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, 2003 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 . ---------- ---------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes . No x. ---------- ---------- 5,410,258 shares of Common Stock were outstanding as of April 30, 2003. 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, 2003 and 2002. Condensed Consolidated Balance Sheets as of March 31, 2003 and June 30, 2002. Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2003 and 2002. 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. Item 4. Controls and Procedures. 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 Stockholders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 2 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- March 31, March 31, March 31, March 31, 2003 2002 2003 2002 --------- --------- --------- --------- (In thousands except per share data) Net Sales $ 17,878 $ 14,988 $ 52,860 $ 53,207 Cost of goods sold 12,511 10,094 36,206 36,524 --------- --------- --------- --------- Gross profit 5,367 4,894 16,654 16,683 --------- --------- --------- --------- Selling, general and administrative expenses 3,813 3,768 11,179 11,267 Interest expense, net 218 159 630 705 Depreciation and amortization 160 133 471 402 --------- --------- --------- --------- Total expenses 4,191 4,060 12,280 12,374 --------- --------- --------- --------- Income before equity in earnings of 50% owned investees and income taxes 1,176 834 4,374 4,309 Equity in earnings of 50% owned investees before income taxes 1,043 676 3,464 1,993 --------- --------- --------- --------- Income before income taxes 2,219 1,510 7,838 6,302 Provision for income taxes 863 541 2,910 2,255 --------- --------- --------- --------- Net income $ 1,356 $ 969 $ 4,928 $ 4,047 ========= ========= ========= ========= Basic earnings per common share $ 0.25 $ 0.16 $ 0.89 $ 0.68 ========= ========= ========= ========= Diluted earnings per common share $ 0.25 $ 0.16 $ 0.88 $ 0.68 ========= ========= ========= ========= Cash dividends declared per common share $ 0.07 $ 0.07 $ 0.21 $ 0.21 ========= ========= ========= ========= SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS March 31, June 30, 2003 2002 --------- --------- (Unaudited) (In thousands) Current assets: Cash $ 2,558 $ 624 Accounts receivable - net of allowance of $150 and $150 respectively 12,173 15,077 Receivables from 50% owned investees 240 2,227 Inventory 10,101 8,570 Deferred income taxes 588 588 Prepaid expenses and other current assets 544 453 --------- --------- Total current assets 26,204 27,539 --------- --------- Property and equipment, net Land 1,535 1,535 Building 7,784 7,784 Office furniture and equipment 3,801 3,694 Leasehold improvements 259 253 --------- --------- 13,379 13,266 Less: accumulated depreciation (3,931) (3,460) --------- --------- Total property and equipment, net 9,448 9,806 --------- --------- Goodwill, net of accumulated amortization of $1,204,000 4,735 4,735 Deferred income tax 156 156 Investment in 50% owned investees 3,847 2,244 Other assets 12 12 --------- --------- Total other assets 8,750 7,147 --------- --------- Total assets $ 44,402 $ 44,492 ========= ========= SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY March 31, June 30, 2003 2002 ----------- ----------- (Unaudited) (In thousands except for share data) Current liabilities: Note payable - current $ 792 $ 696 Revolving lines of credit 13,204 9,034 Accounts payable 3,848 3,067 Commissions payable 238 274 Income taxes payable 1,061 567 Accrued liabilities 1,894 2,484 ----------- ----------- Total current liabilities 21,037 16,122 Other non-current liabilities: Note payable - long term 4,531 5,746 ----------- ----------- Total liabilities 25,568 21,868 ----------- ----------- 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, 9,390,535 and 9,390,535 shares issued, respectively 94 94 Additional paid-in capital 13,422 13,261 Unearned deferred compensation (51) (76) Retained earnings 34,150 30,380 ----------- ----------- 47,647 43,691 Less: treasury stock, 4,001,277 and 3,446,477 common shares at cost, and 32,000 preferred shares at cost (28,813) (21,067) ----------- ----------- Total Stockholders' Equity 18,834 22,624 ----------- ----------- Total liabilities and stockholders' equity $ 44,402 $ 44,492 =========== =========== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) FOR THE NINE MONTHS ENDED MARCH 31, 2003 (In thousands) ACCUMULATED SERIES A ADDITIONAL UNEARNED OTHER PREFERRED PAID-IN DEFERRED RETAINED COMPREHENSIVE VOTING COMMON STOCK STOCK CAPITAL COMPENSATION EARNINGS INCOME ---------------------- --------- ---------- ------------ -------- ------------- SHARES AMOUNT -------- -------- Balance as of June 30, 2002 9,391 $ 94 $ 32 $ 13,261 $ (76) $ 30,380 $ -- Comprehensive income: Net income for the nine months ended March 31, 2003 4,928 -------- -------- -------- -------- -------- -------- -------- Total comprehensive income 4,928 Deferred Compensation Earned 25 Stock Repurchase Exercise of Employee Stock Options 24 0 161 Cash Dividends (1,158) -------- -------- -------- -------- -------- -------- -------- Balance as of March 31, 2003 9,415 $ 94 $ 32 $ 13,422 $ (51) $ 34,151 $ 0 ======== ======== ======== ======== ======== ======== ======== (In thousands) TREASURY STOCK --------------------- SHARES AMOUNT TOTAL -------- -------- -------- Balance as of June 30, 2002 3,478 $(21,067) $ 22,624 Comprehensive income: Net income for the nine months ended March 31, 2003 0 4,928 -------- -------- -------- Total comprehensive income 4,928 Deferred Compensation Earned 25 Stock Repurchase 558 (7,746) (7,746) Exercise of Employee Stock Options 161 Cash Dividends (1,158) -------- -------- -------- Balance as of March 31, 2003 4,036 $(28,813) $ 18,835 ======== ======== ======== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE NINE MONTHS ENDED ------------------------- March 31, March 31, 2003 2002 --------- --------- (In thousands) Net cash provided by operating activities: $ 7,739 $ 13,462 --------- --------- Cash flows from investing activities: Net additions to equipment (114) (627) --------- --------- Net cash used for investing activities (114) (627) --------- --------- Cash flows from financing activities: Net proceeds from (payment to) lines of credit 4,170 (6,625) Principal payments on note payable (1,119) (2,009) Stock repurchase (7,746) -- Stock options exercised 162 418 Cash dividends (1,158) (1,249) --------- --------- Net cash used for financing activities (5,690) (9,465) --------- --------- Net increase in cash 1,935 3,370 Cash at beginning of period 624 723 --------- --------- Cash at end of period $ 2,558 $ 4,093 ========= ========= SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES MARCH 31, 2003 (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 wholly-owned subsidiaries; 50% owned subsidiaries are accounted for using the equity method. 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, as amended, for the fiscal year ended June 30, 2002. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year. Employee stock-based compensation The Company has adopted SFAS 123, "Accounting for Stock-Based Compensation," on a disclosure basis only. The Company measures compensation costs under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. Had compensation cost for all of the Company's stock option plans been determined based upon fair value at the grant dates consistent with the methodology prescribed in FAS 123, the Company's net income and net income per share would have changed to the pro forma amounts listed below using the weighted average fair values indicated. 8 THREE MONTHS THREE MONTHS ENDED MARCH 31, ENDED MARCH 31, 2003 2002 --------------- --------------- Net income, as reported $ 1,356 $ 969 Net income, pro forma 1,217 828 Basic earnings per share, as reported .25 .16 Basic earnings per share, pro forma .23 .14 Diluted earnings per share, pro forma .25 .16 Diluted earnings per share, as reported .22 .14 Weighted average fair value of options granted $ 6.02 $ 5.93 NINE MONTHS NINE MONTHS ENDED MARCH 31, ENDED MARCH 31, 2003 2002 --------------- --------------- Net income as reported $ 4,928 $ 4,047 Net income, pro forma 4,789 3,906 Basic earnings per share, as reported .89 .68 Basic earnings per share, pro forma .86 .66 Diluted earnings per share, as reported .88 .68 Dilted earnings per share, pro forma .85 .65 Weighted average fair value of options granted $ 6.01 $ 5.92 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES March 31, 2003 (Unaudited) (In Thousands) Note 2 - 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 March March March 31, 2003 31, 2002 31, 2003 31, 2002 ---------- ---------- ---------- ---------- (In thousands except per share data) Basic and Diluted EPS Numerator: Net Income $ 1,356 $ 969 $ 4,928 $ 4,047 ---------- ---------- ---------- ---------- Denominator: Common Shares Outstanding 5,384 5,957 5,565 5,930 ---------- ---------- ---------- ---------- Basic EPS $ 0.25 $ 0.16 $ 0.89 $ 0.68 ========== ========== ========== ========== Denominator: Common Shares Outstanding 5,384 5,957 5,565 5,930 Options 52 55 58 62 ---------- ---------- ---------- ---------- Total Shares 5,436 6,012 5,623 5,992 ========== ========== ========== ========== Diluted EPS $ 0.25 $ 0.16 $ 0.88 $ 0.68 ========== ========== ========== ========== 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES March 31, 2003 (Unaudited) (In Thousands) Note 3 - INVESTMENT IN 50% OWNED INVESTEES Combined summarized financial information for Design Trends, LLC ("Design Trends") and Prime/Home Impressions, LLC ("PHI") at March 31, 2003 and 2002 and for the three and nine months ended is as follows: FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- March March March March 31, 2003 31, 2002 31, 2003 31, 2002 -------- -------- -------- -------- Net Sales $ 8,900 $ 7,146 $ 29,031 $ 23,730 Gross profit 2,843 2,111 9,518 6,469 Income before income taxes 2,086 1,320 6,918 3,798 March March 31, 2003 31, 2002 -------- -------- Accounts receivable - net 3,769 3,206 Inventories 3,784 3,209 Total current assets 8,875 7,058 Total assets 10,935 9,873 Revolving line of credit 241 1,300 Note payable - current 153 -- Total current liabilities 5,307 6,159 Long term debt 277 -- Total liabilities 5,583 6,158 Total partners' captial 5,351 3,715 The Company received distributions of $1,855,000 and $516,000 for the nine months ended March 31, 2003 and 2002 respectively, from these two 50% owned investees. The Company's 50% owned investees operate in the form of partnerships and, consequently, do not file federal income tax returns. Instead, the Company's share of their income is reported in the Company's federal tax return. 11 Note 4 - TRANSACTIONS WITH 50% OWNED INVESTEES There are no sales between the Company and its 50% investees or between the investees. The investees utilize the Company's Coppell, Texas distribution facility and Company personnel in the conduct of their operations. The Company charges Design Trends for facility rent and payroll costs for those full time Company employees when they work directly in Design Trends operations. Facility rent is based on total square footage occupied by Design Trends and payroll costs represent actual costs for those employees. No allocation of indirect personnel costs, including management level personnel, is included in the charge to Design Trends. The Company utilizes borrowings under its line of credit to provide Design Trends with advances for its working capital needs. The Company charges Design Trends interest on these advances at its bank's prime rate plus two percentage points and interest is calculated on the average outstanding monthly balance. PHI reimburses the Company $30,000 per month for general warehouse and administrative expenses. Craftmade's charges to its 50% owned investees are summarized as follows for the three months and nine months ended (in thousands): Three Months Ending March 31, March 31, 2003 2002 --------- --------- Rent - Design Trends $ 60,000 $ 60,000 Payroll - Design Trends $ 255,000 $ 231,000 Interest - Design Trends 12,000 $ 61,000 Administrative - PHI $ 90,000 $ 90,000 Nine Months Ending March 31, March 31, 2003 2002 --------- --------- Rent - Design Trends $ 180,000 $ 180,000 Payroll - Design Trends $ 749,000 $ 675,000 Interest - Design Trends $ 32,000 $ 377,000 Administrative - PHI $ 270,000 $ 270,000 12 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 outdoor lighting, portable lamps, indoor 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, 2002. The Company evaluates the performance of its segments and allocates resources to them based on their operating profit and loss and cash flows. The following table presents information about the reportable segments (in thousands): Craftmade TSI Total --------- -------- -------- For the three months ended March 31, 2003 Net sales from external customers $ 11,146 $ 6,732 $ 17,878 Operating profit (loss) 1,521 (127) 1,394 For the three months ended March 31, 2002 Net sales from external customers $ 11,375 $ 3,613 $ 14,988 Operating profit (loss) 1,498 (505) 993 For the nine months ended March 31, 2003 Net sales from external customers $ 35,568 $ 17,292 $ 52,860 Operating profit (loss) 5,366 (362) 5,004 For the nine months ended March 31, 2002 Net sales from external customers $ 36,351 $ 16,856 $ 53,207 Operating profit 5,208 (194) 5,014 13 Note 6 - NEW ACCOUNTING PRONOUNCEMENTS The FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," ("FIN 46"), which is effective immediately to variable interest entities created after January 31, 2003, and applies in the first interim period beginning after June 15, 2003 to variable interest entities created before February 1, 2003. FIN 46 addresses the consolidation of variable interest entities through identification of a primary beneficiary. We do not expect the adoption of this standard to have a material impact on our financial statements in 2003. In November of 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), effective for fiscal years beginning after December 15, 2002. EITF 02-16 addresses the accounting for cash consideration given to a reseller of a vendor's products from a vendor. EITF 02-16 indicates that, generally, cash consideration received by a customer from a vendor is presumed to be a reduction in the price of the vendor's products or services and should, therefore, be characterized as a reduction of cost of sales when recognized in the customer's income statement. EITF 02-16 also indicates that cash consideration would be characterized as revenue if the vendor receives, or will receive, an identifiable benefit (goods or services) in exchange for the consideration, provided that the identified benefit is sufficiently separable from the customer's purchase of the vendor's products and the customer can reasonably estimate the fair value of the benefit provided. We do not expect the adoption of this standard to have a material impact on our financial statements in 2003. 14 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 actual results to differ materially from those anticipated by these 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, TSI's, Design Trends' and PHI's dependence on sales to select mass merchandiser customers and changes in those relationships, changes in anticipated levels of sales, whether due to future national or regional economic and competitive conditions, changes in relationships with Craftmade customers, 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) and changes in the foreign currency exchange rate between the U.S. and Taiwan dollar, 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 of the Company. Results of Operations Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002. Net Sales. Net sales for the Company increased $2,890,000 or 19.3% to $17,878,000 for the three month period ended March 31, 2003 compared to $14,988,000 for the same three month period last year. Net sales from the Craftmade division decreased $229,000, or 2.0%, to $11,146,000 for the three months ended March 31, 2003 from $11,375,000 for the same three month period last year. The decrease in sales of the Craftmade division was primarily due to lower unit sales and lower prices on certain discontinued models of fans that were replaced by new models that were introduced in the January lighting market. This was a continuation of a trend that began in the second quarter of fiscal 2003. Management expects the showroom division to generate positive sales growth in fiscal 2004 as a result of new product introductions and fewer close-out sales. Net sales of the TSI division increased $3,119,000, or 86.3%, to $6,732,000 for the three months ended March 31, 2003 compared to $3,613,000 for the same three-month period last year. The increase in sales of the TSI division was due to increased sales to a mass retail customer as a result of a new product roll out that included five new outdoor lighting designs and one promotional item. 15 Gross Profit. Gross profit of the Company as a percentage of sales decreased to 30.0% of net sales for the three months ended March 31, 2003, compared to 32.7% for the same period of 2002. The gross margin of the Craftmade division decreased to 39.7% of sales from 40.8% of net sales in the year-ago period, primarily due to lower prices on certain close-out models, as discussed above. The gross margin of the TSI division improved to 13.9% of sales for the three months ended March 31, 2003 compared to 7.1% of sales in the year ago period. The improvement in the TSI gross margin was primarily due to a write down of slow moving inventory in the amount of $200,000 in the third quarter of fiscal 2002 that did not occur in the third quarter of fiscal 2003. Selling, General and Administrative Expenses. Total selling, general and administrative ("SG&A") expenses of the Company increased $45,000 to $3,813,000 or 21.3% of net sales for the three months ended March 31, 2003 from $3,768,000 or 25.1% of net sales for the same period last year. Total SG&A expenses of the showroom division declined $264,000 to $2,767,000 or 24.8% of sales compared to $3,031,000 or 26.6% of sales for the same period in the previous period. The decline in SG&A expenses of the Craftmade division in dollars and as a percentage of sales was primarily due to expenses incurred in connection with the company's logistics and accounting systems upgrade in the three months ended March 31, 2002 which did not occur in the same period this year. Total SG&A expenses of the TSI division increased $309,000 to $1,046,000 or 15.5% of sales compared to $737,000 or 20.4% of sales for the same period in the previous year. The improvement in SG&A as a percentage of sales was related to the effect of increased revenue leveraging down fixed SG&A expenses. The increase in SG&A expense dollars was related to an increase in selling costs and payroll related costs to support the increase in sales during the period. Interest Expense. Net interest expense of the Company increased $59,000 to $218,000 for the three months ended March 31, 2003 from $159,000 for the same three-month period last year. The increase in net interest expense was related to a decline in interest income due to a decrease in the outstanding balance of the receivable from the Company's 50% owned subsidiary, Design Trends. Equity in Earnings of 50% Owned Investees. Income from investees, representing the Company's 50% ownership of Prime/Home Impressions, LLC ("PHI") and Design Trends, LLC ("Design Trends") increased $367,000 to $1,043,000 from $676,000 for the three months ended March 31, 2003 and 2002, respectively. The increase in income from investees was primarily due to an increase in sales of Design Trends' portable lamp program, which generated $1,282,000 in incremental revenue for Design Trends during the period. In addition, PHI generated incremental sales of $473,000 during the quarter. 16 Provision For Income Taxes. The provision for income taxes increased $322,000 to $863,000 or 38.9% of net income before taxes for the three months ended March 31, 2003, from $541,000 or 35.8% for the same period of the prior year. Results of Operations Nine Months Ended March 31, 2003 Compared to Nine Months Ended March 31, 2002 Net Sales. Net sales for the Company decreased $347,000, or 0.7%, to $52,860,000 for the nine month period ended March 31, 2003 from $53,207,000 for the same nine-month period last year. Net sales of the Craftmade division decreased $783,000, or 2.2%, to $35,569,000 for the nine months ended March 31, 2003 from $36,351,000 for the same nine-month period last year. The decline in sales of the Craftmade division was primarily due to lower unit sales and lower prices on certain discontinued models of fans, as discussed above. Net sales of the TSI division increased $436,000, or 2.6%, to $17,292,000 for the nine months ended March 31, 2003 from $16,856,000 for the same nine-month period last year. The increase was primarily attributable to an increase in sales during the third quarter of fiscal 2003 to a mass retail customer as a result of a new product roll out that included five new outdoor lighting designs and one new promotional item. The increase was partially offset by a first-quarter decline in direct shipment sales of outdoor lighting to a mass retail customer. Gross Profit. Gross profit of the Company as a percentage of sales remained relatively unchanged at 31.5% of net sales for the nine months ended March 31, 2003 compared to 31.4% for the same period of 2002. The gross margin of the Craftmade division increased to 39.6% of sales from 39.2% of sales in the year ago period. The improvement in the gross margin of the Craftmade division was due primarily to the first quarter improvement in the exchange rate of the U.S. dollar relative to the Taiwanese dollar. The gross margin of the TSI division improved slightly to 14.8% of sales for the nine months ended March 31, 2003 compared to 14.5% of sales in the year ago period. The improvement in the gross margin of TSI was due to a smaller write down of slow moving inventory in the nine-month period ended March 31, 2003 compared to the same period last year. The TSI division recorded an inventory write-down of $426,000 and $500,000 in the nine-month period ended March 31, 2003 and March 31, 2002, respectively. Selling, General and Administrative Expenses. Total selling, general and administrative ("SG&A") expenses of the Company decreased $88,000 to $11,179,000 or 21.1% of net sales for the nine 17 months ended March 31, 2003 from $11,267,000 or 21.2% of net sales for the same nine-month period last year. Total SG&A expenses of the Craftmade division decreased $384,000 to $8,319,000 or 23.4% of sales compared to $8,703,000 or 23.9% of sales for the same period in the previous year. The decline in SG&A expense dollars of Craftmade is primarily attributable to lower selling costs associated with the decline in sales of the Craftmade division. Total SG&A expenses of the TSI division increased $296,000 to $2,860,000 or 16.5% of sales from $2,564,000 or 15.2% of sales for the same period in the previous year. The increase in TSI's SG&A expenses as a percentage of sales was related to an increase in product development costs and payroll related expenses to support the increase in sales during the period. Interest Expense. Net interest expense of the Company decreased $75,000 to $630,000 for the nine-months ended March 31, 2003 from $705,000 for the same nine-month period last year. This improvement was primarily the result of a decrease in the outstanding balance of the Company's revolving lines of credit, combined with lower interest rates in effect during the period. Equity in Earnings of 50% Owned Investees. Income from investees, representing the Company's 50% ownership of PHI and Design Trends increased $1,471,000 to $3,464,000 from $1,993,000 for the nine months ended March 31, 2003 and 2002, respectively. The increase in income from investees was primarily due to an increase in sales of Design Trends' portable lamp program, which generated $4,330,000 in incremental revenue during the period. In addition, PHI generated incremental sales of $971,000 during the period. The increase was due to an expansion in the core program business of PHI's largest mass retail customer, as well as an increase in promotional business with another mass retail customer. Provision for Income Taxes. The provision for income taxes increased $655,000 to $2,910,000 or 37.1% of net income before taxes but after minority interest expense, for the nine months ended March 31, 2003, from $2,255,000 or 35.8% for the same period of the prior year. LIQUIDITY AND CAPITAL RESOURCES The Company's cash increased $1,935,000 from $624,000 at June 30, 2002 to $2,558,000 at March 31, 2003. The Company's operating activities provided cash of $7,739,000 primarily attributable to the Company's net income from operations and collections on customer accounts. The $114,000 of cash used for investing activities related primarily to additions to property and equipment associated with the implementation of the Company's logistics and accounting systems upgrade. 18 Cash used for financing activities of $5,690,000 was primarily the result of (i) the repurchase of 558,000 shares of the Company's common stock at an aggregate cost of $7,746,000, (ii) principal payments of $1,119,000 on the Company's facility note payable, and(iii) cash dividends of $1,158,000. These amounts were partially offset by proceeds of $4,170,000 on the Company's line of credit and $162,000 received from stock options exercised. At March 31, 2003, subject to continued compliance with certain covenants and restrictions, the Company had $20,000,000 available on its line of credit, of which $13,204,000 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 Company's current operating needs, make annual payments of approximately $1,200,000 under the Company's facility note payable, fund any future dividend payments, as well as fund its projected growth over the next twelve months. At March 31, 2003, $5,323,000 remained outstanding under the 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. The facility note payable matures on January 1, 2008. During the year ended June 30, 2002, the Company's Board of Directors authorized the Company's management to repurchase up to 600,000 shares of the Company's outstanding common stock. At June 30, 2002, the Company had repurchased 17,000 shares at an aggregate cost of $235,000. During the nine month period ended March 31, 2003, the Company repurchased 558,000 shares at an aggregate cost of $7,746,000. As of April 30, 2003 25,000 shares remained available for repurchase under this program. With respect to the Company's 50%-owned investees, PHI had $3,000,000 available on its line of credit, of which $241,000 had been utilized at March 31, 2003. Craftmade is a guarantor of this line of credit. Craftmade provides Design Trends with loans to finance its working capital needs, drawing on the $20 million Line of Credit described above, as needed. To satisfy anticipated demand for the portable lamp program, Design Trends maintained an inventory level of $2,783,000 at March 31, 2003. This program is highly concentrated 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 Company would be able to obtain additional customers for this inventory or that these alternative sources would generate similar sales levels and profit margins as anticipated with the current mass merchandiser customer. 19 NEW ACCOUNTING PRONOUNCEMENTS The FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," ("FIN 46"), which is effective immediately to variable interest entities created after January 31, 2003, and applies in the first interim period beginning after June 15, 2003 to variable interest entities created before February 1, 2003. FIN 46 addresses the consolidation of variable interest entities through identification of a primary beneficiary. We do not expect the adoption of this standard to have a material impact on our financial statements in 2003. In November of 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), effective for fiscal years beginning after December 15, 2002. EITF 02-16 addresses the accounting for cash consideration given to a reseller of a vendor's products from a vendor. EITF 02-16 indicates that, generally, cash consideration received by a customer from a vendor is presumed to be a reduction in the price of the vendor's products or services and should, therefore, be characterized as a reduction of cost of sales when recognized in the customer's income statement. EITF 02-16 also indicates that cash consideration would be characterized as revenue if the vendor receives, or will receive, an identifiable benefit (goods or services) in exchange for the consideration, provided that the identified benefit is sufficiently separable from the customer's purchase of the vendor's products and the customer can reasonably estimate the fair value of the benefit provided. We do not expect the adoption of this standard to have a material impact on our financial statements in 2003. 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. At March 31, 2003, the Company had a $20,000,000 line of credit (the "Craftmade Line of Credit") with Frost at an interest rate of prime less .5%, of which $13,205,000 was outstanding. At March 31, 2003, the prime rate was equal to 4.25%. The Craftmade Line of Credit is due on demand; however, if no demand is made, it is scheduled to mature October 31, 2003. At March 31, 2003, PHI had a $3,000,000 line of credit with Wachovia Bank, N.A. at an interest rate equal to the one-month LIBOR plus 2%, of which $241,000 was outstanding. At March 31, 2003, the one-month LIBOR rate was equal to 1.30%. The PHI Line of 20 Credit is due on demand; however, if no demand is made, it is scheduled to mature October 1, 2003. In addition, PHI had a $500,000 three-year note payable with Wachovia maturing on July 29, 2005, of which $431,000 was outstanding at March 31, 2003. The note bears interest at a rate equal to the Monthly LIBOR Index plus 2.5%. These two lines of credit of PHI are referred to as the "PHI Lines of Credit." Because of the variable rate and short-term nature of the Craftmade Line of Credit and the PHI Lines of Credit, the Company is subject to market risk associated with adverse changes in interest rates. A sharp rise in interest rates could materially adversely affect the financial condition and results of operations of the Company. The Company has not entered into any instruments to minimize this market risk of adverse changes in interest rates because the Company believes the cost associated with such instruments would outweigh the benefits that would be obtained from utilizing such instruments. Under the Craftmade Line of Credit, for each one-percentage point (1%) incremental increase in the prime rate, the Company's annualized interest expense would increase by approximately $132,000. Consequently, an increase in the prime rate of five percentage points (5%) would result in an estimated annualized increase of interest expense for the Company of approximately $660,000. Under the PHI Lines of Credit, for each one-percentage point (1%) incremental increase in LIBOR, the Company's annualized interest expense would increase by approximately $7,000. Consequently, an increase in LIBOR of five percentage points (5%) would result in an estimated annualized increase in interest expense for the Company of approximately $35,000. The Company currently purchases a substantial amount of ceiling fans and other products of its Craftmade division from Fanthing, a Taiwanese company. The Company's verbal understanding with Fanthing provides that all transactions are to be denominated in U.S. dollars; however, the understanding further provides that, in the event that the value of the U.S. dollar appreciates or depreciates against the Taiwanese dollar by one Taiwanese dollar or more, Fanthing's prices will be accordingly adjusted by 2.5%. As of March 31, 2003, one U.S. dollar equaled $34.84 Taiwanese dollars. A sharp appreciation of the Taiwanese dollar relative to the U.S. dollar could materially adversely affect the financial condition and results of operations of the Company. The Company has not entered into any instruments to minimize this market risk of adverse changes in currency rates because the Company believes the cost associated with such instruments would outweigh the benefits that would be obtained from utilizing such instruments. 21 All other purchases of the Company and its 50% owned investees from foreign vendors are denominated in U.S. dollars and are not subject to adjustment provisions with respect to foreign currency fluctuations. As a result, the Company does not believe that it is subject to any material foreign currency exchange risk with respect to such purchases. During the fiscal quarter ended March 31, 2003, the Company purchased approximately $3,759,000 of products from Fanthing. Under the Company's understanding with Fanthing, each $1 incremental appreciation of the Taiwanese dollar would result in an estimated annualized net increase in cost of goods sold of approximately $376,000, based on the Company's purchases during the fiscal quarter ended March 31, 2003 (on an annualized basis). A $5 incremental appreciation of the Taiwanese dollar would result in an estimated annualized increase in cost of goods sold of approximately $1,880,000, based on the Company's purchases during the fiscal quarter ended March 31, 2003 (on an annualized basis). A $10 incremental appreciation of the Taiwanese dollar would result in an increase of approximately $3,760,000 on an annualized basis, based on the Company's purchases during the fiscal quarter ended March 31, 2003 (on an annualized basis). These amounts are estimates of the financial impact of an appreciation of the Taiwanese dollar relative to the U.S. dollar and are based on annualizations of the Company's purchases from Fanthing for the fiscal quarter ended March 31, 2003. Consequently, these amounts are not necessarily indicative of the effect of such changes with respect to an entire year. ITEM 4 CONTROLS AND PROCEDURES. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive officer and the chief financial officer of the Company concluded that the Company's disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely manner. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive officer and chief financial officer, including any corrective actions with regard to significant deficiencies and material weaknesses. 22 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 herein. 3.2 Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24, 1992 and filed as Exhibit 4.2 to the Company's Form S-8 (File No. 333-44337) and incorporated by reference herein. 3.3 Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the Company's Post Effective Amendment No. 1 to Form S-8 (File No. 33-33594-FW) and incorporated by reference herein. 4.1 Specimen Common Stock Certificate, filed as Exhibit 4.4 to the Company's Registration Statement on Form S-3 (File No. 333-70823) and incorporated by reference herein. 23 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 (File No. 001-10471), 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 (File No. 001-10471), 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 (File No. 001-10471), 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 (File No. 001-10471), 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 24 31, 1995 (File No. 001-10471), 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 (File No. 001-10471), 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 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., 25 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 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, 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. 10.15 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 10Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.16 Sixth Amendment to Credit Agreement, dated November 12, 1999, by and among Craftmade International, Inc., a Delaware corporation. 26 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. 10.17 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. 10.18 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 Annual Report on Form 10-K filed September 26, 2000 (File No. 000-26667) and herein incorporated by reference. 10.19 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. 10.20 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. 10.21 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, 27 The Chase Manhattan Bank and The Frost National Bank, filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K filed May 14, 2001(File No. 000-26667) and herein incorporated by reference. 10.22 Ninth Amendment to Credit Agreement dated June 29, 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 as Exhibit 10.25 to the Company's Annual Report on Form 10-K filed September 26, 2001 (File No. 000-26667) and herein incorporated by reference. 10.23 Loan Agreement dated November 6, 2001, by and between Craftmade International, Inc., a Delaware corporation, and The Frost National Bank, a national banking association, filed as Exhibit 10.26 to the Company's quarterly Report on Form 10-Q filed February 14, 2002 (File No. 000-26667) and herein incorporated by reference. 10.24 Termination Agreement dated November 16, 2001, by and between Craftmade International, Inc., a Delaware corporation, and JP Morgan Chase Bank, filed as Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q filed February 14, 2002 (File No. 000-26667) and herein incorporated by reference. 10.25 Loan Agreement dated April 17, 2002, by and between Prime/Home Impressions, LLC, a North Carolina limited liability company, and Wachovia Bank, N.A., with Note and Security Agreement of Prime/Home Impressions, LLC, Guaranty Agreement of Craftmade International, Inc., Guaranty Agreement of Trade Source International, Inc., and Guaranty Agreement of Home Impressions, Inc., filed as Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q filed November 14, 2002 (File No. 000-26667) and herein incorporated by reference. 28 10.26 Note and Security Agreement dated April 29, 2002, by Prime/Home Impressions LLC, a North Carolina limited liability company, to Wachovia Bank, N.A., with Security Agreement of Prime/Home Impressions, LLC, Guaranty Agreement of Craftmade International, Inc., and Guaranty Agreement of Trade Source International, Inc., filed as Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q filed November 14, 2002 (File No. 000-26667) and herein incorporated by reference. 99.1 Certification of Period Report by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, accompanying the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. 99.2 Certification of Period Report by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, accompanying the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. b). Reports on Form 8-K None filed 29 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 15, 2003 /s/ James R. Ridings ---------------------- ------------------------------------ JAMES R. RIDINGS President and Chief Executive Officer Date May 15, 2003 /s/ Kathleen B. Oher ---------------------- ------------------------------------ KATHLEEN B. OHER Chief Financial Officer 30 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James R. Ridings, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Craftmade International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 31 a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ James R. Ridings ------------------------- James R. Ridings President and Chief Executive Officer 32 I, Kathleen B. Oher, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Craftmade International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and 33 report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Kathleen B. Oher --------------------------- Kathleen B. Oher Chief Financial Officer 34 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 herein. 3.2 Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24, 1992 and filed as Exhibit 4.2 to the Company's Form S-8 (File No. 333-44337) and incorporated by reference herein. 3.3 Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the Company's Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and incorporated by reference herein. 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 herein. 4.2 Rights Agreement, dated as of June 23, 1999, between Craftmade International, Inc. and Harris Trust and Savings Bank, as Rights Agent, previously filed as an exhibit to Form 8-K dated July 9, 1999 (File No. 000-26667) and incorporated by reference herein. 10.1 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 (File No. 001-10471), 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 (File No. 001-10471), 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 35 Form 10-Q for the quarter ended December 31, 1995 (File No. 001-10471), 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 (File No. 001-10471), 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 (File No. 001-10471), 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 (File No. 001-10471), 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 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 36 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 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, 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. 10.15 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. 10.16 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 37 Company's Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.17 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. 10.18 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 Annual Report on Form 10-K filed September 26, 2000 (File No. 000-26667) and herein incorporated by reference. 10.19 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. 10.20 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. 10.21 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 as Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q filed May 14, 2001 (File No. 000-26667) and herein incorporated by reference. 10.22 Ninth Amendment to Credit Agreement dated June 29, 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 as Exhibit 10.25 to the Company's Annual Report on Form 10-K filed September 26, 2001 (File No. 000-26667) and herein incorporated by reference. 38 10.23 Loan Agreement dated November 6, 2001, by and between Craftmade International, Inc., a Delaware corporation, and The Frost National Bank, a national banking association, filed as Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q filed February 14, 2002 (File No. 000-26667) and herein incorporated by reference. 10.24 Termination agreement dated November 16, 2001, by and between Craftmade International, Inc., a Delaware corporation, and JPMorgan Chase Bank, filed as Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q filed February 14, 2002 (File No. 000-26667) and herein incorporated by reference. 10.25 Loan Agreement dated April 17, 2002, by and between Prime/Home Impressions, LLC, a North Carolina limited liability company, and Wachovia Bank, N.A., with Note and Security Agreement of Prime/Home Impressions, LLC, Guaranty Agreement of Craftmade International, Inc., Guaranty Agreement of Trade Source International, Inc., and Guaranty Agreement of Home Impressions, Inc., filed as Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q filed November 14, 2002 (File No. 000-26667) and herein incorporated by reference. 10.26 Note and Security Agreement dated April 29, 2002, by Prime/Home Impressions LLC, a North Carolina limited liability company, to Wachovia Bank, N.A., with Security Agreement of Prime/Home Impressions, LLC, Guaranty Agreement of Craftmade International, Inc., and Guaranty Agreement of Trade Source International, Inc., filed as Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q filed November 14, 2002 (File No. 000-26667) and herein incorporated by reference. 99.1 Certification of Period Report by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, accompanying the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. 99.2 Certification of Period Report by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, accompanying the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. 39