-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ErLAtOf30l09ig2Y2few/EbUR+E8WTWWa3+gf407By3JwAF9ZaZUYtPBuR/OIc63 A+LIW8rfmbzajssJvy47NQ== 0000950134-02-014313.txt : 20021114 0000950134-02-014313.hdr.sgml : 20021114 20021114121652 ACCESSION NUMBER: 0000950134-02-014313 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRAFTMADE INTERNATIONAL INC CENTRAL INDEX KEY: 0000856250 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRICAL APPLIANCES, TV & RADIO SETS [5064] IRS NUMBER: 752057054 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26667 FILM NUMBER: 02823051 BUSINESS ADDRESS: STREET 1: 650 S ROYAL LANE SUITE 100 CITY: COPPELL STATE: TX ZIP: 75050 BUSINESS PHONE: 9723933800 MAIL ADDRESS: STREET 1: CRAFTMADE INTERNATIONAL INC STREET 2: 650 S ROYAL LANE SUITE 100 CITY: COPPELL STATE: TX ZIP: 75050 10-Q 1 d01310e10vq.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THES ECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ____________ Commission File Number ---------------------- 000-26667 CRAFTMADE INTERNATIONAL, INC. ----------------------------- (Exact name of registrant as specified in its charter) Delaware 75-2057054 - --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 650 South Royal Lane, Suite 100, Coppell, Texas 75019 - ----------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (972) 393-3800 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x]. No [ ]. 5,503,158 shares of Common Stock were outstanding as of October 31, 2002. 1 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES Index to Quarterly Report on Form 10-Q Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Income for the three months ended September 30, 2002 and 2001. Condensed Consolidated Balance Sheets as of September 30, 2002 and June 30, 2002. Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2002 and 2001. Notes to Condensed Consolidated Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Item 4. Controls and Procedures. Part II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Stockholders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 2 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED ----------------------------- September 30 September 30 2002 2001 ------------- ------------- (In thousands except per share data) Net Sales $ 19,022 $ 22,267 Cost of goods sold 12,941 15,622 ------------- ------------- Gross profit 6,081 6,645 ------------- ------------- Selling, general and administrative expenses 3,824 3,759 Interest expense, net 195 313 Depreciation and amortization 151 133 ------------- ------------- Total expenses 4,170 4,205 ------------- ------------- Income before equity in earnings of 50% owned investees and 1,911 2,440 income taxes Equity in earnings of investees before income taxes 1,554 606 ------------- ------------- Income before income taxes 3,465 3,046 Provision for income taxes 1,261 1,089 ------------- ------------- Net income $ 2,204 $ 1,957 ============= ============= Basic earnings per common share $ 0.38 $ 0.33 ============= ============= Diluted earnings per common share $ 0.38 $ 0.33 ============= ============= Cash dividends declared per common share $ 0.07 $ 0.07 ============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
September 30 June 30, 2002 2002 ------------- ------------- (Unaudited) (In thousands) Current assets: Cash $ 1,858 $ 624 Accounts receivable - net of allowance of $150,000 and $150,000, 11,564 15,077 respectively Receivables from 50% owned investees 2,227 Inventory 8,367 8,570 Deferred income taxes 588 588 Prepaid expenses and other current assets 451 453 ------------- ------------- Total current assets 22,828 27,539 Property and equipment, net Land 1,535 1,535 Building 7,784 7,784 Office furniture and equipment 3,742 3,694 Leasehold improvements 253 253 ------------- ------------- 13,314 13,266 Less: accumulated depreciation (3,611) (3,460) ------------- ------------- Total property and equipment, net 9,703 9,806 Goodwill, net of accumulated amortization of $1,204,000 4,735 4,735 Deferred income tax 156 156 Investment in 50% owned investees 3,485 2,244 Other assets 12 12 ------------- ------------- Total other assets 8,388 7,147 ------------- ------------- Total assets $ 40,919 $ 44,492 ============= =============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30, 2002 2002 ------------- ------------- (Unaudited) (In thousands) Current liabilities: Note payable - current $ 710 $ 696 Revolving lines of credit 6,150 9,034 Accounts payable 4,625 3,067 Commissions payable 254 274 Payable to 50% owned investees 1,176 -- Income taxes payable 1,226 567 Accrued liabilities 1,575 2,484 ------------- ------------- Total current liabilities 15,716 16,122 Other non-current liabilities: Note payable - long term 5,563 5,746 ------------- ------------- Total liabilities 21,279 21,868 ------------- ------------- Stockholders' equity: Series A cumulative, convertible callable preferred stock, $1.00 par value, 2,000,000 shares authorized; 32,000 shares issued 32 32 Common stock, $.01 par value, 15,000,000 shares authorized, 9,390,535 and 9,390,535 shares issued, respectively 94 94 Additional paid-in capital 13,261 13,261 Unearned deferred compensation (68) (76) Retained earnings 32,167 30,380 ------------- ------------- 45,486 43,691 Less: treasury stock, 3,783,877 and 3,446,477 common shares at cost, and 32,000 preferred shares at cost (25,846) (21,067) ------------- ------------- Total Stockholders' Equity 19,640 22,624 ------------- ------------- Total liabilities and stockholders' equity $ 40,919 $ 44,492 ============= =============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 CONSOLIDATED FINANCIAL STATEMENTS CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED ------------------------------ September September 30, 2002 31, 2001 ------------- ------------- (In thousands except per share data) Net cash provided by operating activities: 9,533 $ 3,898 ------------- ------------- Cash flows from investing activities: Net additions to equipment (49) (130) ------------- ------------- Net cash used for investing activities (49) (130) ------------- ------------- Cash flows from financing activities: Net proceeds from (payment to) lines of credit (2,884) (2,800) Principal payments on note payable (169) (124) Treasury stock repurchases (4,779) -- Stock options exercised -- 108 Cash dividends (418) (414) ------------- ------------- Net cash used for financing activities (8,250) (3,230) ------------- ------------- Net increase in cash 1,234 538 Cash at beginning of period 624 723 ------------- ------------- Cash at end of period $ 1,858 $ 1,261 ============= =============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES SEPTEMBER 30, 2002 (Unaudited) Note 1 - BASIS OF PREPARATION AND PRESENTATION The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission 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 wholly-owned subsidiaries; 50% owned subsidiaries are accounted for using the equity method. 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 which are incorporated by reference in the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended June 30, 2002. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year. 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES September 30, 2002 (Unaudited) (In Thousands) Note 2 - EARNINGS PER SHARE The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations:
FOR THE THREE MONTHS ENDED ------------------------------- September 30, September 30, 2002 2001 ------------- ------------- (In thousands except per share data) Basic and Diluted EPS: Numerator: Net Income $ 2,204 $ 1,957 ============= ============= Basic Denominator: Common shares outstanding 5,796 5,903 ============= ============= Basic EPS $ 0.38 $ 0.33 ============= ============= Diluted denominator: Common shares outstanding 5,796 5,903 Options 62 71 ------------- ------------- Total Shares 5,858 5,974 ============= ============= Diluted EPS $ 0.38 $ 0.33 ============= =============
8 Note 3 - SEGMENT INFORMATION The Company has two reportable segments, Craftmade and Trade Source International, Inc. ("TSI"). The Company is organized on a combination of product type and customer base. The Craftmade segment primarily derives its revenue from home furnishings including ceiling fans, light kits, bathstrip lighting and lamps offered primarily through lighting showrooms, certain major retail chains and catalog houses. The TSI segment derives its revenue from outdoor lighting, portable lamps, indoor lighting and fan accessories marketed solely to mass merchandisers. The 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, 2001. The Company evaluates the performance of its segments and allocates resources to them based on their operating profit and loss and cash flows. The following table presents information about the reportable segments (in thousands):
Craftmade TSI Total ------------ ------------ ------------ For the three months ended September 30, 2002 Net sales from external customers $ 13,461 $ 5,561 $ 19,022 Operating profit 2,329 (223) 2,106 For the three months ended September 30, 2001 Net sales from external customers $ 13,427 $ 8,840 $ 22,267 Operating profit 2,054 699 2,753
9 Note 4 - INVESTMENT IN 50% OWNED INVESTEES Combined summarized financial information for Design Trends and PHI is as follows for the three months ended:
September 30 September 30 ------------- ------------- 2002 2001 ------------- ------------- Net sales $ 11,155,000 $ 9,801,000 Gross profit 3,991,000 2,415,000 Income before income taxes 3,097,000 1,122,000 Accounts receivable - net $ 4,532,000 5,421,000 Inventories 3,428,000 6,281,000 Total current assets 8,754,000 12,625,000 Total assets 11,540,000 16,209,000 Revolving line of credit 255,000 1,678,000 Note payable - current 167,000 -- Total current liabilities 6,596,000 14,538,000 Total liabilities 6,915,000 14,538,000 Total partner capital 4,625,000 1,671,000
The Company received distributions of $308,000 and $200,000 for the three months ended September 30, 2002 and 2001 respectively, from these two 50% owned investees. The Company's 50% owned investees operate in the form of partnerships and, consequently, do not file federal income tax returns. Instead, the Company's share of their income is reported in the Company's federal tax return. Note 5 - TRANSACTIONS WITH 50% OWNED INVESTEES There are no sales between the Company and its 50% investees or between the investees. The investees utilize the Company's Coppell, Texas distribution facility and Company personnel in the conduct of their operations. The Company charges Design Trends for facility rent and payroll costs for those full time Company employees when they work directly in Design Trends operations. Facility rent is based on total square footage occupied by Design Trends and payroll costs represent actual costs for those employees. No allocation of indirect personnel costs, including management level personnel, is included in the charge to Design Trends. 10 The Company utilizes borrowings under its line of credit to provide Design Trends with advances for its working capital needs. The Company charges Design Trends interest on these advances at the bank's prime rate plus two percentage points and interest is calculated on the average outstanding monthly balance. PHI reimburses the company $30,000 per month for general warehouse and administrative expenses. Craftmade's charges to its 50% owned investees are summarized as follows:
Three Months Ending September 30 September 30 ------------- ------------- 2002 2001 ------------- ------------- Rent - Design Trends $ 60,000 $ 60,000 Payroll - Design Trends $ 243,000 $ 215,000 Interest - Design Trends $ 20,000 $ 181,000 Administrative - PHI $ 90,000 $ 90,000
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 results to differ materially from those anticipated by these forward-looking statements. Some of the important factors which would cause actual results to differ materially from those in the forward-looking statements include, among other things, the success of Design Trends' portable lamp program, the relationship of Design Trends with its primary mass merchandiser customer, changes in anticipated levels of sales and vendor programs, whether due to future national or regional economic and competitive conditions, changes in relationships with customers, TSI's and PHI's dependence on select mass merchandisers, 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), declining conditions in the home construction industry, inability to realize deferred tax assets, and other uncertainties, all of 11 which are difficult to predict and many of which are beyond the control of the Company. Results of Operations Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001. Net Sales. Net sales for the Company decreased $3,245,000, or 14.6%, to $19,022,000 for the three month period ended September 30, 2002 from $22,267,000 for the same three-month period last year. Net sales from the Craftmade division increased $34,000, or .3%, to $13,461,000 for the three months ended September 30, 2002 from $13,427,000 for the same three-month period last year. Net sales of the TSI division decreased $3,279,000, or 37.1%, to $5,561,000 for the three months ended September 30, 2002 from $8,840,000 for the same three-month period last year. The decrease was attributable to a decline in direct shipment sales of outdoor lighting to a mass retail customer. Gross Profit. Gross profit of the Company as a percentage of sales increased to 32.0% of net sales for the three months ended September 30, 2002, compared to 29.8% for the same period of 2001. The gross margin of the Craftmade division increased to 40.4% of sales from 37.4% of sales in the year ago period. The improvement in the gross margin of the Craftmade division was due primarily to the improvement in the exchange rate of the U.S. dollar relative to the Taiwanese dollar. The gross margin of the TSI division decreased to 11.6% of sales for the three months ended September 30, 2002 compared to 18.4% of sales in the year ago period. The decline in the gross margin of TSI was related to an inventory write down of $380,000 taken during the quarter to record discontinued items at their net realizable value. Selling, General and Administrative Expenses. Total selling, general and administrative ("SG&A") expenses of the Company increased $65,000 to $3,824,000, or 20.1% of net sales, for the three months ended September 30, 2002, from $3,759,000, or 16.9% of net sales, for the same three month period last year. Total SG&A expenses of the Craftmade division increased $116,000 to $2,974,000, or 22.1% of net sales, compared to $2,858,000, or 21.3% of net sales, for the same period in the previous period. The increase in SG&A expenses of the Craftmade division as a percentage of sales was primarily related to an increase in payroll related expenses. Total SG&A expenses of the TSI division decreased $51,000 to $850,000, or 15.3% of net sales, 12 compared to $901,000, or 10.2% of net sales, for the same period in the previous year. The increase in TSI's SG&A expenses as a percentage of sales was related to the decline in sales of the TSI division and the de-leveraging effect on fixed SG&A costs. Interest Expense. Net interest expense decreased $118,000 to $195,000 for the three months ended September 30, 2002 from $313,000 for the same three-month period last year. This improvement was primarily the result of a decrease in the outstanding balance of the Company's revolving line of credit, combined with lower interest rates in effect during the period. Equity in Earnings of 50% Owned Investees. Income from investees, representing the Company's 50% ownership of Prime/Home Impressions, LLC ("PHI") and Design Trends, LLC ("Design Trends") increased $948,000 to $1,554,000 from $606,000 for the three months ended September 30, 2002 and 2001, respectively. The increase in income from investees was due to an increase in sales of Design Trends' portable lamp program which generated $1,267,000 in incremental revenue for Design Trends during the period. Provision For Income Taxes. The provision for income taxes increased to $1,261,000 or 36.4% of net income before taxes but after minority interest expense, for the three months ended September 30, 2002, from $1,089,000 or 35.8% for the same period of the prior year. LIQUIDITY AND CAPITAL RESOURCES The Company's cash increased $1,234,000 from $624,000 at June 30, 2002 to $1,858,000 at September 30, 2002. The Company's operating activities provided cash of $9,533,000, which was primarily attributable to the Company's net income from operations, collection of customer receivables and collection of receivables from investees. The $49,000 of cash used for investing activities related primarily to additions to property and equipment associated with the implementation of the Company's logistics and accounting systems upgrade. Cash used for financing activities of $8,250,000 was primarily the result of (i) the repurchase of 337,000 shares of the Company's common stock at an aggregate cost of $4,779,000, (ii) 13 principal payments of $169,000 on the Company's facility note payable, (iii) principal payments or $2,884,000 on the Company's line of credit, and (iv) cash dividends of $418,000. At September 30, 2002, subject to continued compliance with certain covenants and restrictions, the Company had $20,000,000 available on its lines of credit, of which $6,150,000 had been utilized. The Company's management believes that its current line of credit, combined with cash flows from operations, is adequate to fund the Company's current operating needs, make annual payments of approximately $1,200,000 under the Company's facility note payable, fund any future dividend payments, as well as fund its projected growth over the next twelve months. At September 30, 2002, $6,273,000 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. During the year ended June 30, 2002, the Company's Board of Directors authorized the Company's management to repurchase up to 600,000 shares of the Company's outstanding common stock. At June 30, 2002, the Company had repurchased 17,000 shares at an aggregate cost of $235,000. During the first quarter of fiscal 2003, the Company repurchased 337,400 shares at an aggregate cost of $4,779,000. As of October 1, 2002, 245,600 shares remained available for repurchase under this program. 14 With respect to the Company's 50%-owned investees, PHI had $3,000,000 available on its line of credit, of which $741,000 had been utilized at September 30, 2002. Craftmade is a guarantor of this line of credit. Design Trends utilizes the Company's $20,000,000 line of credit described above. To satisfy anticipated demand for the portable lamp program, Design Trends maintained an inventory level of $2,533,000 at September 30, 2002. This program is highly concentrated with one mass merchandiser customer. Should the terms of the program with this particular mass merchandiser be at a level less 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 these 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. At September 30, 2002, the Company had a $20,000,000 line of credit (the "Craftmade Line of Credit") with Frost at an interest rate of prime less .5%, of which $6,150,000 was outstanding. At September 30, 2002 the prime rate was equal to 4.75%. The Craftmade Line of Credit is due on demand; however, if no demand is made, it is scheduled to mature October 31, 2003. At September 30, 2002, PHI had a $3,000,000 line of credit with Wachovia Bank, N.A. at an interest rate equal to the one-month LIBOR plus 2%, of which $241,000 was outstanding. At September 30, 2002 the one-month LIBOR rate was equal to 1.82%. The PHI Line of Credit is due on demand; however, if no demand is made, it is scheduled to mature April 16, 2003. In addition, PHI had a $500,000 three-year note payable with Wachovia maturing on July 29, 2005. The note bears interest at a rate equal to the Monthly LIBOR Index plus 2.5%. These two lines of credit of PHI are referred to as the "PHI Lines of Credit." 15 Because of the short-term nature of each of the Craftmade Line of Credit and the PHI Lines of Credit, the Company is subject to market risk associated adverse changes in interest rates. A sharp rise in interest rates could materially adversely affect the financial condition and results of operations of the Company. The Company has not entered into any instruments to minimize this market risk of adverse changes in interest rates because the Company believes the cost associated with such instruments would outweigh the benefits that would be obtained from utilizing such instruments. Under the Craftmade Line of Credit, for each one-percentage point (1%) incremental increase in the prime rate, the Company's annualized interest expense would increase by approximately $62,000. Consequently, an increase in the prime rate of five percentage points (5%) would result in an estimated annualized increase of interest expense for the Company of approximately $310,000. Under the PHI Lines of Credit, for each one-percentage point (1%) incremental increase in LIBOR, the Company's annualized interest expense would increase by approximately $7,000. 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 $35,000. The Company currently purchases a substantial amount of ceiling fans and other products of its Craftmade division from Fanthing, a Taiwanese company. The Company's verbal understanding with Fanthing provides that all transactions are to be denominated in U.S. dollars; however, the understanding further provides that, in the event that the value of the U.S. dollar appreciates or depreciates against the Taiwanese dollar by one Taiwanese dollar or more, Fanthing's prices will be accordingly adjusted by 2.5%. As of November 6, 2002, one U.S. dollar equaled $34.68 Taiwanese dollars. A sharp appreciation of the Taiwanese dollar relative to the U.S. dollar could materially adversely affect the financial condition and results of operations of the Company. The Company has not entered into any instruments to minimize this market risk of adverse changes in currency rates because the Company believes the cost associated with such instruments would outweigh the benefits that would be obtained from utilizing such instruments. All other purchases of the Company from foreign vendors are denominated in U.S. dollars and are not subject to adjustment provisions with respect to foreign currency fluctuations. As a result, the Company does not 16 believe that it is subject to any material foreign currency exchange risk with respect to such purchases. During the fiscal quarter ended September 30, 2002, the Company purchased approximately $4,645,000 of products from Fanthing. Under the Company's understanding with Fanthing, each $1 incremental appreciation of the Taiwanese dollar would result in an estimated annualized net increase in cost of goods sold of approximately $465,000, based on the Company's purchases during the fiscal quarter ended September 30, 2002 (on an annualized basis). A $5 incremental appreciation of the Taiwanese dollar would result in an estimated annualized increase in cost of goods sold of approximately $2,325,000, based on the Company's purchases during the fiscal quarter ended September 30, 2002 (on an annualized basis). A $10 incremental appreciation of the Taiwanese dollar would result in an increase of approximately $4,650,000 on an annualized basis, based on the Company's purchases during the fiscal quarter ended September 30, 2002 (on an annualized basis). These amounts are estimates of the financial impact of an appreciation of the Taiwanese dollar relative to the U.S. dollar and are based on annualizations of the Company's purchases from Fanthing for the fiscal quarter ended September 30, 2002. Consequently, these amounts are not necessarily indicative of the effect of such changes with respect to an entire year. ITEM 4 CONTROLS AND PROCEDURES. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive officer and the chief financial officer of the Company concluded that the Company's disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely manner. The Company made no significant changes in its internal controls or in other factors that could significantly affect these 17 controls subsequent to the date of the evaluation of those controls by the chief executive officer and chief financial officer. 18 PART II OTHER INFORMATION Item 1. Legal Proceedings not applicable Item 2. Changes in Securities and Use of Proceeds not applicable Item 3. Defaults Upon Senior Securities not applicable Item 4. Submission of Matters to a Vote of Stockholders not applicable Item 5. Other Information not applicable Item 6. Exhibits and Reports on Form 8-K a). Exhibits 3.1 Certificate of Incorporation of the Company, filed as Exhibit 3(a)(2) to the Company's Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and incorporated by reference herein. 3.2 Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24, 1992 and filed as Exhibit 4.2 to the Company's Form S-8 (File No. 333-44337) and incorporated by reference herein. 3.3 Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the Company's Post Effective Amendment No. 1 to Form S-8 (File No. 33-33594-FW) and incorporated by reference herein. 19 4.1 Specimen Common Stock Certificate, filed as Exhibit 4.4 to the Company's Registration Statement on Form S-3 (File No. 333-70823) and incorporated by reference herein. 4.2 Rights Agreement, dated as of June 23, 1999, between Craftmade International, Inc. and Harris Trust and Savings Bank, as Rights Agent, previously filed as an exhibit to Form 8-K dated July 9, 1999 (File No. 000-26667) and incorporated by reference herein. 10.1 Earnest Money contract and Design/Build Agreement dated May 8, 1995, between MEPC Quorum Properties II, Inc. and Craftmade International, Inc. (including exhibits), previously filed as an exhibit in Form 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.2 Assignment of Rents and Leases dated December 21, 1995, between Craftmade International, Inc. and Allianz Life Insurance Company of North America (including exhibits), previously filed as an exhibit in Form 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.3 Deed of Trust, Mortgage and Security Agreement made by Craftmade International, Inc., dated December 21, 1995, to Patrick M. Arnold, as trustee for the benefit of Allianz Life Insurance Company of North America (including exhibits), previously filed as an exhibit in Form 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.4 Second Amended and Restated Credit Agreement dated November 14, 1995, among Craftmade International, Inc., Nations Bank of Texas, N.A., as Agent and the Lenders defined therein (including exhibits), 20 previously filed as an exhibit in Form 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.5 Lease Agreement dated November 30, 1995, between Craftmade International, Inc. and TSI Prime, Inc., previously filed as an exhibit in Form 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.6 Revolving credit facility with Texas Commerce Bank, previously filed as an exhibit in Form 10-K for the year ended June 30, 1996, and herein incorporated by reference. 10.7 Agreement and Plan of Merger, dated as of July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation, Neall and Leslie Humphrey, John DeBlois, the Wiley Family Trust, James Bezzerides, the Bezzco Inc. Employee Retirement Trust and Trade Source International, Inc., a California corporation, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.8 Voting Agreement, dated July 1, 1998, by and among James R. Ridings, Neall Humphrey and John DeBlois, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.9 Third Amendment to Credit Agreement, dated July 1, 1998, by and among Craftmade International, Inc., a Delaware corporation, Trade Source International, Inc., a Delaware corporation, Chase Bank of Texas, National Association (formerly named Texas Commerce Bank, National Association) and Frost National Bank (formerly named 21 Overton Bank and Trust), filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.10 Consent to Merger by Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.11 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation and Neall Humphrey, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.12 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation, and Leslie Humphrey, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.13 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation and John DeBlois, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.14 Fourth Amendment to Credit Agreement, dated April 2, 1999, by and among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc., a Texas Corporation, Trade Source International, Inc., a Delaware Corporation, Chase Bank of Texas, National 22 Association and Frost National Bank, filed as Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.15 Letter Agreement Concerning Fifth Amendment to Credit Agreement, dated August 11, 1999, from Chase Bank of Texas, N.A. and Frost National Bank to Craftmade International, Inc., Durocraft International, Inc., Trade Source International, Inc., and C/D/R Incorporated, filed as Exhibit 10.18 to the Company's Quarterly Report on Form 10Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.16 Sixth Amendment to Credit Agreement, dated November 12, 1999, by and among Craftmade International, Inc., a Delaware corporation. Durocraft International, Inc., a Texas Corporation, Trade Source International, Inc., a Delaware Corporation, C/D/R Incorporated, a Delaware corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.19 to the Company's Quarterly Report on Form 10Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.17 Employment Agreement dated October 25, 1999, between Kathy Oher and Craftmade International, Inc., filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K filed September 26, 2000 (File No. 000-26667) and herein incorporated by reference. 10.18 Seventh Amendment to Credit Agreement dated May 12, 2000, by and among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, C/D/R Incorporated, a Delaware 23 corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K filed September 26, 2000 (File No. 000-26667) and herein incorporated by reference. 10.19 Craftmade International, Inc. 1999 Stock Option Plan, filed as Exhibit A to the Company's Proxy Statement on Schedule 14A filed October 4, 2000 (File No. 000-26667) and herein incorporated by reference. 10.20 Craftmade International, Inc. 2000 Non-Employee Director Stock Plan, filed as Exhibit B to the Company's Proxy Statement on Schedule 14A filed October 4, 2000 (File No. 000-26667) and herein incorporated by reference. 10.21 Eight Amendment to Credit Agreement dated February 12, 2001, by and among Craftmade International, Inc. a Delaware corporation, Durocraft International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, Design Trends, LLC, a Delaware limited liability company, C/D/R Incorporated, a Delaware corporation, The Chase Manhattan Bank and The Frost National Bank, filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K filed May 14, 2001(File No. 000-26667) and herein incorporated by reference. 10.22 Ninth Amendment to Credit Agreement dated June 29, 2001, by and among Craftmade International, Inc. a Delaware corporation, Durocraft International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, Design Trends, LLC, a Delaware limited liability company, C/D/R Incorporated, a Delaware corporation, The Chase Manhattan Bank and The Frost National Bank, filed as Exhibit 24 10.25 to the Company's Annual Report on Form 10-K filed September 26, 2001 (File No. 000-26667) and herein incorporated by reference. 10.23 Loan Agreement dated November 6, 2001, by and between Craftmade International, Inc., a Delaware corporation, and The Frost National Bank, a national banking association, filed as Exhibit 10.26 to the Company's quarterly Report on Form 10-Q filed February 14, 2002 (File No. 000-26667) and herein incorporated by reference. 10.24 Termination Agreement dated November 16, 2001, by and between Craftmade International, Inc., a Delaware corporation, and JP Morgan Chase Bank, filed as Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q filed February 14, 2002 (File No. 000-26667) and herein incorporated by reference. 10.25 Loan Agreement dated April 17, 2002, by and between Prime/Home Impressions, LLC, a North Carolina limited liability company, and Wachovia Bank, N.A., with Note and Security Agreement of Prime/Home Impressions, LLC, Guaranty Agreement of Craftmade International, Inc., Guaranty Agreement of Trade Source International, Inc., and Guaranty Agreement of Home Impressions, Inc. 10.26 Note and Security Agreement dated April 29, 2002, by Prime/Home Impressions LLC, a North Carolina limited liability company, to Wachovia Bank, N.A., with Security Agreement of Prime/Home Impressions, LLC, Guaranty Agreement of Craftmade International, Inc., and Guaranty Agreement of Trade Source International, Inc. b). Reports on Form 8-K 25 On August 20, 2002, the Company filed a Form 8-K concerning the issuance of a press release concerning its fiscal 2002 fourth quarter and year-end results. On September 26, 2002, the Company filed a Form 8-K concerning certifications of the Company's Chief Executive Officer and Chief Financial Officer with respect to the filing of its Form 10-Q/As for the quarters ended September 30, 2001, December 31, 2001, and March 31, 2002, respectively. On September 30, 2002, the Company filed a Form 8-K concerning certifications of the Company's Chief Executive Officer and Chief Financial Officer with respect to the filing of its Form 10-K/A for the fiscal year ended June 30, 2001. On September 30, 2002, the Company filed a Form 8-K concerning certifications of the Company's Chief Executive Officer and Chief Financial Officer with respect to the filing of its Form 10-K for the fiscal year ended June 30, 2002. 26 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CRAFTMADE INTERNATIONAL, INC. (Registrant) Date November 14, 2002 /s/ James R. Ridings ------------------ ------------------------------------ JAMES R. RIDINGS President and Chief Executive Officer Date November 14, 2002 /s/ Kathleen B. Oher ------------------ ------------------------------------ KATHLEEN B. OHER Chief Financial Officer 27 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James R. Ridings, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Craftmade International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 28 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ James R. Ridings ----------------------------------- James R. Ridings President and Chief Executive Officer 29 I, Kathleen B. Oher, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Craftmade International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the 30 equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Kathleen B. Oher ------------------------------------ Kathleen B. Oher Chief Financial Officer Index to Exhibits
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1 Certificate of Incorporation of the Company, filed as Exhibit 3(a)(2) to the Company's Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and incorporated by reference herein. 3.2 Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24, 1992 and filed as Exhibit 4.2 to the Company's Form S-8 (File No. 333-44337) and incorporated by reference herein. 3.3 Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the Company's Post Effective Amendment No. 1 to Form S-18 (File No. 33-33594-FW) and incorporated by reference herein. 4.1 Specimen Common Stock Certificate, filed as Exhibit 4.4 to the Company's Registration Statement on Form S-3 (File No. 333-70823) and incorporated by reference herein. 4.2 Rights Agreement, dated as of June 23, 1999, between Craftmade International, Inc. and Harris Trust and Savings Bank, as Rights Agent, previously filed as an exhibit to Form 8-K dated July 9, 1999 (File No. 000-26667) and incorporated by reference herein. 10.1 Earnest Money contract and Design/Build Agreement dated May 8, 1995, between MEPC Quorum Properties II, Inc. and Craftmade International, Inc. (including exhibits), previously filed as an exhibit in Form 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.2 Assignment of Rents and Leases dated December 21, 1995, between Craftmade International, Inc. and Allianz Life Insurance Company of North America (including exhibits), previously filed as an exhibit in Form 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference.
10.3 Deed of Trust, Mortgage and Security Agreement made by Craftmade International, Inc., dated December 21, 1995, to Patrick M. Arnold, as trustee for the benefit of Allianz Life Insurance Company of North America (including exhibits), previously filed as an exhibit in Form 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.4 Second Amended and Restated Credit Agreement dated November 14, 1995, among Craftmade International, Inc., Nations Bank of Texas, N.A., as Agent and the Lenders defined therein (including exhibits), previously filed as an exhibit in Form 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.5 Lease Agreement dated November 30, 1995, between Craftmade International, Inc. and TSI Prime, Inc., previously filed as an exhibit in Form 10-Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.6 Revolving credit facility with Texas Commerce Bank, previously filed as an exhibit in Form 10-K for the year ended June 30, 1996, and herein incorporated by reference. 10.7 Agreement and Plan of Merger, dated as of July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation, Neall and Leslie Humphrey, John DeBlois, the Wiley Family Trust, James Bezzerides, the Bezzco Inc. Employee Retirement Trust and Trade Source International, Inc., a California corporation, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.8 Voting Agreement, dated July 1, 1998, by and among James R. Ridings, Neall Humphrey and John DeBlois, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.9 Third Amendment to Credit Agreement, dated July 1, 1998, by and among Craftmade International, Inc., a Delaware corporation, Trade Source International, Inc., a
Delaware corporation, Chase Bank of Texas, National Association (formerly named Texas Commerce Bank, National Association) and Frost National Bank (formerly named Overton Bank and Trust), filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.10 Consent to Merger by Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.11 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation and Neall Humphrey, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.12 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation and Leslie Humphrey, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.13 Employment Agreement, dated July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc., a Delaware corporation and John DeBlois, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and herein incorporated by reference. 10.14 Fourth Amendment to Credit Agreement, dated April 2, 1999, by and among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc. a Texas corporation, Trade Source International, a Delaware corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference.
10.15 Letter Agreement Concerning Fifth Amendment to Credit Agreement, dated August 11, 1999, from Chase Bank of Texas, N.A. and Frost National Bank to Craftmade International, Inc., Durocraft International Inc., Trade Source International, Inc., and C/D/R Incorporated, filed as Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.16 Sixth Amendment to Credit Agreement, dated November 12, 1999, by and among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, C/D/R Incorporated, a Delaware corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q filed May 15, 2000 (File No. 000-26667) and herein incorporated by reference. 10.17 Employment Agreement dated October 25, 1999, between Kathy Oher and Craftmade International, Inc., filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K filed September 26, 2000 (File No. 000-26667) and herein incorporated by reference. 10.18 Seventh Amendment to Credit Agreement dated May 12, 2000, by and among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, C/D/R Incorporated, a Delaware corporation, Chase Bank of Texas, National Association and Frost National Bank, filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K filed September 26, 2000 (File No. 000-26667) and herein incorporated by reference. 10.19 Craftmade International Inc. 1999 Stock Option Plan, filed as Exhibit A to the Company's Proxy Statement on Schedule 14A filed October 4, 2000 (File No. 000-26667) and herein incorporated by reference. . 10.20 Craftmade International Inc. 2000 Non-Employee Director Stock Plan, filed as Exhibit B to the Company's Proxy Statement on Schedule 14A filed
October 4, 2000 (File No. 000-26667) and herein incorporated by reference. 10.21 Eighth Amendment to Credit Agreement dated February 12, 2001, by and among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, Design Trends, LLC, a Delaware limited liability company, C/D/R Incorporated, a Delaware corporation, The Chase Manhattan Bank and The Frost National Bank, filed as Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q filed May 14, 2001 (File No. 000-26667) and herein incorporated by reference. 10.22 Ninth Amendment to Credit Agreement dated June 29, 2001, by and among Craftmade International, Inc. a Delaware corporation, Durocraft International, Inc., a Texas corporation, Trade Source International, Inc., a Delaware corporation, Design Trends, LLC, a Delaware limited liability company, C/D/R Incorporated, a Delaware corporation, The Chase Manhattan Bank and The Frost National Bank, filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K filed September 26, 2001 (File No. 000-26667) and herein incorporated by reference. 10.23 Loan Agreement dated November 6, 2001, by and between Craftmade International, Inc., a Delaware corporation, and The Frost National Bank, a national banking association, filed as Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q filed February 14, 2002 (File No. 000-26667) and herein incorporated by reference. 10.24 Termination agreement dated November 16, 2001, by and between Craftmade International, Inc., a Delaware corporation, and JPMorgan Chase Bank, filed as Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q filed February 14, 2002 (File No. 000-26667) and herein incorporated by reference. 10.25 Loan Agreement dated April 17, 2002, by and between Prime/Home Impressions, LLC, a North Carolina limited liability company, and Wachovia Bank, N.A., with Note and Security Agreement of Prime/Home Impressions, LLC,
Guaranty Agreement of Craftmade International, Inc., Guaranty Agreement of Trade Source International, Inc., and Guaranty Agreement of Home Impressions, Inc. 10.26 Note and Security Agreement dated April 29, 2002, by Prime/Home Impressions LLC, a North Carolina limited liability company, to Wachovia Bank, N.A., with Security Agreement of Prime/Home Impressions, LLC, Guaranty Agreement of Craftmade International, Inc., and Guaranty Agreement of Trade Source International, Inc.
EX-10.25 3 d01310exv10w25.txt LOAN AGREEMENT EXHIBIT 10.25 [LETTERHEAD OF WACHOVIA BANK, N.A.] April 17, 2002 Mr. Robert W. Lackey, Sr., Group A Manager Mr. Neall W. Humphrey, Group B Manager Prime/Home Impressions, LLC 420 Third Ave. NW Hickory, NC 28601 Gentlemen: Wachovia Bank, N.A. (the "Bank") is pleased to extend to Prime/Home Impressions, LLC (the "Borrower") a revolving line of credit of up to Three Million and 00/100 Dollars ($3,000,000.00) (the "Commitment"). PURPOSE: To finance short-term working capital REPAYMENT TERMS: Interest shall be paid monthly in arrears. All principal and interest outstanding shall become due and payable in full on the expiration date. EXPIRATION: The Commitment shall expire on April 16, 2003 INTEREST RATE: The Note shall bear interest at a rate per annum equal to the "Monthly LIBOR Index" for the applicable Interest Period plus Two Percent (2.00%). As used herein, the "Monthly LIBOR Index" for an applicable Interest Period shall mean a rate per annum equal to the quotient obtained by dividing the applicable "LIBOR" for such Interest Period by 1.00 minus the "Eurodollar Reserve Percentage". As used herein, the "LIBOR" shall mean for the applicable Interest Period, the rate per annum at which deposits of United States dollars with maturities comparable to the applicable Interest Period, that appears on the display designated as page "3750" of the Telerate Service (or such other page as may replace page 3750 of that service or such other service or services as may be designated by the British Bankers' Association for the purpose of displaying London Interbank Offered Rates for U.S. dollar deposits), determined as of 11:00 a.m. (London time) (rounded upward to the next higher of 1/10,000 of 1%), two (2) business days prior to the commencement of the applicable Interest Period. As used herein, "Eurodollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" (as adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage). As used herein, "Interest Period" shall mean each successive calendar month, with the first Interest Period being the period from the date of the Note until the last day-of that calendar month. FEES/COSTS: Borrower agrees to pay to the Bank a fee of one-quarter of one percent (1/4%) of the Commitment amount upon acceptance of the Commitment. COLLATERAL- The aggregate amount outstanding under the Commitment BORROWING BASE: shall not exceed Paragraph the Margin. "Margin" shall mean an amount equal to 85% of the face dollar amount of Eligible Accounts Receivable (as hereinafter defined) as of the date of determination, plus 60% of the value of Eligible Inventory (as hereinafter defined). The Bank hereby agrees that in the event that the Borrower is in noncompliance with the "Margin" requirement, the Borrower shall have an opportunity to correct such non-compliance by providing the necessary funds to the Bank to satisfy the Margin requirement within seven (7) days after the sooner to occur of the following: 1. Receipt of notice of such non-compliance from the Bank; or 2. The due date of the borrowing base report in which such non-compliance is first reported. This recitation of the right of the Borrower to correct the non-compliance shall not constitute an election by the Bank to waive its right to demand payment at any time under any event as the Bank in its sole discretion may deem appropriate. "Eligible" accounts receivable are defined as the accounts receivable of the Borrower that are less than 90 days from the due date except for. (1) Inter-Company Accounts: Accounts receivable from companies that share common ownership with the Borrower, whether in whole or in part, excluding "pass-through" accounts receivable for which Home Impressions, Inc. serves as the collection agent on behalf of the Borrower. (2) Tainted Accounts: Accounts receivable of which more than 50% of the amount owed is more than 90 days past due, thus making the entire account ineligible. (3) Questionable Accounts: Any other account determined by the Bank to be questionable. "Eligible" inventory is defined as sellable raw materials and finished goods that are in the possession of the Borrower as of the date of determination. GUARANTORS: As selected and offered by the Borrower, the Loan shall be unconditionally guaranteed, on the Bank's form, evidencing the joint and several liability of the following companies: Home Impressions, Inc. Trade Source International, Inc. Craftmade International, Inc. REQUIRED REPORTS: Annual Compiled Financial Statements: The Borrower (Borrower): shall provide to the Bank compiled financial statements for each fiscal year ending June 30. The compilations shall be certified by an officer of the company, and shall be delivered to the Bank no later than 90 days from the end of the accounting period. Quarterly Financial Statements: The Borrower shall provide to the Bank a quarterly balance sheet and income statement prepared internally and certified by an officer of the company. These reports shall be delivered to the Bank no later than-45 days from the end of the accounting period. Monthly Receivables Report: The Borrower shall provide to the Bank a monthly aging report of accounts receivable. The report shall be delivered to the Bank no later than 15 days from the end of the accounting period. Monthly Inventory Report: The Borrower shall provide to the Bank a monthly report of inventory in its possession. The report shall be delivered to the Bank no later than 15 days from the end of the accounting period. Monthly Borrowing Base Report: The Borrower shall provide to the Bank a monthly borrowing base report no later than 15 days from the end of the accounting period. REQUIRED REPORTS: Home Impressions, Inc., identified for these purposes (Guarantor #1): as Guarantor #1, shall provide to the Bank a compiled financial statement for each fiscal year ending May 31. The compilation shall be prepared internally and shall be certified by an officer of the company. The compilation shall be delivered to the Bank no later than 90 days from the end of the accounting period. REQUIRED REPORTS: Craftmade International, Inc., identified for these (Guarantor #2): purposes as Guarantor #2, shall provide to the Bank an audited financial statement for each fiscal year ending June 30. The audit shall be prepared by an independent accounting firm acceptable to the Bank, and shall be delivered to the Bank no later than 90 days from the end of the accounting period. Guarantor #2 shall also provide to the Bank a quarterly balance sheet and income statement prepared internally, and certified by an officer of the company. The quarterly financial report shall detail the balance sheet and income statement of the Guarantor's subsidiaries including, but not limited to, Trade Source International, Inc. The report shall be delivered to the Bank no later than 45 days from the end of the accounting period. COVENANTS: Guarantor #2, as defined above, covenants and agrees that from the date hereof and until payment in full of the principal and interest on the loan, unless the Bank shall otherwise consent in writing, Guarantor #2 shall: 1. Maintain at all times a consolidated "Total Liabilities to Tangible Net Worth" ratio of no greater than 3.00 to 1.00. "Tangible Net Worth" is defined as the sum of all shareholder equity less -all intangibles appearing on the balance sheet. This covenant shall be measured by the Bank on a quarterly basis and shall be reported to the Bank by Guarantor #2 no later than 45 days from the end of each quarterly accounting period. 2. Maintain at all times a consolidated "Funded Debt to EBITDA" ratio of no greater than 2.75 to 1.00. "Consolidated Funded Debt" is defined as the sum of the debt of the Company and its Subsidiaries, determined on a consolidated basis, consisting of (without duplication) the following: (i) indebtedness for borrowed money; (ii) Capital Leases, and (iii) Guarantees of debt of Persons other than the Company or any Subsidiary. "Consolidated EBITDA" is defined as the sum of the following, calculated on a consolidated basis in accordance with GAAP for the Company and its Subsidiaries: (i) Consolidated Net Income, plus (ii) Consolidated Interest Expense, plus (iii) Depreciation and Amortization expense, plus (iv) expenses for taxes paid or accrued during such period. This covenant shall be measured by the Bank at the end of each quarter on a rolling four-quarter basis, and shall be reported to the Bank by Guarantor #2 no later than 45 days from the end of each quarterly accounting period. OTHER CONDITIONS: This commitment is subject to the maintenance by the Borrower and the Guarantors of a condition satisfactory to the Bank and the execution of loan documents satisfactory to the Bank. (Examples of an unsatisfactory condition include a change in management or ownership, an adverse change in financial condition, or any default on any obligation to the Bank or to a third party.) In no event shall either the Borrower, the Guarantors, or the Bank be liable to the other for indirect, special, or consequential damages that may arise out of the issuance of this commitment. Closing must occur by April 30, 2002 All information and representations are and will be at closing accurate. No condition or other term of this commitment may be waived or modified except by a writing signed by the Borrower, the Guarantors, and the Bank. To acknowledge your acceptance, please sign below and return this document to the Bank. Thank you for this opportunity to serve your fine company. Very truly yours, /s/ Philip E. Moore Philip E. Moore Senior Vice President Accepted this 18th day of April, 2002. BORROWER Prime/Home Impressions, LLC - A Manager Managed Limited Liability Company By: /s/ Robert W. Lackey By: /s/ Neall W. Humphrey --------------------------------------- --------------------------------------------- Robert W. Lackey, Sr., Group Manager Neall W. Humphrey, Group B. Manager MEMBERS Home Impressions, Inc. Group A Member Trade Source International, Inc., Group B Member By: /s/ Robert W. Lackey By: /s/James R. Ridings --------------------------------------- -------------------------------------------- Robert W. Lackey, Sr., Vice President James R. Ridings, President
GUARANTORS Home Impressions, Inc. By: /s/Robert W. Lackey -------------------------------------- Robert W. Lackey, Sr., Vice-President Trade Source International, Inc. By: /s/James R. Ridings -------------------------------------- James R. Ridings, President Craftmade International Inc. By: /s/James R. Ridings -------------------------------------- James R. Ridings, President This Note and Security is a renewal of an existing Note and Security Agreement between Borrower and Lender NOTE AND SECURITY AGREEMENT Hickory, North Carolina Date: April 17, 2002 $3,000,000.00 FOR VALUE RECEIVED, Prime/Home Impressions, LLC, limited liability company organized and existing under the laws of the State of North Carolina and whose chief executive office is located at 420 3rd Avenue NW, Hickory, North Carolina 28601 (hereinafter the "Borrower"), hereby promises to pay to the order of Wachovia Bank, NA. (hereinafter the "Lender") at its office where borrowed, or at such other place as Lender hereafter may direct from time to time in writing, in immediately available funds of lawful money of the United States, the sum of Three Million and 00/100 Dollars together with any unpaid interest hereon from date of advance, in accordance with the terms contained in this Note and Security Agreement (hereinafter referred to as the "Note"). The optional provisions applicable to this Note are checked below. REPAYMENT: [ ] One payment in full of principal and unpaid interest due _________________ [ ] On demand __________________________ [ ] ________ payments of $_________ beginning ____________________________ and thereafter __________________________ until ____________________________. When the entire principal amount then outstanding and all accrued but unpaid interest shall be paid in full. [X] On demand the principal amount set forth above or the unpaid principal amount of all advances which the Lender actually makes hereunder to the Borrower, whichever amount is less. The Borrower may borrow, repay and reborrow sums up to the principal amount set forth above. This Note shall be used to evidence the outstanding principal balance advanced hereunder until it is surrendered to the Borrower by the Lender, and it shall continue to be used even though there may be periods prior to such surrender when no amount of principal or interest is owing hereunder. If advances of the principal amount hereof are to be made by Lender to the Borrower after the date of this Note, Lender, at its sole discretion, is hereby authorized to make such advances under this. Note upon telephonic or written communication of a borrowing request from any Person representing himself or herself to be the Borrower or, in the event the Borrower is an organization, a duly authorized officer or representative of Borrower. INTEREST: Payable: [X] in arrears; [ ] in advance [X] in addition to the payments described above; [ ] included in the payments described above. Payable at the rate per annum of [ ] Prime Rate plus ____%; [ ] __________% of Prime Rate; [ ] ____________% Fixed; [ ] Those rates which may be offered from time to time by the Lender and agreed to by the Borrower and so noted by the Lender on an attachment hereto. In the event of a good faith dispute among the parties to this Note as to rate under this rate option, the rate shall be the Prime Rate, adjusted for any changes in the Prime Rate as of the day such Rime Rate changes; [X] The rate(s) set forth in Schedule 1 attached to this Note and incorporated herein by reference; [ ] Those rates which have been offered by the Lender to the Borrower in the Loa a Agreement or Commitment Letter checked below, the provisions of which shall determine such rates, the procedure for the selection of such rates and the time periods for which such rates shall apply. In no case shall interest exceed the maximum rate permitted by applicable law. If the interest is based upon the Prime Rate, such interest rate will be adjusted on: [ ] The day the Prime Rate changes [ ] Other ________ Due: [ ] On principal payment dates [X] Other MONTHLY BEGINNING MAY 1, 2002 Interest will be calculated on the basis of [X] A year of 360 days and paid for the actual number of days elapsed [ ] Other __________ After demand or maturity (whether by acceleration or otherwise), as applicable, interest on any unpaid balance hereof shall be payable on demand at a rate per annum-equal to the greater of 150 % of the Prime Rate, or 2 % above the rate applicable prior to demand or maturity, adjusted for any changes in the Prime Rate as of the day such Prime Rate changes, not to exceed the maximum rate permitted by applicable law. To the extent not prohibited by law, a late charge of four percent (4%) or the applicable statutory maximum, whichever is greater, shall be assessed on any payment remaining past due for fifteen (15) days or more unless interest on this Note is payable in advance, in which case such period shall instead be thirty (30) days or more; provided, however, that if any applicable statute allows, a shorter minimum time period for the imposition of a late charge, such shorter time period shall prevail. As used herein, "Prime Rate" refers to that interest rate so denominated and set by the Lender from time to time as an interest rate basis for borrowings. The Prime Rate is one of several interest rate bases used by the Lender. The Lender lends at interest rates above and below the Prime Rate. All payments on this Note shall be applied, in accordance with the then current billing statement applicable to this Note, first to accrued interest, then to fees, then to principal due and then to late charges. Any remaining funds shall be applied to the further reduction of principal. Notwithstanding the foregoing, upon the occurrence of a default hereunder, payments shall be applied as determined by Lender in its sole discretion. [ ] The terms and conditions in a Loan Agreement dated ___________ between the parties hereto, as the same may be amended from time to time, shall be considered a part hereof to the same extent as if written herein. [X] The terms and conditions in a Commitment Letter dated APRIL 17, 2002 from the Lender to the Borrower, as the same may be amended, extended or replaced from time to time, shall be considered a part hereof to the same extent as if written herein. In addition to any other collateral specified herein and in other agreements, to secure the indebtedness evidenced by this Note, together with any extensions, modifications, or renewals thereof, in whole or in part, as well as all other indebtedness, obligations and liabilities of the Borrower to the Lender, now existing or hereafter incurred or arising, including, , without limitation, ail sums arising under any ISDA Master Agreement now or hereafter executed between Borrower and Lender and any related schedules and confirmations thereto (hereinafter sometimes referred to as the "Obligations"), except for other indebtedness, obligations and liabilities owing to Lender that constitute (a) consumer credit as defined in Federal Reserve Board Regulation Z and either subject to the disclosure requirements of Federal Reserve Board Regulation Z or state consumer protection laws or (b) non-consumer credit if under applicable state law the maximum interest rate for such credit is reduced when secured (herein collectively referred to as "Restricted Debt"), the Borrower does hereby grant to the Lender a security interest in, and does hereby assign, pledge, transfer and convey to Leader the following described property: Collateral more particularly described in Security Agreement-Commercial dated February 24, 1999 between Borrower and Lender whether now owned or hereafter acquired, together with any and all additions and accessions thereto or replacements thereof, returned or unearned premiums from any insurance written in connection with this Note and any products and/or proceeds of any of the foregoing. In no event, however, shall the Lender have a security interest in any goods acquired by the Borrower for personal, family or household purposes more than 10 days after the date of this Note, unless such goods are added to or attached to the collateral (as hereinafter defined). In addition, to the extent not prohibited by law, the Borrower hereby grants to the Lender a security interest in, and does hereby assign, pledge, transfer and convey to Lender, (i) all other property of the Borrower now or hereafter in the possession or control of the Lender (exclusive of any such property in the possession or control of the Lender as a fiduciary other than as agent), including, without limitation, all cash, stock or other dividends and all proceeds thereof, and all rights to subscribe for securities incident thereto and any substitutions or replacements for, or other rights in connection with, any of the Collateral and (ii) any of Borrower's deposit accounts (as such term is defined in the Uniform Commercial Code of the State of North Carolina, as the same may be amended from time to time (the "Code")), whether such accounts be general or special, or individual or multiple party, held by Lender and upon all drafts, notes, or other items deposited for collection or presented for payment by the Borrower with the Lender, and the Lender may at any time, without demand or notice, appropriate and apply any of such to the payment of any of the Obligations (except for Restricted Debt), whether or not due. All property described in this paragraph, in which the Borrower has granted to the Lender a security interest or security title hereunder, is herein collectively referred to as the "Collateral." If, with respect to any Collateral in the form of investment securities, a stock dividend is declared or any stock split-up made or right to subscribe issued, all the certificates for the shares representing such stock dividend or spilt-up or right to subscribe will be immediately delivered, duly endorsed, to the Lender as additional Collateral. The Lender shall be deemed to have possession, control and custody of any Collateral actually in transit to it or to any of its officers or agents. If at any time the Collateral pledged as security for any of the Obligations shall be or become unsatisfactory to the Lender or should the Lender deem itself insecure, the Borrower will immediately furnish such further property to be held by the Lender as if originally pledged as Collateral hereunder or make such payment on account as will be satisfactory to. the Lender. The Lender shall have, but shall not be limited to, the following rights, each of which may be exercised at any time or from time to time:( i) to transfer this Note and the Collateral, and any transferee shall have all the rights of the Lender hereunder and the Lender shall be thereafter relieved from any liability with respect to any Collateral so transferred; (ii) to transfer the whole or any part of the Collateral in the name of itself or its nominees; (iii) to vote any investment securities forming a part of the Collateral; (iv) to notify the obligors on any Obligation to make payment to the Lender of any amounts due thereon; (v) to execute at any time in the name of any party hereto and to file one or more financing statements describing the Collateral, which financing statements may contain a generic collateral description that is broader than the Collateral and which may describe any agricultural liens or other statutory liens held by Lender; (vi) to receive or take control of any income or other proceeds of any of the Collateral; and (vii) to request and receive current financial information from any party liable for all or any part of the Obligations. Borrower will at Lender's request maintain insurance on the Collateral in amounts at least equal to the fair market value of the Collateral and against casualty, public liability and property damage risks and such other risks as Lender may request; provided, however, if the Collateral described above is a vehicle(s), Borrower agrees to obtain and maintain liability insurance as required by law and collision and comprehensive insurance with a deductible not exceeding $500.00. All insurance shall be with companies with a Best Insurance Report Rating of B+ or better, and Borrower will pay all premiums for insurance when due. Unless and until requested by Lender, Borrower shall not be required to name Lender as additional insured in such policy or to provide Lender a copy of the policy for or certificate evidencing such insurance, but when and if requested by Lender, the Borrower shall immediately (but no later than five (5) calendar days) (i) cause all policies of such insurance to specify that Lender is an additional insured as its interests may appear and to provide that such insurance shall not be cancellable by Borrower or the insurer without at least 30 days advance written notice to Lender and that proceeds are payable to Lender regardless of any act or omission of Borrower which would otherwise result in a denial of a claim; and (ii) deliver all policies or certificates thereof (with copies of such policies) to Lender. In the event any or all of such insurance is cancelled, any returned premium thereon may be collected by Lender and applied by Lender to any part of the Obligations, either matured or unmatured. Lender is authorized to receive the proceeds of any insurance loss and at the option of Lender shall apply such proceeds toward either the repair or replacement of the Collateral or the payment of the Obligations secured hereby. The undersigned will also pay all taxes and other impositions on the Collateral as well as the cost of repairs or maintenance to the Collateral. If the undersigned fails to maintain such insurance or fails to pay any and all amounts for taxes, repairs, maintenance and other costs, Lender may, at its option, but shall not be required to, purchase such insurance or pay any premium owing with respect to such insurance or pay such amounts for taxes, repairs, maintenance and other costs, and any such sum paid by Lender shall be payable by the Borrower on demand by Lender or at its option may be added to the Obligations and secured hereby. The loss, injury or destruction of the Collateral, with or without the fault of Borrower, shall not release the Borrower from any liability hereunder or in any way affect Borrower's liability hereunder. The occurrence of any one or more of the following conditions or events shall constitute an "Event of Default" hereunder: (i) any failure of any Obligor (which term shall include the Borrower and each endorser, surety or guarantor of this Note) to pay any of the Obligations when due or to observe or perform any agreement, covenant or promise hereunder or in any other agreement, note, instrument or certificate of any Obligor to the Lender, now existing or hereafter executed in connection with any of the Obligations, including, but not limited to, a loan agreement, if applicable, and any agreement guaranteeing payment of any of the Obligations; (ii) any default of any Obligor in the payment or performance of any other liabilities, indebtedness or obligations to Lender or any other creditor or to allow or permit any other liabilities, indebtedness or obligations to Leader or any other creditor to be accelerated; (iii) any failure of any Obligor to furnish Lender current financial information upon request; (iv) any failure of any Obligor or any pledgor of any security interest in the Collateral (the "Pledgor") to observe or perform any agreement, covenant or promise contained in any agreement, instrument or certificate executed in connection with the granting of a security interest in property to secure the Obligations or any guaranty securing the Obligations; (v) any warranty, representation or statement made or furnished to the Lender by or on behalf of any Obligor or Pledgor in connection with the extension of credit evidenced by this Note proving to have been false in any material respect when made or furnished, (vi) any loss, theft, substantial damage, destruction, sale, foreclosure of or encumbrance to any of the Collateral, or the making of any levy, seizure or attachment thereof or thereon or the rendering of any judgment or lien or garnishment or attachment against any Obligor or Pledgor or his property, whether actual or threatened; (vii) the dissolution, change in control, change of status to an organization, change of type of organization, termination of existence, insolvency, business failure, or appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency laws, state or federal, by or against, the Borrower or any other Obligor or Pledgor; (viii) if Borrower, any Pledgor or any Obligor shall change its name, change its principal residence, change its chief executive office, change its status to an organization, change its state of organization, change its type of organization, or change its organizational identification number, as applicable, without giving Secured Party at least thirty (30) days' written notice (ix) any discontinuance or termination of any guaranty of any of the Obligations by a guarantor; or (x) the Lender determining that some event has occurred, failed to occur or is threatened, or some objective condition exists or is threatened, which significantly impairs the prospects that any of the Obligations will be paid when due or which significantly affects the financial or business condition of any Obligor in an adverse manner, or the Collateral or any other property securing the Obligations or any substantial portion thereof is in danger of misuse, misappropriation or confiscation. Upon the occurrence of an Event of Default (and the expiration of any applicable notice and/or grace periods), to the extent permitted by law, the Lender at its option may terminate any obligation to extend any additional credit or make any other financial accommodation to the Borrower and/or may declare all of the Obligations to be immediately due and payable, all without notice or demand, and shall have in addition to and independent of the right to declare the Obligations to be due and payable and any other rights of the Lender under this Note or any other agreement with any Obligor or any Pledgor, the remedies of a secured party under the Code, including, without limitation thereto, the right to take possession of the Collateral, or the proceeds thereof and to sell or otherwise dispose thereof, and for this purpose, to sign in the name of any Obligor or Pledgor any transfer, conveyance or instrument necessary or appropriate in order for the Lender to sell or dispose of any of the Collateral, and the Lender may, so far as the Borrower can give authority therefor, enter upon the premises on which the Collateral or any part thereof may be situated and remove the same therefrom, without being liable in any way to any Obligor on account of entering any premises. The Lender may require the Borrower to assemble the Collateral and make the Collateral available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Lender shall give the Borrower written notice of the time and place of any public sale thereof or of the time after which any private sale or other intended disposition thereof is to be made. The requirement of sending reasonable notice shall be met if such notice is mailed; postage prepaid, or otherwise given, to the Borrower or Pledgor at the last address shown on the Lender's records at least ten (10) days before such disposition. Lender may (i) comply with any applicable state or federal law requirements in connection with a disposition of the Collateral, (ii) sell the Collateral without giving any warranties as to the Collateral, and (iii) specifically disclaim any warranties of title or the like and in so doing any of the foregoing will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. If any Obligation (including but not limited to the Note) is a demand instrument, the statement of a maturity date, the requirement for the payment of periodic interest or the recitation of defaults and the right of Lender to declare any Obligation due and payable shall not constitute an election by Lender to waive its right to demand payment under a demand at any time and in any event as Lender in its sole discretion may deem appropriate. The rights of the Lender specified herein shall be in addition to, and not in limitation of the Lender's rights under the Code, or any other statute or rules of law conferring rights similar to those conferred by the Code, and under the provisions of any other instrument or agreement executed by the Borrower, any other Obligor or any Pledgor to the Lender. All prior agreements to the extent inconsistent with the terms of this Note shall be construed in accordance with the provisions hereof. Any rights or remedies of the Lender may be exercised or taken in any order or sequence whatsoever, at the sole option of the Lender. This agreement shall bind and inure to the benefit of the heirs, legatees, executors, administrators and assigns of Lender and shall bind all persons who become bound as a debtor to this security agreement. The security agreement set forth herein and the security interest in the Collateral created hereby shall terminate only when all of the Obligations have been indefeasibly paid in full and such payments are no longer subject to rescission, recovery or repayment upon the bankruptcy, insolvency, reorganization, moratorium, receivership or similar proceeding affecting the Borrower or any other person. No waiver by the Lender of any default shall be effective unless in writing nor operate as a waiver of any other default or of the same default an a future occasion. All rights of the Lender hereunder shall inure to the benefit of its successors and assigns, and all obligations of the Borrower shall bind the heirs; legal representatives, successors and assigns of the Borrower. The Borrower and each endorser, surety or guarantor of this Note, whether bound by this or by separate instrument or agreement, shall be jointly and severally liable for the indebtedness evidenced by this Note and hereby severally ( i) waive presentiment for payment, demand, protest, notice of nonpayment or dishonor and of protest and any and all other notices and demands whatsoever; to the fullest extent permitted by applicable law; (ii) consent that at any time, or from time to time, payment of any sum payable under this Note may` be extended without notice whether for a definite or indefinite time; and (iii) agree to remain liable until all of the Obligations are paid in full notwithstanding any impairment, substitution, release or transfer of Collateral or any one or more Borrower or Obligor by the Lender, with or without consideration, or of any extension, modification or renewal. No conduct of the holder shall be deemed a waiver or release of such liability, unless the holder expressly releases such party in writing. The Borrower shall pay to the holder on demand all expenses, including reasonable attorneys' fees and expenses of legal counsel, incurred by the holder in any way arising from or relating to the enforcement or attempted enforcement of the Note and any related guaranty, collateral document or other document and the collection or attempted collection, whether by litigation or otherwise, of the Note. Time is of the essence. Borrower acknowledges that Lender may reproduce (by electronic means or otherwise) any of the documents evidencing and/or securing the Obligations and thereafter may destroy the original documents. Borrower does hereby agree that any document so reproduced shall be and remain the binding obligation of Borrower, enforceable and admissible in evidence against it to the same extent as if the original documents had not been destroyed. This Note, and the rights and obligations of the parties hereunder, shall be governed and construed in accordance with the laws of the State of North Carolina, except to the extent that the Code provides for the application of other law with respect to the Collateral. IN WITNESS WHEREOF, the Borrower has executed this Note under seal the day and year set forth above. Borrower: Prime/Home Impressions, LLC By: /s/ Robert W. Lackey (SEAL) ------------------------------------------------- Robert W. Lackey, Sr. Title: Group A. Manager By: /s/ Neall W. Humphrey (SEAL) ------------------------------------------------- Neall W. Humphrey Title: Group B Manager By: /s/ Robert W. Lackey (SEAL) ------------------------------------------------- Home/Impressions, Inc, by its Vice President, Robert W. Lackey, Sr. Title: Group A Member By: /s/ James R. Ridings (SEAL) ------------------------------------------- Trade Source International, Inc. by its President, James R. Ridings Title: Group B Member SCHEDULE 1 This Schedule is referenced on the Note and Security Agreement dated April 17, 2002 in the stated amount of $3,000,000.00 (the "Note") between Prime/Home Impressions, LLC ("Borrower") and Wachovia Bank N.A. ("Lender") and shall be considered a part thereof to the same extent as if written therein. The Note shall bear interest from the date hereof at a rate per annum equal to the Monthly LIBOR Index plus two percent (2.00%). As used herein, the "Monthly LIBOR Index" shall mean a rate per annum equal to LIBOR (determined in accordance with the paragraph below), adjusted for all applicable Costs (as hereinafter defined). The Monthly LIBOR Index shall be adjusted on the first day of each calendar month and shall be further adjusted on and as of the effective date of changes in the Lender's Costs. As used herein, "Costs" shall mean any charges, fees or costs incurred by the Lender as the result of any changes in the-laws, rules, regulations, or governmental requirements pertaining to LIBOR loans. As used herein, "LIBOR" shall mean the rate per annum (rounded upward to the next higher of 1/10,000 of 1%) for deposits of United States dollars with maturities of one month, that. appears on the display designated as page "3750" of the Telerate Service (or such other page as may replace 3750 of that service or such other service or services as may be designated by the British Bankers' Association for the purpose of displaying London Interbank Offered Rate for U. S. Dollar deposits), determined as of 11:00 a.m. London time, two (2) Business Days prior to the first day of each calendar month. As used herein, "Business Day" shall mean a day on which dealings in United States dollar deposits are being carried out in the London interbank eurodollar market. Notwithstanding any provisions herein to the contrary, if the Lender should at anytime be unable to determine LIBOR, then the Monthly LIBOR Index shall be based on an interest rate selected by the Lender in good faith that approximates one month LIBOR taking into account rates in relevant markets. Such rate shall be in effect until the first day of the next calendar month on which LIBOR is determinable. GUARANTY AGREEMENT WHEREAS. the undersigned has requested Wachovia Bank, N.A. (herein called the "Lender") to extend credit or make certain financial accommodations to Prime/Home Impressions. LLC (herein called the "Borrower") or to renew, or extend, in whole or in part, existing indebtedness or financial accommodations of the Borrower to the Lender, and the Lender has extended credit or extended or renewed existing indebtedness or made financial accommodations and/or may in the future extend credit or extend or renew existing indebtedness or make certain financial accommodations by reason of such request and in reliance upon this guaranty; NOW, THEREFORE, in consideration of such credit extended or renewed and/or to be extended or renewed or such financial accommodations made or to be made in its discretion by the Lender to the Borrower (whether to the same, greater or lesser extent than any limit, if applicable, of this guaranty), in consideration of One Dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which is acknowledged, the undersigned hereby unconditionally guarantees to the Lender and its successors, endorsees, transferees and assigns, the punctual payment when due, whether by acceleration or otherwise, and at all times thereafter of (a) all debts, liabilities and obligations whatsoever of the Borrower to the Lender, now existing. or hereafter coming into existence, whether joint or several, whether created directly or acquired by endorsement, assignment or otherwise, whether absolute or contingent, secured or unsecured, due or not due, including but not being limited to notes, checks, drafts, credits, advances, and obligations to reimburse draws against letters of credit; (b) accrued but unpaid interest on such debts, liabilities and obligations, whether accruing before or after any maturity(ies) thereof, and (c) all expenses, including reasonable attorneys' fees and expenses of legal counsel incurred by Lender if any such debts, liabilities or obligations of the Borrower are collected, or the liability of the undersigned hereunder enforced, by or through any attorney at law (all of (a), (b) and (c) being hereinafter referred to as the "Obligations"). References herein to Borrower shall be deemed to include any successor corporations to Borrower, if Borrower is a corporation, or any reconstituted partnerships of Borrower, if Borrower is a partnership. The undersigned consents that, at any time, and from time to time, either with or without consideration, the whole or any part of any security now or hereafter held for any Obligations may be substituted, exchanged, compromised, impaired, released, or surrendered with or without consideration; the time or place of payment of any Obligations or of any security thereof may be changed or extended, in whole or in part, to a time certain or otherwise, and may be renewed or accelerated, in whole or in part; the Borrower may be granted indulgences generally; any of the provisions of any note or other instrument evidencing any Obligations of any security therefor may be modified or waived; any party liable for the payment thereof (including but not being limited to any co-guarantor) may be granted indulgences or released; neither the death, termination of existence, bankruptcy, incapacity, lack of authority nor disability of the Borrower or any one or more of the guarantors, including any of the undersigned, shall affect the continuing obligation of any other guarantor, including any of the undersigned, and that no claim need be asserted against the personal representative, guardian, custodian, trustee or debtor in bankruptcy or receiver of any deceased, incompetent, bankrupt or insolvent guarantor, any deposit balance to the credit of the Borrower or any other party liable for the payment of the Obligations or liable upon any security therefor may be released, in whole or in part, at, before and/or after the stated, extended or accelerated maturity of any Obligations; and the Lender may release, discharge, compromise or enter into any accord and satisfaction with respect to any collateral for the Obligations, or the liability of the Borrower or any of the undersigned, or any liability of any other person primarily or secondarily liable on any of the Obligations, all without notice to or further assent by the undersigned, who shall remain bound hereon, notwithstanding any such exchange, compromise, surrender, extension, renewal, acceleration, modification, indulgence, release, discharge or accord and satisfaction. Without limiting any of the foregoing, in the event of incompetency, or dissolution of the Borrower, or should the Borrower become insolvent (as defined by the Uniform Commercial Code as in effect for the State of North Carolina, or if a petition in bankruptcy be filed by or against the Borrower, or if a receiver be appointed for any part of the property or assets of the Borrower, or if any final judgment for money damages be entered against the Borrower in a court of competent jurisdiction and remain unsatisfied for a period of thirty (30) days or more, or if the Lender shall deem itself insecure with respect to the Obligations and whether or not such event occurs at a time when any of such Obligations are otherwise due and payable, the undersigned agrees to pay to the Lender upon demand the full amount which would be payable hereunder by the undersigned if all such Obligations were then due and payable. The undersigned expressly waives: (a) notice of acceptance of this guaranty and of all extensions or renewals of credit or other financial accommodations to the Borrower; (b) presentment and demand for payment of any of the Obligations; (c) protest and notice of dishonor or of default to the undersigned or to any other party with respect to any of the Obligations or with respect to any security therefor; (d) any invalidity or disability in whole or in part at the time of the acceptance of, or at any time with respect to, any security for the Obligations or with respect to any party primarily or secondarily liable for the payment of the Obligations to the Lender; (e) the fact that any security for the Obligations may at any time or from time to time be in default or be inaccurately estimated or may deteriorate in value for any cause whatsoever; (f) any diligence in the creation or perfection of a security interest or collection or protection of or realization upon the Obligations or any security therefor, any liability hereunder, or any party primarily or secondarily liable for the Obligations or any lack of commercial reasonableness in dealing with any security for the Obligations; (g) any duty or obligation on the part of the Lender to ascertain the extent or nature of any security for the Obligations, or any insurance or other rights respecting such security, or the liability of any party primarily or secondarily liable for the Obligations, or to take any steps or action to safeguard, protect, handle, obtain or convey information respecting, or otherwise follow in any manner, any such security, insurance or other rights; (h) any duty or obligation on the Lender to proceed to collect the Obligations from, or to commence an action against, the Borrower, any other guarantor, or any other person, or to resort to any security or to any balance of any deposit account or credit on the books of the Lender in favor of the Borrower or any other person, despite any notice or request of the undersigned to do so; (i) to the extent not prohibited by law, the right to assert any of the. benefits under any statute providing appraisal or other rights which may reduce or prohibit any deficiency judgments in any foreclosure or 2 other action; (j) all other notices to which the undersigned might otherwise be entitled; (k) demand for payment under this guaranty; or (l) any rights of the undersigned pursuant to North Carolina General Statutes Section 26-7 or any similar or subsequent law. This is a guaranty of payment and not of collection. The liability of the undersigned on this guaranty shall be continuing, direct and immediate and not conditional or contingent upon either the pursuit of any remedies against the Borrower or any other person or foreclosure of any security interests or liens available to the Lender, its successors, endorsees or assigns. The Lender may accept any payment(s), plan for adjustment of debts, plan for reorganization or liquidation, or plan of composition or extension proposed by, or on behalf of, the Borrower or any other guarantor without in any way affecting or discharging the liability of the undersigned hereunder. If the Obligations are partially paid, the undersigned shall remain liable for any balance of such Obligations. This guaranty shall be revived and reinstated in the event that any payment received by Lender on any Obligation is required to be repaid or rescinded under present or future federal or state law or regulation relating to bankruptcy, insolvency or other relief of debtors. The undersigned agrees to furnish promptly to the Lender annual financial statements and such other current financial information as the Lender may reasonably request from time to time. The undersigned expressly represents and acknowledges that loans and other financial accommodations by the Lender to the Borrower are and will be to the direct interest and advantage of the undersigned. The Lender may, without notice of any kind, sell, assign or transfer all or any of the Obligations, and in such event each and every immediate and successive assignee, transferee, or holder of all or any of the Obligations shall have the right to enforce this guaranty, by suit or otherwise, for the benefit of such assignee, transferee or holder, as fully as if such assignee, transferee or holder were herein by name specifically given such rights, powers and benefits, but the Lender shall have an unimpaired right, prior and superior to that of any such assignee, transferee or holder, to enforce this guaranty for the benefit of the Lender, as to so much of the Obligations as it has not sold, assigned or transferred. No delay or failure on the part of the Lender in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Lender of any right or remedy shall preclude other or further exercise of any other right or remedy. For the purpose of this guaranty, the Obligations shall include all debts, liabilities and obligations of the Borrower to the Lender, notwithstanding any right or power of the Borrower or anyone else to assert any claim or defense as to the invalidity or unenforceability thereof, and no such claim or defense shall impair or affect the obligations and liabilities of the undersigned hereunder. Without limiting the generality of the foregoing, if the Borrower is a corporation, partnership, joint venture, trust or other form of business organization, this guaranty covers all Obligations purporting to be made in behalf of such organization by any officer or agent of the same, without regard to the actual authority of such officer or agent. The term "corporation" shall include associations of all kinds and all purported corporations, whether or not correctly and legally chartered and organized. 3 To the extent not prohibited by law, the undersigned hereby grants to the Lender a security interest in and security title to and hereby assigns, pledges, transfers and conveys to Lender (i) all property of the undersigned of every kind or description now or hereafter in the possession or control of the Lender, exclusive of any such property in the possession or control of the Lender as a fiduciary other than as agent, for any reason including, without limitation, all cash, stock or other dividends and all proceeds thereof, and all rights to subscribe for securities incident thereto and any substitutions or replacements therefor and (ii) any balance or deposit accounts of the undersigned, whether such accounts be general or special, or individual or multiple party, and upon all drafts, notes, or other items deposited for collection or presented for payment by the undersigned with the Lender, exclusive of any such property in the possession or control of the Lender as a fiduciary other than as agent, and the Lender may at any time, without demand or notice, appropriate and apply any of such to the payment of any of the Obligations, whether or not due, except for other indebtedness, obligations and liabilities owing to Lender that constitute (a) consumer credit as defined in Federal Reserve Board Regulation Z or (b) non-consumer credit if under applicable state law the maximum interest rate for such credit is reduced when secured. Any amount received by the Lender from whatever source and applied by it toward the payment of the Obligations shall be applied in such order of application as the Lender may from time to time elect. This guaranty shall bind and inure to the benefit of the Lender, its successors and assigns, and likewise shall bind and inure to the benefit of the undersigned, their heirs, executors, administrators, successors and assigns. If more than one person shall execute this guaranty or a similar, contemporaneous guaranty, the term "undersigned," shall mean, as used herein, all parties executing this guaranty and such similar guaranties and all such parties shall be liable, jointly and severally, one with the other and with the Borrower, for each of the undertakings, agreements, obligations, covenants and liabilities provided for herein with respect to the undersigned. This guaranty contains the entire agreement and there is no understanding that any other person shall execute this or a similar guaranty. Furthermore, no course of dealing between the parties, no usage of trade, and no parole or extrinsic evidence shall be used to supplement or modify any terms of this guaranty; nor are there any conditions to the complete effectiveness of this guaranty. This guaranty shall be deemed accepted by Lender in the State of North Carolina. The parties agree that this guaranty shall be deemed, made, delivered, performed and accepted by Lender in the State of North Carolina and shall be governed by the laws of the State of North Carolina. Wherever possible each provision of this guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provisions of this guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this guaranty. The undersigned (a) submits to personal jurisdiction in the State of North Carolina, the courts thereof and any United States District Court sitting therein, for the enforcement of this 4 guaranty, (b) waives any and all personal rights under the law of any jurisdiction to object on any basis (including, without limitation, inconvenience of forum) to jurisdiction or venue within the State of North Carolina, for the purpose of litigation to enforce this guaranty, and (c) agrees that service of process may be made upon the undersigned by first class postage prepaid mail, addressed to the undersigned at the latest address of the undersigned known to the Lender (or at such other address as the undersigned may specify for the purpose by notice to the Lender). Nothing herein contained, however, shall prevent the Lender from bringing any action or exercising any rights against any security and against the Borrower personally, and against any assets of the Borrower, within any other state or jurisdiction. Guarantor acknowledges that Lender may reproduce (by electronic means or otherwise) any of the documents evidencing and/or securing the Obligations and thereafter may destroy the original documents. Guarantor does hereby agree that any document so reproduced shall be and remain the binding obligation of Guarantor, enforceable and admissible in evidence against it to the same extent as if the original documents had not been destroyed. This guaranty shall remain in full force and effect as to each of the undersigned unless and until terminated as to one or more of the undersigned by notice to that effect actually received by the Lender, by registered mail, addressed to Lender at 100 North Main Street, Winston-Salem, North Carolina 27101, but no such notice shall affect or impair the liabilities hereunder of such of the undersigned who gives or on whose behalf is given any such notice for the Obligations existing at the date of receipt by the Lender of such notice, any renewals, modifications, or extensions thereof (whether made before or after such notice is received), any interest thereon, or any costs or expenses, including without limitation, attorneys' fees incurred in the collection thereof or any future advances made by Lender to Borrower as required or permitted pursuant to the terms of the instruments, documents or agreements evidencing or providing for the Obligations. Any such notice of termination by or on behalf of any of the undersigned shall affect only that person and shall not affect or impair the liabilities and obligations hereunder of any other person. The undersigned hereby expressly waives, for Lender's benefit and the benefit of the Borrower and any other guarantor, maker or endorser of the Obligations, any and all claims or actions against the Borrower, any other guarantor, maker or endorser of the Obligations and any and all rights of recourse against any property or assets of the Borrower, any other guarantor, maker or endorser of the Obligations (including without limitation any security for the Obligations) arising out of or related to any payment made by the undersigned under this guaranty, including, without limitation, any claim of the undersigned for subrogation, reimbursement, exoneration, contribution or indemnity that the undersigned may have against the Borrower, any other guarantor, maker or endorser of the Obligations and any benefit of, and any other right to participate in, any security for the Obligations or any guaranty of the Obligations now or hereafter held by Lender. The waiver contained in this paragraph shall continue and survive after the termination of this guaranty and the payment of the Obligations The terms and provisions of any addendum attached hereto are incorporated herein by reference and made a part hereof. 5 IN WITNESS WHEREOF, each of the undersigned has executed this guaranty under seal this 2nd day of March, 2001. Craftmade International, Inc. /s/ James R. Ridings (SEAL) ----------------------------------- By: James R. Ridings Title: President EX-10.26 4 d01310exv10w26.txt NOTE AND SECURITY AGREEMENT EXHIBIT 10.26 NOTE AND SECURITY AGREEMENT Hickory, North Carolina Date April 29, 2002 $500,000.00 FOR VALUE RECEIVED, Prime/Home Impressions, LLC, limited liability company organized and existing under the laws of the State of North Carolina and whose chief executive office is located at 420 3rd Avenue NW, Hickory, North Carolina 28601 (hereinafter the "Borrower"), hereby promises to pay to the order of Wachovia Bank, N.A. (hereinafter the "Lender") at its office where borrowed, or at such other place as Lender hereafter may direct from time to time in writing, in immediately available fiends of lawful money of the United States, the sum of Five Hundred Thousand and 00/100 Dollars together with any unpaid interest hereon from date of advance, in accordance with the terms contained in this Note and Security Agreement (hereinafter referred to as the "Note"). The optional provisions applicable to this Note are checked below. REPAYMENT: [ ] One payment in full of principal and unpaid interest due ____________ [ ] One demand _______________________________ [X] 36 payments of $13,888.89 beginning August 29, 2002 and thereafter Monthly until July 29, 2005, When the entire principal amount then outstanding and all accrued but unpaid interest shall be paid in full. [ ] On demand the principal amount set forth above or the unpaid principal amount of all advances which the Lender actually makes hereunder to the Borrower, whichever amount is less. The Borrower may borrow, repay and reborrow sums up to the principal amount set forth above. This Note shall be used to evidence the outstanding principal balance advanced hereunder until it is surrendered to the Borrower by the Lender, and it shall continue to be used even though there may be periods prior to such surrender when no amount of principal or interest is owing hereunder. If advances of the principal amount hereof are to be made by Lender to the Borrower after the date of this Note, Lender, at its sole discretion, is hereby authorized to make such advances under this Note upon telephonic or written communication of a borrowing request from any Person representing himself or herself to be the Borrower or, in the event the Borrower is an organization, a duly authorized officer or representative of Borrower. INTEREST: Payable: [X] in arrears; [ ] in advance [X] in addition to the payments described above; [ ] included in the payments described above. Payable at the rate per annum of [ ] Prime Rate plus ________%; [ ] ________% of Prime Rate; [ ] ___________ % Fixed; [ ] Those rates which may be offered from time to time by the Lender and agreed to by the Borrower and so noted by the Lender on an attachment hereto. In the event of a good faith dispute among the parties to this Note as to rate under this rate option, the rate shall be the Prime Rate, adjusted for any changes in the Prime Rate as of the day such Rime Rate changes; |X| The rate(s) set forth in Schedule 1 attached to this Note and incorporated herein by reference; [ ] Those rates which have been offered by the Lender to the Borrower in the Lo an Agreement or Commitment Letter checked below, the provisions of which shall determine such rates, the procedure for the selection of such rates and the time periods for which such rates shall apply. In no case shall interest exceed the maximum rate permitted by applicable law. If the interest is based upon the Prime Rate, such interest rate will be adjusted on: [ ] The day the Prime Rate changes [ ] Other _______________ Due: [X] On principal payment dates Other [ ] ______________________________ Interest will be calculated on the basis of [X] A year of 360 days and paid for the actual number of days elapsed [ ] Other _______________________ After demand or maturity (whether by acceleration or otherwise), as applicable, interest on any unpaid balance hereof shall be payable on demand at a rate per annum-equal to the greater of 150 % of the Prime Rate, or 2 % above the rate applicable prior to demand or maturity, adjusted for any changes in the Prime Rate as of the day such Prime Rate changes, not to exceed the maximum rate permitted by applicable law. To the extent not prohibited by law, a late charge of four percent (4%) or the applicable statutory maximum, whichever is greater, shall be assessed on any payment remaining past due for fifteen (15) days or more unless interest on this Note is payable in advance, in which case such period shall instead be thirty (30) days or more; provided, however, that if any applicable statute allows, a shorter minimum time period for the imposition of a late charge, such shorter time period shall prevail. As used herein, "Prime Rate" refers to that interest rate so denominated and set by the Lender from time to time as an interest rate basis for borrowings. The Prime Rate is one of several interest rate bases used by the Lender. The Lender lends at interest rates above and below the Prime Rate. All payments on this Note shall be applied, in accordance with the then current billing statement applicable to this Note, first to accrued interest, then to fees, then to principal due and then to late charges. Any remaining funds shall be applied to the further reduction of principal. Notwithstanding the foregoing, upon the occurrence of a default hereunder, payments shall be applied as determined by Lender in its sole discretion. [ ] The terms and conditions in a Loan Agreement dated ___________________ between the parties hereto, as the same may be amended from time to time, shall be considered a part hereof to the same extent as if written herein. [ ] The terms and conditions in a Commitment Letter dated ___________________ from the Lender to the Borrower, as the same may be amended, extended or replaced from time to time, shall be considered a part hereof to the same extent as if written herein. In addition to any other collateral specified herein and in other agreements, to secure the indebtedness evidenced by this Note, together with any extensions, modifications, or renewals thereof, in whole or in part, as well as all other indebtedness, obligations and liabilities of the Borrower to the Lender, now existing or hereafter incurred or arising, including, without limitation, all sums arising under any ISDA Master Agreement now or hereafter executed between Borrower and Lender and any related schedules and confirmations thereto (hereinafter sometimes referred to as the "Obligations"), except for other indebtedness, obligations and liabilities owing to Lender that constitute (a) consumer credit as defined in Federal Reserve Board Regulation Z and either subject to the disclosure requirements of Federal Reserve Board Regulation Z or state consumer protection laws or (b) non-consumer credit if under applicable state law the maximum interest rate for such credit is reduced when secured (herein collectively referred to as "Restricted Debt"), the Borrower does hereby grant to the Lender a security interest in, and does hereby assign, pledge, transfer and convey to Leader the following described property: Collateral more particularly described in Security Agreement-Commercial dated April 29, 2002 between Borrower and Lender. whether now owned or hereafter acquired, together with any and all additions and accessions thereto or replacements thereof, returned or unearned premiums from any insurance written in connection with this Note and any products and/or proceeds of any of the foregoing. In no event, however, shall the Lender have a security interest in any goods acquired by the Borrower for personal, family or household purposes more than 10 days after the date of this Note, unless such goods are added to or attached to the collateral (as hereinafter defined). In addition, to the extent not prohibited by law, the Borrower hereby grants to the Lender a security interest in, and does hereby assign, pledge, transfer and convey to Lender, (i) all other property of the Borrower now or hereafter in the possession or control of the Lender (exclusive of any such property in the possession or control of the Lender as a fiduciary other than as agent), including, without limitation, all cash, stock or other dividends and all proceeds thereof, and all rights to subscribe for securities incident thereto and any substitutions or replacements for, or other rights in connection with, any of the Collateral and (ii) any of Borrower's deposit accounts (as such term is defined in the Uniform Commercial Code of the State of North Carolina, as the same may be amended from time to time (the "Code")), whether such accounts be general or special, or individual or multiple party, held by Lender and upon all drafts, notes, or other items deposited for collection or presented for payment by the Borrower with the Lender, and the Lender may at any time, without demand or notice, appropriate and apply any of such to the payment of any of the Obligations (except for Restricted Debt), whether or not due. All property described in this paragraph, in which the Borrower has granted to the Lender a security interest or security title hereunder, is herein collectively referred to as the "Collateral." If, with respect to any Collateral in the form of investment securities, a stock dividend is declared or any stock split-up made or right to subscribe issued, all the certificates for the shares representing such stock dividend or spilt-up or right to subscribe will be immediately delivered, duly endorsed, to the Lender as additional Collateral. The Lender shall be deemed to have possession, control and custody of any Collateral actually in transit to it or to any of its officers or agents. If at any time the Collateral pledged as security for any of the Obligations shall be or become unsatisfactory to the Lender or should the Lender deem itself insecure, the Borrower will immediately furnish such further property to be held by the Lender as if originally pledged as Collateral hereunder or make such payment on account as will be satisfactory to the Leader. The Lender shall have, but shall not be limited to, the following rights, each of which may be exercised at any time or from time to time:( i) to transfer this Note and the Collateral, and any transferee shall have all the rights of the Lender hereunder and the Lender shall be thereafter relieved from any liability with respect to any Collateral so transferred; (ii) to transfer the whole or any part of the Collateral in the name of itself or its nominees; (iii) to vote any investment securities forming a part of the Collateral; (iv) to notify the obligors on any Obligation to make payment to the Lender of any amounts due thereon; (v) to execute at any time in the name of any party hereto and to file one or more financing statements describing the Collateral, which financing statements may contain a generic collateral description that is broader than the Collateral and which may describe any agricultural liens or other statutory liens held by Lender; (vi) to receive or take control of any income or other proceeds of any of the Collateral; and (vii) to request and receive current financial information from any party liable for all or any part of the Obligations. Borrower will at Lender's request maintain insurance on the Collateral in amounts at least equal to the fair market value of the Collateral and against casualty, public liability and property damage risks and such other risks as Lender may request; provided, however, if the Collateral described above is a vehicle(s), Borrower agrees to obtain and maintain liability insurance as required by law and collision and comprehensive insurance with a deductible not exceeding $500.00. All insurance shall be with companies with a Best Insurance Report Rating of B+ or better, and Borrower will pay all premiums for insurance when due. Unless and until requested by Lender, Borrower shall not be required to name Lender as additional insured in such policy or to provide Lender a copy of the policy for or certificate evidencing such insurance, but when and if requested by Lender, the Borrower shall immediately (but no later than five (5) calendar days) (i) cause all policies of such insurance to specify that Lender is an additional insured as its interests may appear and to provide that such insurance shall not be cancellable by Borrower or the insurer without at least 30 days advance written notice to Lender and that proceeds are payable to Lender regardless of any act or omission of Borrower which would otherwise result in a denial of a claim; and (ii) deliver all policies or certificates thereof (with copies of such policies) to Lender. In the event any or all of such insurance is cancelled, any returned premium thereon may be collected by Lender and applied by Lender to any part of the Obligations, either matured or unmatured. Lender is authorized to receive the proceeds of any insurance loss and at the option of Lender shall apply such proceeds toward either the repair or replacement of the Collateral or the payment of the Obligations secured hereby. The undersigned will also pay all taxes and other impositions on the Collateral as well as the cost of repairs or maintenance to the Collateral. If the undersigned fails to maintain such insurance or fails to pay any and all amounts for taxes, repairs, maintenance and other costs, Lender may, at its option, but shall not be required to, purchase such insurance or pay any premium owing with respect to such insurance or pay such amounts for taxes, repairs, maintenance and other costs, and any such sum paid by Lender shall be payable by the Borrower on demand by Lender or at its option may be added to the Obligations and secured hereby. The loss, injury or destruction of the Collateral, with or without the fault of Borrower, shall not release the Borrower from any liability hereunder or in any way affect Borrower's liability hereunder. The occurrence of any one or more of the following conditions or events shall constitute an "Event of Default" hereunder: (i) any failure of any Obligor (which term shall include the Borrower and each endorser, surety or guarantor of this Note) to pay any of the Obligations when due or to observe or perform any agreement, covenant or promise hereunder or in any other agreement, note, instrument or certificate of any Obligor to the Lender, now existing or hereafter executed in connection with any of the Obligations, including, but not limited to, a loan agreement, if applicable, and any agreement guaranteeing payment of any of the Obligations; (ii) any default of any Obligor in the payment or performance of any other liabilities, indebtedness or obligations to Lender or any other creditor or to allow or permit any other liabilities, indebtedness or obligations to Leader or any other creditor to be accelerated; (iii) any failure of any Obligor to furnish Lender current financial information upon request; (iv) any failure of any Obligor or any pledgor of any security interest in the Collateral (the "Pledgor") to observe or perform any agreement, covenant or promise contained in any agreement, instrument or certificate executed in connection with the granting of a security interest in property to secure the Obligations or any guaranty securing the Obligations; (v) any warranty, representation or statement made or furnished to the Lender by or on behalf of any Obligor or Pledgor in connection with the extension of credit evidenced by this Note proving to have been false in any material respect when made or furnished, (vi) any loss, theft, substantial damage, destruction, sale, foreclosure of or encumbrance to any of the Collateral, or the making of any levy, seizure or attachment thereof or thereon or the rendering of any judgment or lien or garnishment or attachment against any Obligor or Pledgor or his property, or threatened; (vii) the dissolution, change in control, change of status to an organization, change of type of organization, termination of existence, insolvency, business failure, or appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency laws, state or federal, by or against, the Borrower or any other Obligor or Pledgor; (viii) if Borrower, any Pledgor or any Obligor shall change its name, change its principal residence, change its chief executive office, change its status to an organization, change its state of organization, change its type of organization, or change its organizational identification number, as applicable, without giving Secured Party at least thirty (30) days' written notice, (ix) any discontinuance or termination of any guaranty of any of the Obligations by a guarantor; or (x) the Lender determining that some event has occurred, failed to occur or is threatened, or some objective condition exists or is threatened, which significantly impairs the prospects that any of the Obligations will be paid when due or which significantly affects the financial or business condition of any Obligor in an adverse manner, or the Collateral or any other property securing the Obligations or any substantial portion thereof is in danger of misuse, misappropriation or confiscation. Upon the occurrence of an Event of Default (and the expiration of any applicable notice and/or grace periods), to the extent permitted by law, the Lender at its option may terminate any obligation to extend any additional credit or make any other financial accommodation to the Borrower and/or may declare all of the Obligations to be immediately due and payable, all without notice or demand, and shall have in addition to and independent of the right to declare the Obligations to be due and payable and any other rights of the Lender under this Note or any other agreement with any Obligor or any Pledgor, the remedies of a secured party under the Code, including, without limitation thereto, the right to take possession of the Collateral, or the proceeds thereof and to sell or otherwise dispose thereof, and for this purpose, to sign in the name of any Obligor or Pledgor any transfer, conveyance or instrument necessary or appropriate in order for the Lender to sell or dispose of any of the Collateral, and the Lender may, so far as the Borrower can give authority therefor, enter upon the premises on which the Collateral or any part thereof may be situated and remove the same therefrom, without being liable in any way to any Obligor on account of entering any premises. The Lender may require the Borrower to assemble the Collateral and make the Collateral available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Lender shall give the Borrower written notice of the time and place of any public sale thereof or of the time after which any private sale or other intended disposition thereof is to be made. The requirement of sending reasonable notice shall be met if such notice is mailed; postage prepaid, or otherwise given, to the Borrower or Pledgor at the last address shown on the Lender's records at least ten (10) days before such disposition. Lender may (i) comply with any applicable state or federal law requirements in connection with a disposition of the Collateral, (ii) sell the Collateral without giving any warranties as to the Collateral, and (iii) specifically disclaim any warranties of title or the like and in so doing any of the foregoing will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. If any Obligation (including but not limited to the Note) is a demand instrument, the statement of a maturity date, the requirement for the payment of periodic interest or the recitation of defaults and the right of Lender to declare any Obligation due and payable shall not constitute an election by Lender to waive its right to demand payment under a demand at any time and in any event as Lender in its sole discretion may deem appropriate. The rights of the Lender specified herein shall be in addition to, and not in limitation of the Lender's rights under the Code, or any other statute or rules of law conferring rights similar to those conferred by the Code, and under the provisions of any other instrument or agreement executed by the Borrower, any other Obligor or any Pledgor to the Lender. All prior agreements to the extent inconsistent with the terms of this Note shall be construed in accordance with the provisions hereof. Any rights or remedies of the Lender may be exercised or taken in any order or sequence whatsoever, at the sole option of the Lender. This agreement shall bind and inure to the benefit of the heirs, legatees, executors, administrators and assigns of Lender and shall bind all persons who become bound as a debtor to this security agreement. The security agreement set forth herein and the security interest in the Collateral created hereby shall terminate only when all of the Obligations have been indefeasibly paid in full and such payments are no longer subject to rescission, recovery or repayment upon the bankruptcy, insolvency, reorganization, moratorium, receivership or similar proceeding affecting the Borrower or any other person. No waiver by the Lender of any default shall be effective unless in writing nor operate as a waiver of any other default or of the same default on a future occasion. All rights of the Lender hereunder shall inure to the benefit of its successors and assigns, and all obligations of the Borrower shall bind the heirs, legal representatives, successors and assigns of the Borrower. The Borrower and each endorser, surety or guarantor of this Note, whether bound by this or by separate instrument or agreement, shall be jointly and severally liable for the indebtedness evidenced by this Note and hereby severally ( i) waive presentiment for payment, demand, protest, notice of nonpayment or dishonor and of protest and any and all other notices and demands whatsoever; to the fullest extent permitted by applicable law; (ii) consent that at any time, or from time to time, payment of any sum payable under this Note may be extended without notice whether for a definite or indefinite time; and (iii) agree to remain liable until all of the Obligations are paid in full notwithstanding any impairment, substitution, release or transfer of Collateral or any one or more Borrower or Obligor by the Lender, with or without consideration, or of any extension, modification or renewal. No conduct of the holder shall be deemed a waiver or release of such liability, unless the holder expressly releases such party in writing. The Borrower shall pay to the holder on demand all expenses, including reasonable attorneys' fees and expenses of legal counsel, incurred by the holder in any way arising from or relating to the enforcement or attempted enforcement of the Note and any related guaranty, collateral document or other document and the collection or attempted collection, whether by litigation or otherwise, of the Note. Time is of the essence. If Lowe's Companies, Inc., its successor or assigns, stops purchasing the ceiling medallion product line from Prime/Home Impressions, LLC or if in subsequent years Lowe's Companies, Inc. reduces by 50% or more the amount of ceiling medallions purchased during the first year, then Prime/Home Impressions, LLC will immediately notify Bank and Bank, at Bank's option, may accelerate the sums due under the note and demand immediate payment. Borrower acknowledges that Lender may reproduce (by electronic means or otherwise) any of the documents evidencing and/or securing the Obligations and thereafter may destroy the original documents. Borrower does hereby agree that any document so reproduced shall be and remain the binding obligation of Borrower, enforceable and admissible in evidence against it to the same extent as if the original documents had not been destroyed. This Note, and the rights and obligations of the parties hereunder, shall be governed and construed in accordance with the laws of the State of North Carolina, except to the extent that the Code provides for the application of other law with respect to the Collateral. IN WITNESS WHEREOF, the Borrower has executed this Note under seal the day and year set forth above. Borrower: Attest: Prime/Home Impressions, LLC By: /s/ Robert W. Lackey (SEAL) - ----------------------------- --------------------------------------- Robert W. Lackey, Sr. Title: Title: Group A. Manager ----------------------- By: /s/ Neall W. Humphrey (SEAL) - ----------------------------- --------------------------------------- Neall W. Humphrey Title: Title: Group B Manager ----------------------- SCHEDULE 1 This Schedule is referenced on the Note and Security Agreement dated April 29, 2002 in the stated amount of $500,000.00 between Prime/Home Impressions, LLC as Borrower and Wachovia Bank, N.A. as Lender and shall be considered a part thereof to the same extent as if written therein. The Note shall bear interest from the date hereof at a rate per annum equal to the Monthly LIBOR Index plus Two Hundred Fifty (250) basis points. As used herein, the "Monthly LIBOR Index" shall mean a rate per annum equal to LIBOR (determined, in accordance with the paragraph below), adjusted for all applicable Costs (as hereinafter defined). The Monthly LIBOR index shall be adjusted on the first day of each calendar month and shall be further adjusted on and as of the effective date of changes in the Lender's Costs. As used herein, "Costs" shall mean any charges, fees or costs incurred by the Lender as the result of any changes in the laws, rules, regulations, or governmental requirements pertaining to LIBOR loans. As used herein, "LIBOR" shall mean the rate per annum (rounded upward to the next higher of 1/10,000 of 1%) for deposits of United States dollars with maturities of one month, that appears on the display designated as page "3750" of the Telerate Service (or such other page as may replace 3750 of that service or such other service or services as may be designated by the British Bankers' Association for the purpose of displaying London Interbank Offered Rate for U. S. Dollar deposits), determined as of 11:00 a.m. London time, two (2) Business Days prior to the first day of each calendar month. As used herein, "Business Day" shall mean a day on which dealings in United States dollar deposits are being carried out in the London interbank eurodollar market. Notwithstanding any provisions herein to the contrary, if the Lender should at anytime be unable to determine LIBOR, then the Monthly LIBOR Index shall be based on an interest rate selected by the Lender in good faith that approximates one month LIBOR taking into account rates in relevant markets. Such rate shall be in effect until the first day of the next calendar month on which LIBOR is determinable. SECURITY AGREEMENT - COMMERCIAL THIS SECURITY AGREEMENT - COMMERCIAL (this "Agreement") is made the 29th day of April, 2002 between Prime/Home Impressions, LLC, a North Carolina limited liability company having a principal address of 420 3rd Avenue NW, Hickory, North Carolina 28601 ("Debtor"), and WACHOVIA BATIK, N.A., a national bank having an address of 100 North Main Street, Winston-Salem, North Carolina 27150 ("Secured Party"). This Agreement is entered into in conjunction with certain financial accommodations provided by Secured Party to Debtor or to another party which are or will be to the direct interest and advantage of Debtor, the receipt and sufficiency of such value are hereby acknowledged, and with respect to all of the following personal property of Debtor, wherever located, and now owned or hereafter acquired, as defined, checked and filled in below (hereinafter referred to as the "Collateral"): check all boxes) that apply: [X] ACCOUNTS. Each and every account, chattel paper, general intangible and instrument, as those terms are defined in the UCC (as defined below), and all other rights of Debtor to the payment of money of every nature, type and description, whether now owing to Debtor or hereafter arising, and all monies and other proceeds (cash or non-cash), including, without limitation, the following: all accounts, accounts receivable, book debts, securities, instruments and chattel paper, books of account and records of Debtor, deposit account balances, notes, drafts, acceptances, rents, guest room receipts, payments under leases or sales of Equipment or Inventory (as defined below) and other forms of obligations now or hereafter received by or belonging or owing to Debtor for goods sold or leased and/or services rendered by it, and all of Debtor's rights in, to and under all purchase orders, instruments and other documents now or hereafter received by it evidencing obligations for and representing payment for goods sold or leased and/or services rendered, and all monies due or to become due to Debtor under all contracts for the sale or lease of goods and/or the performance of services by it, now in existence or hereafter arising, including, without limitation, the right to receive the proceeds of said purchase orders and contracts; all contracts, leases, instruments, undertakings, documents or other agreements in or under which Debtor may now or hereafter have any right, title or interest; all customer lists, tax refunds due Debtor from any governmental agency; and any and all proceeds of any of the above; [X] INVENTORY. All "inventory," as such term is defined in the UCC, now owned or hereafter acquired by Debtor, of every nature, type and description, wherever located, including, without limitation, all of Debtor's goods or personal property held for lease or sale or being processed for lease or sale, all raw materials, work in progress, finished goods, packaging materials, goods held for display or demonstration, goods on lease or consignment, returned and repossessed goods and all other materials or supplies used or consumed or to be used or consumed in Debtor's business or in the processing, packaging or shipping of the same, excluding any toxic, hazardous or radioactive material or any other material which may be disposed of lawfully only pursuant to a special permit or at a government approved facility, all documents including, without limitation, documents of title, warehouse receipts and bills of lading covering all or any portion of such inventory, and all customer lists; and any and all proceeds and products of any of the above; [X] EQUIPMENT. All "equipment," as such term is defined in the UCC, now owned or hereafter acquired or leased by Debtor, including, without limitation, any equipment described on a schedule attached hereto, all tools and items of machinery and equipment of any kind, nature and description whether affixed to real property or not, as well as trucks and vehicles of every description, trailers, handling and delivery equipment, furnishings, leasehold improvements, fixtures and office furniture and all other tangible personal property of Debtor of every nature, type and description, and any and all additions to, substitutions for and replacements of or accessions to and property similar to any of the foregoing, wherever located, together with all attachments, components, parts (including spare parts), equipment and accessories installed thereon or affixed thereto and all fuel for any thereof; and any and all proceeds of any of the above; [X] GENERAL INTANGIBLES. All "general intangibles," as such term is defined in the UCC, now owned or hereafter acquired by Debtor or in which Debtor now has or hereafter acquires any right, title or interest, including, without limitation, (a) all of Debtor's choses in action, suits, actions, causes of action and claims of every kind and nature, whether at law or in equity, (b) all condemnation awards and insurance proceeds, (c) all tax refunds, rights and claims thereto and other payments from any local, state or federal government authority or agency, (d) all contract rights, licenses, permits, zoning approvals, rights, agreements and all other private or governmental documents of every kind or character whatsoever and (e) all customer lists, servicing rights, patents and patent rights (whether or not registered), licenses, permits, certificated and uncertificated securities, investment property, trade marks, service marks, trade names, logos, copyrights, computer programs and software, goodwill; and any and all proceeds of any of the above; [X] INSTRUMENTS [X] DOCUMENTS [X] LETTER-OF-CREDIT RIGHTS [X] DEPOSIT ACCOUNTS [X] CHATTEL PAPER [X] INVESTMENT PROPERTY [ ] OTHER and, to the extent not listed above as original collateral, proceeds and products of all of the foregoing. Any term used in the Uniform Commercial Code of the State of North Carolina (the "UCC") and not defined in this Agreement has the meaning given such term as defined in the UCC in effect on the date hereof or as it may be amended from time to time. 1. OBLIGATIONS SECURED. The security interest hereby granted is to secure the payment to Secured Party and the performance of all indebtedness, liabilities and obligations of Debtor to Secured Party whatsoever, whether direct, indirect, absolute or contingent, joint or several, as maker, endorser, guarantor, surety, account party, swap counterparty or otherwise, including (i) all of Debtor's present or future obligations to Secured Party, (ii) all amounts now or in the future owed by Debtor to Secured Party, (iii) the repayment of (a) any amounts that Secured Party may advance or spend for the maintenance or preservation of the Collateral and (b) any other expenditures that Secured Party may make under the provisions of this Agreement or for the benefit of Debtor, (iv) all amounts owed under any modifications, extensions or renewals of any of the foregoing obligations, (v) all sums arising under any ISDA Master Agreement now or hereafter executed between Debtor and Secured Party and any related schedules and confirmations thereto, and (vi) all costs, expenses and reasonable attorneys' fees incurred by Secured Party in connection with the collection of any of the foregoing or in the protection or enforcement of Secured Party's rights or remedies hereunder (hereinafter collectively referred to as the "Obligations"), provided, however, that the security interest hereby granted shall not include (a) consumer credit as defined in Federal Reserve Board Regulation Z and either subject to the disclosure requirements of Federal Reserve Board Regulation Z or state consumer protection laws or (b) non-consumer credit if under applicable state law the maximum interest rate for such credit is reduced when secured. 2. GRANT OF SECURITY INTEREST. Debtor hereby grants a security interest in the Collateral to Secured Party to secure the payment and performance of the Obligations. 3. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Secured Party (which representations and warranties shall be deemed to be renewed as of the date of each renewal or extension of credit under any Obligation) as follows: (a) Debtor now owns and possesses (or will use the proceeds of the loan advances secured hereby to become the owner and take possession of) the Collateral, except where expressly otherwise provided by this Agreement or where Secured Party chooses to perfect its security interest by possession in addition to the filing of a financing statement. Where Collateral is in the possession of a third party, Debtor will join with Secured Party in notifying the third party of Secured Party's security interest and obtaining an acknowledgment from the third party that it is holding the Collateral for the benefit of Secured Party. (b) Debtor has rights in or the power to transfer the Collateral and its title to the Collateral is free of all adverse claims, liens, security interests and restrictions on transfer or pledge, except as created by this Agreement. (c) Debtor will cooperate with Secured Party in obtaining control of Collateral consisting of Deposit Accounts, Investment Property and Letter-of-credit rights. (d) If Debtor is an individual, Debtor's (i) principal residence is located in _______ and (ii) exact legal name is as set forth in the first paragraph of this Agreement. If Debtor is an organization, Debtor's (i) chief executive office is located in the the State of North Carolina; (ii) state of organization is the the State of North Carolina; and (iii) exact legal name is as set forth in the first paragraph of this Agreement. (e) The following is a list of any and all names used by Debtor during all or any part of the five year period preceding the date of this Agreement:_________. (f) The following is a list of all business addresses used by Debtor during all or part of any of the five (5) year period preceding the date of this Agreement:__________________. (g) The records relating to the Collateral will be located at the address set forth in the first paragraph of this Agreement unless a different address is hereby specified:____________. (h) The Collateral will be located at the address set forth in the first paragraph of this Agreement unless a different address is hereby specified:________________-. (i) All or a part of the Collateral is or will be attached to real estate described as ____________ and its record owner is ____________ (if more than one record owner, all must be shown). Notwithstanding the above, and regardless of the manner of the affixation, the Collateral shall remain personal property and will not become part of the real estate. (j) No financing statement covering the Collateral or any proceeds thereof is on file in any public office except those in favor of Secured Party. (k) The Accounts hereby assigned are bona fide and correct in amount, and there are no set-offs, counterclaims or defenses of any kind thereto, except as may have been disclosed to Secured Party in writing. (1) The Collateral is not and shall not be used for personal, family, household or farming use. (m) Debtor has delivered or will deliver to Secured Party all documents of title evidencing Inventory, including, but not limited to, bills of lading, dock warrants, dock receipts and warehouse receipts. 4. COVENANTS. Until the Obligations are paid and/or performed in full and Secured Party is no longer obligated to extend additional extensions of credit or financial accommodations on the Obligations, Debtor agrees: (a) To promptly pay, without offset or deduction, any amount due under any Obligation, whether principal, interest, late charges or otherwise, even if the Collateral is lost, damaged, or destroyed. To the extent Debtor uses the proceeds of any credit secured hereby to purchase Collateral, Debtor's repayment of the Obligations shall apply on a "first-in-first-out" basis so that the portion of the Obligations used to purchase a particular item of Collateral shall be paid in the chronological order the Debtor purchased the Collateral. (b) To pay when due all taxes, licenses, repair bills and other assessments and public or private charges and to forward to Secured Party upon request evidence of such payments. (c) To maintain insurance on the Collateral in amounts at least equal to the fair market value of the Collateral and against casualty, public liability and property damage risks and such other risks as Secured Party may request. All insurance shall be with reputable companies with a Best Insurance Report Rating of B+ or better, and Debtor or will pay all premiums for insurance when due. Unless and until requested by Secured Party, Debtor shall not be required to name Secured Party as additional insured in such policy or to provide Secured Party a copy of the policy for or certificate evidencing such insurance, but when and if requested by Secured Party, Debtor shall immediately (but no later than five (5) calendar days) (i) cause all policies of such insurance to specify that Secured Party is an additional insured as its interests may appear and to provide that such insurance shall not be cancellable by Debtor or the insurer without at least thirty (30) days' advance written notice to Secured Party and that proceeds are payable to Secured Party regardless of any act or omission of Debtor which would otherwise result in a denial of a claim; and (ii) deliver all policies or certificates thereof (with copies of such policies) to Secured Party. In the event any or all insurance hereinbefore provided for is cancelled, any returned premium thereon may be collected by Secured Party and applied by Secured Party to any part of the Obligations, whether matured or unmatured. (d) To keep and maintain, at Debtor's own expense, satisfactory, complete and current records of the Collateral, including, but not limited to, a record of all shipments received, deliveries made, payments received, credits granted thereon and other dealings therewith; and to furnish such reports on Debtor and the Collateral to Secured Party as Secured Party may request from time to time. (e) To keep the Collateral in good order and repair, at Debtor's expense. Debtor will not violate any federal, state or local law or regulation, including, without limitation, environmental laws and regulations, in the use, operation, manufacture or storage of the Collateral. (f) To execute and deliver on demand such further assurances and to take such steps as may be necessary to perfect and maintain Secured Party's security interest in the Collateral (including, but not limited to, obtaining certificates of title showing Secured Party's lien and executing assignments and financing and continuation statements) and to preserve the priority of Secured Party's security interest and lien on the Collateral. Debtor will reimburse Secured Party for all expenses incurred in the filing of financing statements, obtaining such documents and perfecting its security interest in the Collateral. (g) To pay promptly upon demand Secured Party's costs and expenses, including reasonable attorneys' fees, in connection with any litigation, claim, action or proceeding that may arise in connection with the collection, enforcement or protection of the Obligations or the Collateral. (h) Not to: (i) make any sales or leases of the any of the Collateral, (ii) license any of the Collateral, (iii) grant any other security interest in any of the Collateral, (iv) permit any liens or security interests to attach to any of the Collateral except those created by this Agreement, (v) permit any of the Collateral to be levied upon or seized under any legal process, (vi) do or permit anything to be done that may impair the security intended to be afforded by this Agreement. (i) Not to change the location of the Collateral or cause such Collateral to be moved, maintained or stored in any other location without giving Secured Party at least thirty (30) days' prior written notice, and Debtor will not move the Collateral from the state without prior written consent of Secured Party. (j) To obtain, upon Secured Party's request, a waiver or disclaimer in favor of Secured Party and in a form satisfactory to Secured Party, signed by all persons owning or having an interest in real estate upon which all or part of the Collateral is or will be attached or used. (k) To furnish Secured Party from time to time, upon request, with Debtor's then current financial statement in form and detail satisfactory to Secured Party, as well as such other financial information as Secured Party may request from time to time. (l) To maintain its existence in good standing as may be from time to time required by applicable law. Debtor will not merge, consolidate or chance control, without prior written approval of Secured Party. Debtor shall not change its name, change its principal residence, change its chief executive office, change its status to an organization, change its state of organization, change its type of organization, or change its organizational identification number, as applicable, without giving Secured Party at least thirty (30) days' written notice. At the request of Secured Party, Debtor will qualify to do business and obtain all requisite licenses and permits in each state in which such qualification may be necessary in order to maintain any action to collect any Account. (m) To permit Secured Party or its agent to enter upon Debtor's premises at any time and without hindrance or delay to inspect the Collateral and to inspect, audit, copy and make extracts from the books, records, journals, orders, receipts, correspondence, computer storage media or data related or pertaining thereto; and for the further security of Secured Party, it is agreed that Secured Party has a special property interest in all books and records of Debtor pertaining to Accounts. Secured Party shall also have the right at any time to make direct verification with any account debtors as concerns the Collateral. Debtor shall, at its own expense and cost, deliver any such books, account ledgers and records to Secured Party or any designated agent of Secured Party at any time upon request. (n) To notify Secured Party immediately in the event that any Inventory purchased by or to be delivered to Debtor shall be evidenced by a bill of lading, dock warrant, dock receipt, warehouse receipt or other document of title, and to deliver such document to Secured Party upon request. Debtor also agrees to deliver to Secured Party on demand all Collateral of which Secured Party is required to take possession in order to perfect its security interest therein, promptly upon the acquisition by Debtor of any interest in such Collateral after the date hereof. (o) Not to compromise, modify or discount any Account, except for ordinary trade discounts or allowances for prompt payment, without the prior written consent of Secured Party. (p) If any of the Accounts are or should become evidenced by promissory notes, trade acceptances or other instruments, to immediately notify Secured Party and upon request by Secured Party to deliver the same to Secured Party appropriately endorsed or assigned with recourse to Secured Party's order, and regardless of the form of such endorsement or assignment, Debtor hereby waives presentment, demand, notice of dishonor, protest and notice of protest and all other notices with respect thereto. (q) Secured Party hereby authorizes Debtor to collect the Accounts, but Secured Party may, without cause or notice, curtail or terminate this authority at any time. Upon notice by Secured Party to Debtor, Debtor shall forthwith, upon receipt of all checks, drafts, cash and other remittances in payment of or on account of the Accounts, deposit the same in one or more special accounts maintained with Secured Party, over which Secured Party alone shall have the power of withdrawal. The remittance of the proceeds of such Accounts shall not, however, constitute payment or liquidation of such Accounts until Secured Party shall receive good funds for such proceeds. Funds placed in such special accounts shall be held by Secured Party as security for the Obligations. These proceeds shall be deposited in precisely the form received, except for the endorsement of Debtor where necessary to permit collection of items, which endorsement Debtor agrees to make, and which endorsement Secured Party is also hereby authorized to make on behalf of Debtor. In the event Secured Party has notified Debtor to make deposits to a special account, pending such deposit, Debtor agrees that it will not commingle any such checks, drafts, cash or other remittances with any funds or other property of Debtor but will hold them separate and apart therefrom, and upon an express trust for Secured Party until deposit thereof is made in the special account. Secured Party will from time to time apply the whole or any part of collateral funds on deposit in this special account against such Obligations secured hereby as Secured Party may in its discretion elect. At the sole election of Secured Party, any portion of said funds on deposit in the special account which Secured Party shall elect not to apply to such Obligations, shall be paid over by Secured Party to Debtor. Secured Party, or its agents, shall have the right at any time, whether or not an Event of Default (as defined below) shall have occurred (i) to notify any and all account debtors to make payment directly to Secured Party and otherwise to notify the account debtors of this assignment, (ii) to ask for, demand, collect, institute and maintain suits for, receive, compound, compromise and give acquittances for any and all sums owing, which are now or may hereafter become due upon said Accounts, and to enforce payment thereof either in its own name or in Debtor's name, (iii) to endorse the name of Debtor on checks, drafts or other items tendered or received in payment of said Accounts and (iv) to enter upon the premises of Debtor at any time for the purpose of reducing to possession the Collateral (including chattel paper) and all cash or non-cash proceeds thereof. (r) Secured Party shall have the right at any time to apply the net proceeds of the Accounts whether or not an Event of Default shall have occurred under this Agreement, and the net proceeds of the sale or other disposition of any other Collateral upon the occurrence of an Event of Default under this Agreement, and any other proceeds arising under this Agreement, first, to any Obligation owed Secured Party under this Agreement and then the balance, if any, to other indebtedness of Debtor owed to Secured Party. (s) If Debtor fails to perform any of Debtor's duties and obligations under this Agreement, Secured Party may, at its option, but without obligation, perform such duty or obligation and any cost, fees and expenses incurred by Secured Party in connection therewith shall be payable by Debtor on Secured Party's demand for same and until paid shall bear interest at the highest rate permitted by law. In connection therewith, Debtor hereby irrevocably designates, appoints and empowers Secured Party, at Debtor's cost and expense, to do in the name of Debtor any and all actions which Secured Party may deem necessary or advisable to carry out the terms hereof upon the failure, refusal or inability of Debtor to do so and Debtor hereby agrees to indemnify and hold Secured Party harmless from any cost, damage, expense or liability arising against or incurred by Secured Party in connection therewith. 5. EVENTS OF DEFAULT. Any one of the following events will constitute an "Event of Default" under this Agreement: (a) If any payment on any Obligation or hereunder is not paid when due, or if any payment of any other present or future debt, liability or obligation of Debtor, or any endorser, surety or guarantor of any Obligation (Debtor, or any endorser, surety or guarantor of any Obligation may be referred to generally as a "Party") to Secured Party is not paid when due. (b) If any Party defaults under or breaches any covenant or provision of an Obligation or defaults under or breaches any covenant or provision of this Agreement or any other instrument or agreement delivered to Secured Party in connection with this Agreement or any other transaction or agreement with Secured Party; or if any Party makes a materially false or misleading statement to Secured Party. (c) If any Collateral is lost, stolen, abandoned, destroyed, severely damaged, involved in a legal proceeding, sold, encumbered or transferred except as permitted by prior agreement with Secured Party. (d) If any Party dissolves, merges, consolidates, changes control or ceases to be a going concern, or changes its name or state of organization or chief executive office or type or organization (if an organization), or its place of residence (if an individual), or changes from an individual to an organization without giving Secured Party at least thirty (30) days' written notice. (e) If a petition or complaint in bankruptcy, for arrangement or reorganization or for relief under any insolvency law is fled by or against any Party, or if any Party admits an inability to pay such Party's debts as they mature. (f) If any property of any Party is seized, attached or levied on, or if a receiver or custodian is appointed for any Party. (g) If Secured Party in good faith believes that (i) the prospect of payment or performance is impaired, (ii) any Collateral is insecure or (iii) a material adverse change has occurred in any Party's financial condition. (h) If any guaranty obtained in connection with an Obligation is terminated. (i) If there shall occur a default under any lien or security interest affecting the Collateral, either superior or inferior to the security interests created by this Agreement. 6. REMEDIES. Upon the occurrence of an Event of Default, and in addition to any other rights or remedies provided by law or by contract or accorded to a secured party under the UCC, Secured Party may, without prior notice (unless otherwise provided below), exercise any of the following rights or remedies: (a) Secured Party may refuse any further request for advances to Debtor and/or may declare all sums due under any of the Obligations immediately due and payable. If a note constituting any of the Obligations shall be a demand instrument, however, the recitation of the right of Secured Party to declare any and all of the Obligations to be immediately due and payable or the recitation of Events of Default shall not constitute an election by Secured Party to waive its right to demand payment under a demand at any time and in any event as Secured Party in its sole discretion may deem appropriate. (b) Upon the occurrence of any Event of Default, Secured Party may take possession of the Collateral and exercise its rights hereunder without giving Debtor any opportunity for hearing to be held before Secured Party (whether through judicial process or otherwise) seizes, liquidates or disposes of the Collateral. DEBTOR DOES HEREBY EXPRESSLY AND VOLUNTARILY WAIVE ALL RIGHTS THAT DEBTOR HAS OR MAY HAVE AS TO A NOTICE AND TO A JUDICIAL HEARING PRIOR TO SEIZURE OF THE COLLATERAL BY SECURED PARTY. Secured Party may require and Debtor agrees upon demand to assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party that is reasonably convenient to both parties, and/or Secured Party may enter any premises and take possession of the Collateral or any part thereof. Unless the Collateral is perishable or threatens to decline speedily in value or is of type customarily sold on a recognized market, Secured Party will give Debtor reasonable notice of time and place of any public sale thereof or the time after which any private sale or any other intended disposition thereof is to be made. The requirement of reasonable notice shall be met if notice is mailed, postage prepaid to Debtor at its above mentioned address, at least ten (10) days before the time of sale or disposition of the Collateral. Secured Party may apply cash proceeds from a sale or disposition first to the expenses of such sale or disposition or other enforcement measures, including reasonable attorneys' fees and legal expenses, and then to the Obligations in such order as to principal or interest as Secured Party may desire. Debtor will remain liable for and will pay to Secured Party any deficiency remaining after such application of proceeds. Secured Party may (i) comply with any applicable state or federal law requirements in connection with a disposition of the Collateral, (ii) sell the Collateral without giving any warranties as to the Collateral, and (iii) specifically disclaim any warranties of title or the like and in so doing any of the foregoing will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. (c) Secured Party may appropriate, set off and apply for the payment of any or all of the Obligations, any and all balances, sums, property, claims, credits, deposits, accounts, reserves, collections, drafts, notes or other items or proceeds of the Collateral in or coming into the possession of Secured Party or its agents and belonging or owing to Debtor, without notice to Debtor and in such manner as Secured Party may in its discretion determine. (d) All payments received by Debtor under or in connection with any of the Collateral shall be segregated from other funds of Debtor, held in trust for Secured Party and promptly upon receipt turned over to Secured Party, duly endorsed to Secured Party, if required. Secured Party shall hold such payments as collateral security and apply them to the Obligations in such order as Secured Party may elect. Any balance of such payments remaining after payment in full of the Obligations shall be paid to Debtor or to whomever is lawfully entitled to receive such payments. (e) Debtor shall pay to Secured Party, on demand, any and all costs and expenses, including all reasonable attorneys' fees, incurred or paid by Secured Party in protecting or enforcing its rights, powers and remedies hereunder or under any other agreement with any Party or any Obligation secured hereby or thereby or in any way connected with any proceeding or action, judicial or otherwise, by whomsoever initiated concerning the protection or enforcement thereof. (f) All rights and remedies of Secured Party under any law, under this Agreement or under any agreement given in connection with this Agreement shall be cumulative and not exclusive and may be exercised successively or concurrently. 7. MISCELLANEOUS. (a) Debtor agrees to execute and/or authorizes Secured Party to file one or more financing statements describing the Collateral. The financing statements may contain a generic collateral description that is broader that the Collateral. Debtor further authorizes Secured Party to file one or more financing statements describing any agricultural liens or other statutory liens held by Secured Party. (b) No lawful act of commission or omission upon the part of Secured Party, or any delay in exercising its rights hereunder, shall in any way or at any time affect, impair or waive the rights of Secured Party to enforce any right, power or benefit hereunder. The provisions of this Agreement may be amended only by the written agreement of Secured Party and Debtor. (c) Debtor hereby waives presentment, notice of dishonor and protest of all instruments relating to the Obligations or the Collateral and any notices and demands (except as expressly provided herein) whether or not relating to such instruments. (d) Any notice or demand given hereunder shall be deemed to have been sufficiently given or served for all purposes by being deposited in the mail, postage prepaid, or transmitted by any other usual means of communication with postage or cost of transmission provided for, to Debtor and/or Secured Party at the addresses for each as mentioned above, but nothing herein shall be construed to invalidate any other form of communication actually received by the party to whom the same is directed. (e) Upon the payment in full of all Obligations, Secured Party shall have no duty to release the Collateral nor to release Debtor from any duty or obligation hereunder unless a period of 95 days, beginning with the date of the last payment made by any Party who shall be so obligated or shall elect to pay, as the case may be, shall elapse during which period no petition in bankruptcy shall be filed by or against any Party. In the event any Obligation secured hereby is paid by Debtor, or any maker, endorser or guarantor of the Obligations and because of bankruptcy or other law relating to creditor's rights, such payment is deemed to constitute a preference, Debtor agrees to remain liable hereunder if Secured Party is compelled to repay any such Obligation or any part thereof to any trustee, receiver, custodian or otherwise. (f) This Agreement shall bind and inure to the benefit of the heirs, legatees, executors, administrators and assigns of Secured Party and shall bind all persons who become bound as a debtor to this security agreement. Nothing herein shall authorize Debtor to assign this Agreement or its rights in and to the Collateral. (g) Debtor shall protect, indemnify and save harmless Secured Party from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) imposed upon, incurred by, or asserted against, Secured Party on account of (i) any failure or alleged failure of Debtor to comply with any of the terms or representations in this Agreement, (ii) any claim or loss or damage to the Collateral or any injury or claim of injury to, or death of, any person or property that may be occasioned by any cause whatsoever pertaining to the Collateral or the use, occupancy or operation thereof or (iii) any failure or alleged failure of Debtor to comply with any law, rule or regulation regarding the use, occupancy or operation of the Collateral, provided that such indemnity shall be effective only to the extent of any loss, cost or damage that may be sustained by Secured Party in excess of any net proceeds received by it from any insurance (other than self insurance) carried with respect to such loss. Nothing contained herein shall require Debtor to indemnify Secured Party for any claim or liability resulting from its gross negligence or its willful and wrongful acts. The covenants in this Paragraph shall survive payment of the Obligations. The indemnity provided for herein shall extend to the officers, directors, employees and duly authorized agents of Secured Party. (h) Nothing in this Agreement shall be construed to impose any obligation upon Secured Party to expend funds or to extend or continue any credit whatsoever to Debtor or Obligor or to take any other discretionary act herein permitted, except to the extent that Secured Party may from time to time obligate itself to do so in writing, and Secured Party shall have no liability or obligation for any delay or failure to take any discretionary act. (i) If any Obligation secured hereby concerns a guarantor or other indirect or contingent obligation related to another party, Debtor represents to Secured Party that Secured Party will have no duty or obligation to investigate such party's financial affairs for the benefit of Debtor or to advise Debtor of any fact respecting, or of any change in, such other party's financial condition or affairs which might come to Secured Party's attention. (j) The rights, powers, and remedies of Secured Party under this Agreement shall be in addition to all rights, powers and remedies given to Secured Party by virtue of statute, rule of law, any documents executed in conjunction with any agreement or instrument evidencing or securing the Obligations or any other agreement, all of which rights, powers and remedies shall be cumulative and may be exercised successively or concurrently without impairing Secured Party's security interest in the Collateral. (k) This Agreement shall be governed by the laws of the State of North Carolina except to the extent that the UCC provides for the application of other law with respect to the Collateral. IN WITNESS WHEREOF, Debtor has caused this Agreement to be signed under seal as of the day and year first above written. Prime/Home Impressions, LLC /s/ Robert W. Lackey, Sr. (SEAL) -------------------------------------- By: Robert W. Lackey, Sr. Title: Group A Manager /s/ Neall W. Humphrey (SEAL) -------------------------------------- By: Neall W. Humphrey Title: Group B Manager GUARANTY AGREEMENT WHEREAS. the undersigned has requested Wachovia Bank, N.A. (herein the "Lender") to extend credit or make certain financial accommodations to Prime/Home Impressions. LLC (herein called the "Borrower") or to renew or extend, in whole or in part, existing indebtedness or financial accommodations of the Borrower to the Lender, and the Lender has extended credit or extended or renewed existing indebtedness or made financial accommodations and/or may in the future extend credit or extend or renew existing indebtedness or make certain financial accommodations by reason of such request and in reliance upon this guaranty; NOW, THEREFORE, in consideration of such credit extended or renewed and/or to be extended or renewed or such financial accommodations made or to be made in its discretion by the Lender to the Borrower (whether to the same, greater or lesser extent than any limit, if applicable, of this guaranty), in consideration of One Dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which is acknowledged, the undersigned hereby unconditionally guarantees to the Lender and its successors, endorsees, transferees and assigns, the punctual payment when due, whether by acceleration or otherwise, and at all times thereafter of (a) all debts, liabilities and obligations whatsoever of the Borrower to the Lender, now existing or hereafter coming into existence, whether joint or several, whether created directly or acquired by endorsement, assignment or otherwise, whether absolute or contingent, secured or unsecured, due or not due, including but not being limited to notes, checks, drafts, credits, advances, obligations to reimburse draws against letters of credit, and all sums arising under any ISDA Master Agreement now or hereafter executed between the Borrower and the Lender and any related schedules and confirmations thereto; (b) accrued but unpaid interest on such debts, liabilities and obligations, whether accruing before or after any maturity(ies) thereof; and (c) all expenses, including reasonable attorneys' fees and expenses of legal counsel incurred by Lender if any such debts, liabilities or obligations of the Borrower are collected, or the liability of the undersigned hereunder enforced, by or through any attorney at law (all of (a), (b) and (c) being hereinafter referred to as the "Obligations"). References herein to Borrower shall be deemed to include any successor corporations to Borrower, if Borrower is a corporation, or any reconstituted partnerships of Borrower, if Borrower is a partnership. The undersigned consents that, at any time, and from time to time, either with or without consideration, the whole or any part of any security now or hereafter held for any Obligations may be substituted, exchanged, compromised, impaired, released, or surrendered with or without consideration; the time or place of payment of any Obligations or of any security thereof may be changed or extended, in whole or in part, to a time certain or otherwise, and may be renewed or accelerated, in whole or in part; the Borrower may be granted indulgences generally; any of the provisions of any note or other instrument evidencing any Obligations or any security therefor may be modified or waived; any party liable for the payment thereof (including but not being limited to any co-guarantor) may be granted indulgences or released; neither the death, termination of existence, bankruptcy, incapacity, lack of authority nor disability of the Borrower or any one or more of the guarantors, including any of the undersigned, shall affect the continuing obligation of any other guarantor, including any of the undersigned, and that no claim need be asserted against the personal representative, guardian, 1 custodian, trustee or debtor in bankruptcy or receiver of any deceased, incompetent, bankrupt or insolvent guarantor; any deposit balance to the credit of the Borrower or any other party liable for the payment of the Obligations or liable upon any security therefor may be released, in whole or in part, at, before and/or after the stated, extended or accelerated maturity of any Obligations; and the Lender may release, discharge, compromise or enter into any accord and satisfaction with respect to any collateral for the Obligations, or the liability of the Borrower or any of the undersigned, or any liability of any other person primarily or secondarily liable on any of the Obligations, all without notice to or further assent by the undersigned, who shall remain bound hereon, notwithstanding any such exchange, compromise, surrender, extension, renewal, acceleration, modification, indulgence, release, discharge or accord and satisfaction. Without limiting any of the foregoing, in the event of incompetency, or dissolution of the Borrower, or should the Borrower become insolvent (as defined by the Uniform Commercial Code (as the same may be amended from time to time, (the "Code")) in effect for the State of North Carolina (hereinafter referred to as the "Governing Jurisdiction"), or if a petition in bankruptcy be filed by or against the Borrower, or if a receiver be appointed for any part of the property or assets of the Borrower, or if any final judgment for money damages be entered against the Borrower in a court of competent jurisdiction and remain unsatisfied for a period of thirty (30) days or more, or if the Lender shall deem itself insecure with respect to the Obligations and whether or not such event occurs at a time when any of such Obligations are otherwise due and payable, the undersigned agrees to pay to the Lender upon demand the full amount which would be payable hereunder by the undersigned if all such Obligations were then due and payable. The undersigned expressly waives: (a) notice of acceptance of this guaranty and of all extensions or renewals of credit or other financial accommodations to the Borrower; (b) presentment and demand for payment of any of the Obligations; (c) protest and notice of dishonor or of default to the undersigned or to any other party with respect to any of the Obligations or with respect to any security therefor; (d) any invalidity or disability in whole or in part at the time of the acceptance of, or at any time with respect to, any security for the Obligations or with respect to any party primarily or secondarily liable for the payment of the Obligations to the Lender; (e) the fact that any security for the Obligations may at any time or from time to time be in default or be inaccurately estimated or may deteriorate in value for any cause whatsoever; (f) any diligence in the creation or perfection of a security interest or collection or protection of or realization upon the Obligations or any security therefor, any liability hereunder, or any party primarily or secondarily liable for the Obligations or any lack of commercial reasonableness in dealing with any security for the Obligations; (g) any duty or obligation on the part of the Lender to ascertain the extent or nature of any security for the Obligations, or any insurance or other rights respecting such security, or the liability of any party primarily or secondarily liable for the Obligations, or to take any steps or action to safeguard, protect, handle, obtain or convey information respecting, or otherwise follow in any manner, any such security, insurance or other rights; (h) any duty or obligation on the Lender to proceed to collect the Obligations from, or to commence an action against, the Borrower, any other guarantor, or any other person, or to resort to any security or to any balance of any deposit account or credit on the books of the Lender in favor of the Borrower or any other person, despite any notice or request of the undersigned to do so; (i) to the fullest extent not 2 prohibited by law, the right to receive notification of disposition of any collateral granted by Borrower, the undersigned, or any other person as security for any of the Obligations; (j) to the extent not prohibited by law, the right to assert any of the. benefits under any statute providing appraisal or other rights which may reduce or prohibit any deficiency judgments in any foreclosure or other action; (k) all other notices to which the undersigned might otherwise be entitled; (l) demand for payment under this guaranty; (m) any rights of the undersigned pursuant to North Carolina General Statutes Section 26-7 or any similar or subsequent law. This is a guaranty of payment and not of collection. The liability of the undersigned on this guaranty shall be continuing, direct and immediate and not conditional or contingent upon either the pursuit of any remedies against the Borrower or any other person or foreclosure of any security interests or liens available to the Lender, its successors, endorsees or assigns. The Lender may accept any payment(s), plan for adjustment of debts, plan for reorganization or liquidation, or plan of composition or extension proposed by, or on behalf of, the Borrower or any other guarantor without in any way affecting or discharging the liability of the undersigned hereunder. If the Obligations are partially paid, the undersigned shall remain liable for any balance of such Obligations. This guaranty shall be revived and reinstated in the event that any payment received by Lender on any Obligation is required to be repaid or rescinded under present or future federal or state law or regulation relating to bankruptcy, insolvency or other relief of debtors. The undersigned agrees to furnish promptly to the Lender annual financial statements and such other current financial information as the Lender may reasonably request from time to time. The undersigned expressly represents and acknowledges that loans and other financial accommodations by the Lender to the Borrower are and will be to the direct interest and advantage of the undersigned. The Lender may, without notice of any kind, sell, assign or transfer all or any of the Obligations, and in such event each and every immediate and successive assignee, transferee, or holder of all or any of the Obligations shall have the right to enforce this guaranty, by suit or otherwise, for the benefit of such assignee, transferee or holder, as fully as if such assignee, transferee or holder were herein by name specifically given such rights, powers and benefits, but the Lender shall have an unimpaired right, prior and superior to that of any such assignee, transferee or holder, to enforce this guaranty for the benefit of the Lender, as to so much of the Obligations as it has not sold, assigned or transferred. No delay or failure on the part of the Lender in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Lender of any right or remedy shall preclude other or further exercise of any other right or remedy. For the purpose of this guaranty, the Obligations shall include all debts, liabilities and obligations of the Borrower to the Lender, notwithstanding any right or power of the Borrower or anyone else to assert any claim or defense as to the invalidity or unenforceability thereof, and no such claim or defense shall impair or affect the obligations and liabilities of the undersigned hereunder. Without limiting the generality of the foregoing, if the Borrower is a corporation, partnership, joint venture, trust or other form of business organization, this 3 guaranty covers all Obligations purporting to be made in behalf of such organization by any officer or agent of the same, without regard to the actual authority of such officer or agent. The term "corporation" shall include associations of all kinds and all purported corporations, whether or not correctly and legally chartered and organized. To the extent not prohibited by law, the undersigned hereby grants to the Lender a security interest in and security title to and hereby assigns, pledges, transfers and conveys to Lender (i) all property of the undersigned now or hereafter in the possession or control of the Lender (exclusive of any such property in the possession or control of the Lender as a fiduciary other than as agent), including, without limitation, all cash, stock or other dividends and all proceeds thereof, and all rights to subscribe for securities incident thereto and any substitutions or replacements therefor and (ii) any of the undersigned's deposit accounts (as such term is defined in the Uniform Commercial Code of the State of North Carolina, as the same may be amended from time to time) held by Lender, whether such accounts be general or special, or individual or multiple party, and upon all drafts, notes, or other items deposited for collection or presented for payment by the undersigned with the Lender, exclusive of any such property in the possession or control of the Lender as a fiduciary other than as agent, and the Lender may at any time, without demand or notice, appropriate and apply any of such to the payment of any of the Obligations, whether or not due, except for other indebtedness, obligations and liabilities owing to Lender that constitute (a) consumer credit as defined in Federal Reserve Board Regulation Z and is either subject to the disclosure requirements of Federal Reserve Board Regulation Z or state consumer protection laws or (b) non-consumer credit if under applicable state law the maximum interest rate for such credit is reduced when secured. Any amount received by the Lender from whatever source and applied by it toward the payment of the Obligations shall be applied in such order of application as the Lender may from time to time elect. This guaranty shall bind and inure to the benefit of the Lender, its successors and assigns, and likewise shall bind and inure to the benefit of the undersigned, their heirs, executors, administrators, successors and assigns. If more than one person shall execute this guaranty or a similar, contemporaneous guaranty, the term "undersigned," shall mean, as used herein, all parties executing this guaranty and such similar guaranties and all such parties shall be liable, jointly and severally, one with the other and with the Borrower, for each of the undertakings, agreements, obligations, covenants and liabilities provided for herein with respect to the undersigned. This guaranty contains the entire agreement and there is no understanding that any other person shall execute this or a similar guaranty. Furthermore, no course of dealing between the parties, no usage of trade, and no parol or extrinsic evidence shall be used to supplement or modify any terms of this guaranty; nor are there any conditions to the complete effectiveness of this guaranty. This guaranty shall be deemed accepted by Lender in the Governing Jurisdiction. The parties agree that this guaranty shall be deemed, made, delivered, performed and accepted by Lender in the Governing Jurisdiction and shall be governed by the laws of the Governing Jurisdiction. Wherever possible each provision of this guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provisions of this guaranty shall be 4 prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this guaranty. The undersigned (a) submits to personal jurisdiction in the Governing Jurisdiction, the courts thereof and any United States District Court sitting therein, for the enforcement of this guaranty, (b) waives any and all personal rights under the law of any jurisdiction to object on any basis (including, without limitation, inconvenience of forum) to jurisdiction or venue within the Governing Jurisdiction, for the purpose of litigation to enforce this guaranty, and (c) agrees that service of process may be made upon the undersigned by first class postage prepaid mail, addressed to the undersigned at the latest address of the undersigned known to the Lender (or at such other address as the undersigned may specify for the purpose by notice to the Lender). Nothing herein contained, however, shall prevent the Lender from bringing any action or exercising any rights against any security and against the Borrower personally, and against any assets of the Borrower, within any other state or jurisdiction. Guarantor acknowledges that Lender may reproduce (by electronic means or otherwise) any of the documents evidencing and/or securing the Obligations and thereafter may destroy the original documents. Guarantor does hereby agree that any document so reproduced shall be and remain the binding obligation of Guarantor, enforceable and admissible in evidence against it to the same extent as if the original documents had not been destroyed. This guaranty shall remain in full force and effect as to each of the undersigned unless and until terminated as to one or more of the undersigned by notice to that effect actually received by the Lender, by registered mail, addressed to Lender at 100 North Main Street, Winston-Salem, North Carolina 27101, but no such notice shall affect or impair the liabilities hereunder of such of the undersigned who gives or on whose behalf is given any such notice for the Obligations existing at the date of receipt by the Lender of such notice, any renewals, modifications, or extensions thereof (whether made before or after such notice is received), any interest thereon, or any costs or expenses, including without limitation, attorneys' fees incurred in the collection thereof or any future advances made by Lender to Borrower as required or permitted pursuant to the terms of the instruments, documents or agreements evidencing or providing for the Obligations. Any such notice of termination by or on behalf of any of the undersigned shall affect only that person and shall not affect or impair the liabilities and obligations hereunder of any other person. The undersigned hereby expressly waives, for Lender's benefit and the benefit of the Borrower and any other guarantor, maker or endorser of the Obligations, any and all claims or actions against the Borrower, any other guarantor, maker or endorser of the Obligations and any and all rights of recourse against any property or assets of the Borrower, any other guarantor, maker or endorser of the Obligations (including without limitation any security for the Obligations) arising out of or related to any payment made by the undersigned under this guaranty, including, without limitation, any claim of the undersigned for subrogation, reimbursement, exoneration, contribution or indemnity that the undersigned may have against the Borrower, any other guarantor, maker or endorser of the Obligations and any benefit of, and any other right to participate in, any security for the Obligations or any guaranty of the 5 Obligations now or hereafter held by Lender. The waiver contained in this paragraph shall continue and survive after the termination of this guaranty and the payment of the Obligations. The terms and provisions of any addendum attached hereto are incorporated herein by reference and made a part hereof. IN WITNESS WHEREOF, each of the undersigned has executed this guaranty under seal this 29th day of April, 2002. TRADE SOURCE INTERNATIONAL, INC. /s/ James R. Ridings ------------------------------------------ By: James R. Ridings Title: President 6 -----END PRIVACY-ENHANCED MESSAGE-----