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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996 Commission file number 1-10471
CRAFTMADE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2057054
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
650 S. ROYAL LANE, SUITE 100 75019
COPPELL, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(214) 393-3800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of each exchange
COMMON STOCK, $.01 PAR VALUE on which registered
NASDAQ NATIONAL MARKET
SYSTEM
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, and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
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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 registrant's 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. X
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The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of July 31, 1996, was $20,417,652.
The number of shares outstanding of the registrant's $.01 Par Value
Common Stock as of July 31, 1996, was 3,202,769.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement pertaining to the registrant's
1996 annual meeting of shareholders are incorporated by reference into Part III
of this report.
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INDEX
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders . . 7
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters . . . . . . . . . . . . . . . . . . . 8
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 10
Item 8. Financial Statements . . . . . . . . . . . . . . . . . . 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . 15
PART III
Item 10. Directors and Executive Officers of the Registrant . . . 16
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . 16
Item 13. Certain Relationships and Related Transactions . . . . . 16
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement
Schedules and Reports on Form 8-K . . . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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PART 1
Item 1. Business
THE COMPANY
Craftmade International, Inc. (the "Company") was incorporated under the laws
of the State of Texas on July 16, 1985 under the name of Mastercraft
International, Inc. for the purpose of distributing ceiling fans, furniture,
hardware and plumbing products. In January 1986, the Company limited its
operations to the marketing and distribution of ceiling fans and related
products and accessories. An arrangement with Fanthing Electrical Corp.,
("Fanthing"), Taichung, Taiwan was completed in August 1986 for the manufacture
of ceiling fans designed to the Company's specifications. The Company's
ceiling fan product line consists of 20 series and 127 basic models of premium
priced to lower priced ceiling fans, and represents approximately 65% of the
Company's current product sales. The Company also markets 100 light kit models
in various colors for attachment and use with the Company's ceiling fans or
other ceiling fans, as well as parts and accessories for its ceiling fans and
light kits. The Company purchases most of its light kits from Sunlit
Industries ("Sunlit"), Taipei, Taiwan. The combination of design and
functional features which characterize Craftmade ceiling fans have made them,
in management's judgement, one of the most reliable, durable, energy efficient
and cost effective ceiling fans in the marketplace. The Company's national
sales organization, which consists of 32 independent sales representative
groups employing approximately 60 sales representatives, markets the Company's
products to in excess of 1,400 lighting showrooms and electrical wholesalers
which sell primarily to the new home construction, remodeling and replacement
markets. These markets are comprised principally of private residences and, to
a lesser extent, offices, restaurants and certain public facilities.
On July 26, 1990, the Company formed Durocraft International, Inc.
("Durocraft") and completed an agreement and plan of merger with DMI Products,
Inc. ("DMI"). Durocraft Design Manufacturing, a division of Durocraft, is a
lamp manufacturer whose customer base includes major specialty retail chains.
The merger has enabled the Company to expand its market share in the lighting
industry. A division of Durocraft, Global Electronics, is a wholesaler of
computer cable and accessories.
On December 27, 1991, the Company changed its state of incorporation from Texas
to Delaware, at which time all of the Company's outstanding common stock was
exchanged, share for share, for $.01 par value common stock.
On September 30, 1992, the Company formed C/D/R Incorporated located in
Wilmington, Delaware for the purpose of holding all of the rights to the
Company's trademarks. Management believes that these intangible assets have
value and the Company will defend them as necessary.
BACKGROUND
Prior to the advent of air conditioning, ceiling fans were used in homes and
other facilities to make hot weather tolerable by reducing air stratification.
Developments in air conditioning technology and the pervasive use of central
air conditioning and individual air conditioning units limited the market for
ceiling fans until the mid 1970's, when high energy costs led to the
rediscovery of ceiling fans primarily due to their potential for energy
conservation. Additional benefits of utilizing ceiling fans during winter and
less temperate periods to circulate warm air concentrated near ceilings down to
floor level were also recognized at this time.
The Company estimates that annual unit sales of ceiling fans in the United
States grew
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substantially in the 1970's and through 1983, and then declined and have
stabilized since that time. Management believes that the principal factors
underlying growth of unit sales between 1976 and 1983 were increased
penetration of the residential household market, particularly in the northern
and western sections of the United States (areas which historically have had a
disproportionately low percentage of ceiling fan ownership), a continued shift
to lower and medium priced ceiling fans, an increase in multiple fan ownership
and replacement purchases. Management attributes the moderation of unit sales
since 1983 to the initial saturation in the northern and western sections of
the United States following limited usage prior to that time. The Company does
not believe that industry unit sales of ceiling fans in the United States
market will fluctuate substantially in the foreseeable future. The Company
will attempt to expand future sales of its ceiling fans by increasing its
market share.
PRODUCTS
All of the Company's ceiling fans are manufactured by Fanthing, and most of its
light kits are purchased from Sunlit. Fanthing manufactures the ceiling fans
based on specifications provided by the Company. The finished products are
packaged and labelled by the manufacturer under the Company's trade name,
Craftmade (R). Light kits used in conjunction with ceiling fans are similarly
produced and packaged.
CEILING FANS -- The Company's ceiling fan product line consists of 20 series
and 127 basic models of ceiling fans for sales to the new construction,
remodeling and replacement markets. Series are classified on the basis of
cost, air movement and appearance. Craftmade fans are manufactured and
assembled in a variety of colors, styles and finishes and can be used either in
conjunction with or independent of Craftmade 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 Presidential
II, Crescent and High-Tech series to various low-end builder series. Suggested
retail prices for the various Craftmade fans ranged at June 30, 1996 from
$70.00 (builder series) to $780.00 (Cameo Series), which the Company believes
are favorably priced relative to other mid-level and premium ceiling fans
distributed by Hunter and Casablanca, yet represent comparable quality and
performance characteristics.
The Company's ceiling fans come in five motor sizes, five blade sizes and 37
different decorative finishes. The range of styles and colors give consumers
the ability to select ceiling fans for any style of house, interior decoration
or living and working area, including outdoor patios. All Craftmade fans
include a dual capacitor system to control motor starting and running; a
16-pole motor for greater efficiency and smoother performance; aluminum rotors
die cast for cool running; two sealed heavy duty bearings which are permanently
lubricated; balanced blades and blade arms to minimize vibration; blade arm
gaskets for quieter performance; reversible switching for summer and winter
energy saving; shipping blocks to maintain alignment in transit; and
three-speed switches for high, medium, low and off. In management's judgement,
although not specifically confirmed by any independent testing service, these
features enable the Company's ceiling fans to perform efficiently, consistently
and for extended periods. Management also believes that, in addition to these
design features, the quality control program adhered to by Fanthing in the
course of manufacturing contributes significantly to the quality and durability
of the Craftmade fan. All Craftmade fans carry a limited warranty against
defects in workmanship and materials covering the entire ceiling fan for one
year and also provides a 25 year warranty with respect to the motor contained
in all fans except the Presidential I, Presidential II, Cameo, Crescent, Quest,
Wellington, Phoenix, CXL, Sergio and High-Tech Series, which carry a limited
lifetime warranty. In addition, while the Company's agreement with Fanthing
does not contain provisions relating to adjustments or returns as a result of
product defect, Fanthing has previously extended the Company full credit for
any product returns during the period of their working relationship.
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LIGHT KITS -- The Company markets 100 models of light kits in various colors
which may be utilized with the Company's ceiling fans or other ceiling fans.
These kits, which consist of the glass shades and fitters, presently represent
approximately 15% of the Company's product sales. As of June 30, 1996,
suggested retail prices for the Company's light kits ranged from $16.50 to
$250.00. Since the demand for the Company's Elegance Collection, which
includes lead crystal and alabaster designer shades, has increased, the Company
will continue its efforts to expand these premium lines.
LAMPS -- The Company assembles and markets a variety of lamp styles for sale to
certain major retail chains and catalog houses to be sold under private brand
labels. In addition, the Company markets lamps under its own proprietary trade
names. The lamps are assembled at the Company's facilities in Coppell, Texas
and consist of wood, solid brass, zinc coated, crystal, ceramic and porcelain
table, floor and desk lamps as well as hanging lantern kits. At the present
time, all of the Company's lamps are sold at retail prices ranging from $58 to
$274. Sales of the Company's lamps account for approximately 13% of the
Company's product sales.
ACCESSORIES AND CABLE COMPONENTS -- The Company also markets a variety of
designer and standard wall controls to regulate the speed and intensity of
ceiling fans and lighting fixtures and universal downrods for use with ceiling
fans. In addition, following the acquisition of DMI Products, Inc. in July
1990, the Company also distributes various cable components, including
connectors, switches and compatibles acquired from Far East manufacturers for
use with computers and telephone board circuitry. Sales of such accessories
and cable components presently account for approximately 7% of the Company's
product sales.
MANUFACTURING
The Company's ceiling fans and most of its light kits and certain accessories
are produced by Fanthing and Sunlit. The Company has had a working agreement
with Fanthing since August 1986 to provide the Company with all of its ceiling
fans and certain fan accessories. The Company selected Fanthing to manufacture
the Craftmade fan based on its proven capability to produce and ship a wide
variety of ceiling fans on a cost effective basis while at the same time
maintaining excellent quality control in the manufacturing process. According
to information made available to the Company, Fanthing was organized in 1981
and manufactures ceiling fans from a manufacturing facility consisting of in
excess of 21,000 square feet in Taichung, Taiwan. The Company believes that a
substantial part of Fanthing's revenues are derived from sales of ceiling fans
to the Company. On December 7, 1989, the Company and Fanthing entered into a
formal written agreement which is terminable on 180 days prior notice. The
written agreement does not obligate Fanthing to produce and sell products to
the Company in any specified quantity, nor does it obligate Fanthing to sell
products to the Company at a fixed price. Fanthing is permitted under the
arrangement to manufacture ceiling fans for other distribution provided such
ceiling fans are not a replication of Craftmade's series or models. Fanthing
also manufactures certain ceiling fan accessories, such as down rods, which are
sold by the Company independently of its ceiling fans.
Fanthing has provided the Company with a $1,000,000 credit facility, pursuant
to which Fanthing will manufacture and ship ceiling fans prior to receipt of
payment from the Company. Accordingly, payment can be deferred until delivery
of such products. At present levels, such credit facility is equivalent to
approximately one month's supply of ceiling fans and represents a supplier
commitment which, in the opinion of the Company, is unusual for the industry.
Fanthing is not required to provide this credit facility under its agreement
with the Company, and Fanthing may discontinue this arrangement at any time.
The Company places orders with Fanthing in anticipation of normally recurring
orders. In the ordinary course of business, orders are filled within 60 days
which includes approximately 20 days for transport. All orders are in U.S.
dollars. In the event of any fluctuation in exchange rates exceeding
approximately 5%, any future orders
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placed by the Company may be adjusted accordingly. Ceiling fans are shipped in
container-size lots, generally consisting of 1,600 fan units. Delivery is made
in Dallas, Texas upon presentment of documents by the Company's designated
freight forwarder following payment for such containers at Fanthing's bank in
Taiwan. While the Company believes the present arrangement for purchases and
delivery has been generally satisfactory, the demand for Craftmade fans has
periodically exceeded the Company's delivery capabilities.
Under a stock purchase agreement between the Company and Fancy Industrial, Inc.
("Fancy"), a Texas corporation and wholly-owned subsidiary of Fanthing, the
Company, at its option, may repurchase 101,196 shares owned by Fancy
Industrial, Inc. for an aggregate purchase price of $137,774. The Company has
no intention of reacquiring any shares from Fancy at this time. The Company
believes that its relationship with Fanthing and its ability to supply quality
ceiling fans at competitive prices have been critical to the success of the
Company. The Company believes its relationship with Fanthing to be excellent
and foresees no reason, based on its association to date, for such relationship
to deteriorate. If for any reason Fanthing were to discontinue its
relationship with the Company in the future or should it be unable to continue
to supply sufficient amounts of Craftmade products, the Company would be
required to seek alternative sources of supply. There can be no assurance that
any such alternative source of supply will produce products of comparable
quality to those produced by Fanthing, or that any such source will sell
products to the Company at prices and on terms as favorable as those presently
applicable to purchases made by the Company from Fanthing.
The Company purchases most of its light kits from Sunlit which is located in
Taipei, Taiwan. According to information made available to the Company, Sunlit
was organized in January 1989 and occupies a manufacturing facility consisting
of approximately 10,000 square feet. The Company believes that substantially
all of Sunlit's revenues are derived from the sale of lighting kits to the
Company. Light kit orders are placed independently of ceiling fan orders, but
are also received in container-size lots generally consisting of up to 4,500
light kit units under payment and delivery arrangements similar to those for
ceiling fans. The Company offers a variety of light kits in various finishes
and colors, as well as a variety of fixtures designed for ceiling fans. The
Company also offers a variety of glass selections for the various light
fixtures, including blown glass, beveled glass and crystal. Fixtures and glass
are shipped from Sunlit in the light kit containers. The Company's wall
controls, timers and switches as well as certain of its ceiling fan blades,
representing approximately 1% of the Company's product sales, are manufactured
by companies based in the United States. The Company offers a variety of
custom blade sets in various sizes and finishes, including unfinished oak, ash
and other wood grains and in clear, mirror, gold mirror, black, smoke and
antique white acrylic. The finished products are packaged and labeled under
the Company's Craftmade brand name.
The Company assembles its lamps at its Coppell facility which includes the
placement of the base, cap and shade together with the necessary wiring.
Substantially all of the components are manufactured by domestic and foreign
manufacturers located in Taiwan, China and Germany; however, the Company does
undertake limited manufacturing of certain shade components. The Company
purchases its components on a non-exclusive basis from such suppliers on either
open account or through letters of credit, and no individual manufacturer
accounts for in excess of 3% of such components.
DISTRIBUTION
The Company's products are marketed through in excess of 1,400 lighting
showrooms and electrical wholesalers specializing in sales to the new home
construction, remodelling and replacement markets. The Company's ceiling fans,
light kits and accessory parts are distributed through 32 independent sales
representative groups on a national basis (except for Alaska and
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Hawaii). Each sales representative group is selected to represent the Company
in a specific market area. The independent sales representative groups
comprise a sales force for the Company's products of approximately 60 sales
representatives. Sales representatives represent the Company exclusively in
the sale of ceiling fans. Sales representatives are paid commissions on such
sales. During the fiscal year ended June 30, 1996, no single lighting showroom
or electrical wholesaler accounted for more than 2% of the Company's sales.
Sales representatives are carefully selected and continually evaluated in order
to promote high level representation of the Company's products. Company
personnel 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 the Company's products.
Additional training is provided at least annually, especially for new product
series, at semi-annual trade shows held in Dallas, Texas and elsewhere.
Management believes it has assembled a highly motivated and effective sales
representative organization which has demonstrated a strong commitment to the
Company and its products. Management further believes that the strength of its
sales representative organization is primarily attributable to the quality and
competitive pricing of the Company's products as well as the ongoing
administrative and marketing support that the Company provides to its sales
representatives.
As of June 30, 1996, of the Company's lamps sold to major retail chains and
catalog houses to be distributed under private brand labels, approximately 89%
were sold to Bombay Company. The balance of these lamp sales are made to
various catalog houses and other retail chains including Ethan Allen, CBK Ltd,
Inc., the Horchow Mail Order Catalog and Dr. Livingston. The Company also
markets lamps under proprietary labels through lighting showrooms, furniture
stores and mass merchandising and department stores.
The Company acts as a distributor for various overseas manufacturers of a range
of cable components which account for approximately 3% of the Company's total
product sales.
MARKETING
The Company relies primarily on the reputation of Craftmade ceiling fans and
light kits for high quality and competitive prices and the efforts of its sales
representative organization in order to promote the sales of the Company's
products. The principal market for the Company's products is the new home
construction, remodeling and replacement markets. The Company utilizes
advertising in home lighting magazines, particularly in special editions
devoted to ceiling fans and lighting fixtures, and broadly distributes its
product catalog. The Company also promotes its ceiling fans and light kits at
semi-annual trade shows in Dallas (January and July), and the Company maintains
a showroom at the Dallas Trade Mart. The Company provides the same 25- year
limited warranty on the fan motor for each series of its ceiling fans, and
includes a one year limited warranty against defects in workmanship and
materials to cover the entire ceiling fan. The Company also provides a limited
lifetime warranty on the Presidential series, High-Tech series, Sergio, Cameo,
Quest, Wellington, Phoenix, CXL and Crescent series ceiling fans. The Company
believes these warranties, which are limited to its premium fan series, are
highly attractive to dealers and consumers alike.
PRODUCT EXPANSION
The Company's proposed expansion of its light kit product line will include the
development of new lighting fixture product lines to be marketed under the
Craftmade name, including under cabinet lighting, bathroom and dressing room
lighting, low voltage outside lighting and additional parts and accessories
complementing its various product lines. The Company believes that such
proposed new product lines will complement its light kit product line and that
such product lines
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can be marketed through the same sales representatives, showrooms and
electrical wholesalers which presently distribute the Company's ceiling fans
and light kit products. The Company has commenced discussions with Sunlit and
other manufacturers for the production of such new lighting fixture lines.
BACKLOG
As substantially all of the Company's ceiling fan and lighting kit products are
shipped to customers within 72 hours following receipt of orders, backlog is
not material to the Company's operations. The Company at present is accepting
orders for ceiling fans and light kits based on product availability. At
June 30, 1996, Durocraft had approximately $970,000 in open lamp orders which
are expected to be filled in the current fiscal year, compared with $2,300,000
in open lamp orders at June 30, 1995 which were filled during the year ended
June 30, 1996. As a result, Durocraft is required to carry significant amounts
of inventory to meet rapid delivery requirements of its customers.
COMPETITION
The ceiling fan and lighting fixture market is highly competitive at all levels
of operation. Some of the major companies in this industry include Casablanca,
Hunter, Emerson Electric and Fasco. A number of other well established
companies are also currently engaged in activities that compete directly with
those of the Company. Some of the Company's competitors are better
established, have longer operating histories, have substantially greater
financial resources or have greater name recognition than the Company; however,
the Company believes that the quality of its products, the strength of its
marketing organization and the growing recognition of the Craftmade name will
enable the Company to compete successfully in these highly competitive markets.
INDEPENDENT SAFETY TESTING
All of the ceiling fans, light kits and lamps sold by the Company in the United
States are tested by 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 which provides a technical description
of the product. UL provides the manufacturers with procedures to follow in
manufacturing the products. Electrical products which 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 a business which 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 $10,000,000 in product liability insurance, there can be no assurance
that claims will not arise in the future or that the coverage of such policy
will be sufficient to pay such claims.
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PATENTS AND TRADEMARKS
The Company does not believe that patent protection is significant to most of
the Company's products or current business operations. The Company holds a
patent on its Cathedral Ceiling Adapter and the license on the patents for the
Crescent Series fan and the Carousel light kit. The Company also holds certain
other license agreements which is in the ordinary course of its business.
Fanthing holds certain Taiwanese patents covering specific technology employed
in Craftmade ceiling fans, but the Company does not believe that such patents
are material to the production of Craftmade products. The Company's
trademarks, Craftmade (R) and Durocraft (R), are registered with the United
States Patent and Trademark office.
EMPLOYEES
As of July 31, 1996, the Company employed a total of 95 full time employees,
including three executive officers, fifteen managers, fifteen clerical and
administrative personnel, nine marketing, twenty-seven warehouse and twenty-six
production personnel. The Company's employees are not covered by any
collective bargaining agreements, and the Company believes its employee
relations are satisfactory.
Item 2. Properties
The Company's headquarters were relocated to Coppell, Texas during December
1995 to a facility consisting of approximately 378,000 square feet of general
office and warehouse space. The Company purchased this new facility at a price
of approximately $9,225,182. The Company has financed $9,200,000 of the
purchase price of this facility through a financial institution at an interest
rate of 8.125% for a term of twelve years. Approximately 80,000 square feet of
this facility has been leased to an unrelated party for a term of three years
at an annual rate of $240,000. The Company's management believes that this
facility will be sufficient for its purposes for the foreseeable future.
The Company also leases 1,656 square feet of permanent display facilities at
the Dallas Trade Mart. The lease will expire in April 1998 and provides for
monthly rental payments of approximately $2,993.
Item 3. Legal Proceedings
Due to the nature of the Company's business, it could be a party in legal or
administrative proceedings arising in the ordinary course of business.
Although occasional adverse settlements or resolutions may occur and negatively
impact earnings in the year of settlement, after consideration of the Company's
insurance coverage, it is the opinion of management that the ultimate
resolution would not have a materially adverse effect on the Company's
financial position or its results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Since the initial public offering of the Company's Common Stock at $3.50 per
share on April 16, 1990, the Common Stock has been traded on NASDAQ under the
symbol CRFT. On July 16, 1992, the Company was approved for inclusion in the
National Market System of NASDAQ. At that time, the Company voluntarily
delisted its common shares from the Boston Stock Exchange. Prior thereto, the
Company's shares traded on a limited basis on that exchange. Prior to April
16, 1990, there was no public market for the Common Stock.
The following table sets forth for the periods indicated the high and low
closing sales prices per share of Common Stock on the NASDAQ National Market
System, as reported by NASDAQ.
High Low
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Fiscal Year Ended June 30, 1995:
First Quarter 10 11/16 9
Second Quarter 10 7/8 9 1/8
Third Quarter 10 1/8 8 1/2
Fourth Quarter 8 3/8 7 1/4
Fiscal Year Ended June 30, 1996:
First Quarter 8 1/8 6 1/8
Second Quarter 8 3/8 6 1/4
Third Quarter 7 1/8 5 7/8
Fourth Quarter 8 1/4 6 5/8
Fiscal Year Ended June 30, 1997:
First Quarter (Through July 31, 1996) 7 1/2 6 1/4
On July 31, 1996, there were 130 holders of record of the Company's Common
Stock.
North American Transfer Company, 147 West Merrick Road, Freeport, New York
11520, is the Transfer Agent and Registrar for the Company's Common Stock.
On March 15, 1994, the Company's Board of Directors adopted a policy to pay
$0.01 per share dividend on a quarter to quarter basis within the discretion of
the Board out of the capital surplus or profits of the Company. The quarterly
dividends may not exceed 40% of the Company's net profit before taxes as
restricted by the Company's revolving line of credit. Pursuant to this policy,
the Board has declared and paid a quarterly dividend for each quarter since
March 31, 1994.
COMPANY COMMON STOCK PRICE PERFORMANCE GRAPH
The following graph provides an indicator of and compares the percentage change
of cumulative total shareholder return of the Company's Common Stock against
the cumulative total return of the Russell 2000 Index and the NASDAQ Composite
Index since the initial public
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offering of the Company's common stock on April 16, 1990. This graph assumes
$100 was invested on April 16, 1990 in the Company's common stock, the Russell
2000 Index and the NASDAQ Composite Index. Both the Russell 2000 Index and the
NASDAQ Composite Index exclude the Company.
PRICE PERFORMANCE CHART SHOWN HERE
The historical stock price performance of the Company's common stock shown on
the graph above is not necessarily indicative of future stock performance.
The Company has compared its stock price performance with that of the Russell
2000 Index as it does not believe it can reasonably identify a peer group and
no comparable published industry or line-of-business index is available. The
Russell 2000 Index consists of companies with market capitalization similar to
that of the Company; accordingly, the Company believes the Russell 2000 Index
is the best available performance comparison.
Item 6. Selected Financial Data
The selected financial data in the tables below are for the five fiscal years
ended June 30, 1996. The data should be read in conjunction with the
financial statements and notes, which are included elsewhere herein. The
amounts listed below are in thousands (except per share amounts).
For years ended
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June 30, June 30, June 30, June 30, June 30,
1992 1993 1994 1995 1996
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Selected Operating Results:
- --------------------------
Net sales $ 22,750 $ 27,479 $ 32,130 $ 34,353 $36,320
Gross profit 7,555 9,043 11,729 12,381 12,884
Income before income taxes 1,618 2,600 3,688 2,977 2,850
Net income 1,060 1,646 2,385 1,903 1,826
Net income per common share .31 .48 .69 .55 .56
Cash dividends declared
per common share $ - $ - $ .02 $ .04 $ .04
Weighted average common
shares outstanding 3,395 3,454 3,472 3,431 3,256
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June 30, June 30, June 30, June 30, June 30,
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
Summary Balance Sheet:
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Current assets $ 9,517 $ 11,513 $ 14,878 $ 16,720 $17,835
Current liabilities 5,472 5,535 6,444 8,065 8,799
Long-term debt 53 15 - - 8,519
Total assets 10,615 12,474 15,853 17,631 27,996
Retained earnings 1,799 3,445 5,761 7,528 9,224
Shareholders' equity 4,982 6,853 9,373 9,565 10,633
Book value per common share $ 1.48 $ 2.00 $ 2.71 $ 2.90 $ 3.31
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
With the exception of historical information, the matters discussed herein
contain forward-looking statements. There are certain important factors which
could cause results to differ materially than those anticipated by some of the
forward-looking statements. Some of the important factors which would cause
actual results to differ materially from those in the forward-looking
statements include, among other things, changes from anticipated levels of
sales, whether due to future national or regional economic and competitive
conditions, changes in relationships with customers including, but not limited
to, Durocraft's relationship with its major customer, customer acceptance of
existing and new products, pricing pressures due to excess capacity, raw
material cost increases, change of tax rates, change of interest rates,
unfavorable political developments in the Republic of Taiwan, the location of
the Company's principal vendor, declining condition in the home construction
industry, and other uncertainties, all of which are difficult to predict and
many of which are beyond the control of the Company.
Year Ended June 30, 1996 compared to June 30, 1995
Net sales increased to $36,320,034 for the year ended June 30, 1996 from
$34,352,775 for the year ended June 30, 1995, representing an increase of
$1,967,259 or 5.7%. This increase in sales was primarily attributable to a
9.6% increase in sales from the Company's fan division as a result of the
recovery of this division's market through the stabilization of new home
construction and the continued success of this division's marketing strategy of
selective expansion of its distribution base and new product introductions.
This increase in sales was partially offset by an 8.3% decrease in lamp sales
due to delays in raw materials delivery. The Company's management anticipates
resolving these delays during fiscal 1997. In addition, the Company's fan
division is experiencing strong customer order rates resulting from the
resurgence of new home construction. The Company's management anticipates
that, provided new home construction does not experience a downturn similar to
1995, this division's sales should achieve sales growth at its historical
levels. Sales to one of the lamp division's customers represented
approximately 89% of that division's fiscal 1996 net sales. Should this
customer experience weak sales, this may in turn adversely impact this
Customer's level of purchases from the lamp division; however, the Company's
management anticipates developing a broader customer base in the lamp division
to help minimize any negative impact this decline would have.
Gross profit increased to $12,884,051, or 35.5% of sales, for the year ended
June 30, 1996, as compared to $12,380,599, or 36.0% of sales, for the year
ended June 30, 1995. The Company experienced a decrease in gross profit
percentage primarily as a result of increased raw materials cost incurred in
the latter part of fiscal 1995 associated with the manufacture of its products
and the addition of a lower end line of fans to the product mix of the
Company's fan division towards
- 10 -
13
the end of fiscal 1995. The Company's management anticipates that gross
margins will begin to improve with the stabilization of raw materials costs
achieved during fiscal 1996 and with the recent introduction of additional
higher end products into the market.
Total selling, general and administrative expenses increased $335,318 to
$8,975,954, or 24.7% of sales, for the year ended June 30, 1996 from
$8,640,636, or 25.2% of sales, for the year ended June 30, 1995. This increase
was primarily attributable to an increase in commissions and certain other
costs directly correlated to the increase in sales and one- time charges in
excess of $200,000 related to the acquisition of and relocation to the
Company's new facility completed in December 1995. As a result of this
relocation, fiscal 1996 lease expense declined approximately $310,000 from
prior year levels. However, the decline in this component of selling, general
and administrative expenses was fully offset by increases in depreciation and
interest costs also attributable to the relocation to the new facility. In the
future, management anticipates selling, general and administrative expenses as
a percentage of sales to follow a more consistent trend.
Net interest expense increased $375,272 to $895,931 for the year ended June 30,
1996 from $520,659 for the year ended June 30, 1995. This increase was
primarily the result of $309,187 in interest incurred relating to the financing
of the Company's newly-acquired facility. The Company's management anticipates
that the increase in interest expense will be partially offset by the decrease
in operating lease expense. In addition, management believes the long-term
ownership of this facility should prove advantageous for the Company as future
lease arrangements for adequate facility space would have resulted in an
obligation in excess of the current annual debt requirement under the new
facility note payable and related depreciation and interest expense.
The provision for income taxes decreased to $1,024,466, or 36.0% of income
before income taxes, for the year ended June 30, 1996 from $1,073,551, or 36.1%
of income before income taxes, for the year ended June 30, 1995.
Net income decreased slightly to $1,825,567, or $.56 per share, for the year
ended June 30, 1996 from $1,903,117, or $.55 per share, for the year ended June
30, 1995. The decrease in net income was primarily the result of the decrease
in the Company's gross profit percentage, increases in selling, general and
administrative expenses and the increase in interest expense, partially offset
by the sales increase. Net income per common share improved slightly despite
the decrease in net income as a result of the Company's repurchase of 106,500
common shares during fiscal 1996 which effectively reduced weighted average
common shares outstanding at June 30, 1996.
Year Ended June 30, 1995 compared to June 30, 1994
Net sales increased to $34,352,775 for the year ended June 30, 1995 from
$32,130,223 for the year ended June 30, 1994, representing an increase of
$2,222,552, or 6.9%. This increase in sales was primarily attributable to a
6.5% increase in sales from the Company's fan division as a result of the
expansion of this division's customer base in excess of 10% and the continued
success of new product introductions, despite the significant weakness in new
home construction throughout the nation that affected the entire industry.
This increase was supported by a 17% increase in lamp sales, primarily
attributable to the addition of several new lamp styles to this division's
major customer.
Gross profit increased to $12,380,599, or 36.0% of sales, for the year ended
June 30, 1995, as compared to $11,728,649, or 36.5% of sales, for the year
ended June 30, 1994. The Company experienced a decrease in its gross profit
percentage primarily as a result of a 9% increase in costs of certain raw
materials associated with the manufacture of its products, partially offset by
a price increase to the Company's customers implemented during May 1995.
- 11 -
14
Total selling, general and administrative expenses increased $1,198,107 to
$8,640,636, or 25.2% of sales, for the year ended June 30, 1995 from
$7,442,529, or 23.2% of sales, for the year ended June 30, 1994. This increase
was primarily attributable to (i) an increase in commissions and certain other
costs directly correlated to the increase in sales and (ii) an increase in
costs associated with the growth in the Company's work force during the year
ended June 30, 1995.
Net interest expense increased $181,232 to $520,659 for the year ended June 30,
1995 from $339,427 for the year ended June 30, 1994. This increase was
primarily the result of increases in the bank's prime lending rate, coupled
with increases in indebtedness required to finance the Company's current growth
and its stock repurchase program.
The provision for income taxes decreased to $1,073,551, or 36.1% of income
before income taxes for the year ended June 30, 1995 from $1,303,320, or 35.3%
of income before income taxes, for the year ended June 30, 1994.
Net income decreased to $1,903,117, or $.55 per share, for the year ended June
30, 1995 from $2,385,026, or $.69 per share, for the year ended June 30, 1994.
This decrease was primarily the result of the decrease in the Company's gross
profit percentage and increases in selling, general and administrative
expenses.
Year Ended June 30, 1994 compared to June 30, 1993
Net sales increased to $32,130,223 for the year ended June 30, 1994 from
$27,479,068 for the year ended June 30, 1993, representing an increase of
$4,651,155, or 16.9%. This increase in sales was primarily attributable to a
24.5% increase in fan sales through the Company's continuing increase in market
share, the success of new product introduction and the rise in housing starts.
Improved fan sales were partially offset by an 11.1% decrease in lamp sales as
the division adjusted to the loss of a major customer in 1992.
Gross profit increased to $11,728,649, or 36.5% of sales, for the year ended
June 30, 1994, from $9,043,013, or 32.9% of sales, for the year ended June 30,
1993. This increase was primarily the result of a continuing growth in sales
of the Company's higher end product line as consumers began to focus on the
decorative as well as functional aspects of ceiling fans.
Total selling, general and administrative expenses increased $1,565,507 to
$7,442,529, or 23.2% of sales, for the year ended June 30, 1994 from
$5,877,022, or 21.4% of sales, for the year ended June 30, 1993. This increase
was attributable to (i) an increase in freight expense related to a change in
the Company's freight policy, (ii) an increase in commissions and certain other
costs directly correlated to sales and (iii) an increase in costs associated
with a 21% increase in the Company's work force.
Net interest expense decreased $595 to $339,427 for the year ended June 30,
1994 from $340,022 for the year ended June 30, 1993. This decrease was
primarily the result of reductions in the bank's prime lending rate throughout
the year, partially offset by the Company's higher borrowing base over the
prior year necessary to finance the Company's current growth.
The provision for income taxes increased to $1,303,320, or 35.3% of income
before income taxes, for the year ended June 30, 1994 from $954,105, or 36.7%
of income before income taxes, for the year ended June 30, 1993.
Net income increased to $2,385,026, or $.69 per share, for the year ended June
30, 1994 from $1,646,137, or $.48 per share, for the year ended June 30, 1993.
This increase was primarily the
- 12 -
15
result of the increase in sales and gross margins, partially offset by
increases in selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal year ended June 30, 1996 - The Company's cash increased $394,354, from
$268,703 at June 30, 1995 to $663,057 at June 30, 1996. The Company's
operating activities provided cash of $1,136,852 during fiscal 1996 compared to
$364,186 during fiscal 1995. The increase in cash provided by operating
activities is primarily attributable to net income and a fairly constant level
of inventory during 1996 compared to an approximate $1,400,000 increase during
1995. This increase was partially offset by increases in accounts receivable
of $821,448 relating to increased sales as a result of the stabilization of the
new home construction market.
Cash used by investing activities of $9,152,822 related to the purchase of the
Company's new facility in December 1995 and purchases of warehouse equipment,
computer equipment and general office furniture necessary to facilitate
relocation to this new facility.
Cash provided by financing activities of $8,410,324 was primarily from
$9,200,000 in financing obtained for the new facility, less principal payments
of $192,213, and $220,000 in additional borrowings from the Company's line of
credit, partially offset by the repurchase of 106,500 shares of the Company's
Common Stock at an aggregate cost of $699,955 and dividends paid totalling
$129,653.
On November 15, 1995, The Company's managment obtained an additional $2,000,000
on its line of credit during its renewal, increasing its line to $12,000,000.
On May 31, 1996, the Company's management renegotiated this line of credit with
another financial institution at a more favorable interest rate of LIBOR plus
1.50%. At June 30, 1996, pursuant to the continued compliance with certain
covenants and restrictions, the Company had an additional $4,300,000 available
on its existing line of credit. The Company's management believes that its
current line of credit, combined with cash flows from operations, is adequate
to fund the Company's current operating needs, annual payments under the note
payable related to the facility acquisition approximating $1,600,000,
anticipated treasury stock purchases and its projected growth over the next
twelve months.
Fanthing has provided the Company with a $1,000,000 credit facility, pursuant
to which Fanthing will manufacture and ship ceiling fans prior to receipt of
payment from the Company. Accordingly, payment can be deferred until delivery
of such products. At present levels, such credit facility is equivalent to
approximately one month's supply of ceiling fans and represents a supplier
commitment which, in the opinion of the Company, is unusual for the industry.
Fanthing is not required to provide this credit facility under its agreement
with the Company, and Fanthing may discontinue this arrangement at any time.
Pursuant to the Company's stock repurchase program, the Company to date has
purchased a total of 298,500 shares of the Company's Common Stock at an
agggregate cost of $2,457,273. Under the terms of this program, the Company,
at its option, may purchase an additional 1,500 shares of the Company's Common
Stock. On August 7, 1996, the Company's Board of Directors authorized the
Company's management to repurchase up to an additional 300,000 shares of the
Company's outstanding Common Stock.
In December 1995 the Company purchased a new 378,000 square foot facility
consisting of general office and warehouse space at an aggregate cost of
$9,225,182 and relocated its operation to this facility. Of this purchase
price, $9,200,000 was financed through a financial institution at an interest
rate of 8.125% for a term of twelve years. The Company has leased 80,000
square feet of
- 13 -
16
this facility to an unrelated party for a period of three years at a lease rate
of $20,000 per month. The Company's management believes that this facility
will be sufficient for its purposes for the foreseeable future.
Fiscal year ended June 30, 1995 - The Company's cash increased $152,392, from
$116,311 at June 30, 1994 to $268,703 at June 30, 1995. The Company's
operating activities provided cash of $364,186, primarily from net income and
decreases in accounts receivable of $452,062, offset by increases in inventory
of $1,437,940 and prepaid assets of $678,046.
The cash used by investing activities of $84,610 related to the purchase of
warehouse equipment and general office furniture.
Cash used by financing activities of $127,184 was primarily the result of the
repurchase of 192,000 of the Company's common stock at an aggregate cost of
$1,757,318, coupled with dividends paid totalling $136,141, but partially
offset by $1,755,000 in additional borrowings on the Company's line of credit.
Fiscal year ended June 30, 1994 - The Company's cash decreased $94,696, from
$211,007 at June 30, 1993 to $116,311 at June 30, 1994. The Company used
$559,427 in cash from operations. This use of cash was primarily due to
increases in inventory of $1,220,873 and accounts receivable of $1,979,647,
partially offset by net income and from certain expenses not requiring cash.
The cash used by investing activities of $283,093 related to the purchase of
warehouse equipment, the upgrading of the Company's computer system and the
addition of office space to accommodate the lamp division.
Cash provided by financing activities of $747,824 was primarily the result of
$825,000 in additional borrowings on the Company's line of credit, partially
offset by quarterly dividends of $68,921.
ACCOUNTING CHANGES
Impairment of Assets - FAS 121
In March 1995, the Financial Accounting Standards Board issued FAS 121 on
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This statement requires companies to investigate potential
impairments of long-lived assets, certain identifiable intangibles, and
associated goodwill on an exception basis, when there is evidence that events
or changes in circumstances have made recovery of an asset's carrying value
unlikely. An impairment loss will be 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. The amount of the impairment loss
will generally be measured as the difference between the net book value of the
assets and their estimated fair value. The Company is required to adopt this
statement by July 1, 1996; however, such adoption is not expected to have a
material impact on the Company's results of operations or financial condition.
Stock-Based Compensation - FAS 123
In October 1995, the Financial Accounting Standards Board issued FAS 123,
"Accounting for Stock-Based Compensation", which is effective for fiscal years
beginning after December 15, 1995. Effective July 1, 1996, the Company will
adopt FAS 123 which establishes financial accounting and reporting standards
for stock-based employee compensation plans. The pronouncement defines a fair
value based method of accounting for an employee stock option or similar equity
instrument
- 14 -
17
and encourages all entities to adopt that method of accounting for all of their
employee stock option compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting as prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25). Entities electing
to remain with the accounting in APB 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
defined in FAS 123 had been applied. The Company will continue to account for
stock-based employee compensation plans under the intrinsic method pursuant to
APB 25 and will make the disclosures in its footnotes as required by FAS 123.
INFLATION
Although the Company experienced an increase in its product costs during fiscal
year 1995 which resulted in lower margins, generally inflation has not had, and
the Company does not expect it to have, a material impact upon operating
results. However, there can be no assurance that the Company's business will
not be affected by inflation in the future.
Item 8. Financial Statements
The financial statements and supplementary data are included under Item
14(a)(1) and (2) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
- 15 -
18
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to the Company's directors and nominees for election
as directors of the Company is incorporated herein by reference from the
Company's Proxy Statement for its 1996 Annual Meeting of Shareholders,
specifically the discussion under the heading "Election of Directors." It is
currently anticipated that the Proxy Statement will be publicly available and
mailed to shareholders in September 1996.
Item 11. Executive Compensation
The discussion under "Remuneration of Directors and Officers and Certain
Transactions" in the Company's Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The discussion under "Voting and Principal Shareholders" in the Company's Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Not applicable.
- 16 -
19
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedules and
Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements - The financial statements listed in the
"Index to Consolidated Financial Statements" described at F-1.
2. Exhibits - Refer to (b) below.
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.
(b) Exhibits
10.1 - Earnest Money contract and Design/Build Agreement dated May 8,
1995, between MEPC Quorum Properties II, Inc. and Craftmade
International, Inc. (including exhibits), previously filed as
an exhibit in Form 10Q for the quarter ended December 31,
1995, and herein incorporated by reference.
10.2 - 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.
10.3 - 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.
10.4 - Second Amended and Restated Credit Agreement dated November
14, 1995, among Craftmade International, Inc., NationsBank of
Texas, N.A., as Agent and the Lenders defined therein
(including exhibits), previously filed as an exhibit in Form
10Q for the quarter ended December 31, 1995, and herein
incorporated by reference.
10.5 - Lease Agreement dated November 30, 1995, between Craftmade
International, Inc. and TSI Prime, Inc., previously filed as
an exhibit in Form 10Q for the quarter ended December 31,
1995, and herein incorporated by reference.
10.6 - Revolving credit facility with Texas Commerce Bank.
22 - Subsidiaries of the Registrant
27 - Financial Data Schedule
- 17 -
20
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 August 30, 1996.
Craftmade International, Inc.
By: /s/ James Ridings
---------------------------------------
James Ridings, Chairman of the Board,
President and Chief 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 Ridings Chairman of the Board, President, August 30, 1996
- ---------------------- Chief Executive Officer and
James Ridings Director (Principal Executive
Officer)
/s/ Clifford Crimmings Vice President of Sales and August 30, 1996
- ---------------------- Director
Clifford Crimmings
/s/ Ken Cancienne Chief Financial Officer, Principal August 30, 1996
- ---------------------- Accounting Officer and Director
Ken Cancienne
Director August 30, 1996
- ----------------------
Aaron Shenkman
Director August 30, 1996
- ----------------------
William Maloney
- 18 -
21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Financial Statements:
- --------------------
Report of Independent Accountants F-2
Consolidated Statements of Income F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Changes in Shareholders' Equity F-8
Notes to Consolidated Financial Statements F-9
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.
F-1
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Craftmade International, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing on page F-1 present fairly, in all material respects, the financial
position of Craftmade International, Inc. and its wholly-owned subsidiaries
(the "Company") at June 30, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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 audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Fort Worth, Texas
August 15, 1996
F-2
23
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended
--------------------------------------------
June 30, June 30, June 30,
1994 1995 1996
----------- ------------- -------------
Net sales $32,130,223 $34,352,775 $36,320,034
Cost of goods sold 20,401,574 21,972,176 23,435,983
----------- ----------- -----------
Gross profit 11,728,649 12,380,599 12,884,051
Selling, general and administrative
expenses 7,442,529 8,640,636 8,975,954
Depreciation and amortization 258,347 242,636 282,133
----------- ----------- -----------
Operating profit 4,027,773 3,497,327 3,625,964
Other income (expense):
Interest expense 339,427 520,659 895,931
Other, net - - (120,000)
----------- ----------- -----------
Income before income taxes 3,688,346 2,976,668 2,850,033
Provision for income taxes 1,303,320 1,073,551 1,024,466
----------- ----------- -----------
Net income $ 2,385,026 $ 1,903,117 $ 1,825,567
=========== =========== ===========
Net income per common share $.69 $.55 $.56
---- ---- ----
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
24
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, June 30,
1995 1996
----------- -----------
Current assets:
Cash $ 268,703 $ 663,057
Accounts receivable - trade, net of allowance
of $145,000 and $164,000, respectively 6,142,937 7,104,357
Other receivables 240,134 135,100
Inventory 8,605,483 8,680,625
Deferred income taxes 448,299 395,556
Prepaid expenses and other current assets 1,014,691 856,537
----------- -----------
Total current assets 16,720,247 17,835,232
----------- -----------
Property and equipment, at cost:
Land - 1,534,894
Building - 7,690,288
Office furniture and equipment 887,373 1,061,383
Leasehold improvements 77,386 54,970
----------- -----------
964,759 10,341,535
Less: accumulated depreciation (568,001) (627,943)
----------- -----------
Total property and equipment, net 396,758 9,713,592
Goodwill, net of accumulated amortization
of $286,924 and $342,567, respectively 282,857 227,214
Deferred income taxes 27,850 7,752
Other assets 206,656 211,818
----------- -----------
Total other assets 914,121 10,160,376
----------- -----------
$17,634,368 $27,995,608
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
25
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, June 30,
1995 1996
------------- ------------
Current liabilities:
Note payable, facility - current portion $ - $ 488,656
Revolving line of credit 7,480,000 7,700,000
Accounts and commissions payable 346,303 465,239
Income taxes payable 136,961 -
Accrued liabilities 101,987 144,774
----------- ------------
Total current liabilities 8,065,251 8,798,669
Other non-current liabilities:
Deferred Taxes 3,733 44,977
Note payable, facility - long term portion - 8,519,131
----------- ------------
Total liabilities 8,068,984 17,362,777
----------- ------------
Shareholders' equity:
Series A cumulative, convertible, callable preferred
stock, $1.00 par value, 2,000,000 shares authorized;
32,000 shares issued 32,000 32,000
Common stock, $.01 par value, 15,000,000 shares
authorized; 4,092,483 and 4,110,683 shares issued,
respectively 40,925 41,107
Additional paid-in capital 7,024,265 7,095,571
Retained earnings 7,528,338 9,224,252
----------- ------------
14,625,528 16,392,930
Less: treasury stock, 801,414 and 907,914 common
shares at cost, respectively,
and 32,000 preferred shares at cost (5,060,144) (5,760,099)
----------- ------------
9,565,384 10,632,831
Commitments and contingencies
(Notes 8 and 9)
----------- ------------
$17,634,368 $ 27,995,608
=========== =============
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
26
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
-----------------------------------------------
June 30, June 30, June 30,
1994 1995 1996
------------ ----------- -----------
Cash flows from operating activities:
Net income $ 2,385,026 $ 1,903,117 $ 1,825,567
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 258,347 242,636 282,133
Loss on sale of property and equipment - 3,732 -
Changes in assets and liabilities
providing (using) cash:
Accounts receivable (1,979,647) 452,062 (821,448)
Inventory (1,220,873) (1,437,940) (101,955)
Prepaid expenses and other assets (97,744) (678,046) (217,412)
Accounts and commissions payable (31,884) 40,069 118,936
Income taxes payable 216,188 36,214 (105,448)
Deferred income taxes (150,695) (122,804) 93,987
Other accrued liabilities 61,855 (74,854) 62,492
----------- ----------- -----------
Net cash provided by (used for) operating activities (559,427) 364,186 1,136,852
----------- ----------- -----------
Cash flows used for investing activities:
Additions to property and equipment ( 283,093) (84,610) (9,152,822)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable, facility - - 9,200,000
Principal payments for note payable, facility - - (192,213)
Net proceeds from revolving line of credit 825,000 1,755,000 220,000
Stock repurchase - (1,757,318) (699,955)
Cash dividends (68,921) (136,141) (129,653)
Principal payments under capital lease obligations (37,235) ( 14,625) (595)
Proceeds from exercise of employee stock options 28,980 25,900 12,740
----------- ----------- -----------
Net cash provided by (used for) financing activities 747,824 (127,184) 8,410,324
----------- ----------- -----------
Net increase (decrease) in cash (94,696) 152,392 394,354
Cash at beginning of year 211,007 116,311 268,703
----------- ----------- -----------
Cash at end of year $ 116,311 $ 268,703 $ 663,057
=========== =========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
27
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental disclosures of cash flow
information:
For the years ended
-----------------------------------------------
June 30, June 30, June 30,
1994 1995 1996
------------ ------------ -----------
Cash paid during the year for:
Interest $ 339,427 $ 520,659 $ 895,931
=========== =========== ===========
Income taxes $ 1,219,722 $ 1,142,509 $ 1,016,346
=========== =========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-7
28
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JUNE 30, 1996
SERIES A ADDITIONAL
VOTING PREFERRED PAID-IN RETAINED
COMMON STOCK STOCK CAPITAL EARNINGS
---------------------- ------- ---------- ----------
SHARES AMOUNT
--------- -------
BALANCE AS OF JUNE 30, 1993 4,014,083 $40,141 $32,000 $6,638,383 $3,445,257
EXERCISE OF EMPLOYEE
STOCK OPTIONS 41,400 414 - 203,105 -
CASH DIVIDENDS - - - - (68,921
NET INCOME FOR THE YEAR ENDED
JUNE 30, 1994 - - - - 2,385,026
--------- ------- ------- ---------- ----------
BALANCE AS OF JUNE 30, 1994 4,055,483 40,555 32,000 6,841,488 5,761,362
EXERCISE OF EMPLOYEE
STOCK OPTIONS 37,000 370 - 182,777 -
STOCK REPURCHASE - - - - -
CASH DIVIDENDS - - - - (136,141
NET INCOME FOR THE YEAR ENDED
JUNE 30, 1995 - - - - 1,903,117
--------- ------- ------- ---------- ----------
BALANCE AS OF JUNE 30, 1995 4,092,483 40,925 32,000 7,024,265 7,528,338
EXERCISE OF EMPLOYEE
STOCK OPTIONS 18,200 182 - 71,306 -
STOCK REPURCHASE - - - - -
CASH DIVIDENDS - - - - (129,653
NET INCOME FOR THE YEAR ENDED
JUNE 30, 1996 - - - - 1,825,567
--------- ------- ------- ---------- ----------
4,110,683 $41,107 $32,000 $7,095,571 $9,224,252
========= ======= ======= ========== ==========
TREASURY STOCK TOTAL
---------------------- -----------
SHARES AMOUNT
------- ----------
BALANCE AS OF JUNE 30, 1993 641,414 ($3,302,826) $ 6,852,955
EXERCISE OF EMPLOYEE
STOCK OPTIONS - - 203,519
CASH DIVIDENDS - - (68,921)
NET INCOME FOR THE YEAR ENDED
JUNE 30, 1994 - - 2,385,026
------- ---------- -----------
BALANCE AS OF JUNE 30, 1994 641,414 (3,302,826) 9,372,579
EXERCISE OF EMPLOYEE
STOCK OPTIONS - - 183,147
STOCK REPURCHASE 192,000 (1,757,318) (1,757,318)
CASH DIVIDENDS - - (136,141)
NET INCOME FOR THE YEAR ENDED
JUNE 30, 1995 -- - 1,903,117
------- ---------- -----------
BALANCE AS OF JUNE 30, 1995 833,414 (5,060,144) 9,565,384
EXERCISE OF EMPLOYEE
STOCK OPTIONS - - 71,488
STOCK REPURCHASE 106,500 (699,955) (699,955)
CASH DIVIDENDS - - (129,653)
NET INCOME FOR THE YEAR ENDED
JUNE 30, 1996 - - 1,825,567
------- ---------- -----------
939,914 ($5,760,099) $10,632,831
======= ========== ===========
29
CRAFTMADE INTERNATIONAL, INC.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY
ORGANIZATION
Craftmade International, Inc. ("Craftmade") was incorporated in the state of
Texas in July 1985 under the name of Mastercraft International, Inc. In
January 1987, Craftmade's Articles of Incorporation were amended to reflect
Craftmade's current name. On July 26, 1990, Craftmade formed Durocraft
International, Inc. ("Durocraft"), a wholly- owned subsidiary of Craftmade
International, Inc., and consummated an agreement and plan of merger with
Durocraft and DMI Products, Inc., a lamp manufacturer based in Fort Worth,
Texas. Craftmade and Durocraft are located in Coppell, Texas.
NATURE OF THE COMPANY
Craftmade is principally engaged in the design, distribution and marketing of
ceiling fans, light kits and related accessories to a nationwide network of
lighting showrooms and electrical wholesalers specializing in sales to the
remodeling and new home construction markets, as well as the restaurant and
commercial building market. Primarily all of the fans and accessories are
provided to Craftmade through one supplier. In addition to the principal
business of ceiling fans, Durocraft has two divisions. The Durocraft Design
Manufacturing division assembles build-to-order floor and table lamps primarily
for sale to a mid-price retailer with locations in the United States and
Canada. The other division, Global Electronics, Inc., imports and distributes
a variety of cables and components for telephone and communications industries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements of the Company
include the accounts of Craftmade International, Inc. and its wholly-owned
subsidiaries. All intercompany accounts and transactions have been
eliminated.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily of trade
receivables. Substantially all of the fan division's customers are lighting
showrooms; however, credit risk is limited due to this division's large number
of customers and their dispersion across many different geographic locations.
As of June 30, 1996, the fan division had no significant concentration of
credit risk. The lamp division's customer base consists primarily of one
mid-price retailer with locations in the United States and Canada.
INVENTORIES - Inventories are stated at the lower of cost or market, with cost
being determined using the average cost method which approximates the first-in,
first-out (FIFO) method. The cost of inventory includes freight-in and duties
on imported goods.
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, which range from three to 40 years.
Maintenance and repairs are charged to expense as incurred; renewals and
betterments are
F-9
30
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.
ADVERTISING COST - THE COMPANY'S ADVERTISING EXPENDITURES ARE EXPENSED IN THE
PERIOD THE ADVERTISING FIRST OCCURS. ADVERTISING EXPENSE FOR THE FISCAL YEARS
ENDED JUNE 30, 1994, 1995 AND 1996 WAS $266,236, $279,126 AND $338,744,
RESPECTIVELY.
Goodwill - Goodwill related to the Company's acquisition of DMI Products, Inc.
in 1990 is being amortized using the straight-line method over 10 years.
Accordingly, goodwill amortization has been recorded in the accompanying
consolidated statements of income of $40,344, $55,644 and $55,643 for the
years ended June 30, 1994, 1995 and 1996, respectively.
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 Company's 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.
Impairment of Assets - In March 1995, the Financial Accounting Standards Board
issued FAS 121 on "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This statement requires companies to
investigate potential impairments of long-lived assets, certain identifiable
intangibles, and associated goodwill on an exception basis, when there is
evidence that events or changes in circumstances have made recovery of an
asset's carrying value unlikely. An impairment loss will be 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. The amount of
the impairment loss will generally be measured as the difference between the
net book value of the assets and their estimated fair value. The Company is
required to adopt this statement by July 1, 1996; however, such adoption is not
expected to have a material impact on the Company's results of operations or
financial condition.
STOCK-BASED COMPENSATION - IN OCTOBER 1995, THE FINANCIAL ACCOUNTING STANDARDS
BOARD ISSUED FAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION", WHICH IS
EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1995. EFFECTIVE JULY
1, 1996, THE COMPANY WILL ADOPT FAS 123 WHICH ESTABLISHES FINANCIAL ACCOUNTING
AND REPORTING STANDARDS FOR STOCK-BASED EMPLOYEE COMPENSATION PLANS. THE
PRONOUNCEMENT DEFINES A FAIR VALUE BASED METHOD OF ACCOUNTING FOR AN EMPLOYEE
STOCK OPTION OR SIMILAR EQUITY INSTRUMENT AND ENCOURAGES ALL ENTITIES TO ADOPT
THAT METHOD OF ACCOUNTING FOR ALL OF THEIR EMPLOYEE STOCK OPTION COMPENSATION
PLANS. HOWEVER, IT ALSO ALLOWS AN ENTITY TO CONTINUE TO MEASURE COMPENSATION
COST FOR THOSE PLANS USING THE INTRINSIC VALUE BASED METHOD OF ACCOUNTING AS
PRESCRIBED BY ACCOUNTING PRINCIPLES BOARD OPINION NO. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES" (APB 25). ENTITIES ELECTING TO REMAIN WITH THE ACCOUNTING
IN APB 25 MUST MAKE PRO FORMA DISCLOSURES OF NET INCOME AND EARNINGS PER SHARE
AS IF THE FAIR VALUE BASED METHOD OF ACCOUNTING DEFINED IN FAS 123 HAD BEEN
APPLIED. THE COMPANY WILL CONTINUE TO ACCOUNT FOR STOCK-BASED EMPLOYEE
COMPENSATION PLANS UNDER THE INTRINSIC METHOD PURSUANT TO APB 25 AND WILL MAKE
THE DISCLOSURES IN ITS FOOTNOTES AS REQUIRED BY FAS 123.
EARNINGS PER COMMON SHARE - Earnings per common share is based upon the
weighted average number of shares of common stock and common stock equivalents
outstanding during the periods.
For purposes of computing earnings per common share, stock options outstanding
during each of the years in the three year period ended June 30, 1996 were
treated as common stock equivalents using the treasury stock method. The
aggregate number of common stock equivalents
F-10
31
added to weighted average shares outstanding at June 30, 1994, 1995 and 1996
were 41,362, 14,719 and 1,800, respectively.
Weighted average number of shares including common stock equivalents,
outstanding at June 30, 1994, 1995 and 1996 were, 3,472,302, 3,431,436 and
3,255,717, respectively.
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.
Reclassifications - Certain fiscal 1995 and 1994 amounts were reclassified to
conform with the current year presentation.
NOTE 3 - REVOLVING LINE OF CREDIT
On November 15, 1995, the Company negotiated an additional $2,000,000
availability on its existing line of credit, increasing its line to
$12,000,000. On May 31, 1996, the Company renegotiated this line of credit
with another financial institution and obtained an interest rate of LIBOR plus
1.5% (6.5% at June 30, 1996). The line of credit is due on demand; however, if
no demand is made, it is scheduled to mature November 30, 1997. The line of
credit contains certain financial covenants, which include consolidated debt to
consolidated tangible net worth, funded debt to EBDIT ratio and capital
expenditures and restricts the Company's payment of quarterly dividends to 40%
of the Company's net profit before taxes, of which the Company is in compliance
at June 30, 1996. This line of credit is secured by inventory, accounts
receivable and equipment.
NOTE 4 - NOTES PAYABLE, FACILITY
On December 21, 1995 the Company obtained a $9,200,000 recourse term loan to
finance the purchase of its new facility. The loan bears interest at 8.125%
and is payable in equal monthly installments of principal and interest of
$100,280 until it matures on January 1, 2008. The loan is secured by the
building and land.
Scheduled maturities of long-term debt are as follows:
1997 $ 488,656
1998 529,872
1999 574,564
2000 623,025
2001 675,575
Thereafter 6,116,095
----------
$9,007,787
==========
F-11
32
NOTE 5 - INCOME TAXES
Components of the provision for income taxes for the years ended June 30, 1994,
1995 and 1996 consist of the following:
1994 1995 1996
---------- ---------- -----------
Current Expense:
Federal $1,224,371 $1,018,292 $ 836,983
State 98,575 59,666 33,760
Charge in Lieu of Income Taxes Payable 131,069 118,397 39,638
---------- ---------- ----------
Total Current Expense 1,454,015 1,196,355 910,381
---------- ---------- ----------
Total Deferred (Benefit) Expense (150,695) (122,804) 114,085
---------- ---------- ----------
Total Provision $1,303,320 $1,073,551 $1,024,466
========== ========== ==========
Deferred taxes are provided for temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities. The
temporary differences that give rise to deferred tax assets and liabilities at
June 30, 1994, 1995 and 1996 are as follows:
1994 1995 1996
----------- ----------- -----------
Inventory capitalized for tax $ 247,460 $ 382,806 $ 322,203
Unutilized purchased NOL carryforward 47,948 27,850 7,752
Freight reserves 40,800 49,300 55,760
Rent expense not deductible for tax 12,122 - -
Other 26,999 16,193 17,593
----------- ----------- -----------
Total deferred tax assets 375,329 476,149 403,308
----------- ----------- -----------
Total deferred tax liabilities - depreciation (5,619) (3,733) (44,977)
----------- ----------- -----------
Deferred tax assets valuation allowance - - -
----------- ----------- -----------
$ 369,710 $ 472,416 $ 358,331
=========== =========== ===========
The differences between the Company's effective tax rate and the federal
statutory rate of 34% for the years ended June 30, 1994, 1995 and 1996 are as
follows:
1994 1995 1996
----------- ----------- -----------
Tax at the statutory corporate rate $ 1,254,038 $ 1,012,067 $ 969,011
State income taxes, net of federal benefit 65,059 39,380 22,282
Other (15,777) 22,104 33,173
----------- ----------- -----------
Provision for income taxes $ 1,303,320 $ 1,073,551 $1,024,466
=========== =========== ===========
Effective tax rate 35% 36% 36%
=========== =========== ===========
Upon adoption of FAS 109 for the fiscal year ended June 30, 1994, the Company
recognized a deferred tax benefit of $47,948 representing the expected tax
benefit of an unutilized net operating loss carryforward acquired in the
purchase of the assets of DMI Products, Inc. in July 1990. The Company
correspondingly reduced goodwill by this amount. A valuation allowance
F-12
33
has not been established as the Company believes that it is more likely than
not to realize this benefit before it expires in fiscal year 2005. During the
years ended June 30, 1994 and 1995, the Company utilized $20,098 and $20,098,
respectively, of this deferred tax benefit.
NOTE 6 - SHAREHOLDERS' EQUITY
EMPLOYEE STOCK OPTION PLANS
On December 15, 1989, the Company granted to five key employees, including the
President, options to purchase an aggregate of 200,000 shares of common stock
of the Company at $.70 per share. Under the terms of the grant, the right to
exercise such options fully vested in fiscal 1994, provided such individuals
remained in the employ of the Company. The options were exercisable for a
five-year period subsequent to vesting.
The fair value of the common stock underlying the options at date of grant was
appraised at $1.75 per share. The difference between the appraised value and
the aggregate exercise price of such shares was deemed future compensation to
the recipients of such options and compensation was charged to operations
through June 30, 1994. The Company charged $42,928 to operations for the year
ended June 30, 1994 related to such options.
On December 31, 1992, the Company granted to two additional key employees
options to purchase an aggregate of 30,000 shares of common stock of the
Company at $6.56 per share, the average market value of common stock at date of
grant. Under the terms of the grant, the right to exercise such options fully
vested in fiscal 1994, provided such individuals remained in the employ of the
Company.
The options are exercisable for a five-year period subsequent to vesting,
except that following departure from the Company, exercisable options that have
accrued must be exercised within three months of termination of employment.
The exercise period is accelerated in the event of death, disability or early
retirement.
A summary of outstanding options are as follows:
NUMBER OF SHARES
--------------------------------
1989 1992
PLAN PLAN TOTAL
--------------------------------
OUTSTANDING AT JUNE 30, 1994 55,200 30,000 85,200
EXERCISED (37,000) - (37,000)
--------------------------------
OUTSTANDING AT JUNE 30, 1995 18,200 30,000 48,200
EXERCISED (18,200) - (18,200)
--------------------------------
OUTSTANDING AT JUNE 30, 1996 - 30,000 30,000
================================
EXERCISABLE AT JUNE 30, 1996 - 30,000 30,000
================================
PRICE RANGE AT JUNE 30, 1996 $6.56
=====
F-13
34
Stock Repurchase
On January 27, 1995, the Company's Board of Directors authorized the Company's
management to repurchase up to 200,000 shares of the Company's outstanding
Common Stock. During fiscal 1996, the Company's Board of Directors amended the
stock repurchase plan by 100,000 shares to allow the Company to repurchase up
to 300,000 shares of its issued and outstanding Common Stock. During the years
ended June 30, 1995 and 1996, the Company acquired 192,000 and 106,500 shares,
respectively, of its Common Stock related to this repurchase program at an
aggregate cost of $1,757,318 and $699,955, respectively. These repurchased
shares are reflected as treasury stock at June 30, 1996 on the accompanying
consolidated balance sheet.
On August 7, 1996, the Company's Board of Directors authorized the Company's
management to repurchase up to an additional 300,000 shares of the Company's
outstanding Common Stock.
NOTE 7 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, receivables, accounts and
commissions payable, accrued liabilities and amounts outstanding under various
debt agreements. Management believes the fair values of these instruments
approximate the related carrying values as of June 30, 1996 because of their
short-term nature. In the case of the facility note payable fair value is
estimated at $10,024,000. Carrying value of the facility note payable at June
30, 1996 is $9,007,787.
NOTE 8 - COMMITMENTS
OPERATING LEASES
The Company leases various equipment and real estate under long-term,
non-cancelable operating lease agreements which require future cash payments.
The required future cash payments relating to the Company's non-cancelable
operating leases with terms in excess of one year are as follows:
Year ending June 30:
--------------------
1997 $ 36,186
1998 27,747
--------
$ 63,933
========
The Company incurred rental expense under its operating lease agreements of
$647,154, $682,600 and $372,576 for fiscal 1994, 1995 and 1996, respectively.
The Company leases 80,000 square feet of its new facility to an unaffiliated
company for $20,000 a month. At June 30, 1996 the remaining term under this
lease agreement is twenty nine months.
F-14
35
NOTE 9 - CONTINGENCIES
Due to the nature of the Company's business, it could be a party in legal or
administrative proceedings arising in the ordinary course of business.
Although occasional adverse settlements or resolutions may occur and negatively
impact earnings in the year of settlement, after consideration of the Company's
insurance coverage, it is the opinion of management that the ultimate
resolution would not have a materially adverse effect on the Company's
financial position or its results of operations.
The Company provides a limited warranty against workmanship or materials for
its ceiling fans for one year and also provides a 25 year warranty with respect
to the motor contained in all fans except for certain high-end models which
carry a limited lifetime warranty. Since inception of the Company's
relationship with its major supplier of such fans, the supplier has extended
the Company full credit for all product returns. Accordingly, no reserve for
warranty has been accrued in the accompanying consolidated financial
statements. Should the Company's relationship change in the future with
respect to such supplier, the Company would be liable for any claims received
during the warranty period. Based upon historical experience, management
believes future claims resulting from defects in workmanship or materials are
not significant to the Company's operations.
NOTE 10 - 401(k) DEFINED CONTRIBUTION PLAN
On July 1, 1992, the Company established a qualified 401(k) defined
contribution plan which covers substantially all full-time employees who have
met certain eligibility requirements. Employees are allowed to tax defer the
lesser of 10% of their annual compensation or $8,994. The Company will match
one-half of the participant's contributions up to 6% of their annual
compensation. The Company's matching contribution for the years ended June
30, 1994, 1995 and 1996 aggregated approximately $31,000, $42,000 and $47,000,
respectively.
NOTE 11 - MAJOR SUPPLIER, MAJOR CUSTOMER AND RELATED PARTY
On December 7, 1989, the Company and its major Supplier (the "Supplier")
entered into a written agreement, terminable on 180 days prior notice, pursuant
to which the Supplier has agreed to manufacture Craftmade ceiling fans for the
Company. The Supplier is permitted under the arrangement to manufacture
ceiling fans for other distribution provided such ceiling fans are not a
replication of the Craftmade series or models.
Fans and accessories manufactured and sold to the Company by the Supplier
account for approximately 86%, 90% and 85% of the Company's purchases in fiscal
1994, 1995 and 1996, respectively. As of June 30, 1995 and 1996, the Supplier
owned 101,196 shares of the Company's common stock, representing 3% of
outstanding common stock. The Company, at its option, may
repurchase the shares for an aggregate purchase price of $137,774.
Sales during fiscal 1996 to one of Durocraft's customers aggregated $3,978,241.
Sales to this customer represented approximately 89% of that division's fiscal
1996 net sales.
F-15
36
EXHIBIT INDEX
Exhibit No. Exhibit Description Page
----------- ------------------- ----
10.1 - Earnest Money contract and Design/Build Agreement dated May 8,
1995, between MEPC Quorum Properties II, Inc. and Craftmade
International, Inc. (including exhibits), previously filed as
an exhibit in Form 10Q for the quarter ended December 31,
1995, and herein incorporated by reference.
10.2 - 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.
10.3 - 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.
10.4 - Second Amended and Restated Credit Agreement dated November
14, 1995, among Craftmade International, Inc., NationsBank of
Texas, N.A., as Agent and the Lenders defined therein
(including exhibits), previously filed as an exhibit in Form
10Q for the quarter ended December 31, 1995, and herein
incorporated by reference.
10.5 - Lease Agreement dated November 30, 1995, between Craftmade
International, Inc. and TSI Prime, Inc., previously filed as
an exhibit in Form 10Q for the quarter ended December 31,
1995, and herein incorporated by reference.
10.6 - Revolving credit facility with Texas Commerce Bank.
22 - Subsidiaries of the Registrant
27 - Financial Data Schedule