þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware (Incorporation or Organization) |
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) |
75019 (Zip Code) |
Title of Each Class | Name of each exchange on which registered | |
Common Stock, par value $0.01 | NASDAQ Global Market |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
| Revenues and profits; | ||
| Gross margin; | ||
| Customer concentration; | ||
| Customer buying patterns; | ||
| Sales and marketing expenses; | ||
| General and administrative expenses; | ||
| Pricing and cost reduction activities; | ||
| Income tax provision and effective tax rate; | ||
| Realization of deferred tax assets; | ||
| Liquidity and sufficiency of existing cash, cash equivalents, and investments for near-term requirements; | ||
| Purchase commitments; | ||
| Product development and transitions; | ||
| Competition and competing technology; | ||
| Outcomes of pending or threatened litigation; and | ||
| Financial condition and results of operations as a result of recent accounting pronouncements. |
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PART III | ||||||||
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PART IV | ||||||||
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Exhibit 21.1 | ||||||||
Exhibit 23.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
(a) | General Development of Business | ||
Current Market Conditions | |||
At the beginning of the 2007 fiscal year, the slowing of housing-related demand affected our business, and this impact continued through the 2008 and 2009 fiscal years. The decline in housing turnover was compounded by a broad economic downturn which began in 2008 and has continued into 2009, which negatively impacted both consumer confidence and discretionary spending. This economic downturn is widely viewed as one of the worst since the Great Depression, and its impact has affected all sectors of the economy. This economic environment and the corresponding decline in home-related spending have significantly impacted both our Specialty and Mass retail segments. In addition to historically low levels of new home construction, management believes that consumers also chose to delay home improvement projects and renovations due to well-publicized reports of economic weakness, job losses and declining home values. | |||
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 and exterior lighting fixtures, ceiling fans and vent fans. The 2008 acquisition of certain assets of Woodard, LLC has also broadened the Companys offering to include outdoor patio furniture, opened up new channels and outlets for existing Craftmade products, and created avenues for cross selling both existing and new products to our customers. Following this acquisition, the Company has also focused on the design and development of new and innovative outdoor furniture lines, and has expanded the distribution of clocks and weather gauges through the new distribution channel of independent lawn and garden retailers. | |||
Additional information regarding current market conditions are detailed in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation. | |||
Acquisition of Certain Assets of Woodard, LLC . | |||
On January 2, 2008, Woodard-CM, LLC, a wholly owned subsidiary of Craftmade (Woodard), completed the purchase of substantially all of the net assets of Woodard, LLC, a leading Chicago-based designer, manufacturer and distributor of a broad line of outdoor furniture products and related accessories (the Woodard Asset Acquisition) pursuant to the Asset Purchase Agreement, dated as of December 18, 2007 (the Woodard Agreement), among Craftmade, Woodard and Henry Crown and Company d/b/a CC Industries, Inc. In the acquisition, the Company initially paid Woodard $19,265,000 plus a working capital adjustment of $954,000 and warrants (the Warrants) to purchase up to 200,000 shares of common stock, $0.01 par value per share, of the Company (the Common Stock) for 10 years from the date of issuance at a purchase price of $8.10 per share, valued at $279,000. The purchase price consideration included 500,000 shares of Common Stock valued at $8.10 per share based on the average closing price of the Common Stock for the three days prior to signing the Woodard Agreement for an aggregate price of $4,050,000 (purchase price per share of Common Stock for financial reporting is $8.00 based on the average closing price of the Common Stock on the two days prior, two days after and day of the announcement of the signing of the Woodard Agreement, for an aggregate price of $4,000,000), with the remaining purchase price paid in cash at closing. The Woodard Agreement allowed the parties to adjust the purchase price to accurately reflect the working capital up to 60 days after the closing of the acquisition, resulting in a working capital adjustment of $1,272,000, which was due to the Company. Including the working capital adjustment, the total adjusted cash consideration for the acquisition was $14,896,000. | |||
Acquired assets included $23,370,000 in current assets, a long-term receivable valued at approximately $1.5 million, manufacturing equipment and Woodards 306,000 square foot facility in Owosso, Michigan. Craftmade also assumed certain payables and other liabilities totaling $7,396,000. Additionally, the Company incurred approximately $655,000 in professional fees associated with the transaction and has reserved $692,000 for expected restructuring expense. |
1
Relationship with Mass Merchandisers | |||
The Company sells its products to mass merchandisers including but not limited to Bed, Bath and Beyond, Costco, Lowes and Wal-Mart, through the Companys subsidiaries Woodard and Prime/Home Impressions, Inc. (PHI) and through Design Trends, LLC (Design Trends), the Companys 50%-owned subsidiary. | |||
Lowes remains the Companys largest customer, and management believes that, based on the amount of product currently shipped to Lowes, the Company continues to be a primary vendor for Lowes mix and match portable lamps, lamp accessory and ceiling medallion programs. The Woodard Asset Acquisition also significantly increased the Companys presence at Lowes. While management believes that Craftmade will continue to be invited to participate in each of Lowes scheduled line reviews for its existing and new product lines, the Company has no long-term supply contracts with Lowes and vendor commitments are revisited at each line review. The line reviews occur approximately on an annual basis for each product category and give Craftmade the opportunity to add new SKUs to the Lowes program. However, participation in line reviews could also result in a partial or complete reduction of existing SKUs in the product lines currently offered to Lowes. | |||
In addition to Lowes, the Company sells a variety of products to many other mass retailers and continues to focus its efforts on this channel in order to grow sales and diversify its customer base. Management believes that the future growth of the Mass segment (as described in Section (b) below) is contingent upon the success of the Companys ongoing efforts to introduce new products, product lines and marketing concepts to existing customers and the expansion of the business to new customers. | |||
(b) | Financial Information About Reportable Segments | ||
The Company is organized by customer base into two operating segments referred to as Specialty and Mass. Prior to June 30, 2008, these segments were referred to as Craftmade and TSI, respectively. Subsequent to that date, Craftmade International, Inc. and Craftmade refer to the Company and Craftmade ceiling fans refers to ceiling fan products sold primarily within the Specialty segment under the Craftmade trade name. TSI now refers specifically to the Trade Source International subsidiary rather than the entire Mass segment. | |||
The Specialty segment primarily derives its revenue from home furnishings, including ceiling fans, light kits, bath-strip lighting, lamps, light bulbs, door chimes, ventilation systems, outdoor patio furniture and other accessories offered primarily through lighting showrooms, patio dealers, hospitality customers and catalog houses. The Mass segment derives its revenue from outdoor lighting, outdoor patio furniture, portable lamps, indoor lighting and fan and lamp accessories marketed solely to mass retailers and certain major retail chains. | |||
The additional sales that have resulted from the Woodard Asset Acquisition come from independent patio dealers, hospitality customers and mass retailers. Sales with the independent patio dealers and hospitality customers are included in the Specialty segment and sales to mass retailers are included in the Mass segment. | |||
The Company evaluates the performance of its segments and allocates resources to them based on their income from operations and cash flows. Financial information with respect to the Companys segments is found in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 10 Segment Information in the Companys Consolidated Financial Statements. All prior year financial information has been renamed to be consistent with the current year disclosure. | |||
(c) | Narrative Description of Business | ||
Craftmade International, Inc. was incorporated in the state of Texas in 1985 and reincorporated in the state of Delaware in 1991. Based in Coppell, Texas, the Company has expanded over the years through a combination of organic growth and acquisition of new product lines and customers. The Company currently sells a wide variety of home-related furnishings and products to both specialty retailers and mass merchandisers. | |||
Specialty Specialty is the reporting segment for the portion of the Companys business 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, outdoor patio furniture and related accessories to a nationwide network of over 2000 lighting showrooms, patio dealers, and electrical wholesalers specializing in sales to the remodeling, new home construction and replacement markets. |
2
The Specialty ceiling fan product line consists of over 60 premium-priced to lower-priced ceiling fans and is distributed under the Craftmade® trade name. 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. | |||
The Specialty segment also includes nearly 80 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, the Company offers nearly two dozen styles of bath-strip lighting and over 40 designs of outdoor lighting to its Specialty customers. | |||
The Specialty segment also includes sales of over 100 families of outdoor patio furniture under the Woodard, Woodard Landgrave and Lyon Shaw trade names to independent patio dealers, hospitality customers and catalogue houses. The Company offers molded aluminum, extruded aluminum, wrought iron and woven furniture lines in a wide variety of styles, finishes and fabrics, which can be produced in a significant number of combinations for the end consumer. | |||
Mass Mass 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, outdoor patio furniture, various fan accessories and lamp parts, and home décor items to mass merchandisers. The Mass segments 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. Craftmade strives to offer its Mass customers high quality products at value prices, and these products are typically sold under the retailers own trade names. | |||
The Mass segment includes sales from four Craftmade subsidiaries: Trade Source International (Trade Source or TSI), PHI, Design Trends and Woodard. Trade Source, PHI and Woodard are wholly-owned subsidiaries and Design Trends is 50% owned by Craftmade. | |||
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 Mass 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. |
3
Products | |||
The following table summarizes net sales by product category (defined below) as a percentage of consolidated net sales: |
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Specialty |
||||||||||||
Ceiling fans, light kits and blades |
16 | % | 23 | % | 37 | % | ||||||
Outdoor patio furniture |
20 | % | 16 | % | 0 | % | ||||||
Ventilation, chimes and bulbs |
4 | % | 6 | % | 10 | % | ||||||
Clocks and weather gauges |
1 | % | 2 | % | 3 | % | ||||||
Bath and outdoor lighting |
5 | % | 7 | % | 8 | % | ||||||
46 | % | 54 | % | 58 | % | |||||||
Mass |
||||||||||||
Indoor lighting |
10 | % | 13 | % | 23 | % | ||||||
Outdoor lighting |
1 | % | 2 | % | 2 | % | ||||||
Outdoor patio furniture |
37 | % | 22 | % | 0 | % | ||||||
Accessories |
6 | % | 9 | % | 17 | % | ||||||
54 | % | 46 | % | 42 | % | |||||||
100 | % | 100 | % | 100 | % | |||||||
Specialty Segment Products | |||
The Specialty segment is made up of products organized around two distinctive brands, each of which have numerous product offerings: |
Craftmade® | Woodard® | |
Decorative ceiling fans
|
Wrought iron patio furniture | |
Builder ceiling fans
|
Aluminum patio furniture | |
Light kits and blades
|
All seasons wicker patio furniture | |
Chandeliers and flushmounts
|
Patio umbrellas | |
Ceiling fan accessories
|
Outdoor lighting | |
Bath-strip lighting
|
Outdoor Clocks | |
Outdoor lighting
|
Weather gauges | |
Interior lighting fixtures |
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Door chimes |
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Smoke alarms |
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Ventilation systems |
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Light bulbs |
During fiscal 2009 the Company re-branded many of its product lines to leverage on its two flagship trademarks. Prior to this time the Companys bath-strip lighting, outdoor lighting and much of its interior lighting were branded under the Accolade® trade name, and its door chimes, smoke alarms, ventilation systems and light bulbs were branded as Teiber, all of which now bear the Craftmade brand. The Companys outdoor lighting, outdoor clocks and weather gauges were sold under the Durocraft® brand name, and are now sold under the Woodard brand name. |
4
Craftmade® The Craftmade ceiling fan product line consists of over 70 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. Craftmade ceiling 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 Causal, Modern, Outdoor, Traditional and Youth, depending on the size, finish and other features, and range in price from the premium Chalice, Constantina, Quest and Amphora series to various lower-end builder series. | |||
Craftmade ceiling 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 80 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. | |||
The Specialty segment includes more than 30 series of bath-strip lighting in different lengths and decorative finishes now sold under the Craftmade® trade name (formerly Accolade®). In addition, Craftmade offers more than 30 designs of outdoor lighting in different decorative finishes, and adds new finishes and designs from time to time based on customer demand. | |||
The Company also offers 2,000 different light bulbs and complementary lighting products as well as an extensive line of door chimes, pushbuttons, ventilation systems and smoke alarms, which were formerly sold under the Teiber name. These products are typically offered via a proprietary display that displays numerous Craftmade products and consumes a minimal amount of floor space. | |||
Woodard® As a result of the Woodard Asset Acquisition, the Company offers a wide range of outdoor patio furniture and related products such as umbrellas and patio lighting. Product lines include approximately 20 cast iron, over 30 cast and extruded aluminum and several collections of all-weather wicker products, and they range from the premium Woodard Landgrave collection to the more affordable Lyon Shaw series. Woodard items are primarily distributed to independent patio and garden retailers. | |||
The Company also cross-markets numerous decorative clocks and weather gauges, mini-post lanterns, tabletop and freestanding candle lanterns, oil lanterns and special order items under the Woodard and Lyon Shaw names, which were formerly branded as Durocraft. | |||
Mass Segment Products | |||
The Mass segments products are organized into three groups: lighting, patio furniture, and accessories. | |||
Lighting The Company markets floor and table lamps, chandeliers and wall sconces designed by Patrick Dolan to various mass merchandisers through its Design Trends subsidiary. Design Trends portable lamp program, which is a significant part of the Mass 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. The Company also markets 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. | |||
Patio Furniture The Company offers a broad line of patio furniture, tables, and umbrellas under Woodard Worldwide, Carolina Forge and various private label trade names. Product categories include cast iron, extruded aluminum and all-weather wicker furniture, as well as patio umbrellas and lighting. | |||
Accessories The Mass segment also markets programs of fan accessories and lamp parts, including universal down rods, pull-chains and ceiling medallions, to various mass merchandisers through PHI. Accessories also include non-core products such as decorative ceiling medallions and adjustable window cornices. |
5
Product Sourcing | |||
Specialty. Craftmade ceiling fans, bath-strip lighting, substantially all 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, and all are received in container-sized lots. The Specialty segment includes a variety of light kits in various finishes and colors, as well as a variety of fixtures designed for ceiling fans. The Company 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. Wall controls, timers and switches are manufactured by companies based in the United States. The Company also offers a variety of custom blade sets in various sizes and finishes. The finished products are packaged and labeled under the Craftmade brand name. | |||
Woodard® branded outdoor patio furniture sold in the Specialty segment is sourced primarily from the Woodard manufacturing facility in Owosso, Michigan and consists primarily of wrought iron and extruded aluminum styles. These products are sold through specialty outdoor patio dealers, catalogue houses and hospitality suppliers. The Woodard Landgrave line is sourced through an exclusive relationship with the Mexican producer of Landgrave outdoor patio furniture and is only offered in the United States through Woodard. | |||
The Specialty segment also includes light bulbs, door chimes, pushbuttons, ventilation systems, smoke alarms and complementary lighting products as well as clocks and weather gauges sourced from several manufacturers located in China and the United States. The Company also 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. | |||
The Specialty and Mass segments purchase outdoor lighting from several manufacturers located in China. All of the Companys foreign vendors require payment 30 to 60 days after notification of shipment of product from Asia. While the Company does not typically sign long term supply contracts, it works closely with its vendors and attempts to foster long lasting supply partnerships. | |||
Mass. The Mass segment purchases indoor lighting products, including flush mounts and bath-strip lights from many of the same manufacturers that produce outdoor lighting for Specialty. | |||
PHI purchases most of its ceiling fan accessories and all of its lamp replacement parts from multiple manufacturers located in China, with the exception of ceiling medallions, which are purchased from a distributor located in the United States. | |||
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. | |||
The Company purchases much of its outdoor patio furniture for the Mass segment from a Chinese factory that is 50% owned by CCI, Inc., former owners of the Woodard line, and the remainder is purchased from various other Chinese manufacturers. | |||
Distribution | |||
Specialty. The Specialty segment includes ceiling fans, light kits and accessories which are primarily sold through more than 1,600 lighting showrooms and electrical wholesaler locations specializing in sales to the new home construction, remodeling and replacement markets. The segment also includes outdoor patio furniture sold primarily through more than 500 specialty patio and garden dealers. Craftmade and Woodard products sold to catalogue houses and hospitality accounts are also included in the Specialty segment. | |||
The Companys ceiling fans, light kits, bath strips, outdoor lighting and accessories are sold 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 the three fiscal years ended June 30, 2009, no single lighting showroom or electrical wholesaler accounted for more than 3% of Specialty segment net sales or 1.5% of consolidated net sales. |
6
The Companys outdoor patio furniture products are distributed on a national basis and are represented by a network of independent sales representatives. Each sales representative is selected to cover a specific market area and represents the Company exclusively in the sale of outdoor patio furniture in return for commissions on such sales. During the fiscal year ended June 30, 2009, no single patio dealer, hospitality customer or catalogue house accounted for more than 3% of Specialty segment net sales or 1.5% of consolidated net sales. | |||
Sales representatives are carefully selected and continually evaluated in order to promote high-level representation of our 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 them. Additional training, especially for a new product series, is provided on a regular basis at semi-annual trade shows held at the Companys showrooms. Management believes that it has assembled a highly motivated and effective sales representative organization that has demonstrated a strong commitment to the Company and its products. Management further believes that the strength of its sales representative organization is primarily attributable to the quality and competitive pricing of our products, as well as the ongoing administrative and marketing support that the Company provides to its sales representatives. | |||
Mass. Substantially all of the Mass segments sales are to mass merchandisers, with Lowes comprising 44% and 24% of the sales of the Mass segment and the Companys net sales, respectively, and Costco Wholesale Corporation (Costco) comprising 9% and 5% of the sales of the Mass segment and the Companys net sales, respectively. | |||
Mass sales are primarily delivered to customers through a mixture of direct shipment and shipments from the Companys 378,000 square foot warehouse and distribution facility in Coppell, Texas. The Mass segment utilizes an internal sales force to market its products to service specific mass merchandiser locations. | |||
In general, the Company has a 48-hour product shipment policy for products warehoused at its Coppell facility. 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 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources. | |||
Marketing | |||
Specialty. Craftmade relies primarily on the reputation of its products for high quality and competitive prices, and the efforts of its sales representative organization in order to promote the sales of its products in the Specialty segment. The principal markets for our ceiling fan and lighting products are the new home construction, remodeling and replacement markets. The principle markets for our outdoor living products are retail outlets. Craftmade utilizes advertising in home lighting magazines and outdoor living magazines, and broadly distributes its product catalogs. | |||
Woodard introduced its first hand-crafted wrought iron furniture collection in the 1930s. It been noted for superior craftsmanship and a high standard of excellence in design ever since. Like Craftmade, Woodard also utilizes the efforts of its sales representative organization to promote its products in the Specialty segment. Key placement for outdoor furniture can occur along with new construction or when the consumer moves their living space outdoors. Woodard places advertisements in outdoor living and décor magazines along with various trade publications. | |||
Craftmade and Woodard also promote the lighting and outdoor product at semi-annual trade shows in Dallas (in January and June) and Chicago (July and September) respectively at company maintained showrooms. The Craftmade showroom is at the Dallas Trade Mart, and the Woodard showroom, which is open year-round, is at the Chicago Merchandise Mart. |
7
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 Company offers up to a 15-year warranty on its outdoor patio furniture lines. The Companys management believes these warranties are highly attractive to both dealers and consumers. | |||
Mass. The Mass segment relies primarily on the reputation of its products, merchandising concepts and the relationships it has with mass merchandisers with respect to its sales. From time to time the Company participates in advertising programs and special promotions conducted by its customers. The Company also promotes its product line at select trade shows and line reviews held by its customers. | |||
Product Expansion | |||
Craftmade continually expands its product lines, 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, 2009, the Company introduced 14 new ceiling fans and 5 complete interior lighting families of products, including chandeliers, pendants and sconces, as well as 6 new outdoor lighting collections and 9 new families of outdoor furniture. Each lighting family consists of 6 to 11 individual fixtures and outdoor patio furniture families generally consist of 5 to 12 pieces. Management believes that these new offerings have been well accepted by the Specialty dealers. In addition, the Company increased its selections of complementary products such as specialty light fixtures, including bath bars and outdoor lighting, as well as outdoor accessories such as clocks and gauges. The Companys management will continue to search for opportunities for product expansion that it considers complementary to the Companys existing product lines. | |||
Seasonality | |||
Historically, sales of the Companys products, particularly ceiling fans and lighting kits, have been somewhat seasonal with sales in the warmer first and fourth quarters being higher than in the two other fiscal quarters. The acquisition of the Woodard furniture line has shifted the overall seasonality of the business, as the majority of outdoor furniture sales occur between January and April. Woodard customers also are allowed to participate in an early buy program, which allows them to purchase and take receipt of product in the fall but provides extended payment terms allowing them to pay during the selling season. This program is intended to help offset the Woodard production peak, and take advantage of production capacity during the off-season. | |||
Backlog | |||
Backlog is not a significant issue to the Companys operations. Substantially all products distributed from the Coppell, Texas facility are shipped to customers within 48 hours following receipt of orders. While lead times are longer in relation to outdoor furniture distributed from the Owosso, Michigan production facility, many orders are shipped within two weeks of being placed and the vast majority ship within six weeks. | |||
Competition | |||
The markets for ceiling fans, lighting fixtures and outdoor patio furniture are highly competitive at all levels of operation and across both mass and specialty retailers. Some of the major companies in the ceiling fan industry include Casablanca, Hunter, Minka, Generation Brands companies, Quorum, Litex Industries, Emerson Electric and Taconi. Some of the major companies in the lighting fixture industry include Designers Fountain, Generation Brands, Catalina, Jimco Lamps, J. Hunt, Westinghouse, Kichler and Minka. Some of the many patio furniture competitors include Agio, Brown Jordan and Tropitone. A number of other well-established companies also are currently engaged in activities that compete directly with Craftmade. In addition, mass merchandisers themselves will, at times, compete with the Company by purchasing private label products directly from Asian factories. | |||
Some of the Companys competitors are better established and have longer operating histories, substantially greater financial resources or greater name recognition. However, the Companys management believes that the quality of our products, the strength of our marketing organization and the growing recognition of our brands will enable Craftmade to compete successfully in these highly competitive markets. |
8
More detail on the impact of competition on the Companys business is set forth in Item 1A. Risk Factors.` | |||
Product Warranties | |||
Craftmades products are warranted against defects in workmanship and materials under warranties of various lengths and terms dependent on the product. 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. |
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Ceiling Fans & Lighting |
$ | 980 | $ | 1,179 | $ | 1,147 | ||||||
Outdoor Patio Furniture |
910 | 541 | | |||||||||
$ | 1,890 | $ | 1,720 | $ | 1,147 | |||||||
Research and Development | |||
Research, development and engineering expenditures for the creation and application of new products and processes, are summarized in the following table (excluding related salaries and legal expenses): |
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Research and development |
$ | 221 | $ | 184 | $ | 265 |
Independent Safety Testing | |||
All of the ceiling fans, outdoor lighting, light kits and lamps sold by the Company in the United States and Canada are tested by independent laboratories such as Underwriters Laboratories (UL) and Intertek ETL (ETL), which are independent corporations that test consumer products, including ceiling fans and lighting fixtures, for public safety. Under its agreement with these labs, the Company voluntarily submits its products for testing, and the labs test the products for safety. If the product is acceptable, the testing lab issues a listing report that provides a technical description of the product. These labs also provide the manufacturers with procedures to follow in manufacturing the products. Electrical products that are manufactured in accordance with the designated procedures display a listing mark from the lab, 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. | |||
Product Liability | |||
The Company is engaged in businesses that could expose it to possible claims for injury resulting from the failure of its products. 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. |
9
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 2009 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 certain fans and certain other license agreements entered into in the ordinary course of its business. The Company has registered the trademarks Craftmade®, Woodard®, Accolade® and Durocraft®, along with the product names of certain of its designs, with the United States Patent and Trademark Office. | |||
Employees | |||
As of June 30, 2009, the Company employed a total of 255 full-time employees, compared to 320 employees as of June 30, 2008. Substantially all employees are based in the United States and are located primarily at the Companys headquarters and distribution center in Coppell, Texas, and at the Woodard factory in Owosso, Michigan. During fiscal 2009, the Company transitioned many functions previously performed at the former Woodard headquarters in Chicago, Illinois to other Company locations, primarily Coppell, Texas. This transition resulted in a significant net reduction of employees and the elimination of the Woodard headquarters in Chicago. Currently, four key sales and marketing personnel remain based in a satellite office in Chicago. As of June 30, 2009, two employees were 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. | |||
(d) | Financial Information by Geographic Area | ||
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. | |||
(e) | Available Information | ||
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 with 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. | |||
We will provide a copy of our Annual Report on Form 10-K annual report upon written request of any stockholder. 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. |
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. |
10
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 the forward-looking statements made by 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. |
Our primary markets, particularly the housing, home construction, and remodel sectors, and retail business are subject to business cycles which could lead to reduced short and long-term demand for our products. | |||
General economic conditions in the United States, 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 United States could lead to a reduced demand for our products. The United States has experienced a historic downturn in both new home construction and existing home sales in the past 36 months, and over the past 12 months the entire global economy has suffered a historic downturn. This recent broad downturn and the longer term housing collapse has negatively affected the Companys business. | |||
The industries we operate in are 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. To address these challenges, we must be able to successfully respond to competitive factors, including pricing, promotional incentives and trade terms. 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 specialty 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 structure 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 successfully integrate companies that we acquire, including their personnel, financial systems, distribution, operations and general operating procedures. If we fail to successfully integrate companies that we acquire, 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 the Company may have a material adverse effect on our operating results. |
11
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. Given the importance of a strong sales team to our success, we endeavor to hire capable sales people, compensate them appropriately and provide them with the training and tools necessary for them to succeed in their roles. 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 our chief executive officer. The loss of services of any of our key personnel could have a negative impact on our business. |
As we do not manufacture most of 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 80% of our products from third-party suppliers in China and Mexico with the remainder supplied from vendors, or self-manufactured in the United States. We do not have any material 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. |
A decline in our customers willingness or ability to pay for goods in a timely manner, or at all, could lead to increased working capital costs, higher bad debt expense or lack of liquidity. | |||
All segments of our business are highly competitive and the extension of credit terms to our customers is a critical part of our business offering, and must compare favorably with our competitors. The need to extend credit in order to gain sales must constantly be balanced with the risk of slow payments or payment defaults. Although the Company employs a credit team with years of experience in credit and collections, who carefully weigh all credit decisions, it is not possible to completely mitigate all credit risk. Should we experience a significant increase in late payments or bad debt write offs, it could materially impact our cash flow, ability to borrow against receivables and net income. | |||
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 the Mass segments net sales, including the net sales of Woodard, TSI, PHI and Design Trends, are made to mass merchandisers, with Lowes comprising the most significant portion of Mass 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 also could have a material adverse affect on our financial condition and results of operations. |
12
If net sales to these customers were 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 our current mass merchandise 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 net sales 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. | |||
Our mass merchandise customers may pressure us to lower our prices or take other actions that may adversely impact our results of operations. | |||
Our mass merchandise customers may pressure us to lower our prices in addition to requiring various stipulations from us 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. Even though line reviews give us the potential to add new SKUs, participation in line reviews could result in a partial or complete reduction of our existing SKUs in the product lines currently offered which could have a materially adverse effect on our results of operations. | |||
Our mass merchandise customers may choose to directly source many of the products we currently provide. | |||
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 directly from manufacturers in Asia many of the products we currently provide. | |||
To the extent our mass merchandise 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, our mass merchandise customers 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 adverse 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. |
13
Our Common Stock may be affected by limited trading volume and price fluctuations, each of which could adversely impact the value of our Common Stock. | |||
There has been limited trading in our Common Stock and there can be no assurance that an active trading market in our Common Stock will exist. Our Common Stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our Common Stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our Common Stock to fluctuate substantially. These fluctuations may also cause short sellers to enter the market from time to time in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our stock will be stable or that the price per share of the Common Stock will appreciate over time. |
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 working capital needs, planned capital expenditures, acquisitions, and dividends on our Common Stock 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 can 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 immediately due and payable and terminate all commitments to us to extend further credit. We can offer no assurances 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 based on various index rates, including LIBOR and the Prime Rate, 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 substantially all of our products from manufacturers in the Peoples Republic of China. As a result, our costs for these products may be affected by changes in the value of the U.S. dollar against 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. |
14
We rely heavily on our management information systems for manufacturing, 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 the 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. |
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. | |||
Changes in accounting rules could have a material impact on our reported business and financial results. | |||
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 governmental and regulatory bodies that promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results. |
15
Failure or flaws in our products could lead to product liability claims and payment of associated financial damages or penalties. | |||
The Company goes to great length to ensure that its products meet the highest standard for reliability and consumer safety. We work closely with our contract manufacturers to design, develop and produce products that are both attractive and highly functional, and that pose no threat to our customers when used in an appropriate manner. In the current highly litigious environment, any flaw or failure in our products that causes harm to an individual, property damage or simply consumer dissatisfaction could become the source of legal action, either on an individual or class action basis. Such legal actions could have wide ranging impact including distraction of senior management, adverse publicity, legal fees and financial damages or penalties. 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 our policy will be sufficient to pay any claims. |
The Company could suffer financial losses due to carrying excessive inventory, or conversely due to having insufficient inventory on hand to meet the needs of our customers. | |||
Since over 80% of our sales are sourced from China, the Company has to maintain high levels of inventory in order to meet customer needs and our own delivery policies. The Company seeks to minimize inventory levels wherever possible because of the significant expense associated with the purchase, shipping and warehousing of our products. | |||
In order to gain and retain distribution of our products, we often need to produce specific product lines under customer-owned (Private Label) brands, which legally cannot be sold in any outlets other than those owned by that customer. Discontinued or overstocked products from the Private Label segment generally have to be destroyed or liquidated at highly discounted and unprofitable prices. Management believes that competing in the Private Label segment is essential to gaining market share and sales in the Mass segment and, therefore, is willing to increase the Companys inventory risk by producing and selling Private Label products. | |||
Our design, sales, marketing and manufacturing teams have years of experience in each of the segments we operate in and work to maintain a strong knowledge of current consumer and retail trends, customer buying habits, and the general economic environment to ensure that we are ordering and stocking products that will sell through at a reliable and consistent rate. We also leverage our internal systems, policies and controls to maintain the proper level of inventory, balancing economic cost with customer needs. We cannot ensure that this balance is always maintained, and any misjudgment in inventory management can have an adverse impact on the Companys financial statements and results of operations. |
None. |
The following table sets forth information with respect to the Companys key properties: |
Current | ||||||||
Approximate | Lease | |||||||
Square | Term | |||||||
Location | Use | Feet | Expiration | |||||
Coppell, Texas
|
Headquarters, warehouse and distribution facility | 378,000 | Owned | |||||
Owosso, Michigan
|
Manufacturing and warehouse facility for Woodard | 306,000 | Owned | |||||
Owosso, Michigan
|
Warehouse storage for manufacturing facility | 24,885 | Month to month | |||||
Dallas, Texas
|
Dallas Trade Mart Showroom Fans & Lighting | 5,656 | April 30, 2012 | |||||
Chicago, Illinois
|
Chicago Merchandise Mart Outdoor Furniture | 11,000 | August 31, 2013 | |||||
Chicago, Illinois
|
Woodard Sales and Marketing office space | 1,989 | August 14, 2009 | |||||
Kowloon, Hong Kong
|
Product sourcing and international sales office | 1,147 | October 14, 2010 |
16
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 Specialty and Mass segments. 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. | |||
See Note 4 Long-Term Obligations in the notes to the consolidated financial statements for a discussion of the Companys term loans used to refinance the Coppell, Texas and Owosso, Michigan facilities. | |||
As part of the Woodard Asset Acquisition, the Company acquired a 306,000 square-foot manufacturing and warehouse facility in Owosso, Michigan, that is engaged in the manufacture and distribution of its outdoor furniture lines. The Company currently has no plans to relocate or discontinue use of this facility. As part of the Woodard transaction, the Company also gained 20,000 square feet of office space in Chicago, Illinois, which had been the headquarters of Woodard, LLC, and was leased under terms that ended in February 2009. Upon integration of most Woodard functions in the Coppell headquarters, and expiration of the former Woodard headquarters lease, the Company leased a small office in Chicago for certain sales and marketing roles that remained in Chicago. | |||
The Company also formerly had sales offices in Bentonville, Arkansas and Dedham, Massachusetts which were closed in fiscal 2009. |
The Company is involved in various claims, lawsuits and proceedings arising in the ordinary course of business. There are uncertainties inherent in the ultimate outcome of such matters and it is difficult to determine the ultimate costs that we may incur. We believe the resolution of such uncertainties and the incurrence of such costs will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. |
No matters were submitted to a vote of stockholders during the fourth quarter of fiscal year 2009. |
17
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The Common Stock trades on the 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: |
Dividends | ||||||||||||
Sales Price | Per | |||||||||||
High | Low | Share | ||||||||||
Fiscal Year Ended June 30, 2009 |
||||||||||||
Fourth Quarter |
$ | 2.86 | $ | 1.20 | $ | | ||||||
Third Quarter |
2.20 | 0.89 | | |||||||||
Second Quarter |
4.21 | 1.32 | | |||||||||
First Quarter |
6.51 | 2.77 | | |||||||||
Fiscal Year Ended June 30, 2008 |
||||||||||||
Fourth Quarter |
$ | 8.34 | $ | 6.24 | $ | | ||||||
Third Quarter |
9.99 | 7.33 | 0.12 | |||||||||
Second Quarter |
12.18 | 7.11 | 0.12 | |||||||||
First Quarter |
17.63 | 11.52 | 0.12 |
The Company announced in May of 2008, that it had suspended its quarterly dividend. 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. In addition, the Companys current credit facility restricts dividend payments in certain circumstances. | |||
Computershare Investor Services, 2 North LaSalle Street, Chicago, Illinois 60602, is the transfer agent and registrar for the Common Stock. | |||
Holders | |||
There were 77 holders of record of the Common Stock on August 31, 2009. 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, 2009. | |||
Equity Compensation Plans | |||
See Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The selected financial data in the tables below are for the five fiscal years ended June 30, 2009. 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. |
18
Fiscal Year Ended | ||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | June 30, | ||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(1) | (2) | (3) | ||||||||||||||||||
Selected Operating Results |
||||||||||||||||||||
Net sales |
$ | 149,692 | $ | 137,590 | $ | 103,350 | $ | 118,054 | $ | 118,806 | ||||||||||
Gross profit |
32,220 | 34,913 | 32,291 | 35,469 | 35,446 | |||||||||||||||
Gross profit as a percentage of net sales |
21.5 | % | 25.4 | % | 31.2 | % | 30.0 | % | 29.8 | % | ||||||||||
Selling, general and administrative |
30,340 | 28,117 | 21,151 | 19,895 | 20,503 | |||||||||||||||
Income from operations |
804 | 5,927 | 10,341 | 14,980 | 14,362 | |||||||||||||||
Income (loss) before minority interest |
(367 | ) | 3,404 | 7,418 | 7,418 | 10,530 | ||||||||||||||
Minority interest |
721 | 1,292 | 1,507 | 3,430 | 3,775 | |||||||||||||||
Net income (loss) |
(1,088 | ) | 2,112 | 5,911 | 7,100 | 6,427 | ||||||||||||||
Income from operations per share |
0.14 | 1.09 | 1.99 | 2.88 | 2.82 | |||||||||||||||
Income (loss) before minority interest |
(0.06 | ) | 0.62 | 1.43 | 1.43 | 2.07 | ||||||||||||||
Basic earnings (loss) per common share |
(0.19 | ) | 0.39 | 1.14 | 1.37 | 1.26 | ||||||||||||||
Diluted earnings (loss) per common share |
(0.19 | ) | 0.39 | 1.14 | 1.36 | 1.26 | ||||||||||||||
Cash dividends declared per common share |
| 0.36 | 0.48 | 0.48 | 0.40 | |||||||||||||||
Basic common shares outstanding |
5,705 | 5,450 | 5,204 | 5,201 | 5,095 | |||||||||||||||
Diluted common shares outstanding |
5,705 | 5,451 | 5,206 | 5,211 | 5,115 | |||||||||||||||
Summary Balance Sheet |
||||||||||||||||||||
Current assets |
$ | 51,827 | $ | 52,724 | $ | 41,216 | $ | 45,291 | $ | 50,595 | ||||||||||
Total assets |
80,868 | 81,960 | 64,751 | 65,061 | 70,815 | |||||||||||||||
Current liabilities |
10,203 | 12,429 | 8,687 | 15,020 | 39,714 | |||||||||||||||
Long-term debt |
29,886 | 27,759 | 18,938 | 16,204 | 1,551 | |||||||||||||||
Total liabilities |
41,211 | 41,305 | 28,732 | 32,362 | 42,351 | |||||||||||||||
Stockholders equity |
36,125 | 37,093 | 32,524 | 29,037 | 24,373 | |||||||||||||||
Book value per common share |
6.33 | 6.81 | 6.25 | 5.58 | 4.78 |
(1) | Effective January 2, 2008, Woodard-CM, LLC, a wholly owned subsidiary of Craftmade (Woodard), completed the purchase of substantially all of the net assets of Woodard, LLC. Fiscal year 2008 financial data includes results of operations of Woodard for the period subsequent to the acquisition date. | |
(2) | Effective July 1, 2006, the Company acquired Marketing Impressions, Inc., a Georgia corporation (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. | |
(3) | Fiscal year 2005 results include net assets acquired and four months of the results of operations of Bill Teiber Co., Inc. effective March 1, 2005. |
19
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. For certain products, the Company offers preseason early-order programs that carry extended terms whereby customers may order and take delivery of products prior to the selling season. Products sold under preseason programs have no right of return. | |||
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. |
20
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 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 customers 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 composed of finished goods and are recorded at the lower of cost or market using the average cost method. For inventory shipped out of the Woodard facility in Owosso, Michigan, inventories are stated at the lower of cost, determined principally by the use of the standard cost method which approximates first-in, first-out (FIFO), or market. 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 as of June 30 or when circumstances dictate that the carrying value might be impaired. Impairment testing for goodwill is analyzed at the reporting unit level, which for Craftmade has been defined as Mass and Specialty. 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. In the event that an impairment is determined to have occurred, the Company will reduce the carrying value of the asset in that period. | |||
The estimated fair value of reporting unit as of June 30, 2009 was determined using a combination of the income approach (discounted cash flow or DCF analysis) and the market approach (application of relevant revenue or income multiples, based on comparable companies). | |||
The discounted cash flow method calculates the present value of future cash flows of each
reporting unit. In order to determine the present value of these future cash flows for each reporting unit, it was necessary to forecast future revenues, cost of revenues, other operating expenses and capital expenditures. Management based these forecasts on current information and expectations about our operations, activities and strategies, as well as the impact of the economic environment and actions or our suppliers, customers and competitors. It should be noted that any such forecasts are subjective and inherently uncertain. Each DCF was prepared on an invested capital basis. Invested capital refers to the aggregate of all classes of debt and equity invested in the business. In preparing a DCF analysis on an invested capital basis, forecasted debt-free cash flow is discounted to present value at the reporting units respective weighted average cost of capital (WACC). Interest expense is excluded from the forecast as debt-free cash flow represents an economic benefit that is available to all capital holders of an enterprise. The result of this analysis is to develop a measure of invested capital value. |
21
The market approach involves gathering information about comparable publicly traded guideline companies. Guideline companies provide a reasonable basis for comparison to the relative investment characteristics of the entity being valued. For our analysis, we were able to select representative publicly traded companies that operate in similar industries as Craftmade. We analyzed the latest financials and operating statistics of each of these publicly traded companies. We calculated the high, low, mean, and median for the invested capital to revenue and the invested capital to EBITDA multiples. From this analysis, we selected the appropriate multiple and applied it to Craftmades reporting units associated figure. We then weighted the resulting values based on our assessment of the credibility and appropriateness of the given multiple, resulting in a market based measure of invested capital. |
|||
We believe that both of these approaches have strengths and drawbacks. The DCF analysis captures Managements best estimates of earnings potential for the Companys reporting units from a detail level although numerous educated estimates are required throughout the process, which come with an inherent level of uncertainty. The market approach incorporates results of operations for several comparable companies in determining the Revenue and EBITDA multiples applicable, but it can be difficult to find appropriate comparable companies and this approach ignores specific information about future strategies and actions that can be explicitly factored into the DCF approach. Our final valuation took into consideration both approaches, although we placed more weight on the DCF analysis versus the publicly traded guideline approach. We also applied a working capital adjustment to the concluded present value of invested capital for each reporting unit to normalize the surpluses or deficits in working capital at the reporting unit level. | |||
In order to assess whether or not goodwill was impaired at the reporting unit level, the values developed in this process were compared with the book value of total equity of each reporting unit. If the reporting units fair value of total equity is greater than the book value of total equity, then goodwill is not impaired and no further undertakings are required. | |||
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. | |||
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. |
22
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, 2009, and the corresponding prior year period is summarized in the table that follows (in thousands, except percentage data). | |||
Fiscal year ended June 30, 2009 compared to fiscal year ended June 30, 2008 |
Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | |||||||||||||||||||||||
Specialty | Mass | Total | Specialty | Mass | Total | |||||||||||||||||||
Net sales |
$ | 68,951 | $ | 80,741 | $ | 149,692 | $ | 74,878 | $ | 62,712 | $ | 137,590 | ||||||||||||
Cost of goods sold |
(47,688 | ) | $ | (69,784 | ) | (117,472 | ) | (51,203 | ) | (51,474 | ) | (102,677 | ) | |||||||||||
Gross profit |
21,263 | $ | 10,957 | 32,220 | 23,675 | 11,238 | 34,913 | |||||||||||||||||
Gross profit as a % of net sales |
30.8 | % | 13.6 | % | 21.5 | % | 31.6 | % | 17.9 | % | 25.4 | % | ||||||||||||
Selling, general and administrative expenses |
(19,316 | ) | (11,024 | ) | (30,340 | ) | (19,539 | ) | (8,578 | ) | (28,117 | ) | ||||||||||||
As a % of net sales |
28.0 | % | 13.7 | % | 20.3 | % | 26.1 | % | 13.7 | % | 20.4 | % | ||||||||||||
Depreciation and amortization |
(815 | ) | (261 | ) | (1,076 | ) | (600 | ) | (269 | ) | (869 | ) | ||||||||||||
Total operating expenses |
(20,131 | ) | (11,285 | ) | (31,416 | ) | (20,139 | ) | (8,847 | ) | (28,986 | ) | ||||||||||||
Income (loss) from operations |
1,132 | (328 | ) | 804 | 3,536 | 2,391 | 5,927 | |||||||||||||||||
Interest expense, net |
(1,438 | ) | (1,489 | ) | ||||||||||||||||||||
Other income (expenses) |
(142 | ) | 140 | |||||||||||||||||||||
Income (loss) before income taxes
and minority interests |
(776 | ) | 4,578 | |||||||||||||||||||||
Provision for income tax (expense) / benefit |
409 | (1,174 | ) | |||||||||||||||||||||
Income (loss) before minority interests |
(367 | ) | 3,404 | |||||||||||||||||||||
Minority interests |
(721 | ) | (1,292 | ) | ||||||||||||||||||||
Net income (loss) |
$ | (1,088 | ) | $ | 2,112 | |||||||||||||||||||
Net Sales. Net sales for the Company increased $12,102,000 or 8.8% to $149,692,000 for the fiscal year ended June 30, 2009, compared to $137,590,000 for the fiscal year ended June 30, 2008, primarily from the inclusion of two additional quarters of outdoor furniture sales stemming from the Woodard Asset Acquisition. Due to the timing of the acquisition, fiscal 2008 only included two quarters of Woodard furniture sales, while fiscal 2009 included four quarters. This increase is partially offset by declines in sales of ceiling fans, lighting and accessories. | |||
Management believes that the decline in the housing market and the overall economic downturn will continue to create a difficult sales environment, particularly in the Specialty segment, which more closely correlates to new home starts. The Company continues to pursue its strategic growth plans, while also focusing on developing and implementing more immediate plans to mitigate the impact of the current economic downturn. | |||
Net sales from the Specialty segment decreased $5,927,000 or 7.9% to $68,951,000 for the fiscal year ended June 30, 2009, compared to $74,878,000 for the fiscal year ended June 30, 2008, as summarized in the following table. The inclusion of two additional quarters of outdoor furniture sales was more than offset by a decrease in fans, lighting and accessories. |
23
Fans | Woodard | |||||||||||
Lighting & | Outdoor | Segment | ||||||||||
Fiscal Year Ended | Accessories | Furniture | Total | |||||||||
June 30, 2009 |
$ | 38,156 | $ | 30,795 | $ | 68,951 | ||||||
June 30, 2008 |
$ | 50,768 | $ | 24,110 | $ | 74,878 | ||||||
Dollar increase (decrease) |
$ | (12,612 | ) | $ | 6,685 | $ | (5,927 | ) | ||||
Percent increase (decrease) |
(24.8 | %) | 27.7 | % | (7.9 | %) |
The sales of all Specialty products continue to be affected by the extremely weak overall economy, reduced consumer spending and a historically low housing market. Specialty retailers tend to be small independent businesses, and have suffered disproportionately as cash strapped consumers cut spending and alter their buying habits. Many of these Specialty retailers are economically distressed and a small but growing number have either shut their doors or sought protection under federal bankruptcy laws since the beginning of the broad economic downturn. | |||
Management continues to focus on introducing new products, expanding accounts and developing cross-selling opportunities for its various product lines to offset the weak housing market. Management believes that long-term growth will be favorably affected by additional product offerings through enhanced product development efforts, as well as selling outdoor furniture products to lighting showrooms and selling outdoor lighting and ceiling fans to patio dealers, and focusing efforts on the hospitality markets. | |||
Net sales of the Mass segment increased $18,029,000 or 28.7% to $80,741,000 for the fiscal year ended June 30, 2009, compared to $62,712,000 for the fiscal year ended June 30, 2008, primarily from the inclusion of two additional quarters of outdoor furniture sales related to the Woodard Asset Acquisition. Net sales from the Mass segment are summarized in the following table: |
Woodard | ||||||||||||
Lighting & | Outdoor | Segment | ||||||||||
Fiscal Year Ended | Accessories | Furniture | Total | |||||||||
June 30, 2009 |
$ | 25,135 | $ | 55,606 | $ | 80,741 | ||||||
June 30, 2008 |
31,461 | 31,251 | 62,712 | |||||||||
Dollar increase (decrease) |
$ | (6,326 | ) | $ | 24,355 | $ | 18,029 | |||||
Percent increase (decrease) |
(20.1 | %) | 77.9 | % | 28.7 | % |
Sales of lighting products and fan and lamp accessories to the Mass segment are primarily from the Companys TSI and Design Trends subsidiaries, both of which experienced declines in the fiscal year ended June 30, 2009. The decrease in net sales of lighting and accessories was primarily the result of: (i) a decline in orders from Lowes related to indoor lighting; (ii) lower sales of non-core drop shipped products; and (iii) lower sales of fan accessories. | |||
The decline in lighting net sales was primarily due to reduced retail sales of the mix and match portable lamp program through Lowes. Currently, Design Trends supplies mix and match portable lamps to all 13 Lowes regional distribution centers. |
24
Woodard sales were primarily composed of direct import sales to its various mass merchant customers. Most of its products are shipped directly from China. Due to the seasonal nature of outdoor furniture sales, most sales to mass merchants occur from January to April each year. | |||
Management believes that sales to Lowes will increase in the coming fiscal year. Based on various line reviews, management believes that it will continue to be a primary vendor for Lowes mix and match portable lamps through Design Trends, and for Lowes lamp accessory/ceiling medallion programs through PHI, although based on feedback from Lowes the Company expects to see a reduction in the number of fan accessory SKUs it provides. Based on the number of outdoor furniture SKUs the Company has placed with Lowes for the upcoming year, the Company expects to see growth in this segment. | |||
The Company believes that it will continue to be invited to participate in each of Lowes scheduled line reviews for its existing and new product lines. The line reviews occur on approximately an annual basis for each product category throughout the year and give us the potential to add new SKUs to the Lowes program. 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 Mass segment is contingent upon the success of the Companys ongoing efforts to introduce new products, styles and marketing concepts to existing customers and the expansion of the business to new customers. | |||
Gross Profit. Gross profit of the Company as a percentage of net sales decreased 3.9% to 21.5% for the fiscal year ended June 30, 2009, compared to 25.4% for the fiscal year ended June 30, 2008 primarily due to the inclusion of two additional quarters of sales of Woodard products that carry a lower gross profit, as well as decreased margins in the traditional fan and lighting business in the Specialty segment. | |||
Gross profit as a percentage of net sales of the Specialty segment decreased 0.7% to 30.9% for the fiscal year ended June 30, 2009, compared to 31.6% for the fiscal year ended June 30, 2008. The decrease is summarized in the following table: |
Fans | Woodard | |||||||||||
Lighting & | Outdoor | Segment | ||||||||||
Fiscal Year Ended | Accessories | Furniture | Total | |||||||||
June 30, 2009 |
33.8 | % | 27.2 | % | 30.8 | % | ||||||
June 30, 2008 |
35.2 | % | 24.2 | % | 31.6 | % | ||||||
Percent decrease |
(1.4 | %) | 3.0 | % | (0.8 | %) | ||||||
The decrease is due to the inclusion of an additional two quarters of the lower margin outdoor furniture lines that carry lower gross profit than lighting and furniture, as well as a decrease in margins realized on the traditional fan and lighting business. Fan and lighting margins in the Specialty segment were down from the results generated in the fiscal year ended June 30, 2008, as the economic downturn made it difficult for the Company to pass all cost increases to its customers. Gross profit as a percent of net sales on the outdoor furniture business increased year over year, as higher pricing was locked in prior to the onset of the broader economic slump late in 2008. |
25
Gross profit as a percentage of net sales of the Mass segment decreased 4.4% to 13.5% of net sales for the fiscal year ended June 30, 2009, compared to 17.9% of net sales in the same prior year period, as summarized in the following table: |
Woodard | ||||||||||||
Lighting & | Outdoor | Segment | ||||||||||
Fiscal Year Ended | Accessories | Furniture | Total | |||||||||
June 30, 2009 |
22.8 | % | 9.4 | % | 13.6 | % | ||||||
June 30, 2008 |
26.2 | % | 9.6 | % | 17.9 | % | ||||||
Percent decrease |
(3.4 | %) | (0.2 | %) | (4.3 | %) | ||||||
Gross profit as a percentage of net sales for lighting products and ceiling fan accessories in the Mass segment decreased as a result of changes in vendor programs. Outdoor furniture gross profit as a percent of net sales in the Mass segment is traditionally low as all sales are direct import, and remained relatively flat to those achieved in fiscal 2008. | |||
For fiscal year 2010, gross profit as a percentage of net sales of lighting products and ceiling fan accessories in the Mass segment is expected to increase over the fiscal year ended June 30, 2009, as the Company has been working to gain cost concessions from its key vendors and transition to lower cost vendors where possible. Management believes that the gross profit as a percentage of net sales for Woodard will show slight improvements over fiscal year 2009 as a result of selective price increases used to offset material costs. | |||
Selling, General and Administrative Expenses. Total selling, general and administrative (SG&A) expenses of the Company increased $2,223,000 to $30,340,000 or 20.3% of net sales for the fiscal year ended June 30, 2009, compared to $28,117,000 or 20.4% of net sales for the same period last year. This increase was primarily due to inclusion of two additional quarters of expenses related to the Woodard outdoor furniture business. The expenses for the historical Craftmade business decreased by $1,350,000 during fiscal 2009, and Woodard expenses were added at a much lower rate than achieved in fiscal 2008. | |||
Woodard expenses for all four quarters of fiscal 2009 were $10,474,000 compared to $6,901,000 for two quarters that were reported in fiscal 2008. This indicates, on average, quarterly expenses of $2,619,000 for Woodard for fiscal 2009 compared to average quarterly expenses of $3,451,000 for fiscal 2008, a decrease of 24%. This reduction is due to the completion of the integration of the Woodard business into Craftmade, as well as broad cost cutting efforts across the board. |
Increase/ | ||||||||||||
Fiscal Year Ended | (Decrease) | |||||||||||
June 30, | June 30, | Over Prior | ||||||||||
2009 | 2008 | Year Period | ||||||||||
Historical Craftmade |
$ | 19,866 | $ | 21,216 | $ | (1,350 | ) | |||||
Woodard Incremental |
10,474 | 6,901 | 3,573 | |||||||||
$ | 30,340 | $ | 28,117 | $ | 2,223 | |||||||
26
The historical Craftmade expenses were primarily impacted by lower variable costs, and reductions across the board, offset only slightly by an increase in salaries and property taxes, as summarized below: |
Increase/ | ||||||||||||
Fiscal Year Ended | (Decrease) | |||||||||||
June 30, | June 30, | Over Prior | ||||||||||
2009 | 2008 | Year Period | ||||||||||
Salaries & Wages |
$ | 7,278 | $ | 7,170 | $ | 108 | ||||||
Commissions |
2,259 | 2,754 | (495 | ) | ||||||||
Accounting, Legal And Consulting |
2,331 | 2,468 | (137 | ) | ||||||||
Advertising |
1,654 | 2,079 | (425 | ) | ||||||||
Health Insurance |
864 | 1,102 | (238 | ) | ||||||||
Property Taxes |
472 | 339 | 133 | |||||||||
Warehouse Expense |
389 | 512 | (123 | ) | ||||||||
Trade Shows |
169 | 289 | (120 | ) | ||||||||
Other |
4,450 | 4,503 | (53 | ) | ||||||||
$ | 19,866 | $ | 21,216 | $ | (1,350 | ) | ||||||
27
Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||
June 30, 2008 | June 30, 2007 | |||||||||||||||||||||||
Specialty | Mass | Total | Specialty | Mass | Total | |||||||||||||||||||
Net sales |
$ | 74,878 | $ | 62,712 | $ | 137,590 | $ | 59,925 | $ | 43,425 | $ | 103,350 | ||||||||||||
Cost of goods sold |
(51,203 | ) | (51,474 | ) | (102,677 | ) | (38,745 | ) | (32,314 | ) | (71,059 | ) | ||||||||||||
Gross profit |
23,675 | 11,238 | 34,913 | 21,180 | 11,111 | 32,291 | ||||||||||||||||||
Gross profit as a % of net sales |
31.6 | % | 17.9 | % | 25.4 | % | 35.3 | % | 25.6 | % | 31.2 | % | ||||||||||||
Selling, general and administrative expenses |
(19,539 | ) | (8,578 | ) | (28,117 | ) | (14,900 | ) | (6,251 | ) | (21,151 | ) | ||||||||||||
As a % of net sales |
26.1 | % | 13.7 | % | 20.4 | % | 24.9 | % | 14.4 | % | 20.5 | % | ||||||||||||
Depreciation and amortization |
(600 | ) | (269 | ) | (869 | ) | (548 | ) | (251 | ) | (799 | ) | ||||||||||||
Total operating expenses |
(20,139 | ) | (8,847 | ) | (28,986 | ) | (15,448 | ) | (6,502 | ) | (21,950 | ) | ||||||||||||
Income from operations |
3,536 | 2,391 | 5,927 | 5,732 | 4,609 | 10,341 | ||||||||||||||||||
Interest expense, net |
(1,489 | ) | (1,441 | ) | ||||||||||||||||||||
Other expenses |
140 | | ||||||||||||||||||||||
Income before income taxes
and minority interests |
4,578 | 8,900 | ||||||||||||||||||||||
Provision for income taxes |
(1,174 | ) | (1,482 | ) | ||||||||||||||||||||
Income before minority interests |
3,404 | 7,418 | ||||||||||||||||||||||
Minority interests |
(1,292 | ) | (1,507 | ) | ||||||||||||||||||||
Net income |
$ | 2,112 | $ | 5,911 | ||||||||||||||||||||
Fans | Woodard | |||||||||||
Lighting & | Outdoor | Segment | ||||||||||
Fiscal Year Ended | Accessories | Furniture | Total | |||||||||
June 30, 2008 |
$ | 50,768 | $ | 24,110 | $ | 74,878 | ||||||
June 30, 2007 |
59,925 | | 59,925 | |||||||||
Dollar increase (decrease) |
$ | (9,157 | ) | $ | 24,110 | $ | 14,953 | |||||
Percent increase (decrease) |
(15.3 | %) | 100.0 | % | 25.0 | % |
28
Woodard | ||||||||||||
Lighting & | Outdoor | Segment | ||||||||||
Fiscal Year Ended | Accessories | Furniture | Total | |||||||||
June 30, 2008 |
$ | 31,461 | $ | 31,251 | $ | 62,712 | ||||||
June 30, 2007 |
43,425 | | 43,425 | |||||||||
Dollar increase (decrease) |
$ | (11,964 | ) | $ | 31,251 | $ | 19,287 | |||||
Percent increase (decrease) |
(27.6 | %) | 100.0 | % | 44.4 | % |
Fans | Woodard | |||||||||||
Lighting & | Outdoor | Segment | ||||||||||
Fiscal Year Ended | Accessories | Furniture | Total | |||||||||
June 30, 2008 |
35.2 | % | 24.2 | % | 31.6 | % | ||||||
June 30, 2007 |
35.3 | % | | 35.3 | % | |||||||
Percent decrease |
(0.1 | %) | na | (3.7 | %) | |||||||
29
Woodard | ||||||||||||
Lighting & | Outdoor | Segment | ||||||||||
Fiscal Year Ended | Accessories | Furniture | Total | |||||||||
June 30, 2008 |
26.2 | % | 9.6 | % | 17.9 | % | ||||||
June 30, 2007 |
25.6 | % | | 25.6 | % | |||||||
Percent increase/(decrease) |
0.6 | % | na | (7.7 | %) | |||||||
Increase/ | ||||||||||||
Fiscal Year Ended | (Decrease) | |||||||||||
June 30, | June 30, | Over Prior | ||||||||||
2008 | 2007 | Year Period | ||||||||||
Historical Craftmade |
$ | 21,216 | $ | 21,151 | $ | 65 | ||||||
Woodard Incremental |
6,901 | | 6,901 | |||||||||
$ | 28,117 | $ | 21,151 | $ | 6,966 | |||||||
30
Increase/ | ||||||||||||
Fiscal Year Ended | (Decrease) | |||||||||||
June 30, | June 30, | Over Prior | ||||||||||
2008 | 2007 | Year Period | ||||||||||
Commissions |
$ | 2,754 | $ | 3,326 | $ | (572 | ) | |||||
Bad Debt Expense |
329 | 33 | 296 | |||||||||
Accounting, legal and consulting |
2,468 | 2,237 | 231 | |||||||||
Health Insurance |
1,102 | 789 | 313 | |||||||||
Rent |
246 | 393 | (147 | ) | ||||||||
Other |
14,317 | 14,373 | (56 | ) | ||||||||
$ | 21,216 | $ | 21,151 | $ | 65 | |||||||
31
32
33
Payments Due By Period | ||||||||||||||||||||
Less than | 1 to 3 | 3 to 5 | More than | |||||||||||||||||
Contractual Obligations | Total | 1 year | Years | Years | 5 years | |||||||||||||||
Lines of credit(1) |
$ | 20,042 | $ | 20,042 | $ | | $ | | $ | | ||||||||||
Note payable |
$ | 10,317 | $ | 494 | $ | 1,089 | $ | 1,240 | $ | 7,493 | ||||||||||
Operating lease obligations |
$ | 2,461 | $ | 727 | $ | 1,239 | $ | 495 | $ | | ||||||||||
Capital lease obligations |
$ | 69 | $ | 48 | $ | 21 | $ | | $ | | ||||||||||
Guaranteed royalties |
$ | 199 | $ | 90 | $ | 109 | $ | | $ | | ||||||||||
Assumed interest(2) |
$ | 4,716 | $ | 1,017 | $ | 1,211 | $ | 1,060 | $ | 1,428 | ||||||||||
Woodard Restructuring |
$ | 155 | $ | 155 | $ | | $ | | $ | | ||||||||||
Teiber consulting agreement |
$ | 67 | $ | 67 | $ | | $ | | $ | | ||||||||||
Contingent consideration(3) |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Liability for uncertain tax
positions(4) |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Total |
$ | 38,025 | $ | 22,639 | $ | 3,669 | $ | 2,795 | $ | 8,921 | ||||||||||
(1) | Based on Frost line of credit in place at June 30, 2009. As of July 10, 2009 Frost line of credit has been replaced with a new line of credit with Bank of America providing up to $40,000,000 in revolving loans, supplemented by a $3,500,000 note with Frost. | |
(2) | Assumed interest calculated at the interest rate in effect at June 30, 2009 for each obligation. | |
(3) | 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. | |
(4) | The Company has accrued certain liabilities related to uncertain tax positions, per FIN 48. Given the contingent amouts and timing of these liabilities, we have not included them here. |
Outstanding | Outstanding | |||||||||||||||||||
Balance | Balance | Current | ||||||||||||||||||
Commitment | June 30, 2009 | June 30, 2008 | Interest Rate | Maturity | ||||||||||||||||
Revolving line of credit(1) |
$ | 50,000 | $ | 20,042 | $ | 17,374 | LIBOR plus 1.50% | December 31, 2009 | ||||||||||||
Note payable facility |
n/a | 10,317 | 10,779 | 6.5 | % | December 10, 2017 | ||||||||||||||
Capital lease obligation |
n/a | 69 | 113 | 7.6 | % | November 5, 2010 | ||||||||||||||
Sub-total |
30,428 | 28,266 | ||||||||||||||||||
Less: current amounts due |
(542 | ) | (507 | ) | ||||||||||||||||
Long-term obligations |
$ | 29,886 | $ | 27,759 | ||||||||||||||||
(1) | Based on Frost line of credit in place at June 30, 2009. As of July 10, 2009 Frost line of credit has been replaced with a new line of credit with Bank of America providing up to $40,000,000 in revolving loans, supplemented by a $3,500,000 note with Frost. |
34
35
36
37
(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. |
38
(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, 2009. | |||
(c) | This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to the temporary rules of the SEC that permit the Company to provide only managements report in this annual report. | ||
(d) | Changes in Internal Control Over Financial Reporting | ||
During the quarter ended June 30, 2009, 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. |
39
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 |
140,700 | 13.17 | 239,500 | |||||||||
Total |
159,200 | $ | 13.53 | 239,500 | ||||||||
(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-42 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. |
40
By:
|
/s/ J. Marcus Scrudder
|
|||
J. Marcus Scrudder | ||||
Chief Executive Officer |
Signatures | Capacity | Date | ||
/s/ James R. Ridings
|
Chairman of the Board | September 28, 2009 | ||
/s/ J. Marcus Scrudder
|
Chief Executive Officer (Principal Executive Officer) |
September 28, 2009 | ||
/s/ C. Brett Burford
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
September 28, 2009 | ||
/s/ William E. Bucek
|
Director | September 28, 2009 | ||
/s/ A. Paul Knuckley
|
Director | September 28, 2009 | ||
/s/ R. Don Morris
|
Director | September 28, 2009 | ||
/s/ Lary Snodgrass
|
Director | September 28, 2009 |
41
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-7 | ||||
F-9 | ||||
Financial Statement Schedule: |
||||
F-42 | ||||
F-1
F-2
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Net sales |
$ | 149,692 | $ | 137,590 | $ | 103,350 | ||||||
Cost of goods sold |
(117,472 | ) | (102,677 | ) | (71,059 | ) | ||||||
Gross profit |
32,220 | 34,913 | 32,291 | |||||||||
Gross profit as a percentage of net sales |
21.5 | % | 25.4 | % | 31.2 | % | ||||||
Selling, general and administrative expenses |
(30,340 | ) | (28,117 | ) | (21,151 | ) | ||||||
Depreciation and amortization |
(1,076 | ) | (869 | ) | (799 | ) | ||||||
Total operating expenses |
(31,416 | ) | (28,986 | ) | (21,950 | ) | ||||||
Income from operations |
804 | 5,927 | 10,341 | |||||||||
Interest expense, net |
(1,438 | ) | (1,489 | ) | (1,441 | ) | ||||||
Other income (expense) |
(142 | ) | 140 | | ||||||||
Income (loss) before income taxes and minority interest |
(776 | ) | 4,578 | 8,900 | ||||||||
Income tax (expense) / benefit |
409 | (1,174 | ) | (1,482 | ) | |||||||
Income (loss) before minority interest |
(367 | ) | 3,404 | 7,418 | ||||||||
Minority interest |
(721 | ) | (1,292 | ) | (1,507 | ) | ||||||
Net income (loss) |
$ | (1,088 | ) | $ | 2,112 | $ | 5,911 | |||||
Earnings (loss) per share data: |
||||||||||||
Basic weighted average common shares outstanding |
5,705 | 5,450 | 5,204 | |||||||||
Diluted weighted average common shares outstanding |
5,705 | 5,451 | 5,206 | |||||||||
Basic earnings (loss) per share |
$ | (0.19 | ) | $ | 0.39 | $ | 1.14 | |||||
Diluted earnings (loss) per share |
$ | (0.19 | ) | $ | 0.39 | $ | 1.14 | |||||
Cash dividends declared per common share |
$ | | $ | 0.36 | $ | 0.48 | ||||||
F-3
June 30, | June 30, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash |
$ | 384 | $ | 1,269 | ||||
Accounts receivable, net |
25,290 | 23,644 | ||||||
Inventories, net |
20,563 | 22,420 | ||||||
Income taxes receivable |
1,780 | 1,485 | ||||||
Deferred income taxes |
1,367 | 1,332 | ||||||
Prepaid expenses and other current assets |
2,443 | 2,574 | ||||||
Total current assets |
51,827 | 52,724 | ||||||
Property and equipment, net |
11,141 | 11,060 | ||||||
Goodwill |
14,947 | 14,419 | ||||||
Other intangibles, net |
1,097 | 1,300 | ||||||
Other assets |
1,856 | 2,457 | ||||||
Total non-current assets |
29,041 | 29,236 | ||||||
Total assets |
$ | 80,868 | $ | 81,960 | ||||
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Book overdrafts |
$ | 8 | $ | 182 | ||||
Accounts payable |
7,231 | 8,411 | ||||||
Other accrued expenses |
2,422 | 3,329 | ||||||
Current portion of long-term obligations |
542 | 507 | ||||||
Total current liabilities |
10,203 | 12,429 | ||||||
Non-current liabilities |
||||||||
Long-term obligations |
29,886 | 27,759 | ||||||
Deferred income taxes |
1,122 | 1,117 | ||||||
Total non-current liabilities |
31,008 | 28,876 | ||||||
Total liabilities |
41,211 | 41,305 | ||||||
Minority interests |
3,532 | 3,562 | ||||||
Stockholders equity |
||||||||
Common stock, $0.01 par value, 15,000,000 shares authorized;
10,204,420 and 10,204,420 shares issued, respectively |
102 | 102 | ||||||
Additional paid-in capital |
22,335 | 22,215 | ||||||
Retained earnings |
51,814 | 52,902 | ||||||
Less: treasury stock, 4,499,920 common shares at cost |
(38,126 | ) | (38,126 | ) | ||||
Total stockholders equity |
36,125 | 37,093 | ||||||
Total liabilities, minority interests and stockholders equity |
$ | 80,868 | $ | 81,960 | ||||
F-4
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | (1,088 | ) | $ | 2,112 | $ | 5,911 | |||||
Adjustments to reconcile net income (loss) to net
cash provided (used in) by operating activities: |
||||||||||||
Depreciation and amortization, including amounts in Cost of Sales |
1,341 | 953 | 799 | |||||||||
Provision for bad debt and inventories |
488 | 203 | 136 | |||||||||
(Gain) / loss on sale of property and equipment |
32 | (6 | ) | 7 | ||||||||
Stock compensation expense |
120 | 110 | 64 | |||||||||
Deferred income taxes |
(30 | ) | (71 | ) | 763 | |||||||
Minority interest |
721 | 1,292 | 1,507 | |||||||||
Change in assets and liabilities, net of a business
acquired, providing/(using) cash |
||||||||||||
Accounts receivable |
(1,979 | ) | 6,924 | 1,854 | ||||||||
Inventories |
1,703 | 3,888 | 2,908 | |||||||||
Prepaid expenses and other current assets |
732 | 460 | (300 | ) | ||||||||
Accounts payable |
(1,249 | ) | (3,316 | ) | (2,882 | ) | ||||||
Other accrued expenses |
(1,200 | ) | (771 | ) | (3,725 | ) | ||||||
Net cash provided by (used in) operating activities |
(409 | ) | 11,778 | 7,042 | ||||||||
Cash flows from investing activities: |
||||||||||||
Acquisition of assets of Woodard, LLC |
| (15,498 | ) | | ||||||||
Acquisition of Marketing Impressions, Inc. |
||||||||||||
Initial payment and acquisition related costs, net of cash acquired |
| | (1,507 | ) | ||||||||
Additional contingent consideration |
(619 | ) | (698 | ) | (1,601 | ) | ||||||
Additions to property, equipment and tooling |
(1,094 | ) | (655 | ) | (499 | ) | ||||||
Net cash used in investing activities |
(1,713 | ) | (16,851 | ) | (3,607 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Cash dividends |
| (2,560 | ) | (2,498 | ) | |||||||
Distributions to minority interest members |
(750 | ) | (1,225 | ) | (1,674 | ) | ||||||
Proceeds from note payable facility |
| 11,000 | | |||||||||
Payments on notes |
(459 | ) | (443 | ) | (1,134 | ) | ||||||
Increase/(decrease) in book overdrafts |
(174 | ) | 134 | (22 | ) | |||||||
Proceeds from exercise of employee stock options |
| | 10 | |||||||||
Principal payments on capital lease |
(48 | ) | (41 | ) | (24 | ) | ||||||
Proceeds from lines of credit |
98,419 | 73,355 | 18,252 | |||||||||
Payments on lines of credit |
(95,751 | ) | (74,806 | ) | (17,581 | ) | ||||||
Net cash provided by/(used in) financing activities |
1,237 | 5,414 | (4,671 | ) | ||||||||
Net increase/(decrease) in cash |
(885 | ) | 341 | (1,236 | ) | |||||||
Cash at beginning of year |
1,269 | 928 | 2,164 | |||||||||
Cash at end of year |
$ | 384 | $ | 1,269 | $ | 928 | ||||||
F-5
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash paid during the fiscal year for: |
||||||||||||
Interest |
$ | 1,484 | $ | 1,557 | $ | 1,316 | ||||||
Income taxes |
353 | 1,518 | 2,719 | |||||||||
Supplemental disclosures of non-cash investing and financing activities: |
||||||||||||
Additional contingent consideration not paid |
$ | 90 | $ | 77 | $ | | ||||||
Dividends declared but not paid |
| | 625 | |||||||||
Property and equipment financed under capital lease |
| | 177 | |||||||||
Common stock and warrants
issued in conjunction with acquisition |
$ | | $ | 4,279 | $ | |
F-6
Series A | Additional | |||||||||||||||||||||||||||||||
Common Stock | Preferred | Paid-In | Retained | Treasury Stock | ||||||||||||||||||||||||||||
Shares | Amount | Stock | 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 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income for the fiscal year ended June 30, 2008 |
2,112 | 2,112 | ||||||||||||||||||||||||||||||
Total comprehensive income |
2,112 | 2,112 | ||||||||||||||||||||||||||||||
Stock and warrants issued to Forwoodco, LLC |
500 | 5 | | 4,274 | | | | 4,279 | ||||||||||||||||||||||||
Stock-based compensation charge |
| | | 110 | | | | 110 | ||||||||||||||||||||||||
Cash dividends declared |
| | | | (1,932 | ) | | | (1,932 | ) | ||||||||||||||||||||||
Balance as of June 30, 2008 |
10,204 | $ | 102 | $ | | $ | 22,215 | $ | 52,902 | 4,500 | $ | (38,126 | ) | $ | 37,093 | |||||||||||||||||
F-7
Series A | Additional | |||||||||||||||||||||||||||||||
Common Stock | Preferred | Paid-In | Retained | Treasury Stock | ||||||||||||||||||||||||||||
Shares | Amount | Stock | Capital | Earnings | Shares | Amount | Total | |||||||||||||||||||||||||
Balance as of June 30, 2008 |
10,204 | $ | 102 | $ | | $ | 22,215 | $ | 52,902 | 4,500 | $ | (38,126 | ) | $ | 37,093 | |||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||
Net loss for the fiscal year ended June 30, 2009 |
(1,088 | ) | (1,088 | ) | ||||||||||||||||||||||||||||
Total comprehensive loss |
(1,088 | ) | (1,088 | ) | ||||||||||||||||||||||||||||
Stock-based compensation charge |
| | | 120 | | | | 120 | ||||||||||||||||||||||||
Balance as of June 30, 2009 |
10,204 | $ | 102 | $ | | $ | 22,335 | $ | 51,814 | 4,500 | $ | (38,126 | ) | $ | 36,125 | |||||||||||||||||
F-8
June 30, | June 30, | |||||||
2009 | 2008 | |||||||
Accounts receivable |
$ | 23,062 | $ | 21,623 | ||||
Other receivables |
2,769 | 2,405 | ||||||
Allowance for doubtful accounts |
(541 | ) | (384 | ) | ||||
Net accounts receivable |
$ | 25,290 | $ | 23,644 | ||||
F-9
Lowes | Costco | |||||||||||||||
Percent of | Percent of | Percent of | Percent of | |||||||||||||
Mass | Consolidated | Mass | Consolidated | |||||||||||||
Fiscal Year Ended | Net Sales | Net Sales | Net Sales | Net Sales | ||||||||||||
June 30, 2008 |
44 | % | 24 | % | 9 | % | 5 | % | ||||||||
June 30, 2008 |
41 | % | 19 | % | 14 | % | 6 | % | ||||||||
June 30, 2007 |
70 | % | 29 | % | 0 | % | 0 | % |
June 30, | June 30, | |||||||
2009 | 2008 | |||||||
Raw materials |
$ | 5,728 | $ | 6,212 | ||||
Work in process |
622 | 936 | ||||||
Finished goods |
14,213 | 15,272 | ||||||
Total |
$ | 20,563 | $ | 22,420 | ||||
F-10
June 30, | June 30, | |||||||
2009 | 2008 | |||||||
Land |
$ | 1,761 | $ | 1,761 | ||||
Buildings |
10,499 | 10,341 | ||||||
Office furniture and equipment |
5,184 | 4,841 | ||||||
Leasehold improvements |
440 | 211 | ||||||
Gross property and equipment |
17,884 | 17,154 | ||||||
Accumulated depreciation |
(6,743 | ) | (6,094 | ) | ||||
Net property and equipment |
$ | 11,141 | $ | 11,060 | ||||
Buildings |
40 years | |||
Office furniture and equipment |
2 to 7 years |
2009 | 2008 | 2007 | ||||||||||
Depreciation of property and equipment |
$ | 1,139 | $ | 751 | $ | 601 | ||||||
Amortization of intangibles |
203 | 202 | 198 | |||||||||
$ | 1,342 | $ | 953 | $ | 799 | |||||||
F-11
Speciality | Mass | Total | ||||||||||
June 30, 2008 |
$ | 6,745 | $ | 7,674 | $ | 14,419 | ||||||
Acquisition of Marketing Impressions |
| 529 | 529 | |||||||||
June 30, 2009 |
$ | 6,745 | $ | 8,203 | $ | 14,948 | ||||||
F-12
June 30, | June 30, | |||||||
2009 | 2008 | |||||||
Non-compete covenants |
$ | 1,020 | $ | 1,020 | ||||
Patents and trademarks |
720 | 720 | ||||||
Gross intangible assets |
1,740 | 1,740 | ||||||
Accumulated amortization |
(643 | ) | (440 | ) | ||||
Net intangible assets |
$ | 1,097 | $ | 1,300 | ||||
Fiscal Year Ending | ||||
June 30, 2010 |
$ | 188 | ||
June 30, 2011 |
188 | |||
June 30, 2012 |
179 | |||
June 30, 2013 |
164 | |||
June 30, 2014 |
47 | |||
Thereafter |
331 | |||
$ | 1,097 | |||
F-13
June 30, | June 30, | |||||||
2009 | 2008 | |||||||
Accrued customer allowances |
$ | 729 | $ | 834 | ||||
Commissions payable |
331 | 611 | ||||||
Accrued payroll |
555 | 752 | ||||||
Restructuring reserve, net of taxes |
97 | 443 | ||||||
Co-op advertising allowance |
350 | 353 | ||||||
Other current liabilities |
360 | 336 | ||||||
Other accrued expenses |
$ | 2,422 | $ | 3,329 | ||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Beginning of year balance |
$ | 77 | $ | 91 | $ | 87 | ||||||
Provision for estimated returns |
941 | 909 | 1,025 | |||||||||
Return credits issued |
(950 | ) | (923 | ) | (1,021 | ) | ||||||
End of year balance |
$ | 68 | $ | 77 | $ | 91 | ||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Beginning of year balance |
$ | 774 | $ | 177 | $ | 169 | ||||||
Woodard Opening Reserve |
| 584 | | |||||||||
Provision for estimated expenses |
1,436 | 1,720 | 1,147 | |||||||||
Warranty claims paid |
(1,890 | ) | (1,707 | ) | (1,139 | ) | ||||||
End of year balance |
$ | 320 | $ | 774 | $ | 177 | ||||||
F-14
F-15
F-16
Craftmade | Design | |||||||||||
Wholly Owned | Trends | Consolidated | ||||||||||
Total assets |
$ | 62,892 | $ | 17,976 | $ | 80,868 | ||||||
Total liabilities
and minority interests |
$ | 43,112 | $ | 1,631 | $ | 44,743 | ||||||
Total stockholders equity |
19,780 | 16,345 | 36,125 | |||||||||
Total liabilities
and stockholders equity |
$ | 62,892 | $ | 17,976 | $ | 80,868 | ||||||
Craftmade | Design | |||||||||||
Wholly Owned | Trends | Consolidated | ||||||||||
Total assets |
$ | 65,815 | $ | 16,145 | $ | 81,960 | ||||||
Total liabilities
and minority interests |
$ | 44,346 | $ | 521 | $ | 44,867 | ||||||
Total stockholders equity |
21,469 | 15,624 | 37,093 | |||||||||
Total liabilities
and stockholders equity |
$ | 65,815 | $ | 16,145 | $ | 81,960 | ||||||
F-17
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Advertising expense |
$ | 3,447 | $ | 3,484 | $ | 2,161 | ||||||
Prepaid advertising costs |
920 | 699 | 407 |
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Research and development |
$ | 221 | $ | 184 | $ | 265 |
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Stock-based compensation expense recognized: |
||||||||||||
Selling, general & administrative |
$ | 120 | $ | 110 | $ | 64 |
F-18
Expected | ||||
Future | ||||
Compensation | ||||
Fiscal Year Ending | Cost | |||
June 30, 2010 |
$ | 117 | ||
June 30, 2011 |
72 | |||
June 30, 2012 |
17 | |||
June 30, 2013 |
| |||
$ | 206 | |||
F-19
F-20
F-21
F-22
Cash paid at closing |
$ | 16,168 | ||
GAAP value of 500,000 shares issued |
4,000 | (1) | ||
Value of 200,000 Warrants |
279 | (2) | ||
Purchase price adjustment (Settled April, 2008) |
(1,272 | ) | ||
Total consideration |
$ | 19,175 | ||
(1) | The value of the 500,000 shares of Common Stock was based on the average closing prices of the Common Stock, for the two days before, the day of, and the two days after the date of the announcement of the merger or $8.00 per share. | |
(2) | The 200,000 Warrants were valued using the Black-Scholes calculation at a Warrant price of $1.39 per share using the following assumptions: |
Expected volatility |
33 | % | ||
Risk-free interest rate |
3.81 | % | ||
Expected lives |
10 years | |||
Dividend yield |
5.8 | % |
F-23
Initial estimated purchase price |
$ | 20,168 | ||||||
Less: Working capital adjustment |
(1,272 | ) | ||||||
Value of warrants |
279 | |||||||
Total Purchase Consideration |
19,175 | |||||||
Acquired Assets (Adjusted to estimated fair value) |
||||||||
Accounts receivable, net |
$ | 12,708 | ||||||
Inventories, net |
8,212 | |||||||
Prepaid expenses and other current assets |
2,450 | |||||||
Plant, property and equipment |
2,929 | |||||||
Other assets |
1,528 | |||||||
Total Assets |
27,827 | |||||||
Assumed Liabilities |
||||||||
Accounts payable |
$ | 5,852 | ||||||
Other accrued expenses |
1,702 | |||||||
Other liabilities incurred during transaction |
||||||||
Professional fees associated with acquisition |
655 | |||||||
Restructuring reserve |
692 | |||||||
Deferred tax asset for restructuring reserve |
(249 | ) | ||||||
Total Liabilities |
8,652 | |||||||
Total Purchase Price |
$ | 19,175 | ||||||
F-24
Fiscal Year Ended | ||||||||
June 30, | June 30, | |||||||
2009 | 2008 | |||||||
Net sales |
||||||||
As reported |
$ | 149,692 | $ | 137,590 | ||||
Pro forma |
149,692 | 164,590 | ||||||
Net income |
||||||||
As reported |
$ | (1,088 | ) | $ | 2,112 | |||
Pro forma |
(1,088 | ) | 860 | |||||
Basic earnings per share |
||||||||
As reported |
$ | (0.19 | ) | $ | 0.39 | |||
Pro forma |
$ | (0.19 | ) | $ | 0.14 | |||
Diluted earnings per share |
||||||||
As reported |
$ | (0.19 | ) | $ | 0.39 | |||
Pro forma |
$ | (0.19 | ) | $ | 0.14 |
F-25
As of June 30, 2009: |
||||
Amount paid at closing, net of cash acquired |
$ | 1,287 | ||
Contingent payments earned |
2,954 | |||
Acquisition-related costs |
220 | |||
Total consideration as of June 30, 2009 |
$ | 4,461 | ||
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 | % |
F-26
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 | ||
Life | Gross | |||||||
in Years | Amount | |||||||
Patents and trademarks |
15 | $ | 710 | |||||
Non-compete covenants |
7 | 820 | ||||||
$ | 1,530 | |||||||
F-27
Outstanding | Outstanding | |||||||||||||||||||
Balance | Balance | Current | ||||||||||||||||||
Commitment | June 30, 2009 | June 30, 2008 | Interest Rate | Maturity | ||||||||||||||||
Revolving line of credit (1) |
$ | 50,000 | $ | 20,042 | $ | 17,374 | LIBOR plus 1.50% | December 31, 2009 | ||||||||||||
Note payable facility |
n/a | 10,317 | 10,779 | 6.5 | % | December 10, 2017 | ||||||||||||||
Capital lease obligation |
n/a | 69 | 113 | 7.6 | % | November 5, 2010 | ||||||||||||||
Sub-total |
30,428 | 28,266 | ||||||||||||||||||
Less: current amounts due |
(542 | ) | (507 | ) | ||||||||||||||||
Long-term obligations |
$ | 29,886 | $ | 27,759 | ||||||||||||||||
(1) | Based on Frost line of credit in place at June 30, 2009. As of July 10, 2009 Frost line of credit has been replaced with a new line of credit with Bank of America providing up to $40,000,000 in revolving loans, supplemented by a $3,500,000 note with Frost. |
F-28
Line of | Note | Capital | ||||||||||||||
Fiscal Year Ended | Credit(1) | Payable | Lease | Total | ||||||||||||
June 30, 2010 |
$ | 20,042 | $ | 494 | $ | 48 | $ | 20,584 | ||||||||
June 30, 2011 |
| 527 | 21 | 548 | ||||||||||||
June 30, 2012 |
| 562 | | 562 | ||||||||||||
June 30, 2013 |
| 600 | | 600 | ||||||||||||
June 30, 2014 |
| 640 | | 640 | ||||||||||||
Thereafter |
| 7,494 | | 7,494 | ||||||||||||
$ | 20,042 | $ | 10,317 | $ | 69 | $ | 30,428 | |||||||||
(1) | Based on Frost line of credit in place at June 30, 2009. As of July 10, 2009 Frost line of credit has been replaced with a new line of credit with Bank of America providing up to $40,000,000 in revolving loans, supplemented by a $3,500,000 note with Frost. |
F-29
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Current expense/(benefit): |
||||||||||||
Federal |
$ | (437 | ) | $ | 1,246 | $ | 1,003 | |||||
State |
92 | 57 | (427 | ) | ||||||||
Foreign |
(33 | ) | 42 | 143 | ||||||||
Total current expense/(benefit): |
(378 | ) | 1,345 | 719 | ||||||||
Deferred expense/(benefit) |
(31 | ) | (171 | ) | 763 | |||||||
Provision for income tax
expense/(benefit) |
$ | (409 | ) | $ | 1,174 | $ | 1,482 | |||||
F-30
June 30, | June 30, | |||||||
2009 | 2008 | |||||||
Inventories |
$ | 347 | $ | 403 | ||||
Investment in 50% owned LLCs |
178 | 186 | ||||||
Reserves and accruals |
194 | 216 | ||||||
Accounts receivable reserves |
294 | 131 | ||||||
State refund claims, net of federal tax |
19 | 100 | ||||||
Net operating loss carryforwards |
77 | 24 | ||||||
Other |
102 | 83 | ||||||
Valuation allowance |
(78 | ) | (100 | ) | ||||
Total deferred tax assets |
1,133 | 1,043 | ||||||
Depreciation and amortization |
(771 | ) | (671 | ) | ||||
Foreign taxes |
(117 | ) | (157 | ) | ||||
Total deferred tax liabilities |
(888 | ) | (828 | ) | ||||
Net deferred tax asset/(liability) |
$ | 245 | $ | 215 | ||||
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Tax at the statutory corporate rate |
$ | (264 | ) | $ | 1,557 | $ | 3,026 | |||||
Less: federal income tax attributable to minority interest |
(242 | ) | (439 | ) | (459 | ) | ||||||
Foreign tax rate under federal statutory rate(1) |
31 | (40 | ) | (905 | ) | |||||||
Federal taxes on anticipated repatriation of foreign earnings |
(31 | ) | 40 | 147 | ||||||||
State income taxes, net of federal benefit(2) |
74 | 28 | (314 | ) | ||||||||
Other |
23 | 29 | (13 | ) | ||||||||
Provision for income taxe expense (benefit) |
$ | (409 | ) | $ | 1,174 | $ | 1,482 | |||||
(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 for the fiscal year ended June 30, 2007, include 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. |
F-31
Increases/(Decreases) in Unrecognized | ||||||||||||||||||||||||
Tax Benefits As a Result of | ||||||||||||||||||||||||
Tax Positions from | Lapse in | |||||||||||||||||||||||
July 1, | Prior | Current | Statute of | June 30, | ||||||||||||||||||||
2008 | Periods | Period | Settlements | Limitations | 2009 | |||||||||||||||||||
Reserve for state nexus issues |
$ | 190 | $ | | $ | | $ | | $ | | $ | 190 | ||||||||||||
Valuation
allowance for Texas franchise tax refunds |
100 | (81 | ) | | | | 19 | |||||||||||||||||
State net operating loss and credit carryforwards |
| | 56 | 56 | ||||||||||||||||||||
Unrecognized tax benefits |
$ | 290 | (81 | ) | 56 | | | $ | 265 | |||||||||||||||
F-32
Weighted | Weighted | |||||||||||||||
Average | Exercise | Average | ||||||||||||||
Exercise | Price | Remaining | ||||||||||||||
Shares | Price | Range | Life (Years) | |||||||||||||
Outstanding at June
30, 2006 |
19,500 | $ | 15.78 | |||||||||||||
Granted |
85,000 | 18.49 | ||||||||||||||
Exercised |
(1,000 | ) | 6.75 | |||||||||||||
Forfeited |
(4,400 | ) | 18.85 | |||||||||||||
Outstanding at June
30, 2007 |
99,100 | 18.06 | ||||||||||||||
Granted |
75,500 | 8.01 | ||||||||||||||
Exercised |
| 0.00 | ||||||||||||||
Forfeited |
(12,200 | ) | 14.79 | |||||||||||||
Outstanding at June
30, 2008 |
162,400 | 13.63 | ||||||||||||||
Granted |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(3,200 | ) | 18.85 | |||||||||||||
Outstanding at June
30, 2009 |
1,59,200 | $ | 13.53 | $ | 6.75-$25.20 | 7.6 | ||||||||||
Exercisable at June
30, 2009 |
70,975 | $ | 15.27 | $ | 6.75-$25.20 | 6.8 | ||||||||||
F-33
Fiscal | Fiscal | Fiscal | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Expected volatility |
| 33 | % | 35 | % | |||||||
Risk-free interest rate |
| 3.7 | % | 5.1 | % | |||||||
Expected lives |
| 4 years | 4 years | |||||||||
Dividend yield |
| 6.0 | % | 2.7 | % | |||||||
Weighted average fair value of options granted per share |
| $ | 1.39 | $ | 4.97 | |||||||
Total fair value of options granted |
$ | | $ | 105,000 | $ | 422,000 | ||||||
Total intrinsic value of stock options exercised(1) |
$ | | $ | | $ | 9,000 |
(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. |
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 |
49,200 | 24,600 | 18.85 | |||||||||
2/4/2017 |
20,000 | 10,000 | 17.62 | |||||||||
2/5/2018 |
71,500 | 17,875 | 8.01 | |||||||||
159,200 | 70,975 | $ | 13.53 | |||||||||
F-34
F-35
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Basic and diluted earnings (loss) per share: |
||||||||||||
Numerator |
||||||||||||
Net income (loss) |
$ | (1,088 | ) | $ | 2,112 | $ | 5,911 | |||||
Denominator for basic EPS |
||||||||||||
Weighted average common shares outstanding |
5,705 | 5,450 | 5,204 | |||||||||
Denominator for diluted EPS |
||||||||||||
Weighted average common shares outstanding |
5,705 | 5,450 | 5,204 | |||||||||
Incremental shares for stock options |
| 1 | 2 | |||||||||
Potentially dilutive weighted average
common shares |
5,705 | 5,451 | 5,206 | |||||||||
Basic earnings (loss) per common share |
$ | (0.19 | ) | $ | 0.39 | $ | 1.14 | |||||
Diluted earnings (loss) per common share |
$ | (0.19 | ) | $ | 0.39 | $ | 1.14 | |||||
Fiscal Year Ended | Amount | |||
June 30, 2009 |
$ | 1,164 | ||
June 30, 2008 |
628 | |||
June 30, 2007 |
393 |
F-36
Operating | Guaranteed | |||||||||||
Fiscal Year Ended | Leases | Royalties | Total | |||||||||
June 30, 2010 |
$ | 727 | $ | 90 | $ | 817 | ||||||
June 30, 2011 |
670 | | 670 | |||||||||
June 30, 2012 |
569 | | 569 | |||||||||
June 30, 2013 |
430 | | 430 | |||||||||
June 30, 2014 |
65 | | 65 | |||||||||
$ | 2,461 | $ | 90 | $ | 2,551 | |||||||
F-37
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Contributions to 401(k) |
$ | 247 | $ | 169 | $ | 110 |
F-38
Specialty | Mass | Total | ||||||||||
Fiscal year ended June 30, 2009: |
||||||||||||
Net sales |
$ | 68,951 | $ | 80,741 | $ | 149,692 | ||||||
Gross profit |
21,263 | 10,957 | 32,220 | |||||||||
Income from operations |
1,132 | (328 | ) | 804 | ||||||||
Total assets |
62,632 | 18,236 | 80,868 | |||||||||
Fiscal year ended June 30, 2008: |
||||||||||||
Net sales |
$ | 74,878 | $ | 62,712 | $ | 137,590 | ||||||
Gross profit |
23,675 | 11,238 | 34,913 | |||||||||
Income from operations |
3,536 | 2,391 | 5,927 | |||||||||
Total assets |
60,453 | 21,507 | 81,960 | |||||||||
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 | |||||||||
Total assets |
53,579 | 11,172 | 64,751 |
F-39
Fiscal Year Ended | ||||||||||||
June 30, | June 30, | June 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Specialty |
||||||||||||
Ceiling fans, light kits and
blades |
16 | % | 23 | % | 37 | % | ||||||
Outdoor patio furniture |
20 | % | 16 | % | 0 | % | ||||||
Ventilation, chimes and bulbs |
4 | % | 6 | % | 10 | % | ||||||
Clocks and weather gauges |
1 | % | 2 | % | 3 | % | ||||||
Bath and outdoor lighting |
5 | % | 7 | % | 8 | % | ||||||
46 | % | 54 | % | 58 | % | |||||||
Mass |
||||||||||||
Indoor lighting |
10 | % | 13 | % | 23 | % | ||||||
Outdoor lighting |
1 | % | 2 | % | 2 | % | ||||||
Outdoor patio furniture |
37 | % | 22 | % | 0 | % | ||||||
Accessories |
6 | % | 9 | % | 17 | % | ||||||
54 | % | 46 | % | 42 | % | |||||||
100 | % | 100 | % | 100 | % | |||||||
F-40
Fiscal Year Ended June 30, 2009 | Fiscal Year Ended June 30, 2008(1) | |||||||||||||||||||||||||||||||||||||||
Fourth | Third | Second | First | Fourth | Third | Second | First | |||||||||||||||||||||||||||||||||
Total | Quarter | Quarter | Quarter | Quarter | Total | Quarter(2) | Quarter | Quarter | Quarter | |||||||||||||||||||||||||||||||
Net sales |
$ | 149,692 | $ | 30,265 | $ | 52,000 | $ | 37,262 | $ | 30,165 | $ | 137,590 | $ | 39,122 | $ | 54,918 | $ | 20,812 | $ | 22,738 | ||||||||||||||||||||
Gross profit |
32,220 | 7,451 | 8,593 | 7,706 | 8,470 | 34,913 | 10,177 | 10,692 | 6,534 | 7,510 | ||||||||||||||||||||||||||||||
Income (loss) from
operations |
804 | 245 | 413 | (189 | ) | 335 | 5,927 | 1,185 | 1,634 | 1,344 | 1,764 | |||||||||||||||||||||||||||||
Net income |
(1,088 | ) | (279 | ) | (135 | ) | (545 | ) | (129 | ) | 2,112 | 373 | 639 | 482 | 618 | |||||||||||||||||||||||||
Basic EPS |
$ | (0.19 | ) | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.10 | ) | $ | (0.02 | ) | $ | 0.39 | $ | 0.07 | $ | 0.11 | $ | 0.09 | $ | 0.12 | |||||||||||||||
Diluted EPS |
(0.19 | ) | (0.05 | ) | (0.02 | ) | (0.10 | ) | (0.02 | ) | 0.39 | 0.07 | 0.11 | 0.09 | 0.12 | |||||||||||||||||||||||||
Basic shares outstanding |
5,705 | 5,705 | 5,705 | 5,705 | 5,705 | 5,450 | 5,704 | 5,694 | 5,205 | 5,205 | ||||||||||||||||||||||||||||||
Diluted shares outstanding |
5,705 | 5,705 | 5,705 | 5,705 | 5,705 | 5,451 | 5,705 | 5,700 | 5,205 | 5,206 |
(1) | Includes the results of Woodard LLC. effective January 2, 2008. See Note 3 - Acquisitions. | |
(2) | See Note 5 Income Taxes regarding benefit obtained from a reduction in amounts set aside for tax contingencies. |
F-41
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, 2009 |
$ | 384 | $ | 333 | $ | | $ | (177 | ) | $ | 541 | |||||||||
June 30, 2008 |
251 | 329 | | (196 | ) | 384 | ||||||||||||||
June 30, 2007 |
293 | 32 | | (74 | )(a) | 251 | ||||||||||||||
Allowance for inventory obsolescence
as of: |
||||||||||||||||||||
June 30, 2009 |
$ | 423 | $ | 155 | $ | | $ | (369 | ) | $ | 208 | |||||||||
June 30, 2008 |
403 | 70 | | (50 | ) | 423 | ||||||||||||||
June 30, 2007 |
934 | 104 | | (635 | )(b) | 403 |
(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-42
Exhibit | ||||
Number | Description | |||
2.1 | Asset Purchase Agreement dated as of December 18, 2007, by and among Woodard, LLC, Henry
Crown and Company d/b/a CC Industries, Inc. and Craftmade International, Inc., previously
filed as Exhibit 2.1 to Form 8-K on January 4, 2008, 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 | 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 the
Companys Form 8-K on September 18, 2006, 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. |
||||
2.3 | 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 the Companys Form 8-K on September 18, 2006, and incorporated by reference
herein. |
|||
2.4 | 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 the Companys Form 8-K on September 18, 2006, and incorporated by reference
herein. |
|||
2.5 | 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 the
Companys Form 8-K on September 18, 2006, and incorporated by reference herein. |
|||
2.6 | Non-Competition Agreement between Trade Source International, Inc. and Robert W. Lackey,
dated September 15, 2006, previously filed as Exhibit 10.5 to the Companys Form 8-K on
September 18, 2006, and incorporated by reference herein. |
|||
2.7 | Non-Competition Agreement between Trade Source International and Robert W. Lackey, Jr.,
dated September 15, 2006, previously filed as Exhibit 10.6 to the Companys Form 8-K on
September 18, 2006, and incorporated by reference herein. |
|||
2.8 | 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 the Companys Form 8-K on September 18, 2006, and incorporated by
reference herein. |
|||
2.9 | 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 the
Companys Form 8-K on September 18, 2006, and incorporated by reference herein. |
|||
2.10 | 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 the Companys Form 8-K on September 18, 2006, and
incorporated by reference herein. |
Exhibit | ||||
Number | Description | |||
2.11 | 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 the Companys Form 8-K on March 7, 2005, and incorporated
by reference herein. |
|||
2.12 | 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 the Companys Form 8-K on July 15, 1998 (File No. 33-33594-FW) and
incorporated by reference herein. |
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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. |
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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. |
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3.3 | Amended and Restated Bylaws of the Company, previously filed as Exhibit 3.1 to the
Companys Form 8-K on June 15, 2009, and incorporated by reference herein. |
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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. |
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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 99.1 to the
Companys Form 8-K on July 9, 1999, and incorporated by reference herein. |
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4.3 | Amendment No. 1 to Rights Agreement, dated as of June 9, 2009, between Craftmade
International, Inc. and ComputerShare Trust Company, N.A., as Rights Agent, previously filed
as Exhibit 1(A) to Form 8-A/A on June 15, 2009, and incorporated by reference herein. |
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10.1 | Promissory Note dated November 14, 2007, in the original principal amount of $11,000,000
payable to the order of Allianz Life Insurance Company of North America and executed by CM
Real Estate, LLC., previously filed as Exhibit 10.1 to the Companys Form 8-K on November 20,
2007, and incorporated by reference herein. |
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10.2 | Deed of Trust, Mortgage and Security Agreement by CM Real Estate, LLC, effective November
14, 2007, previously filed as Exhibit 10.2 to the Companys Form 8-K on November 20, 2007,
and incorporated by reference herein. |
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10.3 | Guaranty Agreement dated November 14, 2007, by Craftmade International, Inc. in favor of
Allianz Life Insurance Company of North America, previously filed as Exhibit 10.3 to the
Companys Form 8-K on November 20, 2007, and incorporated by reference herein. |
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10.4 | Lease Agreement dated as of November 14, 2007, between CM Real Estate, LLC and Craftmade
International, Inc., previously filed as Exhibit 10.4 to the Companys Form 8-K on November
20, 2007, and incorporated by reference herein. |
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10.5 | Loan and Security Agreement dated as of July 8, 2009, among Craftmade International, Inc.
and Bank of America, N.A., previously filed as Exhibit 10.1 to the Companys Form 8-K on July
16, 2009, and incorporated by reference herein. |
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10.6 | Term Loan Agreement dated as of July 8, 2009, among Craftmade International, Inc.,
WoodardCM, LLC and The Frost National Bank, previously filed as Exhibit 10.2 to the
Companys Form 8-K on
July 16, 2009, and incorporated by reference herein. |
Exhibit | ||||
Number | Description | |||
10.7 | Term Loan Note dated July 8, 2009 with the Frost National Bank, previously filed as Exhibit
10.3 to the Companys Form 8-K on July 16, 2009, and incorporated by reference herein. |
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10.8 | Mortgage dated as of July 8, 2009 by WoodardCM, LLC for the benefit of the Frost National
Bank, previously filed as Exhibit 10.4 to the Companys Form 8-K on July 16, 2009, and
incorporated by reference herein. |
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10.9 | Craftmade International, Inc. 2006 Long-Term Incentive Plan, previously filed as Exhibit
10.1 to the Companys Form 8-K on December 4, 2006, and incorporated by reference herein. |
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10.10 | Incentive Stock Option Agreement, previously filed as Exhibit 10.2 to the Companys Form
8-K on December 4, 2006, and incorporated by reference herein. |
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10.11 | Non-qualified Stock Option Agreement, previously filed as Exhibit 10.3 to the Companys
Form 8-K on December 4, 2006, and incorporated by reference herein. |
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10.12 | Stock Appreciation Rights Agreement, previously filed as Exhibit 10.4 to the Companys
Form 8-K on December 4, 2006, and incorporated by reference herein. |
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10.13 | Restricted Stock Award Agreement, previously filed as Exhibit 10.5 to the Companys Form
8-K on December 4, 2006, and incorporated by reference herein. |
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21.1 | * | List of the subsidiaries of Craftmade International, Inc. |
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23.1 | * | Consent of BDO Seidman, LLP. |
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31.1 | * | Certification of J. Marcus Scrudder, Chief Executive Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 | * | Certification of C. Brett Burford, Chief Financial Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 | * | Certification of J. Marcus Scrudder, Chairman of the Board, President and Chief Executive
Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 | * | Certification of C. Brett Burford, Chief Financial Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
* | Each document marked with an asterisk is filed or furnished herewith. |