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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 Form 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR I5(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended June 30, 2004Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period
from               to
 Commission file number 000-26667 Craftmade International, Inc. (Exact name of
registrant as specified in its charter)
 Delaware
    
    75-2057054(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)650 S. Royal Lane, Suite 100
    
    75019Coppell, Texas
    
    (Zip Code)(Address of Principal Executive Offices)
 (972) 393-3800
(Registrants Telephone Number, Including Area Code) Securities registered pursuant to Section 12 (b) of the Act:
None Securities registered pursuant to Section 12 (g) of the Act: Title of Each Class
    
    Name of each exchange on whichregisteredCommon Stock, par value
    
    NASDAQ National Market$0.01
    
    System
 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes þ No o The aggregate market
value of the voting stock held by non-affiliates of the registrant as of
December 31, 2003 was $118,802,998 The number of shares outstanding of the registrants $.01 par value common
stock as of September 24, 2004 was 5,128,948 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants proxy statement pertaining to the Registrants
2004 annual meeting of stockholders are incorporated by reference
into Part
III of this report.




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TABLE OF CONTENTS PART I
    
    
    3ITEM 1. BUSINESS
    
    
    3ITEM 2. PROPERTIES
    
    
    9ITEM 3. LEGAL PROCEEDINGS
    
    
    9ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    10PART II
    
    
    11ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    11ITEM 6. SELECTED FINANCIAL DATA
    
    
    12ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
    
    
    13ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    21ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    22ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    22ITEM 9A. CONTROLS AND PROCEDURES
    
    
    22ITEM 9B. OTHER INFORMATION
    
    
    22PART III
    
    
    23ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    23ITEM 11. EXECUTIVE COMPENSATION
    
    
    23ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    23ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    23ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    23PART IV
    
    
    24ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    24SIGNATURES
    
    
    28Business Loan AgreementSecond Amendment to Loan AgreementSubsidiaries of the RegistrantCertification of James R. Ridings, Pursuant to Section 302Certification of Kathleen B. Oher, Pursuant to Section 302Certification of James R. Ridings, Pursuant to Section 906Certification of Kathleen B. Oher, Pursuant to Section 906
  2




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PART I 
 ITEM 1. BUSINESS The Company Craftmade International, Inc. was incorporated in the state of Texas in July
1985 and reincorporated in the state of Delaware in December 1991 and is
organized into two operating segments: Craftmade International, Inc.
(Craftmade) and Trade Source International, Inc.
(TSI). See Note 13 
Segment Information in the Notes to Consolidated Financial Statements for
certain financial information about the Companys two segments. Craftmade,
TSI, their wholly-owned subsidiaries, and its two 50% owned limited
liability companies (LLCs) are collectively referred to as the Company. Craftmade Craftmade is principally engaged in the design, distribution and
marketing of ceiling fans, light kits, outdoor lighting, bath-strip lighting
and related accessories to a nationwide network of over 1,600 lighting
showrooms and electrical wholesalers specializing in sales to the remodeling,
new home construction and replacement markets. Craftmade completed an
arrangement with Fanthing Electrical Corp. (Fanthing), which is located in
Taichung, Taiwan, in August 1986 for the manufacture of ceiling fans designed
to Craftmades specifications. Craftmades ceiling fan product line consists
of over two dozen series of premium priced to lower priced ceiling fans and is
distributed under the Craftmade® trade name. Craftmade also markets nearly
eighty light kit models in various colors for attachment and use with its
ceiling fans or other ceiling fans, along with parts and accessories for its
ceiling fans and light kits. In addition, nearly two dozen styles of bath-strip
lighting and over forty designs of outdoor lighting are marketed under its
Accolade® trade name. Craftmade purchases substantially all of its light kits
from Sunlit Industries (Sunlit), in Taipei, Taiwan. The combination of design
and functional features which characterize Craftmade ceiling fans have made
them, in managements judgment, one of the most reliable, durable, energy
efficient and cost effective ceiling fans in the marketplace. Craftmades
national sales organization, which consists of 33 independent sales groups
employing approximately 65 sales representatives, markets its products to its
distribution network of lighting showrooms and electrical wholesalers. TSI- TSI is principally engaged in the design, distribution and marketing of
outdoor and indoor lighting, selected ceiling fans and various fan accessories
to mass merchandisers. TSIs outdoor lighting consists of over one-hundred
designs in different decorative finishes. The indoor lighting product line
includes ceiling mount lighting fixtures and bath-strip lighting. TSI
purchases substantially all of its products from manufacturers located in
China. 50%
Owned Limited Liability Companies- The Company has a 50%
ownership interest in each of two
entities, Design Trends, LLC (Design Trends) and Prime/Home Impressions, LLC
(PHI), which are part of the TSI segment:  Design Trends- Design Trends markets indoor lighting, including portable
table lamps, floor lamps, chandeliers and wall sconces designed by Patrick
Dolan. Substantially all of Design Trends sales are to mass
merchandisers.PHI- PHI markets various fan accessories including decorative pull-chains,
replacement switches, blade arms, blades and ceiling medallions. All of
PHIs sales are to mass merchandisers. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and all amendments to these reports will be made available free of
charge through the Investor Relations section of our Internet website,
http://www. craftmade.com, or craftmade.com, as soon as practicable after such
material is electronically filed with, or furnished to, the Securities and
Exchange Commission. Craftmade Products Ceiling Fans Craftmades ceiling fan product line consists of over two dozen
fan series for sale to the new home construction, remodeling and replacement
markets. These series are differentiated on the basis of cost, air movement
and appearance. Craftmades fans 3




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are manufactured and assembled in a variety
of colors, styles and finishes and can be used either in conjunction with or
independent of Craftmades light kits. Series lines
include Early American, Traditional and Modern High-Tech Decor and, depending
on the size, finish and other features, range in price from the premium Cameo,
Constantina, Crescent and Presidential series to various low-end builder
series. Craftmades fans come in five motor sizes, five blade sizes and over
two dozen different decorative finishes. The range of styles and colors gives
consumers the ability to select ceiling fans for any style of house, interior
decoration or living and working area, including outdoor patios. Ceiling fans
accounted for 29%, 30% and 29% of the Companys sales for fiscal years 2004,
2003 and 2002, respectively. Light Kits- Craftmade markets nearly eighty models of light kits, which
consist of glass shades and filters,
in various colors that may be utilized with Craftmades ceiling fans or other
ceiling fans. Bath-strip Lighting- Craftmade markets nearly two dozen series of bath-strip
lighting in different lengths and decorative finishes under the Accolade® trade
name. Craftmade plans to add finishes and series from time to time based on
customer demand. Outdoor Lighting Craftmade markets over forty designs of outdoor lighting in
different decorative finishes under the Accolade® trade name. Other outdoor
products are also marketed under the TSI Prime brand, or under the retailers
private label. Styles of outdoor lighting fixtures include wall-mount, pendant and post-mount. Craftmade
plans to add finishes and designs from time to time based on customer demand. Accessories- Craftmade also markets a variety of designer and standard wall
controls to regulate the speed and intensity of ceiling fans and lighting
fixtures and universal down-rods for use with ceiling fans. TSI Products Outdoor
Lighting- TSI markets over sixty designs of outdoor
lighting in a variety of decorative finishes, colors and sizes to
various mass merchandisers under the TSI Prime brand, as well as the
retailers private label brands. The outdoor lighting is designed for
either wall mounting or as a post-mounted fixture. TSIs sales of
outdoor lighting represented less than 10% of the Companys sales in
fiscal year 2004, and 11% and 14% of the Companys sales in fiscal
year 2003 and 2002, respectively. Indoor
Lighting- During fiscal year 2000, the Company began marketing
floor and table lamps, chandeliers and wall sconces designed by Pat
Dolan to various mass merchandisers through Design Trends, a 50%
owned limited liability company. TSIs sales of
indoor lighting represented 39%, 37% and 32% of the Companys sales
in fiscal year 2004, 2003 and 2002, respectively. TSIs portable lamp
program, which is a significant part of the TSIs indoor lighting
program, is merchandised in a mix and match system that enables the
consumer to customize a lamp base and shade combination. Lamp shades
are displayed separately on a revolving carousel that economizes
space. The smaller packaging of the lamp bases enables the retailer
to display a greater number of SKUs in the same amount of space.
Selections of lamp bases include large, medium, buffet, small and
mini lamps and are offered in a variety of styles and finishes. Accessories- TSI also markets various fan accessories, including universal
downrods, pull-chains and ceiling medallions, to various mass
merchandisers through PHI. TSIs accessories sales represented less
than 10% of the Companys sales in fiscal year 2004, 2003 and 2002. Manufacturing Craftmades ceiling fans, bathstrip lighting and substantially all of its light
kits and certain accessories are produced by Fanthing and Sunlit. Craftmade
selected Fanthing in August 1986 to manufacture all of its ceiling fans and
certain fan accessories based on the Companys belief that Fanthing has the
capability to produce and ship a wide variety of product on a cost effective
basis while maintaining excellent quality control in the manufacturing process.
In 1989, Craftmade and Fanthing entered into a formal written agreement that is
terminable on 180 days prior notice. The written agreement does not obligate
Fanthing to produce and sell fans to Craftmade in any specified quantity, nor
does it obligate Fanthing to sell products to Craftmade at a fixed price.
Fanthing is permitted under the arrangement to manufacture ceiling fans for
other distributors provided such ceiling fans are not a replication of
Craftmades series or models. Fanthing also manufactures certain ceiling fan
accessories, such as downrods, that are sold by Craftmade independently of its
ceiling fans. 4




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Fanthing has provided Craftmade with a $1,000,000 credit limit, pursuant to
which Fanthing will manufacture and ship ceiling fans prior to receipt of
payment from Craftmade. Accordingly, payment can be deferred until delivery of
such products. At present levels, this credit limit is equivalent to
approximately three weeks supply of ceiling fans and represents a supplier
commitment that the Companys management believes is unusual for the industry
and favorable to the Company. Fanthing is not required to provide this credit
facility under its agreement with Craftmade, and Fanthing may discontinue this
credit facility at any time. Craftmade places orders with Fanthing in
anticipation of normally recurring orders. In the ordinary course of business,
orders are filled within 60 days, which includes approximately 20 days for
transport. While Craftmades agreement with Fanthing does not contain
provisions relating to adjustments or returns as a result of product defects,
Fanthing has historically extended Craftmade full credit for any product
returns. Ceiling fans are shipped in container-size lots, generally consisting
of 1,600 fan units. Delivery is made in Dallas, Texas upon presentment of
documents by Craftmades designated freight forwarder following payment for
such containers at Fanthings bank in Taiwan. The Companys management believes that Craftmades relationship with Fanthing
and its ability to supply quality ceiling fans at competitive prices have been
critical to the success of Craftmade. The Companys management currently
believes Craftmades relationship with Fanthing is excellent and foresees no
reason, based on its association to date, for such relationship to deteriorate.
If for any reason Fanthing were to discontinue its relationship with Craftmade
in the future or should it be unable to continue to supply sufficient amounts
of Craftmade products, Craftmade would be required to seek alternative sources
of supply. The Companys management currently believes Craftmade could secure
alternative sources of supply with minimal business disruption. Craftmade purchases its bathstrip lighting and substantially all of its light
kits from Sunlit. Light kit orders are placed independently of ceiling fan
orders, but are also received in container-size lots generally consisting of up
to 4,500 light kit units under payment and delivery arrangements similar to
those for ceiling fans. Craftmade offers a variety of light kits in various
finishes and colors, as well as a variety of fixtures designed for ceiling
fans. Craftmade also offers a variety of glass selections for the various light
fixtures, including blown glass, beveled glass and crystal. Fixtures and glass
are shipped from Sunlit in the light kit containers. Craftmades wall controls, timers and switches as well as certain of its
ceiling fan blades, are manufactured by companies based in the United States.
Craftmade offers a variety of custom blade sets in various sizes and finishes,
including unfinished oak, ash and other wood grains and in clear, mirror, gold
mirror, black, smoke and antique white acrylic. The finished products are
packaged and labeled under the Craftmade brand name. Craftmade and TSI purchase outdoor lighting from several manufacturers located
in Asia. Outdoor lighting orders are received in container-size lots, similar
to light kit and ceiling fan orders. Craftmade and TSI offer a wide variety of
outdoor lighting styles in various finishes, colors and sizes and are designed
for either wall mounting or as post-mounted fixtures. TSI purchases indoor lighting products, including flush mounts and bathstrip
lights from the same manufacturers that produce outdoor lighting for Craftmade. PHI purchases most of its ceiling fan accessories and all of its lamp
replacement parts from several manufacturers located in Asia, with the
exception of ceiling medallions, which are purchased from a manufacturer
located in the United States. Design Trends purchases its lamps and shades from multiple manufacturers
located in Asia. Design Trends offers several different styles and sizes of
table and floor lamps, either pre-packaged with shades or glass, or with shades
sold separately, allowing customers to mix and match components. These
products are also shipped on containers, either to the Companys facility in
Coppell, Texas or directly to the customer. All of TSI, PHI and Design Trends foreign vendors require payment seven days
after notification of shipment of product from Asia. Distribution Craftmades products are marketed through more than 1,600 lighting showrooms
and electrical wholesaler locations specializing in sales to the new home
construction, remodeling and replacement markets. Its ceiling fans, light
kits, outdoor lighting and accessories are distributed through 33 independent
sales groups on a national basis. Each sales group is selected to represent
Craftmade in a specific market area. The independent sales groups comprise a
sales force of approximately 65 sales representatives, who represent Craftmade
exclusively in the sale of ceiling fans in return for commissions on such
sales. During fiscal years 2004, 2003 and 2002, no single lighting showroom or
electrical wholesaler accounted for more than 2% of Craftmades sales. 5




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Sales representatives are carefully selected and continually evaluated in order
to promote high-level representation of Craftmades products. Craftmade
employees provide initial field training to new sales representatives covering
features, styles, operation and other attributes of Craftmade products to
enable representatives to more effectively market Craftmades products.
Additional training, especially for a new product
series, is provided on a regular basis at semi-annual trade shows held
throughout the United States. Management believes it has assembled a highly
motivated and effective sales representative organization that has demonstrated
a strong commitment to Craftmade and its products. Management further believes
that the strength of its sales representative organization is primarily
attributable to the quality and competitive pricing of Craftmades products as
well as the ongoing administrative and marketing support that Craftmade
provides to its sales representatives. All of TSIs sales are to mass merchandisers with two customers comprising the
most significant portion of TSIs and the Companys sales, as follows: Lowes Companies
    
    WalmartPercent of
    
    
    
    
    
    Percent ofPercent of TSIs
    
    Consolidated
    
    Percent of
    
    ConsolidatedFiscal Year
    
    Sales
    
    Sales
    
    TSIs Sales
    
    Sales2004
    
    
    75
    %
    
    
    42
    %
    
    
    15
    %
    
    
    8
    %2003
    
    
    70
    %
    
    
    39
    %
    
    
    17
    %
    
    
    9
    %2002
    
    
    70
    %
    
    
    37
    %
    
    
    18
    %
    
    
    10
    %
 The majority of TSIs sales are by direct shipment. The remaining sales are
shipped from the Companys Coppell, Texas facility. TSI utilizes an internal
sales force to market its products and sales representatives to service
specific mass merchandiser locations. Marketing Craftmade relies primarily on the reputation of its ceiling fans, outdoor
lighting and light kits for high quality and competitive prices and the efforts
of its sales representative organization in order to promote the sales of its
products. The principal markets for Craftmades products are the new home
construction, remodeling and replacement markets. Craftmade utilizes
advertising in home lighting magazines, particularly in special editions
devoted to ceiling fans and lighting fixtures, and broadly distributes its
product catalog. Craftmade also promotes its ceiling fans and light kits at
semi-annual trade shows in Dallas (in January and June) and maintains a
showroom at the Dallas Trade Mart. Craftmade provides warranties ranging from
10 years to lifetime on the fan motor of its ceiling fans, and includes a one
year limited warranty against defects in workmanship and materials to cover the
entire ceiling fan. Craftmade also provides a limited lifetime warranty on its
higher-end series of fans. The Companys management believes these warranties
are highly attractive to both dealers and consumers. TSI relies primarily on the reputation of its products and the relationship it
has with its mass merchandiser 6




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customers with respect to its sales. TSI
participates in advertising programs and special promotions performed by its
customers. TSI also promotes its product line at semi-annual trade shows in
Dallas (in January and June) and utilizes Craftmades showroom at the Dallas
Trade Mart. The Company has a 48-hour product shipment policy. In order to meet these
policy delivery requirements and to ensure that it has sufficient goods on hand
from its overseas suppliers, the Company maintains a significant level of
inventory. See Managements Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources. For information concerning revenues of the Company attributable to foreign and
domestic customers, along with information concerning foreign and domestic
long-lived assets of the Company, see Note 13  Segment Information in the
Notes to Consolidated Financial Statements. Product Expansion Craftmade continually expands its ceiling fan product line, providing
proprietary products to its customer base in order to meet current and
anticipated demands for unique, innovative products. During fiscal year 2004,
Craftmade introduced four new series of fans: Ceylon, Sentry, American
Tradition and Universal Hugger. Craftmade also added two new custom
finishes  English Toffee and Oiled Bronze. In addition, Craftmade increased its
selections of complimentary products such as specialty light fixtures, glass
and accessories. The Companys management will continue to search for
opportunities for product expansion that it considers complementary to the
Companys existing product lines. In fiscal year 2004, the Company enlarged its presence in the mass merchandiser
market by continuing to develop and roll out its mix and match ceiling fan
program to TSIs customer base. This program features interchangeable fan
motors, blade arms, blades, light kits and glass  all available in multiple
finishes and styles, allowing customers to create their own fan design. The
Company also introduced a line of lamp replacement and repair parts to the home
center channel through its PHI partnership. Seasonality The Companys product sales, particularly ceiling fans, are somewhat seasonal
with sales in the warmer first and fourth quarters being historically higher
than in the two other fiscal quarters. Backlog Backlog is not material to the Companys operations as substantially all of the
Companys products are shipped to customers within 48 hours following receipt
of orders. Competition The ceiling fan and lighting fixture market is highly competitive at all levels
of operation. Some of the major companies in the ceiling fan industry include
Casablanca, Hunter, Monte Carlo, Quorum, Emerson Electric and Taconi. A number
of other well-established companies are also currently engaged in activities
that compete directly with Craftmade. Some of Craftmades competitors are
better established and have longer operating histories, substantially greater
financial resources or greater name recognition than Craftmade. However, the
Companys management believes that the quality of Craftmades products, the
strength of its marketing organization and the growing recognition of the
Craftmade name will enable Craftmade to compete successfully in these highly
competitive markets. The mass merchandiser market is also highly competitive. TSI and Design Trends
have numerous competitors, which are located both within the United States and
outside of the country, particularly in Asia. Some of the major companies in
the lighting fixture industry include Designers Fountain, Murray Feiss and
Minka. In addition, mass merchandisers themselves will, at times, compete
directly against TSI and Design Trends by purchasing private label products
from TSIs vendors. However, the Companys management believes that TSI has
positioned itself with its customers in a manner that reduces some of the risks
involved with competing in the mass merchandiser market, primarily by offering
unique display systems and packaging that the Company management believes other
companies do not offer. 7




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Independent Safety Testing All of the ceiling fans, outdoor lighting, light kits and lamps sold by the
Company in the United States are tested by Underwriters Laboratories (UL),
which is an independent non-profit corporation which tests certain products,
including ceiling fans and lighting fixtures, for public safety. Under its
agreement with UL, the Company voluntarily submits its products to UL, and UL
tests the products for safety. If the product is acceptable, UL issues a
listing report that provides a technical description of the product. UL
provides the manufacturers with procedures to follow in manufacturing the
products. Electrical products that are manufactured in accordance with the
designated procedures display the UL listing mark, which is generally
recognized by consumers as an indication of a safe product and which is often
required by various governmental authorities to comply with local codes and
ordinances. The contract between the Company and UL provides for automatic
renewal unless either party
cancels as a result of default or gives applicable prior notice. Product Liability The Company is engaged in businesses that could expose it to possible claims
for injury resulting from the failure of its products sold. While no material
claims have been made against the Company since its inception and the Company
maintains product liability insurance, there can be no assurance that claims
will not arise in the future or that the coverage of such policy will be
sufficient to pay such claims. Patents and Trademarks The Company has patented certain of its product designs and the functional
features of some of its products, including a patent on its Cathedral Ceiling
Adapter and the Carousel light kit. The expiration dates of Craftmades
patents (excluding pending applications) currently range from 2008 to 2014. In
addition, Fanthing holds certain Taiwanese patents covering specific technology
employed in Craftmade ceiling fans, but the Companys management does not
believe that such patents are material to the production of Craftmade products.
From time to time, the Company also enters into license agreements with
various designers of the Companys products, including license agreements
concerning licenses on patents for eight series of fans and certain other
license agreements entered into in the ordinary course of its business. The
Company has registered the trademarks Craftmade ®, Accolade ® and Durocraft ®,
along with the product names of certain of its designs, with the United States
Patent and Trademark Office. Design Trends merchandises its portable lamp program in a patented display
system that makes more efficient use of the retailers space than conventional
lighting displays. The Companys management believes that the display patent
is material to Design Trends business. Employees As of August 31, 2004, the Company employed a total of 122 full time employees,
including 4 executive officers, (one of whom is a TSI officer), 20 managers, 21
clerical and administrative personnel, 21 marketing personnel, 44 warehouse
personnel and 12 Design Trends/shipping/production personnel. The Companys
employees are not covered by any collective bargaining agreements, and the
Company believes its employee relations are satisfactory. 8




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ITEM 2. PROPERTIES The Companys headquarters are located in Coppell, Texas. The facility consists
of approximately 378,000 square feet of general office and warehouse space,
which is owned by the Company and is used by both Craftmade and TSI. The
Companys management believes that this Company-owned facility will be
sufficient for its purposes for the foreseeable future. See
Note 4  Note
Payable in the Notes to Consolidated Financial Statements for a discussion of
the Companys term loan used to finance the Companys acquisition of this
facility. The Company also leases permanent display facilities at the Dallas Trade Mart,
which are used by both Craftmade and TSI. The lease provides for monthly
rental payments of $6,632 per month from May 1, 2003 through April 30, 2004 and $6,831 from May 1,
2004 through April 30, 2005, with three percent annual increases thereafter.
The lease expires April 30, 2007. 
 ITEM 3. LEGAL PROCEEDINGS 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. The suit
alleged that the Craftmade Parties infringed two patents  a design patent
and a utility patent  held by Lamps Plus related to a design for a
free-standing torchiere lamp with attached sidelights. The suit sought a
declaration that the two patents were infringed, treble damages, a preliminary
and permanent injunction from further alleged infringement, attorneys fees,
and other unspecified damages. The Craftmade Parties denied the allegations of
patent infringement, asserting affirmative defenses, and counterclaimed for a
declaration that the patents are invalid, not infringed, and unenforceable. On November 3, 2003, the lawsuit went to trial and on November 20, 2003, the
jury found that the Craftmade Parties directly and indirectly infringed the
utility patent with four of the five lamp models, and that their infringement
was willful. The jury found that the Craftmade Parties did not infringe the
design patent for any of the five accused lamp models. The jury further found
that neither patent was invalid or unenforceable, and awarded damages against
Dolan, Design Trends L.L.C., and Craftmade International, Inc., jointly and
severally, in the amount of $143,385. 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. Dolan, Design Trends, and Craftmade have been enjoined from selling
infringing lamps including 4 of the 5 models at issue in the case. Management
believes that the exclusion of these lamp models would not have a material
adverse effect on the business of the Company. Dolan, Design Trends, and Craftmade intend to appeal the
Judgment and Order. 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, along with the rights to any recovery that
might be had by reason of the Lawsuit. Pursuant to the Agreement, Design
Trends (which is owned jointly by Craftmade and Dolan Northwest, LLC) agreed to pay the first
$150,000 of legal fees and expenses incurred by the Parties after February 21,
2003. 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. Pursuant to the Agreement, Dolan Northwest is solely responsible for the
payment of any judgment which may be rendered in the Lawsuit against any of
the Craftmade Parties and has agreed to indemnify and hold harmless Craftmade
and Design Trends from and against any and all liabilities, losses, damages,
costs or other expenses associated with said judgment. Dolan Northwest is also
responsible for all additional legal fees and expenses (including any
supersedeas bond posted), which may be incurred in the prosecution or defense
of any appeal, perfected by any party to the Lawsuit. Dolan Northwest has
additionally agreed to assume and be responsible for all obligations of Design
Trends to indemnify Lowes Companies, Inc. or any of its subsidiaries for any
loss or damage incurred as a result of the Lawsuit. In the event of a recovery
in the Lawsuit in favor of any or all of the Craftmade Parties, Dolan is
entitled to retain all of the proceeds of such recovery. 9




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As an accommodation and convenience to Dolan Northwest, Design Trends has
agreed to advance the funds necessary to pay the legal fees and expenses for
which Dolan Northwest will be responsible as well as any final
judgment that may be entered against any of the Craftmade Parties in
the Lawsuit. Any such advances have been and will continue to be
treated by Design Trends as loans and are charged against Dolan
Northwests capital account in Design Trends. In the event that
Dolan Northwests capital account is insufficient to pay any
such fees and expenses for which Dolan Northwest is responsible under
the Agreement, Design Trends shall notify in writing both Pat Dolan
and Dolan Northwest of such deficiency and Dolan Northwest shall
reimburse Design Trends for any such fees and expenses (including any final
judgment) within ten days. Pat Dolan has agreed to unconditionally guarantee
the obligations of Dolan Northwest under this Agreement. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of stockholders during the fourth quarter
of fiscal year 2004. 10




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PART II 
 ITEM
5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES The initial public offering price of the Companys common stock, $0.01 par value per share (Common Stock)  in April 1990
was $1.55 per share, adjusted for the Companys three-for-two stock splits
effective October 30, 1998 and October 31, 1997. The Common Stock trades on
Nasdaq National Market System under the symbol CRFT. The following table sets forth, for the periods indicated, the high and low bid
information per share of Common Stock on the Nasdaq National Market System, as
reported by Nasdaq. DividendsHigh
    
    Low
    
    per shareFiscal Year Ended June 30, 2003:First Quarter
    
    $
    15.50
    
    
    $
    12.21
    
    
    $
    .07Second Quarter
    
    
    17.60
    
    
    
    11.62
    
    
    
    .07Third Quarter
    
    
    17.10
    
    
    
    13.70
    
    
    
    .07Fourth Quarter
    
    
    18.35
    
    
    
    14.25
    
    
    
    .07Fiscal Year Ended June 30, 2004:First Quarter
    
    $
    23.10
    
    
    $
    17.32
    
    
    $
    0.10Second Quarter
    
    
    27.75
    
    
    
    22.03
    
    
    
    0.10Third Quarter
    
    
    29.40
    
    
    
    24.00
    
    
    
    0.10Fourth Quarter
    
    
    27.57
    
    
    
    19.79
    
    
    
    0.10Fiscal Year Ended June 30, 2005First Quarter (Through September 8, 2004)
    
    $
    22.87
    
    
    $
    18.51
 Computershare Investor Services, Two North Lasalle Street, Chicago IL 60602,
is the transfer agent and registrar for the Common
Stock. Holders On September 8, 2004, there were 95 holders of record of the Common
Stock. ISSUER PURCHASES OF EQUITY SECURITIES (c) Total Number of
    
    (d) Maximum Number (or(a) Total
    
    (b) Average
    
    Shares (or Units)
    
    Approximate Dollar Value) ofNumber of
    
    Price Paid
    
    Purchased as Part of
    
    Shares (or Units) that MayShares (or Units
    
    per Share
    
    Publicly Announced
    
    Yet Be Purchased Under thePeriod
    
    Purchased)
    
    (or Unit)
    
    Plans or Programs
    
    Plans or ProgramsApril 1, 2004 to
April 30, 2004
    
    
    99,920
    
    
    $
    24.66
    
    
    
    99,920
    
    
    
    184,164May 1, 2004 to May
31, 2004
    
    
    15,474
    
    
    $
    23.41
    
    
    
    15,474
    
    
    
    168,690June 1, 2004 to
June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168,690Total
    
    
    115,394
    
    
    
    
    
    
    
    115,394
 11




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On December 9, 2003 the Companys Board of Directors authorized the Companys
management to repurchase up to 500,0000 shares of Common Stock. No expiration date was specified for the repurchase program;
however, it is estimated to be completed within twelve months of the
authorization. No shares were purchased by the Company other than through
publicly announced plans or programs. Management
anticipates that future dividend increases will be implemented in
keeping with anticipated future earnings growth. 
 ITEM 6. SELECTED FINANCIAL DATA. The selected financial data in the tables below are for the five fiscal years
ended June 30. The data should be read in conjunction with Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations, and
the consolidated financial statements included herein. For the years ended(In thousands, except per share data)June 30,
    
    June 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000Selected
Operating Results:Net sales
    
    $
    121,238
    
    
    $
    109,033
    
    
    $
    106,050
    
    
    $
    93,477
    
    
    $
    85,499Gross profit
    
    
    35,910
    
    
    
    35,394
    
    
    
    31,923
    
    
    
    30,357
    
    
    
    26,317Minority
Interest
    
    
    3,719
    
    
    
    4,235
    
    
    
    2,516
    
    
    
    1,954
    
    
    
    1,148Net income
    
    
    7,646
    
    
    
    6,846
    
    
    
    6,160
    
    
    
    4,687
    
    
    
    4,280Basic earnings per common
share
    
    
    1.43
    
    
    
    1.24
    
    
    
    1.04
    
    
    
    0.79
    
    
    
    0.63Diluted earnings per common
share
    
    
    1.42
    
    
    
    1.23
    
    
    
    1.03
    
    
    
    0.79
    
    
    
    0.63Cash dividends declared
per common share
    
    
    0.40
    
    
    
    0.28
    
    
    
    0.28
    
    
    
    0.25
    
    
    
    0.10Basic common
shares outstanding
    
    
    5,336
    
    
    
    5,512
    
    
    
    5,937
    
    
    
    5,933
    
    
    
    6,781Diluted common
shares outstanding
    
    
    5,383
    
    
    
    5,568
    
    
    
    6,001
    
    
    
    5,942
    
    
    
    6,781Summary
Balance Sheet:Current assets
    
    $
    41,291
    
    
    $
    35,804
    
    
    $
    35,395
    
    
    $
    42,214
    
    
    $
    35,483Current liabilities
    
    
    31,605
    
    
    
    22,329
    
    
    
    22,685
    
    
    
    31,981
    
    
    
    24,221Long-term debt
    
    
    2,949
    
    
    
    4,517
    
    
    
    5,746
    
    
    
    8,076
    
    
    
    8,558Total assets
    
    
    55,091
    
    
    
    51,443
    
    
    
    53,298
    
    
    
    59,129
    
    
    
    50,101Stockholders equity
    
    
    18,339
    
    
    
    20,538
    
    
    
    22,624
    
    
    
    17,782
    
    
    
    16,959Book value per common share
    
    
    3.57
    
    
    
    3.79
    
    
    
    3.81
    
    
    
    3.02
    
    
    
    2.74
 12




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. Cautionary Statement With the exception of historical information, the matters discussed in this
Item 7 and elsewhere in this Annual Report on Form 10-K contain forward-looking
statements. There are certain important factors which could cause results to
differ materially from those anticipated by these forward-looking statements.
Some of the important factors which would cause actual results to differ
materially from those in the forward-looking statements include, among other
things, the success of the Design Trends portable lamp program, changes in
anticipated levels of sales, whether due to future national or regional
economic and competitive conditions, changes in relationships with customers,
TSIs dependence on select mass merchandisers, customer acceptance of existing
and new products, pricing pressures due to excess capacity, cost increases,
exchange rate fluctuations in the U.S. and Taiwanese dollar, changes in tax or
interest rates, unfavorable economic and political developments in Asia, the
location of the Companys primary vendors, declining conditions in the home
construction industry, inability to realize deferred tax assets, and other
uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company. Critical Accounting Policies 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 these
financial statements requires the Companys management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. The
Companys estimates are based on historical experience and various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for the Companys conclusions. The Company continually
evaluates the information used to make these estimates as its business and the
economic environment changes. The Companys management believes that the
estimates, assumptions and judgments involved in the accounting policies
described below have the greatest potential impact on its financial statements,
so the Company considers these to be its critical 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 vs. 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. In addition to various incentive programs, from time to time the Company is
required to provide 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. 13




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Allowance for Doubtful Accounts The Company regularly analyzes
significant customer balances, and, when it becomes evident a specific
customer will be unable to meet its financial obligations to the
Company, such as in the case of bankruptcy filings or deterioration
in the customers operating results or financial position, a
specific allowance for doubtful account is recorded to reduce the
related receivable to the amount that is believed reasonably
collectible. The Company also records allowances for doubtful
accounts for all other customers based on a variety of factors
including the length of time the receivables are past due, the
financial health of the customer and historical experiences. If
circumstances related to specific customers change, estimates of the
recoverability of receivables could be further adjusted. Inventories The Companys inventories are primarily comprised of finished goods and are
recorded at the lower of cost or market using the average cost method. The
Company provides estimated inventory allowances for excess, slow-moving and
obsolete inventory as well as inventory whose carrying value is in excess of
net realizable value. These reserves are based on current assessments about
future demands, market conditions and related management initiatives. If market
conditions and actual demands are less favorable than those projected by
management, additional inventory write-downs may be required. Goodwill The Company assesses the carrying values of goodwill annually or
when circumstances dictate that the carrying value might be impaired. The
method for determining if impairment has occurred requires estimates of future
cash flows and the Companys weighted average cost of capital. In the event
that an impairment is determined to have occurred, the Company will reduce the
carrying value of the asset in that period. Income
Taxes The Company accounts for income taxes under an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the Companys financial statements or tax returns. In
estimating future tax consequences, all expected future events other than
enactments of changes in the tax law or rates are considered. Deferred
income taxes have been provided on unremitted earnings from foreign
investees. The Company reviews its deferred tax assets for ultimate
realization and will record a valuation allowance to reduce the deferred tax
asset if it is more likely than not that some portion, or all, of these
deferred tax assets will not be realized. TSIs 50% owned LLCs operate in the form of partnerships
for tax purposes and, consequently, do not file federal income tax returns.
Accordingly, the Company recognizes its share of their income and the
related tax effects on its provision for income taxes. 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 restated its previously issued
financial statements to reflect Design Trends and PHI as consolidated entities. Results of Operations Fiscal year ended June 30, 2004 compared to fiscal year ended June 30, 2003. Net
Sales  Net sales for the Company increased $12,205,000, or 11.2%, to
$121,238,000 for the year ended June 30, 2004 from $109,033,000 for the year
ended June 30, 2003. Net sales of the Craftmade segment
increased $4,372,000,
or 8.9%, to $53,526,000 for the year ended June 30, 2004, from
$49,154,000 for
the year ended June 30, 2003. The increase in sales of the Craftmade segment
was due to an increased focus on sales and marketing and new product
introductions, as well as the overall strength of the housing sector of the
U.S. economy. Management anticipates that Craftmades sales will continue to
trend upwardly, in the range of 5% to 10% annually, assuming continued strength
in the housing sector and the overall U.S. economy. 14




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Net sales of the TSI segment increased $7,833,000, or 13.1% to $67,712,000 for
the year ended June 30, 2004 from $59,879,000 for the year ended June 30,
2003. The increase was primarily attributable to the strong performance of
Design Trends portable lamp business, which generated $7,343,000 in
incremental revenue during the period. Management does not anticipate future
growth of the TSI division to continue at the robust rate generated in Fiscal
2004 from existing products sold to existing customers. Future
growth of the TSI division is contingent upon the success of the Companys
ongoing efforts to introduce new products to existing customers and to expand
the business to new customers. Gross
Profit  Gross profit of the Company as a percentage of sales declined to
29.6% of sales compared to 32.5% of sales for the years ended June 30, 2004 and
2003, respectively. Gross profit of the Craftmade segment declined to 39.3% of
net sales for the year ended June 30, 2004 compared to 40.2% for the year ended
June 30, 2003. The decline in the gross margin of Craftmade was primarily due
to price increases from the Companys ceiling fan manufacturer that were not
passed through to customers. The gross margin of the TSI segment declined to
22.0% of sales for the year ended June 30, 2004 compared to 26.1% of sales for
the year ended June 30, 2003. The decline in the gross profit percentage of
TSI was primarily due to a shift in the sales mix with a greater portion of
revenue made of direct shipment sales which carry lower gross margins and lower
SG&A expenses. In addition, the TSI division experienced an increase in
mark-down money and price concessions provided to mass retail customers.
Management anticipates that based on current market conditions, future gross
profit margins for the Company will not differ significantly from gross margins
generated in Fiscal 2004. Selling, General and Administrative Expenses  Total selling, general and
administrative (SG&A) expenses of the Company decreased $20,000 to
$18,580,000 or 15.3% of net sales for the year ended June 30, 2004 from
$18,600,000 or 17.1% of net sales for the year ended June 30, 2003. Total SG&A
expense of the Craftmade segment declined $12,000 to $11,359,000 or 21.2% of
sales compared to $11,371,000 or 23.1% of sales for the year ended June 30,
2003. The decline in SG&A expense as a percent of sales is primarily
attributable to the effect of increased sales leveraging down fixed SG&A
expenses. Total SG&A expenses of the TSI segment decreased $8,000 to
$7,221,000 or 10.7% of sales for the year ended June 30, 2004 from $7,229,000
or 12.1% of sales for the year ended June 30, 2003. The decrease in SG&A
expense as a percentage of sales was partially related to cost
savings derived from the closing of the California office, which
occurred in the second quarter of fiscal 2004, as well as a change in
the sales mix. Management anticipates
that based on current market conditions, future SG&A expenses as a percentage
of sales will not be significantly different from results generated in Fiscal
2004. Interest
Expense  Net interest expense of the Company decreased $119,000 to
$777,000 for the year ended June 30, 2004 from $896,000 for the year ended June
30, 2003. This decrease was primarily the result of a decline in the average
outstanding balance on the Companys lines of credit and its facility note
payable. Management anticipates that in the future, lower outstanding balances
on its lines of credit will offset expected increases in interest rates,
resulting in total interest expense that is not significantly different from
the expense generated in Fiscal 2004. Minority
Interests  As a result of a decline in income generated by the
Companys 50% owned LLCs, minority interests decreased $516,000 to
$3,719,000 for the year ended June 30, 2004 compared to $4,235,000 for the year
ended June 30, 2003. The decline was primarily related to the $2,100,000 sales
allowance provided by PHI to a mass retail customer in connection with the roll
out of its new lamp parts business in the second quarter of fiscal 2004. The
decline was partially offset by increased sales generated in the second half of
fiscal 2004 related to the new business, as well as increased sales of Design
Trends portable lamp business, as previously discussed. Provision
for Income Taxes  The provision for income taxes increased to
$4,540,000 or 28.5% of income for the year ended June 30, 2004,
from $4,158,000
or 27.3% for the year ended June 30, 2003. Fiscal year ended June 30, 2003 compared to fiscal year ended June 30, 2002 Net Sales  Net sales increased $2,983,000 to $109,033,000 for the year ended
June 30, 2003 from $106,050,000 for the year ended June 30, 2002. Sales of the
Craftmade division decreased 1.3% or $642,000, to $49,154,000 from $49,798,000
for the year ended June 30, 2002. The decrease in sales of the Craftmade
division was primarily due to lower unit sales and lower prices on certain
discontinued models of 15




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##### Table of Contents



fans
that were replaced by new models that were
introduced in the January lighting market. Sales of the TSI division
increased 6.4%, or $3,627,000, to $59,879,000 for the year ended
June 30, 2003
from $56,252,000 for the year ended June 30, 2002. The increase in sales of
the TSI division was attributable to an increase in Design Trends portable
lamp business, which generated $3,404,000 in incremental revenue during the
period. Gross Profit  Gross profit increased to 32.5% of sales, or $35,394,000, for
the year ended June 30, 2003 compared to 30.1% of sales, or $31,923,000, for
the year ended June 30, 2002. The gross margin of the Craftmade division
increased to 40.2% of sales for the year ended June 30, 2003 from 39.3% of
sales for the year ended June 30, 2002. The improvement in the gross margin of
the Craftmade division was due primarily to increased sales of higher margin
products. The gross margin of the TSI division improved to 26.1% for the year
ended June 30, 2003 compared to 21.9% of sales, for the year ended June 30,
2002. The improvement in the gross margin of TSI was primarily due to the
successful re-merchandising of the Design Trends portable lamp program, at
which time slower turning and lower margin items were replaced with more
productive inventory. Selling, General and Administrative Expenses  Total selling, general and
administrative (SG&A) expenses of the Company increased $638,000 to
$18,600,000, or 17.1% of net sales, for the year ended June 30, 2003 from
$17,962,000, or 16.9% of net sales, for the year ended June 30, 2002. Total
SG&A expenses of the Craftmade division decreased $168,000 to $11,371,000 or
23.1% of net sales, compared to $11,539,000 or 23.2% of net sales in the
previous year. The Craftmade divisions SG&A expense as a percentage of sales
was relatively unchanged from fiscal 2002 to fiscal 2003. The decline in SG&A
expense in total dollars was primarily related to the decline in sales of the
Craftmade division from fiscal 2002 to fiscal 2003. Total SG&A expenses of
TSI increased $806,000 to $7,229,000 or 12.1% of sales compared to $6,423,000
or 12.5% of net sales, for the year ended June 30, 2002. The increase in
TSIs SG&A expenses in dollars as well as a percentage of sales was primarily
due to an increase in payroll related expenses. Interest Expense  Interest expense declined $376,000 to $896,000 for
the year ended June 30, 2003 from $1,272,000 for the previous year. This
decline was primarily the result of lower average outstanding balances on the
companys lines of credits and its facility note, combined with lower interest
rates in effect during the period. Minority Interests  As a result of an increase in income generated by the
Companys 50% owned LLCs, minority interests increased $1,719,000 to
$4,235,000 for the year ended June 30, 2003 from $2,516,000 for the year ended
June 30, 2002. The increase was due to an increase in sales of Design Trends
portable lamp program which generated $3,404,000 in incremental revenue during
the year, as well as a $1,272,000 increase in sales of PHI for fiscal 2003
compared to the previous year. Provision for Income Taxes  The provision for income taxes increased to
$4,158,000 or 27.3% of income for the year ended June 30, 2003 from $3,435,000
or 28.4% of income for the year ended June 30, 2002. Liquidity and Capital Resources Fiscal year ended June 30, 2004. The Companys cash increased $846,000 from $4,992,000 at June 30, 2003 to
$5,838,000 at June 30, 2004. The Companys operating activities provided cash
of $11,814,000, which was primarily attributable to income from operations
before minority interest. The $195,000 of cash used in investing activities related to additions to
property and equipment, which consisted primarily of warehouse racking, as well
as purchases of office equipment in connection with the relocation of employees
from the California office to the Companys headquarters in Coppell, Texas. Cash used in financing activities of
$10,936,000 was primarily the result of
(i) repurchases of the Companys outstanding common stock of $8,269,000, (ii)
distributions to minority interest members of $5,302,000, and (iii) cash
dividends of $2,123,000, and (iv) principal payments on the Companys notes payable of $1,982,000. These amounts were 16




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partially offset by (i) net advances on the Companys
revolving lines of credit of
$4,125,000, and (ii) proceeds from a note payable of $2,100.000. 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. Based on
current market conditions, management anticipates that future cash flows will
be used primarily to retire existing debt and to repurchase Company
common stock. 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 June 30, 2004, the Company
had repurchased 331,510 shares at
an aggregate cost of $8,269,000 under this program. The average price paid for
shares repurchased during the period was $24.96. At June 30, 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 (Frost), of which $14,577,000 had been
utilized. The Frost line of credit is due on demand; however if no
demand is made, it is scheduled to mature on October 31, 2005.
Management believes that alternative bank financing on acceptable
terms would be available should the Company not be able to renew its
line of credit. Debt covenants of the Frost line of
credit requires the maintenance of a tangible net worth ratio of 2.5
to 1.0. By entering
into the Unconditional Guaranty of the Promissory Note dated as of November 24, 2003 to Prime/Home
Impressions, LLC with Wachovia Bank, NA, the Company violated its negative covenant not to guarantee debts
contained in the Loan
 Agreement dated as of November 6, 2001 with Frost. The Company has obtained a waiver of such violation
from Frost, for the quarters ended December 31, 2003, March 31, 2004
 and for the fiscal year ended June 30, 2004 and for the period ending
September 15, 2005. Nevertheless the amount outstanding under this note at
June 30, 2004, $14,577,000, has been classified as current due to
its terms. Management believes that alternative bank financing on acceptable
terms would be available should the Company not be able to renew its
loan agreement. The
Company was in violation of its negative covenant not to
retire or otherwise acquire any of its capital stock contained in the
Unconditional Guaranty of the Promissory Note dated as of November 24, 2003 to PHI with Wachovia Bank, N.A. The Company has obtained a waiver of such violation from Wachovia Bank,
 N.A. for the quarters ended December 31, 2003; March 31,
2004; and for the fiscal year ended June 30, 2004
 and for the period ending September 15, 2005. Nevertheless the amount outstanding under this note at
June 30, 2004,
 $1,575,000, has been classified as current due to its terms.
Management believes that alternative bank financing on acceptable
terms would be available should the Company not be able to renew its
loan agreement. At
June 30, 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. Management believes that alternative bank financing on
acceptable terms would be available should the Company not be able to
renew its loan agreement. One
of the
Companys 50%-owned LLCs, 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 1, 2004. During fiscal year 2003, PHI
reduced the amount available on its line of credit from $3,000,000 to
its present level. There was an outstanding balance of $1,548,000
on the $2 Million Line of Credit at June 30, 2004. PHI has a $500,000
three-year note payable to Wachovia (the $500,000 Note) maturing on July
29, 2005, of which $195,000 was outstanding at June 30, 2004.
The $500,000
Note bears interest at a rate equal to 1-month LIBOR plus 2.5%. In
addition, on November 24, 2003, 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 1-month LIBOR plus 2.5%. At June 30, 2004, there was a
$1,575,000 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. At June 30, 2004, $3,841,000 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 (Lowes Companies) 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 $6,253,000 at June 30, 2004.
TSIs sales are highly concentrated with Lowes Companies.
Should the revenues generated by TSI from its programs with Lowes Companies 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. 17




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##### Table of Contents



Fiscal year ended June 30, 2003. The
Companys cash increased $3,680,000 from $1,312,000 at June 30, 2002 to
$4,992,000 at June 30, 2003.
The Companys operating activities provided cash of $14,895,000 during the
year. This cash flow was primarily attributable to the Companys income from
operations before minority interest and a reduction in accounts
receivable from trade. Cash used for investing activities of $186,000 was related to additions to
property, plant and equipment, primarily for additional racking installed in
the Companys warehouse facility. Cash used for financing activities of $11,029,000 was primarily the result of
(i) the repurchase of 558,000 shares of the Companys common stock at an
aggregate cost of $7,746,000, (ii) principal payments of $950,000 on the
Companys notes payable (iii) cash dividends of $1,542,000 and (iv) minority
interest distributions of $2,912,000. These amounts were partially offset by
proceeds of $1,798,000 from the Companys lines of credit and $323,000 from
the exercise of employee stock options. Fiscal year ended June 30, 2002 The Companys cash decreased $326,000 from $1,638,000 at June
30, 2001 to $1,312,000 at June 30, 2002. The Companys operating
activities, provided cash of $17,849,000 during the year. This cash
flow was primarily attributable to the Companys Income from
operations before minority interest of $8,676,000 and a reduction in
inventory of $8,127,000. The reduction in inventory was related
primarily to the TSI segment, in which a substantial portion of the
business shifted toward sales of direct shipments rather than
warehouse shipments. Cash used for investing activities of $2,988,000 was primarily
related to (i) capital expenditures of $2,292,000 incurred in
connection with the installation of Design Trends patented lamp
display program in all stores of the Companys largest mass
retail customer and (ii) $617,000 of capital expenditures associated
with the implementation of the Companys logistics and
accounting systems upgrade. Cash used for financing activities of $15,187,000 was primarily the
result of (i) principal payments of $10,396,000 on the Companys
revolving lines of credit, (ii) principal payments of $2,146,000 on
the Companys notes payable (iii) cash dividends of $1,666,000
(iv) minority interest distributions of $1,322,000 and (iv) the
repurchase of 17,000 shares of the Companys common stock at
an aggregate cost of $236,000. These amounts were partially offset by
proceeds of $578,000 from the exercise of employee stock options. 18




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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. Contractual Obligations The
table below, as well as the information contained in Note 4  Revolving Lines of
Credit and Notes Payable and Note 10  Commitments and Contingencies to the Companys consolidated
financial statements, summarizes the Companys various repayment
requirements at June 30, 2004.
The Company expects to meet these obligations with cash flows from existing
operations. Payments
    
    Due by PeriodContractual
    
    
    
    
    
    Less than 1
    
    
    
    
    
    3-5
    
    More than 5Obligations
    
    Total
    
    year
    
    1-3 years
    
    years
    
    yearsLong Term Debt
Obligations
    
    $
    5,611,000
    
    
    $
    2,662,000
    
    
    $
    2,949,000
    
    
    $
    
    
    
    
    Operating Lease
Obligations
    
    $
    438,000
    
    
    $
    188,000
    
    
    $
    234,000
    
    
    $
    16,000
    
    
    
    Total
    
    $
    6,049,000
    
    
    $
    2,850,000
    
    
    $
    3,183,000
    
    
    $
    16,000
    
    
    $
    
 At June 30, 2004, the Company had a $20,000,000 line of credit with The Frost
National Bank (the Craftmade Line of Credit) at an interest rate of prime
(4.00% at June 30, 2004) less .5%, of which $14,577,000 was outstanding. The
line of credit is due on demand; however, if no demand is made, it is scheduled
to mature October 31, 2005. At June 30, 2004, PHI had a $2 Million Line of Credit with Wachovia at an
interest rate equal to the one-month LIBOR plus 2%. At June 30, 2004, the
one-month LIBOR rate was equal to 1.3582%. There was a $1,548,000 outstanding
balance on the line of credit at June 30, 2004. The $2 Million Line of Credit
is due on demand; however, if no demand is made, it is scheduled to mature
October 1, 2004. 19




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Effects of Recent Accounting Pronouncements In
December 2003, the SEC issued Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition,
which supercedes SAB 101, Revenue Recognition in Financial
Statements. SAB 104 rescinds the accounting guidance
contained in SAB 101 specifically related to multiple elements
revenue managements, but leaves the remaining SAB 101 principles
largely unchanged. The adoption of SAB 104 did not have an impact
on Craftmades consolidated results of operations or
financial position. Inflation Generally, inflation has not had, and the Company does not expect it to have, a
material impact upon operating results. However, there can be no assurance that
the Companys business will not be affected by inflation in the future. Related Party
Transactions The Company has a
non-interest bearing note receivable from its chief executive officer
for $50,000. Principal payments on the note are being amortized
monthly, which will result in the note being paid in full in August
2005. TSI leased office space
from a former director of the Company, who was also an executive
officer of the Company. This lease was for five months at $7,500 per month of the fiscal year,
until the office was relocated in November 2003. 20




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information set forth below constitutes a forward looking statement. See
Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations  Cautionary Statement. At June 30, 2004, the Company had a $20,000,000 line of credit with The Frost
National Bank (the Craftmade Line of Credit) at an interest rate of prime
(4.00% at June 30, 2004) less .5%, of which $14,577,000 was outstanding. The
line of credit is due on demand; however, if no demand is made, it is scheduled
to mature October 31, 2005. At June 30, 2004, PHI had a $2 Million Line of Credit with Wachovia at an
interest rate equal to the one-month LIBOR plus 2%. At June 30, 2004, the
one-month LIBOR rate was equal to 1.3582%. There was a $1,548,000 outstanding
balance on the line of credit at June 30, 2004. The $2 Million Line of Credit
is due on demand; however, if no demand is made, it is scheduled to mature
October 1, 2004. PHI
has a $500,000 Note payable to Wachovia maturing on July 29, 2005, of
which $195,000 was outstanding at June 30, 2004. The note bears interest at a
rate equal to the Monthly LIBOR Index plus 2.5%. In addition, on November 24,
2003, PHI entered into the $2.1 million Note with Wachovia 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. At June 30,
2004, there was a $1,575,000 balance outstanding under the $2.1 Million Note,
which is scheduled to mature on March 15, 2005. The short-term nature of each of the Craftmade Line of Credit and the $2
Million Line of Credit, the $500,000 Note and the $2.1 Million Note
(collectively, the PHI Lines of Credit), subjects the
Company to market-risk-associated with adverse changes in interest rates. A sharp rise in
interest rates could materially adversely affect the financial condition and
results of operations of the Company. The Company has not entered into any
instruments to minimize this market risk of adverse changes in interest rates
because the Company believes the cost associated with such instruments would
outweigh the benefits that would be obtained from utilizing such instruments. Under the Craftmade Line of Credit, for each one-percentage point (1%)
incremental increase in the prime rate, the Companys annualized interest
expense would increase by approximately $146,000. 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
$729,000. Under the PHI Lines of Credit, for each one-percentage point (1%) incremental
increase in LIBOR, the Companys annualized interest expense would increase by
approximately $33,000. 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 $166,000. 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 Taiwanese
dollar by one Taiwanese dollar or more, Fanthings prices will be accordingly
adjusted by 2.5%. As of September 1, 2004 one U.S. dollar equaled $33.87
Taiwanese dollars. A sharp appreciation of the Taiwanese dollar relative to the
U.S. dollar could materially adversely affect the financial condition and
results of operations of the Company. The Company has not entered into any
instruments to minimize this market risk of adverse changes in currency rates
because the Company believes the cost associated with such instruments would
outweigh the benefits that would be obtained from utilizing such instruments.
All other purchases of the Company from foreign vendors are denominated in U.S.
dollars and are not subject to adjustment provisions with respect to foreign
currency fluctuations. As a result, the Company does not believe that it is
subject to any material foreign currency exchange risk with respect to such
purchases. During the fiscal year ended June 30, 2004, the Company purchased approximately
$16,649,000 of products from Fanthing. Under the Companys understanding with
Fanthing, each $1 incremental appreciation of the Taiwanese dollar would result
in an estimated annualized net increase in cost of goods sold of approximately
$416,000, based on the Companys purchases during the fiscal year ended June
30, 2004, (on an annualized basis). A $5 incremental appreciation of the
Taiwanese dollar would result in an estimated annualized increase in cost of
goods sold of approximately $2,081,000 based on the Companys purchases during
the fiscal year ended June 30, 2004 (on an annualized basis). A $10 incremental 21




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appreciation of the Taiwanese dollar would result in an increase of
approximately $4,162,000 on an annualized basis, based on the Companys
purchases during the fiscal year ended June 30, 2004 (on an annualized basis).
These amounts are estimates of the financial impact of an appreciation of the
Taiwanese dollar relative to the U.S. dollar and are based on annualizations of
the Companys purchases from Fanthing for the fiscal year ended June 30, 2004.
Consequently, these amounts are not necessarily indicative of the effect of
such changes with respect to an entire year. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data are included under Item
15(a)(1) and 15(a)(2) of this report. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. Not applicable. 
 ITEM 9A. CONTROLS AND PROCEDURES.  The Companys management, with the participation of the
Companys Chief Executive Officer and 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 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 and in the disclosure
controls that is described below under the heading, Change
in Internal Control over Financial Reporting. Change in Internal Control over Financial Reporting The
Company previously disclosed in its Form 10-Q for the quarter
ended March 31, 2004, that in evaluating its disclosure
controls and procedures, management considered reportable
conditions (as defined under standards established by the
American Institute of Certified Public Accountants
(AICPA)) that were identified in a letter dated April
19, 2004, addressed to the Companys Chief Executive
Officer from PricewaterhouseCoopers, LLP (PwC), the
Companys independent registered public
accounting firm, and then communicated to the Companys
Audit Committee. From January 2004 to the present, the Company has been
engaged in extensive remediation efforts with respect to
the reportable conditions mentioned in the April 19, 2004 letter, including engaging an
outside internal control consultant to evaluate, analyze
and document all of the Companys internal controls over
its financial reporting. However, in connection with the
audit of the fiscal year ended June 30, 2004, PwC informed
the Companys Audit Committee that it believes that the
personnel and management of the Company who perform its
accounting and financial reporting functions are 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 represents a material weakness
(as defined under standards established by AICPA) in the
operation of internal control over financial reporting.
With respect to this material weakness, PwC noted the
following as failures in the Companys operation of
internal control: (i) failure of financial reporting
controls in preventing or detecting misstatements of
accounting information that resulted in certain
adjustments to the financial statements; (ii) failure to
perform internal control tasks such as the timely
preparation of account reconciliations; and (iii) failure
to correct internal control deficiencies it previously
identified such as earnings per share computational
errors, audit adjustments, discipline around financial
reporting, depth of financial accounting and reporting
personnel, timely reconciliation of cash accounts, review
and ascertainment of the amount of inventory reserve on a
quarterly basis and the failure to use financial
consolidation software. In this regard, PwC has recommended that the Company
engage personnel with expertise or train existing
personnel in the following areas:  
    
    U.S. GAAP;
    
    financial reporting in accordance with SEC regulations;
    
    requirements of the Public Company Accounting Oversight Board; and
    
    application of technical accounting pronouncements. Management
of the Company has presented to the Companys Audit Committee a plan
to remedy the concerns raised by PwC. This plan is
designed 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.
In addition, the plan will ensure that the personnel
involved in this process have available to them the
relevant information about U.S. GAAP, SEC financial
reporting requirements, and the requirements of the Public
Company Accounting Oversight Board necessary for them to
be able to prepare the Companys financial statements.
Specifically, our plan provides for additional resources
and further training of the Companys accounting team
including:  
    
    the employment of additional staff on the Companys accounting team,
including a new chief
accounting officer;
    
    increasing the level of attendance at targeted U.S.
GAAP and SEC reporting courses by senior
Company finance staff responsible for the preparation of
U.S. GAAP financial reports and SEC
disclosures; and
    
    subscribing 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. The
Company is actively recruiting additional accounting staff and plans to
complete the hiring process during the second fiscal quarter of 2005.
Additionally, the Companys senior accounting staff have already
committed to taking training courses during the next several months and
will continue to evaluate the merits of additional courses as they
become available. The Company will begin receiving additional publications and
updates of SEC, U.S. GAAP and the Public Company Accounting Oversight
Board requirements and will review the adequacy of this additional
information within the next several months to determine whether
additional resources are required. 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 accounting advisers with respect to the
technical requirements applicable to the Companys financial
statements. The
implementation of the initiatives described above 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 initiatives and make adjustments as
and when necessary. As of the date of this report, management of the
Company believes that the
plans outlined above, when completed, 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. 
 ITEM 9B. OTHER INFORMATION. Not applicable. 22




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item is incorporated herein by reference to
our proxy statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the Proxy Statement). 
 ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated herein by reference to
the Proxy Statement. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS. Equity Compensation Plan Information The following table sets forth (a) the number of securities to be issued upon
exercise of outstanding options, (b) the weighted average of exercise price of
such outstanding options, and (c) the number of securities remaining available
for future issuance, under the Companys equity compensation plans. All of the
Companys equity compensation plans have been approved by security holders of
the Company. (c)(a)
    
    (b)
    
    Number of Securities RemainingNumber of Securities to be
    
    Weighted-Average
    
    Available for Future Issuance UnderIssued Upon Exercise of
    
    Exercise Price of
    
    Equity Compensation PlansOutstanding Options,
    
    Outstanding Options
    
    (Excluding SecuritiesPlan Category
    
    Warrants and Rights
    
    Warrants and Rights
    
    Reflected in Column (a))1999 Stock Option Plan
    
    
    52,000
    
    
    
    6.75
    
    
    
    100,0002000 Non-Employee
Director Plan
    
    
    22,500
    
    
    
    13.67
    
    
    
    52,500Total
    
    
    74,500
    
    
    
    7.45
    
    
    
    152,500
 The remaining information required by this Item is incorporated herein by
reference to the Proxy Statement. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated herein by reference to
the Proxy Statement. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this Item is incorporated herein by reference to
the Proxy Statement. 23




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.  (a)
    
    The following documents are filed as a part of this report:  1.
    
    Financial Statements  The financial statements listed in the
Index to Consolidated Financial Statements described at F-1.2.
    
    Financial Statement Schedule  The financial statement schedule
listed in the Index to Consolidated Financial Statements described
at F-1.3.
    
    Exhibits  Refer to (c) below.  (b)
    
    Reports on Form 8-KNone.  (c)
    
    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.10.1 -
    
    Earnest Money contract and Design/Build Agreement dated
May 8, 1995, between MEPC Quorum Properties II, Inc. and Craftmade
International, Inc. (including exhibits), previously filed as an
exhibit in Form 10Q for the quarter ended December 31, 1995, and
herein incorporated by reference.10.2 -
    
    Assignment of Rents and Leases dated December 21, 1995,
between Craftmade International, Inc. and Allianz Life Insurance
Company of North America (including exhibits), previously filed as
an exhibit in Form 10Q for the quarter ended December 31, 1995, and
herein incorporated by reference.10.3 -
    
    Deed of Trust, Mortgage and Security Agreement made by
Craftmade International, Inc., dated December 21, 1995, to Patrick
M. Arnold, as trustee for the benefit of Allianz Life Insurance
Company of North America (including exhibits), previously filed as
an exhibit in Form 10Q for the quarter ended December 31, 1995, and
herein incorporated by reference.10.4 -
    
    Second Amended and Restated Credit Agreement dated
November 14, 1995, among
 24




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##### Table of Contents



Craftmade International, Inc., Nations Bank
of Texas, N.A., as Agent and the Lenders defined therein (including
exhibits), previously filed as an exhibit in Form 10Q for the
quarter ended December 31, 1995, and herein incorporated by
reference.**10.5 -
    
    Lease Agreement dated November 30, 1995, between Craftmade
International, Inc. and TSI Prime, Inc., previously filed as an
exhibit in Form 10Q for the quarter ended December 31, 1995, and
herein incorporated by reference.10.6 -
    
    Revolving credit facility with Texas Commerce Bank,
previously filed as an exhibit in Form 10K for the year ended June
30, 1996, and herein incorporated by reference.10.7 -
    
    Agreement and Plan of Merger, dated as of July 1, 1998, by
and among Craftmade International, Inc., Trade Source International,
Inc. a Delaware corporation, Neall and Leslie Humphrey, John DeBlois,
the Wiley Family Trust, James Bezzerides, the Bezzco Inc. Employee
Retirement Trust and Trade Source International, Inc, a California
corporation, filed as Exhibit 2.1 to the Companys Current Report on
Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein
incorporated by reference.10.8 -
    
    Voting Agreement, dated July 1, 1998, by and among James R.
Ridings, Neall Humphrey and John DeBlois, filed as Exhibit 2.1 to the
Companys Current Report on Form 8-K filed July 15, 1998 (File No.
33-33594-FW) and herein incorporated by reference.10.9 -
    
    Third Amendment to Credit Agreement, dated July 1, 1998, by
and among Craftmade International, Inc., a Delaware corporation,
Trade Source International, Inc., a Delaware corporation, Chase Bank
of Texas, National Association (formerly named Texas Commerce Bank,
National Association) and Frost National Bank (formerly named Overton
Bank and Trust), filed as Exhibit 2.1 to the Companys Current Report
on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein
incorporated by reference.10.10 -
    
    Consent to Merger by Chase Bank of Texas, National
Association and Frost National Bank, filed as Exhibit 2.1 to the
Companys Current Report on Form 8-K filed July 15, 1998 (File No.
33-33594-FW) and herein incorporated by reference.** 10.11 -
    
    Employment Agreement, dated July 1, 1998, by and among
Craftmade International, Inc., Trade Source International, Inc., a
Delaware corporation and Neall Humphrey, filed as Exhibit 2.1 to the
Companys Current Report on Form 8-K filed July 15, 1998 (File No.
33-33594-FW) and herein incorporated by reference.** 10.12 -
    
    Employment Agreement, dated July 1, 1998, by and among
Craftmade International, Inc., Trade Source International, Inc., a
Delaware corporation and Leslie Humphrey, filed as Exhibit 2.1 to the
Companys Current Report on Form 8-K filed July 15, 1998 (File No.
33-33594-FW) and herein incorporated by reference.** 10.13 -
    
    Employment Agreement, dated July 1, 1998, by and among
Craftmade International, Inc., Trade Source International, Inc., a
Delaware corporation and John DeBlois, filed as Exhibit 2.1 to the
Companys Current Report on Form 8-K filed July 15, 1998 (File No.
33-33594-FW) and herein incorporated by reference.10.14 -
    
    Registration Rights Agreement, dated July 1, 1998, by and
among Craftmade International, Inc., Neall and Leslie Humphrey and
John DeBlois, filed as Exhibit 2.1 to the Companys Current Report on
Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein
incorporated by reference.10.15 -
    
    ISDA Master Agreement and Schedule, dated June 17, 1999, by
and among Chase Bank of Texas, National Association, Craftmade
International, Inc., Durocraft International, Inc. and
 25




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##### Table of Contents



Trade Source
International, Inc., filed as Exhibit 10.15 to the Companys
Quarterly Report on Form 10Q filed November 12, 1999 (File No.
000-26667) and herein incorporated by reference.10.16 -
    
    Confirmation under ISDA Master Agreement, dated July 23,
1999, from Chase Bank of Texas, National Association to Craftmade
International, Inc., filed as Exhibit 10.16 to the Companys
Quarterly Report on Form 10Q filed November 12, 1999 (File No.
000-26667) and herein incorporated by reference.10.17 -
    
    Fourth Amendment to Credit Agreement, dated April 2, 1999,
by and among Craftmade International, Inc., a Delaware corporation,
Durocraft International, Inc. a Texas corporation, Trade Source
International, a Delaware corporation, Chase Bank of Texas, National
Association and Frost National Bank, filed as Exhibit 10.17 to the
Companys Quarterly Report on Form 10-Q filed May 15, 2000 (File No.
000-26667) and herein incorporated by reference.10.18 -
    
    Letter Agreement Concerning Fifth Amendment to Credit
Agreement, dated August 11, 1999, from Chase Bank of Texas, N.A. and
Frost National Bank to Craftmade International, Inc., Durocraft
International Inc., Trade Source International, Inc., and C/D/R
Incorporated, filed as Exhibit 10.18 to the Companys Quarterly
Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and
herein incorporated by reference.10.19 -
    
    Sixth Amendment to Credit Agreement, dated November 12,
1999, by and among Craftmade International, Inc., a Delaware
corporation, Durocraft International, Inc., a Texas corporation,
Trade Source International, Inc., a Delaware corporation, C/D/R
Incorporated, a Delaware corporation, Chase Bank of Texas, National
Association and Frost National Bank, filed as Exhibit 10.19 to the
Companys Quarterly Report on Form 10-Q filed May 15, 2000 (File No.
000-26667) and herein incorporated by reference.** 10.20 -
    
    Employment Agreement dated October 25, 1999, between Kathy
Oher and Craftmade International, Inc., filed as Exhibit 10.20 to the
Companys Annual Report on Form 10-K filed September 26, 2000 (File No.
000-26667) and herein incorporated by reference.10.21 -
    
    Seventh Amendment to Credit Agreement dated May 12, 2000, by
and among Craftmade International, Inc., a Delaware corporation,
Durocraft International, Inc., a Texas corporation, Trade Source
International, Inc., a Delaware corporation, C/D/R Incorporated, a
Delaware corporation, Chase Bank of Texas, National Association and
Frost National Bank, filed as Exhibit 10.21 to the Companys Annual
Report on Form 10-K filed September 26, 2000 (File No. 000-26667) and
herein incorporated by reference.** 10.22 -
    
    Craftmade International, Inc. 1999 Stock Option Plan, filed
as Exhibit A to the Companys Proxy Statement on Schedule 14A filed
October 4, 2000 (File No. 000-26667) and herein incorporated by
reference.** 10.23 -
    
    Craftmade International, Inc. 2000 Non-Employee Director
Stock Plan, filed as Exhibit B to the Companys Proxy Statement on
Schedule 14A filed October 4, 2000 (File No. 000-26667) and herein
incorporated by reference.10.24 -
    
    Eighth Amendment to Credit Agreement dated February 12,
2001, by and among Craftmade International, Inc., a Delaware
corporation, Durocraft International, Inc., a Texas corporation,
Trade Source International, Inc., a Delaware corporation, Design
Trends, LLC, a Delaware limited liability company, C/D/R
Incorporated, a Delaware corporation, The Chase Manhattan Bank and
The Frost National Bank, filed as Exhibit 10.24 to the Companys
Quarterly Report on Form 10-Q filed May 14, 2001 (File No. 000-26667)
and herein incorporated by reference.
 26




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##### Table of Contents



10.25 -
    
    Ninth Amendment to Credit Agreement dated June 29, 2001, by
and among Craftmade International, Inc., a Delaware corporation,
Durocraft International, Inc., a Texas corporation, Trade Source
International, Inc., a Delaware corporation, Design Trends, LLC, a
Delaware limited liability company, C/D/R Incorporated, a Delaware
corporation, The Chase Manhattan Bank and The Frost National Bank,
filed as Exhibit 10.25 to the Companys Annual Report on Form 10-K
filed September 26, 2001 (File No. 000-26667) and herein incorporated
by reference.10.26 -
    
    Loan Agreement dated November 6, 2001, by and between
Craftmade International, Inc., a Delaware corporation, and The Frost
National Bank, a national banking association, filed as Exhibit 10.26
to the Companys quarterly Report on Form 10-Q filed February 14,
2002 (File No. 000-26667) and herein incorporated by reference.10.27 -
    
    Termination Agreement dated November 16, 2001, by and
between Craftmade International, Inc., a Delaware corporation, and JP Morgan Chase Bank, filed as
Exhibit 10.27 to the Companys Quarterly Report on Form 10-Q filed
February 14, 2002 (File No. 000-26667) and herein incorporated by
reference.10.28 -
    
    Modification, Renewal and Extension
Agreement dated October 27, 2003, by and between The Frost
National Bank, a national banking association, and Craftmade
International, Inc., a Delaware corporation, filed as Exhibit 10.27
to the Company's Quarterly Report on Form 10-Q filed
November 14, 2003 (File No. 000-26667) and herein
incorporated by reference.10.29 -
    
    Note and Security Agreement dated
November 24, 2003 by Prime/Home Impressions LLC, a North Carolina
limited liability company, to Wachovia Bank, N.A., with Security
Agreement of Prime/Home Impressions, LLC, and Guaranty Agreement of
Craftmade International, Inc., filed as Exhibit 10.28 to the
Company's Quarterly Report on Form 10-Q filed February 17, 2004
(File No. 000-26667) and herein incorporated by reference.10.30 -
    
    Agreement regarding Lamps Plus,
Inc. Litigation, entered into on December 31, 2003 and effective
February 21, 2003, by and among Craftmade International, Inc., a
Delaware corporation, Design Trends, LLC, a Delaware limited
liability company, Dolan Northwest, LLC, an Oregon limited liability
company and Patrick S. Dolan, filed as Exhibit 10.29 to the Company's
Quarterly Report on Form 10-Q filed February 17, 2004 (File
No. 000-26667) and herein incorporated by reference.*10.31 -
    
    Business Loan Agreement dated
June 14, 2004, by and between The Frost National Bank, a
national banking association, and Design Trends, LLC, a Delaware
limited liability company.*10.32 -
    
    Second Amendment to Loan Agreement
dated June 14, 2004, by and between The Frost National Bank, a
national banking association, and Craftmade International, Inc., a
Delaware corporation.*     21 -
    
    Subsidiaries of the Registrant.*  31.1 -
    
    Certification of James R. Ridings, Chairman of the Board,
President and Chief Executive Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*  31.2 -
    
    Certification of Kathleen B. Oher, Vice President and Chief
Financial Officer of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*  32.1 -
    
    Certification of James R. Ridings, Chairman of the Board,
President and Chief Executive Officer of the Company, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*  32.2 -
    
    Certification of Kathleen B. Oher, Vice President and Chief
Financial Officer of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
  (d)
    
    All other financial statement schedules have been omitted since they
are either not required, not applicable or the required information is
shown in the financial statements or related notes.    ** A management contract or compensatory plan or arrangement required to
be filed as an exhibit to this form. 27




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on
September 24,
2004. CRAFTMADE INTERNATIONAL, INC. By:
    
    /s/ James R. RidingsJames R. Ridings, Chairman of the Board,President and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Signatures
    
    Capacity
    
    Date/s/
James R. Ridings
    
    Chairman of the Board, President,
    
    September 24, 2004Chief Executive Officer andJames
R. Ridings
    
    Director (Principal ExecutiveOfficer)/s/ Clifford Crimmings
    
    Vice President of Marketing and
    
    September 24, 2004DirectorClifford Crimmings/s/
Kathleen B. Oher
    
    Chief Financial Officer, Vice
    
    September 24, 2004President and DirectorKathleen
B. Oher
    
    (Principal Financial andAccounting Officer)/s/ John DeBlois
    
    Executive Vice President of Trade
    
    September 24, 2004Source International, Inc.John DeBlois
    
    and Director/s/ A. Paul Knuckley
    
    Director
    
    September 24, 2004A. Paul Knuckley/s/ Jerry E. Kimmel
    
    Director
    
    September 24, 2004Jerry E. Kimmel/s/ Lary Snodgrass
    
    Director
    
    September 24, 2004Lary Snodgrass/s/ Dale Griggs
    
    Director
    
    September 24, 2004Dale Griggs/s/ R. Don Morris
    
    Director
    
    September 24, 2004R. Don Morris/s/ William E. Bucek
    
    Director
    
    September 24, 2004William E. Bucek
 28




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Craftmade International, Inc. Consolidated Financial StatementsReport of
Independent Registered Public Accounting Firm
    
    F-2Consolidated Statements of Income
    
    F-3Consolidated Balance Sheets
    
    F-4Consolidated Statements of Cash Flows
    
    F-6Consolidated Statements of Changes in Stockholders Equity
    
    F-7Notes to Consolidated Financial Statements
    
    F-8Financial Statement Schedule:II  Valuation and Qualifying Accounts
    
    F-19
 All other financial statement schedules have been omitted since they are either
not required, not applicable, or the required information is shown in the
financial statements or related notes. F-1




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##### Table of Contents



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders     of
Craftmade International, Inc. In
our opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all
material respects, the financial position of Craftmade International, Inc. and
its subsidiaries (the Company) at June 30, 2004 and 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2004 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements
and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our
audits of these statements and financial statement schedule in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. As
noted in Note 3 to the consolidated financial statements,
the Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 46R, effective January 1, 2004. PRICEWATERHOUSECOOPERS LLP  Fort Worth, Texas
September 13, 2004,
except for Note 10, as to which
the date is September 24, 2004 F-2




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##### Table of Contents



CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDEDJune 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2002(See Note 3)
    
    (See Note 3)(In thousands except per share data)Net sales
    
    $
    121,238
    
    
    $
    109,033
    
    
    $
    106,050Cost of
goods sold
    
    
    85,328
    
    
    
    73,639
    
    
    
    74,127Gross profit
    
    
    35,910
    
    
    
    35,394
    
    
    
    31,923Selling, general and
administrative expenses
    
    
    18,580
    
    
    
    18,600
    
    
    
    17,962Interest expense
    
    
    777
    
    
    
    896
    
    
    
    1,272Depreciation
    
    
    648
    
    
    
    659
    
    
    
    578Total expenses
    
    
    20,005
    
    
    
    20,155
    
    
    
    19,812Income before income taxes
and minority interest
    
    
    15,905
    
    
    
    15,239
    
    
    
    12,111Provision for income taxes
    
    
    4,540
    
    
    
    4,158
    
    
    
    3,43511,365
    
    
    
    11,081
    
    
    
    8,676Minority interest
    
    
    (3,719
    )
    
    
    (4,235
    )
    
    
    (2,516
    )Net income
    
    $
    7,646
    
    
    
    6,846
    
    
    
    6,160Basic earnings per common share
    
    $
    1.43
    
    
    $
    1.24
    
    
    $
    1.04Diluted earnings per common share
    
    $
    1.42
    
    
    $
    1.23
    
    
    $
    1.03Cash dividends declared
per common share
    
    $
    0.40
    
    
    $
    0.28
    
    
    $
    0.28
 SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS F-3




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##### Table of Contents



CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ASSETS June 30,
    
    June 30,2004
    
    2003(See Note 3)(In thousands except share data)Current assets:Cash
    
    $
    5,838
    
    
    $
    4,992Accounts receivable  net of
allowance for doubtful accounts of
$150 and $150, respectively
    
    
    19,242
    
    
    
    16,582Inventories
 net
of allowance for obsolescence of $1,171 and $1,641, respectively
    
    
    15,172
    
    
    
    13,124Deferred income taxes
    
    
    9
    
    
    
    435Prepaid expenses and other
current assets
    
    
    1,193
    
    
    
    671Total current assets
    
    
    41,454
    
    
    
    35,804Property and equipment, netLand
    
    
    1,535
    
    
    
    1,535Building
    
    
    7,784
    
    
    
    7,784Office furniture and equipment
    
    
    9,013
    
    
    
    8,818Leasehold improvements
    
    
    279
    
    
    
    27918,611
    
    
    
    18,416Less: accumulated depreciation
    
    
    (9,626
    )
    
    
    (7,524
    )Total property and equipment, net
    
    
    8,985
    
    
    
    10,892Goodwill, net of accumulated
amortization of $1,204 and $1,204 respectively
    
    
    4,735
    
    
    
    4,735Other assets
    
    
    80
    
    
    
    12Total other assets
    
    
    4,815
    
    
    
    4,747Total assets
    
    $
    55,254
    
    
    $
    51,443
 SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS F-4




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##### Table of Contents



CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS EQUITY

June 30,
    
    June 30,2004
    
    2003(In thousands except share data)(See Note 3)Current liabilities:Notes payable - current
    
    $
    2,662
    
    
    $
    976Revolving lines of credit
    
    
    16,125
    
    
    
    12,000Accounts payable
    
    
    6,186
    
    
    
    4,486Commissions payable
    
    
    289
    
    
    
    287Income taxes payable
    
    
    1,112
    
    
    
    607Accrued customer allowances
    
    
    4,320
    
    
    
    3,058Other accrued expenses
    
    
    1,074
    
    
    
    915Total current liabilities
    
    
    31,768
    
    
    
    22,329Other non-current liabilities:Notes payable - long term
    
    
    2,949
    
    
    
    4,517Deferred income taxes
    
    
    214
    
    
    
    492Total liabilities
    
    
    34,931
    
    
    
    27,338Minority interests
    
    
    1,984
    
    
    
    3,567Commitments
and contingencies (Note 10)Stockholders equity:Series A cumulative, convertible
callable preferred stock, $1.00
par value, 2,000,000 shares
authorized; 32,000 shares issued
    
    
    32
    
    
    
    32Common stock, $.01 par value,
15,000,000 shares authorized, 9,465,535
and 9,425,535 shares issued, respectively
    
    
    95
    
    
    
    94Additional paid-in capital
    
    
    14,098
    
    
    
    13,584Unearned deferred compensation
    
    
    (11
    )
    
    
    (43
    )Retained earnings
    
    
    41,207
    
    
    
    35,684Less:
treasury stock, 4,336,587 and
4,004,277 common shares at cost,
and 32,000 preferred shares at cost
    
    
    (37,082
    )
    
    
    (28,813
    )Total stockholders equity
    
    
    18,339
    
    
    
    20,538Total liabilities and stockholders equity
    
    $
    55,254
    
    
    $
    51,443


SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

F-5



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##### Table of Contents



CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30,2004
    
    2003
    
    2002(In thousands)(See Note 3)
    
    (See Note 3)Cash flows from operating activities:Net income
    
    $
    7,646
    
    
    $
    6,846
    
    
    $
    6,160Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation
    
    
    2,102
    
    
    
    2,295
    
    
    
    2,128Provision for bad debts
    
    
    69
    
    
    
    108
    
    
    
    237Stock compensation expense
    
    
    33
    
    
    
    33
    
    
    
    33Deferred income taxes
    
    
    147
    
    
    
    802
    
    
    
    (227
    )Minority Interest
    
    
    3,719
    
    
    
    4,235
    
    
    
    2,516Change in assets and liabilitiesproviding (using) cash:Accounts receivable
    
    
    (2,728
    )
    
    
    4,741
    
    
    
    (2,454
    )Inventories
    
    
    (2,046
    )
    
    
    (1,799
    )
    
    
    8,127Prepaid expenses and other current assets
    
    
    (590
    )
    
    
    65
    
    
    
    442Accounts and commissions payable
    
    
    1,535
    
    
    
    (608
    )
    
    
    (1,650
    )Income taxes payable
    
    
    505
    
    
    
    (250
    )
    
    
    (77
    )Accrued expenses
    
    
    1,422
    
    
    
    (1,573
    )
    
    
    2,614Minority
interest payable
    
    
    (153
    )
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    11,977
    
    
    
    14,895
    
    
    
    17,849Cash flows from investing activities:Additions to property and equipment
    
    
    (195
    )
    
    
    (186
    )
    
    
    (2,988
    )Net cash used in investing activities
    
    
    (195
    )
    
    
    (186
    )
    
    
    (2,988
    )Cash flows from financing activities:Proceeds
from notes payable
    
    
    2,100
    
    
    
    
    
    
    
    Principal
payments on notes payable
    
    
    (1,982
    )
    
    
    (950
    )
    
    
    (2,146
    )Net proceeds from (repayments on)
lines of credit
    
    
    4,125
    
    
    
    1,798
    
    
    
    (10,396
    )Treasury stock purchases
    
    
    (8,269
    )
    
    
    (7,746
    )
    
    
    (235
    )Distributions to minority interest members
    
    
    (5,302
    )
    
    
    (2,912
    )
    
    
    (1,322
    )Cash dividends
    
    
    (2,123
    )
    
    
    (1,542
    )
    
    
    (1,666
    )Proceeds from exercise of employee
stock options
    
    
    514
    
    
    
    323
    
    
    
    578Net cash used in financing activities
    
    
    (10,936
    )
    
    
    (11,029
    )
    
    
    (15,187
    )Net increase (decrease) in cash
    
    
    846
    
    
    
    3,680
    
    
    
    (326
    )Cash at beginning of year
    
    
    4,992
    
    
    
    1,312
    
    
    
    1,638Cash at end of year
    
    $
    5,838
    
    
    $
    4,992
    
    
    $
    1,312
 Supplemental disclosures
of cash flow information: Cash paid during the year for:Interest
    
    $
    777
    
    
    $
    896
    
    
    $
    1,272Income taxes
    
    $
    3,752
    
    
    $
    3,435
    
    
    $
    2,926
 SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS F-6




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##### Table of Contents



CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEAR ENDED JUNE 30, 2004 SERIES A
    
    ADDITIONAL
    
    UNEARNEDPREFERRED
    
    PAID-IN
    
    DEFERREDCOMMON STOCK
    
    STOCK
    
    CAPITAL
    
    COMPENSATION(In thousands)
    
    Shares
    
    AmountBalance as of June 30, 2001
    
    
    9,327
    
    
    $
    93
    
    
    
    32
    
    
    $
    12,683
    
    
    $
    (108
    )Comprehensive income:Net income for the twelve
months ended June 30, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Termination of derivative
financial instrument
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeDeferred compensation earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32Treasury stock purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of employee stock options
    
    
    64
    
    
    
    1
    
    
    
    
    
    
    
    578
    
    
    
    Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of June 30, 2002
    
    
    9,391
    
    
    
    94
    
    
    
    32
    
    
    
    13,261
    
    
    
    (76
    )Comprehensive income:Net income for the twelve
months ended June 30, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeDeferred compensation earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Treasury stock purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of employee stock options
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    323
    
    
    
    Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of June 30, 2003
    
    
    9,426
    
    
    
    94
    
    
    
    32
    
    
    
    13,584
    
    
    
    (43
    )Comprehensive income:Net income for the twelve
months ended June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeDeferred compensation earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32Treasury stock purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of employee stock options
    
    
    40
    
    
    
    1
    
    
    
    
    
    
    
    514
    
    
    
    Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of June 30, 2004
    
    
    9,466
    
    
    $
    95
    
    
    
    32
    
    
    $
    14,098
    
    
    $
    (11
    )
 ACCUMULATEDOTHERRETAINED
    
    COMPREHENSIVEEARNINGS
    
    INCOME
    
    TREASURY STOCK(In thousands)
    
    
    
    
    
    
    
    
    
    Shares
    
    Amount
    
    TotalBalance as of June 30, 2001
    
    $
    25,886
    
    
    $
    28
    
    
    
    3,461
    
    
    $
    (20,832
    )
    
    $
    17,782Comprehensive income:Net income for the twelve
months ended June 30, 2002
    
    
    6,160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,160Termination of derivative
financial instrument
    
    
    0
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (28
    )Total comprehensive income
    
    
    6,160
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    6,132Deferred compensation earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32Treasury stock purchases
    
    
    0
    
    
    
    
    
    
    
    17
    
    
    
    (235
    )
    
    
    (235
    )Exercise of employee stock options
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    579Cash dividends
    
    
    (1,666
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,666
    )Balance as of June 30, 2002
    
    
    30,380
    
    
    
    
    
    
    
    3,478
    
    
    
    (21,067
    )
    
    
    22,624Comprehensive income:Net income for the twelve
months ended June 30, 2003
    
    
    6,846
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,846Total comprehensive income
    
    
    6,846
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,846Deferred compensation earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Treasury stock purchases
    
    
    
    
    
    
    
    
    
    
    558
    
    
    
    (7,746
    )
    
    
    (7,746
    )Exercise of employee stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    323Cash dividends
    
    
    (1,542
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,542
    )Balance as of June 30, 2003
    
    
    35,684
    
    
    
    
    
    
    
    4,036
    
    
    
    (28,813
    )
    
    
    20,538Comprehensive income:Net income for the twelve
months ended June 30, 2004
    
    
    7,646
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,646Total comprehensive income
    
    
    7,646
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,646Deferred compensation earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32Treasury stock purchases
    
    
    
    
    
    
    
    
    
    
    332
    
    
    
    (8,269
    )
    
    
    (8,269
    )Exercise of employee stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    515Cash dividends
    
    
    (2,123
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,123
    )Balance as of June 30, 2004
    
    $
    41,207
    
    
    
    
    
    
    
    4,368
    
    
    $
    (37,082
    )
    
    $
    18,339
 SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS F-7




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##### Table of Contents



CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY Craftmade International, Inc., a Delaware corporation, is organized into
two operating segments: Craftmade International, Inc. (Craftmade) and
Trade Source International, Inc. (TSI). Craftmade is principally
engaged in the design, distribution and marketing of ceiling fans, light
kits, outdoor lighting, bathstrip lighting and related accessories to a
nationwide network of lighting showrooms and electrical wholesalers
specializing in sales to the remodeling, new home construction and
replacement markets. TSI, a wholly-owned subsidiary acquired July 1,
1998, and its two 50% owned limited liability companies, Prime/Home Impressions, LLC (PHI)
and Design Trends, LLC (Design Trends), are principally engaged in the
design, distribution and marketing of outdoor and indoor lighting,
selected ceiling fans and various fan accessories to mass merchandisers.
Craftmade, TSI, their wholly-owned subsidiaries and 50% owned limited
liability companies are collectively referred to as the Company. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation -The Companys consolidated financial statements
include the accounts of all wholly-owned subsidiaries and the
accounts of two variable interest entities, PHI and Design Trends, in
which the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated. The
functional currency of the Companys foreign subsidiaries is the United
States dollar. Accounts receivable -Accounts receivable balances represent customer trade receivables
generated from the Companys operations. To reduce the potential
for credit risk, the Company evaluates the collectibility of customer
balances based on a combination of factors but does not generally
require collateral. The Company regularly analyzes
significant customer balances, and, when it becomes evident a specific
customer will be unable to meet its financial obligations to the
Company, such as in the case of bankruptcy filings or deterioration
in the customers operating results or financial position, a
specific allowance for doubtful account is recorded to reduce the
related receivable to the amount that is believed reasonably
collectible. The Company also records allowances for doubtful
accounts for all other customers based on a variety of factors
including the length of time the receivables are past due, the
financial health of the customer and historical experiences. If
circumstances related to specific customers change, estimates of the
recoverability of receivables could be further adjusted. Receivables
are pledged under the Companys borrowing arrangements. Concentration of credit risk -Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
trade receivables. Substantially all of Craftmades customers are
lighting showrooms; however, credit risk is limited due to the large
number of customers and their dispersion across many different geographic
locations. As of June 30, 2004, Craftmade had no significant
concentration of credit risk. As part of its ongoing control procedures,
TSI monitors the creditworthiness of its customers thereby mitigating the
effect of its concentration of credit risk. All of TSIs sales are to
mass merchandisers with two customers comprising the most significant
portion as follows: Lowes Companies
    
    WalmartFiscal
    
    Percent of
    
    Percent of
    
    Percent of
    
    Percent ofYear
    
    TSIs Sales
    
    Consolidated Sales
    
    TSIs Sales
    
    Consolidated Sales2004
    
    
    75
    %
    
    
    42
    %
    
    
    15
    %
    
    
    8
    %2003
    
    
    70
    %
    
    
    39
    %
    
    
    17
    %
    
    
    9
    %2002
    
    
    70
    %
    
    
    37
    %
    
    
    18
    %
    
    
    10
    %
 Inventories -The Companys inventories are primarily comprised of finished goods and are
recorded at the lower of cost or market using the average cost method. The
Company provides estimated inventory allowances for excess, slow-moving and
obsolete inventory as well as inventory whose carrying value is in excess of
net realizable value. These reserves are based on current assessments about
future demands, market conditions and related management initiatives. If market
conditions and actual demands are less favorable than those projected by
management, additional inventory write-downs may be required. F-8




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##### Table of Contents



Deferred financing costs - Deferred financing costs, consisting of fees and other expenses associated with debt financing,
are amortized over the term of the related debt using the
straight-line method, which approximates the effective interest
method. Property and equipment -Property and equipment is recorded at cost.
Depreciation is determined using the straight-line method over the
estimated useful lives of the property and equipment, as follows: Building
    
    40 yearsOffice
furniture and equipment
    
    3 to 7 years
 Leasehold improvements are amortized over the life of the lease or its
useful life, whichever is shorter. Depreciation expense for the years ended June 30, 2004,
2003 and 2002 approximated $2,102,000, $2,295,000 and
$2,218,000, respectively. Depreciation expense of $1,454,000, $1,636,000 and $1,640,000
was recorded as a reduction of revenue related to display equipment in one of the
Companys customers retail stores. Maintenance and repairs are charged to expense as incurred; renewals and
betterments are charged to appropriate property or equipment accounts. Upon
sale or retirement of depreciable assets, the cost and related accumulated
depreciation is removed from the accounts, and the resulting gain or loss is
included in the results of operations in the period of the sale or
retirement. Impairment of long-lived assets - The Company reviews potential impairments
of long-lived assets and certain identifiable intangibles on an exception
basis when there is evidence that events or changes in circumstances have
made recovery of an assets carrying value unlikely. An impairment loss is
recognized if the sum of the expected future cash flows, undiscounted and
before interest, from the use of the asset is less than the net book value
of the asset. Generally, the amount of the impairment loss is measured as
the difference between the net book value of the assets and the estimated
fair value. Goodwill - Goodwill relates to Craftmades acquisition of TSI in fiscal
1999. The Company assesses the carrying values of goodwill annually or
when circumstances dictate that the carrying value might be impaired. The
method for determining if impairment has occurred requires estimates of future
cash flows and the Companys weighted average cost of capital. In the event
that an impairment is determined to have occurred, the Company will reduce the
carrying value of the asset in that period. Product warranties -
Provisions for estimated expenses related to product warranties are
made at the time products are sold. These estimates are established
using historical information on the nature, frequency, and average
cost of warranty claims. Fiscal
        
        Fiscal
        
        FiscalWarranty Reserve:
        
        2004
        
        2003
        
        2002Beginning of year
balance
    
    $
    139
    
    
    $
    
    
    
    $
    Provision for
estimated expenses
    
    
    1,764
    
    
    
    1,748
    
    
    
    1,941Warranty claims paid
    
    
    (1,673
    )
    
    
    (1,609
    )
    
    
    (1,941
    )End of year balance
    
    $
    230
    
    
    $
    139
    
    
    $
    
 Income taxes -The Company accounts for income taxes under an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the Companys financial statements or tax returns. In
estimating future tax consequences, all expected future events other than
enactments of changes in the tax law or rates are considered. Deferred
income taxes have been provided on unremitted earnings from foreign
investees. The Company reviews its deferred tax assets for ultimate
realization and will record a valuation allowance to reduce the deferred tax
asset if it is more likely than not that some portion, or all, of these
deferred tax assets will not be realized. TSIs 50% owned LLCs operate in the form of partnerships
for tax purposes and, consequently, do not file federal income tax returns.
Accordingly, the Company recognizes its share of their income and the
related tax effects on its provision for income taxes. 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 vs. 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. In addition to various
incentive programs, from time to time the Company is required to
provide mark-down funds to certain of its 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. Advertising cost -The Companys advertising expenditures consist primarily
of print advertising programs, and are expensed as incurred or used.
Advertising expense for the years ended June 30, 2004, 2003 and 2002, was
$1,154,000, $1,299,000 and $1,326,000, respectively. Prepaid advertising
costs consisting of current catalogs on hand at June 30, 2004 and 2003 were
$339,000 and $471,000, respectively and are expensed in relation to use. Research and
development -Research, development and
engineering expenditures for the creation and application of new
products and processes were approximately $293,000, $167,000 and
$219,000 for the
years ended June 30, 2004, 2003 and 2002, respectively. F-9




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##### Table of Contents



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 below (in thousands, except per
share amounts): Fiscal 2004
    
    Fiscal 2003
    
    Fiscal 2002Net income, as reported
    
    $
    7,646
    
    
    $
    6,846
    
    
    $
    6,160Net income, pro forma
    
    
    7,508
    
    
    
    6,689
    
    
    
    6,021Basic earnings per common
share, as reported
    
    
    1.43
    
    
    
    1.24
    
    
    
    1.04Basic
earnings per common share, pro forma
    
    
    1.41
    
    
    
    1.21
    
    
    
    1.01Diluted earnings per common
share, as reported
    
    
    1.42
    
    
    
    1.23
    
    
    
    1.03Diluted earnings per common
share, pro forma
    
    
    1.39
    
    
    
    1.20
    
    
    
    1.00
 The fair value of each option grant is calculated on the date of grant using
the Black-Scholes option pricing model based upon the following
weighted-average assumptions: Fiscal 2004
    
    Fiscal 2003
    
    Fiscal 2002Expected volatility
    
    
    50
    %
    
    
    50
    %
    
    
    50
    %Risk-free interest rate
    
    
    2.9
    %
    
    
    3.7
    %
    
    
    4.9
    %Expected lives
    
    

    7
    years
    
    

   7
    years
    

    

   7
    yearsDividend Yield
    
    
    1.6
    %
    
    
    1.8
    %
    
    
    2.1
    %
 The weighted average fair
value of options granted during fiscal 2004, 2003 and 2002 with an
exercise equal to fair market value on the grant date was $5.06, $5.11
and $5.92, respectively. Earnings per common share -Basic earnings per share measures the
performance of an entity over the reporting period. Diluted earnings per
share measures the performance of an entity over the reporting period while
giving effect to all potentially dilutive common shares that were
outstanding during the period. The treasury stock method is used to
determine the dilutive potential of stock options. Options which, based on
their exercise price, would be anti-dilutive are not considered in the
treasury stock method calculation. There have been no options excluded from
the earnings per share calculations due to their anti-dilutive nature. Segment information -The Company presents two reportable segments,
Craftmade and TSI. The Companys reportable segments have been identified
utilizing the management approach which designates the internal organization
that is used by management for making operating decisions and assessing
performance. Pervasiveness of estimates -The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Reclassifications -Certain prior year amounts have been reclassified to conform with
the current year presentation. Effects of recent
accounting pronouncements -In December 2003, the SEC issued
Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition, which supercedes SAB 101, Revenue
Recognition in Financial Statements. SAB 104 rescinds the
accounting guidance contained in SAB 101 specifically related to
multiple elements revenue managements, but leaves the remaining
SAB 101 principles largely unchanged. The adoption of
SAB 104 did not have an impact on Craftmades condensed
consolidated results of operations or financial position. F-10




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##### Table of Contents



NOTE
3 - ACCOUNTING CHANGES 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 restated its previously issued financial statements to reflect Design Trends and PHI as consolidated entities. Prior to the adoption of FIN 46, the Company guaranteed the debt of PHI; thus, the recognition of the debt of PHI in the Condensed Consolidated Balance Sheets
does not represent an incremental increase in the claims on the general assets of the Company. Further, management believes that recognition of the other
liabilities as a result of consolidating Design Trends and PHI does not result in any incremental increase in the level of claims on the general assets of the
Company; rather, the additional liabilities represent claims against the additional assets recognized by the Company as a result of the consolidations.
Conversely, the additional assets recognized as a result of consolidating Design Trends and PHI do not represent additional assets of the Company that could
be used to satisfy claims by the creditors of the Company. The following tables present the balance sheets of Design Trends and PHI as of June 30, 2004 and June 30, 2003 and the results of operations for the three
years ended June 30, 2004. CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 30, 2004 Consolidation andCraftmade/
    
    Design
    
    Prime
    
    EliminationTSI
    
    Trends
    
    Home
    
    Entries
    
    ConsolidatedTotal assets
    
    $
    39,132
    
    
    $
    10,954
    
    
    $
    3,508
    
    
    $
    1,660
    
    
    $
    55,254Total liabilities and minority interests
    
    
    24,316
    
    
    
    8,844
    
    
    
    5,318
    
    
    
    (1,563
    )
    
    
    36,915Total stockholders equity
    
    
    14,816
    
    
    
    2,110
    
    
    
    (1,810
    )
    
    
    3,223
    
    
    
    18,339Total liabilities and stockholders equity
    
    $
    39,132
    
    
    $
    10,954
    
    
    $
    3,508
    
    
    $
    1,660
    
    
    $
    55,254
 CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 30, 2003 Consolidation andCraftmade/
    
    Design
    
    Prime
    
    EliminationTSI
    
    Trends
    
    Home
    
    Entries
    
    ConsolidatedTotal assets
    
    $
    43,198
    
    
    $
    9,523
    
    
    $
    2,364
    
    
    ($
    3,642
    )
    
    $
    51,443Total liabilities and minority interests
    
    
    22,463
    
    
    
    5,641
    
    
    
    1,457
    
    
    
    1,344
    
    
    
    30,905Total stockholders equity
    
    
    20,735
    
    
    
    3,882
    
    
    
    907
    
    
    
    (4,986
    )
    
    
    20,538Total liabilities and stockholders equity
    
    $
    43,198
    
    
    $
    9,523
    
    
    $
    2,364
    
    
    ($
    3,642
    )
    
    $
    51,443
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED
June 30, 2004 Consolidation andCraftmade/
    
    Design
    
    Prime
    
    EliminationTSI
    
    Trends
    
    Home
    
    Entries
    
    ConsolidatedNet Sales
    
    $
    75,541
    
    
    $
    36,422
    
    
    $
    9,275
    
    
    $
    0
    
    
    $
    121,238Income before minority interest expense
and income taxes
    
    $
    8,274
    
    
    $
    6,830
    
    
    $
    801
    
    
    $
    0
    
    
    $
    15,905Net income
    
    $
    3,928
    
    
    $
    6,636
    
    
    $
    801
    
    
    ($
    3,719
    )
    
    $
    7,646
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED
June 30, 2003 Consolidation andCraftmade/
    
    Design
    
    Prime
    
    EliminationTSI
    
    Trends
    
    Home
    
    Entries
    
    ConsolidatedNet Sales
    
    $
    71,817
    
    
    $
    29,079
    
    
    $
    8,137
    
    
    $
    0
    
    
    $
    109,033Income before minority interest expense
and income taxes
    
    
    6,658
    
    
    
    5,724
    
    
    
    2,857
    
    
    
    0
    
    
    
    15,239Net income
    
    $
    2,610
    
    
    $
    5,591
    
    
    $
    2,881
    
    
    ($
    4,236
    )
    
    $
    6,846
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED
June 30, 2002 Consolidation andCraftmade/
    
    Design
    
    Prime
    
    EliminationTSI
    
    Trends
    
    Home
    
    Entries
    
    ConsolidatedNet Sales
    
    $
    73,510
    
    
    $
    25,675
    
    
    $
    6,865
    
    
    $
    0
    
    
    $
    106,050Income before minority interest expense
and income taxes
    
    
    7,003
    
    
    
    3,384
    
    
    
    1,724
    
    
    
    0
    
    
    
    12,111Net income
    
    $
    3,643
    
    
    $
    3,243
    
    
    $
    1,790
    
    
    ($
    2,516
    )
    
    $
    6,160
 In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which supersedes SAB 101, Revenue Recognition in Financial
Statements. SAB 104 rescinds the accounting guidance contained in SAB 101 specifically related to multiple element revenue arrangements, but leaves the
remaining SAB 101 principles largely unchanged. The adoption of SAB 104 did not have a material impact on Craftmades condensed consolidated results of
operations or financial position. F-11




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##### Table of Contents



NOTE 4  REVOLVING LINES OF CREDIT AND NOTES PAYABLE Description
    
    June 30, 2004
    
    June 30, 2003On
October 27, 2003 the Company renewed its
$20,000,000 loan agreement with The
Frost National Bank. Borrowings under this
agreement are made under a revolving
promissory note (the Craftmade Line of
Credit) and are limited to the lesser of
$20,000,000 less the amount outstanding
under a separate $2,000,000 revolving
promissory note with the bank (Design
Trends Line of Credit) or the amount equal
to the borrowing base calculated on
eligible accounts receivable and inventory.
The borrowings are collateralized by
certain inventory and accounts receivable
and bear interest at prime (4.00% at June
30, 2004) less .5% and require the
maintenance of a tangible net worth ratio
of 2.5 to 1.0. The line of credit is due on
demand; however, if no demand is made, it
is scheduled to mature October 31, 2005.
    
    $
    14,577
    
    
    $
    12,000On June 14, 2004 the Company entered into a
$2,000,000 loan agreement with Frost
National Bank. Borrowings under this
agreement are made under a promissory note
(the Design Trends Line of Credit)
collateralized by certain inventory and
accounts receivable of the Company and 50%
or $1,000,000 whichever is less of
outstanding borrowings are guaranteed by
the other member of Design Trends. The
borrowings bear interest at a variable
interest rate 3.5% at June 30, 2004 and
require the maintenance of working capital
of 2 to 1 and tangible net worth of 2.5 to
1. Any borrowings under this agreement
will be due on October 31, 2005.
    
    
    
    
    
    
    On November 24, 2003 PHI entered into a
loan agreement with Wachovia Bank NA.
Borrowings under this agreement are made
under a $2,100,000 promissory note
collateralized by substantially all the
assets of PHI. This loan is guaranteed
jointly and severally by each of the PHI
members. Borrowings under this agreement
are payable in quarterly installments of
$525,000 plus interest at 1-month LIBOR
plus 2.5% beginning on June 15, 2004 until March 15, 2005 when all
unpaid principal and interest shall be due
and payable. This loan agreement requires
the maintenance of certain financial ratios
including minimum tangible net worth and
funded debt to EBITDA.
    
    
    1,575
    
    
    
    On April 17, 2002 PHI entered into a
$2,000,000 note and security agreement with
Wachovia Bank, NA. Borrowings under this
agreement are limited to a borrowing base
calculated as a percentage of certain
eligible accounts receivable and inventory
are payable on demand with interest at
LIBOR (1.3582% at June 30, 2004) plus 2% payable monthly,
collateralized by certain inventory and
receivables of the Company and jointly and
severally guaranteed by the PHI members. This loan agreement requires, which expires on October 1, 2004, the
maintenance of certain financial ratios
including the maintenance of minimum
tangible net worth and funded debt to
EBITDA.
    
    
    1,548
    
    
    
    On April 29, 2002 PHI entered into a
three-year $500,000 note and security agreement with
Wachovia Bank, NA. Borrowings under this
agreement are payable monthly in
installments of $13,889 plus interest at
LIBOR plus 2.5% collateralized
by certain inventory and receivables of the
Company.
    
    
    195
    
    
    
    362On May 9, 2000 the Company entered into a
term loan to finance its home office and
warehouse with an original principal
balance of $9,200,000. The loan is payable
in equal monthly installments of $100,378
of principal and interest at 8.302% with a
final balloon payment of $901,045 when the
loan matures on January 1, 2008. The loan
is collateralized by the building and land
with a net book value of approximately
$7,743,000 at June 30, 2004.
    
    
    3,841
    
    
    
    5,13121,736
    
    
    
    17,493Less lines of credit due on demand
    
    
    (16,125
    )
    
    
    (12,000
    )Less amounts due in following year  current
    
    
    (2,662
    )
    
    
    (976
    )Non-current
    
    $
    2,949
    
    
    $
    4,517
 Scheduled maturities of notes payable, excluding lines of credit due on demand
are as follows (in thousands): Fiscal Year2005
    
    $
    2,6622006
    
    
    1,0272007
    
    
    1,0862008
    
    
    836$
    5,611
 The Company was in violation of its negative covenant not to retire or
otherwise acquire any of its capital stock contained in the Unconditional
Guaranty of the Promissory Note dated as of November 24, 2003 to Prime/Home
Impressions, LLC with Wachovia Bank, NA. The Company has obtained a waiver of
such violation from Wachovia Bank, NA for the quarters ended December 31, 2003;
March 31, 2004; and for the fiscal year ended June 30, 2004 and for the period ending September
15, 2005. Nevertheless the amount outstanding under this note at June 30, 2004,
$1,575,000 has been classified as current due to its terms. By
entering into the Unconditional Guaranty of the Promissory Note dated as of
November 24, 2003 to Prime/Home Impressions, LLC with Wachovia Bank, NA, the
Company violated its negative covenant not to guarantee debts contained in
the Loan Agreement dated as of November 6, 2001 with Frost Bank. The Company
has obtained a waiver of such violation from Frost Bank, for the quarters ended
December 31, 2003; March 31, 2004; and for the fiscal year ended June 30, 2004
and for the period ending September 15, 2005. Nevertheless the amount
outstanding under this note at June 30, 2004, $14,577,000 has been classified
as current due to its terms. At June 30, 2004 and 2003 the weighted average interest rate on outstanding borrowings under the revolving lines of credit were 4.7% and 5.4%, respectively. F-12




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##### Table of Contents



NOTE 5 - INCOME TAXES Components of the provision for income taxes for the years ended June 30,
2004, 2003 and 2002 consist of the following: 2004
    
    2003
    
    2002(In thousands)Current expense:Federal
    
    $
    3,499
    
    
    $
    2,617
    
    
    $
    3,300State
    
    
    536
    
    
    
    487
    
    
    
    266Foreign
    
    
    358
    
    
    
    252
    
    
    
    96Total current expense
    
    $
    4,393
    
    
    $
    3,356
    
    
    
    3,662Total deferred
    
    
    147
    
    
    
    802
    
    
    
    (227
    )Provision for income taxes
    
    $
    4,540
    
    
    $
    4,158
    
    
    $
    3,435
 Deferred taxes are provided for temporary differences between the financial
reporting basis and the tax basis of the Companys assets and liabilities.
The temporary differences that give rise to deferred tax assets and
liabilities at June 30, 2004 and 2003 are as follows: 2004
    
    2003(In thousands)Inventories
    
    $
    433
    
    
    $
    452Accounts receivable reserves
    
    
    55
    
    
    
    56Accrued customer allowances
    
    
    172
    
    
    
    232Investment
in 50% owned LLCs
    
    
    577
    
    
    
    519Other
    
    
    116
    
    
    
    64Total deferred tax assets
    
    
    1,353
    
    
    
    1,323Depreciation and amortization
    
    
    (388
    )
    
    
    (493
    )Foreign taxes
    
    
    (1,163
    )
    
    
    (888
    )Other
    
    
    (7
    )
    
    
    Total deferred tax liabilities
    
    
    (1,558
    )
    
    
    (1,381
    )$
    (205
    )
    
    $
    (57
    )
 The differences between the Companys effective tax rate and the federal
statutory rate of 34% for the years ended June 30, 2004, 2003 and 2002 are
as follows: 2004
    
    2003
    
    2002(In thousands)Tax at the statutory corporate rate
    
    $
    5,416
    
    
    $
    5,181
    
    
    $
    4,118Less federal income tax
    
    
    (1,297
    )
    
    
    (1,459
    )
    
    
    (868
    )Attributable to minority interestState income taxes, net of federal benefit
    
    
    343
    
    
    
    360
    
    
    
    232Other
    
    
    78
    
    
    
    76
    
    
    
    (47
    )Provision for income taxes
    
    $
    4,540
    
    
    $
    4,158
    
    
    $
    3,435
 F-13




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##### Table of Contents



NOTE 6 - STOCKHOLDERS EQUITY Stock Option Plans On October 27, 2000, the Companys stockholders approved the 1999 Stock
Option Plan (1999 Plan) and 2000 Non-Employee Director Plan (Non-Employee
Plan), previously adopted by the Board of Directors on October 29, 1999 and
February 16, 2000, respectively. The 1999 Plan and Non-Employee Plan allow a
maximum of 300,000 and 75,000 shares, respectively, of the Companys common
stock to be issued. Options granted pursuant to the 1999 Plan will be
designated as either Incentive Stock Options (ISOs) or Non-Qualified Stock
Options (NQSOs). Options granted pursuant to the Non-Employee Plan will be
designated as NQSOs. The
1999 Plan options vest at a rate of 20% on the grant date and 20% for each
successive year. The Non-Employee Plan options vest within six months of the
date of grant. Options may be exercised at any time once they become vested,
but not more than 10 years from the date of grant. A summary of options issued under the above agreements is as follows: 1999 Plan
    
    Non-Employee PlanWeighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Exercise
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    Price
    
    Remaining
    
    
    
    
    
    Exercise
    
    Exercise Price
    
    RemainingShares
    
    Price
    
    Range
    
    Life
    
    Shares
    
    Price
    
    Range
    
    LifeOutstanding at
June 30, 2001
    
    
    190,000
    
    
    
    6.75
    
    
    
    
    
    
    
    
    
    
    
    9,000
    
    
    
    7.06Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,500
    
    
    
    14.85Exercised
    
    
    (64,000
    )
    
    
    6.75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at
June 30, 2002
    
    
    126,000
    
    
    $
    6.75
    
    
    
    
    
    
    
    
    
    
    
    13,500
    
    
    $
    9.66Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,500
    
    
    
    14.15Exercised
    
    
    (33,500
    )
    
    
    6.75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at
June 30, 2003
    
    
    92,500
    
    
    $
    6.75
    
    
    
    
    
    
    
    
    
    
    
    18,000
    
    
    $
    10.78Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,500
    
    
    
    25.20Exercised
    
    
    (40,500
    )
    
    
    6.75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at
June 30, 2004
    
    
    52,000
    
    
    $
    6.75
    
    
    $
    6.75
    
    
    
    6.3
    
    
    
    22,500
    
    
    $
    13.67
    
    
    $
    6.56-$25.20
    
    
    
    7.8Exercisable at
June 30, 2004
    
    
    12,000
    
    
    $
    6.75
    
    
    
    
    
    
    
    
    
    
    
    22,500
    
    
    $
    10.78
 Deferred compensation expense
is recognized in the Companys results of operations as the options vest. F-14




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##### Table of Contents



Treasury Stock Purchases 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 June 30, 2004 the Company had repurchased 331,310 shares at
an aggregate cost of $8,269,000 under this program. Stockholder Rights Plan On June 23, 1999, the Company declared a dividend of one Preferred Share
Purchase Right (Right) on each outstanding share of the Companys
common stock. The dividend distribution was made on July 19, 1999 to
stockholders of record on that date. The Rights become exercisable if a
person or group acquires 15% or more of the Companys common stock or
announces its intent to do so. Each Right will entitle
stockholders to buy one one-thousandth of a share of Series A Preferred
Stock, $1.00 par value per share, at an exercise price of $48. When the
Rights become exercisable, the holder of each Right (other than the
acquiring person or members of such group) is entitled (1) to purchase,
at the Rights then current exercise price, a number of the acquiring
companys common shares having a market value of twice such price, (2) to
purchase, at the Rights then current exercise price, a number of the
Companys common shares having a market value of twice such price, or (3)
at the option of the Company, to exchange the Rights (other than Rights
owned by such person or group), in whole or in part, at an exchange ratio
of one-half share of common stock (or one-thousandth of a share of the
Series A Preferred Stock) per Right. The Rights may be redeemed for
$.001 each by the Company at any time prior to acquisition by a person
(or group) of beneficial ownership of 15% or more of the Companys common
stock. The Rights will expire on June 23, 2009. F-15




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##### Table of Contents



NOTE 8 - EARNINGS PER SHARE The following is a reconciliation of the numerator and denominator used
in the basic and diluted EPS calculations: For the years ended June 30,2004
    
    2003
    
    2002(In thousands, except per share data)Basic and diluted EPS:Numerator: net income
    
    $
    7,646
    
    
    $
    6,846
    
    
    $
    6,160Basic denominator:Common shares outstanding
    
    
    5,336
    
    
    
    5,512
    
    
    
    5,937Basic EPS:
    
    $
    1.43
    
    
    $
    1.24
    
    
    
    1.04Diluted denominator:Common shares outstanding
    
    
    5,336
    
    
    
    5,512
    
    
    
    5,937Options
    
    
    47
    
    
    
    56
    
    
    
    64Total shares
    
    
    5,383
    
    
    
    5,568
    
    
    
    6,001Diluted EPS:
    
    $
    1.42
    
    
    $
    1.23
    
    
    $
    1.03
 NOTE 9 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The Companys financial instruments include cash, receivables, accounts
and commissions payable, accrued expenses and amounts outstanding
under various debt agreements. Management believes the fair values of
these instruments approximate the related carrying values as of June 30,
2004 because of their short-term nature, recent renegotiations and/or
variable interest rates. NOTE 10 - COMMITMENTS AND CONTINGENCIES The Company leases various equipment and real estate under non-cancelable
operating lease agreements which require future cash payments. The Company
incurred rental expense under its operating lease agreements of $264,000,
$363,000, and $364,000 for the years ended June 30, 2004, 2003 and 2002,
respectively. Future minimum lease payments under non-cancelable operating
leases as of June 30, 2004 are as follows (in thousands): Fiscal Year2005
    
    $
    1882006
    
    
    1182007
    
    
    942008
    
    
    222009
    
    
    16Total
    
    $
    438
 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 intend to
appeal 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 June 30, 2004 consolidated financial statements. Craftmade has an agreement with Dolan Northwest, LLC (the owner of the 50%
of Design Trends) pursuant to which Dolan Northwest
is responsible for the judgment rendered in the lawsuit, plus all costs and F-16




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##### Table of Contents



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 11 - 401(k) DEFINED CONTRIBUTION PLAN The Company has a defined
contribution retirement savings plan (the Retirement Plan) covering
substantially all domestic employees who meet certain eligibility
requirements as to age and length of service. The Retirement Plan
incorporates the salary deferral provision of Section 401(k) of the
Internal Revenue Code and employees may defer
compensation up to the annual maximum limit prescribed by the Internal
Revenue Code. The Company matches half of participant contributions
up to 6% of their annual compensation. The Companys
contributions to the Retirement Plan were $90,000, $101,000 and
$96,000 for the years ended June 30, 2004, 2003 and 2002, respectively. NOTE 12 - MAJOR SUPPLIER AND RELATED PARTY On December 7, 1989, Craftmade and its major Supplier (the Supplier)
entered into a written agreement, terminable on 180 days prior notice,
pursuant to which the Supplier has agreed to manufacture ceiling fans for
Craftmade. The Supplier provides substantially all of Craftmades
ceiling fans and accessories. The Supplier is permitted under the
arrangement to manufacture ceiling fans for other distribution provided
such ceiling fans are not a replication of the Craftmade series or
models. Fans and accessories manufactured and sold to Craftmade by the Supplier
account for approximately 67% 66% and 69% of Craftmades purchases (21%,
23%, and 22% of consolidated purchases) during the years ended June 30,
2004, 2003 and 2002, respectively. The company has a non-interest bearing note receivable from its chief-executive
officer for $50,000. Principal payments on the note are being
amortized monthly, which will result in the note being paid in full
in August 2005. TSI leased office space from
a former director of the company, who was also senior-officer of TSI. This lease was
for five months at $7,500 per month
of the fiscal year until the office was relocated. F-17




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##### Table of Contents



NOTE 13 - 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. 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 and
lamps offered primarily through lighting showrooms, certain major retail
chains and catalog houses. The TSI segment derives its revenue from
outdoor lighting, portable lamps, indoor lighting and fan accessories
marketed solely to mass merchandisers. The following table presents information about the reportable segments
(in thousands): Craftmade
    
    TSI
    
    TotalFor the
year ended June 30, 2004:Net sales to external customers
    
    $
    53,526
    
    
    $
    67,712
    
    
    $
    121,238Operating profit
    
    
    9,112
    
    
    
    7,570
    
    
    
    16,682Interest expense
    
    
    708
    
    
    
    69
    
    
    
    777Minority interest
    
    
    
    
    
    
    3,719
    
    
    
    3,719Provision for income taxes
    
    
    3,019
    
    
    
    1,521
    
    
    
    4,540Depreciation
    
    
    554
    
    
    
    94
    
    
    
    648Total assets
    
    
    29,163
    
    
    
    26,091
    
    
    
    55,254For the
year ended June 30, 2003:Net sales to external customers
    
    $
    49,154
    
    
    $
    59,879
    
    
    $
    109,033Operating profit
    
    
    7,835
    
    
    
    8,300
    
    
    
    16,135Interest expense
    
    
    851
    
    
    
    45
    
    
    
    896Minority interest
    
    
    
    
    
    
    4,235
    
    
    
    4,235Provision for income taxes
    
    
    2,677
    
    
    
    1,481
    
    
    
    4,158Depreciation
    
    
    570
    
    
    
    89
    
    
    
    659Total assets
    
    
    28,372
    
    
    
    23,071
    
    
    
    51,443For the
year ended June 30, 2002:Net sales to external customers
    
    $
    49,798
    
    
    $
    56,252
    
    
    $
    106,050Operating profit
    
    
    7,582
    
    
    
    5,801
    
    
    
    13,383Interest expense
    
    
    1,112
    
    
    
    160
    
    
    
    1,272Minority interest
    
    
    
    
    
    
    2,516
    
    
    
    2,516Provision for income taxes
    
    
    2,331
    
    
    
    1,104
    
    
    
    3,435Depreciation
    
    
    474
    
    
    
    104
    
    
    
    578Total assets
    
    
    27,143
    
    
    
    25,999
    
    
    
    53,142
 The following is sales information by geographic area for the years ended June 30, 2004, 2003,
and 2002 (in thousands) 2004
    
    2003
    
    2002United States
    
    
    112,894
    
    
    
    99,781
    
    
    
    102,250Hong Kong
    
    
    8,344
    
    
    
    9,252
    
    
    
    3,800121,238
    
    
    
    109,033
    
    
    
    106,050
 Long-lived assets totalled
approximately $8,985,000 and $10,893,000 at June 30, 2004 and
2003,
respectively. Approximately $0 and $11,000 of the long lived assets
at June 30, 2004 and 2003,
respectively, are located in Hong Kong. F-18




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##### Table of Contents



NOTE 14 - QUARTERLY
DATA The Companys product sales, particularly ceiling fans, are somewhat
seasonal with sales in the warmer first and fourth quarters being
historically higher than in the two other fiscal quarters. The following table contains information derived from unaudited financial
statements of the Company. In the opinion of the Companys management,
the information includes all adjustments necessary for fair presentation
of the results. The results of a particular quarter are not necessarily
indicative of the results that might be achieved for a full fiscal year. Fiscal 2004
    
    Fiscal 2003First
    
    Second
    
    Third
    
    Fourth
    
    First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter(In thousands, except per share data)Statements of income data:Net Sales
    
    $
    31,191
    
    
    $
    28,947
    
    
    $
    28,988
    
    
    $
    32,112
    
    
    $
    30,177
    
    
    $
    24,936
    
    
    $
    26,778
    
    
    $
    27,142Gross Profit
    
    
    10,221
    
    
    
    7,643
    
    
    
    8,462
    
    
    
    9,584
    
    
    
    10,072
    
    
    
    7,891
    
    
    
    8,210
    
    
    
    9,221Operating Profit
    
    
    5,563
    
    
    
    2,556
    
    
    
    3,890
    
    
    
    4,673
    
    
    
    5,234
    
    
    
    3,259
    
    
    
    3,488
    
    
    
    4,154Net Income
    
    
    2,369
    
    
    
    1,364
    
    
    
    1,782
    
    
    
    2,131
    
    
    
    2,204
    
    
    
    1,368
    
    
    
    1,356
    
    
    
    1,918Basic EPS
    
    $
    0.44
    
    
    $
    0.25
    
    
    $
    0.34
    
    
    $
    0.41
    
    
    $
    0.38
    
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.36Diluted EPS
    
    $
    0.43
    
    
    $
    0.25
    
    
    $
    0.33
    
    
    $
    0.41
    
    
    $
    0.38
    
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.36Basic shares outstanding
    
    
    5,422
    
    
    
    5,437
    
    
    
    5,314
    
    
    
    5,165
    
    
    
    5,796
    
    
    
    5,516
    
    
    
    5,384
    
    
    
    5,353Diluted shares outstanding
    
    
    5,481
    
    
    
    5,477
    
    
    
    5,360
    
    
    
    5,207
    
    
    
    5,858
    
    
    
    5,574
    
    
    
    5,436
    
    
    
    5,402
 CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES Schedule II Valuation and Qualifying Accounts For each of the three years
in the period ended June 30, 2004 Additions(1)
    
    (2)Balance at
    
    Charged to
    
    Charged to other
    
    
    
    
    
    Balancebeginning of
    
    costs
    
    accounts
    
    Deductions
    
    at end ofDescription
    
    period
    
    and expense
    
    (describe)
    
    (describe)
    
    periodAllowance for doubtful accounts
for the years ended:June 30, 2004
    
    $
    150
    
    
    $
    69
    
    
    $
    
    
    
    $
    (69
    )(a)

    
    $
    150June 30, 2003
    
    $
    150
    
    
    $
    108
    
    
    $
    
    
    
    $
    (108
    )(a)
    
    $
    150June 30, 2002
    
    $
    150
    
    
    $
    237
    
    
    $
    
    
    
    $
    (237
    )(a)
    
    $
    150Allowance
for inventory obsolescence for the years ended:June 30, 2004
    
    $
    1,641
    
    
    $
    1,070
    
    
    $
    
    
    
    $
    (1,548)
    (b)

    
    $
    1,171June 30, 2003
    
    $
    2,241
    
    
    $
    1,516
    
    
    $
    
    
    
    $
    (2,116)
    (b)
    
    $
    1,641June 30, 2002
    
    $
    342
    
    
    $
    1,967
    
    
    $
    
    
    
    $
    (68)
    (b)
    
    $
    2,241
  (a)
    
    Reduction of the allowance for doubtful accounts associated with
the write-off of certain uncollectible accounts receivable balances.  (b)
    
    Reduction of the allowance for inventory obsolescence associated with
the disposal or sale of certain inventory items. F-19




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##### Table of Contents



EXHIBIT INDEX ExhibitNo.
    
    
    
    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-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
    
    -
    
    Earnest Money contract and Design/Build Agreement dated May 8, 1995, between MEPC Quorum Properties II, Inc. and Craftmade International,
Inc. (including exhibits), previously filed as an exhibit in Form 10Q for the quarter ended December 31, 1995, and herein incorporated by
reference.10.2
    
    -
    
    Assignment of Rents and Leases dated December 21, 1995, between Craftmade International, Inc. and Allianz Life Insurance Company of North
America (including exhibits), previously filed as an exhibit in Form 10Q for the quarter ended December 31, 1995, and herein incorporated
by reference.10.3
    
    -
    
    Deed of Trust, Mortgage and Security Agreement made by Craftmade International, Inc., dated December 21, 1995, to Patrick M. Arnold, as
trustee for the benefit of Allianz Life Insurance Company of North America (including exhibits), previously filed as an exhibit in Form 10Q
for the quarter ended December 31, 1995, and herein incorporated by reference.10.4
    

    -
    
    Second Amended and Restated Credit Agreement dated November 14, 1995, among Craftmade International, Inc., Nations Bank of Texas, N.A., as
Agent and the Lenders defined therein (including exhibits), previously filed as an exhibit in Form 10Q for the quarter ended December 31,
1995, and herein incorporated by reference.** 10.5
    
    -
    
    Lease Agreement dated November 30, 1995, between Craftmade International, Inc. and TSI Prime, Inc., previously filed as an exhibit in Form
10Q for the quarter ended December 31, 1995, and herein incorporated by reference.10.6
    
    -
    
    Revolving credit facility with Texas Commerce Bank, previously filed as an exhibit in Form 10K for the year ended June 30, 1996, and herein
incorporated by reference.10.7
    
    -
    
    Agreement and Plan of Merger, dated as of July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc. a
Delaware corporation, Neall and Leslie Humphrey, John DeBlois, the Wiley Family Trust, James Bezzerides, the Bezzco Inc. Employee
Retirement Trust and Trade Source International, Inc, a California corporation, filed as Exhibit 2.1 to the Companys Current Report on
Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference.




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##### Table of Contents



ExhibitNo.
    
    
    
    Description10.8
    
    -
    
    Voting Agreement, dated July 1, 1998, by and among James R. Ridings, Neall Humphrey and John DeBlois, filed as Exhibit 2.1 to the Companys
Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference.10.9
    
    -
    
    Third Amendment to Credit Agreement, dated July 1, 1998, by and among Craftmade International, Inc., a Delaware corporation, Trade Source
International, Inc., a Delaware corporation, Chase Bank of Texas, National Association (formerly named Texas Commerce Bank, National
Association) and Frost National Bank (formerly named Overton Bank and Trust), filed as Exhibit 2.1 to the Companys Current Report on
Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference.10.10
    
    -
    
    Consent to Merger by Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 2.1 to the Companys Current
Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference.** 10.11
    
    -
    
    Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware
corporation and Neall Humphrey, filed as Exhibit 2.1 to the Companys Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW)
and herein incorporated by reference.** 10.12
    
    -
    
    Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware
corporation and Leslie Humphrey, filed as Exhibit 2.1 to the Companys Current Report on Form 8-K filed July 15, 1998 (File No.
33-33594-FW) and herein incorporated by reference.** 10.13
    
    -
    
    Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware
corporation and John DeBlois, filed as Exhibit 2.1 to the Companys Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW)
and herein incorporated by reference.10.14
    
    -
    
    Registration Rights Agreement, dated July 1, 1998, by and
among Craftmade International, Inc., Neall and Leslie Humphrey and
John DeBlois, filed as Exhibit 2.1 to the Companys Current Report on
Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein
incorporated by reference.10.15
    
    -
    
    ISDA Master Agreement and Schedule, dated June 17, 1999, by and among Chase Bank of Texas, National Association, Craftmade International,
Inc., Durocraft International, Inc. and Trade Source International, Inc., filed as Exhibit 10.15 to the Companys Quarterly Report on Form
10Q filed November 12, 1999 (File No. 000-26667) and herein incorporated by reference.10.16
    
    -
    
    Confirmation under ISDA Master Agreement, dated July 23, 1999, from Chase Bank of Texas, National Association to Craftmade International,
Inc., filed as Exhibit 10.16 to the Companys Quarterly Report on Form 10Q filed November 12, 1999 (File No. 000-26667) and herein
incorporated by reference.10.17
    
    -
    
    Fourth Amendment to Credit Agreement, dated April 2, 1999, by and among Craftmade International, Inc., a Delaware corporation, Durocraft
International, Inc. a Texas corporation, Trade Source International, a Delaware corporation, Chase Bank of Texas, National Association and
Frost National Bank, filed as Exhibit 10.17 to the Companys Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and
herein incorporated by reference.10.18
    
    -
    
    Letter Agreement Concerning Fifth Amendment to Credit Agreement, dated August 11, 1999, from Chase Bank of Texas, N.A. and Frost National
Bank to Craftmade International, Inc., Durocraft International Inc., Trade Source International, Inc., and C/D/R Incorporated, filed as
Exhibit 10.18 to the Companys Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference.10.19
    
    -
    
    Sixth Amendment to Credit Agreement, dated November 12, 1999, by and among Craftmade International, Inc., a Delaware corporation, Durocraft
International, Inc., a Texas corporation, Trade
Source International, Inc., a Delaware corporation, C/D/R Incorporated, a Delaware corporation, Chase Bank of Texas, National Association
and Frost National Bank, filed as Exhibit 10.19 to the Companys Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and
herein incorporated by reference.




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##### Table of Contents



ExhibitNo.
    
    
    
    Description** 10.20
    
    -
    
    Employment Agreement dated October 25, 1999, between Kathy Oher and Craftmade International, Inc., filed as Exhibit 10.20 to the Companys
Annual Report on Form 10-K filed September 26, 2000 (File No.
000-26667) and herein incorporated by reference.10.21
    
    -
    
    Seventh Amendment to Credit Agreement dated May 12, 2000, by and among Craftmade International, Inc., a Delaware corporation, Durocraft
International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, C/D/R Incorporated, a Delaware
corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.21 to the Companys Annual Report on
Form 10-K filed September 26, 2000 (File No. 000-26667) and herein incorporated by reference.** 10.22
    
    -
    
    Craftmade International, Inc. 1999 Stock Option Plan, filed as Exhibit A to the Companys Proxy Statement on Schedule 14A filed October 4,
2000 (File No. 000-26667) and herein incorporated by reference.** 10.23
    
    -
    
    Craftmade International, Inc. 2000 Non-Employee Director Stock Plan, filed as Exhibit B to the Companys Proxy Statement on Schedule 14A
filed October 4, 2000 (File No. 000-26667) and herein incorporated by reference.10.24
    
    -
    
    Eighth Amendment to Credit Agreement dated February 12, 2001, by and among Craftmade International, Inc., a Delaware corporation, Durocraft
International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, Design Trends, LLC, a Delaware limited
liability company, C/D/R Incorporated, a Delaware corporation, The Chase Manhattan Bank and The Frost National Bank, filed as Exhibit 10.24
to the Companys Quarterly Report on Form 10-Q filed May 14, 2001 (File No. 000-2667) and herein incorporated by reference.10.25
    
    -
    
    Ninth Amendment to Credit Agreement dated June 29, 2001, by and among Craftmade International, Inc. a Delaware corporation, Durocraft
International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, Design Trends, LLC, a Delaware limited
liability company, C/D/R Incorporated, a Delaware corporation, The
Chase Manhattan Bank and The Frost National Bank, filed as Exhibit 10.25 to the Companys Annual Report on Form 10-K
filed September 26, 2001 (File No. 000-26667) and herein incorporated
by reference.10.26
    
    -
    
    Loan Agreement dated November 6, 2001, by and between Craftmade International, Inc., a Delaware Corporation, and The Frost National Bank, a
national banking association, filed as Exhibit (0.26 to the Companys quarterly Report on Form 10-Q filed February 14, 2002 (File No.
000-26667) and herein incorporated by reference.10.27
    
    -
    
    Termination Agreement dated November 16, 2001, by and between Craftmade International, Inc., a Delaware corporation, and JP Morgan Chase
Bank, filed as Exhibit 10.27 to the Companys Quarterly Report on Form 10-Q filed February 14, 2002 (File No. 000-26667) and herein
incorporated by reference.10.28
    
    -
    
    Modification, Renewal and Extension
Agreement dated October 27, 2003, by and between The Frost
National Bank, a national banking association, and Craftmade
International, Inc., a Delaware corporation, filed as Exhibit 10.27
to the Company's Quarterly Report on Form 10-Q filed
November 14, 2003 (File No. 000-26667) and herein
incorporated by reference.10.29
    
    -
    
    Note and Security Agreement dated
November 24, 2003 by Prime/Home Impressions LLC, a North Carolina
limited liability company, to Wachovia Bank, N.A., with Security
Agreement of Prime/Home Impressions, LLC, and Guaranty Agreement of
Craftmade International, Inc., filed as Exhibit 10.28 to the
Company's Quarterly Report on Form 10-Q filed February 17, 2004
(File No. 000-26667) and herein incorporated by reference.10.30
    
    -
    
    Agreement regarding Lamps Plus,
Inc. Litigation, entered into on December 31, 2003 and effective
February 21, 2003, by and among Craftmade International, Inc., a
Delaware corporation, Design Trends, LLC, a Delaware limited
liability company, Dolan Northwest, LLC, an Oregon limited liability
company and Patrick S. Dolan, filed as Exhibit 10.29 to the Company's
Quarterly Report on Form 10-Q filed February 17, 2004 (File
No. 000-26667) and herein incorporated by reference.*10.31
    
    -
    
    Business Loan Agreement dated
June 14, 2004, by and between The Frost National Bank, a
national banking association, and Design Trends, LLC, a Delaware
limited liability company.*10.32
    
    -
    
    Second Amendment to Loan Agreement
dated June 14, 2004, by and between The Frost National Bank, a
national banking association, and Craftmade International, Inc., a
Delaware corporation.* 21
    
    -
    
    Subsidiaries of the Registrant.* 31.1
    
    -
    
    Certification of James R. Ridings, Chairman of the Board, President and Chief Executive Officer of the Company, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.* 31.2
    
    -
    
    Certification of Kathleen B. Oher, Vice President and Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* 32.1
    
    -
    
    Certification of James R. Ridings, Chairman of the Board, President and Chief Executive Officer of the Company, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.* 32.2
    
    -
    
    Certification of Kathleen B. Oher, Vice President and Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
    ** A management contract or compensatory plan or arrangement required to
be filed as an exhibit to this form.