic Risks and Strategy Execution Risks
The ceiling fan and lighting industry is highly competitive, and we may not be able to compete
successfully.
We compete with numerous companies, including several major manufacturers and distributors.
Some of our competitors have greater financial and other resources than we have, which could allow
them to compete more successfully than us. Most of our products are available from several other
sources, and our customers tend to have relationships with several distributors. Manufacturers
could also increase their efforts to sell directly to our customers and end-users and bypass
distributors like us. In the future, we may be unable to compete successfully, and competitive
pressures may reduce our revenues.
If we fail to gain customer acceptance of our existing and new products, our operating results
could suffer.
We sell our products primarily to lighting showrooms and mass merchandisers. If we fail to
successfully introduce new products that are accepted by our customers, our operating results may
be adversely affected.
Our failure in pursuing or executing any of our new business ventures, strategic alliances and
acquisitions could have a material adverse impact on our business.
Our growth strategy includes expansion through new business ventures, strategic alliances and
acquisitions. While we employ several different valuation methodologies to assess a potential
growth opportunity, and structuring favorable payout strategies to lower risk, we can give no
assurance that any of our new business ventures and strategic alliances will positively affect our
financial performance. Any acquisitions that we make may result in difficulties in assimilating
acquired companies, and may result in the diversion of our capital and managements attention from
our other business issues and opportunities. We may not be able to integrate companies that we
acquire successfully, including their personnel, financial systems, distribution, operations and
general operating procedures. If we fail to integrate companies that we acquire successfully, our
business could suffer materially. We may also encounter challenges in achieving appropriate
internal control over our financial reporting in connection with our integration of an acquired
company. In addition, our efforts to integrate any acquired company, and its financial results,
into our company may have a material adverse effect on our operating results.
Our revenues depend on our relationships with capable sales personnel as well as key customers,
vendors, and manufacturers of the products that we distribute to our customers.
Our future operating results depend on our ability to maintain satisfactory relationships with
qualified sales personnel as well as key customers, vendors and manufacturers. If we fail to
maintain our existing relationships with these parties or fail to acquire relationships with others
like them in the future, our business may suffer.
Our future success is substantially dependent upon our senior management and retention of key
personnel.
Our success depends upon our ability to attract, motivate, and retain key management and
personnel. We depend upon the continued services of our key executive officers, including the
following individuals:
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|
|
James R. Ridings
|
|
Chairman of the Board and Chief Executive Officer |
|
|
Brad D. Heimann
|
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President and Chief Operating Officer |
|
|
J. Marcus Scrudder
|
|
Chief Financial Officer |
|
|
Michael L. Patton
|
|
Chief Accounting Officer |
|
|
John S. DeBlois
|
|
Executive Vice President of TSI |
|
|
Clifford F. Crimmings
|
|
Vice President of Marketing |
The loss of services of any of our key personnel could have a negative impact on our business.
9
Risks Associated with International Trade
As we do not manufacture the products that we distribute, we are dependent upon third parties for
the manufacture and supply of high quality competitive products on a timely basis.
We obtain over 90% of our products from third-party suppliers in China with the remainder
supplied from vendors in the U.S. We do not have long-term contracts with our suppliers committing
them to supply products to us. Most of our products are imported from suppliers under short-term
purchase orders that we place with them. Therefore, our suppliers may not provide us with the
products we need in the quantities that we request. Because we do not control the actual
production of the products that we sell, we may be subject to delays caused by interruption in
production based on conditions outside of our control. Political or financial instability,
merchandise quality issues, trade restrictions, tariffs, currency exchange rates, transportation
capacity and costs, inflation, outbreak of pandemics and other factors relating to foreign trade
are beyond our control. In the event that any of our third-party suppliers become unable or
unwilling to continue to provide us with products in the volumes that we require, we would need to
identify and obtain acceptable replacement sources on a timely basis. There is no guarantee that
we will be able to obtain such alternative sources of supply on a timely basis, if at all, or at
costs acceptable to us. An extended interruption in the supply of our products would have a
materially adverse effect on our results of operations, which most likely would adversely affect
the value of our common stock.
Risks Related to Profitable Growth
A decline in general economic condition, particularly the housing, home construction, and remodel
sectors, could lead to reduced demand for our products.
General economic conditions in the U.S., including the housing and home construction sectors,
are affected by, among other things, consumer spending habits, levels of employment, salary and
wage rates, prevailing interest rates, income tax rates and policies, consumer confidence and
consumer perception of economic conditions. A decline in general economic conditions in the U.S.
could lead to a reduced demand for our products.
The loss of certain of our customers that represent a significant percentage of our net sales could
adversely affect our results of operations.
All of TSIs net sales, including the net sales of PHI and Design Trends, are made to mass
merchandisers with Lowes comprising the most significant portion of TSIs and our consolidated net
sales. The loss of or reduction in our orders with this customer, or any other significant
customer, could have a material adverse effect on our business and financial results, as could
disputes with our customers regarding shipments, fees, product condition or related matters. Our
inability to collect accounts receivable from any of these customers could also have a material
adverse affect on our financial condition and results of operations.
If net sales to these customers are at levels significantly lower than currently anticipated,
we would be required to find other customers for existing inventory on hand. There can be no
assurances that we would be able to obtain additional customers for this inventory or that any
alternative sources would generate similar sales levels and profit margins as anticipated with
these current mass merchandiser customers.
We do not have long-term sales agreements with or other contractual assurances as to future
sales from any of our customers. Our customers make purchase decisions based on a combination of
price, product quality, consumer demand, customer service performance and their desired inventory
levels. Changes in our customers strategies, including a reduction in the number of brands they
carry or a shift of shelf space to private label products (unless we provide such products) may
adversely affect our net sales. Additionally, our customers may face financial or other
difficulties that may impact their operations and their purchases from us, which could adversely
affect our results of operations. If our net sales of products to one or more of our customers are
reduced, this reduction may have a material adverse effect on our business, financial condition and
results of operations.
10
Our mass merchandise customers may pressure us to lower our prices or take other actions that may
adversely impact our results of operations.
Mass merchandisers, including Lowes and Wal-Mart, require various stipulations from their
vendors related to inventory practices, product reset costs, logistics or other aspects of the
customer-supplier relationship. For example, Wal-Mart and other customers have indicated a desire
to utilize Radio Frequency Identification (RFID) technology in an effort to improve tracking and
management of product in their supply chain. Large-scale implementation of this technology would
significantly increase our product manufacturing and distribution costs. Meeting these types of
demands of customers may adversely affect our margins and results of operations. If we fail to
effectively respond to these types of demands of our customers, our sales and profitability could
be materially adversely affected. In addition, our mass merchandise customers hold line reviews
throughout the year for each product category. Line reviews give us the potential to add new
SKUs; however, participation in line reviews could also result in a partial or complete reduction
of our existing SKUs in the product lines currently offered.
Our mass merchandise customers may choose to source many of the products we provide directly
themselves.
We compete against a wide variety of global and local competitors. As a result, there are
ongoing competitive product and pricing pressures in the environments in which we operate, as well
as challenges in maintaining profit margins. To address these challenges, we must be able to
successfully respond to competitive factors, including pricing, promotional incentives and trade
terms. In particular, our mass merchandise customers may choose to source many of the products we
provide directly from manufacturers in Asia.
To the extent our mass merchandiser customers purchase products in excess of consumer consumption
in any period, our net sales in a subsequent period may be adversely affected as mass merchandisers
seek to reduce their inventory levels.
From time to time, mass merchandisers may purchase more products from us than they expect to
sell to consumers during a particular time period. If mass merchandisers increase their inventory
during a particular reporting period, then our sales during the subsequent reporting period may be
adversely impacted as these mass merchandisers seek to reduce their inventory to usual levels. To
the extent our customers seek to reduce their usual or customary inventory levels, the impact of
such de-inventorying on our sales and profitability would be even greater.
Increases in our shipping costs or service trouble with our third-party shippers could harm our
business.
Shipping is a significant expense in our business for the products we import from
manufacturers and the products we ship to customers. Any significant increase we experience in our
shipping rates could have an adverse effect on our operating results. Similarly, strikes or other
service interruptions by those shippers could cause our operating expenses to rise and adversely
affect our ability to deliver products on a timely basis.
We experience fluctuations in our quarterly earnings. As a result, we may fail to meet or exceed
the expectations of securities analysts and investors, which could cause our stock price to decline
or be highly volatile.
Our product sales, particularly ceiling fans, are subject to seasonal and other quarterly
fluctuations. Our net sales and operating profits generally have been higher in the first and
fourth quarters from the warmer weather during these months. Our quarterly results may also be
adversely affected by a variety of other factors, including:
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the timing of our new product releases; |
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costs related to our acquisitions and/or integrations of businesses that we may acquire; |
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timing and amount of our sales and marketing expenditures; |
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timing of our orders from mass merchandisers; |
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|
our commitments to mass merchandisers, including charge-backs for returns and defective merchandise; |
11
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loss of any of our sales representatives; |
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|
|
general economic conditions that may affect us, including those in the housing sector; |
|
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|
|
establishing or maintaining our business relationships; and |
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|
|
changes in our accounting principles. |
These and other factors could affect our business, financial condition, and results of
operations, and this makes the prediction of our financial results on a quarterly basis difficult.
In addition, the NASDAQ Global Market can experience extreme price and volume fluctuations that can
be unrelated or disproportionate to the operating performance of the companies listed on NASDAQ.
Broad market and industry factors may negatively affect the market price of our common stock,
regardless of actual operating performance. In the past, periods of volatility in the market price
of a companys securities has often been followed by securities class action litigation instituted
against companies. This type of litigation, if instituted, could result in substantial costs and a
diversion of our managements attention and resources, which would harm us.
Risks Relating to Liquidity
Our inability to meet financial covenants contained in our credit facilities could adversely impact
our ability to fund our operations.
Our ability to make payments on and to refinance our indebtedness and to fund our planned
capital expenditures, acquisitions, and dividends will depend on our ability to generate cash in
the future. This, to some extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
We cannot provide assurance that our business will generate sufficient cash flow from our
operating activities or that future borrowings will be available under our credit facility in
amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We
may need to refinance all or a portion of our indebtedness, on or before maturity. We cannot
provide assurance that we would be able to refinance any of our indebtedness on commercially
reasonable terms or at all.
Our credit facility contains restrictive covenants that require us to maintain specified
financial ratios. Our ability to satisfy those financial ratios can be affected by events beyond
our control, and we cannot provide assurance that we will satisfy those ratios. A breach by us of
any of these financial ratio covenants or other covenants could result in our being in default
under our credit facility. Upon the occurrence of an event of default by us, our lenders could
elect to declare the applicable outstanding indebtedness due immediately and payable and terminate
all commitments to us to extend further credit. We cannot be sure that our lenders would waive a
default or that we could pay the outstanding indebtedness in full under our credit facility if it
were accelerated by our lenders.
We are exposed to the risk of an increase in interest rates.
We do not have any agreements with third parties to hedge against the potential rising of
interest rates. The variable rates of interest on our credit facility are comprised of LIBOR plus
the spread as defined by the loan agreements. As a result of our existing variable rate credit
lines and loan agreements, we are exposed to risk from fluctuations in interest rates.
We are exposed to the risk of foreign currency appreciation.
Generally, we purchase our products in U.S. dollars. However, we source our products from
overseas manufacturers in the Peoples Republic of China. As a result, our costs of these products
may be affected by changes in the value of the relevant currencies. These foreign currencies
include the Chinese yuan. We cannot be
assured that foreign currency fluctuations will not have a material adverse impact on our
financial condition and results of operations. See Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital Resources.
12
Risks Associated with Dependence on Technology
We rely heavily on our management information systems for inventory management, distribution and
other functions. If our systems fail to perform these functions adequately or if we experience an
interruption in our operations, we could be materially adversely affected.
The efficient operation of our company is dependent on our management information systems. We
rely heavily on our management information systems to manage our order entry, order fulfillment,
pricing, point-of-sale, and inventory replenishment processes. The failure of our management
information systems to perform as anticipated could disrupt our business and could result in
decreased revenue, increased overhead costs, and excess or out-of-stock inventory levels, causing
us to suffer materially.
Regulatory Risks
Tax legislation initiatives could adversely affect our net earnings and tax liabilities.
We are subject to the tax laws and regulations of the United States, state and local
governments, as well as foreign jurisdictions. From time to time, various legislative initiatives
may be proposed that could adversely affect our tax positions. There can be no assurance that our
effective tax rate will not be adversely affected by these initiatives. In addition, tax laws and
regulations are extremely complex and subject to varying interpretations. Although we believe
that our historical tax positions are sound and consistent with applicable laws, regulations and
existing precedent, we cannot give assurance that our tax positions will not be challenged by
relevant tax authorities, or that we would be successful in any such challenge.
We are subject to increasingly complex corporate governance, public disclosure, accounting, and tax
requirements that have increased our costs and the risk of our not being in compliance with these
requirements.
We are subject to rules and regulations of federal and state government as well as the stock
exchange on which our common stock is listed. These entities, including the Public Company
Accounting Oversight Board (PCAOB), the SEC, the Internal Revenue Service, and the Nasdaq Stock
Market, have issued a significant number of new and increasingly complex requirements and
regulations over the course of the last several years and continue to develop additional
regulations and requirements in response to laws enacted by Congress, most notably the
Sarbanes-Oxley Act of 2002. Our efforts to comply with these requirements have resulted in, and
are likely to continue to result in, increased expenses and a diversion of our managements time
and attention from revenue-generating activities to compliance activities.
We also are subject to periodic audits or other reviews by these governmental agencies and
external auditors. These examinations or reviews frequently require managements time and
diversion of internal resources and, in the event of an unfavorable outcome to us, may result in
additional liabilities or adjustments to our historical financial results.
Recent changes in accounting rules, including the expensing of stock options granted to our
employees, could have a material impact on our reported business and financial results.
The U.S. generally accepted accounting principles are subject to interpretation by the
Financial Accounting Standards Board (FASB), the American Institute of Certified Public
Accountants, the PCAOB, the SEC, and various bodies formed to promulgate and interpret appropriate
accounting principles. A change in these principles or interpretations could have a significant
effect on our reported financial results.
13
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The following table sets forth information with respect to the Companys key properties:
Summary of Properties
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Current |
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Approximate |
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Lease |
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Square |
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Term |
Location |
|
Use |
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Feet |
|
Expiration |
Coppell, Texas |
|
Headquarters, warehouse and distribution facility |
|
|
378,000 |
|
|
Owned |
Carrollton, Texas |
|
Warehouse |
|
|
42,320 |
|
|
July 31, 2007 |
Dallas, Texas |
|
Dallas Trade Mart Showroom - Craftmade and TSI |
|
|
4,292 |
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|
April 30, 2012 |
Kowloon, Hong Kong |
|
Product sourcing and international sales office |
|
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2,534 |
|
|
February 11, 2009 |
The Companys headquarters facility is located in Coppell, Texas. The facility consists
of approximately 378,000 square feet of general office and warehouse space, is owned by the Company
and is used by both Craftmade and TSI. The Companys management believes that this Company-owned
facility is well maintained, in good operating condition and will be sufficient to support
operations for the near term. The Company did not renew its warehouse lease in Carrollton, Texas.
See Note 4 Long-Term Obligations in the notes to the consolidated financial statements for
a discussion of the Companys term loan used to finance the acquisition of this facility.
The Company also has sales offices in Bentonville, Arkansas and Dedham, Massachusetts. The
terms to these leases are not significant to the Companys operations.
Item 3. Legal Proceedings.
There are no material legal proceedings pending to which the Company is party or to which any
of its properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of stockholders during the fourth quarter of fiscal year
2007.
14
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The initial public offering price of the Companys common stock, $0.01 par value per share
(Common Stock) in April 1990 was $1.55 per share, adjusted for the Companys three-for-two stock
splits effective October 30, 1998 and October 31, 1997. The Common Stock trades on NASDAQ Global
Market under the symbol CRFT.
The following table sets forth, for the periods indicated, the high and low sales price per
share of Common Stock on the NASDAQ Global Market, and dividends paid per share of Common Stock:
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Dividends |
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Sales Price |
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Per |
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High |
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Low |
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Share |
Fiscal Year Ended June 30, 2007 |
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Fourth Quarter |
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$ |
18.18 |
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$ |
14.63 |
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$ |
0.12 |
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Third Quarter |
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18.48 |
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14.86 |
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0.12 |
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Second Quarter |
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19.95 |
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17.00 |
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0.12 |
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First Quarter |
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18.29 |
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14.51 |
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0.12 |
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Fiscal Year Ended June 30, 2006 |
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Fourth Quarter |
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$ |
19.57 |
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$ |
16.27 |
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$ |
0.12 |
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Third Quarter |
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20.68 |
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16.22 |
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0.12 |
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Second Quarter |
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21.37 |
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17.42 |
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0.12 |
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First Quarter |
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19.25 |
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15.75 |
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0.12 |
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The Company intends to continue to pay regular quarterly dividends on its outstanding
Common Stock. However, any decision to declare and pay dividends in the future will be made at the
discretion of the Companys Board of Directors and will depend on, among other things, the
Companys results of operations, cash requirements, financial condition, availability of funds
under its line of credit and other factors that the Board of Directors may deem relevant.
Computershare Investor Services, 2 North LaSalle Street, Chicago, Illinois 60602, is the
transfer agent and registrar for the Common Stock.
Holders
There were 85 holders of record of the Common Stock on August 31, 2007. A number of the
Companys stockholders hold their shares in street name; therefore, the Company believes that there
are substantially more beneficial owners of Common Stock.
Issuer Purchases of Equity Securities
There were no purchases of equity securities during the fiscal year ended June 30, 2007.
Equity Compensation Plans
See Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
15
Stock Performance Graph
The following graph provides an indicator of and compares the percentage change of cumulative
total shareholder return of the Companys Common Stock against the cumulative total return of the
Russell 2000 Index and the NASDAQ Composite Index. This graph assumes $100 was invested on June
30, 2002 in the Companys Common Stock, the Russell 2000 Index and the NASDAQ Composite Index.
Both the Russell 2000 Index and the NASDAQ Composite Index exclude the Company. This graph also
assumes that the Companys quarterly dividend was reinvested in the Companys Common Stock.
Stock Performance Graph
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6/30/2002 |
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6/30/2003 |
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6/30/2004 |
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6/30/2005 |
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6/30/2006 |
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6/30/2007 |
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Russell 2000 |
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$ |
100.00 |
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$ |
99.25 |
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$ |
133.39 |
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$ |
145.81 |
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$ |
165.96 |
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$ |
193.96 |
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NASDAQ Composite |
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100.00 |
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110.91 |
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139.95 |
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140.58 |
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148.45 |
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177.91 |
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Craftmade |
|
|
|
100.00 |
|
|
|
|
120.33 |
|
|
|
|
134.74 |
|
|
|
|
113.68 |
|
|
|
|
120.46 |
|
|
|
|
125.99 |
|
|
|
The historical stock price performance of the Companys Common Stock shown on the graph
above is not necessarily an indication of future stock performance.
The Company has compared its stock price performance with that of the Russell 2000 Index as it
does not believe it can reasonably identify a peer group and no comparable published industry or
line-of-business index is available. The Russell 2000 Index consists of companies with market
capitalization similar to that of the Company; accordingly, the Company believes the Russell 2000
Index is the best available performance comparison.
16
Item 6. Selected Financial Data.
The selected financial data in the tables below are for the five fiscal years ended June 30,
2007. The data should be read in conjunction with Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, and the Consolidated Financial Statements included
herein.
Summary of Selected Financial Data
(In thousands, except percentage and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
(1) |
|
|
|
|
|
(2) |
|
|
|
|
|
|
|
|
Selected Operating Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
103,350 |
|
|
$ |
118,054 |
|
|
$ |
118,806 |
|
|
$ |
121,238 |
|
|
$ |
109,033 |
|
Gross profit |
|
|
32,291 |
|
|
|
35,469 |
|
|
|
35,446 |
|
|
|
35,910 |
|
|
|
35,394 |
|
Gross profit as a percentage of net sales |
|
|
31.2 |
% |
|
|
30.0 |
% |
|
|
29.8 |
% |
|
|
29.6 |
% |
|
|
32.5 |
% |
Selling, general and administrative |
|
|
21,151 |
|
|
|
19,895 |
|
|
|
20,503 |
|
|
|
18,580 |
|
|
|
18,600 |
|
Income from operations |
|
|
10,341 |
|
|
|
14,980 |
|
|
|
14,362 |
|
|
|
16,682 |
|
|
|
16,135 |
|
Minority interest |
|
|
1,507 |
|
|
|
3,430 |
|
|
|
3,775 |
|
|
|
3,719 |
|
|
|
4,235 |
|
Net income |
|
|
5,911 |
|
|
|
7,100 |
|
|
|
6,427 |
|
|
|
7,646 |
|
|
|
6,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
|
1.14 |
|
|
|
1.37 |
|
|
|
1.26 |
|
|
|
1.43 |
|
|
|
1.24 |
|
Diluted earnings per common share |
|
|
1.14 |
|
|
|
1.36 |
|
|
|
1.26 |
|
|
|
1.42 |
|
|
|
1.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
|
0.48 |
|
|
|
0.48 |
|
|
|
0.40 |
|
|
|
0.40 |
|
|
|
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding |
|
|
5,204 |
|
|
|
5,201 |
|
|
|
5,095 |
|
|
|
5,336 |
|
|
|
5,512 |
|
Diluted common shares outstanding |
|
|
5,206 |
|
|
|
5,211 |
|
|
|
5,115 |
|
|
|
5,383 |
|
|
|
5,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
41,216 |
|
|
$ |
45,291 |
|
|
$ |
50,595 |
|
|
$ |
41,454 |
|
|
$ |
35,804 |
|
Total assets |
|
|
64,751 |
|
|
|
65,061 |
|
|
|
70,815 |
|
|
|
55,254 |
|
|
|
51,443 |
|
Current liabilities |
|
|
8,687 |
|
|
|
15,020 |
|
|
|
39,714 |
|
|
|
31,768 |
|
|
|
22,329 |
|
Long-term debt |
|
|
18,938 |
|
|
|
16,204 |
|
|
|
1,551 |
|
|
|
2,949 |
|
|
|
4,517 |
|
Total liabilities |
|
|
28,732 |
|
|
|
32,362 |
|
|
|
42,351 |
|
|
|
34,931 |
|
|
|
27,338 |
|
Stockholders equity |
|
|
32,524 |
|
|
|
29,037 |
|
|
|
24,373 |
|
|
|
18,339 |
|
|
|
20,538 |
|
Book value per common share |
|
|
6.25 |
|
|
|
5.58 |
|
|
|
4.78 |
|
|
|
3.44 |
|
|
|
3.73 |
|
|
|
|
(1) |
|
Effective July 1, 2006, TSI acquired Marketing Impressions. This acquisition increased
the Companys effective ownership of PHI to 100%. The results of operations of PHI have
always been included in the consolidated income before minority interest of the Company.
Prior to the acquisition, the minority interest in PHI income was excluded from the
Companys consolidated net income. Since the effective date of the acquisition on July 1,
2006, no minority interest exists in PHI, and accordingly, the consolidated net income will
include the full amount of PHI results from this date. |
|
(2) |
|
Fiscal year 2005 results include net assets acquired and four months of the results of
operations of Teiber effective March 1, 2005. |
17
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation.
The following discussion should be read in conjunction with the information contained in our
consolidated financial statements, including the notes thereto. Statements regarding future
economic performance, managements plans and objectives, and any statements concerning assumptions
related to the foregoing contained in Managements Discussion and Analysis of Financial Condition
and Results of Operation constitute forward-looking statements. Certain factors, which may cause
actual results to vary materially from these forward-looking statements, accompany such statements
or appear elsewhere in this Form 10-K, including the factors disclosed under Item 1A. Risk
Factors.
Critical Accounting Policies and Estimates
Managements discussion and analysis of the Companys financial condition and results of
operations are based upon the Companys consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States. The preparation
of these financial statements requires the Companys management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. The Companys estimates are based on historical
experience and various other factors that are believed to be reasonable under the circumstances,
the results of which form the basis for the Companys conclusions. The Company continually
evaluates the information used to make these estimates as its business and the economic environment
changes. The Companys management believes that the estimates, assumptions and judgments involved
in the accounting policies described below have the greatest potential impact on its financial
statements, so the Company considers these to be its critical accounting policies.
Revenue Recognition
Revenue is recognized as product is shipped and related services are performed in accordance
with all applicable revenue recognition criteria. For these transactions the Company applies the
provisions of SEC Staff Accounting Bulletin No. 104 Revenue Recognition. The Company recognizes
revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed,
delivery has occurred or the services have been rendered, the sales price is fixed or determinable
and collection of the related receivable is reasonably assured. Title generally transfers upon
shipment of goods from the Companys warehouse. The Company does not have an obligation or policy
of replacing customer products damaged or lost in transit. In some instances, the Company ships
product directly from its suppliers to the customers. In these cases, the Company recognizes
revenue when the product is accepted by the customers representative.
The Company applies the provisions of Emerging Issues Task Force (EITF) Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent. The Companys application of EITF
99-19 includes evaluation of its terms with each major customer relative to a number of criteria
that management considers in making its determination with respect to gross versus net reporting of
revenue for transactions with its customers. Managements criteria for making these judgments
place particular emphasis on determining the primary obligor in a transaction and which party bears
general inventory risk. The Company records all shipping and handling fees billed to customers as
revenue, and related costs as cost of sales, when incurred, in accordance with EITF 00-10,
Accounting for Shipping and Handling Fees and Costs.
As part of its revenue recognition policy, the Company records an accrual of estimated
incentives payable to its customers as a reduction of revenue at the time the related revenues are
recorded. The Company bases its estimates on contractual terms of the programs and estimated or
actual sales to individual customers. Actual incentives payable in any future period are
inherently uncertain and, thus, may differ from its estimates. If actual or expected incentives
were significantly greater than the reserves the Company had established, the Company would record
a reduction to net revenues in the period in which the Company made such determination.
In addition to various incentive programs, from time to time, the Company is required to
provide mark-down funds to certain of its mass retail customers to assist them in clearing
slow-moving inventory. These mark-down funds are accrued as a reduction of revenue at the time
that the related revenues are recorded.
18
The Company is also required to provide for the cost of labor associated with resetting store
displays. Resets involve removing slow-moving inventory and replacing it with new products.
Although reset costs are paid to third parties who perform the services, they are considered an
incentive to our mass merchandise customers. For existing products that are replaced, the Company
accrues an estimate for the cost as in increase to cost of goods sold in advance of the reset at
the time that the related revenues are recorded. The Company bases its estimates on a number of
factors, including information obtained from our clients about their future plans. The cost for
any new products or space that is gained is expensed as incurred as an increase to cost of goods
sold.
Allowance for Doubtful Accounts
The Company regularly analyzes significant customer balances, and, when it becomes evident a
specific customer will be unable to meet its financial obligations to the Company, such as in the
case of bankruptcy filings or deterioration in the customers operating results or financial
position, a specific allowance for doubtful account is recorded to reduce the related receivable to
the amount that is believed reasonably collectible. The Company also records allowances for
doubtful accounts for all other customers based on a variety of factors including the length of
time the receivables are past due, the financial health of the customer and historical experiences.
If circumstances related to specific customers change, estimates of the recoverability of
receivables could be further adjusted.
Inventories
The Companys inventories are primarily comprised of finished goods and are recorded at the
lower of cost or market using the average cost method. The Company provides estimated inventory
allowances for excess, slow-moving and obsolete inventory as well as inventory whose carrying value
is in excess of net realizable value. These reserves are based on current assessments about future
demands, market conditions and related management initiatives. If market conditions and actual
demands are less favorable than those projected by management, additional inventory write-downs may
be required.
Goodwill
The Company assesses the carrying values of goodwill annually or when circumstances dictate
that the carrying value might be impaired. Impairment testing for goodwill is analyzed at the
reporting unit level. An impairment loss generally would be recognized when the carrying amount of
the reporting units net assets exceeds the estimated fair value of the reporting unit. The
estimated fair value of a reporting unit is determined using discounted cash flow analysis. In the
event that an impairment is determined to have occurred, the Company will reduce the carrying value
of the asset in that period.
Income Taxes
The Company accounts for income taxes under an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Companys financial statements or tax returns. In
estimating future tax consequences, all expected future events other than enactments of changes in
the tax law or rates are considered. Deferred income taxes have been provided on unremitted
earnings from foreign investees. The Company reviews its deferred tax assets for ultimate
realization and will record a valuation allowance to reduce the deferred tax asset if it is more
likely than not that some portion, or all, of these deferred tax assets will not be realized. Tax
authorities may not always agree with the tax positions taken by the Company. The Company believes
it has adequate reserves in the event that a taxing authority differs with positions taken;
however, there can be no assurance that the Companys results will not be affected adversely. See
Note 2 Summary of Significant Accounting Policies in the notes to the consolidated financial
statements for additional information.
Variable Interest Entities
Variable interest entities (VIEs) are primarily entities that lack sufficient equity to
finance their activities without additional financial support from other parties or whose equity
holders lack adequate decision making ability. All VIEs with which the Company is involved must
be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary
beneficiary is required to consolidate the VIE for financial reporting
purposes.
19
The Company has a 50% ownership interest in Design Trends, a limited liability company.
In connection with the adoption of FIN 46R, the Company concluded that Design Trends is a VIE and
that the Company is the primary beneficiary. Pursuant to the provisions of FIN 46R, the Company
consolidates Design Trends.
Prior to the acquisition of Marketing Impressions, which became effective on July 1, 2006, the
Company had a 50% ownership interest in PHI. The Company also concluded that PHI was a VIE and
that the Company was the primary beneficiary. Pursuant to the provisions of FIN 46R, the Company
consolidated PHI. Accordingly, the results of operations of PHI have historically been included in
the consolidated income before minority interest of the Company. Prior to the acquisition, the
minority interest in PHI income was excluded from the Companys consolidated net income. Since the
effective date of the acquisition on July 1, 2006, no minority interest exists in PHI, and
accordingly, the consolidated net income includes the full amount of PHI results from this date.
Overview
Management reviews a number of key indicators to evaluate the Companys financial performance,
including net sales, gross profit and selling, general and administrative expenses by segment. A
condensed overview of results for the fiscal year ended June 30, 2007 and the corresponding prior
year period is summarized in the table that follows (in thousands, except percentage data).
Fiscal year ended June 30, 2007 compared to fiscal year ended June 30, 2006
Income Statement by Segment
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
Fiscal Year Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
Craftmade |
|
|
TSI |
|
|
Total |
|
|
Craftmade |
|
|
TSI |
|
|
Total |
|
Net sales |
|
$ |
59,925 |
|
|
$ |
43,425 |
|
|
$ |
103,350 |
|
|
$ |
62,902 |
|
|
$ |
55,152 |
|
|
$ |
118,054 |
|
Cost of goods sold |
|
|
(38,745 |
) |
|
|
(32,314 |
) |
|
|
(71,059 |
) |
|
|
(40,361 |
) |
|
|
(42,224 |
) |
|
|
(82,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
21,180 |
|
|
|
11,111 |
|
|
|
32,291 |
|
|
|
22,541 |
|
|
|
12,928 |
|
|
|
35,469 |
|
Gross profit as a % of net sales |
|
|
35.3 |
% |
|
|
25.6 |
% |
|
|
31.2 |
% |
|
|
35.8 |
% |
|
|
23.4 |
% |
|
|
30.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
(14,900 |
) |
|
|
(6,251 |
) |
|
|
(21,151 |
) |
|
|
(13,449 |
) |
|
|
(6,446 |
) |
|
|
(19,895 |
) |
As a % of net sales |
|
|
24.9 |
% |
|
|
14.4 |
% |
|
|
20.5 |
% |
|
|
21.4 |
% |
|
|
11.7 |
% |
|
|
16.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(548 |
) |
|
|
(251 |
) |
|
|
(799 |
) |
|
|
(575 |
) |
|
|
(19 |
) |
|
|
(594 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(15,448 |
) |
|
|
(6,502 |
) |
|
|
(21,950 |
) |
|
|
(14,024 |
) |
|
|
(6,465 |
) |
|
|
(20,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
5,732 |
|
|
|
4,609 |
|
|
|
10,341 |
|
|
|
8,517 |
|
|
|
6,463 |
|
|
|
14,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(1,416 |
) |
|
|
(25 |
) |
|
|
(1,441 |
) |
|
|
(1,104 |
) |
|
|
(80 |
) |
|
|
(1,184 |
) |
Other expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35 |
) |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
and minority interests |
|
|
4,316 |
|
|
|
4,584 |
|
|
|
8,900 |
|
|
|
7,378 |
|
|
|
6,418 |
|
|
|
13,796 |
|
Provision for income taxes |
|
|
(1,469 |
) |
|
|
(13 |
) |
|
|
(1,482 |
) |
|
|
(2,501 |
) |
|
|
(765 |
) |
|
|
(3,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests |
|
|
2,847 |
|
|
|
4,571 |
|
|
|
7,418 |
|
|
|
4,877 |
|
|
|
5,653 |
|
|
|
10,530 |
|
Minority interests |
|
|
|
|
|
|
(1,507 |
) |
|
|
(1,507 |
) |
|
|
|
|
|
|
(3,430 |
) |
|
|
(3,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,847 |
|
|
$ |
3,064 |
|
|
$ |
5,911 |
|
|
$ |
4,877 |
|
|
$ |
2,223 |
|
|
$ |
7,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales. Net sales for the Company decreased $14,704,000 or 12.5% to $103,350,000 for the
fiscal year ended June 30, 2007, compared to $118,054,000 for the fiscal year ended June 30, 2006,
primarily from a decline in net sales of the TSI segment.
Net sales from the Craftmade segment decreased $2,977,000 or 4.7% to $59,925,000 for the fiscal
year ended June 30, 2007, from $62,902,000 for the fiscal year ended June 30, 2006. The decline
was primarily due to a continued decrease in demand for decorative ceiling fans and Accolade
lighting products as a result of the weak overall housing market. These decreases were partially
offset by a 9.6% increase in net sales of Teiber product lines and an increase in net sales from
the Durocraft product line consisting of clocks and weather gauges.
20
Management continues to focus on introducing new lighting products, expanding Teiber accounts
and developing new accounts for the Durocraft product lines to offset the weak housing market.
Management believes that long-term growth will be favorably affected by more competitive product
sourcing and additional product offerings through enhanced product development efforts.
Net sales of the TSI segment declined $11,727,000 or 21.3% to $43,425,000 for the fiscal year ended
June 30, 2007 from $55,152,000 for the fiscal year ended June 30, 2006, as summarized in the
following table:
Net Sales of TSI Segment
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade |
|
|
Design |
|
|
Segment |
|
Fiscal Year Ended |
|
Source |
|
|
Trends |
|
|
Total |
|
June 30, 2007 |
|
$ |
26,160 |
|
|
$ |
17,265 |
|
|
$ |
43,425 |
|
June 30, 2006 |
|
|
33,372 |
|
|
|
21,780 |
|
|
|
55,152 |
|
|
|
|
|
|
|
|
|
|
|
Dollar decrease |
|
$ |
(7,212 |
) |
|
$ |
(4,515 |
) |
|
$ |
(11,727 |
) |
|
|
|
|
|
|
|
|
|
|
Percent decrease |
|
|
(21.6 |
%) |
|
|
(20.7 |
%) |
|
|
(21.3 |
%) |
The decrease in net sales of Trade Source was primarily the result of a decline in orders from
Lowes related to indoor lighting, outdoor lighting and fan accessories. On November 13, 2006,
Lowes notified Trade Source that it will no longer source the 14 indoor and outdoor lighting SKUs
previously sold to Lowes via direct import. Management has been told that Lowes will be sourcing
these products directly from various overseas manufacturers. Trade Source shipped all outstanding
orders of discontinued products as of January 31, 2007.
The decline in Design Trends net sales was primarily due to the previously disclosed reduction of
SKUs sold to Lowes in the seven of 11 regional distribution centers that Design Trends supplied.
Beginning in April 2006, Design Trends began providing approximately 60% of the SKUs in the mix
and match portable lamp display set marketed under Lowes private label as compared to 100% in
prior periods. Management also believes that the decrease in net sales of Design Trends resulted
from reduced demand primarily due to current economic conditions related to the housing industry
and other factors that are within the realm of the retailers control.
This decline in Design Trends was partially offset by an increase in net sales to four additional
Lowes distribution centers. In November 2006, Design Trends began supplying a portion of its mix
and match portable lamps to the four additional Lowes regional distribution centers that Design
Trends had not been supplying since the quarter ended September 30, 2005. As a result, Design
Trends supplies mix and match portable lamps to all 11 Lowes regional distribution centers.
Based on the most recent annual line review, management believes that Lowes remains committed to
the lighting program with Design Trends. Management believes that based on the amount of product
currently shipped to Lowes, Design Trends continues to be a primary portable lamp vendor for
Lowes mix and match portable lamp program. Design Trends has been invited to participate in each
of Lowes scheduled line reviews for its existing and new product lines. The line reviews occur
throughout the year for each product category and give both Trade Source and Design Trends the
potential to add new SKUs; however, participation in line reviews could also result in a partial
or complete reduction of either subsidiarys existing SKUs in the product lines currently offered
to Lowes.
Management believes that the future growth of the TSI segment is contingent upon the success of the
Companys ongoing efforts to introduce new products, product lines and marketing concepts to
existing customers and to expand the business to new customers.
Gross Profit. Gross profit of the Company as a percentage of net sales increased 1.2% to 31.2% for
the fiscal year ended June 30, 2007, compared to 30.0% for the fiscal year ended June 30, 2006.
Gross profit as a percentage of net sales of the Craftmade segment of 35.3% for the fiscal year
ended June 30, 2007
was 0.5% lower than gross profit as a percentage of net sales in the fiscal year ended June 30,
2006. An increase in net sales of product lines that carry a slightly lower gross profit as a
percentage of net sales were offset by a non-recurring benefit obtained in the quarter ended March
31, 2006 from the recapture of duties related to prior periods as a result of an exemption of
duties as prescribed by the American Jobs Creation Act of 2004 (AJCA). This non-
21
recurring
benefit totaled $255,000. The AJCA contains a provision that allowed ceiling fans for permanent
installation to enter the U.S. duty-free between November 6, 2004 and December 31, 2006. The
provision was recently extended through December 31, 2009.
For fiscal year 2008, management expects gross profit as a percentage of net sales of the Craftmade
segment to slightly improve from the results generated in the fiscal year ended June 30, 2007, as
Craftmade begins to realize the benefits obtained from its competitive sourcing efforts in China.
Gross profit as a percentage of net sales of the TSI segment increased 2.2% to 25.6% of net sales
for the fiscal year ended June 30, 2007, compared to 23.4% of net sales in the same prior year
period, as summarized in the following table:
Gross Profit as a Percentage of Net Sales of TSI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade |
|
Design |
|
Segment |
Fiscal Year Ended |
|
Source |
|
Trends |
|
Total |
June 30, 2007 |
|
|
25.6 |
% |
|
|
25.5 |
% |
|
|
25.6 |
% |
June 30, 2006 |
|
|
21.4 |
% |
|
|
26.6 |
% |
|
|
23.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent increase/(decrease) |
|
|
4.2 |
% |
|
|
(1.1 |
%) |
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as a percentage of net sales increased at Trade Source primarily due to the
Companys acquisition of Marketing Impressions which allowed PHI to directly source certain of its
fan accessory products. In addition, Trade Source benefited from lower costs associated with
markdowns and product resets primarily as a result of the previously described loss of the indoor
and outdoor lighting product orders by Lowes. On the other hand, Design Trends gross profit as a
percentage of net sales decreased primarily as a result of higher amounts set aside for vendor
programs with Lowes as compared to the prior fiscal year.
For fiscal year 2008, gross profit as a percentage of net sales of the TSI segment is expected to
remain consistent with the fiscal year ended June 30, 2007, provided that the segment maintains a
sales mix, customer concentration, and level of vendor program commitment similar to what it
maintained during fiscal year 2007.
Selling, General and Administrative Expenses. Total selling, general and administrative (SG&A)
expenses of the Company increased $1,256,000 to $21,151,000 or 20.5% of net sales for the fiscal
year ended June 30, 2007, compared to $19,895,000 or 16.9% of net sales for the same period last
year.
Selling, General and Administrative Expenses
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
Fiscal Year |
|
|
(Decrease) |
|
|
|
June 30, |
|
|
June 30, |
|
|
Over Prior |
|
|
|
2007 |
|
|
2006 |
|
|
Year Period |
|
Advertising |
|
$ |
2,161 |
|
|
$ |
1,514 |
|
|
$ |
647 |
|
Salaries and wages |
|
|
7,135 |
|
|
|
6,821 |
|
|
|
314 |
|
Accounting, legal and consulting |
|
|
2,237 |
|
|
|
2,065 |
|
|
|
172 |
|
Other |
|
|
9,618 |
|
|
|
9,495 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,151 |
|
|
$ |
19,895 |
|
|
$ |
1,256 |
|
|
|
|
|
|
|
|
|
|
|
The increase in advertising expenses primarily resulted from (i) an investment in Teiber
product displays to support
the increase in Teiber net sales, (ii) an increase in direct marketing to support the cornice
window treatment program and (iii) an increase in catalog expense as a result of a new product
catalog for Craftmade which introduced new ceiling fans and other products.
Increases in salaries and wages primarily resulted from increases in salaries of current employees
to remain competitive with market conditions.
22
Accounting, legal and consulting fees increased as a result of (i) consulting expense resulting
from the acquisition of Marketing Impressions and (ii) increased legal and consulting fees from the
Companys exploration of strategic alternatives.
Management anticipates that based on current market conditions, SG&A expenses as a percentage of
net sales for fiscal year 2008 will be relatively consistent with results generated in fiscal year
2007.
Depreciation and Amortization. Depreciation and amortization expense of the Company increased
$205,000 to $799,000 for the fiscal year ended June 30, 2007, compared to $594,000 for the same
period last year. The increase resulted from depreciation and amortization of the fixed assets,
non-compete covenants and intellectual property obtained by the Company as a result of the
acquisition of Marketing Impressions. See Note 3 Acquisitions in the Notes to the Consolidated
Financial Statements for additional information.
Interest Expense. Net interest expense of the Company increased $257,000 to $1,441,000 for the
fiscal year ended June 30, 2007 from $1,184,000 for the fiscal year ended June 30, 2006. This
increase was primarily the result of (i) higher interest rates in effect during the fiscal year
ended June 30, 2007, compared to the prior fiscal year and (ii) higher average outstanding balances
on the Companys sources of debt as a result of cash used to fund the acquisition of Marketing
Impressions and increases in inventory due to the transition of ceiling fan manufacturing from
Taiwan to China.
Minority Interests. Minority interests decreased $1,923,000 to $1,507,000 for the fiscal year
ended June 30, 2007, compared to $3,430,000 for the same period in the previous fiscal year. The
decrease in minority interests resulted from the acquisition of Marketing Impressions which
increased the Companys effective ownership of PHI to 100% and eliminated minority interest in
connection with PHI. The decrease in minority interests was also impacted by decreased profits at
Design Trends as a result of the decline in net sales as previously discussed.
Provision for Income Taxes. The provision for income tax was $1,482,000 or 20.0% of income before
income taxes for the fiscal year ended June 30, 2007, compared to $3,266,000 or 31.5% of income
before taxes for the fiscal year ended June 30, 2006. The decrease in effective rate primarily
resulted from anticipated refunds from lower state apportionment rates applied to prior periods and
a reduction in amounts set aside for tax contingencies. See Note 5 Income Taxes in the notes
to the consolidated financial statements for further discussion. Management anticipates that the
Companys effective tax rate for fiscal year 2008 will return to more historical levels of
approximately 34.5%.
23
Fiscal year ended June 30, 2006 compared to fiscal year ended June 30, 2005
Income Statement by Segment
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
Fiscal Year Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
|
Craftmade |
|
|
TSI |
|
|
Total |
|
|
Craftmade |
|
|
TSI |
|
|
Total |
|
Net sales |
|
$ |
62,902 |
|
|
$ |
55,152 |
|
|
$ |
118,054 |
|
|
$ |
55,663 |
|
|
$ |
63,143 |
|
|
$ |
118,806 |
|
Cost of goods sold |
|
|
(40,361 |
) |
|
|
(42,224 |
) |
|
|
(82,585 |
) |
|
|
(35,352 |
) |
|
|
(48,008 |
) |
|
|
(83,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
22,541 |
|
|
|
12,928 |
|
|
|
35,469 |
|
|
|
20,311 |
|
|
|
15,135 |
|
|
|
35,446 |
|
Gross profit as a % of net sales |
|
|
35.8 |
% |
|
|
23.4 |
% |
|
|
30.0 |
% |
|
|
36.5 |
% |
|
|
24.0 |
% |
|
|
29.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
|
(13,449 |
) |
|
|
(6,446 |
) |
|
|
(19,895 |
) |
|
|
(13,372 |
) |
|
|
(7,131 |
) |
|
|
(20,503 |
) |
As a % of net sales |
|
|
21.4 |
% |
|
|
11.7 |
% |
|
|
16.9 |
% |
|
|
24.0 |
% |
|
|
11.3 |
% |
|
|
17.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(575 |
) |
|
|
(19 |
) |
|
|
(594 |
) |
|
|
(537 |
) |
|
|
(44 |
) |
|
|
(581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(14,024 |
) |
|
|
(6,465 |
) |
|
|
(20,489 |
) |
|
|
(13,909 |
) |
|
|
(7,175 |
) |
|
|
(21,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
8,517 |
|
|
|
6,463 |
|
|
|
14,980 |
|
|
|
6,402 |
|
|
|
7,960 |
|
|
|
14,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(1,104 |
) |
|
|
(80 |
) |
|
|
(1,184 |
) |
|
|
(973 |
) |
|
|
(108 |
) |
|
|
(1,081 |
) |
Other expenses |
|
|
(35 |
) |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
and minority interests |
|
|
7,378 |
|
|
|
6,418 |
|
|
|
13,796 |
|
|
|
5,429 |
|
|
|
7,852 |
|
|
|
13,281 |
|
Provision for income taxes |
|
|
(2,501 |
) |
|
|
(765 |
) |
|
|
(3,266 |
) |
|
|
(1,895 |
) |
|
|
(1,184 |
) |
|
|
(3,079 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests |
|
|
4,877 |
|
|
|
5,653 |
|
|
|
10,530 |
|
|
|
3,534 |
|
|
|
6,668 |
|
|
|
10,202 |
|
Minority interests |
|
|
|
|
|
|
(3,430 |
) |
|
|
(3,430 |
) |
|
|
|
|
|
|
(3,775 |
) |
|
|
(3,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,877 |
|
|
$ |
2,223 |
|
|
$ |
7,100 |
|
|
$ |
3,534 |
|
|
$ |
2,893 |
|
|
$ |
6,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales. Net sales for the Company decreased $752,000 or 0.6% to $118,054,000 for the
fiscal year ended June 30, 2006, compared to $118,806,000 for the fiscal year ended June 30, 2005.
The decrease in net sales resulted from a decrease in net sales of the TSI segment, partially
offset by stronger net sales of the Craftmade segment.
Net sales from the Craftmade segment increased $7,239,000 or 13.0% to $62,902,000 for the fiscal
year ended June 30, 2006 from $55,663,000 for the fiscal year ended June 30, 2005. The increase
resulted from $6,365,000 of incremental net sales from the product lines associated with the March
1, 2005 acquisition of Teiber as the Teiber customer base continues to expand. The current fiscal
year includes 12 months of Teiber, compared to four months in the prior year. The remaining
$874,000 increase in sales of the Craftmade segment resulted from an increase in sales partially
due to newly-introduced products such as Durocraft gauges, the builder-targeted ceiling fans and
Accolade lighting products.
Net sales of the TSI segment declined $7,991,000 or 12.7% to $55,152,000 for the fiscal year ended
June 30, 2006 from $63,143,000 for the fiscal year ended June 30, 2005. Increases in PHIs net
sales were offset by decreases in Trade Source and Design Trends net sales, as summarized in the
following table:
Net Sales of TSI Segment
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSI |
|
|
|
Trade |
|
|
Design |
|
|
|
|
|
|
Segment |
|
Fiscal Year Ended |
|
Source |
|
|
Trends |
|
|
PHI |
|
|
Total |
|
June 30, 2006 |
|
$ |
20,334 |
|
|
$ |
21,780 |
|
|
$ |
13,038 |
|
|
$ |
55,152 |
|
June 30, 2005 |
|
|
21,838 |
|
|
|
30,022 |
|
|
|
11,283 |
|
|
|
63,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar increase/(decrease) |
|
$ |
(1,504 |
) |
|
$ |
(8,242 |
) |
|
$ |
1,755 |
|
|
$ |
(7,991 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent increase/(decrease) |
|
|
(6.9 |
%) |
|
|
(27.5 |
%) |
|
|
15.6 |
% |
|
|
(12.7 |
%) |
24
The decrease in Trade Source net sales was primarily the result of a sales decline from the
Wal-Mart indoor/outdoor lighting and mix and match fan program. Historically, Trade Source has
provided Wal-Mart with these products by direct import from Asia. Wal-Mart now sources a
significant amount of these products directly with the balance still being provided by Trade
Source. The decrease in net sales also resulted from PHIs fan accessory sales in the current
fiscal year that were made by Trade Source in the prior fiscal year. Strong sales of promotional
lighting items, window covering treatments, and non-core products offset the decrease in net sales.
The decline in Design Trends net sales was primarily due to the previously disclosed loss of four
of Lowes 11 regional distribution centers in an attempt by Lowes to mitigate the risk associated
with maintaining a sole supplier for a given product line, and a change in Lowes merchandising
system. During the fiscal year ended June 30, 2006, Lowes decided to change its merchandising
concept to one that will be based on Lowes private label, which resulted in the discontinuance of
the Design Trends merchandising display. The Company was asked to repurchase a portion of the
existing inventory under the old Design Trends packaging and replace it with Lowes private label
packaging. Design Trends agreed to replace a portion of the inventory and as a result, Design
Trends initially offered and is currently offering approximately 60% of the items in the new set
for the Lowes stores supplied by the seven of 11 regional distribution centers that it currently
services.
The increase in net sales of PHI primarily resulted from increased sales of the fan accessory and
lamp replacement parts business to Lowes. Other increases in net sales over the prior year are
due to PHIs sales of fan accessories to Wal-Mart that were made by Trade Source in the prior year.
Gross Profit. Gross profit of the Company as a percentage of net sales increased 0.2% to 30.0% for
the fiscal year ended June 30, 2006, compared to 29.8% for the fiscal year ended June 30, 2005.
Gross profit as a percentage of net sales of the Craftmade segment decreased 0.7% to 35.8% for the
fiscal year ended June 30, 2006, compared to 36.5% in the fiscal year ended June 30, 2005. The
decline was primarily attributable to increased costs of goods sold as a result of the decline of
the U.S. dollar in relation to the Taiwan dollar, an increase in sales of product lines that carry
a slightly lower gross margin as a percentage of sales, and the costs associated with removing
portable lamps as a product line and the related inventory. This was partially offset by benefits
obtained in the fiscal year 2006 from the temporary exemption of the 4.7% duty on imported ceiling
fans as prescribed by the AJCA. The AJCA contains a provision that allows ceiling fans for
permanent installation to enter the U.S. duty-free between November 6, 2004 and December 31, 2006.
In the fiscal year ended June 30, 2006, the Company determined it was eligible for the duty
exemption and received an estimated $945,000 benefit. In addition, the Company recovered an
additional $255,000 of duties that is related to the fiscal year ended June 30, 2005.
The gross profit as a percentage of net sales of the TSI segment decreased 0.6% to 23.4% of net
sales for the fiscal year ended June 30, 2006, compared to 24.0% of net sales in the same prior
year period, as summarized in the following table:
Gross Profit as a Percentage of Net Sales of TSI Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSI |
|
|
Trade |
|
Design |
|
|
|
|
|
Segment |
Fiscal Year Ended |
|
Source |
|
Trends |
|
PHI |
|
Total |
June 30, 2006 |
|
|
13.5 |
% |
|
|
26.6 |
% |
|
|
33.7 |
% |
|
|
23.4 |
% |
June 30, 2005 |
|
|
16.6 |
% |
|
|
25.2 |
% |
|
|
35.0 |
% |
|
|
24.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent increase/(decrease) |
|
|
(3.1 |
%) |
|
|
1.4 |
% |
|
|
(1.3 |
%) |
|
|
(0.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as a percentage of net sales decreased at Trade Source from a change in product
mix. Design Trends gross profit as a percentage of net sales decreased from a change in product
mix, offset by lower amounts set aside for vendor programs to Lowes. Gross profit as a percentage
of net sales decreased at PHI from a change in product mix.
25
Selling, General and Administrative Expenses. Total SG&A expenses of the Company decreased
$608,000 to $19,895,000, or 16.9% of net sales, for the fiscal year ended June 30, 2006, compared
to $20,503,000 or 17.3% of net sales for the prior fiscal year.
Selling, General and Administrative Expenses
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
(Decrease) |
|
|
|
Fiscal Year Ended |
|
|
Over |
|
|
|
June 30, |
|
|
June 30, |
|
|
Prior Year |
|
|
|
2006 |
|
|
2005 |
|
|
Period |
|
Salaries and wages |
|
$ |
6,821 |
|
|
$ |
6,220 |
|
|
$ |
601 |
|
Accounting, legal and consulting |
|
|
2,065 |
|
|
|
3,709 |
|
|
|
(1,644 |
) |
Other |
|
|
11,009 |
|
|
|
10,574 |
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,895 |
|
|
$ |
20,503 |
|
|
$ |
(608 |
) |
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended June 30, 2006, the increase in salaries and wages over the fiscal
year ended June 30, 2005, resulted from higher salaries due to adjustments of current employees to
remain competitive with market conditions as well as the addition of seven Teiber employees hired
on March 1, 2005 (the current fiscal year includes 12 months of Teiber expenses, compared to four
months in the prior fiscal year). There were 131 employees at June 30, 2006, compared to 130
employees at June 30, 2005.
Lower accounting, legal and consulting fees in the fiscal year ended June 30, 2006 were primarily
due to lower costs incurred to address internal controls issues and comply with Section 404 of the
Sarbanes-Oxley Act of 2002 (Section 404) as a result of implementing streamlined processes and
efficiencies gained in year two and higher costs in the fiscal year ended June 30, 2005 to address
internal control issues and the evaluation of FIN 46R with respect to the Companys 50% owned
subsidiaries.
Increases in other SG&A expenses of the Company primarily resulted from 12 months of Teiber
expenses included in fiscal year 2006, compared to only four months in fiscal year 2005, offset by
a decrease in other general expenses.
Interest Expense. Net interest expense of the Company increased $103,000 to $1,184,000 for the
fiscal year ended June 30, 2006 from $1,081,000 for the fiscal year ended June 30, 2005. This
increase was primarily the result of higher interest rates in effect during the period on the
Companys outstanding revolving line of credit with Frost Bank, offset by the effects of a
reduction in overall interest-bearing debt. The average outstanding balance on the Companys
facility note was lower during the 2006 fiscal year than during the 2005 fiscal year, while the
interest rate on the facility note remained unchanged during the 2006 fiscal year compared to the
2005 fiscal year.
Minority Interests. Minority interests generated by the Companys 50% owned subsidiaries decreased
$345,000 to $3,430,000 for the fiscal year ended June 30, 2006, compared to $3,775,000 for the same
period in the previous year. The decrease was due to the decline in profit of Design Trends,
partially offset by an increase in profit of PHI, as discussed above.
Provision for Income Taxes. The provision for income tax was $3,266,000 or 31.5% of income before
income taxes, for the fiscal year ended June 30, 2006, compared to $3,079,000 or 32.4% of income
before taxes for the fiscal year ended June 30, 2005. The decrease in the provision for income
taxes as a percentage of income before income taxes primarily resulted from lower state taxes and
the tax benefit obtained from the repatriation of undistributed foreign earnings under the AJCA.
The AJCA created a temporary incentive for U.S. multinationals to repatriate accumulated income
earned outside the U.S. at an effective tax rate of 5.25%, versus the U.S. federal statutory rate
of 34%. The Company repatriated $9,225,000 in the fiscal year ended June 30, 2006. Beginning in
fiscal year 2007, the Company began recording foreign earnings at the full statutory rate and
assumed that all foreign earnings would be repatriated.
26
Liquidity and Capital Resources
Fiscal year ended June 30, 2007
The Companys cash decreased $1,236,000 from $2,164,000 at June 30, 2006 to $928,000 at June
30, 2007. Cash decreased as a result of the Company sweeping excess cash balances against its line
of credit on a daily basis at PHI beginning in the quarter ended December 31, 2006, funds used to
acquire Marketing Impressions and lower net income in the current fiscal year as compared to prior
fiscal years. Net cash provided by the Companys operating activities decreased $792,000 to
$7,042,000 for the fiscal year ended June 30, 2007, compared to $7,834,000 for the same period last
year. The decrease in cash flow from operations resulted primarily from (a) lower net income, (b)
lower accounts payable from the settlement of balances arising from the acquisition of Marketing
Impressions and (c) a reduction in accrued customer allowances primarily from the loss of the
indoor and outdoor lighting business with Lowes. These amounts were offset by lower accounts
receivable and inventory balances driven in part by lower net sales in the current fiscal year.
The $3,607,000 of cash used in investing activities was primarily related to the acquisition
of Marketing Impressions and the ongoing upgrade of existing computer systems.
Cash used in financing activities primarily resulted from (i) cash dividends of $2,498,000,
(ii) distributions to minority interest members totaling $1,674,000 and (iii) principal payments on
the Companys notes payable of $1,134,000. These amounts were offset by $671,000 of proceeds from
our line of credit.
The Companys management believes that its current lines of credit, combined with cash flows
from operations, are adequate to fund the Companys current operating needs, debt service payments
and any future dividend payments, as well as its projected growth over the next twelve months. In
the event that the Company requires additional capital for growth, management believes that the
Company can obtain favorable refinancing of its warehouse facility. There can be no assurances,
however, that any type of financing arrangement will be consummated.
Management anticipates that future cash flows will be used primarily to retire existing debt,
pay dividends, fund potential acquisitions or other investments that will enhance long-term
shareholder value and distribute earnings to its minority interest member. The Company remains
committed to its business strategy of creating long-term earnings growth, maximizing stockholder
value through internal improvements, making selective acquisitions and dispositions of assets,
focusing on cash flow and retaining quality personnel.
Management believes that given the current volatility in the housing and debt markets, it is
in the best interest of long-term shareholder value to pursue selective and opportunistic
acquisitions in order to achieve more advantageous growth objectives through enhanced product
offerings and potentially expanding into adjacent product categories and sales channels, which will
be less reliant on the overall housing environment. The Company is currently evaluating several
acquisition candidates and is currently engaged in discussions with some of them. There can be no
assurances, however, that any agreement will be reached or that any transaction will be
consummated.
27
Contractual Obligations
The table below, as well as the information contained in Note 4 Long-Term Obligations and
Note 9 Commitments and Contingencies in the notes to the Companys consolidated financial
statements, summarizes the Companys various repayment requirements at June 30, 2007. The Company
expects to meet these obligations with cash flows from existing operations or the ability to renew
and extend its line of credit.
Summary of Contractual Obligations
At June 30, 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
Contractual |
|
|
|
|
|
Less than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
More than |
|
Obligations |
|
Total |
|
|
1 year |
|
|
Years |
|
|
Years |
|
|
5 years |
|
Lines of credit |
|
$ |
18,825 |
|
|
$ |
|
|
|
$ |
18,825 |
|
|
$ |
|
|
|
$ |
|
|
Note payable |
|
|
223 |
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
235 |
|
|
|
128 |
|
|
|
100 |
|
|
|
7 |
|
|
|
|
|
Capital lease obligations |
|
|
154 |
|
|
|
41 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
Guaranteed royalties |
|
|
270 |
|
|
|
71 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
Assumed interest(1) |
|
|
2,808 |
|
|
|
1,299 |
|
|
|
1,509 |
|
|
|
|
|
|
|
|
|
Contingent consideration(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,515 |
|
|
$ |
1,762 |
|
|
$ |
20,746 |
|
|
$ |
7 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Assumed interest calculated at the interest rate in effect at June 30, 2007 for each
obligation. |
|
(2) |
|
The Company is contractually obligated to pay contingent consideration based on
future levels of adjusted gross profit in connection with its acquisition of Marketing Impressions.
We have not estimated the amounts of these payments given their contingent nature. |
Lines of Credit and Notes Payable
The Companys current revolving lines of credit and notes payable are summarized in the following
table:
Summary of Revolving Lines of Credit and Notes Payable
At June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
Commitment |
|
|
Balance |
|
|
Interest Rate |
|
|
Maturity |
|
Revolving line of credit |
|
$ |
30,000,000 |
|
|
$ |
18,825,000 |
|
|
LIBOR plus 1.5% |
|
September 1, 2009 |
Note payable facility |
|
|
N/A |
|
|
|
223,000 |
|
|
|
8.302 |
% |
|
January 1, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,048,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 18, 2006, the Company entered into a Second Amended and Restated Loan
Agreement (the Frost Loan Agreement) with The Frost National Bank, San Antonio, Texas (Frost).
The Frost Loan Agreement amends the Restated Loan Agreement dated October 31, 2005, between
Craftmade and Frost. Also, on September 18, 2006, Craftmade executed a Revolving Promissory Note
(the Note) payable to the order of Frost, in the principal amount of $30,000,000 or the amount
equal to the borrowing base calculated on eligible accounts receivable and inventory, with an
interest rate equal to LIBOR plus 1.5%. The LIBOR rate in effect at June 30, 2007 was 5.32%.
There was $4,505,000 available to borrow under the Note at June 30, 2007. The Note will mature on
September 1, 2009.
The Frost Loan Agreement contains financial covenants that require Craftmade to maintain a
ratio of total liabilities (excluding any subordinated debt) to tangible net worth of not greater
than 3.0 to 1.0 and a Fixed Charge Coverage Ratio (as defined in the Frost Loan Agreement) of not
less than 1.25 to 1.0, tested quarterly. The Company is in compliance with all of its covenants at
June 30, 2007. Design Trends and all wholly-owned subsidiaries of Craftmade have agreed to be
guarantors of the
Frost Loan Agreement (the Guarantors). Craftmade and each of the Guarantors have granted a
security interest to Frost in each of their accounts receivable and inventory.
28
At June 30, 2007, $223,000 remained outstanding under the note payable for the Companys
378,000 square foot operating facility. The loan is payable in equal monthly installments of
$100,378 of principal and interest at 8.302%. The Companys management believes that this facility
will be sufficient for its purposes for the foreseeable future. The facility note payable matures
on January 1, 2008, but was fully repaid in August 2007.
Management does not anticipate that the covenants and other restrictions contained in its
lines of credit and loan agreements will limit the Companys current operations.
Operating and Capital Lease Obligations
Operating and capital lease obligations include rents for the Companys properties (see Item 2. Properties.), its telephone system and computer equipment.
Guaranteed Royalties
Guaranteed royalties represent guaranteed minimum payments under a licensing agreement.
Inflation
The Company believes that inflation has not had a material impact upon the Companys results
of operations for each of the three fiscal years ended June 30, 2007. However, there can be no
assurance that future inflation will not have an adverse impact upon the Companys operating
results and financial condition.
Fiscal year ended June 30, 2006
The Companys cash decreased $6,981,000 from $9,145,000 at June 30, 2005 to $2,164,000 at June
30, 2006. Cash decreased as a result of the Company sweeping excess cash balances against its line
of credit on a daily basis beginning in the second quarter of fiscal 2006. Net cash provided by
the Companys operating activities increased $483,000 to $7,834,000 for the fiscal year ended June
30, 2006, compared to $7,351,000 for the fiscal year ended June 30, 2005. Increases in cash
provided in various operating activities were partially offset by increased inventory balances at
year end to support the increase in Teiber sales, window cornices, and increased levels of
inventory in advance of sourcing products from different suppliers in Asia.
The $233,000 of cash used in investing activities related to additions to property and
equipment, which consisted primarily of upgrading the Companys computer equipment.
Cash used in financing activities of $14,582,000 was primarily the result (i) net payments on
the Companys revolving lines of credit of $6,393,000, (ii) principal payments on the Companys
notes payable of $1,513,000, (iii) distributions to minority interest members totaling $3,859,000,
(iv) cash dividends of $2,404,000, and (v) a decrease in book overdrafts of $450,000. Net payments
on the Companys primary revolving line of credit during fiscal year 2006 were higher during fiscal
year 2005 as a result of the Company sweeping excess cash balances against its line of credit on a
daily basis and the use of cash during fiscal year 2005 in part to fund the acquisition of Teiber.
Fiscal year ended June 30, 2005
The Companys cash increased $3,307,000 from $5,838,000 at June 30, 2004 to $9,145,000 at June
30, 2005. The Companys operating activities provided cash of $7,351,000, which was primarily
attributable to income before depreciation, provision for bad debts, stock compensation expense,
deferred income taxes and changes in minority interest.
The $4,121,000 increase in cash used in investing activities primarily related to cash used to
fund the acquisition of Teiber. There were also additions to property and equipment, which
consisted primarily of purchases of computer equipment and office furniture, and additions to other
intangibles that consisted of the purchase of patents.
29
Cash used in financing activities of $77,000 was primarily the result of (i) repurchases of
the Companys outstanding common stock of $2,925,000, (ii) distributions to minority interest
members of $1,668,000, (iii) cash dividends of $2,036,000 and (iv) principal payments on the
Companys notes payable of $2,740,000. These amounts were partially offset by (i) net advances on
the Companys revolving lines of credit of $8,423,000, (ii) proceeds from the exercise of employee
stock options of $503,000, and (iii) an increase in book overdrafts of $520,000.
On December 9, 2003, the Companys Board of Directors authorized the Companys management to
repurchase up to 500,000 shares of the Companys outstanding common stock. As of December 31, 2004,
the Company had repurchased 494,463 shares at an aggregate cost of $11,194,000 under this program.
The average price paid per share repurchased was $22.63. Although no expiration date was specified
for the repurchase program, it was substantially complete as of December 31, 2004. No shares were
purchased by the Company other than through publicly announced plans or programs.
Effects of Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (SFAS 159). This statement permits
entities to choose to measure many financial instruments and certain other items at fair value.
Companies should report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. This statement is effective as of the
beginning of an entitys first fiscal year that begins after November 15, 2007. The Company is
currently assessing the potential impact, if any, of the adoption of SFAS 159 on its consolidated
financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, Fair
Value Measurements (SFAS 157). This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value measurements. This statement applies under other accounting pronouncements that require
or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November
15, 2007. The Company is currently assessing the impact that the adoption of SFAS 157 will have on
its consolidated financial statements.
In September 2006, the SEC issued Securities and Exchange Commission Staff Accounting Bulletin
No. 108 (SAB 108) in order to eliminate the diversity of practice surrounding how public
companies quantify financial statement misstatements. In SAB 108, the SEC staff established an
approach that requires quantification of financial statement misstatements based on the effects of
the misstatements on each of the Companys financial statements and the related financial statement
disclosures. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company
adopted SAB 108 in fiscal 2007. It did not have a material impact on its consolidated financial
statements.
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes (FIN
48), which requires the use of a two-step approach for recognizing and measuring tax benefits
taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax
positions. We are required to adopt FIN 48 effective July 1, 2007. The cumulative effect of
initially adopting FIN 48 is to record an adjustment to opening retained earnings in the year of
adoption. Only tax positions that meet the more likely than not recognition threshold at the
effective date may be recognized upon adoption of FIN 48. The Company is evaluating the impact of
implementing the provisions of FIN 48 on its financial position and future results of operations,
but does not expect that the impact will be material.
Related Party Transactions
None.
30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Risk
Substantially all of the Companys inventory and other purchases are made in U.S. dollars
in order to limit its exposure to foreign currency fluctuations.
Interest Rate Exposure
The Company does not use derivative financial instruments to hedge interest rate exposure.
The Company sweeps any excess cash balances against its line of credit on a daily basis to
minimize balances outstanding and corresponding interest expense. The Company believes that
its interest rate exposure in modest. As of June 30, 2007, the Company had $18,825,000 million
in borrowings outstanding on its line of credit with the Frost National Bank. A hypothetical
5% adverse change in interest rates would have a negligible impact on the Companys earnings
and cash flows.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data are included under Item 15(a)(1) and 15(a)(2)
of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
|
(a) |
|
Evaluation of Disclosure Controls and Procedures |
|
|
|
|
As of the end of the period covered by this report, the Companys management conducted an
evaluation, under the supervision and with the participation of the principal executive
officer and principal financial officer, of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). |
|
|
|
|
Based on this evaluation, the principal executive officer and principal financial officer
concluded that, as of the end of the period covered by this report, the Companys
disclosure controls and procedures are effective. Notwithstanding the foregoing, a control
system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that it will detect or uncover failures within the Company to disclose
material information otherwise required to be set forth in the Companys periodic reports. |
|
|
(b) |
|
Managements Annual Report on Internal Control Over Financial Reporting |
|
|
|
|
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).
Under the supervision and with the participation of management, including the principal
executive officer and principal financial officer, the Company conducted an evaluation of
the effectiveness of the Companys internal control over financial reporting based on the
framework in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. |
|
|
|
|
Based on the Companys evaluation under the framework in Internal Control Integrated
Framework, the Companys management concluded that its internal control over financial
reporting was effective as of June 30, 2007. |
31
|
(c) |
|
Report of Independent Registered Public Accounting Firm |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Craftmade International, Inc.
Coppell, Texas
We have audited the effectiveness of the internal control over financial reporting
maintained by Craftmade International, Inc. and Subsidiaries (the Company) as of June 30,
2007, based on the criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management of the Company is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on the effectiveness of
the internal control over financial reporting of the Company based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, testing and evaluating the
design and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of June 30, 2007, based on criteria established in
Internal Control Integrated Framework issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Craftmade
International, Inc. and Subsidiaries as of June 30, 2007 and 2006, and the related
consolidated statements of income, stockholders equity, and cash flows for the three years
in the period ended June 30, 2007. We have also audited the schedule listed in Item
15(a)(2) for this Form 10-K for the three years in the period ended June 30, 2007. Our
report dated September 5, 2007 expressed an unqualified opinion on those consolidated
financial statements and schedule.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Dallas, Texas
September 5, 2007
|
(d) |
|
Changes in Internal Control Over Financial Reporting |
|
|
|
|
During the quarter ended June 30, 2007, there were no changes in our internal control over
financial reporting identified in connection with the evaluation described above that have
materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting. |
32
Item 9B. Other Information.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated herein by reference to the Proxy
Statement.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The following table sets forth as of June 30, 2007: (i) the number of securities to be issued
upon exercise of outstanding options, (ii) the weighted average of exercise price of such
outstanding options, and (iii) the number of securities remaining available for future issuance
under equity compensation plans that have been approved by security holders of the Company.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
Number of |
|
|
|
|
|
|
Remaining |
|
|
|
Securities |
|
|
Weighted- |
|
|
Available |
|
|
|
to be Issued |
|
|
Average |
|
|
for Future |
|
|
|
Upon |
|
|
Exercise |
|
|
Issuance |
|
|
|
Exercise of |
|
|
Price of |
|
|
Under Equity |
|
|
|
Outstanding |
|
|
Outstanding |
|
|
Compensation |
|
Plan Category |
|
Options (#) |
|
|
Options ($) |
|
|
Plans (#) |
|
1999 Stock Option Plan |
|
|
3,500 |
|
|
$ |
6.75 |
|
|
|
|
|
2000 Non-Employee Director Plan |
|
|
15,000 |
|
|
|
18.48 |
|
|
|
|
|
2007 Long-Term Incentive Plan |
|
|
80,600 |
|
|
|
18.47 |
|
|
|
319,400 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
99,100 |
|
|
$ |
18.06 |
|
|
|
319,400 |
|
|
|
|
|
|
|
|
|
|
|
The remaining information required by this Item is incorporated by reference to the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by reference to the Proxy
Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated herein by reference to the Proxy
Statement.
33
PART IV
Item 15. Exhibits and Financial Statement Schedules.
|
(a) |
|
The following documents are filed as part of this report: |
|
1. |
|
Consolidated Financial Statements The consolidated financial statements
listed in the Index to Consolidated Financial Statements described at F-1 are
incorporated by reference herein. |
|
|
2. |
|
Financial Statement Schedule The financial statement schedule Schedule II
Valuation and Qualifying Accounts on page F-34 is incorporated by reference herein.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted. |
|
|
3. |
|
Exhibits Certain of the exhibits to this Annual Report are hereby
incorporated by references, as summarized in (b) below. |
|
(b) |
|
Exhibits |
|
|
|
|
A list of exhibits required to be filed as part of this report is set forth in the Exhibit
Index immediately following the Consolidated Financial Statements filed as part of this
report on Form 10-K and is incorporated herein by reference. |
|
|
(c) |
|
All other financial statement schedules have been omitted since they are either not
required, not applicable or the required information is shown in the financial statements
or related notes. |
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on September 11, 2007.
|
|
|
|
|
CRAFTMADE INTERNATIONAL, INC. |
|
|
|
|
|
|
|
By:
|
|
/s/ James R. Ridings
James R. Ridings
|
|
|
|
|
Chairman of the Board and Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signatures |
|
Capacity |
|
Date |
|
|
|
|
|
/s/ James R. Ridings
James R. Ridings
|
|
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
|
|
September 11, 2007 |
|
|
|
|
|
/s/ Brad Dale Heimann
Brad Dale Heimann
|
|
President and Chief Operating Officer
|
|
September 11, 2007 |
|
|
|
|
|
/s/ J. Marcus Scrudder
J. Marcus Scrudder
|
|
Chief Financial Officer (Principal
Financial Officer)
|
|
September 11, 2007 |
|
|
|
|
|
/s/ Clifford Crimmings
Clifford Crimmings
|
|
Vice President of Marketing and
Director
|
|
September 11, 2007 |
|
|
|
|
|
/s/ John S. DeBlois
John S. DeBlois
|
|
Executive Vice President of Trade
Source International, Inc.
and Director
|
|
September 11, 2007 |
|
|
|
|
|
/s/ Michael L. Patton
Michael L. Patton
|
|
Chief Accounting Officer (Principal
Accounting Officer)
|
|
September 11, 2007 |
|
|
|
|
|
/s/ William E. Bucek
William E. Bucek
|
|
Director
|
|
September 11, 2007 |
|
|
|
|
|
/s/ L. Dale Griggs
L. Dale Griggs
|
|
Director
|
|
September 11, 2007 |
|
|
|
|
|
/s/ A. Paul Knuckley
A. Paul Knuckley
|
|
Director
|
|
September 11, 2007 |
|
|
|
|
|
/s/ R. Don Morris
R. Don Morris
|
|
Director
|
|
September 11, 2007 |
|
|
|
|
|
/s/ Lary Snodgrass
Lary Snodgrass
|
|
Director
|
|
September 11, 2007 |
|
|
|
|
|
/s/ Richard T. Walsh
Richard T. Walsh
|
|
Director
|
|
September 11, 2007 |
35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-7 |
|
|
|
|
|
|
|
|
|
F-9 |
|
|
|
|
|
|
Financial Statement Schedule: |
|
|
|
|
|
|
|
F-34 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Craftmade International, Inc.
Coppell, Texas
We have audited the accompanying consolidated balance sheets of Craftmade International, Inc.
and Subsidiaries (the Company) as of June 30, 2007 and 2006, and the related consolidated
statements of income, stockholders equity, and cash flows for the three years in the period ended
June 30, 2007. We have also audited the schedule listed in Item 15(a)(2) of this Form 10-K for the
three years in the period ended June 30, 2007. These financial statements and the schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the
financial statement and schedule. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company at June 30, 2007 and 2006, and the results
of its operations and its cash flows for the three years in the period ended June 30, 2007, in
conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects, the information
set forth herein for the three years in the period ended June 30, 2007.
As more fully described in Note 2 to the consolidated financial statements, effective July 1,
2005, the Company adopted the provisions of SFAS 123(R), Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control over financial
reporting as of June 30, 2007, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
and our report dated September 5, 2007, expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Dallas, Texas
September 5, 2007
F-2
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
103,350 |
|
|
$ |
118,054 |
|
|
$ |
118,806 |
|
Cost of goods sold |
|
|
(71,059 |
) |
|
|
(82,585 |
) |
|
|
(83,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
32,291 |
|
|
|
35,469 |
|
|
|
35,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
(21,151 |
) |
|
|
(19,895 |
) |
|
|
(20,503 |
) |
Depreciation and amortization |
|
|
(799 |
) |
|
|
(594 |
) |
|
|
(581 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(21,950 |
) |
|
|
(20,489 |
) |
|
|
(21,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
10,341 |
|
|
|
14,980 |
|
|
|
14,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(1,441 |
) |
|
|
(1,184 |
) |
|
|
(1,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
|
8,900 |
|
|
|
13,796 |
|
|
|
13,281 |
|
Provision for income taxes |
|
|
(1,482 |
) |
|
|
(3,266 |
) |
|
|
(3,079 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests |
|
|
7,418 |
|
|
|
10,530 |
|
|
|
10,202 |
|
Minority interests |
|
|
(1,507 |
) |
|
|
(3,430 |
) |
|
|
(3,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,911 |
|
|
$ |
7,100 |
|
|
$ |
6,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
5,204 |
|
|
|
5,201 |
|
|
|
5,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
5,206 |
|
|
|
5,211 |
|
|
|
5,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
1.14 |
|
|
$ |
1.37 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
1.14 |
|
|
$ |
1.36 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
0.48 |
|
|
$ |
0.48 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
928 |
|
|
$ |
2,164 |
|
Accounts receivable, net |
|
|
18,082 |
|
|
|
19,968 |
|
Inventories, net |
|
|
18,076 |
|
|
|
21,085 |
|
Income taxes receivable |
|
|
1,376 |
|
|
|
|
|
Deferred income taxes |
|
|
1,251 |
|
|
|
1,252 |
|
Prepaid expenses and other current assets |
|
|
1,503 |
|
|
|
822 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
41,216 |
|
|
|
45,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
8,379 |
|
|
|
8,098 |
|
Goodwill |
|
|
13,644 |
|
|
|
11,480 |
|
Other intangibles, net |
|
|
1,502 |
|
|
|
169 |
|
Other assets |
|
|
10 |
|
|
|
23 |
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
23,535 |
|
|
|
19,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
64,751 |
|
|
$ |
65,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Book overdrafts |
|
$ |
48 |
|
|
$ |
70 |
|
Accounts payable |
|
|
5,903 |
|
|
|
7,544 |
|
Other accrued expenses |
|
|
2,472 |
|
|
|
4,098 |
|
Current portion of long-term obligations |
|
|
264 |
|
|
|
3,308 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
8,687 |
|
|
|
15,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
|
|
|
Long-term obligations |
|
|
18,938 |
|
|
|
16,204 |
|
Deferred income taxes |
|
|
1,107 |
|
|
|
345 |
|
Other long-term liabilities |
|
|
|
|
|
|
793 |
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
20,045 |
|
|
|
17,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
28,732 |
|
|
|
32,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
3,495 |
|
|
|
3,662 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value, 2,000,000 shares authorized;
nil shares issued |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 15,000,000 shares authorized;
9,704,420 and 9,703,420 shares issued, respectively |
|
|
97 |
|
|
|
97 |
|
Additional paid-in capital |
|
|
17,831 |
|
|
|
17,757 |
|
Retained earnings |
|
|
52,722 |
|
|
|
49,309 |
|
Less: treasury stock, 4,499,920 common shares at cost |
|
|
(38,126 |
) |
|
|
(38,126 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
32,524 |
|
|
|
29,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interests and stockholders equity |
|
$ |
64,751 |
|
|
$ |
65,061 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,911 |
|
|
$ |
7,100 |
|
|
$ |
6,427 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
799 |
|
|
|
594 |
|
|
|
651 |
|
Provision for bad debts and inventories |
|
|
136 |
|
|
|
564 |
|
|
|
704 |
|
Loss on sale of property and equipment |
|
|
7 |
|
|
|
63 |
|
|
|
|
|
Stock compensation expense |
|
|
64 |
|
|
|
23 |
|
|
|
11 |
|
Deferred income taxes |
|
|
763 |
|
|
|
91 |
|
|
|
(1,203 |
) |
Minority interest |
|
|
1,507 |
|
|
|
3,430 |
|
|
|
3,775 |
|
Change in assets and liabilities providing/(using) cash,
net of acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,854 |
|
|
|
1,809 |
|
|
|
(1,488 |
) |
Inventories |
|
|
2,908 |
|
|
|
(3,527 |
) |
|
|
(1,246 |
) |
Prepaid expenses and other current assets |
|
|
(300 |
) |
|
|
(469 |
) |
|
|
374 |
|
Accounts payable |
|
|
(2,882 |
) |
|
|
(322 |
) |
|
|
(286 |
) |
Other accrued expenses |
|
|
(3,725 |
) |
|
|
(1,522 |
) |
|
|
(368 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
7,042 |
|
|
|
7,834 |
|
|
|
7,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Marketing Impressions, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
Initial payment and acquisition related costs, net of cash acquired |
|
|
(1,507 |
) |
|
|
|
|
|
|
|
|
Additional contingent consideration |
|
|
(1,601 |
) |
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(499 |
) |
|
|
(233 |
) |
|
|
(111 |
) |
Acquisition of Bill Teiber Co., Inc. |
|
|
|
|
|
|
|
|
|
|
(4,000 |
) |
Additions to other intangibles |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,607 |
) |
|
|
(233 |
) |
|
|
(4,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends |
|
|
(2,498 |
) |
|
|
(2,404 |
) |
|
|
(2,036 |
) |
Distributions to minority interest members |
|
|
(1,674 |
) |
|
|
(3,859 |
) |
|
|
(1,668 |
) |
Principal payments on notes payable |
|
|
(1,134 |
) |
|
|
(1,512 |
) |
|
|
(2,740 |
) |
Increase/(decrease) in book overdrafts |
|
|
(22 |
) |
|
|
(450 |
) |
|
|
520 |
|
Treasury stock purchases |
|
|
|
|
|
|
|
|
|
|
(2,925 |
) |
Proceeds from exercise of employee stock options |
|
|
10 |
|
|
|
37 |
|
|
|
503 |
|
Principal payments on capital lease |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
Net proceeds/(payments on) from lines of credit |
|
|
671 |
|
|
|
(6,394 |
) |
|
|
8,423 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities |
|
|
(4,671 |
) |
|
|
(14,582 |
) |
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash |
|
|
(1,236 |
) |
|
|
(6,981 |
) |
|
|
3,307 |
|
Cash at beginning of year |
|
|
2,164 |
|
|
|
9,145 |
|
|
|
5,838 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
928 |
|
|
$ |
2,164 |
|
|
$ |
9,145 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the fiscal year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,316 |
|
|
$ |
1,202 |
|
|
$ |
929 |
|
Income taxes |
|
|
2,719 |
|
|
|
3,033 |
|
|
|
4,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing activities: |
Dividends declared but not paid |
|
$ |
625 |
|
|
$ |
624 |
|
|
$ |
531 |
|
Property and equipment financed under capital lease |
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and additional paid-in-capital
issued in conjunction with acquisition |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in Series A Preferred Stock |
|
$ |
|
|
|
$ |
(32 |
) |
|
$ |
|
|
Decrease in additional paid-in capital |
|
|
|
|
|
|
(956 |
) |
|
|
|
|
Charge to retained earnings |
|
|
|
|
|
|
(893 |
) |
|
|
|
|
Decrease in preferred treasury stock |
|
|
|
|
|
|
1,881 |
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE THREE YEARS ENDED JUNE 30, 2007
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
|
Additional |
|
|
Unearned |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Preferred |
|
|
Paid-In |
|
|
Deferred |
|
|
Retained |
|
|
Treasury Stock |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Capital |
|
|
Compensation |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
Balance as of June 30, 2004 |
|
|
9,466 |
|
|
$ |
95 |
|
|
$ |
32 |
|
|
$ |
14,098 |
|
|
$ |
(11 |
) |
|
$ |
41,207 |
|
|
|
4,369 |
|
|
$ |
(37,082 |
) |
|
$ |
18,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the fiscal year ended June
30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,427 |
|
|
|
|
|
|
|
|
|
|
|
6,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,427 |
|
|
|
|
|
|
|
|
|
|
|
6,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Treasury stock purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163 |
|
|
|
(2,925 |
) |
|
|
(2,925 |
) |
Exercise of stock options |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501 |
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,036 |
) |
|
|
|
|
|
|
|
|
|
|
(2,036 |
) |
Acquisition of Bill Teiber Co., Inc. |
|
|
190 |
|
|
|
2 |
|
|
|
|
|
|
|
4,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2005 |
|
|
9,700 |
|
|
$ |
97 |
|
|
$ |
32 |
|
|
$ |
18,653 |
|
|
$ |
|
|
|
$ |
45,598 |
|
|
|
4,532 |
|
|
$ |
(40,007 |
) |
|
$ |
24,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the fiscal year ended June
30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,100 |
|
|
|
|
|
|
|
|
|
|
|
7,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,100 |
|
|
|
|
|
|
|
|
|
|
|
7,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options, net of tax benefit |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
Stock-based compensation charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,496 |
) |
|
|
|
|
|
|
|
|
|
|
(2,496 |
) |
Retirement of preferred stock |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
(956 |
) |
|
|
|
|
|
|
(893 |
) |
|
|
(32 |
) |
|
|
1,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
|
9,703 |
|
|
$ |
97 |
|
|
$ |
|
|
|
$ |
17,757 |
|
|
$ |
|
|
|
$ |
49,309 |
|
|
|
4,500 |
|
|
$ |
(38,126 |
) |
|
$ |
29,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY CONTINUED
FOR THE THREE YEARS ENDED JUNE 30, 2007
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Treasury Stock |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
Balance as of June 30, 2006 |
|
|
9,703 |
|
|
$ |
97 |
|
|
$ |
17,757 |
|
|
$ |
49,309 |
|
|
|
4,500 |
|
|
$ |
(38,126 |
) |
|
$ |
29,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the fiscal year ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,911 |
|
|
|
|
|
|
|
|
|
|
|
5,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,911 |
|
|
|
|
|
|
|
|
|
|
|
5,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options, net of tax benefit |
|
|
1 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Stock-based compensation charge |
|
|
|
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64 |
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,498 |
) |
|
|
|
|
|
|
|
|
|
|
(2,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2007 |
|
|
9,704 |
|
|
$ |
97 |
|
|
$ |
17,831 |
|
|
$ |
52,722 |
|
|
|
4,500 |
|
|
$ |
(38,126 |
) |
|
$ |
32,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Organization and Nature of the Company
Craftmade International, Inc., a Delaware corporation, is organized into two operating
segments: Craftmade International, Inc. (Craftmade) and Trade Source International, Inc.
(TSI). Craftmade is principally engaged in the design, distribution and marketing of
ceiling fans, light kits, outdoor lighting, interior lighting fixtures, bath-strip lighting,
light bulbs, door chimes, pushbuttons, ventilation systems and other lighting accessories
and related accessories to a nationwide network of lighting showrooms and electrical
wholesalers specializing in sales to the remodeling, new home construction and replacement
markets.
TSI is a wholly-owned subsidiary that was acquired on July 1, 1998. TSI also includes two
limited liability companies: Design Trends, LLC (Design Trends) which is 50% owned and
Prime/Home Impressions, LLC (PHI) which is wholly owned. The TSI segment is principally
engaged in the design, distribution and marketing of outdoor and indoor lighting, selected
ceiling fans and various fan accessories to mass merchandisers. Craftmade, TSI, their
wholly-owned subsidiaries and 50% owned limited liability company are collectively referred
to as the Company.
Note 2 Summary of Significant Accounting Policies
Basis of presentation The Companys consolidated financial statements include the accounts
of all wholly-owned subsidiaries and the accounts of its variable interest entity, Design
Trends (and Prime/Home Impressions for fiscal years prior to 2007), in which the Company is
the primary beneficiary. All significant intercompany accounts and transactions have been
eliminated. The functional currency of the Companys foreign subsidiaries is the United
States dollar. Certain prior year balances have been reclassified to conform to current
year presentation.
Accounts receivable Accounts receivable balances represent customer trade receivables
generated from the Companys operations and consist of the following:
Summary of Accounts Receivable
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Accounts receivable |
|
$ |
17,780 |
|
|
$ |
20,095 |
|
Other receivables |
|
|
553 |
|
|
|
166 |
|
Allowance for doubtful accounts |
|
|
(251 |
) |
|
|
(293 |
) |
|
|
|
|
|
|
|
Net accounts receivable |
|
$ |
18,082 |
|
|
$ |
19,968 |
|
|
|
|
|
|
|
|
Other receivables primarily consist of debit memos due from customers and vendors.
To reduce the potential for credit risk, the Company evaluates the collectibility of
customer balances based on a combination of factors but does not generally require
collateral. The Company regularly analyzes significant customer balances, and, when it
becomes evident a specific customer will be unable to meet its financial obligations to the
Company, such as in the case of bankruptcy filings or deterioration in the customers
operating results or financial position, a specific allowance for doubtful account is
recorded to reduce the related receivable to the amount that is believed reasonably
collectible. The Company also records allowances for doubtful accounts for all other
customers based on a variety of factors including the length of time the receivables are
past due, the financial health of the customer and historical experiences. If circumstances
related to specific customers change, estimates of the recoverability of receivables could
be further adjusted. After all attempts to collect a receivable have failed, the receivable
is written off against the allowance. Receivables are pledged under the Companys borrowing
arrangements.
F-9
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Concentration of credit risk Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. Substantially all of
Craftmades customers are lighting showrooms; however, credit risk is limited due to the
large number of customers and their dispersion across many different geographic locations.
As of June 30, 2007, Craftmade had no significant concentration of credit risk. As part of
its ongoing control procedures, TSI monitors the creditworthiness of its customers thereby
mitigating the effect of its concentration of credit risk. All of TSIs sales are to mass
merchandisers with Lowes Companies, Inc. (Lowes) comprising the most significant portion
as follows:
|
|
|
|
|
|
|
|
|
|
|
Lowes |
|
|
Percent of |
|
Percent of |
|
|
TSIs |
|
Consolidated |
Fiscal Year Ended |
|
Net Sales |
|
Net Sales |
June 30, 2007 |
|
|
70 |
% |
|
|
29 |
% |
June 30, 2006 |
|
|
87 |
% |
|
|
41 |
% |
June 30, 2005 |
|
|
83 |
% |
|
|
44 |
% |
Inventories The Companys inventories are primarily comprised of finished goods and
are recorded at the lower of cost or market using the average cost method. The Company
provides estimated inventory allowances for excess, slow-moving and obsolete inventory as
well as inventory whose carrying value is in excess of net realizable value. These reserves
are based on current assessments about future demands, market conditions and related
management initiatives. If market conditions and actual demands are less favorable than
those projected by management, additional inventory write-downs may be required. Inventory
reserves were $403,000 and $934,000 at June 30, 2007 and 2006, respectively.
Property and equipment Property and equipment is recorded at cost and summarized as
follows:
Summary of Property and Equipment
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Land |
|
$ |
1,535 |
|
|
$ |
1,535 |
|
Building |
|
|
7,796 |
|
|
|
7,796 |
|
Office furniture and equipment |
|
|
4,203 |
|
|
|
3,320 |
|
Leasehold improvements |
|
|
194 |
|
|
|
187 |
|
|
|
|
|
|
|
|
Gross property and equipment |
|
|
13,728 |
|
|
|
12,838 |
|
Accumulated depreciation |
|
|
(5,349 |
) |
|
|
(4,740 |
) |
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
8,379 |
|
|
$ |
8,098 |
|
|
|
|
|
|
|
|
Depreciation is determined using the straight-line method over the estimated useful
lives of the property and equipment, as follows:
|
|
|
Building
|
|
40 years |
Office furniture and equipment
|
|
2 to 7 years |
See Note 4 Long-Term Obligations in the notes to the consolidated financial statements
for a discussion of the Companys term loan used to finance the Companys acquisition of its
headquarters,
warehouse and distribution facility. Office furniture and equipment includes the cost of
the Companys product tooling which is amortized over two years. Leasehold improvements are
amortized over the life of the lease or their useful life, whichever is shorter.
F-10
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense is summarized in the following table:
Depreciation and Amortization
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Depreciation of property and equipment |
|
$ |
601 |
|
|
$ |
564 |
|
|
$ |
570 |
|
Amortization of intangibles |
|
|
198 |
|
|
|
30 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
799 |
|
|
$ |
594 |
|
|
$ |
581 |
|
|
|
|
|
|
|
|
|
|
|
Maintenance and repairs are charged to expense as incurred; renewals and betterments
are recorded to appropriate property or equipment accounts. Upon sale or retirement of
depreciable assets, the cost and related accumulated depreciation is removed from the
accounts, and the resulting gain or loss is included in the results of operations in the
period of the sale or retirement.
Impairment of long-lived assets The Company reviews potential impairments of long-lived
assets and certain identifiable intangibles on an exception basis when there is evidence
that events or changes in circumstances have made recovery of an assets carrying value
unlikely. An impairment loss is recognized if the sum of the expected future cash flows,
undiscounted and before interest, from the use of the asset is less than the net book value
of the asset. Generally, the amount of the impairment loss is measured as the difference
between the net book value of the assets and the estimated fair value. There was no
impairment of long-lived assets at June 30, 2007.
Goodwill and other intangible assets The following table summarizes the Companys
goodwill:
Summary of Goodwill
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craftmade |
|
|
TSI |
|
|
Total |
|
June 30, 2006 |
|
$ |
6,745 |
|
|
$ |
4,735 |
|
|
$ |
11,480 |
|
Acquisition of Marketing Impressions |
|
|
|
|
|
|
2,164 |
|
|
|
2,164 |
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
$ |
6,745 |
|
|
$ |
6,899 |
|
|
$ |
13,644 |
|
|
|
|
|
|
|
|
|
|
|
The Company assesses the carrying values of goodwill annually or when circumstances
dictate that the carrying value might be impaired. Impairment testing for goodwill is
analyzed at the reporting unit level. An impairment loss generally would be recognized when
the carrying amount of the reporting units net assets exceeds the estimated fair value of
the reporting unit. The estimated fair value of a reporting unit is determined using a
discounted cash flow analysis. In the event that impairment is determined to have occurred,
the Company will reduce the carrying value of the asset in that period. There was no
impairment of goodwill at June 30, 2007. The amount of goodwill deductible for tax purposes
in the future was $6,164,000 at June 30, 2007.
F-11
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In connection with its acquisitions, the Company acquired certain identifiable intangible
assets, including patents, trademarks and covenants not-to-compete:
Summary of Intangible Assets
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
Life |
|
|
|
2007 |
|
|
2006 |
|
|
in Years |
|
Non-compete covenants |
|
$ |
1,020 |
|
|
$ |
200 |
|
|
|
7 |
|
Patents and trademarks |
|
|
720 |
|
|
|
10 |
|
|
|
15 to 17 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross intangible assets |
|
|
1,740 |
|
|
|
210 |
|
|
|
|
|
Accumulated amortization |
|
|
(238 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets |
|
$ |
1,502 |
|
|
$ |
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future amortization expense related to intangible assets is summarized as
follows:
Summary of Future Amortization Expense
(Dollars in Thousands)
|
|
|
|
|
Fiscal Year Ending |
|
|
|
|
June 30, 2008 |
|
$ |
234 |
|
June 30, 2009 |
|
|
228 |
|
June 30, 2010 |
|
|
166 |
|
June 30, 2011 |
|
|
166 |
|
June 30, 2012 |
|
|
165 |
|
Thereafter |
|
|
543 |
|
|
|
|
|
|
|
$ |
1,502 |
|
|
|
|
|
Other accrued expenses Other accrued expenses consist of the following balances:
Summary of Other Accrued Expenses
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Accrued customer allowances |
|
$ |
947 |
|
|
$ |
2,637 |
|
Accrued dividend payable |
|
|
625 |
|
|
|
624 |
|
Commissions payable |
|
|
287 |
|
|
|
274 |
|
Accrued payroll |
|
|
217 |
|
|
|
183 |
|
Income taxes payable |
|
|
|
|
|
|
114 |
|
Other current liabilities |
|
|
396 |
|
|
|
266 |
|
|
|
|
|
|
|
|
Other accrued expenses |
|
$ |
2,472 |
|
|
$ |
4,098 |
|
|
|
|
|
|
|
|
Returns The Company offers certain customers credits for authorized returned
merchandise and estimates an allowance for sales returns at the end of each period:
F-12
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Sales Returns Allowance
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Beginning of year balance |
|
$ |
87 |
|
|
$ |
85 |
|
|
$ |
85 |
|
Provision for estimated returns |
|
|
1,025 |
|
|
|
939 |
|
|
|
760 |
|
Return credits issued |
|
|
(1,021 |
) |
|
|
(937 |
) |
|
|
(760 |
) |
|
|
|
|
|
|
|
|
|
|
End of year balance |
|
$ |
91 |
|
|
$ |
87 |
|
|
$ |
85 |
|
|
|
|
|
|
|
|
|
|
|
Product warranties Craftmade ceiling fans are warranted against defects in
workmanship and materials depending on standard offerings of various lengths and terms.
Provisions for estimated expenses related to product warranties are made at the time
products are sold. These estimates are established using historical information on the
nature, frequency, and average cost of warranty claims.
Product Warranty Reserves
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Beginning of year balance |
|
$ |
169 |
|
|
$ |
171 |
|
|
$ |
145 |
|
Provision for estimated expenses |
|
|
1,147 |
|
|
|
1,037 |
|
|
|
1,009 |
|
Warranty claims paid |
|
|
(1,139 |
) |
|
|
(1,039 |
) |
|
|
(983 |
) |
|
|
|
|
|
|
|
|
|
|
End of year balance |
|
$ |
177 |
|
|
$ |
169 |
|
|
$ |
171 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes The Company accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the Companys
financial statements or tax returns. In estimating future tax consequences, all expected
future events other than enactments of changes in the tax law or rates are considered.
Deferred income taxes have been provided on unremitted earnings from foreign investees. The
Company reviews its deferred tax assets for ultimate realization and will record a valuation
allowance to reduce the deferred tax asset if it is more likely than not that some portion,
or all, of these deferred tax assets will not be realized. The Company has established, and
periodically reviews and reevaluates an estimated contingent tax liability on its
consolidated balance sheet to provide for the possibility of unfavorable outcomes in tax
matters. The Company believes its reserves are adequate in the event the positions are not
ultimately upheld.
Revenue recognition Revenue is recognized as product is shipped and related services are
performed in accordance with all applicable revenue recognition criteria. For these
transactions the Company applies the provisions of Securities and Exchange Commission
(SEC) Staff Accounting Bulletin (SAB) No. 104 Revenue Recognition. The Company
recognizes revenue when there is persuasive evidence of an arrangement, title and risk of
loss have passed, delivery has occurred or the services have been rendered, the sales price
is fixed or determinable and collection of the related receivable is reasonably assured.
Title generally transfers upon shipment of goods from the Companys warehouse. The Company
does not have an obligation or policy of replacing customer products damaged or lost in
transit. In some instances, the Company ships product directly from its suppliers to the
customers. In these cases, the Company recognizes revenue when the product is accepted by
the customers representative.
The Company applies the provisions of Emerging Issues Task Force (EITF) Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent. The Companys application
of EITF 99-19 includes evaluation of its terms with each major customer relative to a number
of criteria that management considers in making its determination with respect to gross
versus net reporting of revenue for transactions with its
F-13
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
customers. Managements criteria for making these judgments place particular emphasis on
determining the primary obligor in a transaction and which party bears general inventory
risk. The Company records all shipping and handling fees billed to customers as revenue, and
related costs as cost of sales, when incurred, in accordance with EITF 00-10, Accounting
for Shipping and Handling Fees and Costs.
As part of its revenue recognition policy, the Company records estimated incentives payable
to its customers at a future date as a reduction of revenue at the time the revenues are
recorded. The Company bases its estimates on contractual terms of the programs and estimated
or actual sales to individual customers. Actual incentives in any future period are
inherently uncertain and, thus, may differ from its estimates. If actual or expected
incentives were significantly greater than the reserves the Company had established, the
Company would record a reduction to net revenues in the period in which the Company made
such determination.
In addition to various incentive programs, from time to time, the Company is required to
provide mark-down funds to certain of its mass retail customers to assist them in clearing
slow-moving inventory. These mark-down funds are accrued as a reduction of revenue at the
time that the related revenues are recorded.
The Company is also required to provide for the cost of labor associated with resetting
store displays. Resets involve removing slow-moving inventory and replacing it with new
products. Although reset costs are paid to third parties who perform the services, they are
considered an incentive to our mass merchandise customers. For existing products that are
replaced, the Company accrues an estimate for the cost as an increase to cost of goods sold
in advance of the reset at the time that the related revenues are recorded. The Company
bases its estimates on a number of factors. The cost for any new products or space that is
gained is expensed as incurred as an increase to cost of goods sold.
Variable interest entities In January 2003, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46) and amended it by issuing FIN 46R in December 2003. Among other things, FIN 46R
generally deferred the effective date of FIN 46 to the quarter ended June 30, 2004.
Variable interest entities (VIEs) are primarily entities that lack sufficient equity to
finance their activities without additional financial support from other parties or whose
equity holders lack adequate decision making ability. All VIEs with which the Company is
involved must be evaluated to determine the primary beneficiary of the risks and rewards of
the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting
purposes.
The Company has a 50% ownership interest in Design Trends, a limited liability company. In
connection with the adoption of FIN 46R, the Company concluded that Design Trends is a VIE
and that the Company is the primary beneficiary. Pursuant to the provisions of FIN 46R,
effective January 1, 2004, the Company began to consolidate Design Trends and restated its
previously issued financial statements to reflect Design Trends as a consolidated entity.
Prior to the acquisition of Marketing Impressions which became effective on July 1, 2006,
the Company had a 50% ownership interest in PHI. The Company also concluded that PHI was a
VIE and that the Company was the primary beneficiary. Pursuant to the provisions of FIN46R,
effective January 1, 2004, the Company began to consolidate PHI and restated its previously
issued financial statements to reflect PHI as a consolidated entity. Accordingly, the
results of operations of PHI have historically been included in the consolidated income
before minority interest of the Company. Prior to the acquisition, the minority interest in
PHI income was excluded from the Companys consolidated net income. Since the effective
date of the acquisition on July 1, 2006, no minority interest exists in PHI, and
accordingly, the consolidated net income includes the full amount of PHI results from this
date.
F-14
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the consolidating balance sheets of the Companys VIEs as of
June 30, 2007 and 2006. Although PHI was a VIE prior to the current fiscal year, prior year
amounts have been restated to reflect current year presentation.
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craftmade/ |
|
|
Design |
|
|
|
|
|
|
Trade Source |
|
|
Trends |
|
|
Consolidated |
|
Total assets |
|
$ |
48,599 |
|
|
$ |
16,064 |
|
|
$ |
64,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and minority interests |
|
$ |
30,407 |
|
|
$ |
1,732 |
|
|
$ |
32,139 |
|
Total stockholders equity |
|
|
18,192 |
|
|
|
14,332 |
|
|
|
32,524 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and stockholders equity |
|
$ |
48,599 |
|
|
$ |
16,064 |
|
|
$ |
64,663 |
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craftmade/ |
|
|
Design |
|
|
|
|
|
|
Trade Source |
|
|
Trends |
|
|
Consolidated |
|
Total assets |
|
$ |
48,699 |
|
|
$ |
16,362 |
|
|
$ |
65,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and minority interests |
|
$ |
32,487 |
|
|
$ |
3,537 |
|
|
$ |
36,024 |
|
Total stockholders equity |
|
|
16,212 |
|
|
|
12,825 |
|
|
|
29,037 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and stockholders equity |
|
$ |
48,699 |
|
|
$ |
16,362 |
|
|
$ |
65,061 |
|
|
|
|
|
|
|
|
|
|
|
Advertising costs The Companys advertising expenditures consist primarily of print
advertising programs, and are expensed as used. Prepaid advertising costs consist of
current catalogs on hand and are expensed in relation to use. Advertising expense and
prepaid advertising costs increased in the fiscal year ended June 30, 2007 as the result of
the rollout of new product catalogs.
Advertising
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2005 |
Advertising expense |
|
$ |
2,161 |
|
|
$ |
1,514 |
|
|
$ |
1,442 |
|
Prepaid advertising costs |
|
|
407 |
|
|
|
164 |
|
|
|
188 |
|
F-15
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Research and development Research, development and engineering expenditures for the
creation and application of new products and processes are expensed as incurred, as
summarized in the following table:
Research and Development
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2005 |
Research and development |
|
$ |
265 |
|
|
$ |
217 |
|
|
$ |
202 |
|
Stock-based compensation Effective July 1, 2005, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment
(SFAS 123(R)), which revises SFAS 123 and supersedes Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires all
share-based payments to employees to be recognized in the financial statements based on
their fair values using an option-pricing model, such as the Black-Scholes model, at the
date of grant. The cost will be recognized over the period during which an employee is
required to provide services in exchange for the award, known as the requisite service
period (usually the vesting period). The Company elected to use the modified prospective
method for adoption, which requires compensation expense to be recorded for all unvested
stock options and restricted shares beginning in the first quarter of adoption.
Compensation cost for awards granted prior to, but not vested as of, the date the Company
adopted SFAS 123(R) were based on the grant date fair value and attributes originally used
to value those awards.
The Company has recognized compensation cost for all stock-based payments granted subsequent
to July 1, 2005 in the consolidated financial statements, summarized as follows:
Stock-Based Compensation Expense
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2005(A) |
Stock-based compensation expense recognized: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative |
|
$ |
64 |
|
|
$ |
23 |
|
|
$ |
|
|
|
|
|
(A) |
|
See pro forma analysis below. |
The following table shows pro forma net income for the fiscal year ended June 30, 2005 had
compensation expense for the Companys stock option plans been determined based upon the
fair value at the grant date for awards consistent with the methodology prescribed by SFAS
123(R). The pro forma results for prior years are compared to actual results for the
current year, where stock option expense is included in reported net income. The pro forma
effects may not be representative of expense in future periods since the estimated fair
value of stock options on the date of grant is amortized to expense over the vesting period
and additional options may be granted or options may be cancelled in future years.
F-16
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Net Income
(In thousands, except per shara data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net income, as reported |
|
$ |
5,911 |
|
|
$ |
7,100 |
|
|
$ |
6,427 |
|
Compensation expense,
pro forma, net of related taxes |
|
|
|
|
|
|
|
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
Net income, proforma |
|
$ |
5,911 |
|
|
$ |
7,100 |
|
|
$ |
6,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares of common stock |
|
|
5,204 |
|
|
|
5,201 |
|
|
|
5,095 |
|
Diluted weighted average shares of common stock |
|
|
5,206 |
|
|
|
5,211 |
|
|
|
5,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share, as reported |
|
$ |
1.14 |
|
|
$ |
1.37 |
|
|
$ |
1.26 |
|
Basic earnings per share, pro forma |
|
|
1.14 |
|
|
|
1.37 |
|
|
|
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share, as reported |
|
$ |
1.14 |
|
|
$ |
1.36 |
|
|
$ |
1.26 |
|
Diluted earnings per share, pro forma |
|
|
1.14 |
|
|
|
1.36 |
|
|
|
1.24 |
|
Total future compensation cost related to non-vested options is expected to be amortized
over the following future periods as follows:
Future Stock-Based Compensation Expense
(Dollars in thousands)
|
|
|
|
|
|
|
Expected |
|
|
Future |
|
|
Compensation |
Fiscal Year Ending |
|
Cost |
June 30, 2008 |
|
$ |
113 |
|
June 30, 2009 |
|
|
113 |
|
June 30, 2010 |
|
|
113 |
|
June 30, 2011 |
|
|
52 |
|
Pervasiveness of estimates The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Effects of recent accounting pronouncements In February 2007, FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). This
statement permits entities to choose to measure many financial instruments and certain other
items at fair value. Companies should report unrealized gains and losses on items for which
the fair value option has been elected in earnings at each subsequent reporting date. This
statement is effective as of the beginning of an entitys first fiscal year that begins
after November 15, 2007. The Company is currently assessing the potential impact, if any,
of the adoption of SFAS 159 on its consolidated financial statements.
F-17
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This
statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. This
statement applies under other accounting pronouncements that require or permit fair value
measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007.
The Company is currently assessing the impact that the adoption of SFAS 157 will have on its
consolidated financial statements.
In September 2006, the SEC issued SAB No. 108 (SAB 108) in order to eliminate the
diversity of practice surrounding how public companies quantify financial statement
misstatements. In SAB 108, the SEC staff established an approach that requires
quantification of financial statement misstatements based on the effects of the
misstatements on each of the Companys financial statements and the related financial
statement disclosures. SAB 108 is effective for fiscal years ending after November 15,
2006. The Company adopted SAB 108 in fiscal 2007. It did not have a material impact on its
consolidated financial statements.
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes (FIN
48) which requires the use of a two-step approach for recognizing and measuring tax
benefits taken or expected to be taken in a tax return and disclosures regarding
uncertainties in income tax positions. We are required to adopt FIN 48 effective July 1,
2007. The cumulative effect of initially adopting FIN 48 is to record an adjustment to
opening retained earnings in the year of adoption. Only tax positions that meet the more
likely than not recognition threshold at the effective date may be recognized upon adoption
of FIN 48. The Company is evaluating the impact of implementing the provisions of FIN 48 on
its financial position and future results of operations, but does not expect that the impact
will be material.
Note 3 Acquisitions
Acquisition of Marketing Impressions, Inc.
Effective July 1, 2006, TSI acquired Marketing Impressions, Inc., a Georgia corporation
(Marketing Impressions). Marketing Impressions owned the remaining 50% interest in the
Companys limited liability company PHI and also supplied the Company with certain fan
accessory products. This acquisition increased the Companys effective ownership of PHI to
100% and has been accounted for using the purchase method of accounting. The transaction
enables the Company to benefit from 100% of PHIs earnings, gives the Company complete
control over the operations of PHI and also allows it to source certain of its fan accessory
products directly. The Company believes that operational control, the ability to source
certain products directly and the additional earnings obtained from 100% ownership support
the goodwill resulting from the transaction.
In conjunction with the acquisition of Marketing Impressions, TSI also acquired certain
patents and trademarks from the sellers and entered into non-compete and consulting
agreements. The complete acquisition agreements are furnished as exhibits to the Current
Report on Form 8-K as filed with the SEC on September 18, 2006.
The results of operations of PHI have historically been included in the consolidated income
before minority interest of the Company. Prior to the acquisition, the minority interest in
PHI income was excluded from the Companys consolidated net income. Since the effective
date of the acquisition on July 1, 2006, no minority interest exists in PHI, and
accordingly, the consolidated net income includes the full amount of PHI results from this
date. In conjunction with the closing of the transaction, the Company paid Marketing
Impressions its share of minority interest outstanding at June 30, 2006. This amount
totaled $972,000.
F-18
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The purchase price, including amounts for patents and trademarks and non-compete agreements,
is based on a known initial payment plus a contingent amount that is based upon percentage
of gross profit without any reductions for vendor displays and annual reset costs (Adjusted
Gross Profit). The purchase price is summarized as follows:
Purchase Price Summary
(Dollars in thousands)
|
|
|
|
|
As of June 30, 2007: |
|
|
|
|
Amount paid at closing, net of cash acquired |
|
$ |
1,287 |
|
Contingent payments earned |
|
|
1,697 |
|
Acquisition-related costs |
|
|
220 |
|
|
|
|
|
Total consideration as of June 30, 2007 |
|
$ |
3,204 |
|
|
|
|
|
|
|
|
|
|
Percent of Adjusted Gross Profit |
|
|
|
|
July 1, 2006 to August 31, 2011 |
|
|
22 |
% |
|
Additonal Percent of Adjusted Gross Profit
|
|
|
|
|
July 1, 2006 to June 30, 2007 (not to exceed $750) |
|
|
15 |
% |
The Company has estimated that the total remaining payout based on future levels of
Adjusted Gross Profit through August 31, 2011 to be a total of $3,552,000. In accordance
with SFAS No. 141, Business Combinations (SFAS 141), contingent consideration is recorded
when a contingency is satisfied and additional consideration is issued or becomes issuable.
The purchase price was allocated based on the estimated fair values of the assets acquired
and liabilities assumed as of the effective date of acquisition and is summarized as
follows:
Purchase Price Allocation
(Dollars in thousands)
|
|
|
|
|
Assets: |
|
|
|
|
Accounts receivable |
|
$ |
368 |
|
Inventory |
|
|
2 |
|
Property and equipment |
|
|
214 |
|
Deferred tax assets |
|
|
70 |
|
Acquired intangibles |
|
|
1,530 |
|
Goodwill |
|
|
2,164 |
|
|
|
|
|
|
|
|
4,348 |
|
|
|
|
|
Liabilities: |
|
|
|
|
Accounts payable |
|
|
1,120 |
|
Note payable and other liabilities |
|
|
24 |
|
|
|
|
|
|
|
|
1,144 |
|
|
|
|
|
Total purchase price as of June 30, 2007 |
|
$ |
3,204 |
|
|
|
|
|
F-19
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The amount of goodwill allocated to the purchase price was $2,164,000, all of which is
deductible for tax purposes over a 15 year period. In connection with the acquisition, the
Company acquired certain identifiable intangible assets, including patents, trademarks and
covenants not-to-compete. The gross amounts of such assets along with the range of
amortizable lives are as follows:
Summary of Acquired Intangibles
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Life |
|
|
Gross |
|
|
|
in Years |
|
|
Amount |
|
Patents and trademarks |
|
|
15 |
|
|
$ |
710 |
|
Non-compete covenants |
|
|
7 |
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,530 |
|
|
|
|
|
|
|
|
|
The purchase price was allocated based on the respective market value of the net assets
acquired. Annual amortization expense is estimated to be $164,000 per fiscal year.
The following table sets forth the unaudited pro forma results of operations of the Company
as if the Marketing Impressions acquisition had occurred at the beginning of each fiscal
year. Since the acquisition was effective at the beginning of the fiscal year on July 1,
2006, pro forma amounts equal actual amounts for the fiscal year ended June 30, 2007. The
pro forma amounts do not purport to be indicative of the results that would have actually
been obtained if the merger occurred as of the beginning of the period presented or that may
be obtained in the future. Management does not believe that the same amount of additional
earnings from the acquisition will necessarily be obtained in the future.
Unaudited Pro Forma Results
(In thousands, except per share data)
|
|
|
|
|
|
|
Fiscal |
|
|
Year |
|
|
Ended |
|
|
June 30, |
|
|
2006 |
Net sales(1) |
|
|
|
|
As reported |
|
$ |
118,054 |
|
Pro forma |
|
|
118,054 |
|
|
|
|
|
|
Net income(2) |
|
|
|
|
As reported |
|
$ |
7,100 |
|
Pro forma |
|
|
8,224 |
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
As reported |
|
$ |
1.36 |
|
Pro forma |
|
|
1.58 |
|
|
|
|
(1) |
|
Since net sales of Marketing Impressions represent sales to Craftmade, they eliminate in consolidation.
Net sales of PHI have historically been included in consolidated net sales of the
Company in accordance with FIN 46R. Accordingly, pro forma net sales equal actual net
sales. |
|
(2) |
|
Pro forma net income includes the remaining 50% net income of PHI (minority
interest portion) plus additional gross margin for certain products, less interest,
depreciation, amortization, and consulting fees. |
F-20
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Acquisition of Bill Teiber Co., Inc.
On March 1, 2005, the Company acquired 100% of the issued and outstanding shares of capital
stock of Bill Teiber Co., Inc. (Teiber) through a merger of subsidiaries. The acquisition
has been accounted for as an asset purchase. Teiber is an importer and distributor of
decorative light bulbs, door chimes, ventilation systems and related lighting accessories.
The business will be operated as Teiber Lighting Products, Inc., a wholly-owned subsidiary
of Craftmade. Craftmade acquired Teiber in order to distribute Teibers product lines to
Craftmades existing showroom customers.
Assets acquired and liabilities assumed were recorded on the Companys Consolidated Balance
Sheets as of the acquisition date based upon their estimated fair values at such date. The
results of operations have been included in the Consolidated Statements of Income since the
date of merger in the Craftmade segment. The aggregate purchase price totaled $8,164,000
and was allocated based on the estimated fair values of the assets acquired and liabilities
assumed as of the date of acquisition. The amount of goodwill allocated to the purchase
price was $6,745,000 of which $4,000,000 is deductible for tax purposes.
The following table sets forth the unaudited pro forma results of operations of the Company
as if the Teiber merger had occurred at the beginning of the fiscal year. These pro forma
amounts do not purport to be indicative of the results that would have actually been
obtained if the merger occurred as of the beginning of each of the periods presented or that
may be obtained in the future.
Unaudited Pro Forma Results
(In thousands, except per share data)
|
|
|
|
|
|
|
Fiscal |
|
|
Year |
|
|
Ended |
|
|
June 30, |
|
|
2005 |
Net sales |
|
|
|
|
As reported |
|
$ |
118,806 |
|
Pro forma |
|
|
123,482 |
|
|
|
|
|
|
Net income |
|
|
|
|
As reported |
|
$ |
6,427 |
|
Pro forma |
|
|
6,684 |
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
As reported |
|
$ |
1.26 |
|
Pro forma |
|
|
1.27 |
|
F-21
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 4 Long-Term Obligations
The Companys long-term obligations are summarized in the following table:
Summary of Revolving Lines of Credit
and Notes Payable at June 30, 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
Commitment |
|
|
Balance |
|
|
Interest Rate |
|
|
Maturity |
|
Revolving line of credit |
|
$ |
30,000 |
|
|
$ |
18,825 |
|
|
LIBOR plus 1.50% |
|
September 1, 2009 |
Note payable facility |
|
|
N/A |
|
|
|
223 |
|
|
|
8.302% |
|
|
January 1, 2008 |
Capital lease obligation |
|
|
N/A |
|
|
|
154 |
|
|
|
|
|
|
November 5, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A description of each long-term obligation is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
Description |
|
2007 |
|
|
2006 |
|
On September 18, 2006, the Company entered into a
Second Amended and Restated Loan Agreement (the
Frost Loan Agreement) with The Frost National
Bank, San Antonio, Texas (Frost). The Frost Loan
Agreement amends the Restated Loan Agreement dated
October 31, 2005, between Craftmade and Frost.
Also, on September 18, 2006, Craftmade executed a
Revolving Promissory Note (the Note) payable to
the order of Frost, in the principal amount of
$30,000,000 or the amount equal to the borrowing
base calculated on eligible accounts receivable and
inventory, with an interest rate equal to LIBOR
plus 1.5%. The LIBOR rate in effect at June 30,
2007 was 5.32%. There was $4,505,000 available to
borrow under the Note at June 30, 2007. The Note
will mature on September 1, 2009. The Frost Loan
Agreement contains financial covenants that require
Craftmade to maintain a ratio of total liabilities
(excluding any subordinated debt) to tangible net
worth of not greater than 3.0 to 1.0 and a Fixed
Charge Coverage Ratio (as defined in the Frost Loan
Agreement) of not less than 1.25 to 1.0, tested
quarterly. The Company is in compliance with all
of its covenants at June 30, 2007. All
wholly-owned subsidiaries of Craftmade and Design
Trends, a 50% owned subsidiary of Craftmade, have
agreed to be guarantors of the Frost Loan Agreement
(the Guarantors). Craftmade and each of the
Guarantors have granted a security interest to
Frost in each of their accounts receivable and
inventory |
|
$ |
18,825 |
|
|
$ |
15,981 |
|
|
|
|
|
|
|
|
|
|
On May 9, 2000, the Company entered into a term
loan to finance its home office and warehouse with
an original principal balance of $9,200,000. The
loan is payable in equal monthly installments of
$100,378 of principal and interest at 8.302%. The
loan is collateralized by the building and land.
The loan is scheduled to mature on January 1, 2008,
but was fully repaid in August 2007 |
|
|
223 |
|
|
|
1,358 |
|
|
|
|
|
|
|
|
|
|
Capital lease obligation for computer
equipment |
|
|
154 |
|
|
|
|
|
F-22
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
Description |
|
2007 |
|
|
2006 |
|
On April 17, 2002 PHI entered into a $3,000,000 note and
security agreement with Wachovia Bank, N.A.
(Wachovia). Borrowings under this agreement are
limited to a borrowing base calculated as a percentage
of certain eligible accounts receivable and inventory
are payable on demand with interest at the monthly LIBOR
index (5.10906% at June 30, 2006) plus 2%,
collateralized by certain inventory and receivables of
the Company and jointly and severally guaranteed by the
PHI members. This loan agreement, which expires on
December 15, 2006, requires the maintenance of certain
financial ratios including the maintenance of minimum
tangible net worth and funded debt to EBITDA. The note
was paid in full and cancelled in September 2006 in
conjunction with the issuance of the Frost Loan
Agreement |
|
|
|
|
|
|
2,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
19,202 |
|
|
|
19,512 |
|
Less: Lines of credit due on
demand |
|
|
|
|
|
|
(2,173 |
) |
Less: Current amounts due in following
year |
|
|
(264 |
) |
|
|
(1,135 |
) |
|
|
|
|
|
|
|
Non-current |
|
$ |
18,938 |
|
|
$ |
16,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rates on outstanding borrowings |
|
|
|
|
|
|
|
|
Lines of credit |
|
|
6.8 |
% |
|
|
6.9 |
% |
Notes payable |
|
|
8.3 |
% |
|
|
8.3 |
% |
Total |
|
|
6.8 |
% |
|
|
7.0 |
% |
Scheduled maturities of notes payable and lines of credit at June 30, 2007 are detailed as
follows:
Schedule of Maturities
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of |
|
|
Note |
|
|
Capital |
|
|
|
|
Fiscal Year Ended |
|
Credit |
|
|
Payable |
|
|
Lease |
|
|
Total |
|
June 30, 2008 |
|
$ |
|
|
|
$ |
223 |
|
|
$ |
41 |
|
|
$ |
264 |
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
44 |
|
June 30, 2010 |
|
|
18,825 |
|
|
|
|
|
|
|
48 |
|
|
|
18,873 |
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,825 |
|
|
$ |
223 |
|
|
$ |
154 |
|
|
$ |
19,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 5 Income Taxes
Components of the provision for income taxes consist of the following:
Provision for Income Taxes
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Current expense/(benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
1,003 |
|
|
$ |
3,309 |
|
|
$ |
3,659 |
|
State |
|
|
(427 |
) |
|
|
(243 |
) |
|
|
264 |
|
Foreign |
|
|
143 |
|
|
|
109 |
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
Total current expense |
|
|
719 |
|
|
|
3,175 |
|
|
|
4,282 |
|
Deferred expense/(benefit) |
|
|
763 |
|
|
|
91 |
|
|
|
(1,203 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense |
|
$ |
1,482 |
|
|
$ |
3,266 |
|
|
$ |
3,079 |
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended June 30, 2007, federal income tax expense was reduced by a
benefit obtained from a reduction in amounts set aside for tax contingencies. The benefit
obtained from state taxes in fiscal years 2007 and 2006 resulted from anticipated refunds
from lower state apportionment rates applied to prior periods as a result of a change in the
state tax law. See Reconciliation of Federal Tax Rate to Effective Tax Rate below.
Deferred taxes are provided for temporary differences between the financial reporting basis
and the tax basis of the Companys assets and liabilities. The temporary differences that
give rise to deferred tax assets and liabilities at June 30, 2007 and 2006 are as follows:
Summary of Deferred Taxes
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Inventories |
|
$ |
346 |
|
|
$ |
518 |
|
Investment in 50% owned LLCs |
|
|
181 |
|
|
|
377 |
|
Reserves and accruals |
|
|
158 |
|
|
|
276 |
|
Accounts receivable reserves |
|
|
85 |
|
|
|
100 |
|
State refund claims, net of federal tax |
|
|
100 |
|
|
|
59 |
|
Net operating loss carryforwards |
|
|
24 |
|
|
|
24 |
|
Other |
|
|
88 |
|
|
|
54 |
|
Valuation allowance |
|
|
(100 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
882 |
|
|
|
1,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(580 |
) |
|
|
(409 |
) |
Foreign taxes |
|
|
(158 |
) |
|
|
(31 |
) |
Other |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(738 |
) |
|
|
(442 |
) |
|
|
|
|
|
|
|
Net deferred tax asset/(liability) |
|
$ |
144 |
|
|
$ |
907 |
|
|
|
|
|
|
|
|
The valuation allowance represents a portion of the tax benefits of certain state
refund claims which may not be fully realized.
F-24
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The differences between the Companys effective tax rate and the federal statutory rate of
34% to its effective tax rate of 20% are summarized in the following table:
Reconciliation of Federal Tax Rate to Effective Tax Rate
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Tax at the statutory corporate rate |
|
$ |
3,026 |
|
|
$ |
4,691 |
|
|
$ |
4,515 |
|
Less: federal income tax attributable to minority interest |
|
|
(459 |
) |
|
|
(1,158 |
) |
|
|
(1,284 |
) |
Foreign tax rate under federal statutory rate(1) |
|
|
(905 |
) |
|
|
(156 |
) |
|
|
(338 |
) |
Federal taxes on anticipated repatriation of foreign earnings |
|
|
147 |
|
|
|
(157 |
) |
|
|
51 |
|
State income taxes, net of federal benefit(2) |
|
|
(314 |
) |
|
|
22 |
|
|
|
180 |
|
Other |
|
|
(13 |
) |
|
|
24 |
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
1,482 |
|
|
$ |
3,266 |
|
|
$ |
3,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The foreign tax rate under the federal statutory rate for the fiscal
year ended June 30, 2007 includes benefits obtained from a reduction in amounts set
aside for tax contingencies of $793,000 recorded in the quarter ended June 30, 2007
and a lower foreign tax rate of approximately $112,000. |
|
(2) |
|
State income taxes, net of federal benefit, includes the benefit resulting
from lower state apportionment rates applied to prior periods as a result of a change
in the state tax law totaling $516,000, offset by increases in amounts set aside for
tax contingencies totaling $231,000. |
Note 6 Stockholders Equity
Stock Option Plans
On October 27, 2000, the Companys stockholders approved the 1999 Stock Option Plan (1999
Plan) and 2000 Non-Employee Director Plan (Non-Employee Plan), previously adopted by the
Board of Directors on October 29, 1999 and February 16, 2000, respectively. At June 30,
2007, there were 18,500 fully vested options which were exercisable under these plans. The
1999 Plan and Non-Employee Plan were terminated upon adoption of the 2006 Long-Term
Incentive Plan (2006 Plan).
On November 28, 2006, the Companys stockholders approved the 2006 Plan. The 2006 Plan
allows a maximum of 400,000 shares of the Companys common stock to be issued. Options
granted will be designated as either Incentive Stock Options or Non-Qualified Stock Options.
The options vest at a rate of 25% on the first anniversary of the grant date and 25% on
each successive anniversary. Options may be exercised at any time once they become vested,
but not more than 10 years from the date of grant. See Note 2 Summary of Significant
Accounting Policies for additional information.
F-25
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A summary of options issued under the above agreements is as follows:
Summary of Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Exercise |
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
Price |
|
|
Remaining |
|
|
|
Shares |
|
|
Price |
|
|
Range |
|
|
Life (Years) |
|
Outstanding at June 30, 2004 |
|
|
69,500 |
|
|
$ |
8.99 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
3,000 |
|
|
|
20.74 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(44,000 |
) |
|
|
7.34 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(8,500 |
) |
|
|
10.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2005 |
|
|
20,000 |
|
|
|
13.94 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
3,000 |
|
|
|
17.48 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(3,500 |
) |
|
|
6.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
19,500 |
|
|
|
15.78 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
85,000 |
|
|
|
18.49 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,000 |
) |
|
|
6.75 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(4,400 |
) |
|
|
18.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6.75- |
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
99,100 |
|
|
$ |
18.06 |
|
|
$ |
25.20 |
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6.75- |
|
|
|
|
|
Exercisable at June 30, 2007 |
|
|
18,500 |
|
|
$ |
16.26 |
|
|
$ |
25.20 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant is calculated on the date of grant using the
Black-Scholes option pricing model based upon the following weighted-average assumptions:
Weighted-Average Stock Option Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
Fiscal |
|
Fiscal |
|
|
2007 |
|
2006 |
|
2005 |
Expected volatility |
|
|
36 |
% |
|
|
45 |
% |
|
|
47 |
% |
Risk-free interest rate |
|
|
4.9 |
% |
|
|
4.5 |
% |
|
|
3.7 |
% |
Expected lives |
|
4 years |
|
4 years |
|
4 years |
Dividend yield |
|
|
2.6 |
% |
|
|
2.7 |
% |
|
|
1.9 |
% |
Weighted average fair value of options granted per share |
|
$ |
5.31 |
|
|
$ |
5.88 |
|
|
$ |
7.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of options granted |
|
$ |
451,000 |
|
|
$ |
18,000 |
|
|
$ |
22,000 |
|
Total fair value of options vested |
|
$ |
105,000 |
|
|
$ |
93,000 |
|
|
$ |
113,000 |
|
Total intrinsic value of stock options exercised(1) |
|
$ |
9,000 |
|
|
$ |
34,000 |
|
|
$ |
566,000 |
|
|
|
|
(1) |
|
Intrinsic value of stock options is calculated using the difference between the
common share price on the date of exercise and the strike price times the number of stock options
exercised. |
F-26
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The assumptions incorporate historical volatility, a risk-free interest rate which
approximates the implied yield currently available on U.S. Treasury zero-coupon issues and a
dividend yield based on the amount of dividends historically paid.
The following table summarizes the range of exercise prices for stock options outstanding
and vested as of June 30, 2007:
Stock Option Exercise Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
Under Stock Options |
|
|
Exercise |
Expiration Date |
|
Outstanding |
|
|
Exercisable |
|
|
Price |
10/28/2009 |
|
|
3,500 |
|
|
|
3,500 |
|
|
$ |
6.75 |
2/15/2012 |
|
|
3,000 |
|
|
|
3,000 |
|
|
|
14.85 |
2/15/2013 |
|
|
3,000 |
|
|
|
3,000 |
|
|
|
14.15 |
2/15/2014 |
|
|
3,000 |
|
|
|
3,000 |
|
|
|
25.20 |
2/15/2015 |
|
|
3,000 |
|
|
|
3,000 |
|
|
|
20.74 |
2/15/2016 |
|
|
3,000 |
|
|
|
3,000 |
|
|
|
17.48 |
11/27/2016 |
|
|
55,600 |
|
|
|
|
|
|
|
18.85 |
2/4/2017 |
|
|
25,000 |
|
|
|
|
|
|
|
17.62 |
|
|
|
|
|
|
|
|
|
|
|
|
99,100 |
|
|
|
18,500 |
|
|
$ |
18.06 |
|
|
|
|
|
|
|
|
|
Retirement of Preferred Stock
In the fiscal year ended June 30, 2006, the Company retired its 32,000 shares of the Series
A cumulative, convertible, and callable preferred stock, $1.00 par value (Preferred
Stock), issued and held by the Company as treasury shares.
Stockholder Rights Plan
On June 23, 1999, the Company declared a dividend of one Preferred Share Purchase Right
(Right) on each outstanding share of the Companys common stock. The dividend
distribution was made on July 19, 1999 to stockholders of record on that date. The Rights
become exercisable if a person or group acquires 15% or more of the Companys common stock
or announces its intent to do so. Each Right will entitle stockholders to buy one
one-thousandth of a share of Series A Preferred Stock, $1.00 par value per share, at an
exercise price of $48 subject to adjustment as provided for in the agreement. When the
Rights become exercisable, the holder of each Right (other than the acquiring person or
members of such group) is entitled (1) to purchase, at the Rights then current exercise
price, a number of the acquiring companys common shares having a market value of twice such
price, (2) to purchase, at the Rights then current exercise price, a number of the
Companys common shares having a market value of twice such price, or (3) at the option of
the Company, to exchange the Rights (other than Rights owned by such person or group), in
whole or in part, at an exchange ratio of one-half share of common stock (or one-thousandth
of a share of the Series A Preferred Stock) per Right. The Rights may be redeemed for $.001
each by the Company at any time prior to acquisition by a person (or group) of beneficial
ownership of 15% or more of the Companys common stock. The Rights will expire on June 23,
2009.
F-27
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 7 Earnings Per Share
Basic earnings per share measures the performance of an entity over the reporting period.
Diluted earnings per share measures the performance of an entity over the reporting period
while giving effect to all potentially dilutive common shares that were outstanding during
the period. The treasury stock method is used to determine the dilutive potential of stock
options. Stock options for which the exercise price was greater than the average market
price of common shares were not included in the computation of diluted earnings per share as
the effect would be antidilutive. The following is a reconciliation of the numerator and
denominator used in the basic and diluted EPS calculations:
Earnings Per Common Share
(In thousands, except per shara data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,911 |
|
|
$ |
7,100 |
|
|
$ |
6,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
5,204 |
|
|
|
5,201 |
|
|
|
5,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
5,204 |
|
|
|
5,201 |
|
|
|
5,095 |
|
Incremental shares for stock options |
|
|
2 |
|
|
|
10 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive weighted average common shares |
|
|
5,206 |
|
|
|
5,211 |
|
|
|
5,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
1.14 |
|
|
$ |
1.37 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
1.14 |
|
|
$ |
1.36 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
|
|
|
Note 8 Disclosures About Fair Value of Financial Instruments
The Companys financial instruments include cash, receivables, accounts and commissions
payable, accrued expenses and amounts outstanding under various debt agreements. Management
believes the fair values of these instruments approximate the related carrying values as of
June 30, 2007, because of their short-term nature, recent renegotiations and/or variable
interest rates.
F-28
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 9 Commitments and Contingencies
The Company leases various equipment and real estate under non-cancelable operating lease
agreements which require future cash payments. The Company incurred rental expense under
its operating leases as summarized in the following table:
Rental Expense Under Operating Leases
(Dollars in thousands)
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
Amount |
June 30, 2007 |
|
|
|
$ |
383 |
|
June 30, 2006 |
|
|
|
|
438 |
|
June 30, 2005 |
|
|
|
|
315 |
|
In addition, the Company has guaranteed royalty payments under a licensing agreement.
There was no royalty expense incurred under this agreement during the three years ended June
30, 2007.
Future minimum lease payments under non-cancelable operating leases and guaranteed minimum
royalty payments as of June 30, 2007 are as follows:
Future Minimum Lease and Royalty Payments
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Guaranteed |
|
|
|
|
Fiscal Year Ended |
|
Leases |
|
|
Royalties |
|
|
Total |
|
June 30, 2008 |
|
$ |
128 |
|
|
$ |
71 |
|
|
$ |
199 |
|
June 30, 2009 |
|
|
84 |
|
|
|
109 |
|
|
|
193 |
|
June 30, 2010 |
|
|
8 |
|
|
|
90 |
|
|
|
98 |
|
June 30, 2011 |
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Thereafter |
|
|
7 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
235 |
|
|
$ |
270 |
|
|
$ |
505 |
|
|
|
|
|
|
|
|
|
|
|
The Company is also contractually obligated to pay contingent consideration based on
future levels of adjusted gross profit in connection with its acquisition of Marketing
Impression. See Note 3 Acquisitions.
There are no material legal proceedings pending to which the Company is party or to which
any of its properties are subject.
F-29
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10 401(k) Defined Contribution Plan
The Company has a defined contribution retirement savings plan (Retirement Plan) covering
substantially all domestic employees who meet certain eligibility requirements as to age and
length of service. The Retirement Plan incorporates the salary deferral provision of
Section 401(k) of the Internal Revenue Code and employees may defer compensation up to the
annual maximum limit prescribed by the Internal Revenue Code. The Company matches half of
participant contributions up to 6% of their annual compensation. The Companys
contributions to the Retirement Plan are summarized in the following table:
Contributions to 401(k) Retirement Plan
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2005 |
Contributions to 401(k) |
|
$ |
110 |
|
|
$ |
101 |
|
|
$ |
94 |
|
Note 11 Segment Information
The Company operates in two reportable segments, Craftmade and TSI. The accounting policies
of the segments are the same as those described in Note 2 Summary of Significant
Accounting Policies. The Company evaluates the performance of its segments and allocates
resources to them based on their income from operations and cash flows.
The Company is organized on a combination of product type and customer base. The Craftmade
segment primarily derives its revenue from home furnishings including ceiling fans, light
kits, bath-strip lighting, interior lighting fixtures, light bulbs, door chimes, ventilation
systems and related accessories to a nationwide network of lighting showrooms and electrical
wholesalers specializing in sales to the remodeling, new home construction and replacement
markets. The TSI segment derives its revenue from outdoor lighting, portable lamps, indoor
lighting and fan accessories marketed solely to mass merchandisers.
Net sales are attributed to geographic areas based on the location of the customer to which
products are shipped. Substantially all of the Companys net sales were to customers in
North America, principally the United States, during the three fiscal years ended June 30,
2007. In addition, substantially all of the Companys assets were attributable to its
operations in the United States as of June 30, 2007 and 2006.
F-30
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about the reportable segments:
Summary of Reportable Segments
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craftmade |
|
TSI |
|
Total |
Fiscal year ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
59,925 |
|
|
$ |
43,425 |
|
|
$ |
103,350 |
|
Gross profit |
|
|
21,180 |
|
|
|
11,111 |
|
|
|
32,291 |
|
Income from operations |
|
|
5,732 |
|
|
|
4,609 |
|
|
|
10,341 |
|
Interest expense, net |
|
|
1,416 |
|
|
|
25 |
|
|
|
1,441 |
|
Minority interest |
|
|
|
|
|
|
1,507 |
|
|
|
1,507 |
|
Provision for income taxes |
|
|
1,469 |
|
|
|
13 |
|
|
|
1,482 |
|
Depreciation and amortization |
|
|
548 |
|
|
|
251 |
|
|
|
799 |
|
Net income |
|
|
2,847 |
|
|
|
3,064 |
|
|
|
5,911 |
|
Total assets |
|
|
53,579 |
|
|
|
11,172 |
|
|
|
64,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
62,902 |
|
|
$ |
55,152 |
|
|
$ |
118,054 |
|
Gross profit |
|
|
22,541 |
|
|
|
12,928 |
|
|
|
35,469 |
|
Income from operations |
|
|
8,517 |
|
|
|
6,463 |
|
|
|
14,980 |
|
Interest expense, net |
|
|
1,104 |
|
|
|
80 |
|
|
|
1,184 |
|
Minority interest |
|
|
|
|
|
|
3,430 |
|
|
|
3,430 |
|
Provision for income taxes |
|
|
2,501 |
|
|
|
765 |
|
|
|
3,266 |
|
Depreciation and amortization |
|
|
575 |
|
|
|
19 |
|
|
|
594 |
|
Net income |
|
|
4,877 |
|
|
|
2,223 |
|
|
|
7,100 |
|
Total assets |
|
|
52,833 |
|
|
|
12,228 |
|
|
|
65,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended June 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
55,663 |
|
|
$ |
63,143 |
|
|
$ |
118,806 |
|
Gross profit |
|
|
20,311 |
|
|
|
15,135 |
|
|
|
35,446 |
|
Income from operations |
|
|
6,402 |
|
|
|
7,960 |
|
|
|
14,362 |
|
Interest expense, net |
|
|
973 |
|
|
|
108 |
|
|
|
1,081 |
|
Minority interest |
|
|
|
|
|
|
3,775 |
|
|
|
3,775 |
|
Provision for income taxes |
|
|
1,895 |
|
|
|
1,184 |
|
|
|
3,079 |
|
Depreciation and amortization |
|
|
537 |
|
|
|
44 |
|
|
|
581 |
|
Net income |
|
|
3,534 |
|
|
|
2,893 |
|
|
|
6,427 |
|
Total assets |
|
|
50,835 |
|
|
|
19,980 |
|
|
|
70,815 |
|
F-31
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes net sales by product category as a percentage of
consolidated net sales:
Net Sales by Product Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2005 |
Craftmade |
|
|
|
|
|
|
|
|
|
|
|
|
Ceiling fans, light kits and blades |
|
|
37 |
% |
|
|
36 |
% |
|
|
37 |
% |
Teiber lighting products |
|
|
10 |
% |
|
|
8 |
% |
|
|
2 |
% |
Durocraft gauges and clocks |
|
|
3 |
% |
|
|
1 |
% |
|
|
0 |
% |
Accolade lighting |
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58 |
% |
|
|
53 |
% |
|
|
47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSI |
|
|
|
|
|
|
|
|
|
|
|
|
Indoor lighting |
|
|
23 |
% |
|
|
29 |
% |
|
|
36 |
% |
Outdoor lighting |
|
|
2 |
% |
|
|
6 |
% |
|
|
7 |
% |
Accessories |
|
|
17 |
% |
|
|
12 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
% |
|
|
47 |
% |
|
|
53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 12 Quarterly Data (Unaudited)
The Companys product sales, particularly ceiling fans, are somewhat seasonal with sales in
the warmer first and fourth quarters being historically higher than in the two other fiscal
quarters.
The following table contains information derived from unaudited financial statements of the
Company. In the opinion of the Companys management, the information includes all adjustments
necessary for fair presentation of the results. The results of a particular quarter are not
necessarily indicative of the results that might be achieved for a full fiscal year.
Quarterly Data (Unaudited)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2007(1) |
|
Fiscal Year Ended June 30, 2006 |
|
|
|
|
|
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
|
|
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
Total |
|
Quarter(2) |
|
Quarter |
|
Quarter |
|
Quarter |
|
Total |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
Net sales |
|
$ |
103,350 |
|
|
$ |
26,169 |
|
|
$ |
22,492 |
|
|
$ |
26,563 |
|
|
$ |
28,126 |
|
|
$ |
118,054 |
|
|
$ |
31,248 |
|
|
$ |
27,154 |
|
|
$ |
28,628 |
|
|
$ |
31,024 |
|
Gross profit |
|
|
32,291 |
|
|
|
7,894 |
|
|
|
7,091 |
|
|
|
8,524 |
|
|
|
8,782 |
|
|
|
35,469 |
|
|
|
9,567 |
|
|
|
8,568 |
|
|
|
8,588 |
|
|
|
8,746 |
|
Income from operations |
|
|
10,341 |
|
|
|
2,242 |
|
|
|
1,413 |
|
|
|
3,188 |
|
|
|
3,498 |
|
|
|
14,980 |
|
|
|
4,218 |
|
|
|
3,385 |
|
|
|
3,687 |
|
|
|
3,690 |
|
Net income |
|
|
5,911 |
|
|
|
1,794 |
|
|
|
733 |
|
|
|
1,500 |
|
|
|
1,884 |
|
|
|
7,100 |
|
|
|
1,923 |
|
|
|
1,748 |
|
|
|
1,697 |
|
|
|
1,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
1.14 |
|
|
$ |
0.34 |
|
|
$ |
0.14 |
|
|
$ |
0.29 |
|
|
$ |
0.36 |
|
|
$ |
1.37 |
|
|
$ |
0.37 |
|
|
$ |
0.34 |
|
|
$ |
0.33 |
|
|
$ |
0.33 |
|
Diluted EPS |
|
|
1.14 |
|
|
|
0.34 |
|
|
|
0.14 |
|
|
|
0.29 |
|
|
|
0.36 |
|
|
|
1.36 |
|
|
|
0.37 |
|
|
|
0.34 |
|
|
|
0.33 |
|
|
|
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares outstanding |
|
|
5,204 |
|
|
|
5,205 |
|
|
|
5,204 |
|
|
|
5,204 |
|
|
|
5,204 |
|
|
|
5,201 |
|
|
|
5,203 |
|
|
|
5,201 |
|
|
|
5,200 |
|
|
|
5,200 |
|
Diluted shares outstanding |
|
|
5,206 |
|
|
|
5,206 |
|
|
|
5,206 |
|
|
|
5,206 |
|
|
|
5,215 |
|
|
|
5,211 |
|
|
|
5,211 |
|
|
|
5,211 |
|
|
|
5,210 |
|
|
|
5,210 |
|
|
|
|
(1) |
|
Includes the results of Marketing Impressions, Inc. effective July 1, 2006. See
Note 3 Acquisitions. |
|
(2) |
|
See Note 5 Income Taxes regarding benefit obtained from a reduction in amounts
set aside for tax contingencies. |
F-33
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
Schedule II Valuation and Qualifying Accounts
Summary of Allowance for Doubtful Accounts and Inventory Obsolescence
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
Balance at |
|
Charged |
|
Charged |
|
|
|
|
|
Balance |
|
|
beginning |
|
to costs |
|
to other |
|
|
|
|
|
at end of |
Description |
|
of period |
|
and expense |
|
accounts |
|
Deductions |
|
period |
Allowance for doubtful accounts as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
$ |
293 |
|
|
$ |
32 |
|
|
$ |
|
|
|
$ |
(74 |
)(a) |
|
$ |
251 |
|
June 30, 2006 |
|
|
300 |
|
|
|
80 |
|
|
|
|
|
|
|
(87 |
)(a) |
|
|
293 |
|
June 30, 2005 |
|
|
150 |
|
|
|
223 |
|
|
|
116 |
|
|
|
(189 |
)(a) |
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for inventory obsolescence as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
$ |
934 |
|
|
$ |
104 |
|
|
$ |
|
|
|
$ |
(635 |
)(b) |
|
$ |
403 |
|
June 30, 2006 |
|
|
717 |
|
|
|
484 |
|
|
|
|
|
|
|
(267 |
)(b) |
|
|
934 |
|
June 30, 2005 |
|
|
1,171 |
|
|
|
481 |
|
|
|
|
|
|
|
(935 |
)(b) |
|
|
717 |
|
|
|
|
(a) |
|
Reduction of the allowance for doubtful accounts associated with the write-off of certain uncollectible accounts
receivable balances. |
|
(b) |
|
Reduction of the allowance for inventory obsolescence associated with the disposal or sale of certain inventory items. |
F-34
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
2.1
|
|
Stock Purchase Agreement between Craftmade International, Inc., Trade Source International,
Inc., and Robert W. Lackey, dated September 15, 2006, previously filed as Exhibit 10.1 to
Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
|
|
Pursuant to Item 601(b)(2) of Regulation S-K, the Company has not filed herewith the
schedules and exhibits to the foregoing exhibit and agrees to furnish supplementally to
the Securities and Exchange Commission, upon request, any omitted schedules or similar
attachments to the foregoing exhibit. |
|
|
|
2.2
|
|
Agreement for the Purchase and Sale of Personal Goodwill between Trade Source
International, Inc. and Robert Lackey, dated September 15, 2006, previously filed as Exhibit
10.2 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference
herein. |
|
|
|
2.3
|
|
Agreement for the Purchase and Sale of Personal Goodwill between Trade Source
International, Inc. and Robert Lackey, Jr., dated September 15, 2006, previously filed as
Exhibit 10.3 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by
reference herein. |
|
|
|
2.4
|
|
Intellectual Property Assignment by and between Trade Source International, Inc., Robert W.
Lackey, Robert W. Lackey, Jr., RWL Incorporated f/k/a Robert W. Lackey Corporation and R.L.
Products Corporation, dated September 15, 2006, previously filed as Exhibit 10.4 to Form 8-K
dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
2.5
|
|
Non-Competition Agreement between Trade Source International, Inc. and Robert W. Lackey,
dated September 15, 2006, previously filed as Exhibit 10.5 to Form 8-K dated September 15,
2006 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
2.6
|
|
Non-Competition Agreement between Trade Source International and Robert W. Lackey, Jr.,
dated September 15, 2006, previously filed as Exhibit 10.6 to Form 8-K dated September 15,
2006 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
2.7
|
|
Consulting Agreement by and between Craftmade International, Inc., Trade Source
International, Inc. and Imagine One Resources, LLC, dated September 15, 2006, previously
filed as Exhibit 10.7 to Form 8-K dated September 15, 2006 (File No. 000-26667), and
incorporated by reference herein. |
|
|
|
2.8
|
|
Partially Subordinate Security Agreement among Trade Source International, Inc., Marketing
Impressions, Inc., Prime Home Impressions, LLC, and Robert Lackey, (Lackey), as collateral
agent for Lackey, Robert W. Lackey, Jr., Imagine One Resources, LLC, RWL Corporation and R.L.
Products Corporation, dated September 15, 2006, previously filed as Exhibit 10.8 to Form 8-K
dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
2.9
|
|
Subordination Agreement by and among Robert W. Lackey (Lackey), as collateral agent for
Lackey, Robert W. Lackey, Jr., Imagine One Resources, LLC, RWL Corporation, R.L. Products
Corporation, and The Frost National Bank, Trade Source International, Inc., Marketing
Impressions, Inc., Prime/Home Impressions, LLC and Craftmade International, Inc., dated
September 15, 2006, previously filed as Exhibit 10.9 to Form 8-K dated September 15, 2006
(File No. 000-26667), and incorporated by reference herein. |
|
|
|
2.10
|
|
Agreement and Plan of Merger by and among Craftmade International, Inc., Bill Teiber Co.,
Inc., Teiber Lighting Products, Inc., Todd Teiber and Edward Oberstein dated March 1, 2005,
previously filed as Exhibit 10.1 to Form 8-K dated March 1, 2005 (File No. 000-26667), and
incorporated by reference herein. |
|
|
|
Exhibit |
|
|
Number |
|
Description |
2.11
|
|
Agreement and Plan of Merger, dated as of July 1, 1998, by and among Craftmade
International, Inc., Trade Source International, Inc. a Delaware corporation, Neall and
Leslie Humphrey, John DeBlois, the Wiley Family Trust, James Bezzerides, the Bezzco Inc.
Employee Retirement Trust and Trade Source International, Inc, a California corporation,
filed as Exhibit 2.1 to Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and incorporated
by reference herein. |
|
|
|
3.1
|
|
Certificate of Incorporation of the Company, filed as Exhibit 3(a)(2) to the Companys Post
Effective Amendment No. 1 to Form S-8 (File No. 33-33594-FW), and incorporated by reference
herein. |
|
|
|
3.2
|
|
Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24,
1992, and filed as Exhibit 4.2 to the Companys Form S-8 (File No. 333-44337), and
incorporated by reference herein. |
|
|
|
3.3
|
|
Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the Companys Post
Effective Amendment No. 1 to Form S-8 (File No. 33-33594-FW), and incorporated by reference
herein. |
|
|
|
4.1
|
|
Specimen Common Stock Certificate, filed as Exhibit 4.4 to the Companys registration
statement on Form S-3 (File No. 333-70823), and incorporated by reference herein. |
|
|
|
4.2
|
|
Rights Agreement, dated as of June 23, 1999, between Craftmade International, Inc. and
Harris Trust and Savings Bank, as Rights Agent, previously filed as Exhibit 4 to Form 8-K
dated July 9, 1999 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
10.1
|
|
Assignment of Rents and Leases dated December 21, 1995, between Craftmade International,
Inc. and Allianz Life Insurance Company of North America (including exhibits), previously
filed as Exhibit 10.2 to Form 10-Q for the quarter ended December 31, 1995, and incorporated
by reference herein. |
|
|
|
10.2
|
|
Deed of Trust, Mortgage and Security Agreement made by Craftmade International, Inc., dated
December 21, 1995, to Patrick M. Arnold, as trustee for the benefit of Allianz Life Insurance
Company of North America (including exhibits), previously filed as Exhibit 10.3 to Form 10-Q
for the quarter ended December 31, 1995, and incorporated by reference herein. |
|
|
|
10.3
|
|
Second Amended and Restated Loan Agreement with Frost National Bank dated September 18,
2006, previously filed as Exhibit 10.1 to Form 8-K dated September 18, 2006 (File No.
000-26667), and incorporated by reference herein. |
|
|
|
10.4
|
|
Revolving Promissory Note with Frost National Bank dated September 18, 2006, previously
filed as Exhibit 10.2 to Form 8-K dated September 18, 2006 (File No. 000-26667), and
incorporated by reference herein. |
|
|
|
10.5
|
|
Craftmade International, Inc. 2006 Long-Term Incentive Plan, previously filed as Exhibit
10.1 to Form 8-K dated November 28, 2006 (File No. 000-26667), and incorporated by reference
herein. |
|
|
|
10.6
|
|
Incentive Stock Option Agreement, previously filed as Exhibit 10.2 to Form 8-K dated
November 28, 2006 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
10.7
|
|
Non-qualified Stock Option Agreement, previously filed as Exhibit 10.3 to Form 8-K dated
November 28, 2006 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
10.8
|
|
Stock Appreciation Rights Agreement, previously filed as Exhibit 10.4 to Form 8-K dated
November 28, 2006 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
10.9
|
|
Restricted Stock Award Agreement, previously filed as Exhibit 10.5 to Form 8-K dated
November 28, 2006 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
21.1*
|
|
List of the subsidiaries of Craftmade International, Inc. |
|
|
|
Exhibit |
|
|
Number |
|
Description |
23.1*
|
|
Consent of BDO Seidman, LLP. |
|
|
|
31.1*
|
|
Certification of James R. Ridings, Chief Executive Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certification of J. Marcus Scrudder, Chief Financial Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1*
|
|
Certification of James R. Ridings, Chairman of the Board, President and Chief Executive
Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2*
|
|
Certification of J. Marcus Scrudder, Chief Financial Officer of the Company, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Each document marked with an asterisk is filed or furnished herewith. |