##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 Commission File Number 000-26667
 CRAFTMADE INTERNATIONAL, INC.
  DELAWARE
    
    75-2057054(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)
 650 SOUTH ROYAL LANE, SUITE 100
COPPELL, TEXAS
75019
 (972) 393-3800
 þ o
  o þ o
 o þ




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##### 



CRAFTMADE INTERNATIONAL, INC.
AND SUBSIDIARIES
 TABLE OF CONTENTS
 Part I. Financial InformationItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
  CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    22,492
    
    
    $
    27,154
    
    
    $
    77,181
    
    
    $
    86,806Cost of goods sold
    
    
    (15,401
    )
    
    
    (18,586
    )
    
    
    (52,784
    )
    
    
    (60,904
    )Gross profit
    
    
    7,091
    
    
    
    8,568
    
    
    
    24,397
    
    
    
    25,902Gross profit as a percentage of net sales
    
    
    31.5
    %
    
    
    31.6
    %
    
    
    31.6
    %
    
    
    29.8
    %Selling, general and administrative expenses
    
    
    (5,483
    )
    
    
    (5,060
    )
    
    
    (15,702
    )
    
    
    (14,692
    )Depreciation and amortization
    
    
    (195
    )
    
    
    (137
    )
    
    
    (596
    )
    
    
    (448
    )Total operating expenses
    
    
    (5,678
    )
    
    
    (5,197
    )
    
    
    (16,298
    )
    
    
    (15,140
    )Income from operations
    
    
    1,413
    
    
    
    3,371
    
    
    
    8,099
    
    
    
    10,762Interest expense, net
    
    
    (351
    )
    
    
    (290
    )
    
    
    (1,112
    )
    
    
    (916
    )Other expenses
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    (50
    )Income before income taxes and minority interests
    
    
    1,062
    
    
    
    3,045
    
    
    
    6,987
    
    
    
    9,796Income taxes
    
    
    118
    
    
    
    (573
    )
    
    
    (1,645
    )
    
    
    (2,423
    )Income before minority interests
    
    
    1,180
    
    
    
    2,472
    
    
    
    5,342
    
    
    
    7,373Minority interests
    
    
    (447
    )
    
    
    (724
    )
    
    
    (1,225
    )
    
    
    (2,196
    )Net income
    
    $
    733
    
    
    $
    1,748
    
    
    $
    4,117
    
    
    $
    5,177Weighted average common shares outstanding:Basic
    
    
    5,204
    
    
    
    5,201
    
    
    
    5,204
    
    
    
    5,201Diluted
    
    
    5,206
    
    
    
    5,211
    
    
    
    5,207
    
    
    
    5,210Basic earnings per common share
    
    $
    0.14
    
    
    $
    0.34
    
    
    $
    0.79
    
    
    $
    1.00Diluted earnings per common share
    
    $
    0.14
    
    
    $
    0.34
    
    
    $
    0.79
    
    
    $
    0.99Cash dividends declared per common share
    
    $
    0.12
    
    
    $
    0.12
    
    
    $
    0.36
    
    
    $
    0.36
 
 1




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##### Table of Contents



CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 ASSETS
 March 31,
    
    
    June 30,2007
    
    
    2006(Unaudited)Current assetsCash
    
    $
    166
    
    
    $
    2,164Accounts receivable  net of allowance
of $202 and $293, respectively
    
    
    16,018
    
    
    
    19,802Inventories  net of allowance of $568
and $934, respectively
    
    
    19,613
    
    
    
    21,085Income taxes receivable
    
    
    1,174
    
    
    
    Deferred income taxes
    
    
    1,400
    
    
    
    1,252Prepaid expenses and other current assets
    
    
    1,703
    
    
    
    988Total current assets
    
    
    40,074
    
    
    
    45,291Property and equipmentLand
    
    
    1,535
    
    
    
    1,535Building
    
    
    7,796
    
    
    
    7,796Office furniture and equipment
    
    
    4,102
    
    
    
    3,320Leasehold improvements
    
    
    194
    
    
    
    18713,627
    
    
    
    12,838Less: accumulated depreciation
    
    
    (5,190
    )
    
    
    (4,740
    )Total property and equipment, net
    
    
    8,437
    
    
    
    8,098Other assetsGoodwill
    
    
    13,202
    
    
    
    11,480Other intangibles, net of accumulated amortization
of $186 and $41, respectively
    
    
    1,554
    
    
    
    169Other assets
    
    
    10
    
    
    
    23Total other assets
    
    
    14,766
    
    
    
    11,672Total assets
    
    $
    63,277
    
    
    $
    65,061
 
 2




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##### Table of Contents



CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS EQUITY
 March 31,
    
    
    June 30,2007
    
    
    2006UnauditedCurrent liabilitiesBook overdrafts
    
    $
    169
    
    
    $
    70Notes payable  current
    
    
    516
    
    
    
    1,135Revolving lines of credit
    
    
    
    
    
    
    2,173Accounts payable
    
    
    5,484
    
    
    
    7,544Commissions payable
    
    
    279
    
    
    
    274Income taxes payable
    
    
    
    
    
    
    114Accrued customer allowances
    
    
    1,877
    
    
    
    2,637Other accrued expenses
    
    
    1,077
    
    
    
    1,073Total current liabilities
    
    
    9,402
    
    
    
    15,020Other non-current liabilitiesRevolving line of credit
    
    
    17,519
    
    
    
    15,981Other long-term expenses
    
    
    916
    
    
    
    793Deferred income taxes
    
    
    824
    
    
    
    345Notes payable  long term
    
    
    
    
    
    
    223Total other non-current liabilities
    
    
    19,259
    
    
    
    17,342Total liabilities
    
    
    28,661
    
    
    
    32,362Minority interests
    
    
    3,290
    
    
    
    3,662Commitments and contingencies (Note 6)Stockholders equitySeries A cumulative, convertible callable preferred
stock, $1.00 par value, 2,000,000 shares authorized;
nil shares issued
    
    
    
    
    
    
    Common stock, $0.01 par value, 15,000,000
shares authorized; 9,704,420 shares issued
    
    
    97
    
    
    
    97Additional paid-in capital
    
    
    17,803
    
    
    
    17,757Retained earnings
    
    
    51,552
    
    
    
    49,309Less: treasury stock, 4,499,920 common
shares at cost
    
    
    (38,126
    )
    
    
    (38,126
    )Total stockholders equity
    
    
    31,326
    
    
    
    29,037Total liabilities, minority interests and stockholders equity
    
    $
    63,277
    
    
    $
    65,061
 
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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006Net cash provided by operating activities
    
    $
    5,828
    
    
    $
    8,609Cash flows from investing activitiesAcquisition of Marketing Impressions, Inc.Initial payment and acquisition-related costs, net of cash acquired
    
    
    (1,501
    )
    
    
    Additional contingent consideration
    
    
    (1,075
    )
    
    
    Additions to property and equipment
    
    
    (575
    )
    
    
    (163
    )Cash used in investing activities
    
    
    (3,151
    )
    
    
    (163
    )Cash flows from financing activitiesCash dividends
    
    
    (1,873
    )
    
    
    (1,780
    )Distributions to minority interest members
    
    
    (1,597
    )
    
    
    (2,830
    )Principal payments on notes payable
    
    
    (842
    )
    
    
    (1,243
    )Net payments on lines of credit
    
    
    (636
    )
    
    
    (10,703
    )Capital lease financing
    
    
    164
    
    
    
    Increase/(decrease) in book overdrafts
    
    
    99
    
    
    
    (361
    )Stock options exercised
    
    
    10
    
    
    
    17Net cash used in financing activities
    
    
    (4,675
    )
    
    
    (16,900
    )Net decrease in cash
    
    
    (1,998
    )
    
    
    (8,454
    )Cash at beginning of period
    
    
    2,164
    
    
    
    9,145Cash at end of period
    
    $
    166
    
    
    $
    691
 
 4




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
      5




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  before
  Purchase Price Summary
(In thousands)
 As of March 31, 2007:Amount paid at closing, net of cash acquired
    
    $
    1,287Contingent payments earned
    
    
    1,185Acquisition-related costs
    
    
    214Total consideration as of March 31, 2007
    
    $
    2,686Percent of Adjusted Gross Profit
July 1, 2006 to August 31, 2011
    
    
    22
    %Additional Percent of Adjusted Gross Profit
July 1, 2006 to June 30, 2007 (not to exceed $750,000)
    
    
    15
    %
 Business Combinations
 6




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Preliminary Purchase Price Allocation
(In thousands)
 Assets:Accounts receivable
    
    $
    368Inventory
    
    
    2Property and equipment
    
    
    214Acquired intangibles
    
    
    1,530Goodwill
    
    
    1,7163,830Liabilities:Accounts payable
    
    
    1,120Note payable and other liabilities
    
    
    241,144Total purchase price as of March 31, 2007
    
    $
    2,686
  Summary of Acquired Intangibles
(In thousands)
 Life
    
    
    Grossin Years
    
    
    AmountPatents and trademarks
    
    
    15
    
    
    $
    710Non-compete covenants
    
    
    7
    
    
    
    820$
    1,530
   7




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Unaudited Pro Forma Results
(In thousands, except per share data)
 Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,
    
    March 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Net sales(1)As reported
    
    $
    22,492
    
    
    $
    27,154
    
    
    $
    77,181
    
    
    $
    86,806Pro forma
    
    
    22,492
    
    
    
    27,154
    
    
    
    77,181
    
    
    
    86,806Net income(2)As reported
    
    $
    733
    
    
    $
    1,748
    
    
    $
    8,099
    
    
    $
    5,177Pro forma
    
    
    733
    
    
    
    1,960
    
    
    
    8,099
    
    
    
    5,942Diluted earnings per shareAs reported
    
    $
    0.14
    
    
    $
    0.34
    
    
    $
    0.79
    
    
    $
    0.99Pro forma
    
    
    0.14
    
    
    
    0.38
    
    
    
    0.79
    
    
    
    1.14
 
 (1)
    
    Since net sales of Marketing Impressions, Inc. represent sales to Craftmade,
they eliminate in consolidation. Net sales of PHI have historically been included in
consolidated net sales of the Company in accordance with FIN 46R. Accordingly, pro forma
net sales equal actual net sales.(2)
    
    Pro forma net income includes the remaining 50% net income of PHI (minority
interest portion) plus additional gross margin for certain products, less interest,
depreciation, amortization, and consulting fees. 8




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per share data)Basic and diluted earnings per share:NumeratorNet income
    
    $
    733
    
    
    $
    1,748
    
    
    $
    4,117
    
    
    $
    5,177Denominator for basic EPSWeighted average common shares outstanding
    
    
    5,204
    
    
    
    5,201
    
    
    
    5,204
    
    
    
    5,201Denominator for diluted EPSWeighted average common shares outstanding
    
    
    5,204
    
    
    
    5,201
    
    
    
    5,204
    
    
    
    5,201Incremental shares for stock options
    
    
    2
    
    
    
    10
    
    
    
    3
    
    
    
    9Dilutive weighted average common shares
    
    
    5,206
    
    
    
    5,211
    
    
    
    5,207
    
    
    
    5,210Basic earnings per share
    
    $
    0.14
    
    
    $
    0.34
    
    
    $
    0.79
    
    
    $
    1.00Diluted earnings per share
    
    $
    0.14
    
    
    $
    0.34
    
    
    $
    0.79
    
    
    $
    0.99
 9




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
     Summary of Segment Information
 Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Net salesCraftmade
    
    $
    13,714
    
    
    $
    14,704
    
    
    $
    43,942
    
    
    $
    46,360TSI
    
    
    8,778
    
    
    
    12,450
    
    
    
    33,239
    
    
    
    40,446Total
    
    $
    22,492
    
    
    $
    27,154
    
    
    $
    77,181
    
    
    $
    86,806Income from operationsCraftmade
    
    $
    996
    
    
    $
    1,950
    
    
    $
    4,310
    
    
    $
    6,495TSI
    
    
    417
    
    
    
    1,421
    
    
    
    3,789
    
    
    
    4,267Total
    
    $
    1,413
    
    
    $
    3,371
    
    
    $
    8,099
    
    
    $
    10,762Net incomeCraftmade
    
    $
    496
    
    
    $
    1,111
    
    
    $
    2,189
    
    
    $
    3,653TSI
    
    
    237
    
    
    
    637
    
    
    
    1,928
    
    
    
    1,524Total
    
    $
    733
    
    
    $
    1,748
    
    
    $
    4,117
    
    
    $
    5,177
 10




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Share-Based Payment
  Stock-Based Compensation Expense
 Three Months Ended
    
    Nine Months EndedMarch 31,
    
    
    
    
    
    March 31,2007
    
    2006
    
    2007
    
    2006(In thousands)Stock-based compensation expense recognized:Selling, general & administrative
    
    $
    26
    
    
    $
    6
    
    
    $
    36
    
    
    $
    15
  Future Stock-Based Compensation Expense
 ExpectedFutureFiscal Year Ending
    
    CompensationJune 30,
    
    Cost(In thousands)2007 (remaining three months)
    
    $
    282008
    
    
    1132009
    
    
    1132010
    
    
    1132011
    
    
    52
 11




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Stock Option Information
 WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    ContractualNumber of
    
    
    Exercise
    
    
    LifeShares
    
    
    Price
    
    
    (Years)Outstanding at June 30, 2006
    
    
    19,500
    
    
    $
    15.78
    
    
    
    5.9Options granted
    
    
    85,000
    
    
    
    18.49Options exercised
    
    
    (1,000
    )
    
    
    6.75Options forfeited
    
    
    
    
    
    
    Options expired
    
    
    
    
    
    
    Outstanding at March 31, 2007
    
    
    103,500
    
    
    $
    18.09
    
    
    
    9.1Exercisable at March 31, 2007
    
    
    18,500
    
    
    $
    16.26
    
    
    
    6.1
  Weighted-Average Stock Option Assumptions
 Fiscal
    
    Fiscal
    
    Fiscal2007
    
    2006
    
    2005Expected volatility
    
    
    36
    %
    
    
    45
    %
    
    
    47
    %Risk-free interest rate
    
    
    4.9
    %
    
    
    4.5
    %
    
    
    3.7
    %Expected lives
    
    4 years
    
    4 years
    
    4 yearsDividend yield
    
    
    2.6
    %
    
    
    2.7
    %
    
    
    1.9
    %Weighted average fair
value of options granted
    
    $
    5.31
    
    
    $
    5.88
    
    
    $
    7.43
   12




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Disclosure Regarding Forward-looking Statements
  Critical Accounting Policies and Estimates
  13




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Results of Operations
  Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
  Summary Income Statement by Segment
(Dollars in thousands)
 Three Months Ended
    
    
    Three Months EndedMarch 31, 2007
    
    
    March 31, 2006Craftmade
    
    
    TSI
    
    
    Total
    
    
    Craftmade
    
    
    TSI
    
    
    TotalNet sales
    
    $
    13,714
    
    
    $
    8,778
    
    
    $
    22,492
    
    
    $
    14,704
    
    
    $
    12,450
    
    
    $
    27,154Cost of goods sold
    
    
    (8,765
    )
    
    
    (6,636
    )
    
    
    (15,401
    )
    
    
    (9,197
    )
    
    
    (9,389
    )
    
    
    (18,586
    )Gross profit
    
    
    4,949
    
    
    
    2,142
    
    
    
    7,091
    
    
    
    5,507
    
    
    
    3,061
    
    
    
    8,568Gross profit as a % of net sales
    
    
    36.1
    %
    
    
    24.4
    %
    
    
    31.5
    %
    
    
    37.5
    %
    
    
    24.6
    %
    
    
    31.6
    %Selling, general and administrative
    
    
    (3,823
    )
    
    
    (1,660
    )
    
    
    (5,483
    )
    
    
    (3,416
    )
    
    
    (1,644
    )
    
    
    (5,060
    )As a % of net sales
    
    
    27.9
    %
    
    
    18.9
    %
    
    
    24.4
    %
    
    
    23.2
    %
    
    
    13.2
    %
    
    
    18.6
    %Depreciation and amortization
    
    
    (130
    )
    
    
    (65
    )
    
    
    (195
    )
    
    
    (141
    )
    
    
    4
    
    
    
    (137
    )Total operating expenses
    
    
    (3,953
    )
    
    
    (1,725
    )
    
    
    (5,678
    )
    
    
    (3,557
    )
    
    
    (1,640
    )
    
    
    (5,197
    )Income from operations
    
    
    996
    
    
    
    417
    
    
    
    1,413
    
    
    
    1,950
    
    
    
    1,421
    
    
    
    3,371Interest expense, net
    
    
    (352
    )
    
    
    1
    
    
    
    (351
    )
    
    
    (266
    )
    
    
    (24
    )
    
    
    (290
    )Other expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    (36
    )Income before income taxes
and minority interests
    
    
    644
    
    
    
    418
    
    
    
    1,062
    
    
    
    1,648
    
    
    
    1,397
    
    
    
    3,045Provision for income taxes
    
    
    (148
    )
    
    
    266
    
    
    
    118
    
    
    
    (537
    )
    
    
    (36
    )
    
    
    (573
    )Income before minority interests
    
    
    496
    
    
    
    684
    
    
    
    1,180
    
    
    
    1,111
    
    
    
    1,361
    
    
    
    2,472Minority interests
    
    
    
    
    
    
    (447
    )
    
    
    (447
    )
    
    
    
    
    
    
    (724
    )
    
    
    (724
    )Net income
    
    $
    496
    
    
    $
    237
    
    
    $
    733
    
    
    $
    1,111
    
    
    $
    637
    
    
    $
    1,748
 Net Sales.
 ®
  14




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##### Table of Contents



Net Sales of TSI Segment
(Dollars in thousands)
 Trade
    
    
    Design
    
    
    SegmentThree Months Ended
    
    Source
    
    
    Trends
    
    
    TotalMarch 31, 2007
    
    $
    4,989
    
    
    $
    3,789
    
    
    $
    8,778March 31, 2006
    
    
    8,034
    
    
    
    4,416
    
    
    
    12,450Dollar decrease
    
    $
    (3,045
    )
    
    $
    (627
    )
    
    $
    (3,672
    )Percent decrease
    
    
    (37.9
    %)
    
    
    (14.2
    %)
    
    
    (29.5
    %)
     15




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##### Table of Contents



Gross Profit.
    Gross Profit as a Percentage of Net Sales of TSI
 Trade
    
    Design
    
    SegmentThree Months Ended
    
    Source
    
    Trends
    
    TotalMarch 31, 2007
    
    
    23.9
    %
    
    
    25.0
    %
    
    
    24.4
    %March 31, 2006
    
    
    26.5
    %
    
    
    21.1
    %
    
    
    24.6
    %Percent increase/(decrease)
    
    
    (2.6
    %)
    
    
    3.9
    %
    
    
    (0.2
    %)
   16




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##### Table of Contents



Selling, General and Administrative Expenses.
 Selling, General and Administrative Expenses
(Dollars in thousands)
 Increase/Three Months Ended
    
    
    (Decrease)March 31,
    
    
    March 31,
    
    
    Over Prior2007
    
    
    2006
    
    
    Year PeriodAdvertising
    
    $
    548
    
    
    $
    342
    
    
    $
    206Accounting, legal and consulting
    
    
    618
    
    
    
    461
    
    
    
    157Group health insurance
    
    
    262
    
    
    
    187
    
    
    
    75Other
    
    
    4,055
    
    
    
    4,070
    
    
    
    (15
    )$
    5,483
    
    
    $
    5,060
    
    
    $
    423
     Depreciation and Amortization.
 Interest Expense.
 17




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##### Table of Contents



Minority Interests.
 Provision for Income Taxes.
 Nine Months Ended March 31, 2007 Compared to Nine Months Ended March 31, 2006
  Summary Income Statement by Segment
(Dollars in thousands)
 Nine Months Ended
    
    
    Nine Months EndedMarch 31, 2007
    
    
    March 31, 2006Craftmade
    
    
    TSI
    
    
    Total
    
    
    Craftmade
    
    
    TSI
    
    
    TotalNet sales
    
    $
    43,942
    
    
    $
    33,239
    
    
    $
    77,181
    
    
    $
    46,360
    
    
    $
    40,446
    
    
    $
    86,806Cost of goods sold
    
    
    (28,336
    )
    
    
    (24,448
    )
    
    
    (52,784
    )
    
    
    (29,612
    )
    
    
    (31,292
    )
    
    
    (60,904
    )Gross profit
    
    
    15,606
    
    
    
    8,791
    
    
    
    24,397
    
    
    
    16,748
    
    
    
    9,154
    
    
    
    25,902Gross profit as a % of net sales
    
    
    35.5
    %
    
    
    26.4
    %
    
    
    31.6
    %
    
    
    36.1
    %
    
    
    22.6
    %
    
    
    29.8
    %Selling, general and administrative
    
    
    (10,888
    )
    
    
    (4,814
    )
    
    
    (15,702
    )
    
    
    (9,819
    )
    
    
    (4,873
    )
    
    
    (14,692
    )As a % of net sales
    
    
    24.8
    %
    
    
    14.5
    %
    
    
    20.3
    %
    
    
    21.2
    %
    
    
    12.0
    %
    
    
    16.9
    %Depreciation and amortization
    
    
    (409
    )
    
    
    (187
    )
    
    
    (596
    )
    
    
    (434
    )
    
    
    (14
    )
    
    
    (448
    )Total operating expenses
    
    
    (11,297
    )
    
    
    (5,001
    )
    
    
    (16,298
    )
    
    
    (10,253
    )
    
    
    (4,887
    )
    
    
    (15,140
    )Income from operations
    
    
    4,309
    
    
    
    3,790
    
    
    
    8,099
    
    
    
    6,495
    
    
    
    4,267
    
    
    
    10,762Interest expense, net
    
    
    (1,084
    )
    
    
    (28
    )
    
    
    (1,112
    )
    
    
    (846
    )
    
    
    (70
    )
    
    
    (916
    )Other expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    (14
    )
    
    
    (50
    )Income before income taxes
and minority interests
    
    
    3,225
    
    
    
    3,762
    
    
    
    6,987
    
    
    
    5,613
    
    
    
    4,183
    
    
    
    9,796Provision for income taxes
    
    
    (1,036
    )
    
    
    (609
    )
    
    
    (1,645
    )
    
    
    (1,960
    )
    
    
    (463
    )
    
    
    (2,423
    )Income before minority interests
    
    
    2,189
    
    
    
    3,153
    
    
    
    5,342
    
    
    
    3,653
    
    
    
    3,720
    
    
    
    7,373Minority interests
    
    
    
    
    
    
    (1,225
    )
    
    
    (1,225
    )
    
    
    
    
    
    
    (2,196
    )
    
    
    (2,196
    )Net income
    
    $
    2,189
    
    
    $
    1,928
    
    
    $
    4,117
    
    
    $
    3,653
    
    
    $
    1,524
    
    
    $
    5,177
 Net Sales.
 18




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##### Table of Contents



®
   Net Sales of TSI Segment
(Dollars in thousands)
 Trade
    
    
    Design
    
    
    SegmentNine Months Ended
    
    Source
    
    
    Trends
    
    
    TotalMarch 31, 2007
    
    $
    19,473
    
    
    $
    13,766
    
    
    $
    33,239March 31, 2006
    
    
    24,973
    
    
    
    15,473
    
    
    
    40,446Dollar decrease
    
    $
    (5,500
    )
    
    $
    (1,707
    )
    
    $
    (7,207
    )Percent decrease
    
    
    (22.0
    %)
    
    
    (11.0
    %)
    
    
    (17.8
    %)
    19




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##### Table of Contents



Gross Profit.
    Gross Profit as a Percentage of Net Sales of TSI
 Trade
    
    Design
    
    SegmentNine Months Ended
    
    Source
    
    Trends
    
    TotalMarch 31, 2007
    
    
    27.2
    %
    
    
    25.4
    %
    
    
    26.4
    %March 31, 2006
    
    
    22.5
    %
    
    
    22.9
    %
    
    
    22.6
    %Percent increase
    
    
    4.7
    %
    
    
    2.5
    %
    
    
    3.8
    %
   20




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##### Table of Contents



Selling, General and Administrative Expenses.
 Selling, General and Administrative Expenses
(Dollars in thousands)
 Increase/Nine Months Ended
    
    
    (Decrease)March 31,
    
    
    March 31,
    
    
    Over Prior2007
    
    
    2006
    
    
    Year PeriodAdvertising
    
    $
    1,546
    
    
    $
    991
    
    
    $
    555Group health insurance
    
    
    579
    
    
    
    411
    
    
    
    168Salaries and wages
    
    
    5,358
    
    
    
    5,193
    
    
    
    165Accounting, legal and consulting
    
    
    1,684
    
    
    
    1,533
    
    
    
    151Other
    
    
    6,535
    
    
    
    6,564
    
    
    
    (29
    )$
    15,702
    
    
    $
    14,692
    
    
    $
    1,010
     Depreciation and Amortization.
 Interest Expense.
 21




---



##### Table of Contents



Minority Interests.
 Provision for Income Taxes.
 Liquidity and Capital Resources
      Recent Accounting Pronouncements
  22




---



##### Table of Contents



Outstanding Debt
  Summary of Revolving Lines of Credit and Notes Payable
At March 31, 2007
 OutstandingCommitment
    
    
    Balance
    
    
    Interest Rate
    
    
    MaturityRevolving line of credit
    
    $
    30,000,000
    
    
    $
    17,519,000
    
    
    LIBOR plus 1.50%
    
    September 1, 2009Note payable  facility
    
    
    N/A
    
    
    
    516,000
    
    
    
    8.302
    %
    
    January 1, 2008$
    18,035,000
  23




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##### Table of Contents



Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Risk
 General
  24




---



##### Table of Contents



USD:TWD
    
    USD:YUANMarch 31, 2006
    
    
    32.568
    
    
    
    8.035June 30, 2006
    
    
    32.619
    
    
    
    8.006September 30, 2006
    
    
    33.119
    
    
    
    7.917December 31, 2006
    
    
    32.590
    
    
    
    7.817March 31, 2007
    
    
    33.135
    
    
    
    7.741
  Summary of Foreign Purchases
Quarter Ended March 31, 2007
(In thousands)
 China
    
    $
    8,754Taiwan
    
    
    
  Hypothetical Appreciation
of Chinese Yuan to U.S. Dollar
(Dollars in thousands)
 Annual
    
    AnnualForeign
    
    Increase in
    
    Decrease inCurrency
    
    Cost of
    
    NetAppreciation
    
    Sales
    
    Income1%
    
    $
    350
    
    
    $
    2115%
    
    
    1,751
    
    
    
    1,053
 Managing Market Risk
 Other Market Risks.
 25




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##### Table of Contents



Item 4.
    
    Controls and Procedures
 Disclosure Controls and Procedures
  Changes in Internal Controls
  26




---



##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3.
    
    Defaults Upon Senior Securities
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
  
 Item 5.
    
    Other Information
  
 Item 6.
    
    Exhibits
 2.1
    
    Stock Purchase Agreement between Craftmade International, Inc., Trade
Source International, Inc., and Robert W. Lackey, dated September 15, 2006,
previously filed as Exhibit 10.1 to Form 8-K dated September 15, 2006 (File No.
000-26667), and incorporated by reference herein.Pursuant to Item 601(b)(2) of Regulation S-K, the Company has not filed herewith
the schedules and exhibits to the foregoing exhibit and agrees to furnish
supplementally to the Securities and Exchange Commission, upon request, any
omitted schedules or similar attachments to the foregoing exhibit.2.2
    
    Agreement for the Purchase and Sale of Personal Goodwill between Trade
Source International, Inc. and Robert Lackey, dated September 15, 2006, previously
filed as Exhibit 10.2 to Form 8-K dated September 15, 2006 (File No. 000-26667), and
incorporated by reference herein.2.3
    
    Agreement for the Purchase and Sale of Personal Goodwill between Trade
Source International, Inc. and Robert Lackey, Jr., dated September 15, 2006,
previously filed as Exhibit 10.3 to Form 8-K dated September 15, 2006 (File No.
000-26667), and incorporated by reference herein.
 27




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##### Table of Contents



2.4
    
    Intellectual Property Assignment by and between Trade Source International,
Inc., Robert W. Lackey, Robert W. Lackey, Jr., RWL Incorporated f/k/a Robert W.
Lackey Corporation and R.L. Products Corporation, dated September 15, 2006,
previously filed as Exhibit 10.4 to Form 8-K dated September 15, 2006 (File No.
000-26667), and incorporated by reference herein.2.5
    
    Non-Competition Agreement between Trade Source International, Inc. and
Robert W. Lackey, dated September 15, 2006, previously filed as Exhibit 10.5 to Form
8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference
herein.2.6
    
    Non-Competition Agreement between Trade Source International and Robert W.
Lackey, Jr., dated September 15, 2006, previously filed as Exhibit 10.6 to Form 8-K
dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein.2.7
    
    Consulting Agreement by and between Craftmade International, Inc., Trade
Source International, Inc. and Imagine One Resources, LLC, dated September 15, 2006,
previously filed as Exhibit 10.7 to Form 8-K dated September 15, 2006 (File No.
000-26667), and incorporated by reference herein.2.8
    
    Partially Subordinate Security Agreement among Trade Source International,
Inc., Marketing Impressions, Inc., Prime Home Impressions, LLC, and Robert Lackey,
(Lackey), as collateral agent for Lackey, Robert W. Lackey, Jr., Imagine One
Resources, LLC, RWL Corporation and R.L. Products Corporation, dated September 15,
2006, previously filed as Exhibit 10.8 to Form 8-K dated September 15, 2006 (File No.
000-26667), and incorporated by reference herein.2.9
    
    Subordination Agreement by and among Robert W. Lackey (Lackey), as
collateral agent for Lackey, Robert W. Lackey, Jr., Imagine One Resources, LLC, RWL
Corporation, R.L. Products Corporation, and The Frost National Bank, Trade Source
International, Inc., Marketing Impressions, Inc., Prime/Home Impressions, LLC and
Craftmade International, Inc., dated September 15, 2006, previously filed as Exhibit
10.9 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by
reference herein.2.10
    
    Agreement and Plan of Merger by and among Craftmade International, Inc.,
Bill Teiber Co., Inc., Teiber Lighting Products, Inc., Todd Teiber and Edward
Oberstein dated March 1, 2005, previously filed as Exhibit 10.1 to Form 8-K dated
March 1, 2005 (File No. 000-26667), and incorporated by reference herein.2.11
    
    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 incorporated by reference
herein.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.
 28




---



##### Table of Contents



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.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
    
    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 10Q for the quarter ended December
31, 1995, and herein incorporated by reference.10.2
    
    Deed of Trust, Mortgage and Security Agreement made by Craftmade
International, Inc., dated December 21, 1995, to Patrick M. Arnold, as trustee for
the benefit of Allianz Life Insurance Company of North America (including exhibits),
previously filed as an exhibit in Form 10-Q for the quarter ended December 31, 1995,
and herein incorporated by reference.10.3
    
    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.10.4
    
    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.10.5
    
    Second Amended and Restated Loan Agreement with Frost dated September 18,
2006, previously filed as Exhibit 10.1 to Form 8-K dated September 18, 2006 (File No.
000-26667), and incorporated by reference herein.10.6
    
    Revolving Promissory Note (the Note) with dated September 18, 2006,
previously filed as Exhibit 10.2 to Form 8-K dated September 18, 2006 (File No.
000-26667), and incorporated by reference herein.10.7
    
    Craftmade International, Inc. 2006 Long-Term Incentive Plan, previously
filed as Exhibit 10.1 to Form 8-K dated November 28, 2006 (File No. 000-26667), and
incorporated by reference herein.10.8
    
    Incentive Stock Option Agreement, previously filed as Exhibit 10.2 to Form
8-K dated November 28, 2006 (File No. 000-26667), and incorporated by reference
herein.
 29




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##### Table of Contents



10.9
    
    Non-qualified Stock Option Agreement, previously filed as Exhibit 10.2 to
Form 8-K dated November 28, 2006 (File No. 000-26667), and incorporated by reference
herein.10.10
    
    Stock Appreciation Rights Agreement, previously filed as Exhibit 10.2 to
Form 8-K dated November 28, 2006 (File No. 000-26667), and incorporated by reference
herein.10.11
    
    Restricted Stock Award Agreement, previously filed as Exhibit 10.2 to Form
8-K dated November 28, 2006 (File No. 000-26667), and incorporated by reference
herein.31.1*
    
    Certification of James R. Ridings, Chief Executive Officer of the Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of J. Marcus Scrudder, Chief Financial Officer of the
Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of James R. Ridings, Chairman of the Board, President and
Chief Executive Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.32.2*
    
    Certification of J. Marcus Scrudder, Chief Financial Officer of the
Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Each document marked with an asterisk is filed or furnished herewith. 30




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##### Table of Contents



SIGNATURES
  CRAFTMADE INTERNATIONAL, INC.(Registrant)Date: May 9, 2007
    
    /s/ James R. RidingsJAMES R. RIDINGSChairman of the Board andChief Executive OfficerDate: May 9, 2007
    
    /s/ J. Marcus ScrudderJ. MARCUS SCRUDDERChief Financial Officer
 31