FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Commission file number

CRAFTMADE INTERNATIONAL, INC.

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

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

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

5,200,000 shares of Common Stock were outstanding as of April 30, 2005.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

Index to Quarterly Report on Form 10-Q

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PART I
FINANCIAL INFORMATION

Item 1. Financial Statements. (Unaudited)

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

3

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

ASSETS

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

4

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

LIABILITIES AND STOCKHOLDERS’ EQUITY

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

5

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES

Note 1	- BASIS OF PREPARATION AND PRESENTATION
	The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting, and include all adjustments which are, in the opinion of management, necessary for a fair presentation. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading; however, it is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto, in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004 filed with the SEC on September 28, 2004. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year. State income tax expense of $256,000 previously classified in selling, general and administrative expenses has been reclassified to provision for income taxes for the quarter ended March 31, 2004. Such reclassification had no effect on previously reported net income.
Note 2	- ACQUISITION OF BILL TEIBER CO., INC.
	On March 1, 2005, the Company acquired 100% of the issued and outstanding shares of capital stock of Bill Teiber Co., Inc. (“Teiber”) through a merger of subsidiaries. Teiber is an importer and distributor of decorative light bulbs, door chimes, ventilation systems and related lighting accessories. The business will be operated as Teiber Lighting Products, Inc., a wholly-owned subsidiary of Craftmade. Craftmade acquired Teiber in order to distribute Teiber’s product lines to Craftmade’s existing 1,600 showroom customers.
	Assets acquired and liabilities assumed were recorded on the Company’s Condensed Consolidated Balance Sheets as of the acquisition date based upon their estimated fair values at such date. The results of operations have been included in the Condensed Consolidated Statements of Income since the date of merger in the Craftmade segment.
	The aggregate purchase price was calculated as follows:

The following table sets forth the unaudited pro forma results of operations of the Company as if the Teiber merger had occurred at the beginning of the periods presented. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the merger occurred as of the

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

beginning of each of the periods presented or that may be obtained in the future.

Unaudited Pro Forma Results
(In thousands except per share data)

The purchase price has been allocated based on the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition. The purchase price allocation is preliminary and may be adjusted for changes in estimates of fair value, including but not limited to changes in allowances for doubtful accounts and inventory reserves. The following represents the preliminary allocation of the purchase price:

	The amounts assigned to intangible assets represent the value of non-compete agreements for the two principals of Teiber. The value was based on an independent appraisal and will be amortized over seven years using the straight-line method.
	The amount of goodwill allocated to the purchase price was $6,821,046 of which $4,000,000 is deductible for tax purposes.

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

Note 3	- EARNINGS PER SHARE
	The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations:

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

Note 4	- STOCK-BASED 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:

10

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

Note 5	- SEGMENT INFORMATION
	The Company operates in two reportable segments, Craftmade and TSI. The accounting policies of the segments are the same as those described in Note 2 — Summary of Significant Accounting Policies to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004. The Company evaluates the performance of its segments and allocates resources to them based on their net sales and income before minority interests and income taxes.
	The Company is organized on a combination of product type and customer base. The Craftmade segment primarily derives its revenue from home furnishings including ceiling fans, light kits, bathstrip lighting, outdoor lighting, lamps, light bulbs, door chimes and ventilation systems offered primarily through lighting showrooms and selected electrical distributors. The TSI segment derives its revenue from indoor lighting, including portable table lamps, floor lamps, ceiling mount lighting fixtures, bath-strip lighting, and outdoor lighting marketed solely to mass merchandisers.
	The following table presents information about the reportable segments:

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

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

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

	Cautionary Statement
	With the exception of historical information, the matters discussed in this document contain forward-looking statements. There are certain important factors which could cause actual results to differ materially from those anticipated by these forward-looking statements. Some of the important factors which would cause actual results to differ materially from those in the forward-looking statements include, among other things, the dependency of Trade Source International, Inc. (“TSI”), Design Trends, LLC (“Design Trends”) and Prime/Home Impression, LLC (“PHI”) on sales to select mass merchandiser customers and changes in those relationships, changes in anticipated levels of sales, whether due to future national or regional economic and competitive conditions, changes in relationships with Craftmade customers, customer acceptance of existing and new products, pricing pressures due to excess capacity, cost increases, changes in tax or interest rates, unfavorable economic and political developments in Asia (the location of the Company’s primary vendors) and changes in the foreign currency exchange rate between the U.S. and Taiwan dollar, declining conditions in the home construction industry, inability to realize deferred tax assets, labor strikes, lockouts, and other labor slow downs, the ability of the Company to import merchandise from foreign countries without significantly restrictive tariffs, duties or quotas and the ability of the Company to source, ship and deliver items from foreign countries to its U.S. distribution centers at reasonable prices and rates and in a timely fashion, as well as other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. When used in this Quarterly Report, the words “believes,” “plans,” “estimates,” “expects,” “anticipates,” “intends,” “continue,” “may,” “will,” “should”, “projects”, “forecast”, “might”, “could” or the negative of such terms and similar expressions as they relate to Craftmade or its management are intended to identify forward-looking statements.
	Critical Accounting Policies and Estimates
	Management’s discussion and analysis of its financial condition and results of operations following is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company’s estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company’s conclusions. The Company continually evaluates the information used to make these estimates as its business and the economic environment changes. As the financial statements contained herein are condensed, one should also read the Company’s Form 10-K for the year ended June 30, 2004 regarding expanded information about our critical accounting policies and estimates.

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

	Results of Operations
	Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
	Net Sales. Net sales for the Company declined $1,929,000 or 6.7% to $27,059,000 for the three month period ended March 31, 2005, compared to $28,988,000 for the same three month period last year. The decline resulted from lower than expected sales in the TSI segment, offset by an increase in the Craftmade segment.
	Net sales from the Craftmade segment increased $418,000 or 3.4% to $12,707,000 for the three months ended March 31, 2005 from $12,289,000 for the same three month period last year. The increase resulted from $696,000 of net sales from the Teiber acquisition. The remaining $278,000 decrease in sales of the Craftmade segment was primarily related to a general decline across product lines, and an unanticipated delay in shipment of new products introduced in January. Based on sales results from the first half of the fiscal year, management anticipates that net sales from the Craftmade segment, excluding results from the Teiber acquisition, will increase slightly for the remainder of the fiscal year as newly introduced products begin to sell. Management believes that the Teiber acquisition will provide incremental growth opportunities for the remainder of 2005 and fiscal 2006.
	Net sales of the TSI segment declined $2,347,000 or 14.1% to $14,352,000 for the three months ended March 31, 2005 from $16,699,000 for the same three month period last year. The decline in sales of the TSI segment resulted from lower sales at TSI and PHI, offset by an increase at Design Trends, summarized as follows (in thousands):

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

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The following table summarizes SG&A expenses of the Craftmade segment:

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

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Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004

A condensed overview of results for the nine months ended March 31, 2005 and the corresponding prior year period can be summarized as follows (in thousands):

	Net Sales. Net sales for the Company decreased $4,693,000 or 5.3%, to $84,433,000 for the nine month period ended March 31, 2005 from $89,126,000 for the same nine month period last year. The TSI segment contributed to virtually all of the decrease, offset by a slight increase from the Craftmade segment.
	Net sales of the Craftmade segment increased $429,000, or 1.1%, to $39,576,000 for the nine months ended March 31, 2005 from $39,147,000 for the same nine month period last year. The increase resulted from $696,000 of net sales from the Teiber acquisition. The remaining $267,000 decrease in sales of the Craftmade segment was primarily related to a general decline across product lines and an unanticipated delay in shipment of new products introduced in January. Based on sales results from the first half of the fiscal year, management anticipates that net sales from the Craftmade segment, excluding results from the Teiber acquisition, will increase slightly for the remainder of the fiscal year as newly introduced products begin to sell. Management believes that the Teiber acquisition will provide continued growth.
	Net sales of the TSI segment declined $5,122,000, or 10.2% to $44,857,000 for the nine months ended March 31, 2005 from $49,979,000 for the same nine month period last year. The change in net sales between periods can be summarized as follows:

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The changes can be explained as follows:

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

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At this time the Company has been given no indication as to what decisions will be made by Lowe’s regarding the future of the Design Trends program as of the end of the “test period.” Depending on test results, Lowe’s could decide to do the following:

	•	Maintain the distribution as implemented in mid-August 2005,
	•	Increase the distribution of the Design Trends’ program to additional or all regional distribution centers, or
	•	Increase the distribution of the competitor’s program to additional or all regional distribution centers.

Management believes that Design Trends remains competitive in its product offerings and provides its customers, in particular Lowe’s, the best opportunity to realize a satisfactory return on investment in the mix and match portable lamp product category. However, management cannot speculate as to whether or not Lowe’s, or any other customer, will make decisions regarding Design Trends’ products based on objective sales related information, or based on other factors unknown to management at this time. Design Trends continues to be invited to participate in scheduled line reviews at Lowe’s for its existing and new product lines.

	Gross Profit. Gross profit of the Company as a percentage of sales increased to 29.9% of net sales for the nine months ended March 31, 2005, compared to 29.5% for the same period of 2004. Gross profit as a percentage of sales of the Craftmade segment decreased to 37.3% for the nine months ended March 31, 2005, compared to 39.4% for the same period of 2004. The decline in the gross margin of the Craftmade segment was partially due to an increase in outbound freight as a percentage of net sales, but primarily due to increased product costs from a weaker U.S. dollar compared to the Taiwan dollar. In addition, gross profit margins were impacted by decreasing margins in the portion of sales driven by Craftmade’s builders’ model ceiling fans, whose sales are more sensitive to price increases which would offset the increased product costs. The Company anticipates that margins for the remainder of fiscal 2005 for the Craftmade segment will stabilize in the fourth quarter due to a price increase effective on March 1, 2005 that was approximately equal to the higher product costs.
	The gross profit of the TSI segment increased to 23.4% of sales for the nine months ended March 31, 2005, compared to 21.8% of sales in the year ago period. The increase was due to the following:

(i)

a $2,100,000 charge that reduced gross sales incurred in connection with the rollout of a new product to a customer of PHI in the quarter ended December 31, 2003, and

(ii)

a 1.2% increase in product margin as a percentage of gross sales, primarily from the semi-annual reset of Design Trends’ mix and match portable lamp program at the largest mass retail customer.

	These benefits were offset by the implementation of a markdown accrual on sales to TSI’s largest mass retail customer that totaled 2.9% of gross sales in the nine months ended March 31, 2005 from 0.0% of gross sales in the prior year period. For the remainder of fiscal 2005, gross profit as a percentage of sales of the TSI segment is expected to remain consistent with the first nine months of the fiscal year.
	Selling, General and Administrative Expenses. Total selling, general and administrative (“SG&A”) expenses of the Company increased $1,200,000 to $14,807,000 or 17.5% of net sales for the nine months ended March 31, 2005 from $13,607,000 or 15.3% of net sales for the same nine month period last year. The increase in SG&A came from the Craftmade segment, partially offset by a decrease in SG&A by the TSI segment.
	Total SG&A expense of the Craftmade segment increased $1,454,000 to $9,461,000 or 23.9% of sales

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compared to $8,007,000 or 20.5% of sales for the same period in the previous year. The increase in SG&A of the Craftmade segment can be summarized as follows (in thousands):

	Higher accounting and legal fees were primarily due to an increase in costs incurred with respect to the Company’s independent auditors, outside legal counsel, and management consultants. These increased costs were incurred in order to address internal controls issues, the evaluation by the Company’s management and independent auditors of the proper interpretation of FIN 46 with respect to the Company’s 50% owned subsidiaries, and an increase in cost to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The costs related to Section 404 was allocated entirely to the Craftmade segment; no allocation was made to the TSI segment for the portion of expenses related to accounting and legal fees, including compliance costs for Section 404.
	The increase in salaries and benefits was impacted by the severance agreement with the Company’s former Chief Financial Officer that totaled $174,000 in the second quarter of fiscal 2005 and higher salaries and wages from the addition of seven Teiber employees in March 2005.
	Total SG&A expenses of the TSI segment decreased $254,000 to $5,346,000 or 11.9% of sales for the nine month period ended March 31, 2005 from $5,600,000 or 11.2% of sales for the same period in the previous year. The decrease in SG&A expenses of the TSI segment between periods can be summarized as follows (in thousands):

	Salaries and wages were lower as the result of lower headcount from the closure of the California office in October 2003 and related severance paid in the prior year. The Company anticipates that its SG&A expenses to increase in the remaining quarter of the year primarily as a result of higher costs from compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
	Interest Expense. Net interest expense of the Company increased $168,000 to $733,000 for the nine months ended March 31, 2005 from $565,000 for the same six-month period last year. This increase was primarily the result of higher outstanding balances from the Company’s revolving line of credit, combined with higher interest rates in effect during the period.
	Minority Interests. Minority interests generated by the Company’s 50% owned subsidiaries decreased $336,000 to $2,420,000 for the nine months ended March 31, 2005 from $2,756,000 for the same period in the previous year. The decline was primarily related to the decline in sales and gross profit of Design

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

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

	A sharp appreciation of the Taiwan dollar relative to the U.S. dollar could materially adversely affect the financial condition and results of operations of the Company. The Company has not entered into any instruments to minimize this market risk of adverse changes in currency rates because the Company believes the cost associated with such instruments would outweigh the benefits that would be obtained from utilizing such instruments. All other purchases of the Company from foreign vendors are denominated in U.S. dollars and are not subject to adjustment provisions with respect to foreign currency fluctuations. As a result, the Company does not believe that it is subject to any material foreign currency exchange risk with respect to such purchases.
	During the fiscal quarter ended March 31, 2005, the Company purchased approximately $5,089,000 of products from Fanthing. Under the Company’s understanding with Fanthing, each $1 incremental appreciation of the Taiwan dollar would result in an estimated annualized net increase in cost of goods sold of approximately $509,000, based on the Company’s purchases during the fiscal quarter ended March 31, 2005 on an annualized basis. A $5 incremental appreciation of the Taiwan dollar would result in an estimated annualized increase in cost of goods sold of approximately $2,545,000, based on the Company’s purchases during the fiscal quarter ended March 31, 2005 on an annualized basis. A $10 incremental appreciation of the Taiwan dollar would result in an increase of approximately $5,089,000 on an annualized basis, based on the Company’s purchases during the fiscal quarter ended March 31, 2005 on an annualized basis. These amounts are estimates of the financial impact of an appreciation of the Taiwan dollar relative to the U.S. dollar and are based on annualizations of the Company’s purchases from Fanthing for the fiscal quarter ended March 31, 2005. Consequently, these amounts are not necessarily indicative of the effect of such changes with respect to an entire year.
	Other market risks at March 31, 2005 have not changed significantly from those discussed in Item 7A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2004 filed with the Securities and Exchange Commission on September 28, 2004.
	For a discussion of the effects of hypothetical changes in interest rates, see “Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital Resources.”

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Item 4. CONTROLS AND PROCEDURES.

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

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

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PART II
OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

	As more fully described in the Company’s Form 10-Q for the fiscal quarter ended September 30, 2004, on August 8, 2001, Lamps Plus, Inc. and Pacific Coast Lighting (collectively, “Lamps Plus”) sued several defendants, including Patrick S. Dolan, Dolan Northwest, LLC, Design Trends, and Craftmade International, Inc. (collectively, the “Craftmade Parties”), for alleged patent infringement in the United States District Court for the Northern District of Texas. On September 14, 2004, the Court entered a Judgment and Permanent Injunction and issued an Order Awarding Attorneys’ Fees against the Craftmade Parties. Dolan, Design Trends, and Craftmade have appealed the Judgment and Order. However, the outcome of this appeal is uncertain.
	With regard to the foregoing litigation (the “Lawsuit”), the Craftmade Parties entered into an agreement (the “Agreement”), that sets forth the responsibilities of the Craftmade Parties for payment of additional fees, costs and expenses of the Lawsuit. Pursuant to the Agreement, on April 16, 2003, Dolan Northwest became responsible for all legal fees and expenses incurred by the Craftmade Parties in connection with the Lawsuit from that date forward, and agreed to indemnify and hold harmless Craftmade and Design Trends from and against any and all claims, liabilities, or losses arising out of the legal fees and expenses incurred in the defense of the Lawsuit after February 21, 2003, including the appeal mentioned above.

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

Not Applicable

Item 3. DEFAULTS UPON SENIOR SECURITIES.

Not Applicable

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

Not Applicable

Item 5. OTHER INFORMATION.

Not Applicable

Item 6. EXHIBITS.

Exhibits

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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.

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Index to Exhibits

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