UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2005 or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                          to

CRAFTMADE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware		75-2057054
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
650 South Royal Lane, Suite 100, Coppell, Texas		75019
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (972) 393-3800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
                    Large Accelerated Filer o                    Accelerated Filer þ                    Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

5,201,000 shares of the registrant’s common stock, $01 par value, were outstanding as of January 31, 2006.

 

 

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

Index to Quarterly Report on Form 10-Q

Part I. Financial Information
		Item 1. Financial Statements
				Condensed Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended December 31, 2005 and 2004
				Condensed Consolidated Balance Sheets at December 31, 2005 (Unaudited) and June 30, 2005
				Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended December 31, 2005 and 2004
				Notes to Condensed Consolidated Financial Statements
		Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Item 3. Quantitative and Qualitative Disclosures About Market Risk
		Item 4. Controls and Procedures
Part II. Other Information
		Item 1. Legal Proceedings
		Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
		Item 3. Defaults Upon Senior Securities
		Item 4. Submission of Matters to a Vote of Security Holders
		Item 5. Other Information
		Item 6. Exhibits
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I

Item 1. Financial Statements.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands except per share amounts)

(Unaudited)

		FOR THE THREE MONTHS ENDED								FOR THE SIX MONTHS ENDED
		December 31,				December 31,				December 31,				December 31,
		2005				2004				2005				2004
Net sales		$	28,418			$	28,349			$	58,887			$	57,374
Cost of goods sold			19,830				19,537				41,553				40,042
Gross profit			8,588				8,812				17,334				17,332
Gross profit as a percentage of net sales			30.2	%			31.1	%			29.4	%			30.2	%
Selling, general and administrative expenses			4,748				4,496				9,646				9,905
Interest expense, net			322				240				626				470
Depreciation and amortization			153				141				311				288
Total expenses			5,223				4,877				10,583				10,663
Income before income taxes and minority interests			3,365				3,935				6,751				6,669
Minority interests			739				995				1,472				1,561
Income before income taxes			2,626				2,940				5,279				5,108
Provision for income taxes			929				1,068				1,850				1,838
Net income		$	1,697			$	1,872			$	3,429			$	3,270
Basic earnings per common share		$	0.33			$	0.37			$	0.66			$	0.65
Diluted earnings per common share		$	0.33			$	0.37			$	0.66			$	0.64
Cash dividends declared per common share		$	0.12			$	0.10			$	0.24			$	0.20

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

		December 31,				June 30,
		2005				2005
		(Unaudited)
Current assets
Cash		$	1,730			$	9,145
Accounts receivable — net of allowance of $232 and $300, respectively			19,015				21,810
Inventories — net of allowance of $637 and $717, respectively			20,107				18,042
Deferred income taxes			1,726				1,224
Prepaid expenses and other current assets			425				374
Total current assets			43,003				50,595
Property and equipment
Land			1,535				1,535
Building			7,796				7,796
Office furniture and equipment			9,303				9,148
Leasehold improvements			279				279
			18,913				18,758
Less: accumulated depreciation			(10,561	)			(10,266	)
Total property and equipment, net			8,352				8,492
Other assets
Goodwill			11,480				11,480
Other intangibles — net of accumulated amortization of $24 and $10, respectively			176				190
Other assets			44				58
Total other assets			11,700				11,728
Total assets		$	63,055			$	70,815

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)

LIABILITIES AND STOCKHOLDERS’ EQUITY

		December 31,				June 30,
		2005				2005
		(Unaudited)
Current liabilities
Note payable — current		$	1,072			$	1,319
Revolving line of credit			1,548				24,548
Accounts payable			9,008				9,299
Commissions payable			194				248
Income taxes payable/(receivable)			262				(33	)
Accrued customer allowances			4,879				4,164
Other accrued expenses			926				1,055
Total current liabilities			17,889				40,600
Other non-current liabilities
Note payable — long term			1,004				1,551
Revolving line of credit			13,245				—
Other long-term expenses			860				860
Deferred income taxes			178				226
Total other non-current liabilities			15,287				2,637
Total liabilities			33,176				43,237
Minority interests			3,308				3,205
Commitments and contingencies (Note 5)
Stockholders’ equity
Series A cumulative, convertible callable preferred stock, $1.00 par value, 2,000,000 shares authorized; 32,000 shares issued			32				32
Common stock, $0.01 par value, 15,000,000 shares authorized and 9,700,920 and 9,699,920 shares issued, respectively			97				97
Additional paid-in capital			18,669				18,653
Retained earnings			47,780				45,598
Less: treasury stock, 4,499,920 common shares at cost, and 32,000 preferred shares at cost			(40,007	)			(40,007	)
Total stockholders’ equity			26,571				24,373
Total liabilities and stockholders’ equity		$	63,055			$	70,815

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

		FOR THE SIX MONTHS ENDED
		December 31,				December 31,
		2005				2004
Net cash provided by operating activities		$	4,437			$	6,665
Cash flows from investing activities
Additions to property and equipment			(155	)			(22	)
Additions to other intangibles			—				(10	)
Cash used in investing activities			(155	)			(32	)
Cash flows from financing activities
Net proceeds from/(payments on) lines of credit			(9,755	)			962
Principal payments on notes payable			(794	)			(1,583	)
Treasury stock repurchases			—				(2,925	)
Stock options exercised			7				164
Cash dividends			(1,155	)			(1,010	)
Distributions to minority interest members			—				(742	)
Net cash used in financing activities			(11,697	)			(5,134	)
Net increase/(decrease) in cash			(7,415	)			1,499
Cash at beginning of period			9,145				5,838
Cash at end of period		$	1,730			$	7,337

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

AS OF AND FOR THE SIX MONTHS ENDED

DECEMBER 31, 2005

Note 1 — BASIS OF PREPARATION AND PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting, and include all adjustments which are, in the opinion of management, necessary for a fair presentation. The condensed consolidated financial statements include the accounts of Craftmade International, Inc. (“Craftmade”), and its wholly-owned subsidiaries, including Trade Source International, Inc., a Delaware corporation (“TSI”), and two 50% owned limited liability companies, Prime/Home Impressions, LLC, a North Carolina limited liability company (“PHI”) and Design Trends, LLC, a Deleware limited liability company (“Design Trends”). Craftmade and its subsidiaries including TSI, PHI and Design Trends are sometimes collectively referred to as the “Company.” The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented. The Company believes that the disclosures are adequate to make the information presented not misleading; however, it is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto, in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed with the SEC on September 20, 2005. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2005

Note 2 — EARNINGS PER SHARE

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations:

		FOR THE THREE MONTHS ENDED								FOR THE SIX MONTHS ENDED
		December 31,				December 31,				December 31,				December 31,
		2005				2004				2005				2004
		(In thousands, except per share data)
Basic and diluted earnings per share:
Numerator
Net income		$	1,697			$	1,872			$	3,429			$	3,270
Denominator for basic EPS
Weighted average common shares outstanding			5,200				5,034				5,200				5,059
Denominator for diluted EPS
Weighted average common shares outstanding			5,200				5,034				5,200				5,059
Incremental shares for stock options			10				23				10				32
Potentially dilutive weighted average common shares			5,210				5,057				5,210				5,091
Basic earnings per share		$	0.33			$	0.37			$	0.66			$	0.65
Diluted earnings per share		$	0.33			$	0.37			$	0.66			$	0.64

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2005

Note 3 — STOCK-BASED COMPENSATION

Effective July 1, 2005, the Company adopted SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which revises SFAS 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees to be recognized in the financial statements based on their fair values using an option-pricing model, such as the Black-Scholes model, at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company elected to use the modified prospective method for adoption, which requires compensation expense to be recorded for all unvested stock options and restricted shares beginning in the first quarter of adoption. Compensation cost for awards granted prior to, but not vested as of, the date the Company adopted SFAS 123R were based on the grant date fair value and attributes originally used to value those awards.

For the six months ended December 31, 2005, compensation expense from unvested options outstanding as of July 1, 2005, totaled $9,000. There were no options granted in the six months ended December 31, 2005.

The following table shows pro forma net income for the three and six months ended December 31, 2004 had compensation expense for the Company’s stock option plans been determined based upon the fair value at the grant date for awards consistent with the methodology prescribed by SFAS 123(R). The pro forma results for the three and six months ended December 31, 2004 are compared to actual results for the three and six months ended December 31, 2005, where stock option expense is included in reported net income. The pro forma effects may not be representative of expense in future periods since the estimated fair value of stock options on the date of grant is amortized to expense over the vesting period and additional options may be granted or options may be cancelled in future years.

		FOR THE THREE MONTHS ENDED								FOR THE SIX MONTHS ENDED
		December 31,				December 31,				December 31,				December 31,
		2005				2004				2005				2004
		(In thousands, except per share data)
		Actual				Pro Forma				Actual				Pro Forma
Net income, as reported		$	1,697			$	1,872			$	3,429			$	3,270
Compensation expense, net of related taxes			—				(10	)			—				(41	)
Net income, proforma		$	1,697			$	1,862			$	3,429			$	3,229
Basic earnings per share, as reported		$	0.33			$	0.37			$	0.66			$	0.65
Basic earnings per share, proforma			0.33				0.37				0.66				0.64
Diluted earnings per share, as reported		$	0.33			$	0.37			$	0.66			$	0.64
Diluted earnings per share, proforma			0.33				0.37				0.66				0.63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2005

Note 4 — SEGMENT INFORMATION

The Company operates in two reportable segments, Craftmade and TSI. The accounting policies of the segments are the same as those described in Note 2 — Summary of Significant Accounting Policies to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005, as filed with the SEC on September 20, 2005. The Company evaluates the performance of its segments and allocates resources to them based on their net sales, income before minority interests and income taxes, 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, lamps, light bulbs, door chimes, ventilation systems and other lighting accessories 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 sales and income for the reportable segments:

		FOR THE THREE MONTHS ENDED								FOR THE SIX MONTHS ENDED
		December 31,				December 31,				December 31,				December 31,
		2005				2004				2005				2004
		(In thousands)
Net sales
Craftmade		$	15,146			$	12,268			$	31,656			$	26,868
TSI			13,272				16,081				27,231				30,506
Total		$	28,418			$	28,349			$	58,887			$	57,374
Income before minority interests and income taxes
Craftmade		$	1,862			$	1,592			$	3,965			$	3,107
TSI			1,503				2,343				2,786				3,562
Total		$	3,365			$	3,935			$	6,751			$	6,669
Net income
Craftmade		$	1,198			$	1,013			$	2,543			$	1,994
TSI			499				859				886				1,276
Total		$	1,697			$	1,872			$	3,429			$	3,270

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2005

The following table presents the total assets for the reportable segments (in thousands):

		December 31,				June 30,
		2005				2005				Change
Total Assets
Craftmade		$	50,660			$	50,835			$	(175	)
TSI			12,395				19,980				(7,585	)
Total		$	63,055			$	70,815			$	(7,760	)

Total assets for the TSI segment were $7,585,000 lower on December 31, 2005 than as reported on June
30, 2005. This is primarily due to a decrease of cash in the amount of $7,415,000. See the discussion in Item 2: Liquidity and Capital Resources for the uses of cash.

Note 5 — COMMITMENTS AND CONTINGENCIES

As more fully described in the Company’s Form 10-K for the fiscal year ended June 30, 2005, as filed with the SEC on September 20, 2005, 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 unsuccessfully appealed the Judgment and Order to the Federal Circuit of the United States Court of Appeals. The appellate court opinion was rendered on January 17, 2006.

Craftmade has an agreement with Dolan Northwest, LLC (the owner of the other 50% of Design Trends) pursuant to which Dolan Northwest is responsible for the judgment rendered in the lawsuit, plus all costs and expenses, including legal fees and court costs, associated with the judgment. Dolan Northwest has also agreed to indemnify and hold harmless the Company from and against any and all liabilities, losses, damages, costs or other expenses associated with said judgment. Patrick Dolan has unconditionally guaranteed the obligations of Dolan Northwest under this agreement.

According to the above mentioned agreement, all rewarded damages are the responsibility of Dolan Northwest, LLC. Pursuant to this agreement, Dolan Northwest filed a deposit in lieu of supersedes bond with the court. Accordingly, given the agreement and deposit in lieu of supersedes bond, management believes that there is no contingent liability for the Company.

Note 6 — RELATED PARTY

At December 31, 2005, the Company owed Home Impressions, LLP, the Company’s 50% partner in PHI, a payable totaling $1,735,000, primarily consisting of undistributed earnings. This payable is partially offset by the minority interest receivable of $257,000 for PHI. The Company has not distributed any minority interests during the six months ended December 31, 2005.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Cautionary Statement

With the exception of historical information, the matters discussed in this document contain forward-looking statements. There are certain important factors which could cause actual results to differ materially from those anticipated by these forward-looking statements. Some of the important factors which would cause actual results to differ materially from those in the forward-looking statements include, among other things, the dependency of TSI, PHI and Design Trends on sales to select mass merchandiser customers and changes in those relationships, changes in anticipated levels of sales, whether due to future national or regional economic and competitive conditions, changes in relationships with Craftmade customers, customer acceptance of existing and new products, pricing pressures due to excess capacity, cost increases, changes in tax or interest rates, unfavorable economic and political developments in Asia (the location of the Company’s primary vendors), changes in the foreign currency exchange rate between the U.S. dollar and Taiwan dollar or Chinese yuan, declining conditions in the home construction industry, inability to realize deferred tax assets, labor strikes, lockouts, and other labor slow downs, the ability of the Company to import merchandise from foreign countries without significantly restrictive tariffs, duties or quotas, the ability of the Company to source, ship and deliver items from foreign countries to its U.S. distribution centers at reasonable prices and rates and in a timely fashion, disruption or failure of management information systems, fluctuation of the results of operations from quarter to quarter, restrictions of the Company’s credit facility could restrict operational flexibility, retention of key personnel, as well as other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. When used in this document, the words “believes,” “plans,” “estimates,” “expects,” “anticipates,” “intends,” “continue,” “may,” “will,” “should,” “projects,” “forecast,” “might,” “could” or the negative of such terms and similar expressions as they relate to Craftmade or its management are intended to identify forward-looking statements.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s 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 change. 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. As the financial statements contained herein are condensed, one should also read the Company’s Annual Report on Form 10-K for the year ended June 30, 2005, as filed with the SEC on September 20, 2005, regarding expanded information about our critical accounting policies and estimates.

Stock-Based Compensation

Effective July 1, 2005, the Company adopted SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which revises SFAS 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees to be recognized in the financial statements based on their fair values using an option-pricing model, such as the Black-Scholes model, at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company elected to use the modified prospective method for adoption, which requires compensation expense to be recorded for all unvested stock options and restricted shares beginning in the first quarter of adoption. Compensation cost for awards granted prior to, but not vested as of, the date the

Company adopted SFAS 123R were based on the grant date fair value and attributes originally used to value those awards.

Overview

Management reviews a number of key indicators to evaluate the Company’s financial performance, including net sales, gross profit and selling, general and administrative expenses by segment. A condensed overview of results for the three months ended December 31, 2005 and the corresponding prior year period is summarized as follows (in thousands, except percentage data):

		Three Months Ended												Three Months Ended
		December 31, 2005												December 31, 2004
		Craftmade				TSI				Total				Craftmade				TSI				Total
Net sales		$	15,146			$	13,272			$	28,418			$	12,268			$	16,081			$	28,349
Cost of goods sold			9,765				10,065				19,830				7,662				11,875				19,537
Gross profit			5,381				3,207				8,588				4,606				4,206				8,812
Gross profit as a % of net sales			35.5	%			24.2	%			30.2	%			37.5	%			26.2	%			31.1	%
SG&A			3,073				1,675				4,748				2,672				1,824				4,496
As a % of net sales			20.3	%			12.6	%			16.7	%			21.8	%			11.3	%			15.9	%
Interest			302				20				322				211				29				240
Depreciation			144				9				153				131				10				141
Income before minority interests and income taxes		$	1,862			$	1,503			$	3,365			$	1,592			$	2,343			$	3,935
Minority interests			—				739				739				—				995				995
Provision for income taxes			664				265				929				579				489				1,068
Net income		$	1,198			$	499			$	1,697			$	1,013			$	859			$	1,872

Results of Operations

Three Months Ended December 31, 2005 Compared to Three Months Ended December 31, 2004

Net Sales. Net sales for the Company increased $69,000, or 0.2%, to $28,418,000 for the quarter ended December 31, 2005, compared to $28,349,000 for the same period last year. The increase in sales was due to increased sales in the Craftmade segment partially offset by a decline in sales in the TSI segment.

Net sales from the Craftmade segment increased $2,878,000, or 23.5%, to $15,146,000 for the quarter ended December 31, 2005, from $12,268,000 for the same period last year. The increase resulted from $2,127,000 of incremental net sales from the acquisition of Bill Teiber Co., Inc. (“Teiber”) as the Teiber customer base continues to expand. The remaining $751,000 increase in sales of the Craftmade segment resulted from an increase in sales partially due to newly introduced products such as the builder-targeted ceiling fans, decorative ceiling fans and Accolade lighting products.

Based on sales results from fiscal year 2005, management anticipates that net sales from the Craftmade segment, excluding results from the Teiber acquisition, will improve in fiscal year 2006 as newly introduced products become available, assuming continued strength in the housing sector and the overall U.S. economy. Management believes that the Teiber acquisition will continue to provide incremental growth opportunities throughout fiscal year 2006.

Net sales of the TSI segment declined $2,809,000 or 17.5% to $13,272,000 for the quarter ended December 31, 2005, from $16,081,000 for the same period last year, as increases in PHI, a 50% owned subsidiary, were offset by decreases in Design Trends, a 50% owned subsidiary, and Trade Source, a wholly-owned subsidiary, as summarized in the following table (in thousands except percentage data):

Change in Net Sales of TSI Segment
										Prime/				TSI
		Trade				Design				Home				Segment
Quarter Ended		Source				Trends				Impressions				Total
December 31, 2005		$	4,892			$	5,127			$	3,253			$	13,272
December 31, 2004			6,272				7,586				2,223				16,081
Dollar change			(1,380	)			(2,459	)			1,030				(2,809	)
Percent change			-22.0	%			-32.4	%			46.3	%			-17.5	%

The TSI segment includes Trade Source, which is wholly-owned by the Company, and Prime/Home Impressions and Design Trends which are each 50% owned by the Company. Hereafter, TSI refers to the segment and Trade Source to the entity.

The net decrease in Trade Source sales was primarily the result of a sales decline as Wal-Mart transitions from a direct-import program for indoor/outdoor lighting and the mix and match fan program to a program where Trade Source will ship indoor/outdoor lighting items from its warehouse in Coppell, Texas. This decrease in sales was partially offset by an increase in sales of promotional indoor lighting products and the addition of the window covering product lines.

For the quarter ending December 31, 2005, Trade Source net sales to Wal-Mart declined to $83,000 from $2,202,000 in the same quarter in the prior year as Wal-Mart depletes its inventory prior to the above referenced transition. As routinely happens, Trade Source participated in Wal-Mart’s indoor/outdoor lighting line review which occurred during the second fiscal quarter. In conjunction with the shift of shipment origins, Trade Source will consolidate some and eliminate other SKU’s to try to maximize inventory turns and reduce risks associated with warehousing slow moving inventory. The consolidated items will have higher gross margins per unit sold; but the Company will only stock 50% to 60% of the total number of SKU’s previously provided in the direct import program once the new program begins in April. The lighting products that could not be priced to meet the needs of Wal-Mart and the Company have been eliminated.

The decline in Design Trends’ net sales was primarily due to the previously disclosed loss of four Lowe’s regional distribution centers which serve approximately 437 stores and the timing of orders prior to the April 2006 reset as described below. More detail of the loss of the distribution centers is provided in the Company’s Annual Report on Form 10-K for the year ended June 30, 2005 as filed with the SEC on September 20, 2005, and the Company’s Current Report on Form 8-K filing dated April 25, 2005.

Lowe’s continues to evaluate its mix and match portable lamp program and is planning to change its merchandising concept to one that will be based on Lowe’s private label, which will result in the discontinuance of the Design Trends’ merchandising display. In advance of the April 2006 reset, the Company has been asked to repurchase a portion of the existing inventory under the old Design Trends’ packaging and replace it with Lowe’s private label packaging. Lowe’s is currently offering the Company approximately 60% of the products in the new display set. The Company and Lowe’s continue to negotiate the terms for the transition into the new set. Based on historical information, private label programs result in declining gross profit margins and the Company will continue to evaluate the profitability of the mix and match portable lamp program relative to the investment required to maintain the program.

The increase in net sales of PHI primarily resulted from increased sales of the fan accessory and lamp replacement parts business to Lowe’s. Additional increases in net sales over the same quarter in the prior year is due to PHI’s sales of fan accessories to Wal-Mart that were made by Trade Source in the prior year quarter.

Future growth of the TSI segment is contingent upon the success of the Company’s ongoing efforts to introduce new products and product lines to existing customers and to expand the business to new customers. Design Trends’ sales could be immediately impacted by management’s attempt to reduce current inventory levels prior to the April 2006 reset in order to minimize potential markdown costs.

Future sales could be negatively impacted if the Company determines that the investment required to maintain the Lowe’s mix and match portable lamp program does not generate the necessary returns to justify the program’s continuance.

Gross Profit. Gross profit of the Company as a percentage of net sales decreased to 30.2% for the quarter ended December 31, 2005, compared to 31.1% for the same period last year. Gross profit from the prior year quarter benefited from a one-time $304,000 reduction in cost of sales by an amount that had been accrued related to import brokerage fees and duties (“Gross Profit Benefit”). On an adjusted basis, gross profit as a percentage of net sales was 30.0% for the second quarter ended December 31, 2004.

Gross profit as a percentage of net sales of the Craftmade segment decreased 2.0% to 35.5% for the quarter ended December 31, 2005, compared to 37.5% in the same period last year. The prior year gross profit includes $133,000 from the Gross Profit Benefit described above. On an adjusted basis, gross profit as a percentage of net sales was 36.5% for the quarter ended December 31, 2004.

The decline in the gross margin of the Craftmade segment was the result of a change in product sales mix, and increased cost due to the decline of the U.S. dollar during the first seven months of the 2005 calendar year. The Company anticipates that margins for the Craftmade division will slightly increase during the second half of the 2006 fiscal year from the first half of the year due to an aggregate decrease in cost due to price decreases resulting from the strengthening U.S. dollar during the last five months of the 2005 calendar year and strengthening relationships with manufacturers that are located in countries with a more favorable exchange rate. However, this could be offset by the affect of the recent weakening of the U.S. dollar. More detail of the impact of fluctuations in exchange rate is in Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The gross profit of the TSI segment decreased to 24.2% of net sales for the quarter ended December 31, 2005, compared to 26.2% of net sales in the same prior year period, as summarized in the following table:

Change in Gross Margins of TSI Segment
										Prime/				TSI
		Trade				Design				Home				Segment
Quarter Ended		Source				Trends				Impressions				Total
December 31, 2005			14.8	%			27.8	%			32.5	%			24.2	%
December 31, 2004			18.9	%			29.1	%			36.5	%			26.2	%
Percent Change			-4.1	%			-1.3	%			-4.0	%			-2.0	%

The prior year gross profit includes $171,000 from the Gross Profit Benefit described above. On an adjusted basis, gross profit of the TSI segment as a percentage of net sales was 25.1% for the quarter ended December 31, 2004. Overall, the net decrease in gross margin as a percentage of sales for the TSI segment resulted from changes in mix of vendor program accruals as a percentage of gross sales and sales mix.

Specifically, margins decreased at Trade Source from the reduction in sales of the mix and match fan program to Wal-Mart, offset by a decrease in the projected cost of the annual reset of products at Lowe’s scheduled to take place in February 2006. The decrease in gross margin at Design Trends resulted from the prior year gross margin including $141,000 from the Gross Profit Benefit described above. On an adjusted basis, Design Trends gross profit as a percentage of net sales was 27.3% for the quarter ended December 31, 2004. Margins decreased at PHI as the result of additional costs incurred with the annual reset which took place in September and October 2005 and higher rebates to Lowe’s as a result of increased sales volume.

For fiscal year 2006, gross profit as a percentage of net sales of the TSI segment is expected to remain consistent with the quarter ended December 31, 2005 provided that the segment maintains a similar sales mix, customer concentration and level of vendor program commitment in fiscal year 2006.

Selling, General and Administrative Expenses. Total selling, general and administrative (“SG&A”)

expenses of the Company increased $252,000 to $4,748,000, or 16.7% of net sales, for the quarter ended December 31, 2005 from $4,496,000, or 15.9%, of net sales for the prior year.

Total SG&A expense of the Craftmade segment increased $401,000 to $3,073,000 or 20.3% of sales, compared to $2,672,000 or 21.8% of net sales for the same period in the previous year. The increase in SG&A of the Craftmade segment is summarized as follows (in thousands):

										Change
		Quarter Ended								From
		December 31,								Prior Year
		2005				2004				Period
Salaries and wages		$	1,098			$	1,169			$	(71	)
Accounting, legal and consulting			357				583				(226	)
Other			1,618				920				698
		$	3,073			$	2,672			$	401

Salaries and wages for the quarter ending Decmeber 31, 2005, were lower than the prior year period as the result of a severance agreement with the Company’s former Chief Financial Officer in the prior year period. The cost of this agreement was $174,000 and was recorded in the quarter ended December 31, 2004. The corresponding increase is salaries and wages resulted from higher salaries due to adjustments of current employees to remain competitive with market conditions as well as the addition of seven Teiber employees and additional accounting and IT staff.

Lower accounting, legal and consulting fees in the quarter ended December 31, 2005 were primarily due to higher costs incurred in the same period in the prior year to (i) address internal controls issues, (ii) evaluate the proper interpretation of FIN 46 with respect to the Company’s 50% owned subsidiaries and (iii) comply with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”).

Other increases in expenses resulted from (i) an increase in commissions of $140,000 from the same period in the prior year due to increased sales volume, (ii) an increase in advertising expenses of $73,000 from the timing of coop advertising payments and one-time charges related to printing material for the rollout of the window covering program, (iii) an increase in property taxes of $133,000 due to additional property taxes related to the Teiber acquisition, (iv) an increase in contract labor of $80,000 as a result of higher temporary labor to manage the increase in sales volume and the increase in shipments managed domestically through the Company’s warehouse and (v) lower distribution of common expenses of $165,000 to TSI driven by lower sales volume.

Total SG&A expenses of the TSI segment decreased $149,000 to $1,675,000, or 12.6%, of net sales, for the quarter ended December 31, 2005 from $1,824,000, or 11.3% of net sales, for the same period in the previous year. The decrease in SG&A expenses resulted from lower costs allocated from the Craftmade segment as a result of lower sales volume from the TSI segment.

Management anticipates that based on current market conditions, future SG&A expenses as a percentage of net sales, excluding accounting, legal and consulting fees related to compliance with Section 404, will be relatively consistent with results generated in fiscal year 2005. Management anticipates that accounting, legal and consulting costs, including costs to comply with Section 404, will be reduced by approximately 35% to 50% of such costs in fiscal year 2005.

Interest Expense. Net interest expense of the Company increased $82,000 to $322,000 for the quarter ended December 31, 2005, from $240,000 for the same period in the previous year. This increase was primarily the result of higher interest rates in effect during the period on the Company’s outstanding promissory note with Frost Bank. The outstanding balance on the Company’s facility note was lower than in the same period during fiscal 2005, and the interest rate on the facility note remained unchanged compared to the same period in the prior year. Management anticipates that in the future, lower outstanding balances on its lines of credit may offset expected increases in interest rates, resulting in total

interest expense that is not significantly different from the expense generated in fiscal year 2005.

Minority Interests. Minority interests generated by the Company’s 50% owned subsidiaries decreased $256,000 to $739,000 for the quarter ended December 31, 2005, compared to $995,000 for the same period in the previous year. The decrease was due to the decline in net sales of Design Trends, partially offset by an increase in net sales and profit of PHI, as discussed above.

Provision for Income Taxes. The provision for income tax was $929,000, or 35.4% of income before income taxes, for the quarter ended December 31, 2005, compared to $1,068,000, or 36.3% of income before taxes, for the same quarter of the prior year. The decrease in percentage resulted from the tax benefit obtained from receiving an 85% dividends received deduction for the repatriation of undistributed 2005 foreign earnings under the American Jobs Creation Act of 2004. The Company expects to receive a similar benefit throughout fiscal year 2006.

Six Months Ended December 31, 2005 Compared to Six Months Ended December 31, 2004

A condensed overview of results for the three months ended December 31, 2005 and the corresponding prior year period is summarized as follows (in thousands, except percentage data):

		Six Months Ended												Six Months Ended
		December 31, 2005												December 31, 2004
		Craftmade				TSI				Total				Craftmade				TSI				Total
Net sales		$	31,656			$	27,231			$	58,887			$	26,868			$	30,506			$	57,374
Cost of goods sold			20,415				21,138				41,553				16,632				23,410				40,042
Gross profit			11,241				6,093				17,334				10,236				7,096				17,332
Gross profit as a % of net sales			35.5	%			22.4	%			29.4	%			38.1	%			23.3	%			30.2	%
SG&A			6,403				3,243				9,646				6,459				3,446				9,905
As a % of net sales			20.2	%			11.9	%			16.4	%			24.0	%			11.3	%			17.3	%
Interest			580				46				626				408				62				470
Depreciation			293				18				311				262				26				288
Income before minority interests and income taxes		$	3,965			$	2,786			$	6,751			$	3,107			$	3,562			$	6,669
Minority interests			—				1,472				1,472				—				1,561				1,561
Provision for income taxes			1,422				428				1,850				1,113				725				1,838
Net income		$	2,543			$	886			$	3,429			$	1,994			$	1,276			$	3,270

Net Sales. Net sales for the Company increased $1,513,000, or 2.6%, to $58,887,000 for the six months ended December 31, 2005, compared to $57,374,000 for the same period in the previous year. The increase in sales was due to increased sales in the Craftmade segment, partially offset by a decline in sales in the TSI segment.

Net sales from the Craftmade segment increased $4,788,000, or 17.8%, to $31,656,000 for the six months ended December 31, 2005, from $26,868,000 for the same period in the previous year. The increase resulted from $4,131,000 of incremental net sales from the acquisition of Teiber as the Teiber customer base continues to expand. The remaining $657,000 increase in sales of the Craftmade segment resulted from an increase in sales partially due to newly introduced products such as builder-targeted ceiling fans, decorative ceiling fans and Accolade decorative lighting products.

Based on sales results from fiscal year 2005, management anticipates that net sales from the Craftmade segment, excluding results from the Teiber acquisition, will improve in fiscal year 2006 as newly introduced products become available, assuming continued strength in the housing sector and the overall U.S. economy. Management believes that the Teiber acquisition will continue to provide incremental growth opportunities throughout fiscal year 2006.

Net sales of the TSI segment declined $3,275,000, or 10.7%, to $27,231,000 for the six months ended December 31, 2005, from $30,506,000 for the same period last year, as increases in PHI, a 50% owned subsidiary, were offset by decreases in Design Trends, a 50% owned subsidiary, and Trade Source, a wholly-owned subsidiary, as summarized in the following table (in thousands except percentage data):

Change in Net Sales of TSI Segment

										Prime/				TSI
		Trade				Design				Home				Segment
Quarter Ended		Source				Trends				Impressions				Total
December 31, 2005		$	10,006			$	10,557			$	6,668			$	27,231
December 31, 2004			12,066				13,731				4,709				30,506
Dollar change			(2,060	)			(3,174	)			1,959				(3,275	)
Percent change			-17.1	%			-23.1	%			41.6	%			-10.7	%

The net decrease in Trade Source sales was primarily the result of a sales decline as Wal-Mart transitions from a direct-import program for indoor/outdoor lighting and the mix and match fan program to a program where Trade Source will ship indoor/outdoor lighting items from its warehouse in Coppell, Texas. This decrease in sales was partially offset by an increase in sales of promotional indoor lighting products and the addition of the window covering product lines.

For the six months ending December 31, 2005, Trade Source’s net sales to Wal-Mart declined to $1,068,000 from $4,085,000 in the same period in the prior year as Wal-Mart depletes its inventory prior to the above referenced transition. As routinely happens, Trade Source participated in Wal-Mart’s indoor/outdoor lighting line review which occurred during the second fiscal quarter. In conjunction with the shift of shipment origins, Trade Source will consolidate some and eliminate other SKU’s to try to maximize inventory turns and reduce risks associated with warehousing slow moving inventory. The consolidated items will have higher gross margins per unit sold, but the Company will only stock 50% to 60% of the total number of SKU’s previously provided in the direct import program once the new program begins in April. The lighting products that could not be priced to meet the needs of Wal-Mart and the Company have been eliminated.

The decline in Design Trends’ net sales was primarily due to the previously disclosed loss of four Lowe’s regional distribution centers which serve approximately 437 stores and the timing of orders prior to the April 2006 reset as described below. More detail of the loss of the distribution centers is provided in the Company’s Annual Report on Form 10-K for the year ended June 30, 2005 as filed with the SEC on September 20, 2005, and the Company’s Current Report on Form 8-K filing dated April 25, 2005.

The increase in net sales of PHI primarily resulted from increased sales of the fan accessory and lamp replacement parts business to Lowe’s. Additional increases in net sales over the same quarter in the prior year is due to PHI’s sales of fan accessories to Wal-Mart that were made by Trade Source in the prior year quarter.

Gross Profit. Gross profit of the Company as a percentage of net sales decreased to 29.4% for the six months ended December 31, 2005, compared to 30.2% for the same period in the previous year. Gross

profit from the prior year period benefited from a one-time $304,000 reduction in cost of sales by the Gross Profit Benefit.. On an adjusted basis, gross profit as a percentage of net sales was 29.7% for the six months ended December 31, 2004.

Gross profit as a percentage of net sales of the Craftmade segment decreased 2.6% to 35.5% for the six months ended December 31, 2005, compared to 38.1% in the same period last year. The prior year gross profit includes $133,000 from the Gross Profit Benefit described above. On an adjusted basis, gross profit as a percentage of net sales was 37.6% for the six months ended December 31, 2004.

The decline in the gross margin of the Craftmade segment was the result of a change in product sales mix, and increased cost due to the decline of the US dollar during the first seven months of the 2005 calendar year. The Company anticipates that margins in the second half of the 2006 fiscal year for the Craftmade division will slightly increase from the first half of the year due to an aggregate decrease in cost due to price decreases resulting from the strengthening U.S. dollar during the last five months of the 2005 calendar year and strengthening relationships with manufacturers that are located in countries with a more favorable exchange rate. However, this could be offset by the affect of the recent weakening of the U.S. dollar. More detail of the impact of fluctuations in exchange rate is in Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The gross profit of the TSI segment decreased to 22.4% of net sales for the six months ended December 31, 2005, compared to 23.3% of net sales in the same prior year period, as summarized in the following table:

Change in Gross Margins of TSI Segment

										Prime/				TSI
		Trade				Design				Home				Segment
Six Months Ended		Source				Trends				Impressions				Total
December 31, 2005			12.6	%			24.7	%			33.3	%			22.4	%
December 31, 2004			17.5	%			24.8	%			33.6	%			23.3	%
Percent Change			-4.9	%			-0.1	%			-0.3	%			-0.9	%

The prior year gross profit includes $171,000 from the Gross Profit Benefit described above. On an adjusted basis, gross profit as a percentage of net sales was 22.7% for the six months ended December 31, 2004.

The net decrease in gross margin as a percentage of net sales for the TSI segment resulted from changes in mix of (i) vendor program accruals as a percentage of gross sales, (ii) sales mix and (iii) changes in composition of shipment’s origin. Orders shipped directly from the Company’s vendors to its customers are typically at lower margins. Orders shipped domestically from the Company’s warehouse are typically at higher margins to offset the costs associated with storage and handling of products.

Specifically, margins decreased at Trade Source from the reduction in sales of the mix and match fan program to Wal-Mart, offset by a decrease in the projected cost of the annual reset of products at Lowe’s scheduled to take place in February 2006. The decrease in gross margin at Design Trends resulted from the prior year gross margin including $141,000 from the Gross Profit Benefit described above. On an adjusted basis, Design Trends’ gross profit as a percentage of net sales was 23.8% for the six months ended December 31, 2004. Margins decreased at PHI as the result of a one-time additional costs incurred with the annual reset which took place in September and October 2005, and higher rebates to Lowe’s as a result of increased sales volume.

For fiscal year 2006, gross profit as a percentage of net sales of the TSI segment is expected to remain consistent with the six months ended December 31, 2005, provided that the segment maintains a similar sales mix, customer concentration and level of vendor program commitment throughout fiscal year 2006.

Selling, General and Administrative Expenses. Total selling, general and administrative (“SG&A”) expenses of the Company decreased $259,000 to $9,646,000 or 16.4% of net sales for the six months ended

December 31, 2005 from $9,905,000, or 17.3% of net sales, for the prior year.

Total SG&A expense of the Craftmade segment decreased $56,000 to $6,403,000, or 20.2% of net sales, compared to $6,459,000, or 24.0% of net sales, for the same period in the previous year. The increase in SG&A of the Craftmade segment is summarized as follows (in thousands):

										Change
		Six Months Ended								From
		December 31,								Prior Year
		2005				2004				Period
Salaries and wages		$	2,213			$	2,074			$	139
Accounting, legal and consulting			929				1,549				(620	)
Other			3,261				2,836				425
		$	6,403			$	6,459			$	(56	)

Salaries and wages were for the six months ending December 31, 2005, higher than the prior year as the result of higher salaries due to adjustments of current employees to remain competitive with market conditions as well as the addition of seven Teiber employees and additional accounting and IT staff. Prior year salaries and wages were impacted by a severance agreement with the Company’s former Chief Financial Officer in the prior year period. The cost of this agreement was $174,000 and was recorded in the six months ended December 31, 2004.

Lower accounting, legal and consulting fees in the six months ended December 31, 2005 were primarily due to higher costs incurred in the same period in the prior year to (i) address internal controls issues, (ii) evaluate the proper interpretation of FIN 46 with respect to the Company’s 50% owned subsidiaries and (iii) comply with Section 404.

Other increases in expenses compared to the same period in the prior year include (i) an increase in commissions of $224,000 due to increased sales volume, (ii) an increase of advertising expenses of $113,000 from the timing of coop advertising payments, (iii) an increase in property taxes of $129,000 due to additional property taxes related to the Tieber acquisition, (iv) an increase in contract labor of $85,000 as a result of higher temporary labor to manage the increase in sales volume and the increase in shipments managed domestically through the Company’s warehouse and (v) a decrease in distribution of common expenses to TSI which is allocated based on sales volume as a percentage of overall sales.

Total SG&A expenses of the TSI segment decreased $203,000 to $3,243,000, or 11.9% of net sales for the six months ended December 31, 2005, from $3,446,000,or 11.3% of sales for the same period in the previous year. The decrease in SG&A expenses resulted from lower costs allocated from the Craftmade segment as a result of lower sales from the TSI segment.

Management anticipates that based on current market conditions, future SG&A expenses as a percentage of sales, excluding accounting, legal and consulting fees related to compliance with Section 404, will be relatively consistent with results generated in fiscal year 2005. Management anticipates that accounting, legal and consulting costs, including costs to comply with Section 404, will be reduced by approximately 35% to 50% of such costs in fiscal year 2005.

Interest Expense. Net interest expense of the Company increased $156,000 to $626,000 for the six months ended December 31, 2005, from $470,000 for the same period in the previous year. This increase was primarily the result of higher interest rates in effect during the period and slightly higher monthly average balances. In addition, the outstanding balance on the Company’s facility note was lower than in the same period during fiscal 2005, and the interest rate on the facility note remained unchanged compared to the same period in the prior year. Management anticipates that in the future, lower outstanding balances on its lines of credit may offset expected increases in interest rates, resulting in total interest expense that is not significantly different from the expense generated in fiscal year 2005.

Minority Interests. Minority interests generated by the Company’s 50% owned subsidiaries decreased $89,000 to $1,472,000 for the six months ended December 31, 2005, compared to $1,561,000 for the same period in the previous year. The decrease was due to the decline in net sales of Design Trends, partially offset by an increase in sales and profit of PHI, as discussed above.

Provision for Income Taxes. The provision for income tax was $1,850,000, or 35.0% of income before income taxes, for the six months ended December 31, 2005, compared to $1,838,000, or 36.0% of income before taxes, for the same prior year period. The decrease in percentage resulted from the tax benefit obtained from receiving an 85% dividends received deduction for the repatriation of undistributed 2005 foreign earnings under the American Jobs Creation Act of 2004. The Company expects to receive a similar benefit throughout fiscal year 2006.

Liquidity and Capital Resources

The Company’s cash decreased $7,415,000 from $9,145,000 at June 30, 2005 to $1,730,000 at December 31, 2005. Cash decreased as a result of the Company sweeping excess cash balances against its line of credit on a daily basis beginning in the second quarter. The Company’s operating activities provided cash of $4,445,000.

The $155,000 of cash used in investing activities related to additions to property and equipment, which consisted primarily of upgrading the Company’s computer equipment.

Cash used in financing activities of $11,704,000 was primarily the result (i) net payments on the Company’s revolving lines of credit of $9,755,000, (ii) principal payments on the Company’s notes payable of $794,000 and (iii) cash dividends of $1,155,000. Net payments on the Company’s primary revolving line of credit were higher than the prior year period as a result of the Company sweeping excess cash balances against its line of credit on a daily basis.

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 its projected growth over the next twelve months.

Management anticipates that future cash flows will be used primarily to retire existing debt, pay dividends, fund potential acquisitions and distribute earnings to minority interest members. The Company remains committed to its business strategy of creating long-term earnings growth, maximizing stockholder value through internal improvements, making selective acquisitions and dispositions of assets, focusing on cash flow and retaining quality personnel.

At December 31, 2005, subject to continued compliance with certain covenants and restrictions, the Company had a $20,000,000 line of credit with The Frost National Bank (“Frost”) at the one-month LIBOR interest rate (4.3857% at December 31, 2005) plus 1.50% to 2.75%, depending on the Company’s debt to worth ratio. There was $13,245,000 outstanding under the Company’s $20,000,000 line of credit with Frost Bank at December 31, 2005. The line of credit is scheduled to mature on October 31, 2007. Financial covenants of the agreement include a requirement that the Company maintain a fixed charge coverage ratio greater than 1.25 to 1. Other covenants and restrictions that apply to this agreement require the Company’s debt to tangible net worth ratio to be less than 3.0 to 1.0 after December 31, 2005. Additionally, the Company has agreed not to purchase its stock if its debt to tangible net worth exceeds 3.0 to 1.0. The Company’s debt to tangible net worth ratio, as defined in the loan agreement, equaled 2.4 to 1.0 at December 31, 2005, resulting in the effective interest rate for the next quarter to be reduced to LIBOR plus 1.75%, provided that the Company remains in compliance with the previously disclosed covenants.

Under this line of credit, for each one-percentage point (1%) incremental increase in LIBOR, the Company’s annualized interest expense would increase by approximately $132,000. 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 $662,000. The Company does not have any

agreements to hedge against the potential rising of interest rates.

On February 25, 2005, the line of credit was amended to provide, among other things, a $3,000,000 increase in the commitment initially through March 31, 2005 and then through December 31, 2005, upon the execution of an additional amendment. This note was renewed and extended until January 15, 2007.

One of the Company’s 50%-owned subsidiaries, PHI, has a $3,000,000 promissory note (the “$3 Million Line of Credit”) with Wachovia Bank, N.A. (“Wachovia”), at an interest rate equal to the monthly LIBOR index plus 2%. There was an outstanding balance of $1,548,000 at December 31, 2005. The note is scheduled to mature on December 15, 2006. The PHI members, which include TSI, agreed to be guarantors of the $3 Million Line of Credit in order to induce the lender to provide these loans to PHI.

Based on the amounts outstanding at December 31, 2005 under the $3 Million Line of Credit, for each one-percentage point (1%) incremental increase in LIBOR, the Company’s annualized interest expense would increase by approximately $15,000. 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 $77,000. The Company does not have any agreements to hedge against the potential rising of interest rates.

At December 31, 2005, $2,076,000 remained outstanding under the note payable for the Company’s 378,000 square foot operating facility. The loan is payable in equal monthly installments of $100,378 of principal and interest at 8.302%. 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 Electrical Corp. (“Fanthing”), Craftmade’s ceiling fan vendor, has provided Craftmade with a $1,000,000 credit limit, pursuant to which it will manufacture and ship ceiling fans prior to receipt of payment from Craftmade. Accordingly, payment can be deferred until delivery of such products. At present levels, such credit facility is equivalent to approximately three weeks’ supply of ceiling fans and represents a supplier commitment, which, in the opinion of the Company’s management, is unusual for the industry and favorable to the Company. This manufacturer is not required to provide this credit facility under its agreement with Craftmade, and it may discontinue this arrangement at any time.

Management does not anticipate that the covenants and restrictions of its lines of credit and loan agreements will limit the Company’s growth potential.

TSI maintained inventory levels of $5,663,000 at December 31, 2005. TSI’s sales are highly concentrated with Lowe’s. Should the revenues generated by TSI from its programs with this customer be at levels significantly lower than originally anticipated, the Company would be required to find other customers for this inventory. There can be no assurances that the Company would be able to obtain additional customers for this inventory or that any alternative sources would generate similar sales levels and profit margins as anticipated with the current mass merchandiser customer.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information set forth below constitutes a “forward looking statement.” See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cautionary Statement.

The Company currently purchases a substantial amount of ceiling fans and other products of its Craftmade segment from Fanthing, a Taiwanese company. The Company’s verbal understanding with Fanthing provides that all transactions are to be denominated in U.S. dollars; however, the understanding further provides that, in the event that the value of the U.S. dollar appreciates or depreciates against the Taiwan dollar by one Taiwan dollar or more, Fanthing’s prices will be accordingly adjusted by 2.5%.

The Company also purchases a substantial amount of other products of its Craftmade and TSI segments from numerous manufacturing companies located in the People’s Republic of China (“China”). On July 21, 2005, China’s central bank adjusted the exchange rate of the Chinese yuan to the U.S. dollar and

continuing fluctuations in the Chinese yuan against the U.S. dollar are expected. All transactions with Chinese manufacturers are denominated in U.S. dollars, but fluctuations in the exchange rate between the U.S. dollar and Chinese yuan could affect the pricing of items manufactured in China.

The following table summarizes the exchange rate of the United States dollar (“USD”) to the Taiwan dollar (“TWD”) and Chinese yuan (“YUAN”):

		USD:TWD				USD:YUAN
June 30, 2004		$	33.746			$	8.287
September 30, 2004			33.990				8.287
December 31, 2004			31.980				8.287
March 31, 2005			31.875				8.287
June 30, 2005			31.665				8.287
September 30, 2005			33.270				8.110
December 31, 2005			32.951				8.073

A sharp appreciation of the Taiwan dollar or the Chinese yuan 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 (i) the cost associated with such instruments would outweigh the benefits that would be obtained from utilizing such instruments and (ii) this risk is not unique to Craftmade as other competitors also purchase a majority of their product from Asian manufacturers.

During the fiscal quarter ended December 31, 2005, the Company purchased approximately $4,245,000 of products from Fanthing and $12,542,000 of products from Chinese manufacturing companies. The Company estimates that an appreciation of the Chinese yuan and the Taiwan dollar to the U.S. dollar of 1% would result in an estimated annual increase in cost of goods sold of approximately $502,000 and a decrease in net income of $263,000, based on the Company’s purchases during the quarter ended December 31, 2005, on an annualized basis. A 10% incremental appreciation of the Chinese yuan and the Taiwan dollar to the U.S. Dollar would result in an estimated annualized increase in cost of goods sold of approximately $6,290,000 and a decrease in net income of $3,488,000, based on the Company’s purchases during the quarter ended December 31, 2005, on an annualized basis. A 20% incremental appreciation of the Chinese yuan and the Taiwan dollar to the U.S. Dollar would result in an increase of approximately $13,005,000 and a decrease in net income of $7,251,000, on an annualized basis, based on the Company’s purchases during the quarter ended December 31, 2005, on an annualized basis. These amounts are estimates of the financial impact of an appreciation of the Chinese yuan and the Taiwan dollar relative to the U.S. dollar and are based on annualizations of the Company’s purchases from Chinese manufacturing companies and Fanthing for the quarter ended December 31, 2005. Consequently, these amounts are not necessarily indicative of the effect of such changes with respect to an entire year.

Other market risks at December 31, 2005 have not changed significantly from those discussed in Item 7A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2005 as filed with the SEC on September 20, 2005.

For a discussion of the effects of hypothetical changes in interest rates, see “Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital Resources.”

Item 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the principal executive officer and principal financial officer

concluded that the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Changes in Internal Controls

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

Information regarding our legal proceedings is set forth in Note 5 — Commitments and Contingencies to the consolidated financial statements in Item 1 of Part I of this Form 10-Q, which is incorporated herein by reference.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Not Applicable

Item 3. DEFAULTS UPON SENIOR SECURITIES.

Not Applicable

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company held its annual meeting of stockholders on November 29, 2005. With respect to the election of directors, the shares were voted as follows:

		Number of Votes								Abstentions
		of Common Stock								and Broker
Nominee		For				Withheld				Non-Votes
James R. Ridings			4,158,625				43,632				—
Clifford Crimmings			4,120,439				81,818				—
R. Don Morris			4,099,090				103,167				—
John DeBlois			4,120,239				82,018				—
A. Paul Knuckley			4,137,788				64,469				—
Lary C. Snodgrass			4,172,127				30,130				—
William E. Bucek			4,172,017				30,240				—
L. Dale Griggs			4,171,617				30,640				—
Richard T. Walsh			4,171,727				30,530				—

With respect to the ratification of BDO Seidman, LLP as the Company’s independent auditors for 2006, the votes were as follows:

Number of Votes		Number of Votes				Abstentions and
Voted For		Voted Against				Broker Non-Votes
4,187,901			3,081				11,275

Item 5. OTHER INFORMATION.

Not Applicable

Item 6. EXHIBITS.

Exhibits

2.1		Agreement and Plan of Merger by and among Craftmade International, Inc., Bill Teiber Co,. Inc., Teiber Lighting Products, Inc., Todd Teiber and Edward Oberstein dated March 1, 2005, filed as Exhibit 10.1 to the Current Report on Form 8-K dated March 1, 2005 (File No. 000-2667) and incorporated by reference herein.
3.1		Certificate of Incorporation of the Company, filed as Exhibit 3 (a) (2) to the Company’s Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and incorporated by reference herein.
3.2		Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24, 1992 and filed as Exhibit to 4.2 to the Company’s For 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 date July 9, 1999 (File No. 000-266667) and incorporated by reference herein.
31.1*		Certification of James R. Ridings, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of J. Marcus Scrudder, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of James R. Ridings, Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of J. Marcus Scrudder, Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CRAFTMADE INTERNATIONAL, INC.
		(Registrant)
Date: February 9, 2006		/s/ James R. Ridings
		JAMES R. RIDINGS
		President and Chief
		Executive Officer
Date: February 9, 2006		/s/ J. Marcus Scrudder
		J. MARCUS SCRUDDER
		Chief Financial Officer

Index to Exhibits

Exhibit
Number		Description
2.1		Agreement and Plan of Merger by and among Craftmade International, Inc., Bill Teiber Co,. Inc., Teiber Lighting Products, Inc., Todd Teiber and Edward Oberstein dated March 1, 2005, filed as Exhibit 10.1 to the Current Report on Form 8-K dated March 1, 2005 (File No. 000-2667) and incorporated by reference herein.
3.1		Certificate of Incorporation of the Company, filed as Exhibit 3 (a) (2) to the Company’s Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and incorporated by reference herein.
3.2		Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24, 1992 and filed as Exhibit to 4.2 to the Company’s For 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 date July 9, 1999 (File No. 000-266667) and incorporated by reference herein.
31.1*		Certification of James R. Ridings, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of J. Marcus Scrudder, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of James R. Ridings, Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of J. Marcus Scrudder, Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.