<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15D OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH, 31 1998 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15D OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO________
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, Coppell, Texas 75019
- -------------------------------------------- -----
(Address of principal executive offices) Zip Code
Registrants' telephone number, including area code (972) 393-3800
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
--- ---
4,375,000 shares of Common Stock were outstanding as of April 10, 1998.
1
<PAGE> 2
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Quarterly Report on Form 10-Q
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Income for the three
months and nine months ended March 31, 1998 and 1997.
Condensed Consolidated Balance Sheets as of March 31, 1998
and June 30, 1997.
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the nine months ended March 31,
1998.
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 31, 1998 and 1997.
Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
--------------------------- --------------------------
March 31, March 31, March 31, March 31,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 8,659,979 $ 9,189,898 $ 28,315,470 $ 29,727,351
Cost of goods sold 5,455,095 5,539,644 17,870,768 17,911,962
------------ ------------ ------------ ------------
Gross profit 3,204,884 3,650,254 10,444,702 11,815,389
------------ ------------ ------------ ------------
Selling, general
and administrative
expenses 2,353,463 2,509,707 6,871,236 7,192,313
Interest expense,net 348,482 284,988 996,951 952,710
Depreciation and
amortization 97,932 94,414 291,949 283,539
------------ ------------ ------------ ------------
Total expenses 2,799,877 2,889,109 8,160,136 8,428,562
------------ ------------ ------------ ------------
Income before
income taxes 405,007 761,145 2,284,566 3,386,827
Provision for
income taxes 145,802 274,012 843,605 1,217,087
------------ ------------ ------------ ------------
Net income $ 259,205 $ 487,133 $ 1,440,961 $ 2,169,740
============ ============ ============ ============
Basic and diluted
earnings per share $ .06 $ .11 $ .31 $ .50
============ ============ ============ ============
Shares outstanding
assuming dilution 4,442,579 4,376,199 4,616,452 4,370,609
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31,
June 30, 1998
1997 (Unaudited)
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 615,173 $ 193,049
Accounts receivable - trade,
net of allowance 7,599,775 6,427,799
Inventory 10,925,342 10,594,219
Prepaid expenses and other
current assets 1,290,503 1,071,843
------------ ------------
Total current assets 20,430,793 18,286,910
------------ ------------
Property and equipment, net 9,531,403 9,358,175
------------ ------------
Other assets:
Goodwill, net 171,571 129,839
Other assets 143,913 91,310
------------ ------------
Total other assets 315,484 221,149
------------ ------------
$ 30,277,680 $ 27,866,234
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
June 30, 1998
1997 (Unaudited)
------------ ------------
<S> <C> <C>
Current liabilities:
Note payable, facility -
current portion $ 529,872 $ 607,895
Revolving line of credit 10,000,000 7,000,000
Accounts payable - trade and
commissions 510,007 362,933
Income taxes payable 204,191 --
Other accrued liabilities 243,410 296,405
------------ ------------
Total current liabilities 11,487,480 8,267,233
Note payable, facility -
long term portion 7,989,259 6,995,445
Other liabilities 81,205 81,205
------------ ------------
Total liabilities 19,557,944 15,343,883
------------ ------------
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,
6,191,024.5 and 4,110,683 shares
issued as of March 31, 1998
and June 30, 1997, respectively 41,107 61,910
Additional paid-in capital 7,095,571 7,184,143
Retained earnings 11,186,507 13,123,747
------------ ------------
18,355,185 20,401,800
Less: treasury stock, 1,816,024.5 and
1,178,683 common shares at cost as
of March 31, 1998 and June 30,
1997, respectively, and 32,000
preferred shares at cost (7,635,449) (7,879,449)
------------ ------------
Total shareholders' equity 10,719,736 12,522,351
------------ ------------
$ 30,277,680 $ 27,866,234
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Voting
-----------------------
Common Stock Series A Additional Treasury
----------------------- Preferred Paid-In Retained Stock Total
Shares Amount Stock Capital Earnings Amount -----------
------------ -------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 1997 4,110,683.0 $ 41,107 $ 32,000 $7,095,571 $ 11,186,507 $( 7,635,449) $10,719,736
Stock Repurchase -- -- -- -- -- (244,000) (244,000)
Exercise of employee
stock options 25,000.0 250 -- 109,125 -- -- 109,375
Cash Dividends -- -- -- -- (232,500) -- (232,500)
Stock Split 2,055,341.5 20,553 -- (20,553) -- -- --
Net Income for the nine months
ended March 31, 1998 -- -- -- -- 2,169,740 -- 2,169,740
----------- -------- --------- ---------- ------------ ------------ -----------
6,191,024.5 $ 61,910 $ 32,000 $7,184,143 $ 13,123,747 $( 7,879,449) $12,522,351
=========== ======== ========= ========== ============ ============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------------
March 31, March 31,
1997 1998
------------ ------------
<S> <C> <C>
Net cash provided by (used for)
operating activities ($ 159,553) $ 3,927,824
------------ ------------
Cash flows from investing activities:
Net additions to equipment (143,508) (67,032)
------------ ------------
Cash flows from financing activities:
Note payments on facility (362,758) (915,791)
Stock repurchase (1,738,158) (244,000)
Net proceeds from (principal payments for)
revolving line of credit 1,900,000 (3,000,000)
Proceeds from exercise of stock
Options -- 109,375
Cash dividends (91,683) (232,500)
------------ ------------
Net cash used for
financing activities (292,599) (4,282,916)
------------ ------------
Net decrease in cash (595,660) (422,124)
Cash at beginning of year 663,057 615,173
------------ ------------
Cash at end of period $ 67,397 $ 193,049
============ ============
</TABLE>
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------------
March 31, March 31,
1997 1998
------------ ------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 996,951 $ 952,710
============ ============
Income taxes $ 913,410 $ 1,436,263
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC.
AND SUBSIDIARIES
March 31, 1998
(Unaudited)
Note 1 - BASIS OF PREPARATION AND PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and include all adjustments which are, in the opinion of management, necessary
for a fair presentation. The condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading;
however, it is suggested that these financial statements be read in conjunction
with the financial statements and the notes thereto which are incorporated by
reference in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997. The financial data for the interim periods may not necessarily be
indicative of results to be expected for the year.
Note 2 - EARNINGS PER SHARE
During the three months ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, Earnings Per Share. This statement
requires interim and annual presentation of basic and diluted earnings per share
("EPS") by all entities that have issued common stock or potential common stock
if those securities are traded in a public market. The objective of basic and
diluted EPS is to measure the performance of an entity over the reporting period
while giving effect to the dilutive potential of all common shares that were
outstanding during the period. This statement also requires a reconciliation of
the numerator and denominator of the diluted EPS computation. EPS data for the
period ended March 31, 1998 and all prior periods have been restated to conform
with the provisions of this statement.
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<PAGE> 9
The following is a reconciliation of the numerator and denominator used in the
basic and diluted EPS calculation:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
--------------------------- ---------------------------
March 31, March 31, March 31, March 31,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic EPS
Numerator $ 259,205 $ 487,133 $ 1,440,961 $ 2,169,740
------------ ------------ ------------ ------------
Denominator:
Common Shares
Outstanding 4,430,460 4,367,750 4,602,573 4,356,091
------------ ------------ ------------ ------------
Basic EPS $ .06 $ .11 $ .31 $ .50
============ ============ ============ ============
Diluted EPS:
Numerator $ 259,205 $ 487,133 $ 1,440,961 $ 2,169,740
------------ ------------ ------------ ------------
Denominator:
Common Shares
Outstanding
Options 4,430,460 4,367,750 4,602,573 4,356,091
3,377 8,449 13,879 14,518
------------ ------------ ------------ ------------
Total Shares 4,438,837 4,376,199 4,616,452 4,370,609
============ ============ ============ ============
Diluted EPS $ .06 $ .11 $ .31 $ .50
============ ============ ============ ============
</TABLE>
Note 3 - STOCK SPLIT
On September 26, 1997, the Board of Directors declared a three-for-two split of
the Company's Common Stock effected in the form of a 50% stock dividend. New
shares were issued November 15, 1997 to holders of record as of the close of
business on October 31, 1997. Common Stock issued, additional paid-in capital
and treasury stock as of March 31, 1998 have been adjusted to reflect the stock
split. In addition, earnings per share and weighted average share data for the
three and nine months ended March 31, 1997 have been restated to reflect the
stock split.
Note 4 - CONTINGENCIES
The lamp division is currently pursuing an aggressive strategy of inventory
reduction through select "seconds" retailers and overhead reduction. The
Company's management believes that this process will be completed by June 1998.
Management will continue to closely monitor this division and its financial
results to determine the feasibility of this division continuing as a
single-customer manufacturer with limited overhead or the dissolution of this
division. At the current time, management believes that the continued reduction
of inventory can be accomplished without material charges against earnings.
9
<PAGE> 10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Cautionary Statement
With the exception of historical information, the matters discussed under
"Results of Operations" and "Liquidity and Capital Resources" contain
forward-looking statements. There are certain important factors that could cause
actual results to differ materially from those anticipated by some of the
forward-looking statements. Some of these factors include, among other things,
changes in anticipated levels of sales, whether due to future national or
regional economic conditions or from competitive conditions, changes in
relationships with customers including, but not limited to, the lamp division's
relationship with its major customer, customer acceptance of existing and new
products, pricing pressures due to excess capacity, raw material cost increases,
changes in tax rates, changes in interest rates, unfavorable political or
economic developments in the Republic of Taiwan, the location of the Company's
principal vendor, declining conditions 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. In addition, the forward-looking statements
do not reflect any potential impact the TSI acquisition may have on the
Company's operations.
Results of Operations
Net sales increased $529,919, or 6.1%, for the three months ended March 31,
1998, to $9,189,898, up from $8,659,979 for the same period last year. For the
nine months ended March 31, 1998, net sales were $29,727,351, an increase of
$1,411,881, or 5.0%, over net sales of $28,315,470 for the same nine month
period last year. These increases were primarily attributable to the continued
success of the bathstrip product line. In addition, fan sales during the three
months ended March 31, 1998 increased 7.8% over fan sales for the same three
month period last year, while fan units sold increased 13.4%. This difference
was the result of management's decision to pass a portion of the price
concessions received from the fan division's overseas supplier to its customers.
The Company's management anticipates that this pricing strategy, along with
selective expansion of its distribution base and new product introductions, will
yield strong growth consistent with prior years, provided that new home
construction does not experience a downturn similar to 1995. In addition, the
Company's management anticipates that bathstrip lighting will continue to
provide an immediate impact to the fan division's sales growth as this product
line gains market share. Lamp sales decreased $20,000 for the nine months ended
March 31, 1998 compared with the same nine month period last year because orders
have failed to recover from the internal restructuring of the lamp division's
primary customer. This division is currently pursuing an aggressive strategy of
inventory reduction through select "seconds" retailers
10
<PAGE> 11
and overhead reduction. The Company's management anticipates that the inventory
reduction and overhead reduction process will be completed by June 1998.
Management will continue to closely monitor this division and its financial
results to determine the feasibility of continuing this division as a
single-customer manufacturer with limited overhead or dissolving this division.
At the current time, management believes that the continued reduction of
inventory can be accomplished without material charges against earnings.
Gross profit for the three month period ended March 31, increased from
$3,204,884, or 37% of sales, in 1997 to $3,650,254, or 39.7% of sales, in 1998.
For the nine month period ended March 31, gross profit increased from
$10,444,702, or 36.9% of sales, in 1997 to $11,815,389, or 39.7% of sales, in
1998. The Company's management anticipates that gross margins will continue to
improve, provided that the Company continues to benefit from favorable product
costs and increasing customer demand and that the aggressive inventory reduction
of the lamp division does not adversely affect overall Company margins.
Total selling, general and administrative expenses increased $156,244 to
$2,509,707, or 27.3% of sales, for the three months ended March 31, 1998,
compared to $2,353,463, or 27.2% of sales, for the same three month period last
year. Total selling, general and administrative expenses increased $321,077 to
$7,192,313, or 24,2% of sales, for the nine months ended March 31, 1998,
compared to $6,871,236, or 24.3% of sales, for the same nine month period last
year. These increases were primarily attributable to increases in sales
commissions and certain other costs directly correlated to sales. The Company's
management anticipates that, in the future, selling, general and administrative
expenses as a percentage of net sales will remain fairly constant due to the
relatively fixed nature of the majority of the Company's overhead expenses.
Net interest expense decreased $63,494, to $284,988 for the three months ended
March 31, 1998 for $348,482 for the same three month period in 1997. For the
nine months ended March 31, 1998, net interest expense was $952,710, a decrease
of $44,241 from the net interest expense of $996,951 for the same nine month
period last year. During the nine months ended March 31, 1998, the Company
utilized excess cash flow to decrease the outstanding balance on its line of
credit by $3,000,000 and to pay down its facility note payable by an additional
$500,000. The Company's management intends to continue this strategy of debt
reduction as excess cash flow is available.
11
<PAGE> 12
Liquidity and Capital Resources
The Company's cash decreased $422,124, from $615,173 at June 30, 1997 to
$193,049 at March 31, 1998. The Company's operating activities provided cash of
$3,927,824. The primary sources of the cash were improved operations and
decreases in accounts receivable and inventory.
The $67,032 of cash used for investing activities related to the purchase of
general warehouse and office equipment.
The $4,282,916 of cash used for financing activities was primarily the result of
the paydown of $3,000,000 on the Company's line of credit, principal payments of
$915,791 made towards the facility note and the repurchase of 32,000 shares of
the Company's common stock at an aggregate cost of $244,000 in July 1997.
On March 18, 1998, the Company signed a letter of intent to acquire Trade Source
International, Inc. ("TSI"), a privately held wholesale distributor of
residential interior and exterior lighting fixtures. Under the terms of the
agreement, Craftmade will acquire TSI for approximately $11 million, in a
combination of cash and approximately 575,000 shares of Craftmade's common
stock. The Company's management intends on closing this transaction on or before
July 1, 1998, subject to the execution of certain definitive documents and
satisfaction of certain conditions. This transaction will be accounted for
utilizing the purchase method of accounting.
At March 31, 1998, subject to continued compliance with certain covenants and
restrictions, the Company had $12,000,000 available on its line of credit of
which $7,000,000 had been utilized. The Company's management believes that its
current line of credit, combined with cash flows from operations, is adequate to
fund the proposed TSI acquisition and its anticipated cash requirements, the
Company's current operating needs, annual payments under the facility note
payable approximating $1,400,000 and its projected growth over the next twelve
months. In addition, the Company has begun to utilize excess cash flow to reduce
outstanding indebtedness, decreasing such indebtedness by an additional
$3,500,000 during the nine months ended March 31, 1998. It is management's
intention to continue this strategy of debt reduction as excess cash flow is
made available.
The Company has discontinued its stock repurchase program. Pursuant to this
program, the Company had purchased a total of 601,269 shares of the Company's
Common Stock prior to the Company's three-for-two stock split effective October
31, 1997, at an aggregate cost of $4,576,623.
At March 31, 1998, $7,603,340 remained outstanding under the twelve year note
payable for the Company's 378,000 square foot operating facility. The Company
continues to lease 80,000 square feet of
12
<PAGE> 13
this facility to TSI at a lease rate of $20,000 per month, expiring December
1998. The Company's management believes that this facility will be sufficient
for its purpose for the foreseeable future.
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company has purchased the
upgrade for its current software to resolve this issue, the cost of which was
not significant, and plans to implement this upgrade within the next twelve
months. The Company also plans to upgrade systems as needed that will already be
year 2000 compliant. The Company will investigate its customers and suppliers
within the next twelve months in order to insure that their year 2000 issues
will not affect the Company's operations.
13
<PAGE> 14
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
14
<PAGE> 15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
not applicable
Item 2. Changes in Securities and Use of Proceeds
not applicable
Item 3. Defaults Upon Senior Securities
not applicable
Item 4. Submission of Matters to a Vote of Security Holders
not applicable
Item 5. Other Information
not applicable
Item 6. Exhibits and Reports of Form 8-K
a). Exhibits
b). Reports on Form 8-K
none
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAFTMADE INTERNATIONAL, INC.
(Registrant)
Date April 16, 1998 /s/ JAMES R. RIDINGS
-----------------------------------------
JAMES R. RIDINGS
President and Chief
Executive Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 193
<SECURITIES> 0
<RECEIVABLES> 6,428
<ALLOWANCES> 0
<INVENTORY> 10,594
<CURRENT-ASSETS> 18,287
<PP&E> 9,358
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,866
<CURRENT-LIABILITIES> 8,267
<BONDS> 6,995
0
32
<COMMON> 62
<OTHER-SE> 20,308
<TOTAL-LIABILITY-AND-EQUITY> 27,866
<SALES> 9,190
<TOTAL-REVENUES> 9,190
<CGS> 5,540
<TOTAL-COSTS> 5,540
<OTHER-EXPENSES> 2,604
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 285
<INCOME-PRETAX> 761
<INCOME-TAX> 274
<INCOME-CONTINUING> 487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 487
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
