Item 1. Business
Craftmade International, Inc. ("Craftmade") was incorporated in the state of
Texas on July 16, 1985 and reincorporated in the state of Delaware in December
1991. Craftmade is principally engaged in the design, distribution and marketing
of ceiling fans, light kits, outdoor lighting, bathstrip lighting and related
accessories to a nationwide network of over 1,600 lighting showrooms and
electrical wholesalers specializing in sales to the remodeling, new home
construction and replacement markets. An arrangement with Fanthing Electrical
Corp. ("Fanthing"), in Taichung, Taiwan was completed in August 1986 for the
manufacture of ceiling fans designed to Craftmade's specifications. Craftmade's
ceiling fan product line consists of over two dozen series of premium priced to
lower priced ceiling fans and is distributed under the Craftmade(R) trade name.
Craftmade also markets nearly eighty light kit models in various colors for
attachment and use with its ceiling fans or other ceiling fans, along with parts
and accessories for its ceiling fans and light kits. In addition, nearly two
dozen styles of bathstrip lighting and over forty designs of outdoor lighting
are marketed under its Accolade(R) trade name. Craftmade purchases substantially
all of its light kits from Sunlit Industries ("Sunlit"), in Taipei, Taiwan. The
combination of design and functional features which characterize Craftmade
ceiling fans have made them, in management's judgment, one of the most reliable,
durable, energy efficient and cost effective ceiling fans in the marketplace.
Craftmade's national sales organization, which consists of 33 independent sales
groups employing approximately 65 sales representatives, markets its products to
its distribution network of lighting showrooms and electrical wholesalers.
Craftmade also assembles and markets a variety of lamp styles for sale to
certain major retail chains and catalog houses and imports and distributes a
variety of cables and components for the telephone and communications
Effective July 1, 1998, Craftmade entered into an agreement and plan of merger
in which Trade Source International, Inc., a California corporation ("TSI
California"), merged with and into Trade Source International, Inc., a Delaware
corporation and wholly-owned subsidiary of Craftmade ("TSI"). TSI is principally
engaged in the design, distribution and marketing of outdoor lighting and the
sale of fan accessories to mass merchandisers.
Craftmade, TSI and their wholly-owned subsidiaries are collectively referred to
in this report as the "Company."
See Note 16 - Segment Information in the Notes to Consolidated Financial
Statements for certain financial information about the Company's two segments,
Craftmade and TSI.
CEILING FANS -- Craftmade's ceiling fan product line consists of over two dozen
fan series for sale to the new home construction, remodeling and replacement
markets. These series are differentiated on the basis of cost, air movement and
appearance. Craftmade's fans are manufactured and assembled in a variety of
colors, styles and finishes and can be used either in conjunction with or
independent of Craftmade's light kits. Series lines include Early American,
Traditional and Modern High-Tech Decor and, depending on the size, finish and
other features, range in price from the premium Cameo, Constantina, Crescent and
Presidential series to various low-end builder series. Craftmade's fans come in
five motor sizes, five blade sizes and over three dozen different decorative
finishes. The range of styles and colors gives consumers the ability to select
ceiling fans for any style of house, interior decoration or living and working
area, including outdoor patios. Craftmade provides warranties ranging from 10
years to lifetime on the fan motor of its ceiling fans, and includes a one year
limited warranty against defects in workmanship and materials to cover the
entire ceiling fan. Craftmade also provides a limited lifetime warranty on its
higher-end series of fans. While Craftmade's agreement with Fanthing does not
contain provisions relating to adjustments or returns as a result of product
defects, Fanthing has previously extended Craftmade full credit for any product
returns during the period of their working relationship. Ceiling fans accounted
for 33%, 32% and 68% of the Company's sales for fiscal 2000, 1999 and 1998
LIGHT KITS -- Craftmade markets nearly eighty models of light kits in various
colors which may be utilized with Craftmade's ceiling fans or other ceiling
fans. These kits, which consist of the glass shades and fitters, represent less
than 10% of the Company's sales in fiscal 2000 and fiscal 1999 and 15% of the
Company's sales in fiscal 1998.
BATHSTRIP LIGHTING -- Craftmade markets nearly two dozen series of bathstrip
lighting in different lengths and decorative finishes under the Accolade(R)
trade name. Craftmade plans to add finishes and series from time to time based
on customer demand. Bathstrip lighting represents less than 10% of the Company's
fiscal 2000, 1999 and 1998 sales.
OUTDOOR LIGHTING - During fiscal 1999, Craftmade began marketing over forty
designs of outdoor lighting in different decorative finishes under the
Accolade(R) trade name. Craftmade plans to add finishes and designs from time to
time based on customer demand. Outdoor lighting represents less than 10% of the
Company's fiscal 2000 and fiscal 1999 sales.
ACCESSORIES -- Craftmade also markets a variety of designer and standard wall
controls to regulate the speed and intensity of ceiling fans and lighting
fixtures and universal downrods for use with ceiling fans. Accessory sales
represent 12% of the Company's fiscal 2000 sales, and less than 10% of the
Company's fiscal 1999 and 1998 sales.
LAMPS - Craftmade assembles and markets a variety of lamp styles for sale to
certain major retail chains and catalog houses to be sold under private brand
labels. The lamps are assembled at the Company's facilities in Coppell, Texas
and consist of wood, solid brass, zinc coated, crystal, ceramic and porcelain
table, floor and desk lamps, as well as hanging lantern kits. Craftmade's lamp
sales represent less than 10% of the Company's fiscal 2000, 1999 and 1998 sales.
CABLE COMPONENTS - Craftmade distributes various cable components, including
connectors and switches that it acquires from Asian manufacturers for use with
computers and telephone board circuitry. Sales of cable components represent
less than 10% of the Company's fiscal 2000, 1999 and 1998 sales.
CEILING FANS - During fiscal 2000, the Company began marketing selected ceiling
fans to TSI's mass merchandiser customers in accordance with the Company's
cross-market product expansion plans. TSI's sales of ceiling fans represent less
than 10% of the Company's fiscal 2000 sales.
OUTDOOR LIGHTING - TSI markets over sixty designs of outdoor lighting in
different decorative finishes to various mass merchandisers. TSI's sales of
outdoor lighting represent 28% and 34% of the Company's fiscal 2000 and 1999
ACCESSORIES - TSI also markets various fan accessories, including universal
downrods, pullchains and ceiling medallions, to various mass merchandisers
through its 50% owned company, Prime/Home Impressions, LLC. TSI's accessories
sales represent 11% and 10% of the Company's fiscal 2000 and 1999 sales,
INDOOR LIGHTING - During fiscal 2000, the Company began marketing floor and
table lamps, chandeliers and wall sconces designed by Pat Dolan to various mass
merchandisers through its 50% owned company, Design Trends, LLC. TSI's sales of
indoor lighting represent less than 10% of the Company's fiscal 2000 sales.
Craftmade's ceiling fans, bathstrip lighting and substantially all of its light
kits and certain accessories are produced by Fanthing and Sunlit. Craftmade
selected Fanthing in August 1986 to manufacture all of its ceiling fans and
certain fan accessories based on the Company's belief that Fanthing has the
capability to produce and ship a wide variety of product on a cost effective
basis while maintaining excellent quality
control in the manufacturing process. In 1989, Craftmade and Fanthing entered
into a formal written agreement that is terminable on 180 days prior notice. The
written agreement does not obligate Fanthing to produce and sell fans to
Craftmade in any specified quantity, nor does it obligate Fanthing to sell
products to Craftmade at a fixed price. Fanthing is permitted under the
arrangement to manufacture ceiling fans for other distributors provided such
ceiling fans are not a replication of Craftmade's series or models. Fanthing
also manufactures certain ceiling fan accessories, such as downrods, which are
sold by Craftmade independently of its ceiling fans.
Fanthing has provided Craftmade with a $1,000,000 credit facility, pursuant to
which Fanthing will manufacture and ship ceiling fans prior to receipt of
payment from Craftmade. Accordingly, payment can be deferred until delivery of
such products. At present levels, such credit facility is equivalent to
approximately three weeks' supply of ceiling fans and represents a supplier
commitment that the Company's management believes is unusual for the industry
and favorable to the Company. Fanthing is not required to provide this credit
facility under its agreement with Craftmade, and Fanthing may discontinue this
credit facility at any time. Craftmade places orders with Fanthing in
anticipation of normally recurring orders. In the ordinary course of business,
orders are filled within 60 days, which includes approximately 20 days for
transport. All orders are in U.S. dollars. In the event of any fluctuation in
exchange rates exceeding approximately 5%, any future orders placed by Craftmade
may be adjusted accordingly. Ceiling fans are shipped in container-size lots,
generally consisting of 1,600 fan units. Delivery is made in Dallas, Texas upon
presentment of documents by Craftmade's designated freight forwarder following
payment for such containers at Fanthing's bank in Taiwan.
Under a stock purchase agreement between the Company and Fancy Industrial, Inc.
("Fancy"), a Texas corporation and a wholly-owned subsidiary of Fanthing, the
Company, at its option, may repurchase 227,691 shares of the Company's common
stock owned by Fancy for an aggregate purchase price of $138,000. At June 30,
2000 and 1999, the fair value of the option approximated $1,537,000 and
$2,960,000 respectively. The Company has no intention to reacquire any shares
from Fancy at this time. The Company's management currently believes that
Craftmade's relationship with Fanthing and its ability to supply quality ceiling
fans at competitive prices have been critical to the success of Craftmade. The
Company's management currently believes Craftmade's relationship with Fanthing
is excellent and foresees no reason, based on its association to date, for such
relationship to deteriorate. If for any reason Fanthing were to discontinue its
relationship with Craftmade in the future or should it be unable to continue to
supply sufficient amounts of Craftmade products, Craftmade would be required to
seek alternative sources of supply. The Company's management currently believes
Craftmade could secure alternative sources of supply with minimal business
Craftmade purchases its bathstrip lighting and substantially all of its light
kits from Sunlit. Light kit orders are placed independently of ceiling fan
orders, but are also received in container-size lots generally consisting of up
to 4,500 light kit units under payment and delivery arrangements similar to
those for ceiling fans. Craftmade offers a variety of light kits in various
finishes and colors, as well as a variety of fixtures designed for ceiling fans.
Craftmade also offers a variety of glass selections for the various light
fixtures, including blown glass, beveled glass and crystal. Fixtures and glass
are shipped from Sunlit in the light kit containers.
Craftmade and TSI purchase outdoor lighting from several manufacturers located
in Asia. Outdoor lighting orders are received in container-size lots, similar to
light kit and ceiling fan orders. However, the outdoor lighting manufacturers
require payment seven days after notification of shipment of the order.
Craftmade and TSI offer a wide variety of outdoor lighting styles in various
finishes, colors and sizes and are designed for either wall mounting or as
Craftmade's wall controls, timers and switches as well as certain of its ceiling
fan blades, are manufactured by companies based in the United States. Craftmade
offers a variety of custom blade sets in various sizes and finishes, including
unfinished oak, ash and other wood grains and in clear, mirror, gold mirror,
black, smoke and antique white acrylic. The finished products are packaged and
labeled under the Company's Craftmade brand name.
Craftmade assembles its lamps at its Coppell facility. This assembly includes
the placement of the base,
cap and shade together with the necessary wiring. Substantially all of the
components are manufactured by domestic and foreign manufacturers located in
Taiwan, China and Germany; however, Craftmade does undertake limited
manufacturing of certain shade components. Craftmade purchases its components on
a non-exclusive basis from such suppliers on either open account or through
letters of credit.
TSI purchases most of its ceiling fan accessories from several manufacturers
located in Asia, with the exception of ceiling medallions which are purchased
from a manufacturer located in the United States. These products are also
shipped on containers, either to the Company's facility in Coppell, Texas or
directly to the customer. All of TSI's foreign vendors require payment seven
days after notification of shipment of product from Asia.
Craftmade's products are marketed through more than 1,600 lighting showrooms and
electrical wholesaler locations specializing in sales to the new home
construction, remodeling and replacement markets. Its ceiling fans, light kits,
outdoor lighting and accessories are distributed through 33 independent sales
groups on a national basis (except for Alaska and Hawaii). Each sales group is
selected to represent Craftmade in a specific market area. The independent sales
groups comprise a sales force for Craftmade's products of approximately 65 sales
representatives, which represent Craftmade exclusively in the sale of ceiling
fans in return for commissions on such sales. During fiscal 2000, 1999 and 1998,
no single lighting showroom or electrical wholesaler accounted for more than 2%
of Craftmade's sales.
Sales representatives are carefully selected and continually evaluated in order
to promote high-level representation of Craftmade's products. Craftmade
employees provide initial field training to new sales representatives covering
features, styles, operation and other attributes of Craftmade products to enable
representatives to more effectively market its products. Additional training is
provided on a regular basis, especially for new product series, at semi-annual
trade shows held throughout the United States. Management believes it has
assembled a highly motivated and effective sales representative organization
that has demonstrated a strong commitment to Craftmade and its products.
Management further believes that the strength of its sales representative
organization is primarily attributable to the quality and competitive pricing of
Craftmade's products as well as the ongoing administrative and marketing support
that Craftmade provides to its sales representatives.
All of TSI's sales are to mass merchandisers. During fiscal 2000, TSI's two
largest customers represented 48% and 25% of TSI's sales, (19% and 10% of
consolidated sales, respectively). During fiscal 1999, TSI's sales to its two
largest customers were 47% and 29%, (20% and 13% of consolidated sales,
respectively). The majority of TSI's sales are by direct shipment. The remaining
sales are shipped from the Company's Coppell, Texas facility. TSI utilizes an
internal sales force to market its products and sales representatives to service
specific mass merchandiser locations.
Craftmade relies primarily on the reputation of its ceiling fans, outdoor
lighting and light kits for high quality and competitive prices and the efforts
of its sales representative organization in order to promote the sales of its
products. The principal markets for Craftmade's products are the new home
construction, remodelling and replacement markets. Craftmade utilizes
advertising in home lighting magazines, particularly in special editions devoted
to ceiling fans and lighting fixtures, and broadly distributes its product
catalog. Craftmade also promotes its ceiling fans and light kits at semi-annual
trade shows in Dallas (January and June) and maintains a showroom at the Dallas
Trade Mart. Craftmade provides warranties ranging from 10 years to lifetime on
the fan motor of its ceiling fans, and includes a one year limited warranty
against defects in workmanship and materials to cover the entire ceiling fan.
Craftmade also provides a limited lifetime warranty on its higher-end series of
fans. The Company's management believes these warranties are highly attractive
to dealers and consumers alike.
TSI relies primarily on the reputation of its products and the relationship it
has with its mass merchandiser customers to increase its sales. TSI participates
in advertising programs and special promotions performed by its customers. TSI
also promotes its product line at semi-annual trade shows in Dallas (January and
June) and utilizes Craftmade's showroom at the Dallas Trade Mart.
The Company has a 48-hour product shipment policy. In order to meet these policy
delivery requirements and to ensure that it has sufficient goods on hand from
its overseas suppliers, the Company maintains a significant level of inventory.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
For information concerning revenues of the Company attributable to foreign and
domestic customers, along with information concerning foreign and domestic
long-lived assets of the Company, see Note 16 - Segment Information in the Notes
to Consolidated Financial Statements.
Craftmade continually expands its ceiling fan product line, providing
proprietary products to its customer base in order to meet current and
anticipated demands for unique, innovative products. During fiscal 2000,
Craftmade introduced four new series of fans (Solo, Warbird, Max Air 29 and
Terrace). The Company also expanded its light kit product line to include under
cabinet lighting and additional parts and accessories complementing its various
product lines. The Company's management will continue to search for
opportunities for product expansion that it considers complementary to the
Company's existing product lines.
Over the next year, the Company plans to enlarge its presence in the mass
merchandiser market by introducing new lines of interior lighting products to
TSI's customer base. In addition, the Company will continue to seek
opportunities to cross-market products between the two companies without
jeopardizing existing business. In June 2000, outdoor lighting was added to
Craftmade's lighting showroom catalog which is distributed to over 1,600
lighting showrooms. The expansion of the catalog is expected to significantly
increase cross-marketing opportunities in fiscal 2001.
The Company's product sales, particularly ceiling fans, are somewhat seasonal
with sales in the warmer first and fourth quarters being historically higher
than in the two other fiscal quarters.
Backlog is not material to the Company's operations as substantially all of the
Company's products are shipped to customers within 48 hours following receipt of
orders. Presently, the Company is accepting orders based on product
The ceiling fan and lighting fixture market is highly competitive at all levels
of operation. Some of the major companies in the ceiling fan industry include
Casablanca, Hunter, Monte Carlo, Quorum, Emerson Electric and Taconi. A number
of other well-established companies are also currently engaged in activities
that compete directly with those of Craftmade. Some of Craftmade's competitors
are better established, have longer operating histories, substantially greater
financial resources or greater name recognition than Craftmade. However, the
Company's management believes that the quality of Craftmade's products, the
strength of its marketing organization and the growing recognition of the
Craftmade name will enable Craftmade to compete successfully in these highly
The mass merchandiser market is also highly competitive. TSI competes with
numerous companies located both within the United States and outside of the
country, particularly in Asia. Some of the major companies in the lighting
fixture industry include Designer's Fountain, American Lantern, Murray Feiss,
and Minka. In addition, mass merchandisers themselves will, at times, compete
directly against TSI by purchasing private label products from TSI's vendors.
However, the Company's management believes that TSI has positioned itself with
its customers in a manner that reduces some of the risks involved of competing
in the mass merchandiser market.
INDEPENDENT SAFETY TESTING
All of the ceiling fans, outdoor lighting, light kits and lamps sold by the
Company in the United States are tested by Underwriter's Laboratories (UL),
which is an independent non-profit corporation which tests certain products,
including ceiling fans and lighting fixtures, for public safety. Under its
agreement with UL, the
Company voluntarily submits its products to UL, and UL tests the products for
safety. If the product is acceptable, UL issues a listing report that provides a
technical description of the product. UL provides the manufacturers with
procedures to follow in manufacturing the products. Electrical products which
are manufactured in accordance with the designated procedures display the UL
listing mark, which is generally recognized by consumers as an indication of a
safe product and which is often required by various governmental authorities to
comply with local codes and ordinances. The contract between the Company and UL
provides for automatic renewal unless either party cancels as a result of
default or gives applicable prior notice.
The Company is engaged in businesses that could expose it to possible claims for
injury resulting from the failure of its products sold. While no material claims
have been made against the Company since its inception and the Company maintains
product liability insurance, there can be no assurance that claims will not
arise in the future or that the coverage of such policy will be sufficient to
pay such claims.
PATENTS AND TRADEMARKS
The Company does not believe that patent protection is significant to most of
its products or current business operations. The Company, however, has patented
certain of its product designs and the functional features of some of its
products, including a patent on its Cathedral Ceiling Adapter and the Carousel
light kit. The expiration dates of Craftmade's patents (excluding pending
applications) currently range from 2008 to 2014. In addition, Fanthing holds
certain Taiwanese patents covering specific technology employed in Craftmade
ceiling fans, but the Company's management does not believe that such patents
are material to the production of Craftmade products. From time to time, the
Company also enters into license agreements with various designers of the
Company's products, including license agreements concerning licenses on patents
for eight series of fans and certain other license agreements entered into in
the ordinary course of its business. The Company has registered the trademarks
Craftmade(R), Accolade(R) and Durocraft(R), along with the product names of
certain of its designs, with the United States Patent and Trademark Office.
As of July 31, 2000, the Company employed a total of 123 full time employees,
including three executive officers, two TSI officers, twenty-two managers,
twenty-nine clerical and administrative personnel, sixteen marketing personnel;
thirty-six warehouse personnel and fifteen production personnel. The Company's
employees are not covered by any collective bargaining agreements, and the
Company believes its employee relations are satisfactory.