e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2006
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-26667
Craftmade International, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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75-2057054
(I.R.S. Employer
Identification No.) |
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650 S. Royal Lane, Suite 100 |
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75019 |
Coppell, Texas
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(Zip Code) |
(Address of Principal Executive Offices)
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(972) 393-3800
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Act:
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Title of Each Class
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Name of each exchange on which registered |
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Common Stock, par value
$0.01
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NASDAQ Global Market |
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer þ Non-accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant as of December 31, 2005 was approximately $104,072,000 based upon the closing price of
the common stock on the NASDAQ National Global Market reported for such date. The number of shares
outstanding of the Registrants Common Stock on December 31, 2005 was 5,201,000.
The number of shares outstanding of the registrants $.01 par value common stock as of August 31,
2006 was 5,203,500.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for its 2006 Annual Meeting of Stockholders (the
Proxy Statement) to be filed with the Securities and Exchange Commission, are incorporated by
reference into Part III of this Form 10-K.
Disclosure Regarding Forward-Looking Statements
In this Form 10-K, references to Craftmade, ourselves, we, our, us, its, itself,
and the Company refer to Craftmade International, Inc., Trade Source International, Inc., their
wholly-owned subsidiaries, and the Companys 50% owned limited liability companies (LLCs)
unless the context requires otherwise.
Various statements in this Form 10-K or incorporated by reference into this Form 10-K, in
future filings with the SEC, in press releases, and in oral statements made by or with the approval
of authorized personnel constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are based on current
expectations and are indicated by words or phrases such as may, will, should, could,
might, expects, plans, anticipates, believes, estimates, projects, predicts,
forecasts, intends, potential, continue, and similar words or phrases and involve known and
unknown risks, uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from the future results, performance or achievements
expressed in or implied by such forward-looking statements. These forward-looking statements
include statements or predictions regarding among other items:
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Revenues and profits; |
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Gross margin; |
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Customer concentration; |
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Customer buying patterns; |
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Sales and marketing expenses; |
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General and administrative expenses; |
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Pricing and cost reduction activities; |
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Income tax provision and effective tax rate; |
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Realization of deferred tax assets; |
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Liquidity and sufficiency of existing cash, cash equivalents, and investments for
near-term requirements; |
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Purchase commitments; |
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Product development and transitions; |
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Competition and competing technology; |
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Outcomes of pending or threatened litigation; and |
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Financial condition and results of operations as a result of recent accounting pronouncements. |
These forward-looking statements are based largely on expectations and judgments and are
subject to a number of risks and uncertainties, many of which are beyond our control. Significant
factors that cause our actual results to differ materially from our expectations are described in
this Form 10-K under the heading of Risk Factors. We undertake no obligation to publicly update
or revise these Risk Factors or any forward-looking statements, whether as a result of new
information, future events or otherwise.
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 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 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 its Business
Ethics Policy. We will provide a copy of our Form 10-K annual report upon written request of any
shareholder. The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC at
www.sec.gov. The public may read and copy any materials we file with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
PART I
Item 1. Business.
The Company
Craftmade International, Inc. was incorporated in the state of Texas in July 1985,
reincorporated in the state of Delaware in December 1991, and is organized by product type and
customer base into two operating segments: Craftmade International, Inc. (Craftmade) and Trade
Source International, Inc. (TSI). The Craftmade segment primarily derives its revenue from home
furnishings including ceiling fans, light kits, bathstrip lighting, light bulbs, door chimes,
ventilation systems and other lighting accessories offered primarily through lighting showrooms,
certain major retail chains, and electrical wholesalers. The TSI segment derives its revenue from
outdoor lighting, portable lamps, indoor lighting and fan accessories marketed solely to mass
merchandisers.
Craftmade Craftmade is principally engaged in the design, distribution and marketing of
ceiling fans, light kits, bath-strip lighting and related accessories to a nationwide network of
over 1,800 lighting showrooms and electrical wholesalers specializing in sales to the remodeling,
new home construction and replacement markets. Craftmades ceiling fan product line consists of
over two dozen series of premium priced to lower priced ceiling fans and is distributed under the
Craftmade® trade name. Craftmade also markets nearly eighty light kit models in various colors for
attachment and use with its ceiling fans or other ceiling fans, along with parts and accessories
for its ceiling fans and light kits. In addition, nearly two dozen styles of bath-strip lighting
and over forty designs of outdoor lighting are marketed under its Accolade® 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. Through its acquisition of Bill Teiber Co., Inc. on
March 1, 2005, Craftmade is able to offer its current customers light bulbs, door chimes,
ventilation systems and other lighting accessories. Craftmades national sales organization, which
consists of 35 independent sales groups employing approximately 65 sales representatives, markets
its products to its distribution network of lighting showrooms, certain major retail chains, and
electrical wholesalers.
TSI TSI is the reporting segment for the portion of the Company that is principally engaged
in the design, distribution and marketing of outdoor and indoor lighting, various fan accessories
and lamp parts, and home décor items to mass merchandisers. TSIs outdoor lighting consists of
numerous lighting programs distributed to mass merchandisers in a variety of designs and decorative
finishes. The indoor lighting product line includes ceiling mount lighting fixtures and bath-strip
lighting. The TSI segment includes the Trade Source entity which is wholly-owned by the Company
and the Design Trends and PHI limited liability companies (defined below) which are 50% owned.
Hereafter, TSI refers to the segment and Trade Source to the entity.
50% Owned Limited Liability Companies The Company has a 50% ownership interest in each of
two entities, Design Trends, LLC (Design Trends), a Deleware limited liability company, and
Prime/Home Impressions, LLC (PHI), a North Carolina limited liability company, which are part of
the TSI segment:
Design Trends 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.
PHI PHI was formed in 1997 to market programs of fan accessories and lamp parts including
decorative pull-chains, replacement switches, blade arms, blades and ceiling medallions. All
of PHIs sales are to mass merchandisers. The Company is responsible for sales, sourcing,
distribution and accounting for PHI. Marketing Impressions, Inc., an unaffiliated Georgia
corporation, which owns the other 50% of PHI, is responsible for developing products and
supplies ceiling medallions to PHI.
1
Segment Financial Information
The following table presents information about the reportable segments:
Summary of Reportable Segments
(Dollars in thousands)
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Craftmade |
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TSI |
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Total |
Fiscal year ended June 30, 2006: |
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Net sales |
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$ |
62,902 |
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$ |
55,152 |
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$ |
118,054 |
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Gross profit |
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22,541 |
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12,928 |
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35,469 |
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Income from operations |
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8,517 |
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6,463 |
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14,980 |
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Interest expense, net |
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1,104 |
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80 |
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1,184 |
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Minority interest |
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3,430 |
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3,430 |
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Provision for income taxes |
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2,501 |
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765 |
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3,266 |
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Depreciation and amortization |
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575 |
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19 |
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594 |
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Net income |
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4,877 |
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2,223 |
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7,100 |
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Total assets |
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52,833 |
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12,228 |
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65,061 |
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Fiscal year ended June 30, 2005: |
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Net sales |
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$ |
55,663 |
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$ |
63,143 |
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$ |
118,806 |
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Gross profit |
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20,311 |
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15,135 |
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35,446 |
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Income from operations |
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6,402 |
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7,960 |
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14,362 |
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Interest expense, net |
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973 |
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108 |
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1,081 |
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Minority interest |
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3,775 |
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3,775 |
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Provision for income taxes |
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1,895 |
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1,184 |
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3,079 |
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Depreciation and amortization |
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537 |
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44 |
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581 |
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Net income |
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3,534 |
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2,893 |
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6,427 |
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Total assets |
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50,835 |
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19,980 |
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70,815 |
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Fiscal year ended June 30, 2004: |
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Net sales |
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$ |
53,526 |
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$ |
67,712 |
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$ |
121,238 |
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Gross profit |
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21,025 |
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14,885 |
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35,910 |
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Income from operations |
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9,112 |
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7,570 |
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16,682 |
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Interest expense, net |
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708 |
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69 |
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777 |
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Minority interest |
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3,719 |
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3,719 |
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Provision for income taxes |
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3,019 |
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1,521 |
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4,540 |
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Depreciation |
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554 |
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94 |
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648 |
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Net income |
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5,385 |
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2,261 |
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7,646 |
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Total assets |
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29,163 |
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26,091 |
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55,254 |
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Net Sales 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.
2
Products
The following table summarizes net sales by product category as a percentage of consolidated
net sales:
Net Sales by Product Category
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Fiscal Year Ended |
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June 30, |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2004 |
Craftmade |
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Ceiling fans |
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27 |
% |
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29 |
% |
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29 |
% |
Teiber lighting products |
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8 |
% |
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2 |
% |
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0 |
% |
Other |
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18 |
% |
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16 |
% |
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15 |
% |
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53 |
% |
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47 |
% |
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44 |
% |
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TSI |
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Indoor lighting |
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29 |
% |
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36 |
% |
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39 |
% |
Outdoor lighting |
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7 |
% |
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7 |
% |
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10 |
% |
Accessories |
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11 |
% |
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10 |
% |
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7 |
% |
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47 |
% |
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53 |
% |
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56 |
% |
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100 |
% |
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100 |
% |
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100 |
% |
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Craftmade Products
Ceiling Fans Craftmades ceiling fan product line consists of over two dozen fan series for
sale to the new home construction, remodeling and replacement markets. These series are
differentiated on the basis of cost, air movement and appearance. Craftmades fans are
manufactured and assembled in a variety of colors, styles and finishes and can be used either in
conjunction with or independent of Craftmades light kits. Series lines include Early American,
Traditional and Modern High-Tech Decor and, depending on the size, finish and other features, range
in price from the premium Cameo, Constantina, Crescent and Presidential series to various lower-end
builder series. Craftmades fans come in five motor sizes, five blade sizes and over two dozen
different decorative finishes. The range of styles and colors gives consumers the ability to select
ceiling fans for any style of house, interior decoration or living and working area, including
outdoor patios.
Light Kits Craftmade markets nearly eighty models of light kits, which consist of glass
shades and filters, in various colors that may be utilized with Craftmades ceiling fans or other
ceiling fans.
Bath-strip Lighting Craftmade markets nearly two dozen series of bath-strip lighting in
different lengths and decorative finishes under the Accolade® trade name. Craftmade plans to add
finishes and series from time to time based on customer demand.
Outdoor Lighting Craftmade markets over forty designs of outdoor lighting in different
decorative finishes under the Accolade® trade name. Craftmade plans to add finishes and designs
from time to time based on customer demand.
Teiber Lighting Products Through the acquisition of Bill Teiber Co., Inc. (Teiber) on
March 1, 2005, Craftmade offers 2,000 different light bulbs and complimentary lighting products as
well as an extensive line of door chimes, pushbuttons, ventilation systems and smoke alarms.
Accessories Craftmade also markets a variety of designer and standard wall controls to
regulate the speed and intensity of ceiling fans and lighting fixtures and universal down-rods for
use with ceiling fans.
TSI Products
Indoor Lighting During fiscal year 2000, the Company began marketing floor and table lamps,
chandeliers and wall sconces designed by Patrick Dolan to various mass merchandisers through Design
Trends. TSIs portable lamp program, which is a significant part of the TSIs indoor lighting
program, is merchandised in a mix and match system that enables the consumer to customize a lamp
base and shade combination. Lamp shades are displayed
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separately on a revolving carousel that
economizes space. The smaller packaging of the lamp bases enables the
retailer to display a greater number of SKUs in the same amount of space. Selections of lamp bases
include large, medium, buffet, small and mini lamps and are offered in a variety of styles and
finishes.
Outdoor Lighting TSI markets over sixty designs of outdoor lighting in a variety of
decorative finishes, colors and sizes to various mass merchandisers under the TSI Prime brand, as
well as the retailers private label brands. The outdoor lighting is designed for either wall
mounting or as a post-mounted fixture.
Accessories TSI also markets programs of fan accessories and lamp parts, including universal
downrods, pull-chains and ceiling medallions, to various mass merchandisers through PHI.
Manufacturing
Craftmade. Craftmades ceiling fans, bathstrip lighting and substantially all of its light
kits and certain accessories are produced by multiple manufacturers in Asia. Light kit and other
product orders are typically placed independently of ceiling fan orders, but are also received in
container-size lots generally consisting of up to 4,500 light kit units. Craftmade offers a
variety of light kits in various finishes and colors, as well as a variety of fixtures designed for
ceiling fans. Craftmade also offers a variety of glass selections for the various light fixtures,
including blown glass, beveled glass and crystal. Fixtures and glass are shipped in the light kit
containers. Craftmades wall controls, timers and switches as well as a portion of its ceiling fan
blades, are manufactured by companies based in the United States. Craftmade offers a variety of
custom blade sets in various sizes and finishes. The finished products are packaged and labeled
under the Craftmade brand name.
Craftmade purchases Teiber light bulbs, door chimes, pushbuttons, ventilation systems, smoke
alarms and complimentary lighting products from several manufacturers located in Asia and the
United States.
Craftmade and TSI purchase outdoor lighting from several manufacturers located in Asia.
Outdoor lighting orders are received in container-size lots, similar to light kit and ceiling fan
orders. Craftmade and TSI offer a wide variety of outdoor lighting styles in various finishes,
colors and sizes and are designed for either wall mounting or as post-mounted fixtures.
In the ordinary course of business, orders are typically filled within 90 days, which includes
approximately 20 days for transport. Three of our larger vendors ship products prior to receipt of
payment from Craftmade. Accordingly, payment is deferred until delivery of such products. At
present levels, this credit arrangement is equivalent to approximately three weeks supply of
products and represents a supplier commitment that the Companys management believes is unusual for
the industry and favorable to the Company.
TSI. TSI purchases indoor lighting products, including flush mounts and bathstrip lights from
many of the same manufacturers that produce outdoor lighting for Craftmade.
PHI purchases most of its ceiling fan accessories and all of its lamp replacement parts from
several manufacturers located in Asia, 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 Asia.
Design Trends offers several different styles and sizes of table and floor lamps, either
pre-packaged with shades or glass, or with shades sold separately, allowing customers to mix and
match components. These products are also shipped on containers, either to the Companys facility
in Coppell, Texas or directly to the customer.
All of TSI, PHI and Design Trends foreign vendors require payment 30 to 60 days after
notification of shipment of product from Asia.
4
Distribution
Craftmade. Craftmades products are marketed through more than 1,800 lighting showrooms,
certain major retail chains, and electrical wholesaler locations specializing in sales to the new
home construction, remodeling and replacement markets. Its ceiling fans, light kits, bath strips,
outdoor lighting and accessories are distributed through 35 independent sales groups on a national
basis. Each sales group is selected to represent Craftmade in a specific market area. The
independent sales groups comprise a sales force of approximately 65 sales representatives, who
represent Craftmade exclusively in the sale of ceiling fans in return for commissions on such
sales. During each of three fiscal years ended June 30, 2006, no single lighting showroom or
electrical wholesaler accounted for more than 3% of Craftmades sales.
Sales representatives are carefully selected and continually evaluated in order to promote
high-level representation of Craftmades products. Craftmade employees provide initial field
training to new sales representatives covering features, styles, operation and other attributes of
Craftmade products to enable representatives to more effectively market Craftmades products.
Additional training, especially for a new product series, is provided on a regular basis at
semi-annual trade shows held throughout the United States. Management believes it has assembled a
highly motivated and effective sales representative organization that has demonstrated a strong
commitment to Craftmade and its products. Management further believes that the strength of its
sales representative organization is primarily attributable to the quality and competitive pricing
of Craftmades products, as well as the ongoing administrative and marketing support that Craftmade
provides to its sales representatives.
TSI. All of TSIs sales are to mass merchandisers with two customers comprising the most
significant portion of TSIs and the Companys sales, as follows:
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Lowes Companies |
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Wal-Mart |
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Percent of |
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Percent of |
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Percent of |
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Percent of |
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TSIs |
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Consolidated |
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TSIs |
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Consolidated |
Fiscal Year Ended |
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Net Sales |
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Net Sales |
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Net Sales |
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Net Sales |
June 30, 2006
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87%
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41%
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12%
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6% |
June 30, 2005
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83%
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44%
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20%
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11% |
June 30, 2004
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75%
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42%
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15%
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8% |
The majority of TSIs sales are by direct shipment. The remaining sales are shipped from
the Companys Coppell, Texas facility. TSI utilizes an internal sales force to market its products
and independent sales representatives to service specific mass merchandiser locations.
Marketing
Craftmade. Craftmade relies primarily on the reputation of its ceiling fans, outdoor lighting
and light kits for high quality and competitive prices and the efforts of its sales representative
organization in order to promote the sales of its products. The principal markets for Craftmades
products are the new home construction, remodeling and replacement markets. Craftmade utilizes
advertising in home lighting magazines, particularly in special editions devoted to ceiling fans
and lighting fixtures, and broadly distributes its product catalog.
Craftmade also promotes its ceiling fans and light kits at semi-annual trade shows in Dallas
(in January and June) and maintains a showroom at the Dallas Trade Mart. Craftmade provides
warranties ranging from 30 years to lifetime on the fan motor of its ceiling fans, and includes a
one year limited warranty against defects in workmanship and materials to cover the entire ceiling
fan. Craftmade provides a limited lifetime warranty on its higher-end series of fans. The
Companys management believes these warranties are highly attractive to both dealers and consumers.
TSI. TSI relies primarily on the reputation of its products, merchandising concepts and the
relationship it has with its mass merchandiser customers with respect to its sales. TSI
participates in advertising programs and special promotions performed by its customers. TSI also
promotes its product line at semi-annual trade shows in Dallas (in January and June) and utilizes
Craftmades showroom at the Dallas Trade Mart.
5
General. The Company has a 48-hour product shipment policy. In order to meet these policy
delivery requirements and to ensure that it has sufficient goods on hand from its overseas
suppliers, the Company maintains a significant level of inventory. See Managements Discussion
and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
For information concerning revenues of the Company attributable to foreign and domestic
customers, along with information concerning foreign and domestic long-lived assets of the Company,
see Note 13 Segment Information in the notes to consolidated financial statements.
Product Expansion
Craftmade continually expands its ceiling fan product line, providing proprietary products to
its customer base in order to meet current and anticipated demands for unique, innovative products.
During the fiscal year ended June 30, 2006, Craftmade introduced six new series of fans Epic,
Riatta, Argos, Artistry, Mia, and Celestial II which will begin shipping during the fiscal year
ended June 30, 2007. In addition, Craftmade increased its selections of complimentary products
such as specialty light fixtures, including bath bars and outdoor lighting. The Companys
management will continue to search for opportunities for product expansion that it considers
complementary to the Companys existing product lines.
Seasonality
The Companys product sales, particularly ceiling fans, are somewhat seasonal with sales in
the warmer first and fourth quarters being historically higher than in the two other fiscal
quarters.
Backlog
Backlog is not material to the Companys operations as substantially all of the Companys
products are shipped to customers within 48 hours following receipt of orders.
Competition
The ceiling fan and lighting fixture market is highly competitive at all levels of operation.
Some of the major companies in the ceiling fan industry include Casablanca, Hunter, Minka, Monte
Carlo, Quorum, Emerson Electric, and Taconi. A number of other well-established companies are also
currently engaged in activities that compete directly with Craftmade. Some of Craftmades
competitors are better established and have longer operating histories, substantially greater
financial resources or greater name recognition than Craftmade. However, the Companys management
believes that the quality of Craftmades products, the strength of its marketing organization and
the growing recognition of the Craftmade name will enable Craftmade to compete successfully in
these highly competitive markets.
The mass merchandiser market is also highly competitive. TSI, PHI, and Design Trends have
numerous competitors, which are located both within the United States and outside of the country,
particularly in Asia. Some of the major companies in the lighting fixture industry include
Designers Fountain, Murray Feiss, Catalina, Jimco Lamps, J. Hunt, Westinghouse, and Minka. In
addition, mass merchandisers themselves will, at times, compete directly against TSI, PHI, and
Design Trends by purchasing private label products from Asian factories that are not TSI vendors.
More detail of the impact of this risk is in Item 1A. Risk Factors.
6
Product warranties
Craftmade ceiling fans are warranted against defects in workmanship and materials depending on
standard offerings of various lengths and terms. Provisions for estimated expenses related to
product warranties are made at the time products are sold. These estimates are established using
historical information on the nature, frequency, and average cost of warranty claims.
Product Warranty Costs
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2004 |
Product warranty costs |
|
$ |
1,037 |
|
|
$ |
1,009 |
|
|
$ |
872 |
|
Research and development
Research, development and engineering expenditures for the creation and application of new
products and processes, as summarized in the following table:
Research and Development
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2004 |
Research and development |
|
$ |
217 |
|
|
$ |
202 |
|
|
$ |
293 |
|
Independent Safety Testing
All of the ceiling fans, outdoor lighting, light kits and lamps sold by the Company in the
United States are tested by Underwriters Laboratories (UL), which is an independent non-profit
corporation which tests certain products, including ceiling fans and lighting fixtures, for public
safety. Under its agreement with UL, the Company voluntarily submits its products to UL, and UL
tests the products for safety. If the product is acceptable, UL issues a listing report that
provides a technical description of the product. UL provides the manufacturers with procedures to
follow in manufacturing the products. Electrical products that are manufactured in accordance with
the designated procedures display the UL listing mark, which is generally recognized by consumers
as an indication of a safe product and which is often required by various governmental authorities
to comply with local codes and ordinances. The contract between the Company and UL provides for
automatic renewal unless either party cancels as a result of default or gives applicable prior
notice.
Product Liability
The Company is engaged in businesses that could expose it to possible claims for injury
resulting from the failure of its products sold. While no material claims have been made against
the Company since its inception and the Company maintains product liability insurance, there can be
no assurance that claims will not arise in the future or that the coverage of the policy will be
sufficient to pay any claims.
Patents and Trademarks
The Company has patented certain of its product designs and the functional features of some of
its products. The expiration dates of Craftmades patents (excluding pending applications)
currently range from 2008 to 2022. In addition, Fanthing holds certain Taiwanese patents covering
specific technology employed in Craftmade ceiling fans, but the Companys management does not
believe that such patents are material to the production of Craftmade products. From time to time,
the Company also enters into license agreements with various designers of the Companys products,
including license agreements concerning licenses on patents for eight series of fans and certain
other license agreements entered into in the ordinary course of its business. The Company has
registered the trademarks Craftmade ®, Accolade ® and Durocraft ®, along with the product names of
certain of its designs, with the United States Patent and Trademark Office.
7
Employees
As of June 30, 2006, the Company employed a total of 131 full time employees, including six
executive officers (one of whom is an officer of TSI), 10 managers, 24 clerical and administrative
personnel, 30 marketing and customer service personnel, 49 warehouse personnel and 12
shipping/production personnel. There were 130 employees at June 30, 2005. 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.
Item 1A. Risk Factors.
Described below are certain risks that we believe are applicable to our business and the
industry in which we operate. There may be additional risks applicable to our business that are
not presently material or known. There are also risks within the economy and the capital markets,
both domestically and internationally, that affect business generally, including us and other
companies in our industry, such as inflation; higher interest rates; higher fuel and other energy
costs; higher transportation costs; higher costs of labor, insurance and healthcare; foreign
exchange rate fluctuations; and higher levels of unemployment, which have not been described. You
should carefully consider each of the following risks and all other information set forth in this
Annual Report on Form 10-K.
If any of the events described below occur, our business, financial condition, results of
operations, liquidity or access to the capital markets could be materially adversely affected. The
following risks could cause our actual results to differ materially from our historical experience
and from results predicted by forward-looking statements made by us related to conditions or events
that we anticipate may occur in the future. All of our forward-looking statements made us are
qualified by the risks described below. The following should not be construed as an exhaustive
list of all factors that could cause our actual results to differ materially from those expressed
in our forward-looking statements.
The ceiling fan and lighting industry is highly competitive, and we may not be able to compete
successfully.
We compete with numerous companies, including several major manufacturers and distributors.
Some of our competitors have greater financial and other resources than we have, which could allow
them to compete more successfully than us. Most of our products are available from several other
sources, and our customers tend to have relationships with several distributors. Manufacturers
could also increase their efforts to sell directly to end-users and bypass distributors like us.
In the future, we may be unable to compete successfully, and competitive pressures may reduce our
revenues.
If we fail to gain customer acceptance of our existing and new products, our operating results
could suffer.
We sell our products primarily to lighting showrooms and mass merchandisers. If we fail to
successfully introduce new products that are accepted by our customers, our operating results may
be adversely affected.
As we do not manufacture the products that we distribute, we are dependent upon third parties for
the manufacture and supply of high quality competitive products on a timely basis.
We obtain substantially all of our products from third-party suppliers in China and Taiwan.
We currently purchase a substantial amount of ceiling fans and other products of the Craftmade
segment from Fanthing Electrical Corp. (Fanthing), a Taiwanese company. The following table
summarizes the Companys purchases from Fanthing:
Summary of Purchases from Fanthing
(Dollars in thousands)
|
|
|
|
|
|
|
As % of |
|
As % of |
|
|
Craftmade |
|
Total |
Fiscal Year Ended |
|
Purchases |
|
Purchases |
June 30, 2006
|
|
50%
|
|
23% |
June 30, 2005
|
|
60%
|
|
29% |
June 30, 2004
|
|
67%
|
|
21% |
8
We do not have long-term contracts with our suppliers committing them to supply products
to us. Most of our products are imported from suppliers under short-term purchase orders that we
place with them. Therefore, our
suppliers may not provide us with the products we need in the quantities that we request. Because
we do not control the actual production of the products that we sell, we may be subject to delays
caused by interruption in production based on conditions outside of our control. Political or
financial instability, merchandise quality issues, trade restrictions, tariffs, currency exchange
rates, transportation capacity and costs, inflation, outbreak of pandemics and other factors
relating to foreign trade are beyond our control. In the event that any of our third-party
suppliers were to 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 general economic condition, particularly the housing, home construction, and remodel
sectors, could lead to reduced demand for the Companys products.
General economic conditions in the U.S., including the housing and home construction sectors,
are affected by, among other things consumer spending habits, levels of employment, salary and wage
rates, prevailing interest rates, income tax rates and policies, consumer confidence and consumer
perception of economic conditions. A decline in general economic conditions in the U.S. could lead
to a reduced demand for our products.
The loss of certain of our customers that represent a significant percentage of our net sales could
adversely affect our results of operations.
All of TSIs net sales, including the net sales of PHI and Design Trends, are made to mass
merchandisers with two customers comprising the most significant portion of TSIs and our
consolidated net sales, as follows:
|
|
|
|
|
|
|
|
|
|
|
Lowes Companies |
|
Wal-Mart |
|
|
Percent of |
|
Percent of |
|
Percent of |
|
Percent of |
|
|
TSIs |
|
Consolidated |
|
TSIs |
|
Consolidated |
Fiscal Year Ended |
|
Net Sales |
|
Net Sales |
|
Net Sales |
|
Net Sales |
June 30, 2006
|
|
87%
|
|
41%
|
|
12%
|
|
6% |
June 30, 2005
|
|
83%
|
|
44%
|
|
20%
|
|
11% |
June 30, 2004
|
|
75%
|
|
42%
|
|
15%
|
|
8% |
The loss of or reduction in our orders from Lowes Companies, Inc. (Lowes), Wal-Mart
Stores, Inc. (Wal-Mart), or any other significant customer could have a material adverse effect
on our business and financial results, as could disputes with our customers regarding shipments,
fees, product condition or related matters. Our inability to collect accounts receivable from any
of these customers could also have a material adverse affect on our financial condition and results
of operations.
If net sales to these customers are at levels significantly lower than currently anticipated,
we would be required to find other customers for existing inventory on hand. There can be no
assurances that we would be able to obtain additional customers for this inventory or that any
alternative sources would generate similar sales levels and profit margins as anticipated with
these current mass merchandiser customers.
We do not have long-term sales agreements with or other contractual assurances as to future
sales from any of our customers. Our customers make purchase decisions based on a combination of
price, product quality, consumer demand, customer service performance and their desired inventory
levels. Changes in our customers strategies, including a reduction in the number of brands they
carry or a shift of shelf space to private label products (unless we provide such products) may
adversely affect our net sales. Additionally, our customers may face financial or other
difficulties that may impact their operations and their purchases from us, which could adversely
affect our results of operations. If our net sales of products to one or more of our customers are
reduced, this reduction may have a material adverse effect on our business, financial condition and
results of operations.
9
Our mass merchandise customers may pressure us to lower our prices or take other actions that may
adversely impact our results of operations.
Mass merchandisers, including Lowes and Wal-Mart, require various stipulations from its
vendors related to inventory practices, product reset costs, logistics or other aspects of the
customer-supplier relationship. For example, Wal-Mart and other customers have indicated a desire
to utilize Radio Frequency Identification (RFID) technology in an effort to improve tracking and
management of product in their supply chain. Large-scale implementation of this technology would
significantly increase our product manufacturing and distribution costs. Meeting these types of
demands of customers may adversely affect our margins and results of operations. If we fail to
effectively respond to these types of demands of our customers, our sales and profitability could
be materially adversely affected.
To the extent our mass merchandiser customers purchase product in excess of consumer consumption in
any period, our net sales in a subsequent period may be adversely affected as mass merchandisers
seek to reduce their inventory levels.
From time to time, mass merchandisers may purchase more product from us than they expect to
sell to consumers during a particular time period. If mass merchandisers increase their inventory
during a particular reporting period, then our sales during the subsequent reporting period may be
adversely impacted as these mass merchandisers seek to reduce their inventory to usual levels. To
the extent our customers seek to reduce their usual or customary inventory levels, the impact of
such de-inventorying on our sales and profitability would be even greater.
Increases in our shipping costs or service trouble with our third-party shippers could harm our
business.
Shipping is a significant expense in our business for the products we import from
manufacturers and the products we ship to customers. Any significant increase we experience in our
shipping rates could have an adverse effect on our operating results. Similarly, strikes or other
service interruptions by those shippers could cause our operating expenses to rise and adversely
affect our ability to deliver products on a timely basis.
We experience fluctuations in our quarterly earnings. As a result, we may fail to meet or exceed
the expectations of securities analysts and investors, which could cause our stock price to decline
or be highly volatile.
Our product sales, particularly ceiling fans, are subject to seasonal and other quarterly
fluctuations. Our net sales and operating profits generally have been higher in the first and
fourth quarters from the warmer weather during these months. Our quarterly results may also be
adversely affected by a variety of other factors, including:
|
|
|
the timing of our new product releases; |
|
|
|
|
costs related to our acquisitions and/or integrations of businesses that we may acquire; |
|
|
|
|
timing and amount of our sales and marketing expenditures; |
|
|
|
|
timing of our orders from mass merchandisers; |
|
|
|
|
our commitments to mass merchandisers; |
|
|
|
|
loss of any of our sales representatives; |
|
|
|
|
general economic conditions that may affect us, including those in the housing sector; |
|
|
|
|
establishing or maintaining our business relationships; and |
|
|
|
|
changes in our accounting principles. |
These and other factors could affect our business, financial condition, and results of
operations, and this makes the prediction of our financial results on a quarterly basis difficult.
In addition, the NASDAQ Global Market can experience extreme price and volume fluctuations that can
be unrelated or disproportionate to the operating
10
performance of the companies listed on NASDAQ. Broad market and industry factors may negatively
affect the market price of our common stock, regardless of actual operating performance. In the
past, following periods of volatility in the market price of a companys securities, securities
class action litigation has often been instituted against companies. This type of litigation, if
instituted, could result in substantial costs and a diversion of our managements attention and
resources, which would harm us.
Our failure in pursuing or executing any of our new business ventures, strategic alliances and
acquisitions could have a material adverse impact on our business.
Our growth strategy includes expansion through new business ventures, strategic alliances and
acquisitions. While we employ several different valuation methodologies to assess a potential
growth opportunity, and structuring favorable payout strategies to lower risk, we can give no
assurance that any of our new business ventures and strategic alliances will positively affect our
financial performance. Any acquisitions that we make may result in difficulties in assimilating
acquired companies, and may result in the diversion of our capital and managements attention from
our other business issues and opportunities. We may not be able to integrate companies that we
acquire successfully, including their personnel, financial systems, distribution, operations and
general operating procedures. If we fail to integrate companies that we acquire successfully, our
business could suffer materially. We may also encounter challenges in achieving appropriate
internal control over our financial reporting in connection with our integration of an acquired
company. In addition, our efforts to integrate any acquired company, and its financial results,
into our company may have a material adverse effect on our operating results.
Our revenues depend on our relationships with capable sales personnel as well as key customers,
vendors, and manufacturers of the products that we distribute to our customers.
Our future operating results depend on our ability to maintain satisfactory relationships with
qualified sales personnel as well as key customers, vendors and manufacturers. If we fail to
maintain our existing relationships with these parties or fail to acquire relationships with others
like them in the future, our business may suffer.
Our future success is substantially dependent upon our senior management and retention of key
personnel.
Our success depends upon our ability to attract, motivate, and retain key management and
personnel. We depend upon the continued services of our key executive officers, including the
following individuals:
|
|
|
James R. Ridings
|
|
Chairman of the Board and Chief Executive Officer |
Brad D. Heimann
|
|
President and Chief Operating Officer |
J. Marcus Scrudder
|
|
Chief Financial Officer |
John S. DeBlois
|
|
Executive Vice President of TSI |
Clifford F. Crimmings
|
|
Vice President of Marketing |
The loss of services of any of our key personnel could have a negative impact on our business.
Our inability to meet financial covenants contained in our credit facilities could adversely impact
our ability to fund our operations.
Our ability to make payments on and to refinance our indebtedness and to fund our planned
capital expenditures, acquisitions, and dividends will depend on our ability to generate cash in
the future. This, to some extent, is subject to general economic, financial, competitive,
legislative, regulatory, and other factors that are beyond our control.
We cannot provide assurance that our business will generate sufficient cash flow from our
operating activities or that future borrowings will be available under our credit facility in
amounts sufficient to enable the Company 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.
The Companys credit facility contains restrictive covenants that require us to maintain
specified financial ratios. Our ability to satisfy those financial ratios can be affected by
events beyond our control, and we cannot provide assurance that we will satisfy those ratios. A
breach by us of any of these financial ratio covenants or other
11
covenants could result in our being in default under our credit facility. Upon the occurrence of an
event of default, by us, our lenders could elect to declare the applicable outstanding indebtedness
due immediately and payable and terminate all commitments to us to extend further credit. We
cannot be sure that our lenders would waive a default or that we could pay the outstanding
indebtedness in full under our credit facility if it were accelerated by our lenders.
We are exposed to the risk of an increase in interest rates.
We do not have any agreements with third parties to hedge against the potential rising of
interest rates. The variable rates of interest on our credit facility are comprised of LIBOR plus
the spread as defined by the loan agreements. As a result of our existing variable rate credit
lines and loan agreements, we are exposed to risk from fluctuations in interest rates.
We are exposed to the risk of foreign currency appreciation.
Generally, we purchase our products in U.S. dollars. However, we source our products from
overseas manufacturers in Taiwan and the Peoples Republic of China. As a result, our costs of
these products may be affected by changes in the value of the relevant currencies. These foreign
currencies include the Taiwan dollar and 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.
Tax legislation initiatives could adversely affect the Companys 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 rely heavily on our management information systems for inventory management, distribution and
other functions. If our systems fail to perform these functions adequately or if we experience an
interruption in our operations, we could be materially adversely affected.
The efficient operation of our company is dependent on our management information systems. We
rely heavily on our management information systems to manage our order entry, order fulfillment,
pricing, point-of-sale, and inventory replenishment processes. The failure of our management
information systems to perform as anticipated could disrupt our business and could result in
decreased revenue, increased overhead costs, and excess or out-of-stock inventory levels, causing
us to suffer materially.
We are subject to increasingly complex corporate governance, public disclosure, accounting, and tax
requirements that has 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.
12
Recent changes in accounting rules, including the expensing of stock options granted to our
employees, could have a material impact on our reported business and financial results.
The U.S. generally accepted accounting principles are subject to interpretation by the
Financial Accounting Standards Board (FASB), the American Institute of Certified Public
Accountants, the PCAOB, the SEC, and various bodies formed to promulgate and interpret appropriate
accounting principles. A change in these principles or interpretations could have a significant
effect on our reported financial results.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The following table sets forth information with respect to the Companys key properties:
Summary of Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
Approximate |
|
Lease |
|
|
|
|
Square |
|
Term |
Location |
|
Use |
|
Feet |
|
Expiration |
Coppell, Texas |
|
Distribution Facility |
|
|
378,000 |
|
|
Owned |
Carrollton, Texas |
|
Warehouse |
|
|
42,320 |
|
|
July 31, 2007 |
Dallas, Texas |
|
Dallas Trade Mart Showroom Craftmade and TSI |
|
|
4,292 |
|
|
April 30, 2007 |
Dallas, Texas |
|
Dallas Trade Mart Showroom Teiber |
|
|
533 |
|
|
September 30, 2006 |
The Companys headquarters facility is in Coppell, Texas. The facility consists of
approximately 378,000 square feet of general office and warehouse space, is owned by the Company
and is used by both Craftmade and TSI. The Companys management believes that this Company-owned
facility is well maintained, in good operating condition, and will be sufficient to support
operations for the near term. See Note 5 Revolving Lines of Credit and Notes Payable in the
Notes to Consolidated Financial Statements for a discussion of the Companys term loan used to
finance the Companys acquisition of this facility.
In conjunction with the acquisition of Teiber, the Company assumed a lease consisting of a
42,320 square foot facility used by both Craftmade and TSI as additional warehouse space. The lease
provides for rental payments of $14,741 per month from August 1, 2001 through July 31, 2007. The
lease expires on July 31, 2007.
The Company also has sales and product sourcing offices in Kowloon, Hong Kong; Bentonville,
Arkansas; and Dedham, Massachusetts. The terms to these leases are not significant to the
Companys operations.
Item 3. Legal Proceedings.
There are no material legal proceedings pending to which the Company is party or to which any
of its properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of stockholders during the fourth quarter of fiscal year
2006.
13
PART II
|
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The initial public offering price of the Companys common stock, $0.01 par value per share
(Common Stock) in April 1990 was $1.55 per share, adjusted for the Companys three-for-two stock
splits effective October 30, 1998 and October 31, 1997. The Common Stock trades on NASDAQ National
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, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter (Through August 31, 2006) |
|
$ |
17.72 |
|
|
$ |
14.61 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
18.87 |
|
|
$ |
16.41 |
|
|
$ |
0.12 |
|
Third Quarter |
|
|
20.41 |
|
|
|
16.75 |
|
|
|
0.12 |
|
Second Quarter |
|
|
21.06 |
|
|
|
18.00 |
|
|
|
0.12 |
|
First Quarter |
|
|
19.08 |
|
|
|
16.10 |
|
|
|
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
22.38 |
|
|
$ |
15.46 |
|
|
$ |
0.10 |
|
Third Quarter |
|
|
22.95 |
|
|
|
19.25 |
|
|
|
0.10 |
|
Second Quarter |
|
|
24.75 |
|
|
|
16.59 |
|
|
|
0.10 |
|
First Quarter |
|
|
22.14 |
|
|
|
19.49 |
|
|
|
0.10 |
|
The Company intends to continue to pay regular quarterly dividends on its outstanding
Common Stock. However, any decision to declare and pay dividends in the future will be made at the
discretion of the Companys Board of Directors and will depend on, among other things, the
Companys results of operations, cash requirements, financial condition and other factors that the
Board of Directors may deem relevant.
Computershare Investor Services, 2 North LaSalle Street, Chicago, Illinois 60602, is the
transfer agent and registrar for the Common Stock.
Holders
There were 89 holders of record of the Common Stock on August 31, 2006. 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 fiscal year ended June 30, 2006.
Equity Compensation Plans
See Item 12.
14
Item 6. Selected Financial Data.
The selected financial data in the tables below are for the five fiscal years ended June 30,
2006. The data should be read in conjunction with Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, and the consolidated financial statements included
herein.
Summary of Selected Financial Data
(In thousands, except percentage and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
(1) |
|
|
|
|
|
(2) |
|
(2) |
Selected Operating Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
118,054 |
|
|
$ |
118,806 |
|
|
$ |
121,238 |
|
|
$ |
109,033 |
|
|
$ |
106,050 |
|
Gross profit |
|
|
35,469 |
|
|
|
35,446 |
|
|
|
35,910 |
|
|
|
35,394 |
|
|
|
31,923 |
|
Gross profit as a percentage of net sales |
|
|
30.0 |
% |
|
|
29.8 |
% |
|
|
29.6 |
% |
|
|
32.5 |
% |
|
|
30.1 |
% |
Selling, general and administrative |
|
|
19,895 |
|
|
|
20,503 |
|
|
|
18,580 |
|
|
|
18,600 |
|
|
|
17,962 |
|
Income from operations |
|
|
14,980 |
|
|
|
14,362 |
|
|
|
16,682 |
|
|
|
16,135 |
|
|
|
13,383 |
|
Minority interest |
|
|
3,430 |
|
|
|
3,775 |
|
|
|
3,719 |
|
|
|
4,235 |
|
|
|
2,516 |
|
Net income |
|
|
7,100 |
|
|
|
6,427 |
|
|
|
7,646 |
|
|
|
6,846 |
|
|
|
6,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
|
1.37 |
|
|
|
1.26 |
|
|
|
1.43 |
|
|
|
1.24 |
|
|
|
1.04 |
|
Diluted earnings per common share |
|
|
1.36 |
|
|
|
1.26 |
|
|
|
1.42 |
|
|
|
1.23 |
|
|
|
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
|
0.48 |
|
|
|
0.40 |
|
|
|
0.40 |
|
|
|
0.28 |
|
|
|
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding |
|
|
5,201 |
|
|
|
5,095 |
|
|
|
5,336 |
|
|
|
5,512 |
|
|
|
5,937 |
|
Diluted common shares outstanding |
|
|
5,211 |
|
|
|
5,115 |
|
|
|
5,383 |
|
|
|
5,568 |
|
|
|
6,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
45,291 |
|
|
$ |
50,595 |
|
|
$ |
41,454 |
|
|
$ |
35,804 |
|
|
$ |
35,395 |
|
Total assets |
|
|
65,061 |
|
|
|
70,815 |
|
|
|
55,254 |
|
|
|
51,443 |
|
|
|
53,298 |
|
Current liabilities |
|
|
15,020 |
|
|
|
39,714 |
|
|
|
31,768 |
|
|
|
22,329 |
|
|
|
22,685 |
|
Long-term debt |
|
|
16,204 |
|
|
|
1,551 |
|
|
|
2,949 |
|
|
|
4,517 |
|
|
|
5,746 |
|
Total liabilities |
|
|
32,362 |
|
|
|
42,351 |
|
|
|
34,931 |
|
|
|
27,338 |
|
|
|
28,430 |
|
Stockholders equity |
|
|
29,037 |
|
|
|
24,373 |
|
|
|
18,339 |
|
|
|
20,538 |
|
|
|
22,624 |
|
Book value per common share |
|
|
5.58 |
|
|
|
4.78 |
|
|
|
3.44 |
|
|
|
3.73 |
|
|
|
3.81 |
|
|
|
|
(1) |
|
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. |
|
(2) |
|
Amounts have been restated to incorporate the effects of FIN 46R. See Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates and Note 4 Accounting Changes in the notes
to consolidated financial statements. |
15
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation.
Critical Accounting Policies and Estimates
Managements discussion and analysis of the Companys financial condition and results of
operations following are based upon the Companys consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Companys management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. The Companys estimates are based on
historical experience and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for the Companys conclusions. The Company
continually evaluates the information used to make these estimates as its business and the economic
environment changes. The Companys management believes that the estimates, assumptions and
judgments involved in the accounting policies described below have the greatest potential impact on
its financial statements, so the Company considers these to be its critical accounting policies.
Revenue Recognition
Revenue is recognized as product is shipped and related services are performed in accordance
with all applicable revenue recognition criteria. For these transactions the Company applies the
provisions of SEC Staff Accounting Bulletin No. 104 Revenue Recognition. The Company recognizes
revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed,
delivery has occurred or the services have been rendered, the sales price is fixed or determinable
and collection of the related receivable is reasonably assured. Title generally transfers upon
shipment of goods from the Companys warehouse. The Company does not have an obligation or policy
of replacing customer products damaged or lost in transit. In some instances, the Company ships
product directly from its suppliers to the customers. In these cases, the Company recognizes
revenue when the product is accepted by the customers representative. The Company applies the
provisions of Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent. The Companys application of EITF 99-19 includes evaluation of
the terms of each major customer contract relative to a number of criteria that management
considers in making its determination with respect to gross versus net reporting of revenue for
transactions with its customers. Managements criteria for making these judgments place particular
emphasis on determining the primary obligor in a transaction and which party bears general
inventory risk. The Company records all shipping and handling fees billed to customers as revenue,
and related costs as cost of sales, when incurred, in accordance with EITF 00-10, Accounting for
Shipping and Handling Fees and Costs.
As part of its revenue recognition policy, the Company records an accrual of estimated
incentives payable to its customers as a reduction of revenue at the time the related revenues are
recorded. The Company bases its estimates on contractual terms of the programs and estimated or
actual sales to individual customers. Actual incentives payable in any future period are
inherently uncertain and, thus, may differ from its estimates. If actual or expected incentives
were significantly greater than the reserves the Company had established, the Company would record
a reduction to net revenues in the period in which the Company made such determination.
In addition to various incentive programs, from time to time, the Company is required to
provide mark-down funds to certain of its mass retail customers to assist them in clearing
slow-moving inventory. These mark-down funds are recorded as a reduction of revenue in the period
in which they are granted.
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.
16
Inventories
The Companys inventories are primarily comprised of finished goods and are recorded at the
lower of cost or market using the average cost method. The Company provides estimated inventory
allowances for excess, slow-moving and obsolete inventory as well as inventory whose carrying value
is in excess of net realizable value. These reserves are based on current assessments about future
demands, market conditions and related management initiatives. If market conditions and actual
demands are less favorable than those projected by management, additional inventory write-downs may
be required.
Goodwill
The Company assesses the carrying values of goodwill annually or when circumstances dictate
that the carrying value might be impaired. Impairment testing for goodwill is analyzed at the
reporting unit level. An impairment loss generally would be recognized when the carrying amount of
the reporting units net assets exceeds the estimated fair value of the reporting unit. The
estimated fair value of a reporting unit is determined using discounted cash flow analysis. In the
event that an impairment is determined to have occurred, the Company will reduce the carrying value
of the asset in that period.
Income Taxes
The Company accounts for income taxes under an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Companys financial statements or tax returns. In
estimating future tax consequences, all expected future events other than enactments of changes in
the tax law or rates are considered. Deferred income taxes have been provided on unremitted
earnings from foreign investees. The Company reviews its deferred tax assets for ultimate
realization and will record a valuation allowance to reduce the deferred tax asset if it is more
likely than not that some portion, or all, of these deferred tax assets will not be realized. Tax
authorities may not always agree with the tax positions taken by the Company. The Company believes
it has adequate reserves in the event that a taxing authority differs with positions taken;
however, there can be no assurance that the Companys results will not be affected adversely. See
Note 2 Summary of Significant Accounting Policies in the notes to the consolidated financial
statements for additional information.
TSIs 50% owned LLCs operate in the form of partnerships for tax purposes and, consequently,
do not file federal income tax returns. Accordingly, the Company recognizes its share of their
income and the related tax effects on its provision for income taxes.
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 two limited liability companies, PHI and Design
Trends. In connection with the adoption of FIN 46R, the Company concluded that PHI and Design
Trends are VIEs and that the Company is the primary beneficiary of each of PHI and Design Trends.
Pursuant to the provisions of FIN 46R, the Company consolidates PHI and Design Trends.
17
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, 2006 and the corresponding prior
year period is summarized as follows (in thousands, except percentage data):
Fiscal year ended June 30, 2006 compared to fiscal year ended June 30, 2005.
Income Statement by Segment
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
Fiscal Year Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
|
Craftmade |
|
|
TSI |
|
|
Total |
|
|
Craftmade |
|
|
TSI |
|
|
Total |
|
Net sales |
|
$ |
62,902 |
|
|
$ |
55,152 |
|
|
$ |
118,054 |
|
|
$ |
55,663 |
|
|
$ |
63,143 |
|
|
$ |
118,806 |
|
Cost of goods sold |
|
|
(40,361 |
) |
|
|
(42,224 |
) |
|
|
(82,585 |
) |
|
|
(35,352 |
) |
|
|
(48,008 |
) |
|
|
(83,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
22,541 |
|
|
|
12,928 |
|
|
|
35,469 |
|
|
|
20,311 |
|
|
|
15,135 |
|
|
|
35,446 |
|
Gross profit as a % of net sales |
|
|
35.8 |
% |
|
|
23.4 |
% |
|
|
30.0 |
% |
|
|
36.5 |
% |
|
|
24.0 |
% |
|
|
29.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
(13,449 |
) |
|
|
(6,446 |
) |
|
|
(19,895 |
) |
|
|
(13,372 |
) |
|
|
(7,131 |
) |
|
|
(20,503 |
) |
As a % of net sales |
|
|
21.4 |
% |
|
|
11.7 |
% |
|
|
16.9 |
% |
|
|
24.0 |
% |
|
|
11.3 |
% |
|
|
17.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(575 |
) |
|
|
(19 |
) |
|
|
(594 |
) |
|
|
(537 |
) |
|
|
(44 |
) |
|
|
(581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(14,024 |
) |
|
|
(6,465 |
) |
|
|
(20,489 |
) |
|
|
(13,909 |
) |
|
|
(7,175 |
) |
|
|
(21,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
8,517 |
|
|
|
6,463 |
|
|
|
14,980 |
|
|
|
6,402 |
|
|
|
7,960 |
|
|
|
14,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(1,104 |
) |
|
|
(80 |
) |
|
|
(1,184 |
) |
|
|
(973 |
) |
|
|
(108 |
) |
|
|
(1,081 |
) |
Other expenses |
|
|
(35 |
) |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
|
7,378 |
|
|
|
6,418 |
|
|
|
13,796 |
|
|
|
5,429 |
|
|
|
7,852 |
|
|
|
13,281 |
|
Provision for income taxes |
|
|
(2,501 |
) |
|
|
(765 |
) |
|
|
(3,266 |
) |
|
|
(1,895 |
) |
|
|
(1,184 |
) |
|
|
(3,079 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests |
|
|
4,877 |
|
|
|
5,653 |
|
|
|
10,530 |
|
|
|
3,534 |
|
|
|
6,668 |
|
|
|
10,202 |
|
Minority interests |
|
|
|
|
|
|
(3,430 |
) |
|
|
(3,430 |
) |
|
|
|
|
|
|
(3,775 |
) |
|
|
(3,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,877 |
|
|
$ |
2,223 |
|
|
$ |
7,100 |
|
|
$ |
3,534 |
|
|
$ |
2,893 |
|
|
$ |
6,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales. Net sales for the Company decreased $752,000 or 0.6% to $118,054,000 for the
fiscal year ended June 30, 2006, compared to $118,806,000 for the fiscal year ended June 30, 2005.
The decrease in net sales resulted from a decrease in net sales of the TSI segment, partially
offset by stronger net sales of the Craftmade segment.
Net sales from the Craftmade segment increased $7,239,000 or 13.0% to $62,902,000 for the fiscal
year ended June 30, 2006 from $55,663,000 for the fiscal year ended June 30, 2005. The increase
resulted from $6,365,000 of incremental net sales from the product lines associated with the March
1, 2005 acquisition of Bill Teiber Co., Inc. (Teiber) as the Teiber customer base continues to
expand. The current fiscal year includes 12 months of Teiber, compared to four months in the prior
year. The remaining $874,000 increase in sales of the Craftmade segment resulted from an increase
in sales partially due to newly-introduced products such as DuroCraft gauges, the builder-targeted
ceiling fans, and Accolade lighting products.
Management anticipates that net sales from the Craftmade segment will continue to grow throughout
the fiscal year ending June 30, 2007, assuming continued strength in the overall U.S. economy.
Growth will be driven by the Teiber product lines and from more competitive pricing as Craftmade
continues to strengthen its relationship with manufacturers in countries that have historically had
more favorable pricing and foreign currency exchange rates than the Company has had in the past.
18
Net sales of the TSI segment declined $7,991,000 or 12.7% to $55,152,000 for the fiscal year ended
June 30, 2006 from $63,143,000 for the fiscal year ended June 30, 2005. Increases in PHIs net
sales were offset by decreases in Trade Source and Design Trends net sales, as summarized in the
following table:
Net Sales of TSI Segment
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSI |
|
|
|
Trade |
|
|
Design |
|
|
|
|
|
|
Segment |
|
Fiscal Year Ended |
|
Source |
|
|
Trends |
|
|
PHI |
|
|
Total |
|
June 30, 2006 |
|
$ |
20,334 |
|
|
$ |
21,780 |
|
|
$ |
13,038 |
|
|
$ |
55,152 |
|
June 30, 2005 |
|
|
21,838 |
|
|
|
30,022 |
|
|
|
11,283 |
|
|
|
63,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar increase/(decrease) |
|
$ |
(1,504 |
) |
|
$ |
(8,242 |
) |
|
$ |
1,755 |
|
|
$ |
(7,991 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent increase/(decrease) |
|
|
(6.9 |
%) |
|
|
(27.5 |
%) |
|
|
15.6 |
% |
|
|
(12.7 |
%) |
The decrease in Trade Source net sales was primarily the result of a sales decline from the
Wal-Mart indoor/outdoor lighting and mix and match fan program. Historically, Trade Source has
provided Wal-Mart with these products by direct import from Asia. Wal-Mart will now source a
significant amount of these products directly itself with the balance still provided by Trade
Source. The decrease in net sales also resulted from PHIs fan accessory sales in the current
fiscal year that were made by Trade Source in the prior fiscal year. Strong sales of promotional
lighting items, window covering treatments, and non-core products offset the decrease in net sales.
The decline in Design Trends net sales was primarily due to the previously disclosed loss of four
of Lowes 11 regional distribution centers in an attempt by Lowes to mitigate the risk associated
with maintaining a sole supplier for a given product line, and a change in Lowes merchandising
system. During the fiscal year ended June 30, 2006, Lowes decided to change its merchandising
concept to one that will be based on Lowes private label, which resulted in the discontinuance of
the Design Trends merchandising display. The Company was asked to repurchase a portion of the
existing inventory under the old Design Trends packaging and replace it with Lowes private label
packaging. Design Trends agreed to replace a portion of the inventory and as a result, Design
Trends is initially offering approximately 60% of the items in the new set for the Lowes stores
supplied by the seven of 11 regional distribution centers that it currently services.
Management believes that Design Trends remains competitive in its product offerings and provides
its customers, in particular Lowes, the best opportunity to realize a satisfactory return on
investment in the mix and match portable lamp product category. However, management cannot
speculate as to whether Lowes, or any other customer, will make decisions regarding its products
based on objective sales-related information, or based on other factors unknown to management at
this time. Based on the amount of product currently shipped to Lowes, Design Trends continues to
be Lowes largest portable lamp vendor and has been invited to participate in scheduled line
reviews for its existing and new product lines.
The increase in net sales of PHI primarily resulted from increased sales of the fan accessory and
lamp replacement parts business to Lowes. Other increases in net sales over the prior year are
due to PHIs sales of fan accessories to Wal-Mart that were made by Trade Source in the prior year.
Future growth of the TSI segment is contingent upon the success of the Companys ongoing efforts to
introduce new products, product lines, and marketing concepts to existing customers and to expand
the business to new customers.
Gross Profit. Gross profit of the Company as a percentage of net sales increased 0.2% to 30.0% for
the fiscal year ended June 30, 2006, compared to 29.8% for the fiscal year ended June 30, 2005.
Gross profit as a percentage of net sales of the Craftmade segment decreased 0.7% to 35.8% for the
fiscal year ended June 30, 2006, compared to 36.5% in the fiscal year ended June 30, 2005. The
decline was primarily attributable to increased costs of goods sold as a result of the decline of
the U.S. dollar in relation to the Taiwan dollar, an increase in sales of product lines that carry
a slightly lower gross margin as a percentage of sales, and the costs associated with removing
portable lamps as a product line and the related inventory. This is partially offset by benefits
obtained in the current year from the temporary exemption of the 4.7% duty on imported ceiling fans
as prescribed by the American Jobs Creation Act of 2004 (AJCA). The AJCA contains a provision
that allows ceiling fans for permanent installation to enter the U.S. duty-free between November 6,
2004 and December 31,
19
2006. In the fiscal year ended June 30, 2006, the Company determined it was eligible for the duty
exemption and received an estimated $945,000 benefit. In addition, the Company recovered an
additional $255,000 of duties that is related to the prior year.
The Company anticipates that gross profit as a percentage of net sales of the Craftmade segment
will slightly improve in fiscal year 2007 as it continues to strengthen its relationship with
manufacturers in countries that have more favorable pricing and foreign currency exchange rates
than the Company has had in the past.
The gross profit as a percentage of net sales of the TSI segment decreased 0.6% to 23.4% of net
sales for the fiscal year ended June 30, 2006, compared to 24.0% of net sales in the same prior
year period, as summarized in the following table:
Gross Profit as a Percentage of Net Sales of TSI Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSI |
|
|
Trade |
|
Design |
|
|
|
|
|
Segment |
Fiscal Year Ended |
|
Source |
|
Trends |
|
PHI |
|
Total |
June 30, 2006 |
|
|
13.5 |
% |
|
|
26.6 |
% |
|
|
33.7 |
% |
|
|
23.4 |
% |
June 30, 2005 |
|
|
16.6 |
% |
|
|
25.2 |
% |
|
|
35.0 |
% |
|
|
24.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent increase/(decrease) |
|
|
(3.1 |
%) |
|
|
1.4 |
% |
|
|
(1.3 |
%) |
|
|
(0.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as a percentage of net sales decreased at Trade Source from a change in product
mix. Design Trends gross profit as a percentage of net sales decreased from a change in product
mix, offset by lower amounts set aside for vendor programs to Lowes. Gross profit as a percentage
of net sales decreased at PHI from a change in product mix.
For fiscal year 2007, gross profit as a percentage of net sales of the TSI segment is expected to
remain consistent with the fiscal year ended June 30, 2006, provided that the segment maintains in
fiscal year 2007 a sales mix, customer concentration, and level of vendor program commitment
similar to what it maintained in fiscal year 2006.
Selling, General and Administrative Expenses. Total selling, general and administrative (SG&A)
expenses of the Company decreased $608,000 to $19,895,000, or 16.9% of net sales, for the fiscal
year ended June 30, 2006, compared to $20,503,000 or 17.3% of net sales for the prior fiscal year.
Selling, General and Administrative Expenses
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
(Decrease) |
|
|
|
Fiscal Year Ended |
|
|
Over |
|
|
|
June 30, |
|
|
June 30, |
|
|
Prior Year |
|
|
|
2006 |
|
|
2005 |
|
|
Period |
|
Salaries and wages |
|
$ |
6,821 |
|
|
$ |
6,220 |
|
|
$ |
601 |
|
Accounting, legal and consulting |
|
|
2,065 |
|
|
|
3,709 |
|
|
|
(1,644 |
) |
Other |
|
|
11,009 |
|
|
|
10,574 |
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,895 |
|
|
$ |
20,503 |
|
|
$ |
(608 |
) |
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended June 30, 2006, the increase in salaries and wages over the fiscal
year ended June 30, 2005, resulted from higher salaries due to adjustments of current employees to
remain competitive with market conditions as well as the addition of seven Teiber employees hired
on March 1, 2005 (the current fiscal year includes 12 months of Teiber expenses, compared to four
months in the prior fiscal year). There were 131 employees at June 30, 2006, compared to 130
employees at June 30, 2005.
Lower accounting, legal and consulting fees in the fiscal year ended June 30, 2006 were primarily
due to lower costs incurred to address internal controls issues and comply with Section 404 of the
Sarbanes-Oxley Act of 2002 (Section 404) as a result of implementing streamlined processes and
efficiencies gained in year two and higher costs in the fiscal year ended June 30, 2005 to address
internal control issues and the evaluation of FIN 46 with respect to the Companys 50% owned
subsidiaries.
20
Increases in other SG&A expenses of the Company primarily resulted from 12 months of Teiber
expenses included in fiscal year 2006, compared to only four months in fiscal year 2005, offset by
a decrease in other general expenses.
Management anticipates that based on current market conditions, SG&A expenses as a percentage of
net sales for fiscal year 2007 will be relatively consistent with results generated in fiscal year
2006.
Interest Expense. Net interest expense of the Company increased $103,000 to $1,184,000 for the
fiscal year ended June 30, 2006 from $1,081,000 for the fiscal year ended June 30, 2005. This
increase was primarily the result of higher interest rates in effect during the period on the
Companys outstanding revolving line of credit with Frost Bank, offset by the effects of a
reduction in overall interest-bearing debt. The average outstanding balance on the Companys
facility note was lower during the 2006 fiscal year than during the 2005 fiscal year, while the
interest rate on the facility note remained unchanged during the 2006 fiscal year compared to the
2005 fiscal year.
Minority Interests. Minority interests generated by the Companys 50% owned subsidiaries decreased
$345,000 to $3,430,000 for the fiscal year ended June 30, 2006, compared to $3,775,000 for the same
period in the previous year. The decrease was due to the decline in profit of Design Trends,
partially offset by an increase in profit of PHI, as discussed above.
Provision for Income Taxes. The provision for income tax was $3,266,000, or 31.5% of income before
income taxes, for the fiscal year ended June 30, 2006, compared to $3,079,000, or 32.4% of income
before taxes for the fiscal year ended June 30, 2005. The decrease in the provision for income
taxes as a percentage of income before income taxes primarily resulted from lower state taxes and
the tax benefit obtained from the repatriation of undistributed foreign earnings under the AJCA.
The AJCA created a temporary incentive for U.S. multinationals to repatriate accumulated income
earned outside the U.S. at an effective tax rate of 5.25%, versus the U.S. federal statutory rate
of 34%. The Company repatriated $9,225,000 in the fiscal year ended June 30, 2006. Beginning in
fiscal year 2007, the Company will resume recording foreign earnings at the full statutory rate and
assume that all foreign earnings will be repatriated.
Fiscal year ended June 30, 2005 compared to fiscal year ended June 30, 2004.
Income Statement by Segment
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
Fiscal Year Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2004 |
|
|
|
Craftmade |
|
|
TSI |
|
|
Total |
|
|
Craftmade |
|
|
TSI |
|
|
Total |
|
Net sales |
|
$ |
55,663 |
|
|
$ |
63,143 |
|
|
$ |
118,806 |
|
|
$ |
53,526 |
|
|
$ |
67,712 |
|
|
$ |
121,238 |
|
Cost of goods sold |
|
|
(35,352 |
) |
|
|
(48,008 |
) |
|
|
(83,360 |
) |
|
|
(32,501 |
) |
|
|
(52,827 |
) |
|
|
(85,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
20,311 |
|
|
|
15,135 |
|
|
|
35,446 |
|
|
|
21,025 |
|
|
|
14,885 |
|
|
|
35,910 |
|
Gross profit as a % of net sales |
|
|
36.5 |
% |
|
|
24.0 |
% |
|
|
29.8 |
% |
|
|
39.3 |
% |
|
|
22.0 |
% |
|
|
29.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
(13,372 |
) |
|
|
(7,131 |
) |
|
|
(20,503 |
) |
|
|
(11,359 |
) |
|
|
(7,221 |
) |
|
|
(18,580 |
) |
As a % of net sales |
|
|
24.0 |
% |
|
|
11.3 |
% |
|
|
17.3 |
% |
|
|
21.2 |
% |
|
|
10.7 |
% |
|
|
15.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(537 |
) |
|
|
(44 |
) |
|
|
(581 |
) |
|
|
(554 |
) |
|
|
(94 |
) |
|
|
(648 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(13,909 |
) |
|
|
(7,175 |
) |
|
|
(21,084 |
) |
|
|
(11,913 |
) |
|
|
(7,315 |
) |
|
|
(19,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
6,402 |
|
|
|
7,960 |
|
|
|
14,362 |
|
|
|
9,112 |
|
|
|
7,570 |
|
|
|
16,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(973 |
) |
|
|
(108 |
) |
|
|
(1,081 |
) |
|
|
(708 |
) |
|
|
(69 |
) |
|
|
(777 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
|
5,429 |
|
|
|
7,852 |
|
|
|
13,281 |
|
|
|
8,404 |
|
|
|
7,501 |
|
|
|
15,905 |
|
Provision for income taxes |
|
|
(1,895 |
) |
|
|
(1,184 |
) |
|
|
(3,079 |
) |
|
|
(3,019 |
) |
|
|
(1,521 |
) |
|
|
(4,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests |
|
|
3,534 |
|
|
|
6,668 |
|
|
|
10,202 |
|
|
|
5,385 |
|
|
|
5,980 |
|
|
|
11,365 |
|
Minority interests |
|
|
|
|
|
|
(3,775 |
) |
|
|
(3,775 |
) |
|
|
|
|
|
|
(3,719 |
) |
|
|
(3,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,534 |
|
|
$ |
2,893 |
|
|
$ |
6,427 |
|
|
$ |
5,385 |
|
|
$ |
2,261 |
|
|
$ |
7,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Net Sales. Net sales for the Company declined $2,432,000 or 2.0% to $118,806,000 for the
fiscal year ended June 30, 2005, compared to $121,238,000 for the fiscal year ended June 30, 2004.
The decline resulted from lower than expected sales in the TSI segment, partially offset by an
increase in sales in the Craftmade segment.
Net sales from the Craftmade segment increased $2,137,000, or 4.0%, to $55,663,000 for the fiscal
year ended June 30, 2005 from $53,526,000 for the same prior year period. The increase resulted
from $2,544,000 of incremental net sales from the acquisition of Teiber. The remaining $407,000
decrease in sales of the Craftmade segment resulted from a general decline across product lines.
Net sales of the TSI segment declined $4,569,000 or 6.7% to $63,143,000 for the fiscal year ended
June 30, 2005 from $67,712,000 for the fiscal year ended June 30, 2004, as summarized in the
following table:
Net Sales of TSI Segment
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSI |
|
|
|
Trade |
|
|
Design |
|
|
|
|
|
|
Segment |
|
|
|
Source |
|
|
Trends |
|
|
PHI |
|
|
Total |
|
Net sales fiscal 2005 |
|
$ |
21,838 |
|
|
$ |
30,022 |
|
|
$ |
11,283 |
|
|
$ |
63,143 |
|
Net sales fiscal 2004 |
|
|
22,015 |
|
|
|
36,422 |
|
|
|
9,275 |
|
|
|
67,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar increase/(decrease) |
|
$ |
(177 |
) |
|
$ |
(6,400 |
) |
|
$ |
2,008 |
|
|
$ |
(4,569 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent increase/(decrease) |
|
|
(0.8 |
%) |
|
|
(17.6 |
%) |
|
|
21.6 |
% |
|
|
(6.7 |
%) |
The net decrease in sales of Trade Source resulted in part from (i) the reset of an outdoor
lighting program at Lowes that occurred in fiscal year 2004 that did not occur in fiscal year
2005, (ii) a decrease in sales of the mix and match fan program to Wal-Mart and (iii) changes in
buying patterns of promotional sales items to Lowes related to the retailers sales forecasts and
targeted levels of replenishment inventory.
The $6,400,000 or 17.6% decline in Design Trends net sales was primarily due to changes in the
buying pattern of Lowes. Management believes the changes are related to the retailers sales
forecasts, targeted levels of replenishment inventory, targeted inventory turns and other factors
that are beyond the Companys control.
Lowes maintains a Better Alternative to Negotiated Agreement (BATNA) policy, which mitigates the
risk associated with maintaining a sole supplier for a given product line. Pursuant to BATNA, the
Design Trends mix and match lamp program exited 118 of Lowes stores that were located in the
Midwestern region of the United States in the first quarter of fiscal year 2005, and a competitors
mix and match lamp program has replaced the Design Trends mix and match lamp program in such
stores.
On April 19, 2005, Design Trends was notified by Lowes that Design Trends would no longer supply
its mix and match portable lamp program to an additional three regional distribution centers. As a
result, Design Trends mix and match portable lamp program is not available in such stores.
The change in PHIs net sales between periods was impacted by a charge that totaled $2,100,000.
The charge decreased net sales in fiscal year 2004 and was incurred in connection with the rollout
of a new lamp replacement parts business to Lowes. PHI net sales declined as a result of a
benefit in the prior fiscal year from the rollout of the new lamp replacement parts business that
did not occur in the current period. This rollout occurred in the second quarter of fiscal year
2004 with pipeline fill continuing into the third quarter of fiscal year 2004.
Gross Profit. Gross profit of the Company as a percentage of net sales increased to 29.8% for
fiscal year 2005, compared to 29.6% in fiscal year 2004. Gross profit as a percentage of net sales
of the Craftmade segment decreased to 36.5% for fiscal year 2005, compared to 39.3% in fiscal year
2004. The decline in the gross margin of the Craftmade segment was primarily the result of
increased product costs due to a weaker U.S. dollar compared to the Taiwan dollar. The decline in
the gross margin was partially due to an increase in outbound freight as a percentage of net sales.
In addition, gross profit margins were impacted by decreasing margins in the portion of sales
driven by Craftmades builders model ceiling fans, whose sales are more sensitive to price
increases which would offset the increased product costs.
22
The gross profit of the TSI segment increased to 24.0% of sales for fiscal year 2005, compared to
22.0% of sales in the prior year, as summarized in the following table:
Gross Profit as a Percentage of Net Sales of the TSI Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSI |
|
|
Trade |
|
Design |
|
|
|
|
|
Segment |
|
|
Source |
|
Trends |
|
PHI |
|
Total |
Gross margin for fiscal 2004 |
|
|
15.8 |
% |
|
|
26.1 |
% |
|
|
20.3 |
% |
|
|
22.0 |
% |
Charge in connection with the rollout of the lamp
replacement parts business in fiscal 2004 |
|
|
|
|
|
|
|
|
|
|
14.7 |
% |
|
|
2.3 |
% |
Net change in gross margin |
|
|
0.8 |
% |
|
|
(0.9 |
)% |
|
|
0.0 |
% |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin for fiscal 2005 |
|
|
16.6 |
% |
|
|
25.2 |
% |
|
|
35.0 |
% |
|
|
24.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase was primarily driven by the $2,100,000 charge that reduced gross sales in fiscal
year 2004 that was incurred in connection with the rollout of a new product to a customer of PHI as
discussed above. The resulting increase in PHIs gross margin resulted from a change in product mix
to higher margin products.
The increase in gross margin at the Trade Source division resulted from a change in product mix.
Design Trends gross margin benefited from a $1,384,000 reduction in depreciation expense. The
depreciation expense was recorded as a reduction of revenue and was related to display equipment in
one customers retail stores. The reduction resulted from the equipment being fully depreciated.
This benefit was offset by higher accruals for markdown money and price concessions provided to
mass retail customers.
Selling, General and Administrative Expenses. SG&A expenses of the Company increased $1,923,000 to
$20,503,000 or 17.3% of net sales for fiscal year 2005 from $18,580,000 or 15.3% of net sales for
fiscal year 2004:
Selling, General and Administrative Expenses
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
(Decrease) |
|
|
|
Fiscal Year Ended |
|
|
From |
|
|
|
June 30, |
|
|
June 30, |
|
|
Prior Year |
|
|
|
2005 |
|
|
2004 |
|
|
Period |
|
Salaries and wages |
|
$ |
6,220 |
|
|
$ |
6,077 |
|
|
$ |
143 |
|
Accounting, legal and consulting |
|
|
3,709 |
|
|
|
1,899 |
|
|
|
1,810 |
|
Other |
|
|
10,574 |
|
|
|
10,604 |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,503 |
|
|
$ |
18,580 |
|
|
$ |
1,923 |
|
|
|
|
|
|
|
|
|
|
|
Higher accounting and legal fees were primarily due to an increase in costs incurred with
respect to the Companys management consultants, outside legal counsel and the Companys
independent auditors. These increased costs were incurred in order to address internal controls
issues, the evaluation by the Companys management and independent auditors of the proper
interpretation of FIN 46 with respect to the Companys 50% owned subsidiaries and an increase in
cost to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
The increase in salaries and benefits was impacted by the severance agreement with the Companys
former Chief Financial Officer that totaled $174,000 in the second quarter of fiscal year 2005, the
addition of a Chief Accounting Officer in the second quarter of fiscal year 2005, higher salaries
and wages from the addition of seven Teiber employees in March 2005 and the addition of a Vice
President of Information Technology in the fourth quarter of fiscal year 2005.
Interest Expense. Net interest expense of the Company increased $304,000 to $1,081,000 for fiscal
year 2005 from $777,000 for fiscal year 2004. This increase was primarily the result of higher
outstanding balances from the Companys revolving lines of credit, combined with higher interest
rates in effect during the period. The balance on the Companys revolving lines of credit increased
primarily as a result of Craftmades borrowings to finance its acquisition of Teiber. In addition,
borrowings on the Companys revolving lines of credit increased as a result of an increase in the
Companys accounts receivable due to a change in its accounts receivable payment terms with
23
Lowes to 60 days from a previous range of 30 to 45 days. The outstanding balance on the Companys
facility note was lower than in the prior year period, and the interest rate on the facility note remained
unchanged compared to the prior year period.
Minority Interests. Minority interests generated by the Companys 50% owned subsidiaries increased
$56,000 to $3,775,000 for fiscal year 2005 compared to $3,719,000 for the same period in the
previous year. The increase was primarily related to the increase in sales and gross profit of
PHI, offset by a decline in sales and gross profit of Design Trends, as discussed above.
Provision for Income Taxes. The provision for income tax was $3,079,000 or 32.3% of income before
income taxes for fiscal year 2005, compared to $4,540,000 or 37.3% of income before taxes for
fiscal year 2004. The decrease in percentage resulted from the tax benefit obtained from receiving
an 85% dividends received deduction for the repatriation of undistributed 2005 foreign earnings
under the American Jobs Creation Act of 2004. The benefit received totaled $287,000 net of the
federal taxes due on anticipated repatriation of foreign earnings.
Liquidity and Capital Resources
Fiscal year ended June 30, 2006
The Companys cash decreased $6,981,000 from $9,145,000 at June 30, 2005 to $2,164,000 at June
30, 2006. Cash decreased as a result of the Company sweeping excess cash balances against its line
of credit on a daily basis beginning in the second quarter of fiscal 2006. Net cash provided by
the Companys operating activities increased $483,000 to $7,834,000 for the fiscal year ended June
30, 2006, compared to $7,351,000 for the fiscal year ended June 30, 2005. Increases in cash
provided in various operating activities were partially offset by increased inventory balances at
year end to support the increase in Teiber sales, window cornices, and increased levels of
inventory in advance of sourcing products from different suppliers in Asia.
The $233,000 of cash used in investing activities related to additions to property and
equipment, which consisted primarily of upgrading the Companys computer equipment.
Cash used in financing activities of $14,582,000 was primarily the result (i) net payments on
the Companys revolving lines of credit of $6,393,000, (ii) principal payments on the Companys
notes payable of $1,513,000, (iii) distributions to minority interest members totaling $3,859,000,
(iv) cash dividends of $2,404,000, and (v) a decrease in book overdrafts of $450,000. Net payments
on the Companys primary revolving line of credit during fiscal year 2006 were higher during fiscal
year 2005 as a result of the Company sweeping excess cash balances against its line of credit on a
daily basis and the use of cash during fiscal year 2005 in part to fund the acquisition of Teiber.
The Companys management believes that its current lines of credit, combined with cash flows
from operations, are adequate to fund the Companys current operating needs, debt service payments
and any future dividend payments, as well as its projected growth over the next twelve months.
Management anticipates that future cash flows will be used primarily to retire existing debt,
pay dividends, fund potential acquisitions and distribute earnings to minority interest members.
The Company remains committed to its business strategy of creating long-term earnings growth,
maximizing stockholder value through internal improvements, making selective acquisitions and
dispositions of assets, focusing on cash flow and retaining quality personnel.
24
Contractual Obligations
The table below, as well as the information contained in Note 5 Revolving Lines of Credit
and Notes Payable and Note 10 Commitments and Contingencies in the notes to the Companys
consolidated financial statements, summarizes the Companys various repayment requirements at June
30, 2006. The Company expects to meet these obligations with cash flows from existing operations
or be able to renew and extend its line of credit.
Summary of Contractual Obligations
At June 30, 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
Contractual |
|
|
|
|
|
Less than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
More than |
|
Obligations |
|
Total |
|
|
1 year |
|
|
Years |
|
|
Years |
|
|
5 years |
|
Lines of credit |
|
$ |
18,154 |
|
|
$ |
2,173 |
|
|
$ |
15,981 |
|
|
$ |
|
|
|
$ |
|
|
Note payable |
|
|
1,358 |
|
|
|
1,135 |
|
|
|
223 |
|
|
|
|
|
|
|
|
|
Assumed interest (1) |
|
|
1,785 |
|
|
|
1,235 |
|
|
|
550 |
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
422 |
|
|
|
348 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,719 |
|
|
$ |
4,891 |
|
|
$ |
16,828 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Assumed interest calculated at the interest rate in effect at June 30, 2006 for each line of
credit or note payable. |
Lines of Credit and Notes Payable
The Companys current revolving lines of credit and notes payable are summarized in the
following table:
Summary of Revolving Lines of Credit
and Notes Payable at June 30, 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
Commitment |
|
|
Balance |
|
|
Interest Rate |
|
Maturity |
Revolving lines of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
The Frost National Bank |
|
$ |
20,000 |
|
|
$ |
15,981 |
|
|
LIBOR plus 1.50% |
|
October 31, 2007 |
The Frost National Bank |
|
|
3,000 |
|
|
|
|
|
|
LIBOR plus 1.50% |
|
January 15, 2007 |
Wachovia Bank, N.A. |
|
|
3,000 |
|
|
|
2,173 |
|
|
LIBOR plus 2.00% |
|
December 15, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,000 |
|
|
|
18,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable facility |
|
N/A |
|
|
1,358 |
|
|
8.302% |
|
January 1, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, the Company had a $20,000,000 line of credit with The Frost National
Bank (Frost) at the one-month LIBOR interest rate (5.34625% at June 30, 2006) plus 1.50% to
2.75%, depending on the Companys debt to worth ratio. There was $15,981,000 outstanding under the
Companys $20,000,000 line of credit with Frost Bank at June 30, 2006. The line of credit is
scheduled to mature on October 31, 2007. Financial covenants of the agreement include a
requirement that the Company maintain a fixed charge coverage ratio greater than 1.25 to 1. Other
covenants and restrictions that apply to this agreement require the Companys debt to tangible net
worth ratio to be less than 3.0 to 1.0 after December 31, 2005. Additionally, the Company has
agreed not to purchase its stock if its debt to tangible net worth exceeds 3.0 to 1.0. The
Companys debt to tangible net worth ratio, as defined in the loan agreement, equaled 1.6 to 1.0 at
June 30, 2006, resulting in the effective interest rate for the next quarter to be reduced to LIBOR
plus 1.50%, provided that the Company remains in compliance with the previously disclosed
covenants.
25
Under this line of credit, for each one-percentage point (1%) incremental increase in LIBOR,
the Companys annualized interest expense would increase by approximately $166,000 and net income
would decrease by $105,000. Consequently, an increase in LIBOR of five percentage points (5%) would
result in an estimated annualized increase in interest expense of approximately $799,000 and
decrease net income by $527,000. The Company does not have any agreements to hedge against the
potential rise in interest rates under this line of credit.
On February 25, 2005, the line of credit was amended to provide, among other things, a
$3,000,000 increase in the commitment. This increase in commitment was renewed and extended until
January 15, 2007.
One of the Companys 50%-owned subsidiaries, PHI, has a $3,000,000 promissory note (the $3
Million Line of Credit) with Wachovia Bank, N.A. (Wachovia), at an interest rate equal to the
monthly LIBOR index (5.10906% at June 30, 2006) plus 2%. There was an outstanding balance on the
$3 Million Line of Credit of $2,173,000 at June 30, 2006. The $3 Million Line of Credit is
scheduled to mature on December 15, 2006. The PHI members, which include TSI, agreed to be
guarantors of the $3 Million Line of Credit in order to induce the lender to provide this loan to
PHI.
Based on the amounts outstanding at June 30, 2006 under the $3 Million Line of Credit, for
each one-percentage point (1%) incremental increase in LIBOR, the Companys annualized interest
expense would increase by approximately $22,000 and net income would decrease by $7,000.
Consequently, an increase in LIBOR of five percentage points (5%) would result in an estimated
annualized increase in interest expense of approximately $136,000 and decrease net income by
$45,000. The Company does not have any agreements to hedge against the potential rise in interest
rates under the $3 Million Line of Credit.
At June 30, 2006, $1,358,000 remained outstanding under the note payable for the Companys
378,000 square foot operating facility. The loan is payable in equal monthly installments of
$100,378 of principal and interest at 8.302%. The Companys management believes that this facility
will be sufficient for its purposes for the foreseeable future. The facility note payable matures
on January 1, 2008.
Management does not anticipate that the covenants and restrictions of its lines of credit and
loan agreements will limit the Companys growth potential.
Operating Lease Obligations
Operating lease obligations include rents for the Companys properties (see Item 2.
Properties.) and its telephone system.
Inflation
The Company believes that inflation has not had a material impact upon the Companys results
of operations for each of the three fiscal years ended June 30, 2006. However, there can be no
assurance that future inflation will not have an adverse impact upon the Companys operating
results and financial condition.
Fiscal year ended June 30, 2005
The Companys cash increased $3,307,000 from $5,838,000 at June 30, 2004 to $9,145,000 at June
30, 2005. The Companys operating activities provided cash of $7,351,000, which was primarily
attributable to income before depreciation, provision for bad debts, stock compensation expense,
deferred income taxes and changes in minority interest.
The $4,121,000 increase in cash used in investing activities primarily related to cash used to
fund the acquisition of Teiber. There were also additions to property and equipment, which
consisted primarily of purchases of computer equipment and office furniture, and additions to other
intangibles that consisted of the purchase of patents.
Cash used in financing activities of $77,000 was primarily the result of (i) repurchases of
the Companys outstanding common stock of $2,925,000, (ii) distributions to minority interest
members of $1,668,000, (iii) cash dividends of $2,036,000 and (iv) principal payments on the
Companys notes payable of $2,740,000. These amounts were partially offset by (i) net advances on
the Companys revolving lines of credit of $8,423,000, (ii) proceeds from the exercise of employee
stock options of $503,000, and (iii) an increase in book overdrafts of $520,000.
26
On December 9, 2003, the Companys Board of Directors authorized the Companys management to
repurchase up to 500,000 shares of the Companys outstanding common stock. As of December 31, 2004,
the Company had repurchased 494,463 shares at an aggregate cost of $11,194,000 under this program.
The average price paid per share repurchased was $22.63. Although no expiration date was specified
for the repurchase program, it was substantially complete as of December 31, 2004. No shares were
purchased by the Company other than through publicly announced plans or programs.
Fiscal year ended June 30, 2004
The Companys cash increased $846,000 from $4,992,000 at June 30, 2003 to $5,838,000 at June
30, 2004. The Companys operating activities provided cash of $11,977,000, which was primarily
attributable to income before depreciation, provision for bad debts, stock compensation expense,
deferred income taxes and changes in minority interest. See the Companys Consolidated Statement
of Cash Flow included in the consolidated financial statements below.
The $195,000 of cash used in investing activities related to additions to property and
equipment, which consisted primarily of warehouse racking, as well as purchases of office equipment
in connection with the relocation of employees from the California office to the Companys
headquarters in Coppell, Texas.
Cash used in financing activities of $10,936,000 was primarily the result of (i) repurchases
of the Companys outstanding common stock of $8,269,000, (ii) distributions to minority interest
members of $5,302,000, (iii) cash dividends of $2,123,000 and (iv) principal payments on the
Companys notes payable of $1,982,000. These amounts were partially offset by (i) net advances on
the Companys revolving lines of credit of $4,125,000 and (ii) proceeds from a note payable of
$2,100,000.
Effects of Recent Accounting Pronouncements
Effective July 1, 2005, the Company adopted SFAS 123 (revised 2004), Share-Based Payment
(SFAS 123R), which revises SFAS 123 and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS 123R requires all share-based payments to employees to be recognized in
the financial statements based on their fair values using an option-pricing model, such as the
Black-Scholes model, at the date of grant. The cost will be recognized over the period during
which an employee is required to provide services in exchange for the award, known as the requisite
service period (usually the vesting period).
The Company elected to use the modified prospective method for adoption, which requires
compensation expense to be recorded for all unvested stock options and restricted shares beginning
in the first quarter of adoption. Compensation cost for awards granted prior to, but not vested as
of, the date the Company adopted SFAS 123R were based on the grant date fair value and attributes
originally used to value those awards. See Stock-Based Compensation under Note 2 Summary of
Significant Accounting Policies in the notes to the consolidated financial statements for the pro
forma impact of applying the fair-value method of accounting for all stock-based compensation
awards in accordance with the provisions of SFAS 123R.
On July 13, 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
48, Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109
(Interpretation 48). Interpretation 48 clarifies SFAS 109, Accounting for Income Taxes, to
indicate a criterion that an individual tax position would have to meet for some or all of the
benefit of that position to be recognized in an entitys financial statements. The Company adopted
Interpretation 48 effective for its fiscal year beginning on July 1, 2007. The Company has not yet
determined the impact, if any, that the adoption of Interpretation 48 will have on its financial
position, results of operations, and cash flows.
Related Party Transactions
None.
27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Risk
The Company currently purchases a substantial amount of ceiling fans and other products of its
Craftmade segment from Fanthing, a Taiwanese company. The Companys verbal understanding with
Fanthing provides that all transactions are to be denominated in U.S. dollars; however, the
understanding further provides that, in the event that the value of the U.S. dollar appreciates or
depreciates against the Taiwan dollar by one Taiwan dollar or more, Fanthings prices will be
accordingly adjusted by 2.5%.
The Company also purchases a substantial amount of other products of its Craftmade and TSI
segments from numerous manufacturing companies located in China. On July 21, 2005, Chinas central
bank adjusted the exchange rate of the Chinese yuan to the U.S. dollar and fluctuations in the
Chinese yuan against the U.S. dollar are expected to continue. All transactions with Chinese
manufacturers are denominated in U.S. dollars, but fluctuations in the exchange rate between the
U.S. dollar and Chinese yuan could affect the pricing of items manufactured in China.
The following table summarizes the exchange rate of the United States dollar (USD) to the
Taiwan dollar (TWD) and Chinese yuan (YUAN):
|
|
|
|
|
|
|
|
|
|
|
USD:TWD |
|
USD:YUAN |
December 31, 2004 |
|
|
31.980 |
|
|
|
8.287 |
|
March 31, 2005 |
|
|
31.875 |
|
|
|
8.287 |
|
June 30, 2005 |
|
|
31.665 |
|
|
|
8.287 |
|
September 30, 2005 |
|
|
33.270 |
|
|
|
8.110 |
|
December 31, 2005 |
|
|
32.951 |
|
|
|
8.073 |
|
March 31, 2006 |
|
|
32.568 |
|
|
|
8.035 |
|
June 30, 2006 |
|
|
32.619 |
|
|
|
8.006 |
|
A sharp appreciation of the Taiwan dollar or the Chinese yuan relative to the U.S. dollar
could materially adversely affect the financial condition and results of operations of the Company.
The Company has not entered into any instruments to minimize this market risk of adverse changes
in currency rates because the Company believes (i) the cost associated with such instruments would
outweigh the benefits that would be obtained from utilizing such instruments and (ii) this risk is
not unique to Craftmade as its competitors also purchase a majority of their products from Asian
manufacturers.
The following table summarizes the Companys purchases from non-U.S. sources during the fiscal
year ended June 30, 2006:
Summary of Foreign Purchases
Fiscal Year Ended June 30, 2006
(Dollars in thousands)
|
|
|
|
|
China |
|
$ |
50,498,000 |
|
Taiwan |
|
|
16,271,000 |
|
28
The following table estimates that an appreciation of the Taiwan dollar and the Chinese
yuan to the U.S. dollar would result in the following changes to cost of goods sold and net income
based on the Companys purchases from Fanthing and Chinese manufacturing companies for the fiscal
year ended June 30, 2006:
Hypothetical Appreciation of Foreign Currencies
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual |
|
Annual |
Foreign |
|
Increase in |
|
Decrease in |
Currency |
|
Cost of |
|
Net |
Appreciation |
|
Sales |
|
Income |
1 |
% |
|
|
$ |
2,020 |
|
|
$ |
1,149 |
|
5 |
% |
|
|
|
13,354 |
|
|
|
7,975 |
|
10 |
% |
|
|
|
25,080 |
|
|
|
14,835 |
|
Interest Rate Exposure
The Company does not use derivative financial instruments to hedge interest rate exposure.
The Company sweeps any excess cash balances against its line of credit on a daily basis to minimize
balances outstanding and corresponding interest expense. The Company believes that its interest
rate exposure in modest. For a discussion of the effects of hypothetical changes in interest
rates, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data are included under Item 15(a)(1) and 15(a)(2)
of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
|
(a) |
|
Evaluation of Disclosure Controls and Procedures |
|
|
|
|
As of the end of the period covered by this report, the Companys management conducted an
evaluation, under the supervision and with the participation of the principal executive
officer and principal financial officer, of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on
this evaluation, the principal executive officer and principal financial officer concluded
that, as of the end of the period covered by this report, the Companys disclosure controls
and procedures are effective. Notwithstanding the foregoing, a control system, no matter
how well designed and operated, can provide only reasonable, not absolute, assurance that
it will detect or uncover failures within the Company to disclose material information
otherwise required to be set forth in the Companys periodic reports. |
|
|
(b) |
|
Managements Annual Report on Internal Control Over Financial Reporting |
|
|
|
|
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).
Under the supervision and with the participation of management, including the principal
executive officer and principal financial officer, the Company conducted an evaluation of
the effectiveness of the Companys internal control over financial reporting based on the
framework in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on the Companys evaluation under the
framework in Internal Control Integrated Framework, the Companys management concluded
that its internal control over financial reporting was effective as of June 30, 2006. The
Companys assessment of the effectiveness of its internal control over financial reporting
as of June 30, 2006 has been audited by BDO Seidman, LLP, an independent registered public
accounting firm, as stated in their report which is included herein. |
|
(c) |
|
Report of Independent Registered Public Accounting Firm |
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Craftmade International, Inc.
Coppell, Texas |
|
We have audited managements assessment, included in the accompanying Managements Annual
Report on Internal Control over Financial Reporting appearing under Item 9A, that Craftmade
International, Inc. and Subsidiaries (the Company) maintained effective internal control
over financial reporting as of June 30, 2006, based on the criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Management of the Company is responsible for maintaining
effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to
express an opinion on managements assessment and an opinion on the effectiveness of the
internal control over financial reporting of the Company based on our audit. |
|
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, evaluating managements
assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion. |
|
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect
on the financial statements. |
|
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. |
|
In our opinion, managements assessment that the Company maintained effective internal
control over financial reporting as of June 30, 2006, is fairly stated, in all material
respects, based on criteria established in Internal Control Integrated Framework issued
by the COSO. Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2006, based on the
criteria established in Internal Control Integrated Framework issued by the COSO. |
|
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Craftmade
International, Inc. and Subsidiaries as of June 30, 2006 and June 30, 2005 and the related
consolidated statements of income, stockholders equity, and cash flows for the years then
ended June 30, 2006 and June 30, 2005. We have also audited the schedule listed in Item
15(a)(2) for this Form 10-K for the years ended June 30, 2006 and June 30, 2005. Our
report dated August 25, 2006 expressed an unqualified opinion on those consolidated
financial statements and schedule. |
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Dallas, Texas
August 25, 2006
30
|
(d) |
|
Changes in Internal Controls Over Financial Reporting |
|
|
|
|
None. |
Item 9B. Other Information.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated herein by reference to the Proxy
Statement.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The following table sets forth (i) the number of securities to be issued upon exercise of
outstanding options, (ii) the weighted average of exercise price of such outstanding options, and
(iii) the number of securities remaining available for future issuance under equity compensation
plans that have been approved by security holders of the Company.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
Number of |
|
|
|
|
|
|
Remaining |
|
|
|
Securities |
|
|
Weighted- |
|
|
Available |
|
|
|
to be Issued |
|
|
Average |
|
|
for Future |
|
|
|
Upon |
|
|
Exercise |
|
|
Issuance |
|
|
|
Exercise of |
|
|
Price of |
|
|
Under Equity |
|
|
|
Outstanding |
|
|
Outstanding |
|
|
Compensation |
|
Plan Category |
|
Options (#) |
|
|
Options ($) |
|
|
Plans (#) |
|
1999 Stock Option Plan |
|
|
4,500 |
|
|
$ |
6.75 |
|
|
|
100,000 |
|
2000 Non-Employee Director Plan |
|
|
15,000 |
|
|
|
18.48 |
|
|
|
46,500 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
19,500 |
|
|
$ |
15.77 |
|
|
|
146,500 |
|
|
|
|
|
|
|
|
|
|
|
The remaining information required by this Item is incorporated by reference to the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by reference to the Proxy
Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated herein by reference to the Proxy
Statement.
31
PART IV
Item 15. Exhibits and Financial Statement Schedules.
|
(a) |
|
The following documents are filed as part of this report: |
|
1. |
|
Consolidated Financial Statements The consolidated financial statements
listed in the Index to Consolidated Financial Statements described at F-1 are
incorporated by reference herein. |
|
|
2. |
|
Financial Statement Schedule The financial statement schedule Schedule II
Valuation and Qualifying Accounts on page F-31 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. |
|
2.1 |
|
Agreement and Plan of Merger by and among Craftmade International, Inc., Bill
Teiber Co., Inc., Teiber Lighting Products, Inc., Todd Teiber and Edward Oberstein
dated March 1, 2005, previously filed as Exhibit 10.1 to Form 8-K dated March 1, 2005
(File No. 000-26667), and incorporated by reference herein. |
|
|
2.2 |
|
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 Current Report on
Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and incorporated by reference
herein. |
|
|
3.1 |
|
Certificate of Incorporation of the Company, filed as Exhibit 3(a)(2) to the
Companys Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW), and
incorporated by reference herein. |
|
|
3.2 |
|
Certificate of Amendment of Certificate of Incorporation of the Company,
dated March 24, 1992, and filed as Exhibit 4.2 to the Companys Form S-8 (File No.
333-44337), and incorporated by reference herein. |
|
|
3.3 |
|
Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the
Companys Post Effective Amendment No. 1 to Form S-8 (File No. 33-33594-FW), and
incorporated by reference herein. |
|
|
4.1 |
|
Specimen Common Stock Certificate, filed as Exhibit 4.4 to the Companys
registration statement on Form S-3 (File No. 333-70823), and incorporated by reference
herein. |
|
|
4.2 |
|
Rights Agreement, dated as of June 23, 1999, between Craftmade International,
Inc. and Harris Trust and Savings Bank, as Rights Agent, previously filed as an
exhibit to Form 8-K dated July 9, 1999 (File No. 000-26667), and incorporated by
reference herein. |
|
|
10.1 |
|
Assignment of Rents and Leases dated December 21, 1995, between
Craftmade International, Inc. and Allianz Life Insurance Company of North America
(including exhibits), previously filed as an exhibit in Form 10Q for the quarter ended
December 31, 1995, and herein incorporated by reference. |
|
|
10.2 |
|
Deed of Trust, Mortgage and Security Agreement made by Craftmade
International, Inc., dated December 21, 1995, to Patrick M. Arnold, as trustee for the
benefit of Allianz Life Insurance Company of North America (including exhibits),
previously filed as an exhibit in Form 10Q for the quarter ended December 31, 1995,
and herein incorporated by reference. |
|
|
10.3 |
|
Craftmade International, Inc. 1999 Stock Option Plan, filed as Exhibit A to
the Companys Proxy Statement on Schedule 14A filed October 4, 2000 (File No.
000-26667) and herein incorporated by reference. |
32
|
10.4 |
|
Craftmade International, Inc. 2000 Non-Employee Director Stock Plan, filed as
Exhibit B to the Companys Proxy Statement on Schedule 14A filed October 4, 2000 (File
No. 000-26667) and herein incorporated by reference. |
|
|
10.5 |
|
Modification, Renewal and Extension Agreement dated October 31, 2005 by and
between Craftmade International, Inc. and The Frost National Bank, filed as Exhibit
10.1 to the Companys Form 10-Q/A dated November 9, 2005 (File No. 000-26667), and
incorporated by reference herein. |
|
|
10.6 |
|
Amended and Restated Loan Agreement dated October 31, 2005 by and between
Craftmade International, Inc. and The Frost National Bank, filed as Exhibit 10.2 to
the Companys Form 10-Q/A dated November 9, 2005 (File No. 000-26667), and
incorporated by reference herein. |
|
|
10.7 |
|
Arbitration and Notice of Final Agreement dated October 31, 2005 by and
between Craftmade International, Inc. and The Frost National Bank, filed as Exhibit
10.3 to the Companys Form 10-Q/A dated November 9, 2005 (File No. 000-26667), and
incorporated by reference herein. |
|
|
21.0* |
|
List of the subsidiaries of Craftmade International, Inc., a Delaware corporation, as of June 30, 2006. |
|
|
23.1* |
|
Consent of BDO Seidman, LLP. |
|
|
23.2* |
|
Consent of PricewaterhouseCoopers, LLP. |
|
|
31.1* |
|
Certification of James R. Ridings, Chief Executive Officer of the Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2* |
|
Certification of J. Marcus Scrudder, Chief Financial Officer of the Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1* |
|
Certification of James R. Ridings, Chairman of the Board, President and
Chief Executive Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
32.2* |
|
Certification of J. Marcus Scrudder, Chief Financial Officer of the Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
* |
Each document marked with an asterisk is filed herewith. |
|
(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. |
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on September 12, 2006.
|
|
|
|
|
|
CRAFTMADE INTERNATIONAL, INC.
|
|
|
By: |
/s/ James R. Ridings
|
|
|
|
James R. Ridings |
|
|
|
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer) |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signatures |
|
Capacity |
|
Date |
|
|
|
|
|
/s/ James R. Ridings
|
|
Chairman of the Board, Chief
|
|
September 12, 2006 |
|
|
Executive
Officer and Director
|
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ J. Marcus Scrudder
|
|
Chief Financial Officer
|
|
September 12, 2006 |
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
|
/s/ Clifford Crimmings
|
|
Vice President of Marketing
|
|
September 12, 2006 |
|
|
and
Director
|
|
|
|
|
|
|
|
/s/ John S. DeBlois
|
|
Executive Vice President of
|
|
September 12, 2006 |
|
|
Trade
Source International, Inc.
|
|
|
|
|
and Director |
|
|
|
|
|
|
|
/s/ Michael L. Patton
|
|
Chief Accounting Officer
|
|
September 12, 2006 |
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/ William E. Bucek
|
|
Director
|
|
September 12, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ L. Dale Griggs
|
|
Director
|
|
September 12, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ A. Paul Knuckley
|
|
Director
|
|
September 12, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ R. Don Morris
|
|
Director
|
|
September 12, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Lary Snodgrass
|
|
Director
|
|
September 12, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Richard T. Walsh
|
|
Director
|
|
September 12, 2006 |
|
|
|
|
|
34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
F-2 |
|
|
|
F-4 |
|
|
|
F-5 |
|
|
|
F-7 |
|
|
|
F-9 |
|
|
|
F-11 |
|
|
|
|
II Valuation and Qualifying Accounts
|
|
F-31 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Craftmade International, Inc.
Coppell, Texas
We have audited the accompanying consolidated balance sheets of Craftmade International, Inc.
and Subsidiaries (the Company) as of June 30, 2006 and 2005 and the related consolidated
statements of income, stockholders equity, and cash flows for each of the years then ended. We
have also audited the schedule listed in Item 15(a)(2) of this Form 10-K. These financial
statements and the schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and the schedule are free of
material misstatement. An audits also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements and the schedule, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statement and schedule. We believe that our audits provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company at June 30, 2006 and 2005, and the results
of its operations and its cash flows for each of the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects, the information
set forth for the years ended June 30, 2006 and 2005.
As more fully described in Note 2 to the consolidated financial statements, effective July 1,
2005, the Company adopted the provisions of SFAS 123(R), Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control over financial
reporting as of June 30, 2006 and June 30, 2005, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated August 25, 2006, expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Dallas, Texas
August 25, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Craftmade International, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(l) present fairly, in all material respects, the results of operations and cash flows of
Craftmade International, Inc. and its subsidiaries (the Company) for the year ended
June 30, 2004 in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth
therein as of and for the year ended June 30, 2004 when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audit. We conducted our
audit of these statements and financial statement schedule in accordance with auditing standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Fort Worth, Texas
September 13, 2004
F-3
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share data) |
|
Net sales |
|
$ |
118,054 |
|
|
$ |
118,806 |
|
|
$ |
121,238 |
|
Cost of goods sold |
|
|
(82,585 |
) |
|
|
(83,360 |
) |
|
|
(85,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
35,469 |
|
|
|
35,446 |
|
|
|
35,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
(19,895 |
) |
|
|
(20,503 |
) |
|
|
(18,580 |
) |
Depreciation and amortization |
|
|
(594 |
) |
|
|
(581 |
) |
|
|
(648 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(20,489 |
) |
|
|
(21,084 |
) |
|
|
(19,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
14,980 |
|
|
|
14,362 |
|
|
|
16,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(1,184 |
) |
|
|
(1,081 |
) |
|
|
(777 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
|
13,796 |
|
|
|
13,281 |
|
|
|
15,905 |
|
Provision for income taxes |
|
|
(3,266 |
) |
|
|
(3,079 |
) |
|
|
(4,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests |
|
|
10,530 |
|
|
|
10,202 |
|
|
|
11,365 |
|
Minority interests |
|
|
(3,430 |
) |
|
|
(3,775 |
) |
|
|
(3,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,100 |
|
|
$ |
6,427 |
|
|
$ |
7,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
5,201 |
|
|
|
5,095 |
|
|
|
5,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
5,211 |
|
|
|
5,115 |
|
|
|
5,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
1.37 |
|
|
$ |
1.26 |
|
|
$ |
1.43 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
1.36 |
|
|
$ |
1.26 |
|
|
$ |
1.42 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
0.48 |
|
|
$ |
0.40 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
2,164 |
|
|
$ |
9,145 |
|
Accounts receivable net of allowance
of $293 and $300, respectively |
|
|
19,802 |
|
|
|
21,810 |
|
Inventories net of allowance of $934
and $717, respectively |
|
|
21,085 |
|
|
|
18,042 |
|
Deferred income taxes |
|
|
1,252 |
|
|
|
1,224 |
|
Prepaid expenses and other current assets |
|
|
988 |
|
|
|
374 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
45,291 |
|
|
|
50,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
|
|
|
|
|
|
Land |
|
|
1,535 |
|
|
|
1,535 |
|
Building |
|
|
7,796 |
|
|
|
7,796 |
|
Office furniture and equipment |
|
|
3,320 |
|
|
|
9,148 |
|
Leasehold improvements |
|
|
187 |
|
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
12,838 |
|
|
|
18,758 |
|
Less: accumulated depreciation |
|
|
(4,740 |
) |
|
|
(10,266 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
|
8,098 |
|
|
|
8,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
Goodwill |
|
|
11,480 |
|
|
|
11,480 |
|
Other intangibles, net of accumulated amortization
of $41 and $10, respectively |
|
|
169 |
|
|
|
190 |
|
Other assets |
|
|
23 |
|
|
|
58 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
11,672 |
|
|
|
11,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
65,061 |
|
|
$ |
70,815 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, |
|
|
|
except share data) |
|
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Book overdrafts |
|
$ |
70 |
|
|
$ |
520 |
|
Notes payable current |
|
|
1,135 |
|
|
|
1,319 |
|
Revolving lines of credit |
|
|
2,173 |
|
|
|
24,548 |
|
Accounts payable |
|
|
7,544 |
|
|
|
7,893 |
|
Commissions payable |
|
|
274 |
|
|
|
248 |
|
Income taxes payable/(receivable) |
|
|
114 |
|
|
|
(33 |
) |
Accrued customer allowances |
|
|
2,637 |
|
|
|
4,164 |
|
Other accrued expenses |
|
|
1,073 |
|
|
|
1,055 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
15,020 |
|
|
|
39,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities |
|
|
|
|
|
|
|
|
Notes payable long term |
|
|
223 |
|
|
|
1,551 |
|
Revolving line of credit |
|
|
15,981 |
|
|
|
|
|
Other long-term expenses |
|
|
793 |
|
|
|
860 |
|
Deferred income taxes |
|
|
345 |
|
|
|
226 |
|
|
|
|
|
|
|
|
Total other non-current liabilities |
|
|
17,342 |
|
|
|
2,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
32,362 |
|
|
|
42,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
3,662 |
|
|
|
4,091 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Series A cumulative, convertible callable preferred
stock, $1.00 par value, 2,000,000 shares authorized;
nil and 32,000 shares issued, respectively |
|
|
|
|
|
|
32 |
|
Common stock, $0.01 par value, 15,000,000
shares authorized; 9,703,420 and 9,699,920
shares issued, respectively |
|
|
97 |
|
|
|
97 |
|
Additional paid-in capital |
|
|
17,757 |
|
|
|
18,653 |
|
Retained earnings |
|
|
49,309 |
|
|
|
45,598 |
|
Less: treasury stock, 4,499,920 common
shares at cost; and nil and 32,000
preferred shares at cost, respectively |
|
|
(38,126 |
) |
|
|
(40,007 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
29,037 |
|
|
|
24,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interests and stockholders equity |
|
$ |
65,061 |
|
|
$ |
70,815 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,100 |
|
|
$ |
6,427 |
|
|
$ |
7,646 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
594 |
|
|
|
651 |
|
|
|
2,102 |
|
Provision for bad debts and inventories |
|
|
564 |
|
|
|
704 |
|
|
|
1,139 |
|
Loss on sale of property and equipment |
|
|
63 |
|
|
|
|
|
|
|
|
|
Stock compensation expense |
|
|
23 |
|
|
|
11 |
|
|
|
33 |
|
Deferred income taxes |
|
|
91 |
|
|
|
(1,203 |
) |
|
|
147 |
|
Minority interest |
|
|
3,430 |
|
|
|
3,775 |
|
|
|
3,719 |
|
Change in assets and liabilities providing
(using) cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,928 |
|
|
|
(1,975 |
) |
|
|
(2,728 |
) |
Inventories |
|
|
(3,527 |
) |
|
|
(1,246 |
) |
|
|
(3,116 |
) |
Prepaid expenses and other current assets |
|
|
(588 |
) |
|
|
861 |
|
|
|
(590 |
) |
Accounts and commissions payable |
|
|
(493 |
) |
|
|
(1,172 |
) |
|
|
1,851 |
|
Income taxes payable |
|
|
147 |
|
|
|
(1,146 |
) |
|
|
505 |
|
Accrued expenses and customer allowances |
|
|
(1,669 |
) |
|
|
778 |
|
|
|
1,422 |
|
Minority interest payable |
|
|
171 |
|
|
|
886 |
|
|
|
(153 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
7,834 |
|
|
|
7,351 |
|
|
|
11,977 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(233 |
) |
|
|
(111 |
) |
|
|
(195 |
) |
Acquisition of Bill Teiber Co., Inc. |
|
|
|
|
|
|
(4,000 |
) |
|
|
|
|
Additions to other intangibles |
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(233 |
) |
|
|
(4,121 |
) |
|
|
(195 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds/(payments on) from lines of credit |
|
|
(6,394 |
) |
|
|
8,423 |
|
|
|
4,125 |
|
Principal payments on notes payable |
|
|
(1,512 |
) |
|
|
(2,740 |
) |
|
|
(1,982 |
) |
Distributions to minority interest members |
|
|
(3,859 |
) |
|
|
(1,668 |
) |
|
|
(5,302 |
) |
Cash dividends |
|
|
(2,404 |
) |
|
|
(2,036 |
) |
|
|
(2,123 |
) |
Treasury stock purchases |
|
|
|
|
|
|
(2,925 |
) |
|
|
(8,269 |
) |
Proceeds from exercise of employee stock options |
|
|
37 |
|
|
|
503 |
|
|
|
514 |
|
Increase/(decrease) in book overdrafts |
|
|
(450 |
) |
|
|
520 |
|
|
|
|
|
Proceeds from notes payable |
|
|
|
|
|
|
|
|
|
|
2,100 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities |
|
|
(14,582 |
) |
|
|
77 |
|
|
|
(10,936 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash |
|
|
(6,981 |
) |
|
|
3,307 |
|
|
|
846 |
|
Cash at beginning of year |
|
|
9,145 |
|
|
|
5,838 |
|
|
|
4,992 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
2,164 |
|
|
$ |
9,145 |
|
|
$ |
5,838 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,202 |
|
|
$ |
929 |
|
|
$ |
777 |
|
Income taxes |
|
|
3,033 |
|
|
|
4,299 |
|
|
|
3,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared but not paid |
|
$ |
624 |
|
|
$ |
531 |
|
|
$ |
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and additional paid-in-capital
issued in conjunction with acquisition |
|
$ |
|
|
|
$ |
4,056 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in Series A Preferred Stock |
|
$ |
(32 |
) |
|
$ |
|
|
|
$ |
|
|
Decrease in additional paid-in capital |
|
|
(956 |
) |
|
|
|
|
|
|
|
|
Charge to retained earnings |
|
|
(893 |
) |
|
|
|
|
|
|
|
|
Decrease in preferred treasury stock |
|
|
1,881 |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE THREE YEARS ENDED JUNE 30, 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
|
Additional |
|
|
Unearned |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Preferred |
|
|
Paid-In |
|
|
Deferred |
|
|
Retained |
|
|
Treasury Stock |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Capital |
|
|
Compensation |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
Balance as of June 30, 2003 |
|
|
9,426 |
|
|
$ |
94 |
|
|
$ |
32 |
|
|
$ |
13,584 |
|
|
$ |
(43 |
) |
|
$ |
35,684 |
|
|
|
4,036 |
|
|
$ |
(28,813 |
) |
|
$ |
20,538 |
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the fiscal year ended June 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,646 |
|
|
|
|
|
|
|
|
|
|
|
7,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,646 |
|
|
|
|
|
|
|
|
|
|
|
7,646 |
|
|
Deferred compensation earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
Treasury stock purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
332 |
|
|
|
(8,269 |
) |
|
|
(8,269 |
) |
Exercise of stock options |
|
|
40 |
|
|
|
1 |
|
|
|
|
|
|
|
514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
515 |
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,123 |
) |
|
|
|
|
|
|
|
|
|
|
(2,123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2004 |
|
|
9,466 |
|
|
$ |
95 |
|
|
$ |
32 |
|
|
$ |
14,098 |
|
|
$ |
(11 |
) |
|
$ |
41,207 |
|
|
|
4,368 |
|
|
$ |
(37,082 |
) |
|
$ |
18,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the fiscal year ended June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,427 |
|
|
|
|
|
|
|
|
|
|
|
6,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,427 |
|
|
|
|
|
|
|
|
|
|
|
6,427 |
|
|
Deferred compensation earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Treasury stock purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163 |
|
|
|
(2,925 |
) |
|
|
(2,925 |
) |
Exercise of stock options |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501 |
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,036 |
) |
|
|
|
|
|
|
|
|
|
|
(2,036 |
) |
Acquisition of Bill Teiber Co., Inc. |
|
|
190 |
|
|
|
2 |
|
|
|
|
|
|
|
4,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2005 |
|
|
9,700 |
|
|
$ |
97 |
|
|
$ |
32 |
|
|
$ |
18,653 |
|
|
$ |
|
|
|
$ |
45,598 |
|
|
|
4,531 |
|
|
$ |
(40,007 |
) |
|
$ |
24,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
F-9
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY CONTINUED
FOR THE THREE YEARS ENDED JUNE 30, 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Preferred |
|
|
Paid-In |
|
|
Retained |
|
|
Treasury Stock |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
Balance as of June 30, 2005 |
|
|
9,700 |
|
|
$ |
97 |
|
|
$ |
32 |
|
|
$ |
18,653 |
|
|
$ |
45,598 |
|
|
|
4,531 |
|
|
$ |
(40,007 |
) |
|
$ |
24,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the fiscal year ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,100 |
|
|
|
|
|
|
|
|
|
|
|
7,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,100 |
|
|
|
|
|
|
|
|
|
|
|
7,100 |
|
|
Exercise of stock options, net of tax benefit |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
Stock-based compensation charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,496 |
) |
|
|
|
|
|
|
|
|
|
|
(2,496 |
) |
Retirement of preferred stock |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
(956 |
) |
|
|
(893 |
) |
|
|
(32 |
) |
|
|
1,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
|
9,703 |
|
|
$ |
97 |
|
|
$ |
|
|
|
$ |
17,757 |
|
|
$ |
49,309 |
|
|
|
4,499 |
|
|
$ |
(38,126 |
) |
|
$ |
29,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
F-10
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Organization and Nature of the Company
Craftmade International, Inc., a Delaware corporation, is organized into two operating
segments: Craftmade International, Inc. (Craftmade) and Trade Source International, Inc.
(TSI). Craftmade is principally engaged in the design, distribution and marketing of
ceiling fans, light kits, outdoor lighting, bathstrip lighting, light bulbs, door chimes,
pushbuttons, ventilation systems and other lighting accessories and related accessories to
a nationwide network of lighting showrooms and electrical wholesalers specializing in sales
to the remodeling, new home construction and replacement markets. TSI, a wholly-owned
subsidiary acquired July 1, 1998, and its two 50% owned limited liability companies, Design
Trends, LLC (Design Trends) and Prime/Home Impressions, LLC (PHI), are principally
engaged in the design, distribution and marketing of outdoor and indoor lighting, selected
ceiling fans and various fan accessories to mass merchandisers. Craftmade, TSI, their
wholly-owned subsidiaries and 50% owned limited liability companies are collectively
referred to as the Company.
Note 2 Summary of Significant Accounting Policies
Basis of presentation The Companys consolidated financial statements include the
accounts of all wholly-owned subsidiaries and the accounts of two variable interest
entities, PHI and Design Trends, in which the Company is the primary beneficiary. All
significant intercompany accounts and transactions have been eliminated. The functional
currency of the Companys foreign subsidiaries is the United States dollar. Certain prior
year balances have been reclassified to confirm to current fiscal 2006 presentation.
Accounts receivable Accounts receivable balances represent customer trade receivables
generated from the Companys operations. To reduce the potential for credit risk, the
Company evaluates the collectibility of customer balances based on a combination of factors
but does not generally require collateral. The Company regularly analyzes significant
customer balances, and, when it becomes evident a specific customer will be unable to meet
its financial obligations to the Company, such as in the case of bankruptcy filings or
deterioration in the customers operating results or financial position, a specific
allowance for doubtful account is recorded to reduce the related receivable to the amount
that is believed reasonably collectible. The Company also records allowances for doubtful
accounts for all other customers based on a variety of factors including the length of time
the receivables are past due, the financial health of the customer and historical
experiences. If circumstances related to specific customers change, estimates of the
recoverability of receivables could be further adjusted. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance. Receivables
are pledged under the Companys borrowing arrangements.
F-11
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of credit risk Financial instruments that potentially subject the Company
to concentrations of credit risk consist primarily of trade receivables. Substantially all
of Craftmades customers are lighting showrooms; however, credit risk is limited due to the
large number of customers and their dispersion across many different geographic locations.
As of June 30, 2006, Craftmade had no significant concentration of credit risk. As part of
its ongoing control procedures, TSI monitors the creditworthiness of its customers thereby
mitigating the effect of its concentration of credit risk. All of TSIs sales are to mass
merchandisers with two customers comprising the most significant portion as follows:
|
|
|
|
|
|
|
|
|
|
|
Lowes Companies |
|
Wal-Mart |
|
|
Percent of |
|
Percent of |
|
Percent of |
|
Percent of |
|
|
TSIs |
|
Consolidated |
|
TSIs |
|
Consolidated |
Fiscal Year Ended |
|
Net Sales |
|
Net Sales |
|
Net Sales |
|
Net Sales |
June 30, 2006 |
|
87% |
|
41% |
|
12% |
|
6% |
June 30, 2005 |
|
83% |
|
44% |
|
20% |
|
11% |
June 30, 2004 |
|
75% |
|
42% |
|
15% |
|
8% |
Inventories The Companys inventories are primarily comprised of finished goods and
are recorded at the lower of cost or market using the average cost method. The Company
provides estimated inventory allowances for excess, slow-moving and obsolete inventory as
well as inventory whose carrying value is in excess of net realizable value. These
reserves are based on current assessments about future demands, market conditions and
related management initiatives. If market conditions and actual demands are less favorable
than those projected by management, additional inventory write-downs may be required.
Property and equipment Property and equipment is recorded at cost. Depreciation is
determined using the straight-line method over the estimated useful lives of the property
and equipment, as follows:
|
|
|
|
|
Building |
|
40 years |
Office furniture and equipment |
|
|
3 to 7 years |
|
Leasehold improvements are amortized over the life of the lease or their useful life,
whichever is shorter.
Depreciation and amortization expense is summarized in the following table:
Depreciation and Amortization
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Depreciation of property and equipment |
|
$ |
564 |
|
|
$ |
570 |
|
|
$ |
648 |
|
Amortization of intangibles |
|
|
30 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
594 |
|
|
$ |
581 |
|
|
$ |
648 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense of $0, $70,000 and $1,454,000 for the three fiscal years ended
June 30, 2006, respectively, was recorded as a reduction of revenue related to display
equipment at Lowes.
Maintenance and repairs are charged to expense as incurred; renewals and betterments are
charged to appropriate property or equipment accounts. Upon sale or retirement of
depreciable assets, the cost and related accumulated depreciation is removed from the
accounts, and the resulting gain or loss is included in the results of operations in the
period of the sale or retirement.
F-12
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment of long-lived assets The Company reviews potential impairments of long-lived
assets and certain identifiable intangibles on an exception basis when there is evidence
that events or changes in circumstances have made recovery of an assets carrying value
unlikely. An impairment loss is recognized if the sum of the expected future cash flows,
undiscounted and before interest, from the use of the asset is less than the net book value
of the asset. Generally, the amount of the impairment loss is measured as the difference
between the net book value of the assets and the estimated fair value. There was no
impairment of long-lived assets at June 30, 2006.
Goodwill The following table summarizes the Companys goodwill at June 30, 2006:
Summary of Goodwill at June 30, 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
Craftmade |
|
|
TSI |
|
|
Total |
|
Teiber |
|
$ |
6,745 |
|
|
$ |
|
|
|
$ |
6,745 |
|
TSI |
|
|
|
|
|
|
4,735 |
|
|
|
4,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,745 |
|
|
$ |
4,735 |
|
|
$ |
11,480 |
|
|
|
|
|
|
|
|
|
|
|
The Company assesses the carrying values of goodwill annually or when circumstances
dictate that the carrying value might be impaired. Impairment testing for goodwill is
analyzed at the reporting unit level. An impairment loss generally would be recognized
when the carrying amount of the reporting units net assets exceeds the estimated fair
value of the reporting unit. The estimated fair value of a reporting unit is determined
using discounted cash flow analysis. In the event that impairment is determined to have
occurred, the Company will reduce the carrying value of the asset in that period. There
was no impairment of goodwill at June 30, 2006.
Returns The Company offers certain customers credits for authorized returned merchandise
and estimates an allowance for sales returns at the end of each period:
Sales Returns Allowance
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Beginning of year balance |
|
$ |
85 |
|
|
$ |
85 |
|
|
$ |
92 |
|
Provision for estimated returns |
|
|
939 |
|
|
|
760 |
|
|
|
800 |
|
Return credits issued |
|
|
(937 |
) |
|
|
(760 |
) |
|
|
(807 |
) |
|
|
|
|
|
|
|
|
|
|
End of year balance |
|
$ |
87 |
|
|
$ |
85 |
|
|
$ |
85 |
|
|
|
|
|
|
|
|
|
|
|
F-13
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product warranties Craftmade ceiling fans are warranted against defects in
workmanship and materials depending on standard offerings of various lengths and terms.
Provisions for estimated expenses related to product warranties are made at the time
products are sold. These estimates are established using historical information on the
nature, frequency, and average cost of warranty claims.
Product Warranty Reserves
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Beginning of year balance |
|
$ |
171 |
|
|
$ |
145 |
|
|
$ |
139 |
|
Provision for estimated expenses |
|
|
1,037 |
|
|
|
1,009 |
|
|
|
872 |
|
Warranty claims paid |
|
|
(1,039 |
) |
|
|
(983 |
) |
|
|
(866 |
) |
|
|
|
|
|
|
|
|
|
|
End of year balance |
|
$ |
169 |
|
|
$ |
171 |
|
|
$ |
145 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes The Company accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the Companys
financial statements or tax returns. In estimating future tax consequences, all expected
future events other than enactments of changes in the tax law or rates are considered.
Deferred income taxes have been provided on unremitted earnings from foreign investees.
The Company reviews its deferred tax assets for ultimate realization and will record a
valuation allowance to reduce the deferred tax asset if it is more likely than not that
some portion, or all, of these deferred tax assets will not be realized. The Company has
established, and periodically reviews and reevaluates an estimated contingent tax liability
on its consolidated balance sheet to provide for the possibility of unfavorable outcomes in
tax matters. The Company believes its reserves are adequate in the event the positions are
not ultimately upheld.
TSIs 50% owned LLCs operate in the form of partnerships for tax purposes and,
consequently, do not file federal income tax returns. Accordingly, the Company recognizes
its share of their income and the related tax effects on its provision for income taxes.
Revenue recognition Revenue is recognized as product is shipped and related services are
performed in accordance with all applicable revenue recognition criteria. For these
transactions the Company applies the provisions of SEC Staff Accounting Bulletin No. 104
Revenue Recognition. The Company recognizes revenue when there is persuasive evidence of
an arrangement, title and risk of loss have passed, delivery has occurred or the services
have been rendered, the sales price is fixed or determinable and collection of the related
receivable is reasonably assured. Title generally transfers upon shipment of goods from the
Companys warehouse. The Company does not have an obligation or policy of replacing
customer products damaged or lost in transit. In some instances, the Company ships product
directly from its suppliers to the customers. In these cases, the Company recognizes
revenue when the product is accepted by the customers representative. The Company applies
the provisions of Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue
Gross as a Principal versus Net as an Agent. The Companys application of EITF 99-19
includes evaluation of the terms of each
major customer contract 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.
F-14
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of its revenue recognition policy, the Company records estimated incentives payable
to its customers at a future date as a reduction of revenue at the time the revenues are
recorded. The Company bases its estimates on contractual terms of the programs and
estimated or actual sales to individual customers. Actual incentives in any future period
are inherently uncertain and, thus, may differ from its estimates. If actual or expected
incentives were significantly greater than the reserves the Company had established, the
Company would record a reduction to net revenues in the period in which the Company made
such determination.
In addition to various incentive programs, from time to time, the Company is required to
provide mark-down funds to certain of its mass retail customers to assist them in clearing
slow-moving inventory. These mark-down funds are recorded as a reduction of revenue in the
period in which they are granted.
Advertising costs The Companys advertising expenditures consist primarily of print
advertising programs, and are expensed as used. Prepaid advertising costs consist of
current catalogs on hand and are expensed in relation to use.
Advertising
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Advertising expense |
|
$ |
1,514 |
|
|
$ |
1,442 |
|
|
$ |
1,154 |
|
Prepaid advertising costs |
|
|
125 |
|
|
|
176 |
|
|
|
339 |
|
Research and development Research, development and engineering expenditures for the
creation and application of new products and processes are expensed as incurred, as
summarized in the following table:
Research and Development
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Research and development |
|
$ |
217 |
|
|
$ |
202 |
|
|
$ |
293 |
|
Stock-based compensation Effective July 1, 2005, the Company adopted SFAS 123
(revised 2004), Share-Based Payment (SFAS 123(R)), which revises SFAS 123 and supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires all
share-based payments to employees to be recognized in the financial statements based on
their fair values using an option-pricing model, such as the Black-Scholes model, at the
date of grant. The cost will be recognized over the period during which an employee is
required to provide services in exchange for the award, known as the requisite service
period (usually the vesting period). The Company elected to use the modified prospective
method for adoption, which requires compensation expense to be recorded for all unvested
stock options and restricted shares beginning in the first quarter of adoption.
Compensation cost for awards granted prior to, but not vested as of, the date the Company
adopted SFAS 123(R) were based on the grant date fair value and attributes originally used
to value those awards.
In addition to requiring fair value expense recognition, SFAS 123(R) modifies the cash
flow statement presentation of actual tax benefits in excess of the amount provided on the
fair value expense. Such benefits are now to be presented as a component of financing
activities rather than the previous presentation as a component of operating activities.
F-15
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the fiscal year ended June 30, 2006, compensation expense totaled $23,000 from vested
options. Total future compensation cost related to non-vested options not yet recognized
in the Consolidated Statement of Income totaled $4,000 as of June 30, 2006.
The following table shows pro forma net income for the fiscal years ended June 30, 2005 and
2004 had compensation expense for the Companys stock option plans been determined based
upon the fair value at the grant date for awards consistent with the methodology prescribed
by SFAS 123(R). The pro forma results for prior years are compared to actual results for
the current year, where stock option expense is included in reported net income. The pro
forma effects may not be representative of expense in future periods since the estimated
fair value of stock options on the date of grant is amortized to expense over the vesting
period and additional options may be granted or options may be cancelled in future years.
Pro Forma Net Income
(In thousands, except per shara data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net income, as reported |
|
$ |
7,100 |
|
|
$ |
6,427 |
|
|
$ |
7,646 |
|
Compensation
expense, pro forma, net of related taxes |
|
|
|
|
|
|
(63 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
Net income, proforma |
|
$ |
7,100 |
|
|
$ |
6,364 |
|
|
$ |
7,508 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares of common stock |
|
|
5,201 |
|
|
|
5,095 |
|
|
|
5,336 |
|
Diluted weighted average shares of common stock |
|
|
5,211 |
|
|
|
5,115 |
|
|
|
5,383 |
|
|
Basic earnings per share, as reported |
|
$ |
1.37 |
|
|
$ |
1.26 |
|
|
$ |
1.43 |
|
Basic earnings per share, pro forma |
|
|
1.37 |
|
|
|
1.25 |
|
|
|
1.41 |
|
|
Diluted earnings per share, as reported |
|
$ |
1.36 |
|
|
$ |
1.26 |
|
|
$ |
1.42 |
|
Diluted earnings per share, pro forma |
|
|
1.36 |
|
|
|
1.24 |
|
|
|
1.39 |
|
The fair value of each option grant is calculated on the date of grant using the
Black-Scholes option pricing model based upon the following weighted-average assumptions:
Summary of Stock Option Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Expected volatility |
|
|
45 |
% |
|
|
47 |
% |
|
|
50 |
% |
Risk-free interest rate |
|
|
4.5 |
% |
|
|
3.7 |
% |
|
|
2.9 |
% |
Expected lives |
|
4 years |
|
4 years |
|
7 years |
Dividend yield |
|
|
2.7 |
% |
|
|
1.9 |
% |
|
|
1.6 |
% |
Weighted average fair
value of options granted |
|
$ |
5.88 |
|
|
$ |
7.43 |
|
|
$ |
5.06 |
|
F-16
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pervasiveness of estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Effects of recent accounting pronouncements On July 13, 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation 48, Accounting for Uncertainty in
Income Taxes: An Interpretation of FASB Statement No. 109 (Interpretation 48).
Interpretation 48 clarifies SFAS 109, Accounting for Income Taxes, to indicate a criterion
that an individual tax position would have to meet for some or all of the benefit of that
position to be recognized in an entitys financial statements. The Company plans to adopt
Interpretation 48 effective for its fiscal years beginning on July 1, 2007. The Company
has not yet determined the impact that the adoption of Interpretation 48 will have on its
financial position, results of operations, or cash flows.
Note 3 Acquisition
Acquisition of Bill Teiber Co., Inc.
On March 1, 2005, the Company acquired 100% of the issued and outstanding shares of capital
stock of Teiber through a merger of subsidiaries. The acquisition has been accounted for as
an asset purchase. Teiber is an importer and distributor of decorative light bulbs, door
chimes, ventilation systems and related lighting accessories. The business will be operated
as Teiber Lighting Products, Inc., a wholly-owned subsidiary of Craftmade. Craftmade
acquired Teiber in order to distribute Teibers product lines to Craftmades existing
showroom customers.
Assets acquired and liabilities assumed were recorded on the Companys Consolidated Balance
Sheets as of the acquisition date based upon their estimated fair values at such date. The
results of operations have been included in the Consolidated Statements of Income since the
date of merger in the Craftmade segment. The aggregate purchase price totaled $8,164,000
and was allocated based on the estimated fair values of the assets acquired and liabilities
assumed as of the date of acquisition. The amount of goodwill allocated to the purchase
price was $6,745,000 of which $4,000,000 is deductible for tax purposes.
The following table sets forth the unaudited pro forma results of operations of the Company
as if the Teiber merger had occurred at the beginning of the fiscal year. These pro forma
amounts do not purport to be indicative of the results that would
have actually been obtained if the merger occurred as of the beginning of each of the
periods presented or that may be obtained in the future.
Unaudited Pro Forma Results
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
Revenues |
|
$ |
123,482 |
|
|
$ |
128,003 |
|
Net income |
|
|
6,684 |
|
|
|
7,857 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.28 |
|
|
$ |
1.42 |
|
Diluted earnings per share |
|
|
1.27 |
|
|
|
1.41 |
|
F-17
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 Accounting Changes
Variable Interest Entities
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) and amended it
by issuing FIN 46R in December 2003. Among other things, FIN 46R generally deferred the
effective date of FIN 46 to the quarter ended June 30, 2004. Variable interest entities
(VIEs) are primarily entities that lack sufficient equity to finance their activities
without additional financial support from other parties or whose equity holders lack
adequate decision making ability. All VIEs with which the Company is involved must be
evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The
primary beneficiary is required to consolidate the VIE for financial reporting purposes.
The Company has a 50% ownership interest in two limited liability companies, PHI and Design
Trends. In connection with the adoption of FIN 46R, the Company concluded that PHI and
Design Trends are VIEs and that the Company is the primary beneficiary of each of PHI and
Design Trends. Pursuant to the provisions of FIN 46R, effective January 1, 2004, the
Company began to consolidate PHI and Design Trends and restated its previously issued
financial statements to reflect PHI and Design Trends as consolidated entities.
The following tables present the consolidating balance sheets of the Companys VIEs as of
June 30, 2006 and 2005 and the results of operations for the three years ended June 30,
2006.
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation/ |
|
|
|
|
|
|
Craftmade/ |
|
|
Design |
|
|
|
|
|
|
Elimination |
|
|
|
|
|
|
Trade Source |
|
|
Trends |
|
|
PHI |
|
|
Entries |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Total assets |
|
$ |
44,554 |
|
|
$ |
6,251 |
|
|
$ |
6,014 |
|
|
$ |
8,242 |
|
|
$ |
65,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and minority interests |
|
$ |
25,062 |
|
|
$ |
5,649 |
|
|
$ |
7,239 |
|
|
$ |
(1,926 |
) |
|
$ |
36,024 |
|
Total stockholders equity |
|
|
19,492 |
|
|
|
602 |
|
|
|
(1,225 |
) |
|
|
10,168 |
|
|
|
29,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and stockholders equity |
|
$ |
44,554 |
|
|
$ |
6,251 |
|
|
$ |
6,014 |
|
|
$ |
8,242 |
|
|
$ |
65,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation/ |
|
|
|
|
|
|
Craftmade/ |
|
|
Design |
|
|
|
|
|
|
Elimination |
|
|
|
|
|
|
Trade Source |
|
|
Trends |
|
|
PHI |
|
|
Entries |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Total assets |
|
$ |
53,486 |
|
|
$ |
8,999 |
|
|
$ |
4,119 |
|
|
$ |
4,211 |
|
|
$ |
70,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and minority interests |
|
$ |
36,434 |
|
|
$ |
4,613 |
|
|
$ |
4,154 |
|
|
$ |
1,241 |
|
|
$ |
46,442 |
|
Total stockholders equity |
|
|
17,052 |
|
|
|
4,386 |
|
|
|
(35 |
) |
|
|
2,970 |
|
|
|
24,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and stockholders equity |
|
$ |
53,486 |
|
|
$ |
8,999 |
|
|
$ |
4,119 |
|
|
$ |
4,211 |
|
|
$ |
70,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 Accounting Changes, Continued
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FISCAL YEAR ENDED JUNE 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craftmade/ |
|
Design |
|
|
|
|
|
|
Trade Source |
|
Trends |
|
PHI |
|
Consolidated |
|
|
(In thousands) |
Net sales |
|
$ |
83,236 |
|
|
$ |
21,780 |
|
|
$ |
13,038 |
|
|
$ |
118,054 |
|
Income from operations |
|
|
8,151 |
|
|
|
3,418 |
|
|
|
3,411 |
|
|
|
14,980 |
|
Net income |
|
|
3,670 |
|
|
|
1,771 |
|
|
|
1,659 |
|
|
|
7,100 |
|
FISCAL YEAR ENDED JUNE 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craftmade/ |
|
Design |
|
|
|
|
|
|
Trade Source |
|
Trends |
|
PHI |
|
Consolidated |
|
|
(In thousands) |
Net sales |
|
$ |
77,501 |
|
|
$ |
30,022 |
|
|
$ |
11,283 |
|
|
$ |
118,806 |
|
Income from operations |
|
|
6,571 |
|
|
|
4,700 |
|
|
|
3,091 |
|
|
|
14,362 |
|
Net income |
|
|
2,627 |
|
|
|
2,311 |
|
|
|
1,489 |
|
|
|
6,427 |
|
FISCAL YEAR ENDED JUNE 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craftmade/ |
|
Design |
|
|
|
|
|
|
Trade Source |
|
Trends |
|
PHI |
|
Consolidated |
|
|
(In thousands) |
Net sales |
|
$ |
75,541 |
|
|
$ |
36,422 |
|
|
$ |
9,275 |
|
|
$ |
121,238 |
|
Income from operations |
|
|
8,981 |
|
|
|
6,830 |
|
|
|
871 |
|
|
|
16,682 |
|
Net income |
|
|
3,928 |
|
|
|
3,318 |
|
|
|
400 |
|
|
|
7,646 |
|
F-19
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 Revolving Lines of Credit and Notes Payable
The Companys current revolving lines of credit and notes payable are summarized in the
following table:
Summary of Revolving Lines of Credit
and Notes Payable at June 30, 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
Commitment |
|
|
Balance |
|
|
Interest Rate |
|
|
Maturity |
|
Revolving lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Frost National Bank |
|
$ |
20,000 |
|
|
$ |
15,981 |
|
|
LIBOR plus 1.50% |
|
October 31, 2007 |
The Frost National Bank |
|
|
3,000 |
|
|
|
|
|
|
LIBOR plus 1.50% |
|
January 15, 2007 |
Wachovia Bank, N.A. |
|
|
3,000 |
|
|
|
2,173 |
|
|
LIBOR plus 2.00% |
|
December 15, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,000 |
|
|
|
18,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable facility |
|
N/A |
|
|
1,358 |
|
|
|
8.302% |
|
|
January 1, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A description of each revolving line of credit and note payable is summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
Description |
|
2006 |
|
|
2005 |
|
On October 31, 2005, the Company renewed its $20,000,000
loan agreement with The Frost National Bank. Borrowings
under this agreement are made under a revolving
promissory note (the Craftmade Line of Credit) and are
limited to the lesser of $20,000,000 or the amount equal
to the borrowing base calculated on eligible accounts
receivable and inventory. The borrowings are
collateralized by certain inventory and accounts
receivable and bear interest at at the one-month LIBOR
interest rate (5.34625% at June 30, 2006) plus 1.50% to
2.75%, depending on the Companys debt to worth ratio.
The line of credit is scheduled to mature on October 31,
2007. Financial covenants of the agreement include a
requirement that the Company maintain a fixed charge
coverage ratio greater than 1.25 to 1. Other
covenants and restrictions that apply to this agreement
require the Companys debt to tangible net worth ratio
to be less than 3.0 to 1.0 after December 31, 2005.
Additionally, the Company has agreed not to purchase its
stock if its debt to tangible net worth exceeds 3.0 to
1.0. The Companys debt to tangible net worth ratio, as
defined in the loan agreement, equaled 1.6 to 1.0 at
June 30, 2006, resulting in the effective interest rate
of LIBOR plus 1.50%. On February 25, 2005, the line of
credit was amended to provide, among other things, a
$3,000,000 increase in the commitment. This increase in
commitment expires on January 15, 2007. |
|
$ |
15,981 |
|
|
$ |
23,000 |
|
F-20
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
Description |
|
2006 |
|
|
2005 |
|
On April 17, 2002 PHI entered into a $3,000,000 note and
security agreement with Wachovia Bank, N.A.
(Wachovia). Borrowings under this agreement are
limited to a borrowing base calculated as a percentage
of certain eligible accounts receivable and inventory
are payable on demand with interest at the monthly LIBOR
index (5.10906% at June 30, 2006) plus 2%,
collateralized by certain inventory and receivables of
the Company and jointly and severally guaranteed by the
PHI members. This loan agreement, which expires on
December 15, 2006, requires the maintenance of certain
financial ratios including the maintenance of minimum
tangible net worth and funded debt to
EBITDA. |
|
|
2,173 |
|
|
|
1,548 |
|
|
|
|
|
|
|
|
|
|
On May 9, 2000, the Company entered into a term loan to
finance its home office and warehouse with an original
principal balance of $9,200,000. The loan is payable in
equal monthly installments of $100,378 of principal and
interest at 8.302%. The loan is collateralized by the
building and land. The loan is scheduled to mature on
January 1, 2008. |
|
|
1,358 |
|
|
|
2,579 |
|
|
|
|
|
|
|
|
|
|
On November 24, 2003, PHI entered into a loan agreement
with Wachovia. Borrowings under this agreement are made
under a $2,100,000 promissory note collateralized by
substantially all the assets of PHI. The note matured on
September 15, 2005 and all outstanding principal and
interest were paid in full. |
|
|
|
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
On April 29, 2002 PHI entered into a three-year $500,000
note and security agreement with Wachovia Bank, NA.
Borrowings under this agreement are payable monthly in
installments of $13,889 plus interest at LIBOR (3.3401%
at June 30, 2005) plus 2.5% collateralized by certain
inventory and receivables of the Company. The note
matured on July 29, 2005. |
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
19,512 |
|
|
|
27,418 |
|
Less: Lines of credit due on demand |
|
|
(2,173 |
) |
|
|
(24,548 |
) |
Less: Current amounts due in following
year |
|
|
(1,135 |
) |
|
|
(1,319 |
) |
|
|
|
|
|
|
|
Non-current |
|
$ |
16,204 |
|
|
$ |
1,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rates on outstanding borrowings |
|
|
|
|
|
|
|
|
Lines of credit |
|
|
6.9 |
% |
|
|
5.5 |
% |
Notes payable |
|
|
8.3 |
% |
|
|
8.1 |
% |
Total |
|
|
7.0 |
% |
|
|
5.8 |
% |
As of June 30, 2006, the Company had $7,817,000 available to borrow on its lines of credit.
F-21
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of notes payable and lines of credit at June 30, 2006 are detailed as
follows:
Schedule of Maturities
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
|
|
Lines of |
|
|
|
|
Fiscal Year Ended |
|
Payable |
|
|
Credit |
|
|
Total |
|
June 30, 2007 |
|
$ |
1,135 |
|
|
$ |
2,173 |
|
|
$ |
3,308 |
|
June 30, 2008 |
|
|
223 |
|
|
|
15,981 |
|
|
|
16,204 |
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,358 |
|
|
$ |
18,154 |
|
|
$ |
19,512 |
|
|
|
|
|
|
|
|
|
|
|
Note 6 Income Taxes
Components of the provision for income taxes consist of the following:
Provision for Income Taxes
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Current expense/(benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
3,309 |
|
|
$ |
3,659 |
|
|
$ |
3,499 |
|
State |
|
|
(243 |
) |
|
|
264 |
|
|
|
536 |
|
Foreign |
|
|
109 |
|
|
|
359 |
|
|
|
358 |
|
|
|
|
|
|
|
|
|
|
|
Total current expense |
|
|
3,175 |
|
|
|
4,282 |
|
|
|
4,393 |
|
Deferred expense (benefit) |
|
|
91 |
|
|
|
(1,203 |
) |
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense |
|
$ |
3,266 |
|
|
$ |
3,079 |
|
|
$ |
4,540 |
|
|
|
|
|
|
|
|
|
|
|
F-22
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred taxes are provided for temporary differences between the financial reporting basis
and the tax basis of the Companys assets and liabilities. The temporary differences that
give rise to deferred tax assets and liabilities at June 30, 2006 and 2005 are as follows:
Summary of Deferred Taxes
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Inventories |
|
$ |
518 |
|
|
$ |
369 |
|
Investment in 50% owned LLCs |
|
|
377 |
|
|
|
720 |
|
Reserves and accruals |
|
|
276 |
|
|
|
394 |
|
Accounts receivable reserves |
|
|
100 |
|
|
|
75 |
|
State refund claims, net of federal tax |
|
|
59 |
|
|
|
|
|
Net operating loss carryforwards |
|
|
24 |
|
|
|
|
|
Other |
|
|
54 |
|
|
|
123 |
|
Valuation allowance |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
1,349 |
|
|
|
1,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(409 |
) |
|
|
(301 |
) |
Foreign taxes |
|
|
(31 |
) |
|
|
(354 |
) |
Other |
|
|
(2 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(442 |
) |
|
|
(683 |
) |
|
|
|
|
|
|
|
Net deferred tax asset/(liability) |
|
$ |
907 |
|
|
$ |
998 |
|
|
|
|
|
|
|
|
The differences between the Companys effective tax rate and the federal statutory rate
of 34% is summarized in the following table:
Reconciliation of Federal Tax Rate to Effective Tax Rate
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Tax at the statutory corporate rate |
|
$ |
4,691 |
|
|
$ |
4,515 |
|
|
$ |
5,416 |
|
Less: federal income tax attributable to minority interest |
|
|
(1,158 |
) |
|
|
(1,284 |
) |
|
|
(1,297 |
) |
Foreign tax rate under federal statutory rate |
|
|
(156 |
) |
|
|
(338 |
) |
|
|
|
|
Federal taxes on anticipated repatriation of foreign earnings |
|
|
(157 |
) |
|
|
51 |
|
|
|
|
|
State income taxes, net of federal benefit |
|
|
22 |
|
|
|
180 |
|
|
|
343 |
|
Other |
|
|
24 |
|
|
|
(45 |
) |
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
3,266 |
|
|
$ |
3,079 |
|
|
$ |
4,540 |
|
|
|
|
|
|
|
|
|
|
|
F-23
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7
Stockholders Equity
Stock Option Plans
On October 27, 2000, the Companys stockholders approved the 1999 Stock Option Plan (1999
Plan) and 2000 Non-Employee Director Plan (Non-Employee Plan), previously adopted by the
Board of Directors on October 29, 1999 and February 16, 2000, respectively. The 1999 Plan and
Non-Employee Plan allow a maximum of 300,000 and 75,000 shares, respectively, of the Companys
common stock to be issued. Options granted pursuant to the 1999 Plan will be designated as
either Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQSOs). Options
granted pursuant to the Non-Employee Plan will be designated as NQSOs. The 1999 Plan options
vest at a rate of 20% on the grant date and 20% for each successive year. The Non-Employee
Plan options vest within six months of the date of grant. Options may be exercised at any time
once they become vested, but not more than 10 years from the date of grant. Compensation
expense is recognized in the Companys results of operations as the options vest. A summary
of options issued under the above agreements is as follows:
Summary of Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 Plan |
|
|
Non-Employee Plan |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Exercise |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Exercise |
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
Price |
|
|
Remaining |
|
|
|
|
|
|
Exercise |
|
|
Price |
|
|
Remaining |
|
|
|
Shares |
|
|
Price |
|
|
Range |
|
|
Life (Years) |
|
|
Shares |
|
|
Price |
|
|
Range |
|
|
Life (Years) |
|
Outstanding at June 30, 2003 |
|
|
87,500 |
|
|
$ |
6.75 |
|
|
|
|
|
|
|
|
|
|
|
18,000 |
|
|
$ |
10.78 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,500 |
|
|
|
25.20 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(40,000 |
) |
|
|
6.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(500 |
) |
|
|
6.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2004 |
|
|
47,000 |
|
|
$ |
6.75 |
|
|
|
|
|
|
|
|
|
|
|
22,500 |
|
|
$ |
13.67 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
20.74 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(32,000 |
) |
|
|
6.75 |
|
|
|
|
|
|
|
|
|
|
|
(12,000 |
) |
|
|
8.92 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(7,000 |
) |
|
|
6.75 |
|
|
|
|
|
|
|
|
|
|
|
(1,500 |
) |
|
|
25.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2005 |
|
|
8,000 |
|
|
$ |
6.75 |
|
|
|
|
|
|
|
|
|
|
|
12,000 |
|
|
$ |
18.74 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
17.48 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(3,500 |
) |
|
|
6.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
4,500 |
|
|
$ |
6.75 |
|
|
$ |
6.75 |
|
|
|
4.3 |
|
|
|
15,000 |
|
|
$ |
18.48 |
|
|
$ |
14.15-$25.20 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
4,500 |
|
|
$ |
6.75 |
|
|
|
|
|
|
|
|
|
|
|
12,000 |
|
|
$ |
18.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Retirement of Preferred Stock
In the fiscal year ended June 30, 2006, the Company retired its 32,000 shares of the Series
A cumulative, convertible, and callable preferred stock, $1.00 par value (Preferred
Stock), issued and held by the Company as treasury shares.
Treasury Stock Purchases
On December 9, 2003, the Companys Board of Directors authorized the Companys management to
repurchase up to 500,000 shares of the Companys outstanding common stock. As of December
31, 2004, the Company had repurchased 494,463 shares at an aggregate cost of $11,194,000
under this program. The average price paid per share repurchased was $22.63. Although no
expiration date was specified for the repurchase program, it was substantially complete as
of December 31, 2004. No shares were purchased by the Company other than through publicly
announced plans or programs.
Stockholder Rights Plan
On June 23, 1999, the Company declared a dividend of one Preferred Share Purchase Right
(Right) on each outstanding share of the Companys common stock. The dividend distribution
was made on July 19, 1999 to stockholders of record on that date. The Rights become
exercisable if a person or group acquires 15% or more of the Companys common stock or
announces its intent to do so. Each Right will entitle stockholders to buy one
one-thousandth of a share of Series A Preferred Stock, $1.00 par value per share, at an
exercise price of $48 subject to adjustment as provided for in the agreement. When the
Rights become exercisable, the holder of each Right (other than the acquiring person or
members of such group) is entitled (1) to purchase, at the Rights then current exercise
price, a number of the acquiring companys common shares having a market value of twice such
price, (2) to purchase, at the Rights then current exercise price, a number of the
Companys common shares having a market value of twice such price, or (3) at the option of
the Company, to exchange the Rights (other than Rights owned by such person or group), in
whole or in part, at an exchange ratio of one-half share of common stock (or one-thousandth
of a share of the Series A Preferred Stock) per Right. The Rights may be redeemed for $.001
each by the Company at any time prior to acquisition by a person (or group) of beneficial
ownership of 15% or more of the Companys common stock. The Rights will expire on June 23,
2009.
F-25
CRAFTMADE
INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 Earnings Per Share
Basic earnings per share measures the performance of an entity over the reporting period.
Diluted earnings per share measures the performance of an entity over the reporting period
while giving effect to all potentially dilutive common shares that were outstanding during
the period. The treasury stock method is used to determine the dilutive potential of stock
options. Options which, based on their exercise price, would be anti-dilutive are not
considered in the treasury stock method calculation. There have been no options excluded
from the earnings per share calculations due to their anti-dilutive nature. The following
is a reconciliation of the numerator and denominator used in the basic and diluted EPS
calculations:
Earnings Per Common Share
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,100 |
|
|
$ |
6,427 |
|
|
$ |
7,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
5,201 |
|
|
|
5,095 |
|
|
|
5,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
5,201 |
|
|
|
5,095 |
|
|
|
5,336 |
|
Incremental shares for stock options |
|
|
10 |
|
|
|
20 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive weighted average common shares |
|
|
5,211 |
|
|
|
5,115 |
|
|
|
5,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
1.37 |
|
|
$ |
1.26 |
|
|
$ |
1.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
1.36 |
|
|
$ |
1.26 |
|
|
$ |
1.42 |
|
|
|
|
|
|
|
|
|
|
|
Note 9 Disclosures About Fair Value of Financial Instruments
The Companys financial instruments include cash, receivables, accounts and commissions
payable, accrued expenses and amounts outstanding under various debt agreements. Management
believes the fair values of these instruments approximate the related carrying values as of
June 30, 2006, because of their short-term nature, recent renegotiations and/or variable
interest rates.
Note 10 Commitments and Contingencies
The Company leases various equipment and real estate under non-cancelable operating lease
agreements which require future cash payments. The Company incurred rental expense under
its operating lease as summarized in the following table:
F-26
CRAFTMADE
INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Rental Expense Under Operating Leases
(Dollars in thousands)
|
|
|
|
|
Fiscal Year Ended |
|
Amount |
June 30, 2006 |
|
$ |
438 |
|
June 30, 2005 |
|
|
315 |
|
June 30, 2004 |
|
|
264 |
|
Future minimum lease payments under non-cancelable operating leases as of June 30, 2006
are as follows:
Future Minimum Lease Payments
(Dollars in thousands)
|
|
|
|
|
Fiscal Year Ended |
|
Amount |
|
June 30, 2007 |
|
$ |
348 |
|
June 30, 2008 |
|
|
53 |
|
June 30, 2009 |
|
|
21 |
|
|
|
|
|
|
|
$ |
422 |
|
|
|
|
|
There are no material legal proceedings pending to which the Company is party or to
which any of its properties are subject.
Note
11 401(k) Defined Contribution Plan
The Company has a defined contribution retirement savings plan (Retirement Plan) covering
substantially all domestic employees who meet certain eligibility requirements as to age and
length of service. The Retirement Plan incorporates the salary deferral provision of Section
401(k) of the Internal Revenue Code and employees may defer compensation up to the annual
maximum limit prescribed by the Internal Revenue Code. The Company matches half of
participant contributions up to 6% of their annual compensation. The Companys contributions
to the Retirement Plan are summarized in the following table:
Contributions to 401(k) Retirement Plan
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2004 |
Contributions to 401(k) |
|
$ |
101 |
|
|
$ |
94 |
|
|
$ |
90 |
|
F-27
CRAFTMADE
INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
12 Major Supplier
The Company currently purchases a substantial amount of ceiling fans and other products of
its Craftmade segment from Fanthing Electrical Corp. (Fanthing), a Taiwanese company. The
following table summarizes the Companys purchases from Fanthing:
Summary of Purchases from Fanthing
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
As % of |
|
As % of |
|
|
Craftmade |
|
Total |
Fiscal Year Ended |
|
Purchases |
|
Purchases |
June 30, 2006 |
|
|
50 |
% |
|
|
23 |
% |
June 30, 2005 |
|
|
60 |
% |
|
|
29 |
% |
June 30, 2004 |
|
|
67 |
% |
|
|
21 |
% |
The Company does not have a long-term contract with Fanthing committing them to supply
products. Most of the Companys products are imported from suppliers under short-term
purchase orders. Therefore, Fanthing may not be able to provide the products the Company
needs in the quantities requested. Because the Company does not control the actual
production of the products that it sells, it may be subject to delays caused by interruption
in production based on conditions outside of its control. There is no guarantee that the
Company will be able to obtain alternative sources of supply on a timely basis, if at all,
or at acceptable costs.
Note
13 Segment Information
The Company operates in two reportable segments, Craftmade and TSI. The accounting policies
of the segments are the same as those described in Note 2 Summary of Significant
Accounting Policies. The Company evaluates the performance of its segments and allocates
resources to them based on their income from operations and cash flows.
The Company is organized on a combination of product type and customer base. The Craftmade
segment primarily derives its revenue from home furnishings including ceiling fans, light
kits, bathstrip lighting, lamps, light bulbs, door chimes, ventilation systems and other
lighting accessories offered primarily through lighting showrooms, certain major retail
chains and catalog houses. The TSI segment derives its revenue from outdoor lighting,
portable lamps, indoor lighting and fan accessories marketed solely to mass merchandisers.
Net sales are attributed to geographic areas based on the location of the customer to which
products are shipped. Substantially all of the Companys net sales were to customers in
North America, principally the United States, during the three fiscal years ended June 30,
2006. In addition, substantially all of the Companys assets were attributable to its
operations in the United States as of June 30, 2006 and 2005.
F-28
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about the reportable segments:
Summary of Reportable Segments
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craftmade |
|
TSI |
|
Total |
Fiscal year ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
62,902 |
|
|
$ |
55,152 |
|
|
$ |
118,054 |
|
Gross profit |
|
|
22,541 |
|
|
|
12,928 |
|
|
|
35,469 |
|
Income from operations |
|
|
8,517 |
|
|
|
6,463 |
|
|
|
14,980 |
|
Interest expense, net |
|
|
1,104 |
|
|
|
80 |
|
|
|
1,184 |
|
Minority interest |
|
|
|
|
|
|
3,430 |
|
|
|
3,430 |
|
Provision for income taxes |
|
|
2,501 |
|
|
|
765 |
|
|
|
3,266 |
|
Depreciation and amortization |
|
|
575 |
|
|
|
19 |
|
|
|
594 |
|
Net income |
|
|
4,877 |
|
|
|
2,223 |
|
|
|
7,100 |
|
Total assets |
|
|
52,833 |
|
|
|
12,228 |
|
|
|
65,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended June 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
55,663 |
|
|
$ |
63,143 |
|
|
$ |
118,806 |
|
Gross profit |
|
|
20,311 |
|
|
|
15,135 |
|
|
|
35,446 |
|
Income from operations |
|
|
6,402 |
|
|
|
7,960 |
|
|
|
14,362 |
|
Interest expense, net |
|
|
973 |
|
|
|
108 |
|
|
|
1,081 |
|
Minority interest |
|
|
|
|
|
|
3,775 |
|
|
|
3,775 |
|
Provision for income taxes |
|
|
1,895 |
|
|
|
1,184 |
|
|
|
3,079 |
|
Depreciation and amortization |
|
|
537 |
|
|
|
44 |
|
|
|
581 |
|
Net income |
|
|
3,534 |
|
|
|
2,893 |
|
|
|
6,427 |
|
Total assets |
|
|
50,835 |
|
|
|
19,980 |
|
|
|
70,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended June 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
53,526 |
|
|
$ |
67,712 |
|
|
$ |
121,238 |
|
Gross profit |
|
|
21,025 |
|
|
|
14,885 |
|
|
|
35,910 |
|
Income from operations |
|
|
9,112 |
|
|
|
7,570 |
|
|
|
16,682 |
|
Interest expense, net |
|
|
708 |
|
|
|
69 |
|
|
|
777 |
|
Minority interest |
|
|
|
|
|
|
3,719 |
|
|
|
3,719 |
|
Provision for income taxes |
|
|
3,019 |
|
|
|
1,521 |
|
|
|
4,540 |
|
Depreciation |
|
|
554 |
|
|
|
94 |
|
|
|
648 |
|
Net income |
|
|
5,385 |
|
|
|
2,261 |
|
|
|
7,646 |
|
Total assets |
|
|
29,163 |
|
|
|
26,091 |
|
|
|
55,254 |
|
F-29
\
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 Quarterly Data (Unaudited)
The Companys product sales, particularly ceiling fans, are somewhat seasonal with sales in
the warmer first and fourth quarters being historically higher than in the two other fiscal
quarters.
The following table contains information derived from unaudited financial statements of the
Company. In the opinion of the Companys management, the information includes all adjustments
necessary for fair presentation of the results. The results of a particular quarter are not
necessarily indicative of the results that might be achieved for a full fiscal year.
Quarterly Data (Unaudited)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2006 |
|
Fiscal Year Ended June 30, 2005 |
|
|
|
|
|
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
|
|
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
Total |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Total |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
Net sales |
|
$ |
118,054 |
|
|
$ |
31,248 |
|
|
$ |
27,154 |
|
|
$ |
28,628 |
|
|
$ |
31,024 |
|
|
$ |
118,806 |
|
|
$ |
32,906 |
|
|
$ |
27,566 |
|
|
$ |
28,844 |
|
|
$ |
29,490 |
|
Gross profit |
|
|
35,469 |
|
|
|
9,567 |
|
|
|
8,568 |
|
|
|
8,588 |
|
|
|
8,746 |
|
|
|
35,446 |
|
|
|
10,221 |
|
|
|
7,893 |
|
|
|
8,812 |
|
|
|
8,520 |
|
Income from operations |
|
|
14,980 |
|
|
|
4,232 |
|
|
|
3,371 |
|
|
|
3,687 |
|
|
|
3,690 |
|
|
|
14,362 |
|
|
|
4,380 |
|
|
|
2,843 |
|
|
|
4,175 |
|
|
|
2,964 |
|
Net income |
|
|
7,100 |
|
|
|
1,923 |
|
|
|
1,748 |
|
|
|
1,697 |
|
|
|
1,732 |
|
|
|
6,427 |
|
|
|
2,064 |
|
|
|
1,093 |
|
|
|
1,872 |
|
|
|
1,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
1.37 |
|
|
$ |
0.37 |
|
|
$ |
0.34 |
|
|
$ |
0.33 |
|
|
$ |
0.33 |
|
|
$ |
1.26 |
|
|
$ |
0.40 |
|
|
$ |
0.22 |
|
|
$ |
0.37 |
|
|
$ |
0.27 |
|
Diluted EPS |
|
|
1.36 |
|
|
|
0.37 |
|
|
|
0.34 |
|
|
|
0.33 |
|
|
|
0.33 |
|
|
|
1.26 |
|
|
|
0.40 |
|
|
|
0.22 |
|
|
|
0.37 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares outstanding |
|
|
5,201 |
|
|
|
5,203 |
|
|
|
5,201 |
|
|
|
5,200 |
|
|
|
5,200 |
|
|
|
5,095 |
|
|
|
5,200 |
|
|
|
5,062 |
|
|
|
5,034 |
|
|
|
5,084 |
|
Diluted shares outstanding |
|
|
5,211 |
|
|
|
5,211 |
|
|
|
5,211 |
|
|
|
5,210 |
|
|
|
5,210 |
|
|
|
5,115 |
|
|
|
5,206 |
|
|
|
5,074 |
|
|
|
5,057 |
|
|
|
5,124 |
|
F-30
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
Schedule II Valuation and Qualifying Accounts
Summary of Allowance for Doubtful Accounts and Inventory Obsolescence
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
Balance at |
|
Charged |
|
Charged |
|
|
|
|
|
Balance |
|
|
beginning |
|
to costs |
|
to other |
|
|
|
|
|
at end of |
Description |
|
of period |
|
and expense |
|
accounts |
|
Deductions |
|
period |
Allowance for doubtful accounts as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
$ |
300 |
|
|
$ |
80 |
|
|
$ |
|
|
|
$ |
(87 |
) (a) |
|
$ |
293 |
|
June 30, 2005 |
|
|
150 |
|
|
|
223 |
|
|
|
116 |
|
|
|
(189 |
) (a) |
|
|
300 |
|
June 30, 2004 |
|
|
150 |
|
|
|
69 |
|
|
|
|
|
|
|
(69 |
) (a) |
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for inventory obsolescence as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
$ |
717 |
|
|
$ |
484 |
|
|
$ |
|
|
|
$ |
(267 |
) (b) |
|
$ |
934 |
|
June 30, 2005 |
|
|
1,171 |
|
|
|
481 |
|
|
|
|
|
|
|
(935 |
) (b) |
|
|
717 |
|
June 30, 2004 |
|
|
1,641 |
|
|
|
1,070 |
|
|
|
|
|
|
|
(1,548 |
) (b) |
|
|
1,171 |
|
|
|
|
(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-31
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
2.1
|
|
Agreement and Plan of Merger by and among Craftmade International, Inc., Bill Teiber Co.,
Inc., Teiber Lighting Products, Inc., Todd Teiber and Edward Oberstein dated March 1, 2005,
previously filed as Exhibit 10.1 to Form 8-K dated March 1, 2005 (File No. 000-26667), and
incorporated by reference herein. |
|
|
|
2.2
|
|
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 Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and
incorporated by reference herein. |
|
|
|
3.1
|
|
Certificate of Incorporation of the Company, filed as Exhibit 3(a)(2) to the Companys Post
Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW), and incorporated by reference
herein. |
|
|
|
3.2
|
|
Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24,
1992, and filed as Exhibit 4.2 to the Companys Form S-8 (File No. 333-44337), and
incorporated by reference herein. |
|
|
|
3.3
|
|
Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the Companys Post
Effective Amendment No. 1 to Form S-8 (File No. 33-33594-FW), and incorporated by reference
herein. |
|
|
|
4.3
|
|
Specimen Common Stock Certificate, filed as Exhibit 4.4 to the Companys registration
statement on Form S-3 (File No. 333-70823), and incorporated by reference herein. |
|
|
|
4.4
|
|
Rights Agreement, dated as of June 23, 1999, between Craftmade International, Inc. and Harris
Trust and Savings Bank, as Rights Agent, previously filed as an exhibit to Form 8-K dated July
9, 1999 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
10.1
|
|
Assignment of Rents and Leases dated December 21, 1995, between Craftmade
International, Inc. and Allianz Life Insurance Company of North America (including exhibits),
previously filed as an exhibit in Form 10Q for the quarter ended December 31, 1995, and herein
incorporated by reference. |
|
|
|
10.2
|
|
Deed of Trust, Mortgage and Security Agreement made by Craftmade International, Inc., dated
December 21, 1995, to Patrick M. Arnold, as trustee for the benefit of Allianz Life Insurance
Company of North America (including exhibits), previously filed as an exhibit in Form 10Q for
the quarter ended December 31, 1995, and herein incorporated by reference. |
|
|
|
10.3
|
|
Craftmade International, Inc. 1999 Stock Option Plan, filed as Exhibit A to the
Companys Proxy Statement on Schedule 14A filed October 4, 2000 (File No. 000-26667) and
herein incorporated by reference. |
|
|
|
10.4
|
|
Craftmade International, Inc. 2000 Non-Employee Director Stock Plan, filed as Exhibit B to
the Companys Proxy Statement on Schedule 14A filed October 4, 2000 (File No. 000-26667) and
herein incorporated by reference. |
|
|
|
10.5
|
|
Modification, Renewal and Extension Agreement dated October 31, 2005 by and between
Craftmade International, Inc. and The Frost National Bank, filed as Exhibit 10.1 to the
Companys Form 10-Q/A dated November 9, 2005 (File No. 000-26667), and incorporated by
reference herein. |
|
|
|
10.6
|
|
Amended and Restated Loan Agreement dated October 31, 2005 by and between Craftmade
International, Inc. and The Frost National Bank, filed as Exhibit 10.2 to the Companys Form
10-Q/A dated November 9, 2005 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
10.7
|
|
Arbitration and Notice of Final Agreement dated October 31, 2005 by and between Craftmade
International, Inc. and The Frost National Bank, filed as Exhibit 10.3 to the Companys Form
10-Q/A dated November 9, 2005 (File No. 000-26667), and incorporated by reference herein. |
|
|
|
21.0*
|
|
List of the subsidiaries of Craftmade International, Inc., a Delaware corporation, as of June 30, 2006. |
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
23.1*
|
|
Consent of BDO Seidman, LLP. |
|
|
|
23.2*
|
|
Consent of PricewaterhouseCoopers, LLP. |
|
|
|
31.1*
|
|
Certification of James R. Ridings, Chief Executive Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certification of J. Marcus Scrudder, Chief Financial Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1*
|
|
Certification of James R. Ridings, Chairman of the Board, President and Chief Executive
Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2*
|
|
Certification of J. Marcus Scrudder, Chief Financial Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
* |
Each document marked with an asterisk is filed herewith. |