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FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004 OR
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
  
 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 4,995,615 shares of Common Stock were outstanding as of January 31, 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.Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
 2




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##### Table of Contents



PART I
FINANCIAL INFORMATION 
 Item 1. Financial Statements. (Unaudited) CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES 
 
 FOR THE THREE MONTHS ENDED
    
    
    FOR THE SIX MONTHS ENDEDDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net sales
    
    $
    28,349
    
    
    $
    28,948
    
    
    $
    57,374
    
    
    $
    60,138Cost of goods sold
    
    
    19,537
    
    
    
    21,305
    
    
    
    40,042
    
    
    
    42,275Gross profit
    
    
    8,812
    
    
    
    7,643
    
    
    
    17,332
    
    
    
    17,863Gross margin
    
    
    31.1
    %
    
    
    26.4
    %
    
    
    30.2
    %
    
    
    29.7
    %Selling, general and administrative expenses
    
    
    4,496
    
    
    
    4,936
    
    
    
    9,905
    
    
    
    9,441Interest expense, net
    
    
    240
    
    
    
    146
    
    
    
    470
    
    
    
    339Depreciation and amortization
    
    
    141
    
    
    
    151
    
    
    
    288
    
    
    
    305Total expenses
    
    
    4,877
    
    
    
    5,233
    
    
    
    10,663
    
    
    
    10,085Income before income taxes and minority interests
    
    
    3,935
    
    
    
    2,410
    
    
    
    6,669
    
    
    
    7,778Minority interests
    
    
    995
    
    
    
    274
    
    
    
    1,561
    
    
    
    1,921Income before income taxes
    
    
    2,940
    
    
    
    2,136
    
    
    
    5,108
    
    
    
    5,857Provision for income taxes
    
    
    1,068
    
    
    
    772
    
    
    
    1,838
    
    
    
    2,125Net income
    
    $
    1,872
    
    
    $
    1,364
    
    
    $
    3,270
    
    
    $
    3,732Basic earnings per common share
    
    $
    0.37
    
    
    $
    0.25
    
    
    $
    0.65
    
    
    $
    0.69Diluted earnings per common share
    
    $
    0.37
    
    
    $
    0.25
    
    
    $
    0.64
    
    
    $
    0.68Cash dividends declared per common share
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.20
    
    
    $
    0.20
 SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS 3




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES 
 
 ASSETS December 31,
    
    
    June 30,2004
    
    
    2004(Unaudited)Current assetsCash
    
    $
    7,337
    
    
    $
    5,838Accounts receivable - net of allowance
of $170 and $150, respectively
    
    
    19,650
    
    
    
    19,242Inventory
    
    
    15,985
    
    
    
    15,172Deferred income taxes
    
    
    
    
    
    
    9Prepaid expenses and other current assets
    
    
    550
    
    
    
    1,193Total current assets
    
    
    43,522
    
    
    
    41,454Property and equipmentLand
    
    
    1,535
    
    
    
    1,535Building
    
    
    7,784
    
    
    
    7,784Office furniture and equipment
    
    
    9,034
    
    
    
    9,013Leasehold improvements
    
    
    279
    
    
    
    27918,632
    
    
    
    18,611Less:accumulated depreciation
    
    
    (9,983
    )
    
    
    (9,626
    )Total property and equipment, net
    
    
    8,649
    
    
    
    8,985Other assetsGoodwill net of accumulated amortization
of $1,204 in each period presented
    
    
    4,735
    
    
    
    4,735Other assets
    
    
    75
    
    
    
    80Total other assets
    
    
    4,810
    
    
    
    4,815Total assets
    
    $
    56,981
    
    
    $
    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 per share amounts) LIABILITIES AND STOCKHOLDERS EQUITY December 31,
    
    
    June 30,2004
    
    
    2004(Unaudited)Current liabilitiesNote payable - current
    
    $
    1,588
    
    
    $
    2,662Revolving line of credit
    
    
    17,087
    
    
    
    16,125Accounts payable
    
    
    8,023
    
    
    
    6,186Commissions payable
    
    
    184
    
    
    
    289Income taxes payable
    
    
    841
    
    
    
    1,112Current deferred income taxes
    
    
    226
    
    
    
    Accrued customer allowances
    
    
    4,736
    
    
    
    4,320Other accrued expenses
    
    
    993
    
    
    
    1,074Total current liabilities
    
    
    33,678
    
    
    
    31,768Other non-current liabilitiesNote payable - long term
    
    
    2,438
    
    
    
    2,949Deferred income taxes
    
    
    214
    
    
    
    214Total other non-current liabilities
    
    
    2,652
    
    
    
    3,163Total liabilities
    
    
    36,330
    
    
    
    34,931Minority interests
    
    
    2,803
    
    
    
    1,984Commitments and contingencies (Note 7)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, 9,489,535 and 9,465,535
shares issued, respectively
    
    
    95
    
    
    
    95Additional paid-in capital
    
    
    14,261
    
    
    
    14,098Unearned deferred compensation
    
    
    
    
    
    
    (11
    )Retained earnings
    
    
    43,467
    
    
    
    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
    
    
    17,848
    
    
    
    18,339Total liabilities and stockholders equity
    
    $
    56,981
    
    
    $
    55,254
 SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS 5




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CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES 
 
 FOR THE SIX MONTHS ENDEDDecember 31,
    
    
    December 31,2004
    
    
    2003Net cash provided by operating activities
    
    $
    6,665

    
    
    $
    4,348Cash flows from investing activitiesNet additions to property and equipment
    
    
    (22
    )
    
    
    (79
    )Net additions to other intangibles
    
    
    (10
    )
    
    
    Net cash used in investing activities
    
    
    (32
    )
    
    
    (79
    )Cash flows from financing activitiesNet proceeds from (payments on) lines of credit
    
    
    962
    
    
    
    (1,597
    )Principal payments on notes payable
    
    
    (1,583
    )
    
    
    (479
    )Treasury stock repurchases
    
    
    (2,925
    )
    
    
    (916
    )Stock options exercised
    
    
    164
    
    
    
    256Cash dividends
    
    
    (1,010
    )
    
    
    (1,112
    )Distributions to minority interest members
    
    
    (742
    )
    
    
    (2,903
    )Net cash used in financing activities
    
    
    (5,134
    )
    
    
    (6,751
    )Net increase/(decrease) in cash
    
    
    1,499
    
    
    
    (2,482
    )Cash at beginning of period
    
    
    5,838
    
    
    
    4,992Cash at end of period
    
    $
    7,337
    
    
    $
    2,510
 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
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2004 Note 1 - BASIS OF PREPARATION AND PRESENTATION The 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. Note 2 - SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Revenue is recognized as product is shipped and related services are performed in accordance
with all applicable revenue recognition criteria. For these transactions the Company
applies the provisions of SEC Staff Accounting Bulletin No. 104 Revenue Recognition. The
Company recognizes revenue when there is persuasive evidence of an arrangement, title and
risk of loss have passed, delivery has occurred or the services have been rendered, the
sales price is fixed or determinable and collection of the related receivable is reasonably
assured. Title generally transfers upon shipment of goods from our warehouse. The Company
does not have an obligation or policy of replacing, at no cost, customer products damaged or
lost in transit. In some instances, the Company ships product directly from our suppliers to
the customers. In these cases, the Company recognizes revenue when the product is accepted
by the customers representative. The Company applies the provisions of Emerging Issues
Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
Agent. The Companys application of EITF 99-19 includes evaluation of the terms of each
major customer contract relative to a number of criteria that management considers in making
its determination with respect to gross versus net reporting of revenue for transactions
with its customers. Managements criteria for making these judgments place particular
emphasis on determining the primary obligor in a transaction and which party bears general
inventory risk. The Company records all shipping and handling fees billed to customers as
revenue, and related costs as cost of sales, when incurred, in accordance with EITF 00-10,
Accounting for Shipping and Handling Fees and Costs. As part of its revenue recognition policy, the Company records estimated incentives payable
to its customers at a future date as a reduction of revenue at the time the revenues are
recorded. The Company bases its estimates on contractual terms of the programs and
estimated or actual sales to individual customers. Actual incentives in any future period
are inherently uncertain and, thus, may differ from its estimates. If actual or expected
incentives were significantly greater than the reserves the Company had established, the
Company would record a reduction to net revenues in the period in which the Company made
such determination. 7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2004 In addition to various incentive programs, from time to time the Company has historically
provided mark-down funds to certain of it mass retail customers to assist them in clearing
slow-moving inventory. These mark-down funds were recorded as a reduction of revenue in the period in which they
were granted. In March 2004, the Company began to estimate and record reductions to revenue
for these mark-down funds that it records when the revenue is recorded because based on its
past practice these mark-down funds were estimable and considered likely to be granted. FIN 46 In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 46, Consolidation of Variable Interest Entities (FIN 46) and amended it by issuing FIN
46R in December 2003. Among other things, FIN 46R generally deferred the effective date of
FIN 46 to the quarter ended March 31, 2004. Variable interest entities (VIEs) are primarily
entities that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack adequate decision making
ability. All VIEs with which the Company is involved must be evaluated to determine the
primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required
to consolidate the VIE for financial reporting purposes. The Company has a 50% ownership interest in two limited liability companies, Design Trends
and PHI. In connection with the adoption of FIN 46R, the Company concluded that Design
Trends and PHI are VIEs and that the Company is the primary beneficiary of each of Design
Trends and PHI. Pursuant to the provisions of FIN 46R, effective January 1, 2004, the
Company began to consolidate Design Trends and PHI and retroactively applied to previously
issued financial statements. 8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2004 Note 3 - EARNINGS PER SHARE The following is a reconciliation of the numerator and denominator used in the basic and
diluted EPS calculations: FOR THE THREE MONTHS ENDED
    
    
    FOR THE SIX MONTHS ENDEDDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(In thousands except per sharedata)Basic and diluted earnings per share:NumeratorNet income
    
    $
    1,872
    
    
    $
    1,364
    
    
    $
    3,270
    
    
    $
    3,732Denominator for basic EPSCommon shares outstanding
    
    
    5,034
    
    
    
    5,437
    
    
    
    5,059
    
    
    
    5,430Denominator for diluted EPSCommon shares outstanding
    
    
    5,034
    
    
    
    5,437
    
    
    
    5,059
    
    
    
    5,430Stock options
    
    
    23
    
    
    
    40
    
    
    
    32
    
    
    
    50Potentially dilutive common shares
    
    
    5,057
    
    
    
    5,477
    
    
    
    5,091
    
    
    
    5,480Basic earnings per share
    
    $
    0.37
    
    
    $
    0.25
    
    
    $
    0.65
    
    
    $
    0.69Diluted earnings per share
    
    $
    0.37
    
    
    $
    0.25
    
    
    $
    0.64
    
    
    $
    0.68
 9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2004 Note 4 - STOCK-BASED COMPENSATION The 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 SIX MONTHS ENDEDDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(In thousands except per share data)Net income, as reported
    
    $
    1,872
    
    
    $
    1,364
    
    
    $
    3,270
    
    
    $
    3,732Compensation expense, proforma
    
    
    (10
    )
    
    
    (31
    )
    
    
    (41
    )
    
    
    (62
    )Net income, proforma
    
    $
    1,862
    
    
    $
    1,333
    
    
    $
    3,229
    
    
    $
    3,670Basic earnings per share, as reported
    
    $
    0.37
    
    
    $
    0.25
    
    
    $
    0.65
    
    
    $
    0.69Basic earnings per share, proforma
    
    
    0.37
    
    
    
    0.25
    
    
    
    0.64
    
    
    
    0.68Diluted earnings per share, as reported
    
    $
    0.37
    
    
    $
    0.25
    
    
    $
    0.64
    
    
    $
    0.68Diluted earnings per share, proforma
    
    
    0.37
    
    
    
    0.24
    
    
    
    0.63
    
    
    
    0.67
 10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2004 Note 5 - SEGMENT INFORMATION The 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 operating profit and loss and cash flows. 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, and lamps 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 (in thousands): FOR THE THREE MONTHS ENDED
    
    
    FOR THE SIX MONTHS ENDEDDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(In thousands except per share data)Net salesCraftmade
    
    $
    12,268
    
    
    $
    12,546
    
    
    $
    26,868
    
    
    $
    26,858TSI
    
    
    16,081
    
    
    
    16,402
    
    
    
    30,506
    
    
    
    33,280Total
    
    $
    28,349
    
    
    $
    28,948
    
    
    $
    57,374
    
    
    $
    60,138Income before minority interests and income taxesCraftmade
    
    $
    1,592
    
    
    $
    1,930
    
    
    $
    3,107
    
    
    $
    4,486TSI
    
    
    2,343
    
    
    
    480
    
    
    
    3,562
    
    
    
    3,292Total
    
    $
    3,935
    
    
    $
    2,410
    
    
    $
    6,669
    
    
    $
    7,778
 Note 6 - SUBSEQUENT EVENTS Subsequent to December 31, 2004, the Company entered into a non-binding letter of intent to
purchase all of the issued and outstanding capital stock of Bill Teiber Co., Inc., a Texas
corporation doing business as Teiber Lighting Products. Teiber was established in 1968 as
an importer and distributor of decorative light bulbs. Today, Teiber distributes over 3,000
different light bulbs and complementary lighting products as well as an extensive line of
door chimes and pushbuttons from its three distribution centers. Craftmade is currently negotiating a definitive agreement for this acquisition and
completion of this transaction is subject to a number of customary closing conditions. The purchase price will
be a combination of the Companys common stock and cash. Finalization of the terms of the
acquisition is subject to adjustment based on the results of the due diligence, which has
commenced, and approval by the Craftmade Board of Directors. While management of the
Company expects to complete this acquisition during its third fiscal quarter of 2005, there
can be no assurance that the parties will be able to negotiate a definitive acquisition
agreement or that due diligence will satisfy all conditions to which closing is subject
under such definitive agreement. 11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2004 Note 7 - COMMITMENTS AND CONTINGENCIES The 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 December 31, 2004. 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.   12




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. Cautionary Statement With the exception of historical information, the matters discussed in this document contain
forward-looking statements. There are certain important factors which could cause actual
results to differ materially from those anticipated by these forward-looking statements.
Some of the important factors which would cause actual results to differ materially from
those in the forward-looking statements include, among other things, 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 Estimates The Companys managements discussion and analysis of its financial condition and results of
operations following are based upon the Companys consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United
States. The preparation of 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 our 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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Overview Management 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 December
31, 2004 and the corresponding prior year period can be summarized as follows (in
thousands): Three Months Ended
    
    
    Three Months EndedDecember 31, 2004
    
    
    December 31, 2003Craftmade
    
    
    TSI
    
    
    Total
    
    
    Craftmade
    
    
    TSI
    
    
    TotalNet sales
    
    $
    12,268
    
    
    $
    16,081
    
    
    $
    28,349
    
    
    $
    12,546
    
    
    $
    16,402
    
    
    $
    28,948Cost of goods sold
    
    
    7,662
    
    
    
    11,875
    
    
    
    19,537
    
    
    
    7,745
    
    
    
    13,560
    
    
    
    21,305Gross profit
    
    
    4,606
    
    
    
    4,206
    
    
    
    8,812
    
    
    
    4,801
    
    
    
    2,842
    
    
    
    7,643Gross margin
    
    
    37.5
    %
    
    
    26.2
    %
    
    
    31.1
    %
    
    
    38.3
    %
    
    
    17.3
    %
    
    
    26.4
    %SG&A
    
    
    2,672
    
    
    
    1,824
    
    
    
    4,496
    
    
    
    2,591
    
    
    
    2,345
    
    
    
    4,936As a % of net sales
    
    
    21.8
    %
    
    
    11.3
    %
    
    
    15.9
    %
    
    
    20.7
    %
    
    
    14.3
    %
    
    
    17.1
    %Interest
    
    
    211
    
    
    
    29
    
    
    
    240
    
    
    
    145
    
    
    
    1
    
    
    
    146Depreciation
    
    
    131
    
    
    
    10
    
    
    
    141
    
    
    
    135
    
    
    
    16
    
    
    
    151Income before minority
interests and income taxes
    
    $
    1,592
    
    
    $
    2,343
    
    
    
    3,935
    
    
    $
    1,930
    
    
    $
    480
    
    
    
    2,410Minority interests
    
    
    
    
    
    
    
    
    
    
    995
    
    
    
    
    
    
    
    
    
    
    
    274Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    1,068
    
    
    
    
    
    
    
    
    
    
    
    772Net income
    
    
    
    
    
    
    
    
    
    $
    1,872
    
    
    
    
    
    
    
    
    
    
    $
    1,364
 Results of Operations Three Months Ended December 31, 2004 Compared to Three Months Ended December 31,
2003 Net Sales.Net sales for the Company declined $599,000 or 2.1% to $28,349,000 for the three
month period ended December 31, 2004 compared to $28,948,000 for the same three month period
last year. The Craftmade segment contributed to 46% of the decline while the TSI segment
contributed to 54% of the decline. Net sales from the Craftmade segment decreased $278,000 or 2.2% to $12,268,000 for the three
months ended December 31, 2004 from $12,546,000 for the same three month period last year.
The decrease in sales of the Craftmade segment was primarily related to a general decline
across product lines. Net sales of the TSI segment declined $321,000, or 2.0% to $16,081,000 for the three months
ended December 31, 2004 from $16,402,000 for the same three month period last year. The
change in net sales of the TSI segment between periods can be summarized as follows (in
thousands): Net sales for the three months ended December 31, 2003
    
    $
    16,402Decline in sales of Design Trends
    
    
    (3,601
    )Charge related to prior period vendor programs of the largest mass retail customer
    
    
    (105
    )Charge in connection with rollout of a new customer in the quarter ended December 31, 2003
    
    
    2,100Net increase in sales of the remaining divisions of the TSI segment
    
    
    1,285Net sales for the three months ended December 31, 2004
    
    $
    16,081
 14




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The $3,601,000 or 31.9% decline in Design Trends net sales was primarily due to
changes in the buying pattern of its 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. Craftmades management receives feedback from the retailer primarily at
the time of the retailers annual line review in connection with the semi-annual reset of
its lighting program. Based on the most recent annual line review, management believes that
the retailer remains committed to the lighting program with Design Trends, a 50% owned
subsidiary of the TSI segment. However, lower average unit prices went into effect in June
2004 in Design Trends portable lamp program with its largest customer. Based on sales
results in the first half of the fiscal year, management anticipates that Design Trends
sales will continue to decline for the remainder of the fiscal year compared to the same
period in the previous year. The largest mass retailer 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. The Company has estimated that exiting
from 118 stores has reduced net sales by approximately $1,061,000 for the three months ended
December 31, 2004 compared to the same period a year ago. Design Trends has been notified by the mass retailer that Design Trends remains the primary
vendor of its mix and match lamp program. As of August 2004, Design Trends mix and match
lamp program supplied approximately 90% of the mass retailers stores and management of
Design Trends anticipates Design Trends will obtain product placements in approximately 90%
of the new stores the mass retailer opens. According to publicly available information, the
mass retailer has indicated that it will open 150 stores in 2005. Management believes that
the Companys share of product placement in these new store openings will help the Company
offset the loss of net sales from the 118 exited stores. 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 product to a customer of PHI. The increase in net sales from the remaining divisions of the TSI segment resulted in part
from higher sales of indoor lighting products. Gross Profit.Gross profit of the Company as a percentage of sales increased to 31.1% for
the three months ended December 31, 2004, compared to 26.4% for the same period of 2003.
Gross profit benefited from a $304,000 reduction in cost of sales by an amount that had been
accrued in prior periods related to import brokerage fees and duties (Gross Profit
Benefit). The pre-tax earnings impact of the Gross Profit Benefit totaled $224,000 net of
minority interest from the 50% owned subsidiaries. On an adjusted basis, gross profit as a
percentage of sales was 30.0% for the second quarter. The gross profit percentage of the Craftmade segment of 37.5% includes $133,000 from the
Gross Profit Benefit described above. On an adjusted basis, gross profit as a percentage of
sales was 36.5% for the second quarter, compared to 38.3% of net sales in the prior year
period. 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. Outbound freight increased to
8.3% of sales for the three months ended December 31, 2004, compared to 7.4% in the same
period a year ago. The decline in the gross profit margin was also the result of increased
product costs due to a weaker U.S. dollar compared to the Taiwan dollar. In addition, gross
profit margins were impacted by a change in sales mix with a greater portion of sales being
driven by Craftmades builders model ceiling fans, which carry a lower gross profit percentage than the overall
product mix. The 15




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Company anticipates that margins for the remainder of fiscal 2005 for the
Craftmade division will decrease slightly in the third quarter from higher product costs,
but improve after a price increase takes effect on March 1, 2005. The gross profit percentage of the TSI segment increased to 26.2% of sales for the three
months ended December 31, 2004, compared to 17.3% of sales in the prior year period. The
increase was due to the following:  (i)
    a $2,100,000 charge that reduced gross sales in the quarter
ended December 31, 2003 that was incurred in connection with the rollout of a
new product to a customer of PHI,(ii)
    the implementation of a markdown accrual on sales to TSIs
largest mass retail customer of 2.9% of gross sales from 0.0% of gross sales in
the prior year period,(iii)
    a decrease in outbound freight cost to 0.5% of gross sales
from 1.8% of gross sales in the prior year period that was related to the
rollout of a new product to a customer of PHI, and(iv)
    a $171,000 increase from the Gross Profit Benefit as described
above. The $2,100,000 charge was incurred in connection with the rollout of a new product to a
customer of PHI and lowered gross margins by approximately 9.4% in the three months ended
December 31, 2003. 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 decreased $440,000 to $4,496,000 or 15.9% of net sales for
the three months ended December 31, 2004 from $4,936,000 or 17.1% of net sales for the same
three month period last year. The TSI segment contributed to substantially all of the
decrease. This decrease was offset by a slight increase in the Craftmade segment. Total SG&A expenses of the Craftmade segment increased $81,000 to $2,672,000 or 21.8% of
sales compared to $2,591,000 or 20.7% of sales for the same period in the previous fiscal
year. The increase was primarily related to an increase in salaries and benefits that
resulted from the severance agreement with the Companys former Chief Financial Officer.
The cost of this agreement was approximately $174,000. This increase in SG&A was offset by
nominal decreases in a broad category of expenses. Total SG&A expenses of the TSI segment decreased $521,000 to $1,824,000 or 11.3% of sales
compared to $2,345,000 or 14.3% 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): DecreaseThree Months Ended
    
    
    OverDecember 31,
    
    


    Prior Year2004
    
    
    2003
    
    
    PeriodOverhead allocation
    
    $
    763
    
    
    $
    1,021
    
    
    
    ($258
    )Salaries and wages
    
    
    595
    
    
    
    732
    
    
    
    (137
    )Travel
    
    
    43
    
    
    
    78
    
    
    
    (35
    )Other
    
    
    423
    
    
    
    514
    
    
    
    (91
    )$
    1,824
    
    
    $
    2,345
    
    
    
    ($521
    )
 16




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##### Table of Contents



The change in overhead allocation was primarily the result of a smaller portion of the
Companys fixed and variable overhead being allocated to the TSI division due to the decline
in sales of Design Trends. In addition, there were lower salary and wages as the result of
reduced headcount from the closure of the TSI divisions California office and related
severance costs incurred in the prior year quarter. Similarly, travel costs were higher in
the prior year quarter from relocating employees from the California office to either
Arkansas or the Companys office in Texas. The Company anticipates SG&A expenses to increase in the remaining half 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 $94,000 to $240,000 for the
three months ended December 31, 2004 from $146,000 for the three month period ended December
31, 2003. The average outstanding balance on the Companys lines of credit was higher in
the fiscal first 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 partially as a result of PHIs
borrowings to finance the rollout of its lamp parts program in fiscal 2004. 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 $721,000 to $995,000 for the second
quarter from $274,000 for the same period in the previous year. The increase primarily
resulted from a charge that occurred in the three month period ended December 31, 2003, that
did not occur in the same period of the current year. The charge totaled $2,100,000, or
$1,050,000 net of the 50% minority interest, and was incurred in connection with the rollout
of a new product to a customer of PHI. Provision For Income Taxes.The provision for income tax was $1,068,000 or 36.3% of income
for the three months ended December 31, 2004, compared to $772,000 or 36.1% for the same
period of the prior year. 17




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##### Table of Contents



Six Months Ended December 31, 2004 Compared to Six Months Ended December 31, 2003 A condensed overview of results for the six months ended December 31, 2004 and the
corresponding prior year period can be summarized as follows (in thousands): Six Months Ended
    
    
    Six Months EndedDecember 31, 2004
    
    
    December 31, 2003Craftmade
    
    
    TSI
    
    
    Total
    
    
    Craftmade
    
    
    TSI
    
    
    TotalNet sales
    
    $
    26,868
    
    
    $
    30,506
    
    
    $
    57,374
    
    
    $
    26,858
    
    
    $
    33,280
    
    
    $
    60,138Cost of goods sold
    
    
    16,632
    
    
    
    23,410
    
    
    
    40,042
    
    
    
    16,222
    
    
    
    26,053
    
    
    
    42,275Gross profit
    
    
    10,236
    
    
    
    7,096
    
    
    
    17,332
    
    
    
    10,636
    
    
    
    7,227
    
    
    
    17,863Gross margin
    
    
    38.1
    %
    
    
    23.3
    %
    
    
    30.2
    %
    
    
    39.6
    %
    
    
    21.7
    %
    
    
    29.7
    %SG&A
    
    
    6,459
    
    
    
    3,446
    
    
    
    9,905
    
    
    
    5,551
    
    
    
    3,890
    
    
    
    9,441As a % of net sales
    
    
    24.0
    %
    
    
    11.3
    %
    
    
    17.3
    %
    
    
    20.7
    %
    
    
    11.7
    %
    
    
    15.7
    %Interest
    
    
    408
    
    
    
    62
    
    
    
    470
    
    
    
    328
    
    
    
    11
    
    
    
    339Depreciation
    
    
    262
    
    
    
    26
    
    
    
    288
    
    
    
    271
    
    
    
    34
    
    
    
    305Income before minority interests and income taxes
    
    $
    3,107
    
    
    $
    3,562
    
    
    
    6,669
    
    
    $
    4,486
    
    
    $
    3,292
    
    
    
    7,778Minority interests
    
    
    
    
    
    
    
    
    
    
    1,561
    
    
    
    
    
    
    
    
    
    
    
    1,921Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    1,838
    
    
    
    
    
    
    
    
    
    
    
    2,125Net income
    
    
    
    
    
    
    
    
    
    $
    3,270
    
    
    
    
    
    
    
    
    
    
    $
    3,732
 Net Sales.Net sales for the Company decreased $2,764,000 or 4.6%, to $57,374,000 for
the six month period ended December 31, 2004 from $60,138,000 for the same six month period
last year. The TSI segment contributed to virtually all of the decrease, offset by only a
slight increase from the Craftmade segment. Net sales of the Craftmade segment increased $10,000, or 0.0%, to $26,868,000 for the six
months ended December 31, 2004 from $26,858,000 for the same six month period last year.
Management believes net sales of the Craftmade segment will increase during the remaining
half of the 2005 fiscal year due to the Company refocusing its efforts on sales to lighting
showrooms and specialty retailers. Net sales of the TSI segment declined $2,774,000, or 8.3% to $30,506,000 for the six months
ended December 31, 2004 from $33,280,000 for the same six month period last year. The
change in net sales between periods can be summarized as follows: Net sales for the six months ended December 31, 2003
    
    $
    33,280Decline in sales of Design Trends
    
    
    (7,574
    )Charge related to prior period vendor programs of the largest mass retail customer
    
    
    (105
    )Charge in
connection with rollout of a new customer in the quarter ended
December 31, 2003
    
    
    2,100Net increase in sales of the remaining divisions of TSI segment
    
    
    2,805Net sales for the six months ended December 31, 2004
    
    $
    30,506
 The $7,574,000 or 35.4% decline in Design Trends net sales was primarily due to
changes in the buying pattern of TSIs largest mass retail customer as described above. The change in net sales between periods was also 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 product to a customer of PHI. 18




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The increase in net sales from the remaining divisions of the TSI segment resulted in part
from higher sales of indoor lighting products. Gross Profit.Gross profit of the Company as a percentage of sales increased to 30.2% of
net sales for the six months ended December 31, 2004 compared to 29.7% for the same period
of 2003. Gross profit benefited from a $304,000 reduction in cost of sales from the Gross
Profit Benefit as described above. The pre-tax earnings impact of the Gross Profit Benefit
totaled $224,000 net of minority interest from the 50% owned subsidiaries. On an adjusted
basis, gross profit as a percentage of sales was 29.7% for the six months ended December 31,
2004, compared to the same amount for the prior year period. Gross profit as a percentage of sales of the Craftmade segment decreased to 38.1% for the
six months ended December 31, 2004, compared to 39.6% for the same period of 2003. Gross
profit benefited from a $133,000 reduction in cost of sales from the Gross Profit Benefit.
On an adjusted basis, gross margin was 37.6% for the six months ended December 31, 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, increased product costs due to a weaker U.S.
dollar compared to the Taiwan dollar, and a change in sales mix with a greater portion of
sales being driven by Craftmades builders model ceiling fans, which carry a lower gross
profit percentage than the overall product mix. The Company anticipates that margins for
the remainder of fiscal 2005 for the Craftmade division will decrease slightly in the third
quarter from higher product costs, but improve after a price increase takes effect on March
1, 2005. The gross profit of the TSI segment increased to 23.3% of sales for the six months ended
December 31, 2004 compared to 21.7% of sales in the year ago period. The increase was due
to (i) a $2,100,000 charge that reduced gross sales in the quarter ended December 31, 2003,
(ii) the implementation of a markdown accrual on sales to TSIs largest mass retail customer
of 3.0% of gross sales from 0.0% of gross sales in the prior year period, and (iii) a
$171,000 increase from the Gross Profit Benefit described above. The $2,100,000 charge was
incurred in connection with the rollout of a new product to a customer of PHI in the quarter
ended December 31, 2003 and lowered gross margins by approximately 4.7% in the six months
ended December 31, 2003. 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 $464,000 to $9,905,000 or 17.3% of net sales for
the six months ended December 31, 2004 from $9,441,000 or 15.7% of net sales for the same
six month period last year. The increase in SG&A came from the Craftmade segment. This
increase was partially offset by a decrease in SG&A by the TSI segment. Total SG&A expense of the Craftmade segment increased $908,000 to $6,459,000 or 24.0% of
sales compared to $5,551,000 or 20.7% 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): 19




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##### Table of Contents



IncreaseSix Months Ended
    
    
    OverDecember 31,
    
    
    Prior Year2004
    
    
    2003
    
    
    PeriodAccounting & legal
    
    $
    1,774
    
    
    $
    1,007
    
    
    $
    767Salaries and wages
    
    
    2,074
    
    
    
    1,831
    
    
    
    243Other
    
    
    2,611
    
    
    
    2,713
    
    
    
    (102
    )$
    6,459
    
    
    $
    5,551
    
    
    $
    908
 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, management
consultants and contract labor. These increased costs were incurred in order to address
internal controls issues and the continuing 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. The increase in salaries and benefits was impacted by the severance agreement with the
Companys former Chief Financial Officer that totaled $174,000. Total SG&A expenses of the TSI segment decreased $444,000 to $3,446,000 or 11.3% of sales
for the six month period ended December 31, 2004 from $3,890,000 or 11.7% 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): DecreaseSix Months Ended
    
    
    OverDecember 31,
    
    
    Prior Year2004
    
    
    2003
    
    
    PeriodOverhead allocation
    
    $
    1,220
    
    
    $
    1,315
    
    
    
    ($95
    )Salaries and wages
    
    
    1,134
    
    
    
    1,480
    
    
    
    (346
    )Travel
    
    
    86
    
    
    
    125
    
    
    
    (39
    )Other
    
    
    1,006
    
    
    
    970
    
    
    
    36$
    3,446
    
    
    $
    3,890
    
    
    
    ($444
    )
 The change in overhead allocation was primarily the result of a smaller portion of the
Companys fixed and variable overhead being allocated to the TSI division due to the decline
in sales of Design Trends. In addition, there were lower salary and wages as the result of
lower headcount from the closure of the California office in October 2003 and related
severance paid in the prior year quarter. The Company anticipates that its SG&A expenses to increase in the remaining half 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 $131,000 to $470,000 for
the six-months ended December 31, 2004 from $339,000 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 $360,000 to $1,561,000 for the six months ended December 31, 2004 from $1,921,000
for the same period in the previous year. The decline was primarily related to the decline in sales and gross
profit of Design Trends, as discussed above. 20




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Provision For Income Taxes.The provision for income tax was $1,838,000 or 36.0% of income
for the six months ended December 31, 2004, compared to $2,125,000 or 36.3% for the same
period of the prior year. Liquidity and Capital Resources The Companys cash increased $1,499,000 from $5,838,000 at June 30, 2004 to $7,337,000 at
December 31, 2004. The Companys operating activities provided cash of $6,665,000, which
was primarily attributable to income from operations before minority interest expense. The $32,000 of cash used in investing activities related to 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 purchase of a patent. Cash used in financing activities of $5,134,000 was primarily the result of (i) repurchases
of the Companys outstanding common stock of $2,925,000, (ii) principal payments on the
Companys notes payable of $1,583,000, (iii) cash dividends of $1,010,000, and (iv)
distributions to minority interest members of $742,000. These amounts were partially offset
by (i) net proceeds from the Companys revolving lines of credit of $962,000 and (ii)
proceeds from stock options exercised of $164,000. 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, repurchases of Company common stock, 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
and to repurchase Company common stock. As of December 31, 2004, the Company had
repurchased 494,463 shares at an aggregate cost of $11,194,000 under this program. The
average price paid per share repurchased was $22.63. See Part II. Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds for further information. At December 31, 2004, subject to continued compliance with certain covenants and
restrictions, the Company had a $20,000,000 line of credit with The Frost National Bank at
an interest rate of prime (5.25% at December 31, 2004) less 0.5%, of which $15,539,000 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. 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 $155,000. 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 $777,000. At December 31, 2004, 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. 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 December 31, 2004. In addition, PHI has a $500,000 three-year note payable to Wachovia (the $500,000 Note)
maturing on July 29, 2005, of which $111,000 was outstanding at December 31, 2004. The
$500,000 Note bears interest at a rate equal to one-month LIBOR plus 2.5%. 21




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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 December 31, 2004,
there was a $525,000 balance outstanding under the $2.1 Million Note, which is scheduled to
mature on March 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 PHI $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 $22,000.
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 $109,000. At December 31, 2004, $3,391,000 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. During fiscal year 2004, the Company extended its accounts receivable payment terms with its
largest mass retail customer to 60 days from a previous range of 30 to 45 days. The Company
does not anticipate that this will have a material impact on the availability of future cash
collections to meet the Companys expected future cash obligations. TSI maintained inventory levels of $4,608,000 at December 31, 2004. 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. 22




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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. 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
    
    
    31.98
 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 December 31, 2004, the Company purchased approximately
$3,443,000 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 $344,000, based on the Companys purchases
during the fiscal quarter ended December 31, 2004 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 $1,722,000, based on the Companys purchases during the
fiscal quarter ended December 31, 2004 on an annualized basis. A $10 incremental
appreciation of the Taiwan dollar would result in an increase of approximately $3,443,000 on
an annualized basis, based on the Companys purchases during the fiscal quarter ended
December 31, 2004 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
December 31, 2004. Consequently, these amounts are not necessarily indicative of the effect
of such changes with respect to an entire year. Other market risks at December 31, 2004 have not changed significantly from those discussed
in Item 7A of our Form 10-K for the year ended June 30, 2004 filed with the Securities and
Exchange Commission. 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 Reporting In 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 (as defined under standards established by the American
Institute of Certified Public Accountants (AICPA)) in the operation of internal control
over financial reporting. 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 as 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 24




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##### Table of Contents



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 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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##### Table of Contents



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. On December 9, 2003 the Companys Board of Directors authorized the Companys management to
repurchase up to 500,000 shares of the Companys outstanding common stock. As of December
31, 2004, the Company had repurchased 494,463 shares at an aggregate cost of $11,194,000
under this program. The average price paid per share repurchased was $22.63. The following
table summarizes the repurchase activity during the six months ended December 31, 2004: ISSUER PURCHASES OF EQUITY SECURITIES MaximumNumberof Sharesthat MayTotal
    
    
    
    
    
    
    Yet BeNumber
    
    
    Average
    
    
    Purchasedof Shares
    
    
    Price Paid
    
    
    Under thePeriod
    
    Purchased
    
    
    Per Share
    
    
    ProgramJuly 1 to July 31, 2004
    
    
    50,333
    
    
    $
    19.74
    
    
    
    118,357August 1 to August 31, 2004
    
    
    
    
    
    
    
    
    
    
    118,357September 1 to September 31, 2004
    
    
    
    
    
    
    
    
    
    
    118,357October 1 to October 31, 2004
    
    
    
    
    
    
    
    
    
    
    118,357November 1 to November 30, 2004
    
    
    113,000
    
    
    
    17.09
    
    
    
    5,357December 1 to December 31, 2004
    
    
    
    
    
    
    
    
    
    
    5,357Total for six months ended December 31, 2004
    
    
    163,333
    
    
    $
    17.91
    
    
    
    5,357
 Although no expiration date was specified for the repurchase program, it was
substantially complete as of December 31, 2004. No shares were purchased by the Company
other than through publicly announced plans or programs. 
 Item 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable 26




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##### Table of Contents



Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held its annual meeting of stockholders on November 30, 2004. With respect to
the election of directors, the shares were voted as follows: Number of Votes

    
    Abstentionsof Common Stock
    
    
    and BrokerNominee
    
    For
    
    
    Withheld
    
    
    Non-VotesJames R. Ridings
    
    
    4,125,730
    
    
    
    37,355
    
    
    
    Clifford Crimmings
    
    
    4,125,760
    
    
    
    37,325
    
    
    
    R. Don Morris
    
    
    4,133,823
    
    
    
    29,262
    
    
    
    John DeBlois
    
    
    4,126,360
    
    
    
    36,725
    
    
    
    A. Paul Knuckley
    
    
    4,133,903
    
    
    
    29,182
    
    
    
    Lary C. Snodgrass
    
    
    4,133,903
    
    
    
    29,182
    
    
    
    William E. Bucek
    
    
    4,133,653
    
    
    
    29,432
    
    
    
    L. Dale Griggs
    
    
    4,133,023
    
    
    
    30,062
    
    
    
    
 With respect to the ratification of PricewaterhouseCoopers, LLP as the Companys
auditors for 2005, the votes were as follows: Number of Votes
    
    Number of Votes
    
    Abstentions andVoted For
    
    Voted Against
    
    Broker Non-Votes4,136,127
    
    20,837
    
    6,121
 
 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 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.
 27




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##### Table of Contents



10.1
    
    
    General Release and Severance Agreement dated November 18, 2004 between
Kathleen B. Oher and Craftmade International, Inc., filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K filed November 24, 2004 (File No. 000-26667) and
herein incorporated by reference.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. 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: February 9, 2005
    
    /s/ James R. RidingsJAMES R. RIDINGSPresident and ChiefExecutive OfficerDate: February 9, 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
    
    General Release and Severance Agreement dated November 18, 2004 between
Kathleen B. Oher and Craftmade International, Inc., filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K filed November 24, 2004 (File No. 000-26667) and
herein incorporated by reference.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. 30