-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SN9Cemb0fzb2jWbWoOxPECxBSwwgfVyM3tt6Xzc4F2Af6mljNyuSJavWru17CcFe RmtmRoxhMwIYNXOgBSdKCw== 0000950134-02-011766.txt : 20020926 0000950134-02-011766.hdr.sgml : 20020926 20020926114453 ACCESSION NUMBER: 0000950134-02-011766 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020926 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRAFTMADE INTERNATIONAL INC CENTRAL INDEX KEY: 0000856250 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRICAL APPLIANCES, TV & RADIO SETS [5064] IRS NUMBER: 752057054 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-26667 FILM NUMBER: 02772727 BUSINESS ADDRESS: STREET 1: 650 S ROYAL LANE SUITE 100 CITY: COPPELL STATE: TX ZIP: 75050 BUSINESS PHONE: 9723933800 MAIL ADDRESS: STREET 1: CRAFTMADE INTERNATIONAL INC STREET 2: 650 S ROYAL LANE SUITE 100 CITY: COPPELL STATE: TX ZIP: 75050 10-Q/A 1 d00041ae10vqza.txt AMENDMENT NO. 1 TO FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 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 . - ---------- ---------- 5,962,058 shares of Common Stock were outstanding as of May 10, 2002. CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES Index to Quarterly Report on Form 10-Q/A Part I. Financial Information Introductory Note - Restatement The Company has changed the way it accounts for its two 50%-owned investees - Design Trends and Prime/Home Impressions - to account for these investees using the equity method of accounting rather than consolidation. Assets, liabilities, revenues and expense of these two investees are no longer included in the Company's balance sheets or statements of income. Instead, the balance sheets include the Company's investment in the investees and the income statements reflect, as a single line item, its equity share in the earnings of these investees. Net income, primary and diluted earnings per share and stockholders' equity did not change for any period restated. For purposes of this Form 10-Q/A, the Company has amended and restated in its entirety Part I of the Company's Form 10-Q for the quarterly period ended March 31, 2002. This Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q, or modify or update those disclosures in any way, except as required to reflect the effects of this restatement. Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Income for the three and nine months ended March 31, 2002 and 2001 (Restated). Condensed Consolidated Balance Sheets as of March 31, 2002 and June 30, 2001 (Restated). Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2002 and 2001 (Restated). Notes to Condensed Consolidated Financial Statements (Restated). Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Restated). 2 Item 3. Quantitative and Qualitative Disclosures About Market Risk (Restated). CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED ----------------------------- ----------------------------- March March March March 31, 2002 31, 2001 31, 2002 31, 2001 Restated Restated Restated Restated ---------- ---------- ---------- ---------- (In thousands except per share data) Net Sales $ 14,988 $ 15,468 $ 53,207 $ 51,297 Cost of goods sold 10,094 10,511 36,524 35,123 ---------- ---------- ---------- ---------- Gross profit 4,894 4,957 16,683 16,174 ---------- ---------- ---------- ---------- Selling, general and administrative expenses 3,768 3,560 11,267 10,468 Interest expense, net 159 458 705 1,428 Depreciation and amortization 133 222 402 670 ---------- ---------- ---------- ---------- Total Expenses 4,060 4,240 12,374 12,566 ---------- ---------- ---------- ---------- Income before equity in earnings of 50% owned investees and income taxes 834 717 4,309 3,608 Equity in earnings of 50% owned investees before income taxes 676 305 1,993 1,004 ---------- ---------- ---------- ---------- Income before income taxes 1,510 1,022 6,302 4,612 Provision for income taxes 541 342 2,255 1,707 ---------- ---------- ---------- ---------- Net income $ 969 $ 680 $ 4,047 $ 2,905 ========== ========== ========== ========== Basic earnings per common share $ 0.16 $ 0.12 $ 0.68 $ 0.49 ========== ========== ========== ========== Diluted earnings per common share $ 0.16 $ 0.12 $ 0.68 $ 0.49 ========== ========== ========== ========== Cash dividends declared per common share $ 0.07 $ 0.07 $ 0.21 $ 0.18 ========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
March 31 June 30, 2002 2001 Restated Restated ---------- ---------- (Unaudited) (In thousands) Current assets: Cash $ 4,093 $ 723 Accounts receivable - net of allowance of $150,000 10,152 13,308 Receivables from 50% owned investees 1,241 8,271 Inventory 10,699 12,650 Deferred income taxes 758 758 Prepaid expenses and other current assets 434 1,158 ---------- ---------- Total current assets 27,377 36,868 Property and equipment, net Land 1,535 1,535 Building 7,784 7,784 Office furniture and equipment 3,613 2,998 Leasehold improvements 253 253 ---------- ---------- 13,185 12,570 Less: accumulated depreciation (3,290) (2,900) ---------- ---------- Total property and equipment, net 9,895 9,670 Goodwill, net of accumulated amortization of $1,204,000 4,735 4,735 Investment in 50% owned investees 2,432 1,049 Other assets 12 39 ---------- ---------- Total other assets 7,179 5,823 ---------- ---------- Total assets $ 44,451 $ 52,361 ========== ==========
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, 2002 2001 Restated Restated ---------- ---------- (Unaudited) (In thousands) Current liabilities: Note payable - current $ 680 $ 512 Revolving line of credit 12,175 18,800 Accounts payable 1,845 4,124 Commissions payable 266 301 Income taxes payable 125 719 Accrued liabilities 2,198 1,806 ---------- ---------- Total current liabilities 17,289 26,262 Other non-current liabilities: Deferred income taxes 241 241 Note payable - long term 5,927 8,104 ---------- ---------- Total liabilities 23,457 34,607 ---------- ---------- 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,9,388,535 and 9,326,535 shares issued, respectively 94 93 Additional paid-in capital 13,100 12,683 Unearned deferred compensation (84) (108) Retained earnings 28,684 25,886 ---------- ---------- 41,826 38,586 Less: treasury stock, 3,429,477 common shares at cost, and 32,000 preferred shares at cost (20,832) (20,832) ---------- ---------- Total stockholders' equity 20,994 17,754 ---------- ---------- Total liabilities and stockholders' equity $ 44,451 $ 52,361 ========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED ---------------------------------- March March 30, 2002 31, 2001 Restated Restated ---------- ---------- (In thousands except per share data) Net cash provided by operating activities: 13,462 $ 2,835 ---------- ---------- Cash flows from investing activities: Net additions to equipment (627) (532) ---------- ---------- Net cash used for investing activities (627) (532) ---------- ---------- Cash flows from financing activities: Net proceeds from (payment to) lines of credit (6,625) 900 Principal payments on note payable (2,009) (353) Stock repurchase -- (2,559) Stock options exercised 418 -- Cash dividends (1,249) (1,043) ---------- ---------- Net cash used for financing activities (9,465) (3,055) ---------- ---------- Net increase in cash 3,370 (752) Cash at beginning of period 723 1,065 ---------- ---------- Cash at end of period $ 4,093 $ 313 ========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES MARCH 31, 2002 (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 investees are accounted for under 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 for the fiscal year ended June 30, 2001, as amended. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year. Certain amounts for the three and nine months ended March 31, 2002 have been reclassified to conform with the current quarter and nine months' presentation. Note 2 - RESTATEMENT The Company has changed the way it accounts for its two 50%-owned investees - Design Trends, LLC ("Design Trends") and Prime/Home Impressions, LLC ("PHI") - to account for these investees using the equity method of accounting rather than consolidation. Assets, liabilities, revenues and expense of these two investees are no longer included in the Company's balance sheets or statements of income. Instead, the balance sheets include the Company's investment in the investees, and the income statements reflect, as a single line item, its equity share in the earnings of these investees. Net income, primary and diluted earnings per share and stockholders' equity did not change for any period restated. 7 The following table sets forth balances as originally reported and as restated (in thousands, except per share amounts):
March 31, June 30, 2002 2001 -------------------------------- -------------------------------- As As Previously As Previously As Reported Restated Reported Restated ---------- ---------- ---------- ---------- Accounts receivable - net $ 13,357 $ 10,152 $ 19,215 $ 13,308 Receivables from 50% owned investees -- $ 1,241 -- $ 8,271 Inventory $ 13,908 $ 10,699 $ 19,454 $ 12,650 Total current assets $ 33,193 $ 27,377 $ 42,214 $ 36,868 Investment in 50% owned investees -- $ 2,432 -- $ 1,049 Total assets $ 50,650 $ 44,451 $ 59,129 $ 52,361 Revolving lines of credit $ 13,475 $ 12,175 $ 20,600 $ 18,800 Total current liabilities $ 21,056 $ 17,289 $ 31,981 $ 26,262 Total liabilities $ 27,224 $ 23,457 $ 40,326 $ 34,607 Minority interest $ 2,432 -- $ 1,049 -- Stockholders' equity $ 20,994 $ 20,994 $ 17,754 $ 17,754
Three Months Ended Three Months Ended March 31, 2002 March 31, 2001 -------------------------------- -------------------------------- As As Previously As Previously As Reported Restated Reported Restated ---------- ---------- ---------- ---------- Net sales $ 22,134 $ 14,988 $ 19,658 $ 15,468 Gross profit $ 7,005 $ 4,894 $ 6,373 $ 4,957 Equity in earnings of 50% owned investees before income taxes -- $ 676 -- $ 305 Net income $ 969 $ 969 $ 680 $ 680 Primary earning per share $ 0.16 $ 0.16 $ 0.12 $ 0.12 Diluted earnings per share $ 0.16 $ 0.16 $ 0.12 $ 0.12
Nine Months Ended Nine Months Ended March 31, 2002 March 31, 2001 -------------------------------- -------------------------------- As As Previously As Previously As Reported Restated Reported Restated ---------- ---------- ---------- ---------- Net sales $ 76,937 $ 53,207 $ 62,674 $ 51,297 Gross profit $ 23,152 $ 16,683 $ 19,887 $ 16,174 Equity in earnings of 50% owned investees -- $ 1,993 -- $ 1,004 Net income $ 4,047 $ 4,047 $ 2,905 $ 2,905 Primary earning per Share $ 0.68 $ 0.68 $ 0.49 $ 0.49 Diluted earnings per Share $ 0.68 $ 0.68 $ 0.49 $ 0.49
8 Note 3 - INVESTMENT IN 50% OWNED INVESTEES Combined summarized financial information for Design Trends and PHI is as follows for the three and nine months ended (in thousands):
Three Months Ended March 31 -------------------------------- 2002 2001 ---------- ---------- Net sales $ 7,146 $ 4,190 Gross profit $ 2,111 $ 1,416 Income before income taxes $ 1,320 $ 558
Nine Months Ended March 31 -------------------------------- 2002 2001 ---------- ---------- Net sales $ 23,730 $ 11,377 Gross profit $ 6,469 $ 3,713 Income before income taxes $ 3,798 $ 1,928
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. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES March 31, 2002 (Unaudited) (In Thousands) Note 4 - 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, 2002 31, 2001 31, 2002 31, 2001 ---------- ---------- ---------- ---------- (In thousands except per share data) Basic and Diluted EPS Numerator: Net Income $ 969 $ 680 $ 4,047 $ 2,905 ---------- ---------- ---------- ---------- Denominator: Common Shares Outstanding 5,957 5,887 5,930 5,949 Basic EPS $ 0.16 $ 0.12 $ 0.68 $ 0.49 ========== ========== ========== ========== Denominator: Common Shares Outstanding 5,957 5,887 5,930 5,949 Options 55 4 62 7 ---------- ---------- ---------- ---------- Total Shares 6,012 5,891 5,992 5,956 ========== ========== ========== ========== Diluted EPS $ 0.16 $ 0.12 $ 0.68 $ 0.49 ========== ========== ========== ==========
9 Note 5 - DERIVATIVE FINANCIAL INSTRUMENT During the first quarter of fiscal 2000, the Company entered into an interest rate swap agreement, with a maturity of December 29, 2003, to manage its exposure to interest rate movements by effectively converting its long-term facility debt from fixed to variable rates. The swap was designated as a fair value hedge. In November 2001, the Company and its counterparty agreed to terminate the swap agreement prior to its scheduled maturity. In return for the early termination of the interest rate swap, the Company received $61,500 in cash. Note 6 - 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, 2001, as amended. The Company evaluates the performance of its segments and allocated 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, 2002: Restated Net sales from external customers $ 11,375 $ 3,613 $ 14,988 Operating profit 1,498 (505) 993 For the three months ended March 31, 2001: Restated Net sales from external customers $ 11,026 $ 4,442 $ 15,468 Operating profit 1,363 (188) 1,175 For the nine months ended March 31, 2002: Restated Net sales from external customers $ 36,351 $ 16,856 $ 53,207 Operating profit 5,208 (194) 5,014 . For the nine months ended March 31, 2001: Restated Net sales from external customers $ 34,991 $ 16,306 $ 51,297 Operating profit 4,709 327 5,036
Note 7 - GOODWILL AND OTHER INTANGIBLE ASSETS Effective July 1, 2001, the Company adopted Statement on Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill and intangible assets with indefinite lives, including such assets recorded in past business combinations, ceased upon adoption. Thus, no amortization was recognized in the accompanying consolidated statements of income for the three and nine months ended March 31, 2002 compared to $105,000, or $0.01 per share, net of taxes, and $315,000, or $0.03 per share, net of taxes, for the same periods of the prior year, respectively. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and a write-down may be necessary. Other than the cessation of the amortization of goodwill, the adoption of FAS 142 did not have any effect on the Company's financial statements. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (RESTATED). 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 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, the success of Design Trends' portable lamp program, the relationship of Design Trends with its primary mass merchandiser 10 customer, changes in anticipated levels of sales and vendor programs, whether due to future national or regional economic and competitive conditions, changes in relationships with customers, TSI's and PHI'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 of the Company. Critical Accounting Policies The Company's management discussion and analysis of its financial condition and results of operations following are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company's management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company's estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for our conclusions. The Company continually evaluates the information used to make these estimates as our business and the economic environment changes. The Company's management believes that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so the Company considers these to be our critical accounting policies. Revenue recognition The Company recognizes revenue when title transfers and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title generally transfers upon shipment of goods from our warehouse. In some instances, the Company ships product directly from our supplier to the customer. In these cases, the Company recognizes revenue when the product is accepted by the customer's representative. The Company does not have an obligation or policy of replacing, at no cost, customer products damaged or lost in transit. As part of our revenue recognition policy, the Company records estimated incentives payable to our customers at a future date as a reduction of revenue at the time the revenues are recorded. The Company bases its estimates on contractual terms of the programs and estimated or actual sales to individual customers. Actual incentives in any future period are inherently uncertain and, thus, may differ 11 from our estimates. If actual or expected incentives were significantly greater than the reserves the Company had established, the Company would record a reduction to net revenues in the period in which the Company made such determination. Allowance for Doubtful Accounts The Company maintains an allowance for trade accounts receivable for which collection on specific customer accounts is doubtful. In determining collectibility, the Company's management reviews available customer financial statement information, credit rating reports as well as other external documents and public filings. When it is deemed probable that a specific customer account is uncollectible, that balance is included in the reserve calculation. Actual results could differ from these estimates. Inventory Inventory is the Company's largest asset class. The Company's inventory is primarily comprised of finished goods and is recorded at the lower of cost or market using the average cost method. The Company provides estimated inventory allowances for excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These reserves are based on current assessments about future demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. Results of Operations Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001. Net Sales. Net sales for the Company decreased $480,000, or 3.1%, to $14,988,000 for the three month period ended March 31, 2002 from $15,468,000 for the same three-month period last year. Net sales from the Craftmade division increased $349,000, or 3.2%, to $11,375,000 for the three months ended March 31, 2002 from $11,026,000 for the same three-month period last year. The increase in sales of the Craftmade division was primarily due to an increase in Craftmade's sales of outdoor lighting which generated incremental revenue of $324,000 from the prior year period. Net sales of the TSI division decreased $829,000, or 18.7%, to $3,613,000 for the three months ended March 31, 2002 from $4,442,000 for the same three-month period last year. The decrease was due in part to an increase in sales credits provided to a mass retail customer to help clear slow moving inventory. Sales comparisons were also impacted by the sale of certain products such as ceiling fans sold to a mass retail customer in the prior year period 12 that did not occur in the three month period ended March 31, 2002. Gross Profit. Gross profit of the Company as a percentage of sales increased to 32.7% of net sales for the three months ended March 31, 2002, compared to 32.0% for the same period of 2001. The gross margin of the Craftmade division increased to 40.8% of sales from 38.2% of sales in the year ago period. The improvement in the gross margin of the Craftmade division was due primarily to a series of price concessions the Company negotiated with its ceiling fan vendor, which have, in part, been passed on to customers. The improvement in the exchange rate of the U.S. dollar relative to the Taiwanese dollar also had a favorable impact on the gross margin of the showroom division. The gross margin of the TSI division decreased to 7.1% of sales for the three months ended March 31, 2002 compared to 16.8% of sales in the year ago period. An inventory write down of $200,000 or approximately $0.02 per share net of taxes was taken during the quarter to record discontinued items at their net realizable value. Non-recurring sales credits totaling $263,000 or approximately $0.03 per share net of taxes were provided to mass retail customers to help clear slow-moving and discontinued items. Selling, General and Administrative Expenses. Total selling, general and administrative ("SG&A") expenses of the Company increased $208,000 to $3,768,000, or 25.1% of net sales, for the three months ended March 31, 2002, from $3,560,000 or 23.0% of net sales, for the same three month period last year. Total SG&A expenses of the Craftmade division increased $279,000 to $3,031,000, or 26.6% of net sales, compared to $2,752,000, or 25.0% of net sales, for the same period in the previous period. The increase in SG&A expenses of the Craftmade division was primarily related to costs associated with the implementation of the Company's logistics and accounting systems upgrade. Total SG&A expenses of the TSI division decreased $71,000 to $737,000, or 20.4% of net sales, compared to $808,000, or 18.2% of net sales, for the same period in the previous year. The increase in TSI's SG&A expenses as a percentage of sales was primarily due to the decline in sales during the three month period ended March 31, 2002, which resulted in the de-leveraging of SG&A expenses compared to the same period in the previous year. Interest Expense. Net interest expense decreased $299,000 to $159,000 for the three months ended March 31, 2001 from $458,000 for the same three-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 Before Income Taxes. Income from investees, representing the Company's 50% ownership of PHI and Design Trends, increased $371,000 to $676,000 from $305,000 for the 13 three months ended March 31, 2002 and 2001, respectively. The increase in income from these investees was due to an increase in sales of Design Trends portable lamp program which generated $3,175,000 in incremental revenue during the period. Provision For Income Taxes. The provision for income taxes increased to $541,000 or 35.8% of net income before taxes for the three months ended March 31, 2002, from $342,000 or 33.5% for the same period of the prior year. Nine Months Ended March 31, 2002 Compared to Nine Months Ended March 31, 2001 Net Sales. Net sales for the Company increased $1,910,000, or 3.7%, to $53,207,000 for the nine month period ended March 31, 2002 from $51,297,000 for the same nine-month period last year. Net sales of the Craftmade division increased $1,360,000, or 3.9%, to $36,351,000 for the nine months ended March 31, 2002 from $34,991,000 for the same nine-month period last year. The increase in sales of the Craftmade division was primarily due to an increase in sales of outdoor lighting which generated incremental revenue of $965,000. Net sales of the TSI division increased $550,000 or 3.4%, to $16,856,000 for the nine months ended March 31, 2002 from $16,306,000 for the same nine-month period last year. Gross Profit. Gross profit of the Company as a percentage of sales was substantially unchanged at 31.4% of sales for the nine months ended March 31, 2002 compared to 31.5% for the same period of 2001. The gross margin of the Craftmade division increased to 39.2% of sales from 37.5% of sales in the year ago period. The improvement in the gross margin of the Craftmade division was due primarily to a series of price concessions the Company negotiated with its ceiling fan vendor, which have, in part, been passed on to customers. The improvement in the exchange rate of the U.S. dollar relative to the Taiwanese dollar also had a favorable impact on the gross margin of the showroom division. This improvement was partially offset by a write down of certain bathstrip and outdoor lighting inventory in the amount of $200,000, or $0.02 per share, net of taxes. The gross margin of the TSI division declined to 14.5% of sales for the nine months ended March 31, 2002 compared to 18.7% of sales in the year ago period. The decline in the gross margin was partially related to the impact of inventory write downs and sales credits issued to a mass retail customer in the three months ending March 31, 2002, as previously discussed. In addition, an inventory write down of $300,000 or approximately $0.03 per share net of taxes was taken during the second quarter of fiscal 2002 to record discontinued items at their net realizable value. 14 Selling, General and Administrative Expenses. Total SG&A expenses of the Company increased $799,000 to $11,267,000, or 21.2% of net sales, for the nine months ended March 31, 2002, from $10,468,000, or 20.4% of net sales, for the same nine month period last year. Total SG&A expenses of the Craftmade division increased $569,000, to $8,704,000 or 23.9% of net sales, compared to $8,135,000, or 23.2% of net sales, for the same period in the previous year. The increase in SG&A expenses of Craftmade was primarily attributable to costs associated with the implementation of the company's logistics and accounting systems upgrade. Total SG&A expenses of the TSI division increased $230,000 to $2,563,000, or 15.2% of net sales from $2,333,000, or 14.3% of net 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 a an increase in the fixed portion of SG&A expenses. Interest Expense. Net interest expense decreased $723,000 to $705,000 for the nine months ended March 31, 2002 from $1,428,000 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 Before Income Taxes. Income from investees, representing the Company's 50% ownership of PHI and Design Trends, increased $989,000 to $1,993,000 from $1,004,000 for the nine months ended March 31, 2002 and 2001, respectively. The increase in income from these investees was due to an increase in sales of Design Trends portable lamp program which generated $13,636,000 in incremental revenue during the period. Provision for Income Taxes. The provision for income taxes increased to $2,255,000 or 35.8% of net income before taxes for the nine months ended March 31, 2002, from $1,707,000 or 37.0% for the same period of the prior year. The decrease in the effective rate for the nine-month period is the result of the elimination of amortization of nondeductible goodwill in 2002. LIQUIDITY AND CAPITAL RESOURCES The Company's cash increased $3,370,000 from $723,000 at June 30, 2001 to $4,093,000 at March 31, 2002. The Company's operating activities provided cash of $13,462,000 primarily attributable to the Company's net income from operations, collections on customer accounts and reduced inventory levels. The $627,000 of cash used for investing activities related primarily to expenditures associated with the implementation of the Company's logistics and accounting systems upgrade. 15 The $9,465,000 of cash used for financing activities was primarily the result of (i) principal payments of $2,009,000 on the Company's note payable,(ii) cash dividends of $1,249,000, and (iii) principal payments of $6,625,000 on the Company's lines of credit. These amounts were partially offset by proceeds of $418,000 received from stock options exercised. On November 6, 2001, the Company entered into a Credit Agreement with The Frost National Bank ("Frost"), pursuant to which Frost agreed to provide the Company with a $20,000,000 line of credit. The Credit Agreement with Frost replaced the Company's existing $20,000,000 line of credit with J.P. Morgan Chase & Co. ("Chase") and Frost. The terms of the Company's new line of credit with Frost are substantially identical to the Company's preceding line of credit. The Company chose to obtain its line of credit solely from Frost, rather than a syndicate of Frost and Chase, because the Company currently maintains its banking accounts with Frost, and the use of Frost exclusively will permit the Company to facilitate more rapid payments with respect to the line of credit, which the Company believes will result in a reduction of interest expense. At March 31, 2002, subject to continued compliance with certain covenants and restrictions, the Company had $20,000,000 available on its lines of credit, of which $12,175,000 had been utilized. In addition, PHI had $3,000,000 available on its line of credit at March 31, 2002, of which $1,300,000 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 and Design Trends' current operating needs, make annual payments of approximately $1,200,000 under the note payable, fund dividend payments of approximately $420,000 per quarter, as well as fund its projected growth over the next twelve months. At March 31, 2002, $6,607,000 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. With respect to the Company's 50%-owned investees, PHI had $3,000,000 available on its line of credit at March 31, 2002, of which $1,300,000 had been utilized. Design Trends utilizes the Company's lines of credits described above. In addition, in order to satisfy anticipated demand for Design Trends' portable lamp program, Design Trends maintains an inventory of approximately $2.2 million as of March 31, 2002. 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, Design Trends would be required to find other customers for this inventory. There can be no assurances that the alternative sources would generate 16 similar sales levels and profit margins as anticipated with the current customer. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (RESTATED). 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 during the first quarter of fiscal 2000, which was held by the Company for non-trading purposes. In November 2001, the Company transferred its line of credit from Chase to Frost. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." In connection with this transfer, the Company and Chase agreed to terminate the Swap Agreement, and Chase paid the Company $61,500 in connection with this termination. At March 31, 2002, 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 $12,175,000 was outstanding. At March 31, 2002 the prime rate was equal to 4.75%. The Craftmade Line of Credit is due on demand; however, if no demand is made, it is scheduled to mature October 31, 2003. In addition, at March 31, 2002, PHI had a $3,000,000 line of credit (the "PHI Line of Credit") with Wachovia Bank, N.A. at an interest rate of the one-month LIBOR plus 2%, of which $1,300,000 was outstanding. At March 31, 2002, the one-month LIBOR rate was equal to 1.88%. The PHI Line of Credit is due on demand; however, it no demand is made, it is scheduled to mature April 16, 2003. Because of the short-term nature of each of the Craftmade Line of Credit and the PHI Line of Credit, the Company is subject to market risk associated 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. 17 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 $122,000. 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 $610,000. Under the PHI Line of Credit, for each one-percentage point (1%) incremental increase in LIBOR, the Company's annualized interest expense would increase by approximately $13,000. Consequently, an increase in LIBOR of five percentage points (5%) would result in an estimated annualized increase of interest expense for the Company of approximately $65,000. 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 May 10, 2002, one U.S. dollar equaled $34.52 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. All other purchases of the Company 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, 2002, the Company purchased approximately $3,485,000 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 $349,000, based on the Company's purchases during the fiscal quarter ended March 31, 2002 (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 $1,743,000, based on the Company's purchases during the fiscal quarter ended March 31, 2002 (on an annualized basis). A $10 incremental appreciation of the Taiwanese dollar would result in an increase of approximately $3,485,000 on an annualized basis, based on the Company's purchases during the fiscal quarter ended March 31, 2002 (on an annualized basis). These amounts 18 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, 2002. Consequently, these amounts are not necessarily indicative of the effect of such changes with respect to an entire year. 19 SIGNATURES 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 September 26, 2002 /s/ James R. Ridings ---------------------------- --------------------------------------- JAMES R. RIDINGS President and Chief Executive Officer Date September 26, 2002 /s/ Kathleen B. Oher ---------------------------- -------------------------------------- KATHLEEN B. OHER Chief Financial Officer 20 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/A 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. Date: September 26, 2002 /s/ James R. Ridings --- ------------------------------- James R. Ridings President and Chief Executive Officer I, Kathleen B. Oher, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A 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. Date: September 26, 2002 /s/ Kathleen B. Oher --- ------------------------------- Kathleen B. Oher Chief Financial Officer 21 -----END PRIVACY-ENHANCED MESSAGE-----