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, 2006

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

CRAFTMADE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		75-2057054 (I.R.S. employer identification no.)

650 SOUTH ROYAL LANE, SUITE 100
COPPELL, TEXAS
75019
(Address of principal executive offices)
(Zip code)

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

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. (Check one):

Large accelerated filer  o                    Accelerated filer  þ                    Non-accelerated filer o

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

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 5,203,500 as of January 31, 2007.

 

 

CRAFTMADE INTERNATIONAL, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS

Part I. Financial Information			1
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
Item 4. Controls and Procedures			26
Part II. Other Information			27
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3. Defaults Upon Senior Securities			27
Item 4. Submission of Matters to a Vote of Security Holders			27
Item 5. Other Information			28
Item 6. Exhibits			28
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

FINANCIAL INFORMATION

Item 1. Financial Statements

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

		Three Months Ended								Six Months Ended
		December 31,				December 31,				December 31,				December 31,
		2006				2005				2006				2005
Net sales		$	26,563			$	28,629			$	54,689			$	59,652
Cost of goods sold			(18,039	)			(20,041	)			(37,383	)			(42,318	)
Gross profit			8,524				8,588				17,306				17,334
Gross profit as a percentage of net sales			32.1	%			30.0	%			31.6	%			29.1	%
Selling, general and administrative expenses			(5,135	)			(4,748	)			(10,219	)			(9,646	)
Depreciation and amortization			(201	)			(153	)			(401	)			(311	)
Total operating expenses			(5,336	)			(4,901	)			(10,620	)			(9,957	)
Income from operations			3,188				3,687				6,686				7,377
Interest expense, net			(393	)			(322	)			(761	)			(626	)
Income before income taxes and minority interests			2,795				3,365				5,925				6,751
Income taxes			(782	)			(929	)			(1,763	)			(1,850	)
Income before minority interests			2,013				2,436				4,162				4,901
Minority interests			(513	)			(739	)			(778	)			(1,472	)
Net income		$	1,500			$	1,697			$	3,384			$	3,429
Weighted average common shares outstanding:
Basic			5,204				5,200				5,204				5,200
Diluted			5,206				5,210				5,207				5,210
Basic earnings per common share		$	0.29			$	0.33			$	0.65			$	0.66
Diluted earnings per common share		$	0.29			$	0.33			$	0.65			$	0.66
Cash dividends declared per common share		$	0.12			$	0.12			$	0.24			$	0.24

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

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

ASSETS

		December 31,				June 30,
		2006				2006
		(Unaudited)
Current assets
Cash		$	464			$	2,164
Accounts receivable — net of allowance of $202 and $293, respectively			19,013				19,802
Inventories — net of allowance of $649 and $934, respectively			21,944				21,085
Deferred income taxes			1,357				1,252
Prepaid expenses and other current assets			850				988
Total current assets			43,628				45,291
Property and equipment
Land			1,535				1,535
Building			7,796				7,796
Office furniture and equipment			3,970				3,320
Leasehold improvements			190				187
			13,491				12,838
Less: accumulated depreciation			(5,043	)			(4,740	)
Total property and equipment, net			8,448				8,098
Other assets
Goodwill			12,926				11,480
Other intangibles, net of accumulated amortization of $138 and $41, respectively			1,602				169
Other assets			10				23
Total other assets			14,538				11,672
Total assets		$	66,614			$	65,061

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

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

LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY

		December 31,				June 30,
		2006				2006
		Unaudited
Current liabilities
Book overdrafts		$	298			$	70
Notes payable — current			802				1,135
Revolving lines of credit			—				2,173
Accounts payable			5,733				7,544
Commissions payable			234				274
Income taxes payable/(receivable)			(532	)			114
Accrued customer allowances			2,026				2,637
Other accrued expenses			980				1,073
Total current liabilities			9,541				15,020
Other non-current liabilities
Revolving line of credit			21,162				15,981
Other long-term expenses			927				793
Deferred income taxes			710				345
Notes payable — long term			—				223
Total other non-current liabilities			22,799				17,342
Total liabilities			32,340				32,362
Minority interests			3,092				3,662
Commitments and contingencies (Note 6)
Stockholders’ equity
Series A cumulative, convertible callable preferred stock, $1.00 par value, 2,000,000 shares authorized; nil shares issued			—				—
Common stock, $0.01 par value, 15,000,000 shares authorized; 9,703,420 shares issued			97				97
Additional paid-in capital			17,767				17,757
Retained earnings			51,444				49,309
Less: treasury stock, 4,499,920 common shares at cost			(38,126	)			(38,126	)
Total stockholders’ equity			31,182				29,037
Total liabilities, minority interests and stockholders’ equity		$	66,614			$	65,061

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Six Months Ended
		December 31,				December 31,
		2006				2005
Net cash provided by operating activities		$	836			$	4,651
Cash flows from investing activities
Acquisition of Marketing Impressions, Inc.
Initial payment, net of cash acquired			(1,483	)			—
Additional contingent consideration			(870	)			—
Additions to property and equipment			(440	)			(155	)
Cash used in investing activities			(2,793	)			(155	)
Cash flows from financing activities
Net proceeds from/(payments on) lines of credit			3,008				(9,755	)
Distributions to minority interest members			(1,347	)			—
Cash dividends			(1,249	)			(1,155	)
Principal payments on notes payable			(555	)			(794	)
Capital lease financing			173				—
Increase/(decrease) in book overdrafts			227				(214	)
Stock options exercised			—				7
Net cash provided by/(used in) financing activities			257				(11,911	)
Net decrease in cash			(1,700	)			(7,415	)
Cash at beginning of period			2,164				9,145
Cash at end of period		$	464			$	1,730

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2006(Unaudited)

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 (“Trade Source”), Prime/Home Impressions, LLC, a North Carolina limited liability company (“PHI”), and one 50% owned limited liability company, Design Trends, LLC, a Delaware limited liability company (“Design Trends”). References to “Craftmade,” “ourselves,” “we,” “our,” “us,” “its,” “itself,” and the “Company” refer to Craftmade and its subsidiaries, including TSI, PHI and Design Trends unless the context requires otherwise.

The balance sheet at June 30, 2006 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, 2006, filed with the SEC on September 13, 2006. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year. Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current period presentation.

Note 2 — ACQUISITION OF MARKETING IMPRESSIONS, INC.

Effective July 1, 2006, TSI acquired Marketing Impressions, Inc., a Georgia corporation (“Marketing Impressions”). Marketing Impressions owned the remaining 50% interest in the Company’s limited liability company PHI and also supplied the Company with certain fan accessory products. This acquisition increased the Company’s effective ownership of PHI to 100% and has been accounted for using the purchase method of accounting. The transaction will enable the Company to benefit from 100% of PHI’s earnings, will give the Company complete control over the operations of PHI and will also allow it to source certain of its fan accessory products directly itself. The Company believes that operational control, the ability to source certain products directly and the additional earnings obtained from 100% ownership support the goodwill resulting from the transaction.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2006(Unaudited)

In conjunction with the acquisition of Marketing Impressions, TSI also acquired certain patents and trademarks from the sellers and entered into non-compete and consulting agreements. The complete acquisition agreements are furnished as exhibits to the Current Report on  Form 8-K as filed with the SEC on September 18, 2006.

The results of operations of PHI have historically been included in the consolidated income before minority interest of the Company. Prior to the acquisition, the minority interest in PHI income was excluded from the Company’s consolidated net income. Since the effective date of the acquisition on July 1, 2006, no minority interest exists in PHI, and accordingly, the consolidated net income includes the full amount of PHI results from this date.

The purchase price, including amounts for patents and trademarks and non-compete agreements, is based on a known initial payment plus a contingent amount that is based upon percentage of gross profit without any reductions for vendor displays and annual reset costs (“Adjusted Gross Profit”). The purchase price is summarized as follows:

Purchase Price Summary
(In thousands)

As of December 31, 2006:
Amount paid at closing, net of cash acquired		$	1,287
Contingent payments earned			945
Acquisition-related costs			196
Total consideration as of December 31, 2006		$	2,428
Percent of Adjusted Gross Profit July 1, 2006 to August 31, 2011			22	%
Additonal Percent of Adjusted Gross Profit July 1, 2006 to June 30, 2007 (not to exceed $750,000)			15	%

The Company has estimated that the total remaining payout based on future levels of Adjusted Gross Profit through August 31, 2011 to be a total of $5,461,000. In accordance with SFAS No. 141, Business Combinations (“SFAS 141”), contingent consideration is recorded when a contingency is satisfied and additional consideration is issued or becomes issuable.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2006(Unaudited)

The preliminary purchase price was allocated based on the estimated fair values of the assets acquired and liabilities assumed as of the effective date of acquisition and is summarized as follows:

Preliminary Purchase Price Allocation
(In thousands)

Assets:
Accounts receivable		$	368
Inventory			2
Property and equipment			214
Acquired intangibles			1,530
Goodwill			1,441
			3,555
Liabilities:
Accounts payable			1,120
Note payable			7
			1,127
Total purchase price as of December 31, 2006		$	2,428

The amount of goodwill allocated to the purchase price was $1,441,000, all of which is deductible for tax purposes over a 15 year period. In connection with the acquisition, the Company acquired certain identifiable intangible assets, including patents, trademarks and covenants not-to-compete. The gross amounts of such assets along with the range of amortizable lives are as follows:

Summary of Acquired Intangibles
(In thousands)

		Life				Gross
		in Years				Amount
Patents and trademarks			15			$	710
Non-compete covenants			7				820
						$	1,530

The value of the patents, trademarks and covenants not-to-compete was based on an independent appraisal. Annual amortization expense is estimated to be $172,000 per fiscal year.

The following table sets forth the unaudited pro forma results of operations of the Company as if the Marketing Impressions acquisition had occurred at the beginning of each fiscal year. Since the acquisition was effective at the beginning of the fiscal year on July 1, 2006, pro forma amounts equal actual amounts for the periods ended December 31, 2006. The pro forma amounts for the periods ended December 31, 2005 do not purport to be indicative of the results that would have actually been obtained if the merger occurred as of the beginning of the period presented or that may be obtained in the future. Management does not believe that the same amount of additional earnings from the acquisition will necessarily be obtained in the current fiscal year or in the future.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2006(Unaudited)

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

		Three Months Ended								Six Months Ended
		December 31,				December 31,				December 31,				December 31,
		2006				2005				2006				2005
Net sales(1)
As reported		$	26,563			$	28,629			$	54,689			$	59,652
Pro forma			26,563				28,629				54,689				59,652
Net income(2)
As reported		$	1,527			$	1,697			$	3,411			$	3,429
Pro forma			1,527				1,941				3,411				3,967
Diluted earnings per share
As reported		$	0.29			$	0.33			$	0.65			$	0.66
Pro forma			0.29				0.37				0.65				0.76

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2006(Unaudited)

Note 3 — EARNINGS PER SHARE

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

		Three Months Ended								Six Months Ended
		December 31,				December 31,				December 31,				December 31,
		2006				2005				2006				2005
		(In thousands, except per share data)
Basic and diluted earnings per share:
Numerator
Net income		$	1,500			$	1,697			$	3,384			$	3,429
Denominator for basic EPS
Weighted average common shares outstanding			5,204				5,200				5,204				5,200
Denominator for diluted EPS
Weighted average common shares outstanding			5,204				5,200				5,204				5,200
Incremental shares for stock options			2				10				3				10
Dilutive weighted average common shares			5,206				5,210				5,207				5,210
Basic earnings per share		$	0.29			$	0.33			$	0.65			$	0.66
Diluted earnings per share		$	0.29			$	0.33			$	0.65			$	0.66

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2006(Unaudited)

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, 2006, as filed with the SEC on September 13, 2006. The Company evaluates the performance of its segments and allocates resources to them based on their income from operations 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 net sales, income from operations and net income for the reportable segments:

Summary of Segment Information

		Three Months Ended								Six Months Ended
		December 31,				December 31,				December 31,				December 31,
		2006				2005				2006				2005
		(In thousands)
Net sales
Craftmade		$	13,778			$	15,146			$	30,229			$	31,656
TSI			12,785				13,483				24,460				27,996
Total		$	26,563			$	28,629			$	54,689			$	59,652
Income from operations
Craftmade		$	1,338			$	2,164			$	3,313			$	4,545
TSI			1,850				1,523				3,373				2,832
Total		$	3,188			$	3,687			$	6,686			$	7,377
Net income
Craftmade		$	618			$	1,198			$	1,693			$	2,543
TSI			882				499				1,691				886
Total		$	1,500			$	1,697			$	3,384			$	3,429

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2006(Unaudited)

Note 5 — STOCK-BASED COMPENSATION

Effective July 1, 2005, the Company adopted SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which revises SFAS 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) 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 123(R) were based on the grant date fair value and attributes originally used to value those awards.

The Company has recognized compensation cost for all stock-based payments granted subsequent to July 1, 2005 in the consolidated financial statements, summarized as follows:

Stock-Based Compensation Expense

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
		(In thousands)
Stock-based compensation expense recognized:
Selling, general & administrative		$	7			$	9			$	11			$	9

Total future compensation cost related to non-vested options is expected to be amortized over the following future periods as follows:

Future Stock-Based Compensation Expense

		Expected
		Future
Fiscal Year Ending		Compensation
June 30,		Cost
		(In thousands)
2007 (remaining six months)		$	41
2008			82
2009			82
2010			82
2011			34

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 2006(Unaudited)

The following table summarizes information about outstanding and exercisable options at December 31, 2006:

Stock Option Information

										Weighted
										Average
						Weighted				Remaining
						Average				Contractual
		Number of				Exercise				Life
		Shares				Price				(Years)
Outstanding at June 30, 2006			19,500			$	15.78				6.1
Options granted			60,000				18.85				9.9
Options exercised			—				—				—
Options forfeited			—				—				—
Options expired			—				—				—
Outstanding at December 31, 2006			79,500			$	18.10				9.0
Exercisable at December 31, 2006			19,500			$	15.78				6.1

The fair value of each option grant is calculated on the date of grant using the Black-Scholes option pricing model based upon the following weighted-average assumptions:

Summary of Stock Option Assumptions

		Grant Date
		November 28,				February 16,				February 16,
		2006				2006				2005
Expected volatility			36	%			45	%			47	%
Risk-free interest rate			4.9	%			4.5	%			3.7	%
Expected lives		4 years				4 years				4 years
Dividend yield			2.5	%			2.7	%			1.9	%
Weighted average fair value of options granted		$	5.46			$	5.88			$	7.43

Note 6 — COMMITMENTS AND CONTINGENCIES

There are no material legal proceedings pending to which the Company is party or to which any of its properties are subject.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Disclosure Regarding Forward-looking Statements

With the exception of historical information, the matters discussed in this document contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Craftmade International, Inc. to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward looking statements include, but are not limited to, (i) statements concerning future financial condition and operations, including future cash flows, revenues, gross margins, earnings and variations in quarterly results, (ii) statements relating to anticipated completion dates for new products and (iii) other statements identified by words such as “may,” “will,” “should,” “could,” “might,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “forecasts,” “intends,” “potential,” “continue,” and similar words or phrases. These factors that could affect our financial and other results can be found in the risk factors section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2006, filed with the SEC on September 13, 2006. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this filing with the SEC, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or other circumstances.

     Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s financial condition and results of operations 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 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 certain estimates, assumptions and judgments derived from the accounting policies have significant impact on its financial statements, so the Company considers these to be its critical accounting policies. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the Company’s Annual Report on Form 10-K for the year ended June 30, 2006, as filed with the SEC on September 13, 2006.

Results of Operations

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.

Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005

A condensed overview of results for the three months ended December 31, 2006 and the corresponding prior year period is summarized as follows:

Summary Income Statement by Segment 
(Dollars in thousands)

		Three Months Ended												Three Months Ended
		December 31, 2006												December 31, 2005
		Craftmade				TSI				Total				Craftmade				TSI				Total
Net sales		$	13,778			$	12,785			$	26,563			$	15,146			$	13,483			$	28,629
Cost of goods sold			(8,873	)			(9,166	)			(18,039	)			(9,765	)			(10,276	)			(20,041	)
Gross profit			4,905				3,619				8,524				5,381				3,207				8,588
Gross profit as a % of net sales			35.6	%			28.3	%			32.1	%			35.5	%			23.8	%			30.0	%
Selling, general and administrative			(3,427	)			(1,708	)			(5,135	)			(3,073	)			(1,675	)			(4,748	)
As a % of net sales			24.9	%			13.4	%			19.3	%			20.3	%			12.4	%			16.6	%
Depreciation and amortization			(140	)			(61	)			(201	)			(144	)			(9	)			(153	)
Total operating expenses			(3,567	)			(1,769	)			(5,336	)			(3,217	)			(1,684	)			(4,901	)
Income from operations			1,338				1,850				3,188				2,164				1,523				3,687
Interest expense, net			(395	)			2				(393	)			(302	)			(20	)			(322	)
Income before income taxes and minority interests			943				1,852				2,795				1,862				1,503				3,365
Provision for income taxes			(325	)			(457	)			(782	)			(664	)			(265	)			(929	)
Income before minority interests			618				1,395				2,013				1,198				1,238				2,436
Minority interests			—				(513	)			(513	)			—				(739	)			(739	)
Net income		$	618			$	882			$	1,500			$	1,198			$	499			$	1,697

Net Sales. Net sales for the Company decreased $2,066,000 or 7.2% to $26,563,000 for the quarter ended December 31, 2006, compared to $28,629,000 for the quarter ended December 31, 2005.

Net sales from the Craftmade segment decreased $1,368,000 or 9.0% to $13,778,000 for the quarter ended December 31, 2006 from $15,146,000 for the quarter ended December 31, 2005. The decline was primarily due to a continued decrease in demand for decorative ceiling fans and Accolade^® lighting products as a result of the weak overall housing market. These decreases were partially offset by increases in net sales of builder series ceiling fans and a 10.4% increase in net sales of the Teiber product lines. The Company shipped orders of Teiber products to 182 customers who had not placed Teiber orders during the same quarter of last year.

Management continues to focus on introducing new products and expanding Teiber accounts to offset the weak housing market. Management believes that long-term growth will be favorably affected by more

competitive pricing as Craftmade continues to develop more competitive sourcing throughout China and strengthen its product offering through its enhanced product development efforts.

Net sales of the TSI segment declined $698,000 or 5.2% to $12,785,000 for the quarter ended December 31, 2006 from $13,483,000 for the quarter ended December 31, 2005, as summarized in the following table:

Net Sales of TSI Segment
(Dollars in thousands)

		Trade				Design				Segment
Three Months Ended		Source				Trends				Total
December 31, 2006		$	7,101			$	5,684			$	12,785
December 31, 2005			8,106				5,377				13,483
Dollar increase/(decrease)		$	(1,005	)		$	307			$	(698	)
Percent increase/(decrease)			(12.4	%)			5.7	%			(5.2	%)

The decrease in net sales of Trade Source was primarily the result of a decline in orders from Lowe’s Companies, Inc. (“Lowe’s”) related to indoor lighting, outdoor lighting and fan accessories. On November 13, 2006, Lowe’s notified Trade Source that it will no longer supply the 14 indoor and outdoor lighting SKU’s previously sold to Lowe’s via direct import. Management has been told that Lowe’s will be sourcing these products directly from various overseas manufacturers. Trade Source has shipped all outstanding orders of discontinued products as of January 31, 2007. Additional information is detailed in the Current Report on Form 8-K as filed with the SEC on November 15, 2006.

The increase in Design Trends’ net sales was primarily due to the rollout of the mix and match portable lamps to the four additional Lowe’s regional distribution centers that Design Trends had not been supplying since the quarter ended September 30, 2005. Currently, Design Trends supplies mix and match portable lamps to all 11 Lowe’s regional distribution centers. Management believes that based on the amount of product currently shipped to Lowe’s, Design Trends continues to be Lowe’s largest portable lamp vendor and has been invited to participate in each of Lowe’s scheduled line reviews for its existing and new product lines. The line reviews occur throughout the year for each product category and give both Trade Source and Design Trends the potential to add new SKU’s, but could also result in a partial or complete reduction of existing SKU’s to the product lines currently offered to Lowe’s.

Future growth of the TSI segment is contingent upon the success of the Company’s ongoing efforts to introduce new products, product lines and marketing concepts to existing customers, and to expand the business to new customers.

Gross Profit. Gross profit of the Company as a percentage of net sales increased 2.1% to 32.1% for the quarter ended December 31, 2006, compared to 30.0% for the quarter ended December 31, 2005.

Gross profit as a percentage of net sales of the Craftmade segment of 35.6% for the quarter ended December 31, 2006 was consistent with the 35.5% obtained in the quarter ended December 31, 2005. An increase in net sales of product lines that carry a slightly lower gross profit as a percentage of net sales were offset by a reduction in duties paid for certain products from the American Jobs Creation Act of 2004 (“AJCA”). The AJCA contains a provision that allowed ceiling fans for permanent installation to enter the U.S. duty-free between November 6, 2004 and December 31, 2006. The provision was recently extended through December 31, 2009.

The Company anticipates that gross profit as a percentage of net sales of the Craftmade segment will slightly improve in fiscal year 2007 as it develops more competitive sourcing throughout China.

The gross profit as a percentage of net sales of the TSI segment increased 4.5% to 28.3% of net sales for the quarter ended December 31, 2006, compared to 23.8% of net sales in the same prior year period, as summarized in the following table:

Gross Profit as a Percentage of Net Sales of TSI

		Trade				Design				Segment
Three Months Ended		Source				Trends				Total
December 31, 2006			28.2	%			28.5	%			28.3	%
December 31, 2005			22.0	%			26.5	%			23.8	%
Percent increase/(decrease)			6.2	%			2.0	%			4.5	%

Gross profit as a percentage of net sales increased at Trade Source primarily due to the Company’s acquisition of Marketing Impressions which allowed PHI to directly source certain of its fan accessory products. In addition, Trade Source benefited from lower costs associated with markdowns and product resets primarily as a result of the loss of the indoor and outdoor lighting product orders by Lowe’s. Similarly, Design Trends’ gross profit as a percentage of net sales increased primarily as a result of lower amounts set aside for product reset costs, partially offset by higher amounts set aside for other vendor programs to Lowe’s.

For fiscal year 2007, management expects gross profit as a percentage of net sales of the TSI segment to remain consistent with the six months ended December 31, 2006, provided that the segment maintains a sales mix, customer concentration, and level of vendor program commitment similar to what it maintained during the first half of fiscal year 2007.

Selling, General and Administrative Expenses. Total selling, general and administrative (“SG&A”) expenses of the Company increased $387,000 to $5,135,000 or 19.3% of net sales for the quarter ended December 31, 2006, compared to $4,748,000 or 16.6% of net sales for the same period last year.