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FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2005 oro
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission file number 
 000-26667
 CRAFTMADE INTERNATIONAL, INC. 
  Delaware
    
    75-2057054(State or other jurisdiction
    
    (I.R.S. Employerof 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o 5,200,000 shares of Common Stock were outstanding as of April 30, 2005.




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES Index to Quarterly Report on Form 10-Q  
 Part I. Financial Information (Unaudited)Item 1. Financial Statements.Condensed Consolidated Statements of IncomeCondensed Consolidated Balance SheetsCondensed Consolidated Statements of Cash FlowsNotes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.Item 3. Quantitative and Qualitative Disclosures About Market Risk.Item 4. Controls and Procedures.Part II. Other InformationItem 1. Legal Proceedings.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.Promissory NoteThird Amendment to Loan AgreementArbitration and Notice of Final AgreementRenewal and Extension AgreementArbitration and Notice of Final AgreementCertification of James R. Ridings, CEO, Pursuant to Section 302Certification of Brad D. Heimann, Executive VP and Interim CFO, Pursuant to Section 302Certification of James R. Ridings, CEO, Pursuant to Section 906Certification of Brad D. Heimann, Executive VP and Interim CFO, Pursuant to Section 906
 2




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PART I
FINANCIAL INFORMATION 
 Item 1. Financial Statements. (Unaudited) CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES 
   FOR THE THREE MONTHS ENDED
    
    
    FOR THE NINE MONTHS ENDEDMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    27,059
    
    
    $
    28,988
    
    
    $
    84,433
    
    
    $
    89,126Cost of goods sold
    
    
    19,166
    
    
    
    20,526
    
    
    
    59,208
    
    
    
    62,800Gross profit
    
    
    7,893
    
    
    
    8,462
    
    
    
    25,225
    
    
    
    26,326Selling, general and administrative expenses
    
    
    4,902
    
    
    
    4,165
    
    
    
    14,807
    
    
    
    13,607Interest expense, net
    
    
    263
    
    
    
    226
    
    
    
    733
    
    
    
    565Depreciation and amortization
    
    
    148
    
    
    
    151
    
    
    
    436
    
    
    
    456Total expenses
    
    
    5,313
    
    
    
    4,542
    
    
    
    15,976
    
    
    
    14,628Income before income taxes and minority interests
    
    
    2,580
    
    
    
    3,920
    
    
    
    9,249
    
    
    
    11,698Provision for income taxes
    
    
    628
    
    
    
    1,302
    
    
    
    2,466
    
    
    
    3,4261,952
    
    
    
    2,618
    
    
    
    6,783
    
    
    
    8,272Minority interests
    
    
    859
    
    
    
    836
    
    
    
    2,420
    
    
    
    2,756Net income
    
    $
    1,093
    
    
    $
    1,782
    
    
    $
    4,363
    
    
    $
    5,516Basic earnings per common share
    
    $
    0.22
    
    
    $
    0.34
    
    
    $
    0.86
    
    
    $
    1.02Diluted earnings per common share
    
    $
    0.22
    
    
    $
    0.33
    
    
    $
    0.86
    
    
    $
    1.01Cash dividends declared per common share
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.30
    
    
    $
    0.30
 SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS 3




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES 
   ASSETS March 31,
    
    
    June 30,2005
    
    
    2004(Unaudited)Current assetsCash
    
    $
    5,930
    
    
    $
    5,838Accounts receivable  net of allowance
of $245 and $150, respectively
    
    
    18,876
    
    
    
    19,242Inventory
    
    
    18,517
    
    
    
    15,172Deferred income taxes
    
    
    
    
    
    
    9Prepaid expenses and other current assets
    
    
    554
    
    
    
    1,193Total current assets
    
    
    43,877
    
    
    
    41,454Property and equipmentLand
    
    
    1,535
    
    
    
    1,535Building
    
    
    7,796
    
    
    
    7,784Office furniture and equipment
    
    
    9,094
    
    
    
    9,013Leasehold improvements
    
    
    279
    
    
    
    27918,704
    
    
    
    18,611Less: accumulated depreciation
    
    
    (10,128
    )
    
    
    (9,626
    )Total property and equipment, net
    
    
    8,576
    
    
    
    8,985Other assetsGoodwill net of accumulated amortization
of $1,204 in each period presented
    
    
    11,556
    
    
    
    4,735Other intangibles net of accumulated amortization
of $2 at March 31, 2005
    
    
    198
    
    
    
    Other assets
    
    
    78
    
    
    
    80Total other assets
    
    
    11,832
    
    
    
    4,815Total assets
    
    $
    64,285
    
    
    $
    55,254
 SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS 4




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts) LIABILITIES AND STOCKHOLDERS EQUITY March 31,
    
    
    June 30,2005
    
    
    2004(Unaudited)Current liabilitiesNote payable  current
    
    $
    1,602
    
    
    $
    2,662Revolving line of credit
    
    
    20,644
    
    
    
    16,125Accounts payable
    
    
    8,561
    
    
    
    6,186Commissions payable
    
    
    228
    
    
    
    289Income taxes payable
    
    
    157
    
    
    
    1,112Current deferred income taxes
    
    
    208
    
    
    
    Accrued customer allowances
    
    
    4,913
    
    
    
    4,320Other accrued expenses
    
    
    992
    
    
    
    1,074Total current liabilities
    
    
    37,305
    
    
    
    31,768Other non-current liabilitiesNote payable  long term
    
    
    1,817
    
    
    
    2,949Deferred income taxes
    
    
    268
    
    
    
    214Total other non-current liabilities
    
    
    2,085
    
    
    
    3,163Total liabilities
    
    
    39,390
    
    
    
    34,931Minority interests
    
    
    2,282
    
    
    
    1,984Commitments and contingencies (Note 6)Stockholders equitySeries A cumulative, convertible callable
preferred stock, $1.00 par value, 2,000,000
shares authorized; 32,000 shares issued
    
    
    32
    
    
    
    32Common stock, $0.01 par value, 15,000,000
shares authorized, 9,698,220 and 9,465,535
shares issued, respectively
    
    
    97
    
    
    
    95Additional paid-in capital
    
    
    18,458
    
    
    
    14,098Unearned deferred compensation
    
    
    
    
    
    
    (11
    )Retained earnings
    
    
    44,033
    
    
    
    41,207Less: treasury stock, 4,499,920 and 4,336,587
common shares at cost, and 32,000
preferred shares at cost
    
    
    (40,007
    )
    
    
    (37,082
    )Total stockholders equity
    
    
    22,613
    
    
    
    18,339Total liabilities and stockholders equity
    
    $
    64,285
    
    
    $
    55,254
 SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS 5




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES 
    FOR THE NINE MONTHS ENDEDMarch 31,
    
    
    March 31,2005
    
    
    2004Net cash provided by operating activities
    
    $
    7,383
    
    
    $
    8,394Cash flows from investing activitiesAcquisition of Bill Teiber Co., Inc., net of cash acquired
    
    
    (4,000
    )
    
    
    Net additions to property and equipment
    
    
    (57
    )
    
    
    (162
    )Net additions to other intangibles
    
    
    (10
    )
    
    
    Net cash used in investing activities
    
    
    (4,067
    )
    
    
    (162
    )Cash flows from financing activitiesNet proceeds from (payments on) lines of credit
    
    
    4,519
    
    
    
    2,184Principal payments on notes payable
    
    
    (2,191
    )
    
    
    (1,197
    )Proceeds from notes payable
    
    
    
    
    
    
    2,100Treasury stock repurchases
    
    
    (2,925
    )
    
    
    (5,443
    )Stock options exercised
    
    
    306
    
    
    
    269Cash dividends
    
    
    (1,538
    )
    
    
    (1,635
    )Distributions to minority interest members
    
    
    (1,395
    )
    
    
    (4,613
    )Net cash used in financing activities
    
    
    (3,224
    )
    
    
    (8,335
    )Net increase/(decrease) in cash
    
    
    92
    
    
    
    (103
    )Cash at beginning of period
    
    
    5,838
    
    
    
    4,992Cash at end of period
    
    $
    5,930
    
    
    $
    4,889
 SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS 6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES 
  Note 1
    - BASIS OF PREPARATION AND PRESENTATIONThe accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America and
with the rules and regulations of the Securities and Exchange Commission (SEC) for interim
financial reporting, and include all adjustments which are, in the opinion of management,
necessary for a fair presentation. The condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures are adequate to make the information
presented not misleading; however, it is suggested that these financial statements be read
in conjunction with the financial statements and the notes thereto, in the Companys Annual
Report on Form 10-K for the fiscal year ended June 30, 2004 filed with the SEC on September
28, 2004. The financial data for the interim periods may not necessarily be indicative of
results to be expected for the year. State income tax expense of
$256,000 previously classified in selling, general and administrative expenses has been
reclassified to provision for income taxes for the quarter ended
March 31, 2004. Such reclassification had no effect on
previously reported net income.Note 2
    - ACQUISITION OF BILL TEIBER CO., INC.On March 1, 2005, the Company acquired 100% of the issued and outstanding shares of capital
stock of Bill Teiber Co., Inc. (Teiber) through a merger of subsidiaries. Teiber is an
importer and distributor of decorative light bulbs, door chimes, ventilation systems and
related lighting accessories. The business will be operated as Teiber Lighting Products,
Inc., a wholly-owned subsidiary of Craftmade. Craftmade acquired Teiber in order to
distribute Teibers product lines to Craftmades existing 1,600 showroom customers.Assets acquired and liabilities assumed were recorded on the Companys Condensed
Consolidated Balance Sheets as of the acquisition date based upon their estimated fair
values at such date. The results of operations have been included in the Condensed
Consolidated Statements of Income since the date of merger in the Craftmade segment.The aggregate purchase price was calculated as follows: Number of shares of Common Stock
    
    
    190,385Average trading price
    
    $
    21.306
    (i)Sub-total
    
    $
    4,056,343Cash consideration
    
    
    4,000,000Merger-related costs
    
    
    99,278Total consideration
    
    $
    8,155,621
   (i)
    
    The average trading price is based on the average of
the closing prices of Craftmades common stock, $0.01 par
value per share (Common Stock), for the two days before,
the day of, and the two days after the date of the
announcement of the merger, March 1, 2005.  The following table sets forth the unaudited pro forma results of operations of the Company
as if the Teiber merger had occurred at the beginning of the periods presented. These pro
forma amounts do not purport to be indicative of the results that would have actually been
obtained if the merger occurred as of the 7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 2005  beginning of each of the periods presented or that
may be obtained in the future. Unaudited Pro Forma Results
(In thousands except per share data) Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    28,111
    
    
    $
    30,074
    
    
    $
    89,109
    
    
    $
    93,475Net income
    
    
    1,125
    
    
    
    1,805
    
    
    
    4,620
    
    
    
    5,691Diluted earnings per share
    
    $
    0.22
    
    
    $
    0.34
    
    
    $
    0.91
    
    
    $
    1.05
  The purchase price has been allocated based on the estimated fair values of the assets
acquired and liabilities assumed as of the date of acquisition. The purchase price
allocation is preliminary and may be adjusted for changes in estimates of fair value,
including but not limited to changes in allowances for doubtful accounts and inventory
reserves. The following represents the preliminary allocation of the purchase price: Current assets
    
    $
    2,931,441Property and equipment
    
    
    36,771Intangible assets
    
    
    200,000Goodwill
    
    
    6,821,046Other assets
    
    
    9,559Total assets
    
    
    9,998,817Current liabilities
    
    
    (1,843,196
    )Total liabilities
    
    
    (1,843,196
    )Total purchase price
    
    $
    8,155,621
  The amounts assigned to intangible assets represent the value of non-compete agreements
for the two principals of Teiber. The value was based on an independent appraisal and will
be amortized over seven years using the straight-line method.The amount of goodwill allocated to the purchase price was $6,821,046 of which $4,000,000 is
deductible for tax purposes. 8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 2005  Note 3
    - EARNINGS PER SHAREThe 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 ENDEDMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands except per share data)Basic and diluted earnings per share:NumeratorNet income
    
    $
    1,093
    
    
    $
    1,782
    
    
    $
    4,363
    
    
    $
    5,516Denominator for basic EPSCommon shares outstanding
    
    
    5,062
    
    
    
    5,314
    
    
    
    5,060
    
    
    
    5,392Denominator for diluted EPSCommon shares outstanding
    
    
    5,062
    
    
    
    5,314
    
    
    
    5,060
    
    
    
    5,392Stock options
    
    
    12
    
    
    
    46
    
    
    
    25
    
    
    
    48Potentially dilutive common shares
    
    
    5,074
    
    
    
    5,360
    
    
    
    5,085
    
    
    
    5,440Basic earnings per share
    
    $
    0.22
    
    
    $
    0.34
    
    
    $
    0.86
    
    
    $
    1.02Diluted earnings per share
    
    $
    0.22
    
    
    $
    0.33
    
    
    $
    0.86
    
    
    $
    1.01
 9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 2005  Note 4
    - STOCK-BASED COMPENSATIONThe Company follows the disclosure only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation as amended by SFAS No.
148. However, the Company continues to measure compensation cost for those plans using the
intrinsic value based method of accounting as prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees.Had compensation cost for the Companys stock option plans been determined based on the fair
value of the stock options at grant date, in accordance with the provisions of FAS 123,
Accounting for Stock-Based Compensation, the Companys net income and diluted earnings per
common share would have been adjusted to the pro forma amounts indicated: FOR THE THREE MONTHS ENDED
    
    
    FOR THE NINE MONTHS ENDEDMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands except per share data)Net income, as reported
    
    $
    1,093
    
    
    $
    1,782
    
    
    $
    4,363
    
    
    $
    5,516Compensation expense, proforma
    
    
    (5
    )
    
    
    (38
    )
    
    
    (46
    )
    
    
    (100
    )Net income, proforma
    
    $
    1,088
    
    
    $
    1,744
    
    
    $
    4,317
    
    
    $
    5,416Basic earnings per share, as reported
    
    $
    0.22
    
    
    $
    0.34
    
    
    $
    0.86
    
    
    $
    1.02Basic earnings per share, proforma
    
    
    0.21
    
    
    
    0.33
    
    
    
    0.85
    
    
    
    1.00Diluted earnings per share, as reported
    
    $
    0.22
    
    
    $
    0.33
    
    
    $
    0.86
    
    
    $
    1.01Diluted earnings per share, proforma
    
    
    0.21
    
    
    
    0.33
    
    
    
    0.85
    
    
    
    1.00
 10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 2005  Note 5
    - SEGMENT INFORMATIONThe Company operates in two reportable segments, Craftmade and TSI. 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, 2004. The Company evaluates the performance of its segments and allocates
resources to them based on their net sales and income before minority interests and income
taxes.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, outdoor lighting, lamps, light bulbs, door chimes and ventilation
systems offered primarily through lighting showrooms and selected electrical distributors.
The TSI segment derives its revenue from indoor lighting, including portable table lamps,
floor lamps, ceiling mount lighting fixtures, bath-strip lighting, and outdoor lighting
marketed solely to mass merchandisers.The following table presents information about the reportable segments: FOR THE THREE MONTHS ENDED
    
    
    FOR THE NINE MONTHS ENDEDMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands except per share data)Net salesCraftmade
    
    $
    12,707
    
    
    $
    12,289
    
    
    $
    39,576
    
    
    $
    39,147TSI
    
    
    14,352
    
    
    
    16,699
    
    
    
    44,857
    
    
    
    49,979Total
    
    $
    27,059
    
    
    $
    28,988
    
    
    $
    84,433
    
    
    $
    89,126Income before minority interests and
income taxesCraftmade
    
    $
    1,130
    
    
    $
    2,001
    
    
    $
    4,237
    
    
    $
    6,487TSI
    
    
    1,450
    
    
    
    1,919
    
    
    
    5,012
    
    
    
    5,211Total
    
    $
    2,580
    
    
    $
    3,920
    
    
    $
    9,249
    
    
    $
    11,698
 11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 2005  Note 6
    - COMMITMENTS AND CONTINGENCIESThe Company is a party to a lawsuit alleging patent infringement related to a patent held by
Lamps Plus, Inc. In November 2003, a jury verdict held that the Company willfully infringed
on the patent. The jury awarded damages of $143,385, and Lamps Plus filed a motion to seek
treble damages plus reasonable attorneys fees and court costs. On September 14, 2004, the
Court entered a Judgment and Permanent Injunction and issued an Order Awarding Attorneys
Fees. The Judgment awards Lamps Plus $143,385 in actual damages plus costs of court. The
Order awards $600,000 in attorneys fees to Lamps Plus. The Company and other defendants in
the lawsuit have appealed the Judgment and Order, and the outcome of the appeal is
uncertain, accordingly no accrual for any amount has been made in the Companys consolidated
financial statements as of March 31, 2005.Craftmade has an agreement with Dolan Northwest, LLC (the owner of the other 50% of Design
Trends) pursuant to which Dolan Northwest is responsible for the judgment rendered in the
lawsuit, plus all costs and expenses, including legal fees and court costs, associated with
the judgment. Pat Dolan has unconditionally guaranteed the obligations of Dolan Northwest
under this agreement.If the defendants appeal is unsuccessful, according to the above mentioned agreement, any
damages would be the responsibility of Dolan Northwest, LLC. In the event that both Dolan
Northwest and Pat Dolan became insolvent or otherwise unable to meet any such obligation, it
could become a liability of Design Trends or Craftmade.Note 7
    - INCOME TAXESOn October 22, 2004, President Bush signed the American Jobs Creation Act of 2004 (the
Act), which includes numerous provisions that may affect business practices and accounting
for income taxes. Management is currently evaluating what, if any, effects the Act may have
on the Company. 12




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.  Cautionary StatementWith the exception of historical information, the matters discussed in this document contain
forward-looking statements. There are certain important factors which could cause actual
results to differ materially from those anticipated by these forward-looking statements.
Some of the important factors which would cause actual results to differ materially from
those in the forward-looking statements include, among other things, the dependency of Trade
Source International, Inc. (TSI), Design Trends, LLC (Design Trends) and Prime/Home
Impression, LLC (PHI) on sales to select mass merchandiser customers and changes in those
relationships, changes in anticipated levels of sales, whether due to future national or
regional economic and competitive conditions, changes in relationships with Craftmade
customers, customer acceptance of existing and new products, pricing pressures due to excess
capacity, cost increases, changes in tax or interest rates, unfavorable economic and
political developments in Asia (the location of the Companys primary vendors) and changes
in the foreign currency exchange rate between the U.S. and Taiwan dollar, declining
conditions in the home construction industry, inability to realize deferred tax assets,
labor strikes, lockouts, and other labor slow downs, the ability of the Company to import
merchandise from foreign countries without significantly restrictive tariffs, duties or
quotas and the ability of the Company to source, ship and deliver items from foreign
countries to its U.S. distribution centers at reasonable prices and rates and in a timely
fashion, as well as other uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Company. When used in this Quarterly Report, the words
believes, plans, estimates, expects, anticipates, intends, continue, may,
will, should, projects, forecast, might, could or the negative of such terms and
similar expressions as they relate to Craftmade or its management are intended to identify
forward-looking statements.Critical Accounting Policies and EstimatesManagements discussion and analysis of its financial condition and results of operations
following is 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 the 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 the Companys
conclusions. The Company continually evaluates the information used to make these estimates
as its business and the economic environment changes. As the financial statements contained
herein are condensed, one should also read the Companys Form 10-K for the year ended June
30, 2004 regarding expanded information about our critical accounting policies and
estimates. 13




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##### Table of Contents



OverviewManagement reviews a number of key indicators to evaluate the Companys financial
performance, including net sales, gross profit and selling, general and administrative
expenses by segment. A condensed overview of results for the three months ended March 31,
2005 and the corresponding prior year period can be summarized as follows (in thousands): Three Months Ended
    
    
    Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Craftmade
    
    
    TSI
    
    
    Total
    
    
    Craftmade
    
    
    TSI
    
    
    TotalNet sales
    
    $
    12,707
    
    
    $
    14,352
    
    
    $
    27,059
    
    
    $
    12,289
    
    
    $
    16,699
    
    
    $
    28,988Cost of goods sold
    
    
    8,198
    
    
    
    10,968
    
    
    
    19,166
    
    
    
    7,504
    
    
    
    13,022
    
    
    
    20,526Gross profit
    
    
    4,509
    
    
    
    3,384
    
    
    
    7,893
    
    
    
    4,785
    
    
    
    3,677
    
    
    
    8,462Gross margin
    
    
    35.5
    %
    
    
    23.6
    %
    
    
    29.2
    %
    
    
    38.9
    %
    
    
    22.0
    %
    
    
    29.2
    %SG&A
    
    
    3,002
    
    
    
    1,900
    
    
    
    4,902
    
    
    
    2,455
    
    
    
    1,710
    
    
    
    4,165As a % of net sales
    
    
    23.6
    %
    
    
    13.2
    %
    
    
    18.1
    %
    
    
    20.0
    %
    
    
    10.2
    %
    
    
    14.4
    %Interest
    
    
    239
    
    
    
    24
    
    
    
    263
    
    
    
    194
    
    
    
    32
    
    
    
    226Depreciation
    
    
    138
    
    
    
    10
    
    
    
    148
    
    
    
    135
    
    
    
    16
    
    
    
    151Income before minority
interests and income taxes
    
    $
    1,130
    
    
    $
    1,450
    
    
    
    2,580
    
    
    $
    2,001
    
    
    $
    1,919
    
    
    
    3,920Minority interests
    
    
    
    
    
    
    
    
    
    
    859
    
    
    
    
    
    
    
    
    
    
    
    836Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    628
    
    
    
    
    
    
    
    
    
    
    
    1,302Net income
    
    
    
    
    
    
    
    
    
    $
    1,093
    
    
    
    
    
    
    
    
    
    
    $
    1,782
  Results of OperationsThree Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004Net Sales.Net sales for the Company declined $1,929,000 or 6.7% to $27,059,000 for the
three month period ended March 31, 2005, compared to $28,988,000 for the same three month
period last year. The decline resulted from lower than expected sales in the TSI segment,
offset by an increase in the Craftmade segment.Net sales from the Craftmade segment increased $418,000 or 3.4% to $12,707,000 for the three
months ended March 31, 2005 from $12,289,000 for the same three month period last year. The
increase resulted from $696,000 of net sales from the Teiber acquisition. The remaining
$278,000 decrease in sales of the Craftmade segment was primarily related to a general
decline across product lines, and an unanticipated delay in shipment of new products
introduced in January. Based on sales results from the first half of the fiscal year,
management anticipates that net sales from the Craftmade segment, excluding results from the
Teiber acquisition, will increase slightly for the remainder of the fiscal year as newly
introduced products begin to sell. Management believes that the Teiber acquisition will
provide incremental growth opportunities for the remainder of 2005 and fiscal 2006.Net sales of the TSI segment declined $2,347,000 or 14.1% to $14,352,000 for the three
months ended March 31, 2005 from $16,699,000 for the same three month period last year. The
decline in sales of the TSI segment resulted from lower sales at TSI and PHI, offset by an
increase at Design Trends, summarized as follows (in thousands): 14




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##### Table of Contents



Net sales for the three months ended March 31, 2004
    
    $
    16,699Net decrease in sales of TSI (excluding results from the 50% owned subsidiaries)
    
    
    (1,821
    )Net decrease in sales of PHI
    
    
    (1,261
    )Net increase in sales at Design Trends
    
    
    735Net sales for the three months ended March 31, 2005
    
    $
    14,352
  The net decrease in sales of TSI resulted in part from (i) the reset of the outdoor
lighting program at the Companys largest mass retail customer that occurred in the third
quarter of fiscal 2004 that did not occur in the same quarter this year, (ii) a decrease in
sales of the mix and match fan program to another mass retail customer that occurred in the
third quarter of fiscal 2005 compared to the same quarter in the prior year, and (iii)
changes in buying patterns of promotional sales items to its largest mass retail customer
related to the retailers sales forecasts and targeted levels of replenishment inventory.PHI sales declined as a result of a benefit in the prior year from the rollout of the new
lamp replacement parts business that did not occur in the current period. This rollout
occurred in the second quarter of fiscal 2004 with pipeline fill continuing into the third
quarter of fiscal 2004.The increase in sales at Design Trends occurred from a semi-annual reset of the mix and
match portable lamp program at its largest mass retail customer. See Nine Months Ended
March 31, 2005 Compared to Nine Months Ended March 31, 2004for additional information.Gross Profit.Gross profit of the Company as a percentage of sales was 29.2% for the three
months ended March 31, 2005 and for the same period of 2004. The gross profit percentage of
the Craftmade segment was 35.5% for the third quarter, compared to 38.9% of net sales in the
prior year period. The decline in the gross margin of the Craftmade segment was primarily
the result of increased product costs due to a weaker U.S. dollar compared to the Taiwan
dollar. The decline in the gross margin was partially due to an increase in outbound
freight as a percentage of net sales. Outbound freight increased to 8.1% of sales for the
three months ended March 31, 2005, compared to 7.2% in the same period a year ago. In
addition, gross profit margins were impacted by decreasing margins in the portion of sales
driven by Craftmades builders model ceiling fans, whose sales are more sensitive to price
increases which would offset the increased product costs. The Company anticipates that
margins for the remainder of fiscal 2005 for the Craftmade division will stabilize in the
fourth quarter due to a price increase that was approximately equal to the higher product
costs effective from March 1, 2005.The gross profit percentage of the TSI segment increased to 23.6% of sales for the three
months ended March 31, 2005, compared to 22.0% of sales in the prior year period. The
increase was due to a 3.7% increase in product margin as a percentage of gross sales
primarily from the semi-annual reset of Design Trends mix and match portable lamp program
at its largest mass retail customer, offset by the implementation of a markdown accrual on
sales to TSIs largest mass retail customer that totaled 2.8% of gross sales in the three
months ended March 31, 2005 from 0.0% of gross sales in the prior year period. For the
remainder of fiscal 2005, gross profit as a percentage of sales of the TSI segment is
expected to remain consistent with the first half of the fiscal year.Selling, General and Administrative Expenses.Total selling, general and administrative
(SG&A) expenses of the Company increased $737,000 to $4,902,000 or 18.1% of net sales for
the three months ended March 31, 2005 from $4,165,000 or 14.4% of net sales for the same
three month period last year. The Craftmade segment contributed to all of the increase,
offset by a slight decrease in the TSI segment.Total SG&A expenses of the Craftmade segment increased $547,000 to $3,002,000 or 23.6% of
sales compared to $2,455,000 or 20.0% of sales for the same period in the previous fiscal
year. 15




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##### Table of Contents



The following table
summarizes SG&A expenses of the Craftmade segment: IncreaseThree Months Ended
    
    
    OverMarch 31,
    
    
    Prior Year2005
    
    
    2004
    
    
    PeriodAccounting & legal
    
    $
    714
    
    
    $
    125
    
    
    $
    589Salaries and wages
    
    
    901
    
    
    
    832
    
    
    
    69Other
    
    
    1,387
    
    
    
    1,498
    
    
    
    (111
    )$
    3,002
    
    
    $
    2,455
    
    
    $
    547
  The increase primarily related to the cost of management consultants to comply with
Section 404 of the Sarbanes-Oxley Act of 2002, which was allocated entirely to the Craftmade
segment. Higher salaries and wages resulted primarily from the addition of seven Teiber
employees in March 2005.Total SG&A expenses of the TSI segment increased $190,000 to $1,900,000 or 13.2% of sales
compared to $1,710,000 or 10.2% of sales for the same period in the previous year from a
increase in a broad category of expenses. No allocation was made to the TSI segment for the
portion of expenses related to accounting and legal fees, including compliance costs for
Section 404 of the Sarbanes-Oxley Act of 2002.The Company anticipates SG&A expenses to increase in the remaining quarter of the year,
primarily as a result of higher costs from compliance with Section 404 of the Sarbanes-Oxley
Act of 2002.Interest Expense.Net interest expense of the Company increased $37,000 to $263,000 for the
three months ended March 31, 2005 from $226,000 for the three month period ended March 31,
2004. The average outstanding balance on the Companys lines of credit was higher in the
fiscal third quarter compared to the prior year period, and interest rates on its lines of
credit in effect during the period were higher than in the prior year period. The balance
on the Companys revolving lines of credit increased primarily as a result of Craftmades
borrowings to finance its acquisition of Bill Teiber Co., Inc. In addition, borrowings on
the Companys revolving lines of credit increased as a result of an increase in the
Companys accounts receivable due to a change in its accounts receivable payment terms with
its largest mass retail customer to 60 days from a previous range of 30 to 45 days. The
outstanding balance on the Companys facility note was lower than in the prior year period,
and the interest rate on the facility note remained unchanged compared to the prior year
period.Minority Interests.Minority interests increased $23,000 to $859,000 for the third quarter
from $836,000 for the same period in the previous year. The increase primarily resulted
from higher sales at Design Trends compared to the prior year quarter.Provision For Income Taxes.The provision for income tax was $628,000 or 36.5% of income
for the three months ended March 31, 2005, compared to $1,302,000 or 42.2% for the same
period of the prior year. The improvement in income taxes as a percentage of income
resulted from lower franchise state tax. 16




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##### Table of Contents



Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004 A condensed overview of results for the nine months ended March 31, 2005 and the
corresponding prior year period can be summarized as follows (in thousands): Nine Months Ended
    
    
    Nine Months EndedMarch 31, 2005
    
    
    March 31, 2004Craftmade
    
    
    TSI
    
    
    Total
    
    
    Craftmade
    
    
    TSI
    
    
    TotalNet sales
    
    $
    39,576
    
    
    $
    44,857
    
    
    $
    84,433
    
    
    $
    39,147
    
    
    $
    49,979
    
    
    $
    89,126Cost of goods sold
    
    
    24,831
    
    
    
    34,377
    
    
    
    59,208
    
    
    
    23,725
    
    
    
    39,075
    
    
    
    62,800Gross profit
    
    
    14,745
    
    
    
    10,480
    
    
    
    25,225
    
    
    
    15,422
    
    
    
    10,904
    
    
    
    26,326Gross margin
    
    
    37.3
    %
    
    
    23.4
    %
    
    
    29.9
    %
    
    
    39.4
    %
    
    
    21.8
    %
    
    
    29.5
    %SG&A
    
    
    9,461
    
    
    
    5,346
    
    
    
    14,807
    
    
    
    8,007
    
    
    
    5,600
    
    
    
    13,607As a % of net sales
    
    
    23.9
    %
    
    
    11.9
    %
    
    
    17.5
    %
    
    
    20.5
    %
    
    
    11.2
    %
    
    
    15.3
    %Interest
    
    
    647
    
    
    
    86
    
    
    
    733
    
    
    
    522
    
    
    
    43
    
    
    
    565Depreciation
    
    
    400
    
    
    
    36
    
    
    
    436
    
    
    
    406
    
    
    
    50
    
    
    
    456Income before minority
interests and income taxes
    
    $
    4,237
    
    
    $
    5,012
    
    
    
    9,249
    
    
    $
    6,487
    
    
    $
    5,211
    
    
    
    11,698Minority interests
    
    
    
    
    
    
    
    
    
    
    2,420
    
    
    
    
    
    
    
    
    
    
    
    2,756Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    2,466
    
    
    
    
    
    
    
    
    
    
    
    3,426Net income
    
    
    
    
    
    
    
    
    
    $
    4,363
    
    
    
    
    
    
    
    
    
    
    $
    5,516
  Net Sales.Net sales for the Company decreased $4,693,000 or 5.3%, to $84,433,000 for
the nine month period ended March 31, 2005 from $89,126,000 for the same nine month period
last year. The TSI segment contributed to virtually all of the decrease, offset by a slight
increase from the Craftmade segment.Net sales of the Craftmade segment increased $429,000, or 1.1%, to $39,576,000 for the nine
months ended March 31, 2005 from $39,147,000 for the same nine month period last year. The
increase resulted from $696,000 of net sales from the Teiber acquisition. The remaining
$267,000 decrease in sales of the Craftmade segment was primarily related to a general
decline across product lines and an unanticipated delay in shipment of new products
introduced in January. Based on sales results from the first half of the fiscal year,
management anticipates that net sales from the Craftmade segment, excluding results from the
Teiber acquisition, will increase slightly for the remainder of the fiscal year as newly
introduced products begin to sell. Management believes that the Teiber acquisition will
provide continued growth.Net sales of the TSI segment declined $5,122,000, or 10.2% to $44,857,000 for the nine
months ended March 31, 2005 from $49,979,000 for the same nine month period last year. The
change in net sales between periods can be summarized as follows: Net sales for the nine months ended March 31, 2004
    
    $
    49,979Net increase
in sales at TSI (excluding results from the 50% owned subsidiaries)
    
    
    1,553Charge in connection with rollout of a new customer in the quarter ended December 31, 2003
    
    
    2,100Net decrease in sales of PHI
    
    
    (1,831
    )Net decrease in sales of Design Trends
    
    
    (6,944
    )Net sales for the nine months ended March 31, 2005
    
    $
    44,857
 17




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The changes can be explained as follows:  
    The increase in sales at TSI resulted from higher sales of indoor
lighting products.
    The change in net sales between periods was impacted by a charge that
totaled $2,100,000. The charge decreased net sales in the quarter ended December
31, 2003 and was incurred in connection with the rollout of a new replacement lamps
parts business to a customer of PHI.
    PHI sales declined as a result of a benefit in the prior year from the
rollout of the new lamp replacement parts business that did not occur in the
current period. This rollout occurred in the second quarter of fiscal 2004 with
pipeline fill continuing into the third quarter of fiscal 2004.
    The $6,944,000 or 24.6% decline in Design Trends net sales was
primarily due to changes in the buying pattern of TSIs largest mass retail
customer. Management believes the changes are related to the retailers sales
forecasts, targeted levels of replenishment inventory, targeted inventory turns,
and other factors that are within the realm of the retailers
control. The largest mass retail customer of Design Trends maintains a BATNA (Better
Alternative to Negotiated Agreement) policy, which mitigates the risk associated
with maintaining a sole supplier for a given product line. Pursuant to BATNA, the
Design Trends mix and match lamp program has exited 118 of the mass retailers
stores, located in the Midwestern region of the United States, and a competitors
mix and match lamp program has replaced the Design Trends mix and match lamp
program in such stores.On April 19, 2005, Design Trends was notified by Lowes that Design Trends will no
longer supply its mix and match portable lamp program to an additional three
regional distribution centers. Such distribution centers currently serve, in the
aggregate, approximately 265 Lowes stores. As a result, Design Trends mix and
match portable lamp program will not be available in such stores. However, Design
Trends continues to be the primary vendor to Lowes for the mix and match portable
lamp program, and such program will continue to be available in approximately 722
Lowes stores. In addition, according to publicly available information, Lowes has
indicated that it will open 150 stores in 2005. Management anticipates that Design
Trends will obtain product placements in approximately 63% or 94 of the new stores
Lowes opens, assuming Lowes opens all 150 new stores.Management understands that in mid-August 2005, Lowes will be rolling out a mix and
match portable lamp program of a Design Trends competitor to replace the Design
Trends program in the affected Lowes stores. Management further understands that
the reason for the roll out of the competitors product is to conduct a more
thorough test, comprised of multiple markets nationally, to determine the
effectiveness and productivity of the competitors product versus Design Trends
mix and match portable lamp program. Management further understands that such test
will continue approximately through mid-February 2006.Management of the Company has estimated that the three regional distribution centers
contributed $4,465,000 or 5.3% of consolidated net sales for the nine months ended
March 31, 2005 and $6,265,000 or 5.2% of consolidated net sales in fiscal 2004. On
a fully diluted basis, management has estimated that the annual earnings impact will
be between $0.06 to $0.07 per share.Based on historical sales data, management has estimated that each regional
distribution center contributes on average between $1.7 million and $2.4 million to
net sales annually. 18




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##### Table of Contents



At this time the Company has been given no indication as to what decisions will be
made by Lowes regarding the future of the Design Trends program as of the end of
the test period. Depending on test results, Lowes could decide to do the
following:  
    Maintain the distribution as implemented in mid-August 2005,
    Increase the distribution of the Design Trends program to
additional or all regional distribution centers, or
    Increase the distribution of the competitors program to
additional or all regional distribution centers.  Management believes that Design Trends remains competitive in its product offerings
and provides its customers, in particular Lowes, the best opportunity to realize a
satisfactory return on investment in the mix and match portable lamp product
category. However, management cannot speculate as to whether or not Lowes, or any
other customer, will make decisions regarding Design Trends products based on
objective sales related information, or based on other factors unknown to management
at this time. Design Trends continues to be invited to participate in scheduled
line reviews at Lowes for its existing and new product lines.  Gross Profit.Gross profit of the Company as a percentage of sales increased to 29.9% of
net sales for the nine months ended March 31, 2005, compared to 29.5% for the same period of
2004. Gross profit as a percentage of sales of the Craftmade segment decreased to 37.3% for
the nine months ended March 31, 2005, compared to 39.4% for the same period of 2004. The
decline in the gross margin of the Craftmade segment was partially due to an increase in
outbound freight as a percentage of net sales, but primarily due to increased product costs
from a weaker U.S. dollar compared to the Taiwan dollar. In addition, gross profit margins
were impacted by decreasing margins in the portion of sales driven by Craftmades builders
model ceiling fans, whose sales are more sensitive to price increases which would offset the
increased product costs. The Company anticipates that margins for the remainder of fiscal
2005 for the Craftmade segment will stabilize in the fourth quarter due to a price increase
effective on March 1, 2005 that was approximately equal to the higher product costs.The gross profit of the TSI segment increased to 23.4% of sales for the nine months ended
March 31, 2005, compared to 21.8% of sales in the year ago period. The increase was due to
the following:  (i)
    a $2,100,000 charge that reduced gross sales incurred in connection
with the rollout of a new product to a customer of PHI in the quarter ended
December 31, 2003, and  (ii)
    a 1.2% increase in product margin as a percentage of gross sales,
primarily from the semi-annual reset of Design Trends mix and match portable lamp
program at the largest mass retail customer.  These benefits were offset by the implementation of a markdown accrual on sales to TSIs
largest mass retail customer that totaled 2.9% of gross sales in the nine months ended March
31, 2005 from 0.0% of gross sales in the prior year period. For the remainder of fiscal
2005, gross profit as a percentage of sales of the TSI segment is expected to remain
consistent with the first nine months of the fiscal year.Selling, General and Administrative Expenses.Total selling, general and administrative
(SG&A) expenses of the Company increased $1,200,000 to $14,807,000 or 17.5% of net sales
for the nine months ended March 31, 2005 from $13,607,000 or 15.3% of net sales for the same
nine month period last year. The increase in SG&A came from the Craftmade segment,
partially offset by a decrease in SG&A by the TSI segment.Total SG&A expense of the Craftmade segment increased $1,454,000 to $9,461,000 or 23.9% of
sales 19




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##### Table of Contents



compared to $8,007,000 or 20.5% of sales for the same period in the previous year.
The increase in SG&A of the Craftmade segment can be summarized as follows (in thousands): IncreaseNine Months Ended
    
    
    OverMarch 31,
    
    
    Prior Year2005
    
    
    2004
    
    
    PeriodAccounting & legal
    
    $
    1,852
    
    
    $
    685
    
    
    $
    1,167Salaries and wages
    
    
    2,975
    
    
    
    2,664
    
    
    
    311Other
    
    
    4,634
    
    
    
    4,658
    
    
    
    (24
    )$
    9,461
    
    
    $
    8,007
    
    
    $
    1,454
  Higher accounting and legal fees were primarily due to an increase in costs incurred
with respect to the Companys independent auditors, outside legal counsel, and management
consultants. These increased costs were incurred in order to address internal controls
issues, the evaluation by the Companys management and independent auditors of the proper
interpretation of FIN 46 with respect to the Companys 50% owned subsidiaries, and an
increase in cost to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The costs
related to Section 404 was allocated entirely to the Craftmade segment; no allocation was
made to the TSI segment for the portion of expenses related to accounting and legal fees,
including compliance costs for Section 404.The increase in salaries and benefits was impacted by the severance agreement with the
Companys former Chief Financial Officer that totaled $174,000 in the second quarter of
fiscal 2005 and higher salaries and wages from the addition of seven Teiber employees in
March 2005.Total SG&A expenses of the TSI segment decreased $254,000 to $5,346,000 or 11.9% of sales
for the nine month period ended March 31, 2005 from $5,600,000 or 11.2% of sales for the
same period in the previous year. The decrease in SG&A expenses of the TSI segment between
periods can be summarized as follows (in thousands): DecreaseNine Months Ended
    
    
    OverMarch 31
    
    
    Prior Year2005
    
    
    2004
    
    
    PeriodSalaries and wages
    
    
    1,670
    
    
    
    2,015
    
    
    
    (345
    )Other
    
    
    3,676
    
    
    
    3,585
    
    
    
    91$
    5,346
    
    
    $
    5,600
    
    
    $
    (254
    )
  Salaries and wages were lower as the result of lower headcount from the closure of the
California office in October 2003 and related severance paid in
the prior year.
The Company anticipates that its SG&A expenses to increase in the remaining quarter of the
year primarily as a result of higher costs from compliance with Section 404 of the
Sarbanes-Oxley Act of 2002.Interest Expense.Net interest expense of the Company increased $168,000 to $733,000 for
the nine months ended March 31, 2005 from $565,000 for the same six-month period last year.
This increase was primarily the result of higher outstanding balances from the Companys
revolving line of credit, combined with higher interest rates in effect during the period.Minority Interests.Minority interests generated by the Companys 50% owned subsidiaries
decreased $336,000 to $2,420,000 for the nine months ended March 31, 2005 from $2,756,000
for the same period in the previous year. The decline was primarily related to the decline
in sales and gross profit of Design 20




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##### Table of Contents



Trends, as discussed above.Provision For Income Taxes.The provision for income tax was $2,466,000 or 36.1% of income
for the nine months ended March 31, 2005, compared to $3,426,000 or 38.3% for the same
period of the prior year. The improvement in income taxes as a percentage of income
resulted from lower franchise state tax.Liquidity and Capital ResourcesThe Companys cash increased $92,000 from $5,838,000 at June 30, 2004 to $5,930,000 at March
31, 2005. The Companys operating activities provided cash of $7,383,000, which was
primarily attributable to income from operations before minority interest expense.The $4,067,000 of cash used in investing activities primarily related to cash used to fund
the acquisition of Bill Teiber Co. There were also additions to property and equipment,
which consisted primarily of purchases of computer equipment and office furniture, and
additions to other intangibles which consisted of the purchases of patents.Cash used in financing activities of $3,224,000 was primarily the result of (i) principal
payments on the Companys notes payable of $2,191,000, (ii) repurchases of the Companys
outstanding common stock of $2,925,000, (iii) cash dividends of $1,538,000, and (iv)
distributions to minority interest members of $1,395,000. These amounts were partially
offset by (i) net proceeds from the Companys revolving lines of credit of $4,519,000 and
(ii) proceeds from stock options exercised of $306,000.The Companys management believes that its current lines of credit, combined with cash flows
from operations, are adequate to fund the Companys current operating needs, debt service
payments, and any future dividend payments, as well as fund its projected growth over the
next twelve months. Management believes that alternative bank financing on acceptable terms
would be available should the Company not be able to renew its existing lines of credit.
The Company remains committed to its business strategy of creating long-term earnings
growth, maximizing stockholder value through internal improvements, making selective
acquisitions and dispositions of assets, focusing on cash flow, and retaining quality
personnel.Management anticipates that future cash flows will be used primarily to retire existing
debt, pay dividends, fund potential acquisitions and distribute earnings to minority
interest members.At March 31, 2005, subject to continued compliance with certain covenants and restrictions,
the Company had a $20,000,000 line of credit with The Frost National Bank (Frost) at an
interest rate of prime (5.75% at March 31, 2005) less 0.5%, of which $19,096,000 was
outstanding. The line of credit is due on demand; however, if no demand is made, it is
scheduled to mature on October 31, 2005. On February 28, 2005, the line of credit was
amended to provide, among other things, a $3.0 million increase in the commitment initially
through March 31, 2005. The increase was subsequently extended through May 31, 2005. The
amended agreement stipulates that the Company will not repurchase Company common stock if
its debt to tangible net worth ratio exceeds 3.0 to 1.0. Based on the criteria in the
amended agreement, the Companys debt to tangible net worth ratio totaled 4.0 to 1.0 at
March 31, 2005. Managements anticipates that the Company may be able to lower this ratio to
3.0 to 1.0 or below within three to six months.Under this 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
$191,000. Consequently, an increase in the prime rate of five percentage points (5%) would
result in an estimated annualized increase in interest expense for the Company of
approximately $955,000.At March 31, 2005, Design Trends had a $2,000,000 loan agreement with Frost, of which none
had been utilized. Design Trends can borrow under this loan subject to continued compliance
with certain covenants. 21




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One of the Companys 50%-owned subsidiaries, PHI, has a $2,000,000 line of credit (the $2
Million Line of Credit) with Wachovia Bank, N.A. (Wachovia), at an interest rate equal to
the Monthly LIBOR index plus 2%, which expires October 15, 2005. There was an outstanding
balance of $1,548,000 at March 31, 2005.In addition, PHI has a $500,000 three-year note payable to Wachovia (the $500,000 Note)
maturing on July 29, 2005, of which $69,000 was outstanding at March 31, 2005. The $500,000
Note bears interest at a
rate equal to one-month LIBOR plus 2.5%.Furthermore, PHI entered into a loan agreement with Wachovia (the $2.1 Million Note)
whereby Wachovia agreed to advance up to $2,100,000 to PHI, subject to PHIs continued
compliance with certain loan covenants specified by the agreement. The $2.1 Million Note
bears interest at a rate equal to the one-month LIBOR plus 2.5%. At March 31, 2005, there
was a $525,000 balance outstanding under the $2.1 Million Note, which was scheduled to
mature on March 15, 2005, but was extended through September 15, 2005. The PHI members
agreed to be guarantors of the $2 Million Line of Credit, the $500,000 Note and the $2.1
Million Note for business purposes in order to induce the lender to provide these loans to
PHI.Under the amounts outstanding of the $2 Million Line of Credit, $500,000 Note and $2.1
Million Note, for each one-percentage point (1%) incremental increase in LIBOR, the
Companys annualized interest expense would increase by approximately $21,000.
Consequently, an increase in LIBOR of five percentage points (5%) would result in an
estimated annualized increase in interest expense for the Company of approximately $107,000.At March 31, 2005, $2,824,000 remained outstanding under the note payable for the Companys
378,000 square foot operating facility. The Companys management believes that this
facility will be sufficient for its purposes for the foreseeable future. The facility note
payable matures on January 1, 2008.Fanthing, Craftmades ceiling fan vendor, has provided Craftmade with a $1,000,000 credit
limit, pursuant to which it 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, which, in the opinion of
the Companys management, is unusual for the industry and favorable to the Company. This
manufacturer is not required to provide this credit facility under its agreement with
Craftmade, and it may discontinue this arrangement at any time.Management does not anticipate that the covenants and restrictions of its lines of credit
and loan agreements will limit the Companys growth potential.TSI maintained inventory levels of $4,683,000 at March 31, 2005. TSIs sales are highly
concentrated with one mass retail customer. Should the revenues generated by TSI from its
programs with this customer be at levels significantly lower than originally anticipated,
the Company would be required to find other customers for this inventory. There can be no
assurances that the Company would be able to obtain additional customers for this inventory
or that any alternative sources would generate similar sales levels and profit margins as
anticipated with the current mass merchandiser customer. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.  The information set forth below constitutes a forward looking statement. See Managements
Discussion and Analysis of Financial Condition and Results of Operations  Cautionary
Statement. 22




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The Company currently purchases a substantial amount of ceiling fans and other products of
its Craftmade segment 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 Taiwan dollar by one Taiwan dollar or more,
Fanthings prices will be accordingly adjusted by 2.5%. The following table summarizes the
exchange rate of the United States dollar (USD) to the Taiwan dollar (TWD): USD:TWDDecember 31, 2003
    
    $
    34.11March 31, 2004
    
    
    33.18June 30, 2004
    
    
    33.75September 30, 2004
    
    
    33.99December 31, 2004
    
    
    31.98March 31, 2005
    
    
    31.88
  A sharp appreciation of the Taiwan 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, 2005, the Company purchased approximately
$5,089,000 of products from Fanthing. Under the Companys understanding with Fanthing, each
$1 incremental appreciation of the Taiwan dollar would result in an estimated annualized net
increase in cost of goods sold of approximately $509,000, based on the Companys purchases
during the fiscal quarter ended March 31, 2005 on an annualized basis. A $5 incremental
appreciation of the Taiwan dollar would result in an estimated annualized increase in cost
of goods sold of approximately $2,545,000, based on the Companys purchases during the
fiscal quarter ended March 31, 2005 on an annualized basis. A $10 incremental appreciation
of the Taiwan dollar would result in an increase of approximately $5,089,000 on an
annualized basis, based on the Companys purchases during the fiscal quarter ended March 31,
2005 on an annualized basis. These amounts are estimates of the financial impact of an
appreciation of the Taiwan 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, 2005. Consequently, these amounts are not necessarily indicative of the effect of such
changes with respect to an entire year.Other market risks at March 31, 2005 have not changed significantly from those discussed in
Item 7A of the Companys Annual Report on Form 10-K for the year ended June 30, 2004 filed
with the Securities and Exchange Commission on September 28, 2004.For a discussion of the effects of hypothetical changes in interest rates, see Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Liquidity and Capital Resources. 23




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Item 4. CONTROLS AND PROCEDURES.  The Companys management, with the participation of the Companys Chief Executive Officer
and interim Chief Financial Officer, evaluated the effectiveness of the Companys disclosure
controls and procedures as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and interim Chief Financial Officer concluded that
the Companys disclosure controls and procedures as of the end of the period covered by this
report were not designed nor were functioning effectively to provide reasonable assurance
that the information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. This conclusion is based on the
identified material weakness in internal control over financial reporting previously
disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2004.Change in Internal Control over Financial ReportingIn connection with the audit of the Companys consolidated financial statements for the
fiscal year ended June 30, 2004, PricewaterhouseCoopers, LLP (PwC), the Companys
registered independent public accounting firm, informed the Companys Audit Committee that
it believed that the personnel and management of the Company who perform its accounting and
financial reporting functions were not sufficiently expert in U.S. GAAP and the requirements
of the SEC and the Public Company Accounting Oversight Board, and this lack of expertise
represented a material weakness. A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or
detected.In response to the foregoing material weakness, management of the Company, with the guidance
of the Companys Audit Committee, has been engaged in remediation efforts to ensure that the
preparation of the Companys consolidated financial statements, including the process to
review and analyze elements of the Companys financial statement close process, is in
accordance with U.S. GAAP. The Chief Accounting Officer and senior Company finance and
accounting staff responsible for the preparation of U.S. GAAP financial reports and SEC
disclosures have increased their level of attendance at targeted U.S. GAAP and SEC reporting
courses. The Company has subscribed during the second quarter of fiscal year 2005 to
additional information networks that provide publications and updates of SEC and U.S. GAAP
releases and rule changes and of information about the requirements of the Public Company
Accounting Oversight Board.As a result of the remediation efforts mentioned above and more fully described in the
Companys Form 10-Q for the fiscal quarter ended September 30, 2004 filed with the SEC on
November 9, 2004, management of the Company believes that its internal controls and
procedures over financial reporting have been strengthened and functioned better during the
period covered by this Quarterly Report, as compared to recent reporting periods.Although Management of the Company believes there has been improvement in the operation of
the Companys internal controls during the period covered by this Quarterly Report, the
material weakness will not be considered completely remediated until the procedures
resulting from the remediation efforts are fully implemented, operate for a period of time,
are tested and the Company concludes that such procedures are operating effectively.
Moreover, the Company is continuing to implement additional internal controls remediation
efforts prior to the 2005 audit, including adding additional controls and review processes
to its monthly and quarterly close processes. To assist it with the documentation and
testing of the Companys internal controls to ensure they are operating effectively, the
Company engaged outside internal control consultants in the second quarter of fiscal year
2005.Until management of the Company is satisfied that it has addressed its need for sufficient
expertise in 24




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##### Table of Contents



preparing financial statements required in its filings under the securities laws, the
Company will seek to mitigate this weakness by conferring with its outside accounting
advisers with respect to the technical requirements applicable to the Companys financial
statements.The implementation of the Companys remediation plan is among the Companys highest
priorities. The Companys Board of Directors, in coordination with the Companys Audit
Committee, will continually assess the progress and sufficiency of these efforts and make
adjustments as and when necessary. As of the date of this report, management of the Company
believes that the plan, when completely implemented prior to June 30, 2005, will eliminate
the material weakness in internal accounting control as described above. However, a control
system, no matter how well designed and operated, cannot provide absolute assurance that the
objectives of the control system are met, and no evaluation of controls can provide absolute
assurance that all control issues have been detected. 25




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PART II
OTHER INFORMATION 
 Item 1. LEGAL PROCEEDINGS.  As more fully described in the Companys Form 10-Q for the fiscal quarter ended September
30, 2004, on August 8, 2001, Lamps Plus, Inc. and Pacific Coast Lighting (collectively,
Lamps Plus) sued several defendants, including Patrick S. Dolan, Dolan Northwest, LLC,
Design Trends, and Craftmade International, Inc. (collectively, the Craftmade Parties),
for alleged patent infringement in the United States District Court for the Northern
District of Texas. On September 14, 2004, the Court entered a Judgment and Permanent
Injunction and issued an Order Awarding Attorneys Fees against the Craftmade Parties.
Dolan, Design Trends, and Craftmade have appealed the Judgment and Order. However, the
outcome of this appeal is uncertain.With regard to the foregoing litigation (the Lawsuit), the Craftmade Parties entered into
an agreement (the Agreement), that sets forth the responsibilities of the Craftmade
Parties for payment of additional fees, costs and expenses of the Lawsuit. Pursuant to the
Agreement, on April 16, 2003, Dolan Northwest became responsible for all legal fees and
expenses incurred by the Craftmade Parties in connection with the Lawsuit from that date
forward, and agreed to indemnify and hold harmless Craftmade and Design Trends from and
against any and all claims, liabilities, or losses arising out of the legal fees and
expenses incurred in the defense of the Lawsuit after February 21, 2003, including the
appeal mentioned above. 
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.  Not Applicable 
 Item 3. DEFAULTS UPON SENIOR SECURITIES.  Not Applicable 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.  Not Applicable 
 Item 5. OTHER INFORMATION.  Not Applicable 
 Item 6. EXHIBITS.  Exhibits 3.1
    
    Certificate of Incorporation of the Company, filed as Exhibit 3(a)(2) to the
Companys Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and
incorporated by reference herein.3.2
    
    Certificate of Amendment of Certificate of Incorporation of the Company, dated
March 24, 1992 and filed as Exhibit 4.2 to the Companys Form S-8 (File No. 333-44337)
and incorporated by reference herein.3.3
    
    Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the
Companys Post
 26




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##### Table of Contents



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
    
    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.10.2
    
    Agreement for the Purchase and Sale of Personal Goodwill by and between Teiber
Lighting Products, Inc. and Todd Teiber dated March 1, 2005, previously filed as
Exhibit 10.2 to Form 8-K dated March 1, 2005 (File No. 000-26667) and incorporated by
reference herein.10.3
    
    Agreement for the Purchase and Sale of Personal Goodwill by and between Teiber
Lighting Products, Inc. and Edward Oberstein dated March 1, 2005, previously filed as
Exhibit 10.3 to Form 8-K dated March 1, 2005 (File No. 000-26667) and incorporated by
reference herein.10.4
    
    Consulting Agreement dated March 1, 2005 by and among Craftmade International,
Inc., Teiber Lighting Products, Inc. and Todd Teiber, previously filed as Exhibit 10.4
to Form 8-K dated March 1, 2005 (File No. 000-26667) and incorporated by reference
herein.10.5
    
    Employment Agreement dated March 1, 2005 by and among Craftmade International,
Inc., Teiber Lighting Products, Inc. and Edward Oberstein, previously filed as Exhibit
10.5 to Form 8-K dated March 1, 2005 (File No. 000-26667) and incorporated by reference
herein.10.6*
    
    Promissory Note dated February 25, 2005 by and between Craftmade
International, Inc. and The Frost National Bank.10.7*
    
    Third Amendment to Loan Agreement dated February 25, 2005 by and between
Craftmade International, Inc. and The Frost National Bank.10.8*
    
    Arbitration and Notice of Final Agreement dated February 25, 2005 by and
between Craftmade International, Inc. and The Frost National Bank.10.9*
    
    Renewal and Extension Agreement dated March 31, 2005 by and between Craftmade
International, Inc. and The Frost National Bank.10.10*
    
    Arbitration and Notice of Final Agreement dated March 31, 2005 by and between
Craftmade International, Inc. and The Frost National Bank.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 Brad D. Heimann, Executive Vice President and Interim Chief
Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
 27




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##### Table of Contents



32.1*
    
    Certification of James R. Ridings, Chief Executive Officer of the Company,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of Brad D. Heimann, Executive Vice President and Interim Chief
Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Each document marked with an asterisk is filed herewith. 28




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##### Table of Contents



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: May 10, 2005
    
    
    
    /s/ James R. RidingsJAMES R. RIDINGSPresident and ChiefExecutive OfficerDate: May 10, 2005
    
    
    
    /s/ Brad D. HeimannBRAD D. HEIMANNExecutive Vice President andInterim Chief Financial Officer
 29




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##### Table of Contents



Index to Exhibits ExhibitNumber
    
    Description3.1
    
    Certificate of Incorporation of the Company, filed as Exhibit 3(a)(2) to the
Companys Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and
incorporated by reference herein.3.2
    
    Certificate of Amendment of Certificate of Incorporation of the Company, dated
March 24, 1992 and filed as Exhibit 4.2 to the Companys Form S-8 (File No. 333-44337)
and incorporated by reference herein.3.3
    
    Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the
Companys Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and
incorporated by reference herein.4.1
    
    Specimen Common Stock Certificate, filed as Exhibit 4.4 to the Companys
Registration Statement on Form S-3 (File No. 333-70823) and incorporated by reference
herein.4.2
    
    Rights Agreement, dated as of June 23, 1999, between Craftmade International,
Inc. and Harris Trust and Savings Bank, as Rights Agent, previously filed as an exhibit
to Form 8-K dated July 9, 1999 (File No. 000-26667) and incorporated by reference
herein.10.1
    
    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.10.2
    
    Agreement for the Purchase and Sale of Personal Goodwill by and between Teiber
Lighting Products, Inc. and Todd Teiber dated March 1, 2005, previously filed as
Exhibit 10.2 to Form 8-K dated March 1, 2005 (File No. 000-26667) and incorporated by
reference herein.10.3
    
    Agreement for the Purchase and Sale of Personal Goodwill by and between Teiber
Lighting Products, Inc. and Edward Oberstein dated March 1, 2005, previously filed as
Exhibit 10.3 to Form 8-K dated March 1, 2005 (File No. 000-26667) and incorporated by
reference herein.10.4
    
    Consulting Agreement dated March 1, 2005 by and among Craftmade International,
Inc., Teiber Lighting Products, Inc. and Todd Teiber, previously filed as Exhibit 10.4
to Form 8-K dated March 1, 2005 (File No. 000-26667) and incorporated by reference
herein.10.5
    
    Employment Agreement dated March 1, 2005 by and among Craftmade International,
Inc., Teiber Lighting Products, Inc. and Edward Oberstein, previously filed as Exhibit
10.5 to Form 8-K dated March 1, 2005 (File No. 000-26667) and incorporated by reference
herein.10.6*
    
    Promissory Note dated February 25, 2005 by and between Craftmade
International, Inc. and The Frost National Bank.10.7*
    
    Third Amendment to Loan Agreement dated February 25, 2005 by and between
Craftmade International, Inc. and The Frost National Bank.
 30




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ExhibitNumber
    
    Description10.8*
    
    Arbitration and Notice of Final Agreement dated February 25, 2005 by and
between Craftmade International, Inc. and The Frost National Bank.10.9*
    
    Renewal and Extension Agreement dated March 31, 2005 by and between Craftmade
International, Inc. and The Frost National Bank.10.10*
    
    Arbitration and Notice of Final Agreement dated March 31, 2005 by and between
Craftmade International, Inc. and The Frost National Bank.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 Brad D. Heimann, Executive Vice President and Interim Chief
Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1*
    
    Certification of James R. Ridings, Chief Executive Officer of the Company,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of Brad D. Heimann, Executive Vice President and Interim Chief
Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Each document marked with an asterisk is filed herewith. 31