1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ Commission File Number ---------------------- 000-26667 CRAFTMADE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 75-2057054 -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 650 South Royal Lane, Suite 100, Coppell, Texas 75019 ----------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's 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 . ---------- ---------- 5,887,058 shares of Common Stock were outstanding as of May 14, 2001. 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 and nine months ended March 31, 2001 and 2000. Condensed Consolidated Balance Sheets as of March 31, 2001 and June 30, 2000. Condensed Consolidated Statement of Changes in Stockholders' Equity for the nine months ended March 31, 2001. Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2001 and 2000. 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 3 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- March 31, March 31, March 31, March 31, 2001 2000 2001 2000 ----------- ----------- ---------- ---------- Net Sales $ 19,892 $ 20,336 $ 63,357 $ 60,157 Cost of goods sold 12,541 14,119 40,355 39,526 ---------- ---------- ---------- ---------- Gross profit 7,351 6,217 23,002 20,631 ---------- ---------- ---------- ---------- Selling, general and administrative expenses 5,214 4,607 15,020 13,480 Interest expense,net 577 445 1,692 1,150 Depreciation and amortization 259 219 714 648 ---------- ---------- ---------- ---------- Total expenses 6,050 5,271 17,426 15,278 ---------- ---------- ---------- ---------- Income before income taxes and minority interest 1,301 946 5,576 5,353 Provision for income taxes 342 216 1,707 1,613 ---------- ---------- ---------- ---------- Income before minority interest 959 730 3,869 3,740 Minority interest (279) (339) (964) (879) ---------- ---------- ---------- ---------- Net income $ 680 $ 391 $ 2,905 $ 2,861 ========== ========== ========== ========== Basic and diluted earnings per common share $ .12 $ .06 $ .49 $ .41 ========== ========== ========== ========== Cash dividends declared per common share $ .07 $ .02 $ .18 $ .06 ========== ========== ========== ========== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3 4 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS March 31, 2001 June 30, (Unaudited) 2000 ---------- ---------- (In thousands) Current assets: Cash $ 524 $ 1,171 Accounts receivable - net of allowance of $150,000 and $236,000, respectively 14,926 17,610 Income taxes receivable 272 -- Inventory 19,625 15,322 Deferred income taxes 462 462 Prepaid expenses and other current assets 1,230 918 ---------- ---------- Total current assets 37,039 35,483 ---------- ---------- Property and equipment, at cost: Land 1,535 1,535 Building 7,784 7,784 Furniture, fixtures and equipment 3,262 2,297 Leasehold improvement 274 257 ---------- ---------- 12,855 11,873 Less: accumulated depreciation (2,808) (2,410) ---------- ---------- Total property and equipment, net 10,047 9,463 Goodwill, net of accumulated amortization of $1,123,000 and $808,000, respectively 4,816 5,131 Other assets 12 24 Derivative financial instrument 28 -- ---------- ---------- Total other assets 14,903 14,618 ---------- ---------- $ 51,942 $ 50,101 ========== ========== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 5 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 2001 June 30, (Unaudited) 2000 ---------- ---------- (In Thousands) Current liabilities: Note payable - current $ 500 $ 470 Revolving lines of credit 18,650 17,600 Accounts payable 5,039 4,179 Commissions payable 342 422 Income taxes payable -- 10 Accrued liabilities 1,952 1,540 ---------- ---------- Total current liabilities 26,483 24,221 Other non-current liabilities: Deferred Income taxes 88 88 Note payable - long term 8,209 8,588 Minority interest 825 245 ---------- ---------- Total liabilities 35,605 33,142 ---------- ---------- Stockholders' equity: Series A cumulative, convertible, callable preferred stock, $1.00 par value, 2,000,000 shares authorized; 32,000 shares issued 32 32 Common stock, $.01 par value, 15,000,000 shares authorized, 9,316,535 shares issued 93 93 Additional paid-in capital 12,616 12,453 Unearned deferred compensation (116) -- Retained earnings 24,516 22,654 Accumulated other comprehensive income 28 -- ---------- ---------- 37,169 35,232 Less: treasury stock, 3,429,477 and 3,116,177 common shares at cost, respectively, and 32,000 preferred shares at cost (20,832) (18,273) ---------- ---------- Total Stockholders' Equity 16,337 16,959 ---------- ---------- Commitments and contingencies $ 51,942 $ 50,101 ========== ========== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 6 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) FOR THE NINE MONTHS ENDED MARCH 31, 2001 (In thousands) ACCUMULATED SERIES A ADDITIONAL UNEARNED OTHER VOTING PREFERRED PAID-IN DEFERRED RETAINED COMPREHENSIVE COMMON STOCK STOCK CAPITAL COMPENSATION EARNINGS INCOME --------------- --------- ---------- ------------ -------- ------------- Shares Amount ------ ------ Balance as of June 30, 2000 9,317 $ 93 $ 32 $ 12,453 $ -- $ 22,654 $ -- Comprehensive income: Net income for the nine months ended March 31, 2001 2,905 Income on derivative financial instrument, net of tax of $16 28 ------ ------ --------- ---------- ------------ -------- ------------- Total comprehensive income 2,905 28 Stock Option Grants 163 (163) Deferred Compensation Earned 47 Stock repurchase Cash Dividends (1,043) ------ ------ --------- ---------- ------------ -------- ------------- Balance as of March 31, 2001 9,317 $ 93 $ 32 $ 12,616 $ (116) $ 24,516 $ 28 ====== ====== ========= ========== ============ ======== ============= (In thousands) TREASURY STOCK ----------------- Shares Amount Total ------ -------- ------- Balance as of June 30, 2000 3,148 ($18,273) $16,959 Comprehensive income: Net income for the nine months ended March 31, 2001 2,905 Income on derivative financial instrument, net of tax of $16 28 ------ -------- ------- Total comprehensive income 2,933 Stock Option Grants -- Deferred Compensation Earned 47 Stock repurchase 313 (2,559) (2,559) Cash Dividends (1,043) ------ -------- ------- Balance as of March 31, 2001 3,461 $(20,832) $16,337 ====== ======== ======= SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 7 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE NINE MONTHS ENDED ---------------------------- March 31, March 31, 2001 2000 ------------ ------------ (In Thousands) Net cash provided by operating activities $ 3,621 $ 2,737 ------------ ------------ Cash flows from investing activities: Net additions to equipment (982) (204) ------------ ------------ Net cash used for investing activities (982) (204) ------------ ------------ Cash flows from financing activities: Net proceeds from lines of credit 1,050 3,750 Proceeds from note payable -- 4,316 Principal payments on note payable (349) (581) Stock repurchase (2,559) (9,008) Cash dividends (1,043) (425) Capital contribution from minority interest members 10 -- Distributions to minority interest members (395) (1,021) ------------ ------------ Net cash used for financing activities (3,286) (2,969) ------------ ------------ Net decrease in cash (647) (436) Cash at beginning of period 1,171 1,563 ------------ ------------ Cash at end of period $ 524 $ 1,127 ============ ============ SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES MARCH 31, 2001 (Unaudited) Note 1 - BASIS OF PREPARATION AND PRESENTATION The accompanying unaudited condensed 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, 2000. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year. Note 2 - STOCK REPURCHASE During the year ended June 30, 1999, the Company's Board of Directors authorized the Company's management to repurchase up to an aggregate of 2,350,000 shares of the Company's outstanding common stock. At March 31, 2001, the Company had repurchased 1,689,300 shares, at an aggregate cost of $15,119,000, of which 313,300 shares at an aggregate cost of $2,559,000 were repurchased during the first nine months of fiscal 2001. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. 8 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES March 31, 2001 (Unaudited) (In Thousands) Note 3 - EARNINGS PER SHARE The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations: FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------ March 31, March 31, March 31, March 31, 2001 2000 2001 2000 ----------- ------------ ---------- ----------- Basic and Diluted EPS Numerator: Net Income $ 680 $ 391 $ 2,905 $ 2,861 ---------- ------------ ---------- ---------- Denominator: Common Shares Outstanding 5,887 6,671 5,949 6,954 ---------- ------------ ---------- ---------- Basic EPS $ .12 $ .06 $ .49 $ .41 ========== ============ ========== ========== Denominator: Common Shares Outstanding 5,887 6,671 5,949 6,954 Options 4 -- 7 -- ---------- ------------ ---------- ---------- Total Shares $ 5,891 $ 6,671 $ 5,956 $ 6,954 ========== ============ ========== ========== Diluted EPS $ .12 $ .06 $ .49 $ .41 ========== ============ ========== ========== 9 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES MARCH 31, 2001 (Unaudited) Note 4 - DERIVATIVE FINANCIAL INSTRUMENTS The Company adopted Statement on Financial Accounting Standards No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities, on July 1, 2000. FAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in an asset's, liability's, or firm commitment's fair value, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash-flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current-period earnings. During the first quarter of fiscal 2000, the Company entered into an interest rate swap agreement, with a maturity of December 26, 2003, to manage its exposure to interest rate movements by effectively converting its long-term facility debt from fixed to variable rates. The notional amount of the interest rate swap subject to variable rates as of March 31, 2001 was $3,189,000, which decreases as payments are made on the long-term note payable. Under this agreement, the Company has contracted to pay a variable rate equal to LIBOR plus 2.43% (which equaled 7.51% at March 31, 2001) and receive a fixed rate of 8.125%. In accordance with the transition provisions of FAS 133, the Company recorded a net-of-tax cumulative-effect-type adjustment of $28,000 in accumulated other comprehensive income on the accompanying condensed consolidated statement of changes in stockholders' equity to recognize at fair value the interest rate swap agreement which management designated as a cash-flow hedging instrument. As the critical terms of the interest rate swap agreement and the interest-bearing debt are the same the Company has assumed that there is no ineffectiveness in the hedge relationship. 10 11 Note 5 - SEGMENT INFORMATION The Company has two reportable segments, Craftmade and Trade Source International, Inc. ("TSI"). The Company is organized on a combination of product type and customer base. The Craftmade segment primarily derives its revenue from home furnishings including ceiling fans, light kits, bathstrip lighting and lamps offered primarily through lighting showrooms, certain major retail chains and catalog houses. The TSI segment derives its revenue from lighting and fan accessories marketed solely to mass merchandisers. The accounting policies of the segments are the same as those described in Note 2 - Summary of Significant Accounting Policies to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. The Company evaluates the performance of its segments and allocates resources to them based on their operating profit and loss and cash flows. 11 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES MARCH 31, 2001 (Unaudited) Note 5 - SEGMENT INFORMATION (con't) The following table presents information about the reportable segments (in thousands): Craftmade TSI Total --------- --------- --------- For the three months ended March 31, 2001: Net sales from external customers $ 11,026 $ 8,866 $ 19,892 Operating profit 1,363 515 1,878 For the three months ended March 31, 2000: Net sales from external customers $ 11,672 $ 8,664 $ 20,336 Operating profit 1,266 125 1,391 For the nine months ended March 31, 2001: Net sales from external customers $ 34,991 $ 28,366 $ 63,357 Operating profit 4,709 2,559 7,268 For the nine months ended March 31, 2000: Net sales from external customers $ 36,120 $ 24,037 $ 60,157 Operating profit 5,338 1,165 6,503 March 31, 2001 $ 29,576 $ 22,366 $ 51,942 Total Assets March 31, 2000 $ 27,827 $ 18,287 $ 46,114 Total Assets 12 13 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 in this document 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, the success of the rollout of the portable lamp program, changes from anticipated levels of sales, whether due to future national or regional economic and competitive conditions, changes in relationships with customers, TSI's dependence on select mass merchandisers, customer acceptance of existing and new products, pricing pressures due to excess capacity, cost increases, changes in tax or interest rates, unfavorable economic and political developments in Asia, the location of the Company's primary vendors, declining conditions in the home construction industry, inability to realize deferred tax assets, and other uncertainties, all of which are difficult to predict and many of which are beyond the control the Company. RESULTS OF OPERATIONS Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000. Net Sales. Net sales decreased 2.2% or $444,000 to $19,892,000 for the three month period ended March 31, 2001 from $20,336,000 for the same three month period last year. Net sales of the Craftmade division decreased $646,000 to $11,026,000 for the three months ended March 31, 2001 compared to $11,672,000 for the same three-month period last year. The decline in revenues of the Craftmade division was primarily related to lower unit sales and lower pricing in the Company's lower end series of ceiling fans, which was partially offset by increases in higher priced, higher margin products. The Company intends to continue to be aggressive in the pricing of specific products when the strategy is effective in increasing unit volume sales. Craftmade has negotiated price concessions from its ceiling fan vendor which management believes will enable the Company to be competitive on pricing and maintain or improve its historical margins on these products. Sales of the TSI division increased 2.3% or $202,000 to $8,866,000 for the quarter ended March 31, 2001 from $8,664,000 for the same period in the previous year. The increase was primarily attributable to sales generated by Design Trends, LLC ("Design Trends"), the Company's 50% owned subsidiary, which introduced a new line of portable lamps in March 2000. The continued roll out of this new product generated $2,585,000 in incremental revenue during the quarter ended March 31, 2001. These sales were partially offset by a $2,383,000 decline in sales of outdoor lighting that occurred as many of TSI's customers reduced inventory levels during the period and 13 14 delayed the implementation of new programs until the fourth quarter of fiscal 2001. Management believes the shift in revenue will result in positive sales growth in the fourth quarter in addition to the incremental revenue generated by Design Trends. Gross Profit. Gross profit of the Company increased to $7,351,000 or 37.0% of net sales, from $6,217,000 or 30.6% of net sales, for the three months ended March 31, 2001 compared to the same period of 2000. The gross profit of the Craftmade division increased to 43.8% of sales compared to 38.9% of sales in the year ago period. Excluding the impact of a $517,000 inventory write down in the third quarter of fiscal 2000, the prior year comparison was 43.3%. Gross profit from TSI increased to $2,525,000, or 28.5% of net sales, for the three months ended March 31, 2001 compared to $1,679,000 or 19.4% of sales for the same period in the previous year. The increase in the gross margin of TSI was primarily attributable to a shift in the sales mix from direct import sales to domestic sales that have higher gross profit margins and higher SG&A expenses. TSI's gross margin comparison was also positively impacted because the division recorded $194,000 in sales credits during the third quarter of fiscal 2000 which did not occur in the third quarter of fiscal 2001. Selling, General and Administrative Expenses. Total selling, general and administrative ("SG&A") expenses of the Company increased to $5,214,000 or 26.2% of net sales for the three months ended March 31, 2001 from $4,607,000 or 22.7% of net sales for the same three month period last year. Total SG&A expenses of the Craftmade division increased to 30.5% of sales compared to 27.2% for the same period in the previous year. The increase in Craftmade's SG&A expenses as a percentage of sales was primarily due to an increase in the fixed portion of SG&A without a corresponding increase in sales to leverage down the expenses. Total SG&A expenses of the TSI division increased to $1,845,000 or 20.8% of sales compared to $1,437,000 or 16.6% of sales for the same period in the previous year. The increase in TSI's SG&A expenses as a percentage of sales was consistent with the shift in the sales mix from direct import to domestic sales as discussed above. Interest Expense. Net interest expense of the Company increased $132,000 to $577,000 for the three months ended December 31, 2000 from $445,000 for the same three month period last year. This increase was primarily the result of an increase in amounts outstanding under the Company's lines of credit. The proceeds were utilized primarily to finance the roll-out of the portable lamp program that began in March 2000. Minority Interest. Minority interest expense of $279,000 and $339,000 for the three months ended March 31, 2001 and 2000, respectively, represented the 50% ownership of Prime/Home Impressions, LLC ("PHI") and Design Trends, LLC by non-Company owned members. The non-Company owned interests have been accounted for as a minority interest. Provision For Income Taxes. The provision for income taxes increased to $342,000 or 33.5% of net income before taxes but after minority 14 15 interest, for the three months ended March 31, 2001, from $216,000 or 35.6% for the same period of the prior year. Nine Months Ended March 31, 2001 Compared to Nine Months Ended March 31, 2000 Net Sales. For the nine months ended March 31, 2001, net sales increased 5.3% or $3,200,000 to $63,357,000 from $60,157,000 for the same period last year. Net sales from the Craftmade division decreased 3.1% or $1,129,000 to $34,991,000 for the nine months ended March 31, 2001 from $36,120,000 in the prior year period. The decline in sales of the Craftmade division was primarily related to sales declines in the company's lower priced, lower margin series of ceiling fans. Net sales of the TSI division increased 18.0% or $4,329,000 to $28,366,000 for the nine month period ended March 31, 2001 compared to $24,037,000 for the same period in the previous year. The increase was attributable to incremental revenue of $5,386,000 generated by the roll out of the Design Trends program, offset by a net decline of $1,057,000 in TSI's other businesses, primarily outdoor lighting, as discussed above. Gross Profit. For the nine month period ended March 31, 2001, gross profit of the Company increased to $23,002,000 or 36.3% of sales from $20,631,000 or 34.3% of sales for the same period in the previous year. The gross profit of the Craftmade division declined to $15,164,000 or 43.3% of sales from $15,255,000 or 42.2% of sales for the nine months ended March 31, 2001 and 2000, respectively. The decline was primarily due to discounted pricing and promotional programs that occurred in the initial part of the nine-month period ended March 31, 2001. Gross profit of the TSI division increased to $7,838,000 or 27.6% of sales compared to $5,376,000 or 22.4% of sales for the same period in the previous year. The increase was primarily attributable to a shift in the sales mix from direct import sales to domestic sales that carry higher gross profit margins and higher SG&A expenses. Selling, General and Administrative Expenses. For the nine month period ended March 31, 2001, total SG&A expenses of the Company increased to $15,020,000 or 23.7% of sales compared to $13,480,000 or 22.4% of sales for the same period last year. SG&A expenses of the Craftmade division increased to $10,168,000 or 29.1% of sales compared to $9,630,000 or 26.7% of sales for the same period last year. The increase in SG&A expenses of Craftmade as a percentage of sales was primarily due to the decline in sales during the fiscal year 2001 period, which resulted in the de-leveraging of SG&A expenses compared to the same period in the previous year. For the nine month period ending March 31, 2001, SG&A expenses of the TSI division increased as a percentage of sales to 17.1% of sales or $4,852,000 compared to 16.0% of sales or $3,851,000 for the same period in the previous year. The increase in TSI's SG&A expenses as a percentage of sales was consistent with the shift in the sales mix from direct import to domestic sales as discussed above. 15 16 Interest Expense. For the nine-month period ended March 31, 2001, net interest expense increased to $1,692,000 compared to $1,150,000 for the same period in the previous year. This increase was primarily the result of an increase in the Company's lines of credit. The proceeds were used primarily to finance the roll out of the portable lamp program that began in March 2000. Minority Interest. Minority interest expense of $964,000 and $879,000 for the nine months ended March 31, 2001 and 2000, respectively, represented the 50% ownership of PHI and Design Trends, LLC by non-Company owned members. The non-Company owned interests have been accounted for as a minority interest. Provision for Income Taxes. The provision for income taxes increased to $1,707,000 or 37.0% of net income before taxes but after minority interest, for the nine months ended March 31, 2001 from $1,613,000 or 36.1% for the same period of the prior year. The increase in the effective rate relates to non-deductible expenses, primarily amortization of goodwill, as a percentage of pre-tax income. LIQUIDITY AND CAPITAL RESOURCES The Company's cash decreased $647,000 to $524,000 at March 31, 2001 from $1,171,000 at June 30, 2000. The Company's operating activities provided cash of $3,621,000, primarily attributable to the Company's net income from operations and collections on customer accounts, less increases in inventory to support the rollout of the portable lamp program that began in March 2000. In order to satisfy anticipated demand for the portable lamp program, the Company has increased Design Trends' inventory to approximately $5,902,000. Currently, this program is primarily with one mass merchandiser customer. Should the terms of the program with this particular mass merchandiser be at a level less than originally anticipated the Company would be required to find other customers for this inventory. There can be no assurances that the alternative sources would generate similar sales levels and profit margins as anticipated with the currently targeted mass merchandiser. The $982,000 of cash used for investing activities related to the purchase of general warehouse, office and computer equipment. The $3,286,000 of cash used for financing activities was primarily the result of (i) the repurchase of 313,300 shares of the Company's common stock in connection with the Company's stock repurchase plans, at an aggregate cost of $2,559,000, (ii) distributions to PHI's minority interest members of $395,000, (iii) principal payments of $349,000 on the Company's note payable,(iv) cash dividends of $1,043,000, partially offset by principal advances of $1,050,000 on the Company's lines of credit. The Company has currently suspended its stock repurchase program but may implement the program in the future. 16 17 At December 31, 2000, subject to continued compliance with certain covenants and restrictions, the Company had $19,000,000 available on its line of credit, of which $16,500,000 had been utilized. In addition, PHI had $3,000,000 available on its line of credit, of which $2,150,000 had been utilized. The Company's management believes that its current lines of credit, combined with cash flows from operations, are adequate to fund the Company's current operating needs, make annual payments approximating $1,200,000 under the note payable, fund the Design Trends new product roll-out of approximately $3,500,000, fund anticipated capital expenditures, as well as fund its projected growth over the next twelve months. At March 31, 2001, $8,709,000 remained outstanding under the twelve year note payable for the Company's 378,000 square foot operating facility. The Company's management believes that this facility will be sufficient for its purposes for the foreseeable future. During the first quarter of fiscal 2000, the Company entered into a letter agreement with Chase Bank of Texas, N.A., pursuant to which the Company conducted a fixed-to-floating interest rate swap. See Note 4 - Derivative Financial Instruments in the Notes to Condensed Consolidated Financial Statements and Item 3 - Quantitative and Qualitative Disclosures about Market Risk. The Company does not believe that this transaction will have a material effect on its financial condition. During the third quarter of fiscal 2001, the Company entered into an agreement with J.P. Morgan Chase and Co. and The Frost National Bank to modify the terms of the Company's lines of credit. The modifications provide less restrictive loan covenant ratios to enable the Company to increase its capital expenditures to fund the roll out of its portable lamp program. The terms of the agreement specify a sliding scale between the interest rate spread and the Company's ratio of total debt to tangible net worth, with a maximum spread that is 50 basis points higher than the maximum spread specified by the loan agreement prior to the modification. The Company does not believe that any additional interest expense associated with the higher interest rate spread will have a material effect on its financial condition. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information set forth below constitutes a "forward looking statement." See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement." As a result of the terms of the Company's note payable on its operating facility, the Company is subject to market risk associated with adverse changes in interest rates. In an effort to reduce this market risk, the Company entered into an interest rate swap agreement (the "Swap Agreement") with Chase Bank of Texas, National Association ("Chase") 17 18 during the first quarter of fiscal 2000. The Swap Agreement is held by the Company for non-trading purposes and is designated as a cash-flow hedging instrument. The notional principal amount of the Swap Agreement was $3,189,000 at March 31, 2001. During the term of the Swap Agreement, the Company receives a fixed rate of interest (8.125%) from Chase on such notional amount in consideration of its obligation to pay a floating rate of interest on such notional amount. The floating rate of interest is based on the regularly published London Interbank Offered Rate ("LIBOR") plus 2.43%. At March 31, 2001, LIBOR was equal to 5.078%. The Swap Agreement matures on December 26, 2003. Although the Company entered into the Swap Agreement to reduce its exposure to changes in interest rates, a sharp rise in interest rates could materially adversely affect the financial condition and results of operations of the Company. Under the Swap Agreement, for each one percent (1%) incremental increase in LIBOR, the Company's annualized interest expense would increase by approximately $31,890. Consequently, an increase in LIBOR of five percent (5%) would result in an estimated annualized increase of interest expense for the Company of approximately $159,450. See Note 4 - Derivative Financial Instrument to the Notes to Condensed Consolidated Financial Statements. 18 19 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 Stockholders not applicable Item 5. Other Information not applicable Item 6. Exhibits and Reports on Form 8-K a). Exhibits 3.1 Certificate of Incorporation of the Company, filed as Exhibit 3(a)(2) to the Company's Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and incorporated by reference therein. 3.2 Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24, 1992 and filed as Exhibit 4.2 to the Company's Form S-8 (File No. 333-44337) and incorporated by reference therein. 3.3 Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the Company's Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and incorporated by reference therein. 4.1 Specimen Common Stock Certificate, filed as Exhibit 4.4 to the Company's Registration Statement on Form S-3 (File No. 333-70823) and incorporated by reference therein. 4.2 Rights Agreement, dated as of June 23, 1999, between Craftmade International, Inc. and 19 20 Harris Trust and Savings Bank, as Rights Agent, previously filed as an exhibit to Form 8-K dated July 9, 1999 (File No. 000-26667) and incorporated by reference herein. 10.1 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 10-Q 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 10-Q 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 10-Q 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., Nations Bank of Texas, N.A., as Agent and the Lenders defined therein (including exhibits), previously filed as an exhibit in Form 10-Q 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 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.6 Revolving credit facility with Texas Commerce Bank, previously filed as an exhibit in Form 10-K for the year ended June 30, 1996, and herein incorporated by reference. 10.7 Agreement and Plan of Merger, dated as of July 1, 1998, by and among Craftmade International, Inc., Trade Source 20 21 International, Inc., a Delaware corporation, Neall and Leslie Humphrey, John DeBlois, the Wiley Family Trust, James Bezzerides, the Bezzco Inc. Employee Retirement Trust and Trade Source International, Inc., a California corporation, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.8 Voting Agreement, dated July 1, 1998, by and among James R. Ridings, Neall Humphrey and John DeBlois, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.9 Third Amendment to Credit Agreement, dated July 1, 1998, by and among Craftmade International, Inc., a Delaware corporation, Trade Source International, Inc., a Delaware corporation, Chase Bank of Texas, National Association (formerly named Texas Commerce Bank, National Association) and Frost National Bank (formerly named Overton Bank and Trust), filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.10 Consent to Merger by Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.11 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation, and Neall Humphrey, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.12 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation, and Leslie Humphrey, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 21 22 10.13 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation, and John DeBlois, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.14 Registration Rights Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Neall and Leslie Humphrey and John DeBlois, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.15 ISDA Master Agreement and Schedule, dated June 17, 1999, by and among Chase Bank of Texas, National Association, Craftmade International, Inc., Durocraft International, Inc. and Trade Source International, Inc., filed as Exhibit 10.15 to the Company's Quarterly Report on Form 10Q filed November 12, 1999 (File No. 000-26667) and herein incorporated by reference. 10.16 Confirmation under ISDA Master Agreement, dated July 23, 1999, from Chase Bank of Texas, National Association to Craftmade International, Inc., filed as Exhibit 10.165 to the Company's Quarterly Report on Form 10Q filed November 12, 1999 (File No. 000-26667) and herein incorporated by reference. 10.17 Fourth Amendment to Credit Agreement, dated April 2, 1999, by and among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc., a Texas Corporation, Trade Source International, Inc., a Delaware Corporation, C/D/R Incorporated, a Delaware corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.18 Letter Agreement Concerning Fifth Amendment to Credit Agreement, dated August 11, 1999, from Chase Bank of Texas, N.A. and Frost National Bank to Craftmade International, Inc., Durocraft International, Inc., Trade Source International, Inc., and C/D/R Incorporated, filed as Exhibit 10.18 to the 22 23 Company's Quarterly Report on Form 10Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.19 Sixth Amendment to Credit Agreement, dated November 12, 1999, by and among Craftmade International, Inc., a Delaware corporation. Durocraft International, Inc., a Texas Corporation, Trade Source International, Inc., a Delaware Corporation, C/D/R Incorporated, a Delaware corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.19 to the Company's Quarterly Report on Form 10Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.20 Employment Agreement dated October 25, 1999, between Kathy Oher and Craftmade International, Inc., filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K filed September 26, 2000 (File No. 000-26667) and herein incorporated by reference. 10.21 Seventh Amendment to Credit Agreement dated May 12, 2000, by and among Craftmade International, Inc., a Delaware corporation, C/D/R Incorporated, a Delaware corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K filed September 26, 2000 (File No. 000-26667) and herein incorporated by reference. 10.22 Craftmade International, Inc. 1999 Stock Option Plan, filed as Exhibit A to the Company's Proxy Statement on Schedule 14A filed October 4, 2000 (File No. 000-26667) and herein incorporated by reference. 10.23 Craftmade International, Inc. 2000 Non-Employee Director Stock Plan, filed as Exhibit B to the Company's Proxy Statement on Schedule 14A filed October 4, 2000 (File No. 000-2667) and herein incorporated by reference. 10.24* Eighth Amendment to Credit Agreement dated February 12, 2001, by and among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, Design Trends, LLC, a Delaware limited liability company, C/D/R Incorporated, a Delaware corporation, The Chase Manhattan Bank and The Frost National Bank. -------- * Filed herewith b). Reports on Form 8-K None. 23 24 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 May 14, 2001 /s/ James R. Ridings -------------- ------------------------------ JAMES R. RIDINGS President and Chief Executive Officer Date May 14, 2001 /s/ Kathleen B. Oher -------------- ------------------------------ KATHLEEN B. OHER Chief Financial Officer 24 25 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Certificate of Incorporation of the Company, filed as Exhibit 3(a)(2) to the Company's Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and incorporated by reference therein. 3.2 Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24, 1992 and filed as Exhibit 4.2 to the Company's Form S-8 (File No. 333-44337) and incorporated by reference therein. 3.3 Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the Company's Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and incorporated by reference therein. 4.1 Specimen Common Stock Certificate, filed as Exhibit 4.4 to the Company's Registration Statement on Form S-3 (File No. 333-70823) and incorporated by reference therein. 4.2 Rights Agreement, dated as of June 23, 1999, between Craftmade International, Inc. and Harris Trust and Savings Bank, as Rights Agent, previously filed as an exhibit to Form 8-K dated July 9, 1999 (File No. 000-26667) and incorporated by reference herein. 10.1 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 10-Q 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 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 25 26 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 10-Q 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., Nations Bank of Texas, N.A., as Agent and the Lenders defined therein (including exhibits), previously filed as an exhibit in Form 10-Q 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 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.6 Revolving credit facility with Texas Commerce Bank, previously filed as an exhibit in Form 10-K for the year ended June 30, 1996, and herein incorporated by reference. 10.7 Agreement and Plan of Merger, dated as of July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation, Neall and Leslie Humphrey, John DeBlois, the Wiley Family Trust, James Bezzerides, the Bezzco Inc. Employee Retirement Trust and Trade Source International, Inc., a California corporation, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.8 Voting Agreement, dated July 1, 1998, by and among James R. Ridings, Neall Humphrey and John DeBlois, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.9 Third Amendment to Credit Agreement, dated July 1, 1998, by and among Craftmade International, Inc., a Delaware corporation, Trade Source International, Inc., a Delaware corporation, Chase Bank of Texas, National Association (formerly named Texas Commerce Bank, National Association) and Frost National Bank (formerly named 26 27 Overton Bank and Trust), filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.10 Consent to Merger by Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.11 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation, and Neall Humphrey, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.12 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation, and Leslie Humphrey, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.13 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation, and John DeBlois, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.14 Registration Rights Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Neall and Leslie Humphrey and John DeBlois, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.15 ISDA Master Agreement and Schedule, dated June 17, 1999, by and among Chase Bank of Texas, National Association, Craftmade International, Inc., Durocraft International, Inc. and Trade Source International, Inc., filed as Exhibit 10.15 to the Company's Quarterly Report on Form 10Q filed November 12, 1999 (File No. 000-26667) and herein incorporated by reference. 10.16 Confirmation under ISDA Master Agreement, dated July 23, 1999, from Chase Bank of Texas, National Association to 27 28 Craftmade International, Inc., filed as Exhibit 10.165 to the Company's Quarterly Report on Form 10Q filed November 12, 1999 (File No. 000-26667) and herein incorporated by reference. 10.17 Fourth Amendment to Credit Agreement, dated April 2, 1999, by and among Craftmade International, Inc., a Delaware corporation, C/D/R Inc., a Delaware corporation, Durocraft International, Inc. a Texas corporation, Trade Source International, a Delaware corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.18 Letter Agreement Concerning Fifth Amendment to Credit Agreement, dated August 11, 1999, from Chase Bank of Texas, N.A. and Frost National Bank to Craftmade International, Inc., Durocraft International Inc., Trade Source International, Inc., and C/D/R Incorporated, filed as Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.19 Sixth Amendment to Credit Agreement, dated November 12, 1999, by and among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, C/D/R Incorporated, a Delaware corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.20 Employment Agreement dated October 25, 1999, between Kathy Oher and Craftmade International, Inc., filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K filed September 26, 2000 (File No. 000-26667) and herein incorporated by reference. 10.21 Seventh Amendment to Credit Agreement dated May 12, 2000, by and among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, C/D/R Incorporated, a Delaware corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.21 to the Company's 28 29 Annual Report on Form 10-K filed September 26, 2000 (File No. 000-26667) and herein incorporated by reference. 10.22 Craftmade International Inc. 1999 Stock Option Plan, filed as Exhibit A to the Company's Proxy Statement on Schedule 14A filed October 4, 2000 (File No. 000-26667) and herein incorporated by reference. . 10.23 Craftmade International Inc. 2000 Non-Employee Director Stock Plan, filed as Exhibit B to the Company's Proxy Statement on Schedule 14A filed October 4, 2000 (File No. 000-26667) and herein incorporated by reference. 10.24* Eighth Amendment to Credit Agreement dated February 12, 2001, by and among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware Corporation, Design Trends, LLC, a Delaware limited liability company, C/D/R Incorporated, a Delaware corporation, The Chase Manhattan Bank, and The Frost National Bank. ---------- * Filed herewith 29