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.

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

Commission File Number 000-26667

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 5,704,500 as of April 30, 2008.

 

 

CRAFTMADE INTERNATIONAL, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS

Part I. Financial Information

Item 1. 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 1A. Risk Factors

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
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								Nine Months Ended
		March 31,				March 31,				March 31,				March 31,
		2008				2007				2008				2007
Net sales		$	54,918			$	22,492			$	98,468			$	77,181
Cost of goods sold			(44,226	)			(15,401	)			(73,732	)			(52,784	)
Gross profit			10,692				7,091				24,736				24,397
Gross profit as a percentage of net sales			19.5	%			31.5	%			25.1	%			31.6	%
Selling, general and administrative expenses			(8,848	)			(5,483	)			(19,366	)			(15,702	)
Depreciation and amortization			(210	)			(195	)			(628	)			(596	)
Total operating expenses			(9,058	)			(5,678	)			(19,994	)			(16,298	)
Income from operations			1,634				1,413				4,742				8,099
Interest expense, net			(524	)			(351	)			(1,144	)			(1,112	)
Other Income			139				—				139				—
Income before income taxes and minority interest			1,249				1,062				3,737				6,987
Income tax (expense) / benefit			(343	)			118				(929	)			(1,645	)
Income before minority interest			907				1,180				2,809				5,342
Minority interest			(267	)			(447	)			(1,069	)			(1,225	)
Net income		$	639			$	733			$	1,739			$	4,117
Weighted average common shares outstanding:
Basic			5,694				5,204				5,366				5,204
Diluted			5,700				5,206				5,373				5,207
Basic earnings per common share		$	0.11			$	0.14			$	0.32			$	0.79
Diluted earnings per common share		$	0.11			$	0.14			$	0.32			$	0.79
Cash dividends declared per common share		$	0.12			$	0.12			$	0.36			$	0.36

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

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

		March 31,				June 30,
		2008				2007
		(Unaudited)
ASSETS
Current assets
Cash		$	986			$	928
Accounts receivable, net			42,881				18,082
Inventories, net			24,261				18,076
Income taxes receivable			2,019				1,376
Deferred income taxes			1,106				1,251
Prepaid expenses and other current assets			2,298				1,503
Total current assets			73,551				41,216
Property and equipment, net			10,550				8,379
Goodwill			14,100				13,644
Other intangibles, net			1,351				1,502
Other assets			1,588				10
Total non-current assets			27,589				23,535
Total assets		$	101,140			$	64,751
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities
Book overdrafts		$	95			$	48
Accounts payable			13,404				5,903
Other accrued expenses			3,463				2,472
Current portion of long-term obligations			499				264
Total current liabilities			17,461				8,687
Non-current liabilities
Long-term obligations			42,465				18,938
Deferred income taxes			1,178				1,107
Total non-current liabilities			43,644				20,045
Total liabilities			61,104				28,732
Minority interest			3,339				3,495
Commitments and contingencies (Note 9)
Stockholders’ equity
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; 10,204,420 shares issued			102				97
Additional paid-in capital			22,192				17,831
Retained earnings			52,529				52,722
Less: treasury stock, 4,499,920 common shares at cost			(38,126	)			(38,126	)
Total stockholders’ equity			36,697				32,524
Total liabilities, minority interest and stockholders’ equity		$	101,140			$	64,751

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

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

		Nine Months Ended
		March 31,				March 31,
		2008				2007
Net cash provided (used) in operating activities		$	(3,601	)		$	5,828
Cash flows from investing activities
Acquisition of assets of Woodard, LLC.			(16,135	)			—
Acquisition of Marketing Impressions, Inc.
Initial payment and acquisition-related costs, net of cash acquired			—				(1,501	)
Additional contingent consideration			(486	)			(1,075	)
Additions to property and equipment			(436	)			(575	)
Cash used in investing activities			(17,057	)			(3,151	)
Cash flows from financing activities
Net proceeds from/(payments) on note payable			10,668				(842	)
Net proceeds from/(payments) on lines of credit			13,125				(636	)
Cash dividends			(1,874	)			(1,873	)
Distributions to minority interest members			(1,225	)			(1,597	)
Increase/(decrease) in book overdrafts			47				99
Principal payments on capital lease			(26	)			—
Proceeds from capital lease			—				164
Stock options exercised			—				10
Net cash provided (used) in financing activities			20,716				(4,675	)
Net increase/(decrease) in cash			58				(1,998	)
Cash at beginning of period			928				2,164
Cash at end of period		$	986			$	166

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 (“TSI”), Prime/Home Impressions, LLC, a North Carolina limited liability company (“PHI”), CM-Real Estate, LLC, a Texas limited liability company (“CM-Real Estate”), Woodard-CM, LLC, a Delaware limited liability company (“Woodard-CM”) 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 CM-Real Estate, Woodard-CM and Design Trends unless the context requires otherwise.

The balance sheet at June 30, 2007, 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. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company believes that the disclosures are adequate so that the information presented is not misleading; however, it is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, filed with the SEC on September 13, 2007. 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.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2 — ACQUISITIONS

Acquisition of Certain Net Assets of Woodard, LLC

On January 2, 2008, Woodard — CM, LLC, a wholly owned subsidiary of Craftmade completed the purchase of substantially all of the assets of Woodard, LLC (“Woodard”), a leading Chicago-based designer, manufacturer and distributor of a broad line of outdoor furniture products and related accessories pursuant to the Asset Purchase Agreement, dated as of December 18, 2007 (the “Agreement”), by and among Craftmade, Woodard and Henry Crown and Company d/b/a CC Industries, Inc. In the acquisition, the Company initially paid Woodard $19,265,000 plus a working capital adjustment of $954,000 and warrants (the “Warrants”) to purchase up to 200,000 shares of Craftmade common stock (the “Common Stock”) for 10 years from the date of issuance at a purchase price of $8.10 per share, valued at $279,000. The purchase price consideration included 500,000 shares of Common Stock valued at $8.10 per share based on the average closing price of the Common Stock for the three days prior to signing the Agreement for an aggregate price of $4,050,000 (price of Common Stock for financial reporting is $8.00 per share based on the average closing price of the Common Stock on the two days prior, two days after and day of the announcement of the signing of the Agreement, for an aggregate price of $4,000,000), with the remaining purchase price paid in cash at closing. The Agreement allowed the parties to adjust the purchase price to accurately reflect the working capital up to 60 days after the closing of the acquisition, resulting in a working capital adjustment of $1,272,000 due the Company. Including the working capital adjustment, the total adjusted cash consideration for the acquisition is $14,896,000.

Acquired assets included $22,540,000 in short term assets, a long-term receivable valued at approximately $1.5 million, manufacturing equipment and Woodard’s 305,000 square foot facility in Owosso, Michigan. Craftmade also assumed certain payables and other liabilities totaling $6,143,000. Additionally, the Company incurred approximately $685,000 in professional fees associated with the transaction and has reserved $339,000 for expected severance and relocation expense as certain positions are being moved into the Company’s corporate office.

Purchase Price Summary
(Dollars in thousands)

Cash paid at closing		$	16,168
GAAP value of 500,000 shares issued			4,000	(1)
Value of 200,000 Warrants			279	(2)
Purchase price adjustment (Settled April, 2008)			(1,272	)
Total consideration		$	19,175

Expected volatility			33	%
Risk-free interest rate			3.81	%
Expected lives		10 years
Dividend yield			5.8	%

The allocation of the purchase price to Woodard’s assets and liabilities has been based on preliminary estimates of fair values. This allocation is preliminary and further refinements are likely to be made. Criteria have been established in Statement of Financial Accounting Standards No. 141, “Business Combinations” for determining whether intangible assets should be recognized separately from goodwill. The amounts included in the following allocation include $2.5 million that was placed in an escrow account for a period of 18 months from the closing date for indemnifications made by the seller in relations to its representations, warranties or covenants pursuant to the asset purchase agreement.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Preliminary Purchase Price Allocation
Initial estimated purchase price						$	20,168
Less: Working capital adjustment							(1,272	)
Value of Warrants							279
Total Purchase Consideration						$	19,175
Acquired Assets (Adjusted to estimated fair value)
Accounts receivable, net		$	12,710
Inventories, net			8,351
Prepaid expenses and other current assets			1,479
Plant property and equipment			2,274
Goodwill			—
Other intangible assets			—
Other assets			1,528
Total Assets						$	26,342
Assumed Liabilities
Accounts payable		$	4,545
Other accrued expenses			1,598
Other liabilities incurred during transaction
Professional Fees Associated with Acquisition			685
Restructuring Reserve			339
Total Liabilities						$	7,167
Total Purchase Price						$	19,175

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table sets forth the unaudited pro forma results of operations of the Company as if the Woodard acquisition had occurred at the beginning of each fiscal year. The results for periods prior to the acquisition are comprised of historical information adjusted for certain expenses that were not included in the acquisition. More detail is provided with the Form 8-K/A filed with the Securities and Exchange Commission on March 13, 2008.

Since the acquisition was effective on January 2, 2008, the three-month pro forma and actual results are the same. The pro forma amounts for the periods ended March 31, 2007 and for the nine months ended March 31, 2008 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.

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

		Three Months Ended								Nine Months Ended
		March 31,				March 31,				March 31,				March 31,
		2008				2007				2008				2007
Net sales(1)
As reported		$	54,918			$	22,492			$	98,468			$	77,181
Pro forma			54,918				55,287				125,468				143,290
Net income(2)
As reported		$	639			$	733			$	1,739			$	4,117
Pro forma			639				1,537				487				5,513
Basic earnings per share
As reported		$	0.11			$	0.14			$	0.32			$	0.79
Pro forma		$	0.11			$	0.27			$	0.09			$	0.97
Diluted earnings per share
As reported		$	0.11			$	0.14			$	0.32			$	0.79
Pro forma		$	0.11			$	0.27			$	0.09			$	0.97

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 acquisition is more fully described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

The purchase price 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
(Dollars in thousands)

As of March 31, 2008:
Amount paid at closing, net of cash acquired		$	1,287
Contingent payments earned			2,153
Acquisition-related costs			220
Total consideration as of March 31, 2008		$	3,660
Percent of Adjusted Gross Profit
July 1, 2006 to August 31, 2011			22	%
Additional Percent of Adjusted Gross Profit
July 1, 2006 to June 30, 2007 (Actual amount paid was $677)			15	%

The Company has estimated the total remaining payout based on future levels of Adjusted Gross Profit through August 31, 2011, to be a total of $2,289,000. 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 THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The 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:

Purchase Price Allocation
(Dollars in thousands)

		As of				Additional				As of
		June 30,				Contingent				March 31,
		2007				Consideration				2008
Assets:
Accounts receivable		$	368			$	—			$	368
Inventory			2				—				2
Property and equipment			214				—				214
Deferred tax assets			70				—				70
Acquired intangibles			1,530				—				1,530
Goodwill			2,164				457				2,621
			4,348				457				4,805
Liabilities:
Accounts payable			1,120				—				1,120
Note payable and other liabilities			24				—				24
			1,144				—				1,144
Total purchase price		$	3,204			$	457			$	3,661

The amount of goodwill allocated to the purchase price was $2,621,000, all of which is deductible for tax purposes over a 15-year period.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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								Nine Months Ended
		March 31,				March 31,				March 31,				March 31,
		2008				2007				2008				2007
		(In thousands, except per share data)
Basic and diluted earnings per share:
Numerator
Net income		$	639			$	733			$	1,739			$	4,117
Denominator for basic EPS
Weighted average common shares outstanding			5,694				5,204				5,366				5,204
Denominator for diluted EPS
Weighted average common shares outstanding			5,694				5,204				5,366				5,204
Incremental shares for stock options/warrants			6				2				7				3
Dilutive weighted average common shares			5,700				5,206				5,373				5,207
Basic earnings per share		$	0.11			$	0.14			$	0.32			$	0.79
Diluted earnings per share		$	0.11			$	0.14			$	0.32			$	0.79

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 4 — SEGMENT INFORMATION

As of March 31, 2008, 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, 2007, as filed with the SEC on September 13, 2007. 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, outdoor patio furniture and other accessories offered primarily through lighting showrooms, patio dealers, certain major retail chains, hospitality customers and catalog houses. The TSI segment derives its revenue from outdoor lighting, outdoor patio furniture, portable lamps, indoor lighting and fan accessories marketed solely to mass retailers.

The additional sales from the acquisition of certain net assets of Woodard come from independent patio dealers, hospitality customers and mass retailers. Sales with the independent patio dealers and hospitality customers are included in the Craftmade segment and sales to the mass merchants are included in the TSI segment.

Subsequent to the acquisition of certain assets of Woodard, we are reassessing our position under Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company believes that it is likely that the Company’s segments will change due to the significance of this acquisition and expects to complete its analysis during the fourth quarter of fiscal 2008.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table presents net sales, gross profit, income from operations and changes in assets for the reportable segments:

Summary of Segment Information

		Three Months Ended								Nine Months Ended
		March 31,				March 31,				March 31,				March 31,
		2008				2007				2008				2007
		(In thousands)
Net sales
Craftmade		$	23,146			$	13,714			$	49,726			$	43,943
TSI			31,772				8,778				48,742				33,238
Total		$	54,918			$	22,492			$	98,468			$	77,181
Gross profit
Craftmade			6,328			$	4,949				15,823			$	15,606
TSI			4,364				2,142				8,913				8,791
Total		$	10,692			$	7,091			$	24,736			$	24,397
Income from operations
Craftmade		$	486			$	998			$	2,387			$	4,308
TSI			1,149				415				2,355				3,791
Total		$	1,634			$	1,413			$	4,742			$	8,099

Changes in Assets of Segments

Due to the size of the Woodard acquisition, which is comprised of assets that are allocated to each segment, total assets for each segment increased significantly. Total assets related to Woodard and included in the TSI segment primarily consist of accounts receivables from mass merchant customers. The remaining assets related to Woodard, including the building and related equipment in Owosso, Michigan, inventory and accounts receivable for patio dealers are included in the Craftmade segment.

Changes in Total Assets

		March 31,				June 30,				Increase/
		2008				2007				(Decrease)
		(Unaudited)
Craftmade		$	63,196			$	41,049			$	22,147
TSI			37,944				23,702				14,241
Total		$	101,140			$	64,751			$	36,389

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 5 — STOCK-BASED COMPENSATION

Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”). 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.

The options to purchase Common Stock are issued at fair market value on the date of the grant. Generally, the options vest and become exercisable ratably over a four-year period, commencing one year after the grant date, and expire ten years from issuance. The fair value of each option is recognized as compensation expense on a straight-line basis between the grant date and the date the options become fully vested. The Company has recognized compensation cost for all stock-based payments in the consolidated financial statements as follows:

Stock-Based Compensation Expense
(Dollars in thousands)

		Three Months Ended								Nine Months Ended
		March 31,				March 31,				March 31,				March 31,
		2008				2007				2008				2007
Stock-based compensation expense recognized:
Selling, general & administrative		$	30			$	26			$	86			$	36

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
(Dollars in thousands)

		Expected
		Future
		Compensation
Fiscal Year Ending		Cost
June 30, 2008 (remaining three months)		$	30
June 30, 2009			137
June 30, 2010			137
June 30, 2011			52
June 30, 2012			16

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes information about outstanding and exercisable options at March 31, 2008:

Stock Option Information

										Weighted
										Average
						Weighted				Remaining
						Average				Contractual
		Number of				Exercise				Life
		Shares				Price				(Years)
Outstanding at June 30, 2007			99,100			$	18.06				8.5
Options granted			75,500				8.01				9.8
Options exercised			—				—				—
Options forfeited			(7,600	)			18.85				—
Options expired			—				—				—
Outstanding at March 31, 2008			167,000			$	13.48				9.5
Exercisable at March 31, 2008			3,500			$	6.00				1.5

The fair value of each option grant is calculated on the date of grant using the Black-Scholes option pricing model.

The Company issued 75,500 options to key employees in the third quarter of the fiscal year ending June 30, 2008. The options were valued using the Black-Scholes calculation at a price of $1.39 per share using the following assumptions:

Expected volatility			33	%
Risk-free interest rate			3.74	%
Expected lives		4 years
Dividend yield			6.0	%

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 6 — INCOME TAXES

The Company’s effective tax rate is summarized in the following table:

Summary of Effective Tax Rate

		Three Months Ended								Nine Months Ended
		March 31,				March 31,				March 31,				March 31,
		2008				2007				2008				2007
Effective tax rate			34.9	%			(19.2	%)			34.8	%			28.5	%

The effective tax rate is calculated by dividing income tax expense by income after minority interest and before income taxes. The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 34% primarily due to state income taxes. The tax provisions for the current fiscal year are based on our estimate of the Company’s annualized income tax rate.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The statute of limitations has lapsed for all U.S. federal returns prior to and including the fiscal year ended June 30, 2003. In May 2007, the Internal Revenue Service completed an examination of the Company’s U.S. income tax return for the fiscal year ended June 30, 2005. There were no material adjustments, penalties or interest resulting from this examination.

With respect to state and local jurisdictions and countries outside of the United States, the Company and its subsidiaries are typically subject to examination for four to five years after the income tax returns have been filed. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been provided for in the accompanying financial statements for any adjustments that might be incurred due to state, local or foreign audits.

On July 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). At the date of adoption, the gross amount of unrecognized tax benefits, interest and penalties was $290,000 that, if recognized, would affect the effective tax rate. As a result of the implementation of FIN 48, we recognized no additional adjustments in the liability for unrecognized income tax benefits. Additionally, adoption of FIN 48 resulted in the reclassification of certain accruals for uncertain tax positions in the amount of $190,000 from current to other long-term expenses.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

For the nine months ended March 31, 2008, there was no change in our unrecognized income tax benefits:

Reconciliation of Unrecognized Tax Benefits
(Dollars in thousands)

						Increases/(Decreases) in Unrecognized
						Tax Benefits As a Result of
						Tax Positions from												Lapse in
		July 1,				Prior				Current								Statute of				March 31,
		2007				Periods				Period				Settlements				Limitations				2008
Unrecognized tax benefits		$	290				—				—				—				—			$	290

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions could significantly increase or decrease within the next 12 months as a result of settling ongoing tax matters. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.

The Company has historically recognized interest relating to income tax matters as a component of interest expense and recognized penalties relating to income tax matters as a component of selling, general and administrative expense. Such interest and penalties have historically been immaterial. Upon adoption of FIN 48, the Company will recognize accrued interest and penalties related to income tax matters in income tax expense. There was $48,000 in interest and penalties related to unrecognized tax benefits accrued at the date of adoption and as of March 31, 2008.

Note 7 — RELATED PARTY TRANSACTIONS

In connection with the acquisition of certain net assets of Woodard, LLC, the Company issued 500,000 shares of Common Stock and 200,000 Warrants to purchase Common Stock to Woodard, (now known as Forwoodco, LLC). Forwoodco, LLC, is owned by CCI, Inc., which also participates in a joint venture that has 50% ownership in an entity that operates as a Chinese factory. For the quarter ended March 31, 2008, the Company purchased approximately $15.3 million in products from the joint venture which were sold to various customers. The Company’s liability to the joint venture was approximately $2.6 million at March 31, 2008.

The Company currently does not have any agreements in place that compel either party to operate in any manner that differs from standard customer/vendor relationships. Based on this, Management has determined that the transactions between the two parties are at arms-length.

Note 8 — 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, 2007, filed with the SEC on September 13, 2007. 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, 2007, as filed with the SEC on September 13, 2007.

Accounting for Uncertainty in Income Taxes. In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) which clarifies the accounting for uncertainty in income taxes recognized under FASB Statement No. 109, Accounting for Income Taxes. FIN 48 addresses the recognition and measurement of tax positions taken or expected to be taken, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. We adopted and applied FIN 48 under the transition provisions to all of our income tax positions at the required effective date of July 1, 2007. See Note 6 in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail.

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.

This discussion and analysis includes references to historical Craftmade. Historical Craftmade consists of ceiling fans, lighting, door chimes and pushbutton sales and related operations that have historically comprised the Company’s operations prior to the acquisition of certain net assets of Woodard.

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

An unaudited, condensed overview of results for the three months ended March 31, 2008, and the corresponding prior year period is summarized as follows:

Summary Income Statement by Segment
(Dollars in thousands)

		Three Months Ended												Three Months Ended
		March 31, 2008												March 31, 2007
		Craftmade				TSI				Total				Craftmade				TSI				Total
Net sales		$	23,146			$	31,772			$	54,918			$	13,714			$	8,778			$	22,492
Cost of goods sold			(16,818	)			(27,408	)			(44,226	)			(8,765	)			(6,636	)			(15,401	)
Gross profit			6,328				4,364				10,692				4,949				2,142				7,091
As a % of net sales			27.3	%			13.7	%			19.5	%			36.1	%			24.4	%			31.5	%
Selling, general and administrative			(5,697	)			(3,151	)			(8,848	)			(3,823	)			(1,660	)			(5,483	)
As a % of net sales			24.6	%			9.9	%			16.1	%			27.9	%			18.9	%			24.4	%
Depreciation and amortization			(145	)			(66	)			(210	)			(130	)			(65	)			(195	)
Total operating expenses			(5,842	)			(3,216	)			(9,058	)			(3,953	)			(1,725	)			(5,678	)
Income from operations		$	486			$	1,148				1,633			$	996			$	417				1,413
Other income											139												—
Interest expense, net											(524	)											(351	)
Other expenses											(385	)											(351	)
Income before income taxes and minority interest											1,249												1,062
Income taxes (expense) / benefit											(343	)											118
Income before minority interest											907												1,180
Minority interest											(267	)											(447	)
Net income										$	639											$	733

Net Sales. Net sales for the Company increased $32,427,000 or 142.5% to $54,918,000 for the quarter ended March 31, 2008, compared to $22,492,000 for the quarter ended March 31, 2007. The increase is due to the acquisition of Woodard, offset by declines in sales in both segments.

Net sales from the Craftmade segment increased $9,432,000 or 68.8% to $23,146,000 for the quarter ended March 31, 2008, compared to $13,714,000 for the quarter ended March 31, 2007, as summarized in the following table.

Net Sales of Craftmade Segment
(Dollars in thousands)

		Fans				Woodard
		Lighting &				Outdoor				Segment
Three Months Ended		Accessories				Furniture				Total
March 31, 2008		$	11,627			$	11,519			$	23,146
March 31, 2007			13,714				—				13,714
Dollar increase (decrease)		$	(2,087	)		$	11,519			$	9,432
Percent increase (decrease)			(15.2	%)			100.0	%			68.8	%

The sales of fans and lighting related products continue to be affected by the extremely weak overall housing market.

Management continues to focus on introducing new lighting products, expanding Teiber accounts and developing new accounts for the Durocraft product lines to offset the weak housing market. Management believes that long-term growth will be favorably affected by additional product offerings through enhanced product development efforts, as well as selling outdoor furniture products to lighting showrooms and selling outdoor lighting and ceiling fans to patio dealers, and focusing efforts on the hospitality markets.

Fourth quarter net sales of Woodard outdoor furniture is expected to remain consistent with the third quarter ended March 31, 2008. Historically, sales of outdoor furniture to patio dealers are seasonally high during the third and fourth quarters of the Company’s fiscal year.

Net sales of the TSI segment increased $22,994,000 or 261.9% to $31,772,000 for the quarter ended March 31, 2008, compared to $8,778,000 for the quarter ended March 31, 2007, as summarized in the following table:

Net Sales of TSI Segment
(Dollars in thousands)

		Trade				Design								Segment
Three Months Ended		Source				Trends				Woodard				Total
March 31, 2008		$	4,042			$	3,403			$	24,327			$	31,772
March 31, 2007			4,989				3,789				—				8,778
Dollar increase (decrease)		$	(947	)		$	(386	)		$	24,327			$	22,994
Percent increase (decrease)			(19.0	%)			(10.2	%)			100.0	%			261.9	%

The decrease in net sales of Trade Source was primarily the result of: (i) a decline in orders from Lowe’s related to indoor lighting and outdoor lighting; (ii) lower sales of non-core dropped shipped products; and (iii) fan accessories. In November 2006, Lowe’s notified Trade Source that it will no longer source the 14 indoor and outdoor lighting SKUs previously sold by Trade Source to Lowe’s via direct import. The final shipments were shipped in during the third quarter of the previous year. Additional information is detailed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

The decline in Design Trends’ net sales was primarily due to reduced retail sales of the mix and match portable sales through Lowe’s. Currently, Design Trends supplies mix and match portable lamps to all 13 Lowe’s regional distribution centers.

Woodard sales were primarily comprised of sales to its various mass merchant customers. Most of its products are shipped directly from China. Due to the seasonal nature of outdoor furniture; the majority of sales to mass merchants occur from December to April each year.

Based on the most recent annual line review, management believes that Lowe’s remains committed to the respective programs it currently has with each of Design Trends and PHI, a subsidiary of Trade Source. Management believes that, based on the amount of product currently shipped to Lowe’s, Design Trends and PHI continue to be a primary vendors for Lowe’s mix and match portable lamp and fan accessory/ceiling medallion programs, respectively. Management believes that Design Trends and PHI continue to be invited to participate in each of Lowe’s scheduled line reviews for its existing and new product lines. The line reviews occur on an annual basis for each product category throughout the year for each product category and give both Design Trends and PHI the potential to add new SKUs to the Lowe’s program; however, participation in line reviews could also result in a partial or complete reduction of either subsidiary’s existing SKUs in the product lines currently offered to Lowe’s.

Management believes that the future growth of the TSI segment are contingent upon the success of the Company’s ongoing efforts to introduce new products, product lines and marketing concepts to existing customers and the expansion of the business to new customers.

Gross Profit. Gross profit of the Company as a percentage of net sales decreased 12.0% to 19.5% for the quarter ended March 31, 2008, compared to 31.5% for the quarter ended March 31, 2007, primarily due to consolidated sales of Woodard products that carry a lower gross profit percentage than the Company’s historical operations through December 31, 2007.

Gross profit as a percentage of net sales of the Craftmade segment decreased 8.7% to 27.3% for the quarter ended March 31, 2008, compared to 36.1% in the quarter ended March 31, 2007. The decrease is summarized in the following table.

Gross Profit as a Percentage of Net Sales of Craftmade Segment

		Fans				Woodard
		Lighting &				Outdoor				Segment
Three Months Ended		Accessories				Furniture				Total
March 31, 2008			33.1	%			21.5	%			27.3	%
March 31, 2007			36.1	%			—				36.1	%
Percent decrease			(3.0	%)							(8.7	%)

Decreases in gross margin for ceiling fans and lighting is primarily due to changes in sales mix to items that carry a lower margin, as well as inflation in the cost of goods sold.

For fiscal year 2008, we expect gross profit as a percentage of net sales of the ceiling fan and lighting sales in the Craftmade segment to be roughly equal to the results generated in the fiscal year ended June 30, 2007, as Craftmade is able to offset the increases in cost of goods with a price increase that was effective April 15, 2008. Gross profit as a percentage of net sales of Woodard outdoor furniture historically is slightly higher during the fourth quarter as custom orders increase with the peak season.

Gross profit as a percentage of net sales of the TSI segment decreased 10.7% to 13.7% of net sales for the quarter ended March 31, 2008, compared to 24.4% 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				Woodard				Total
March 31, 2008			23.4	%			26.2	%			10.4	%			13.7	%
March 31, 2007			23.9	%			25.0	%			n/a				24.4	%
Percent increase/(decrease)			(0.5	%)			1.2	%							(10.7	%)

Gross profit as a percentage of net sales at Trade Source and Design Trends varied as a result of slight changes in vendor programs. Woodard gross profit as a percent of net sales is low as all sales are direct import.

For fiscal year 2008, gross profit as a percentage of net sales of Trade Source and Design Trends are expected to remain consistent with the fiscal year ended June 30, 2007, provided that the segment maintains a sales mix, customer concentration and level of vendor program commitment similar to that maintained during fiscal year 2007. Management expects gross profit as a percentage of net sales for Woodard to increase slightly as sales mix changes to customers with less discounting.

Selling, General and Administrative Expenses. Total selling, general and administrative (“SG&A”) expenses of the Company increased $3,366,000 to $8,849,000 or 16.1% of net sales for the quarter ended March 31, 2008, compared to $5,483,000 or 24.4% of net sales for the same period last year.

Selling, General and Administrative Expenses
(Dollars in thousands)

										Increase/
		Three Months Ended								(Decrease)
		March 31,				March 31,				Over Prior
		2008				2007				Year Period
Historical Craftmade		$	5,312			$	5,483			$	(171	)
Woodard Incremental			3,537				—				3,537
		$	8,849			$	5,483			$	3,366

The decrease in historical Craftmade expenses was primarily due to lower variable costs and reductions in overhead partially offset by increases in bad debt expense, consulting and legal fees as summarized below:

Historical Craftmade
Selling, General and Administrative Expenses
(Dollars in thousands)

										Increase/
		Three Months Ended								(Decrease)
		March 31,				March 31,				Over Prior
		2008				2007				Year Period
Commissions		$	614			$	754			$	(139	)
Bad Debt Expense			81				(5	)			86
Accounting, legal and consulting			653				618				36
Salaries and Wages			1,820				1,872				(52	)
Rent			58				89				(31	)
Other			2,086				2,157				(71	)
		$	5,312			$	5,483			$	(171	)

Management anticipates that based on current market conditions, SG&A expenses for the fourth quarter of fiscal year 2008 will be relatively consistent with results generated in the quarter ended March 31, 2008. Management feels it will be able to reduce certain expenses in future periods as it realizes synergies from the acquisition of Woodard.

Interest Expense. Net interest expense of the Company increased $173,000 to $524,000 for the quarter ended March 31, 2008, compared to $351,000 for the quarter ended March 31, 2007. This increase is primarily due to increased working capital associated with the acquisition of Woodard, partially offset by lower interest rates in effect as compared to the previous year.

Other income. The Company realized a gain of $140,000 for the quarter ended March 31, 2008, for leasing the oil and gas mineral rights at its principal place of business in Coppell, Texas.

Minority interest. Minority interest expense decreased $180,000 to $267,000 for the quarter ended March 31, 2008, compared to $447,000 for the same period in the previous quarter. The decrease in minority interest resulted from lower profits at Design Trends as a result of the decline in net sales.

Provision for Income Taxes. The provision for income tax was $343,000 or 34.9% of income before income taxes for the quarter ended March 31, 2008, compared to a benefit of $118,000 for the quarter ended March 31, 2007, for anticipated refunds from lower state apportionment rates that applied to prior periods. See Note 6 in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail regarding the Company’s policy for determining the provision for income taxes.

Nine Months Ended March 31, 2008 Compared to Nine Months Ended March 31, 2007

An unaudited, condensed overview of results for the nine months ended March 31, 2008, and the corresponding prior year period is summarized as follows:

Summary Income Statement by Segment
(Dollars in thousands)

		Nine Months Ended												Nine Months Ended
		March 31, 2008												March 31, 2007
		Craftmade				TSI				Total				Craftmade				TSI				Total
Net sales		$	49,726			$	48,742			$	98,468			$	43,942			$	33,239			$	77,181
Cost of goods sold			(33,903	)			(39,829	)			(73,732	)			(28,336	)			(24,448	)			(52,784	)
Gross profit			15,823				8,913				24,736				15,606				8,791				24,397
As a % of net sales			31.8	%			18.3	%			25.1	%			35.5	%			26.4	%			31.6	%
Selling, general and administrative			(13,003	)			(6,363	)			(19,366	)			(10,888	)			(4,814	)			(15,702	)
As a % of net sales			26.1	%			13.1	%			19.7	%			24.8	%			14.5	%			20.3	%
Depreciation and amortization			(432	)			(196	)			(628	)			(409	)			(187	)			(596	)
Total operating expenses			(13,435	)			(6,559	)			(19,994	)			(11,297	)			(5,001	)			(16,298	)
Income from operations		$	2,388			$	2,354				4,742			$	4,309			$	3,790				8,099
Other income											139												—
Interest expense, net											(1,144	)											(1,112	)
Other expenses											(1,005	)											(1,112	)
Income before income taxes
and minority interest											3,737												6,987
Income taxes											(929	)											(1,645	)
Income before minority interest											2,809												5,342
Minority interest											(1,069	)											(1,225	)
Net income										$	1,739											$	4,117