-----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, P8xDax916Ipo4ECQxg56FR9rT0jeM/8htZyohE+Gh48v35ExJt+FBva2i0PGpzJL JfaIy3brcuUV6wSkoneuDg== 0000950134-96-005035.txt : 19960925 0000950134-96-005035.hdr.sgml : 19960925 ACCESSION NUMBER: 0000950134-96-005035 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960924 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10471 FILM NUMBER: 96633870 BUSINESS ADDRESS: STREET 1: 2700 112TH ST CITY: GRAND PRAIRIE STATE: TX ZIP: 75050 BUSINESS PHONE: 2146478099 MAIL ADDRESS: STREET 1: 2700 112TH ST CITY: GRAND PRARIE STATE: TX ZIP: 75050 10-K 1 FORM 10-K FOR YEAR ENDED JUNE 30, 1996 1 SECURITIES AND EXCHANGE COMMISSION ================================================================================ Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 Commission file number 1-10471 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 S. ROYAL LANE, SUITE 100 75019 COPPELL, TEXAS (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (214) 393-3800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Name of each exchange COMMON STOCK, $.01 PAR VALUE on which registered NASDAQ NATIONAL MARKET SYSTEM 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, and (2) has been subject to such filing requirements for the past 90 days: Yes X No ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ----- The aggregate market value of the voting stock held by nonaffiliates of the registrant as of July 31, 1996, was $20,417,652. The number of shares outstanding of the registrant's $.01 Par Value Common Stock as of July 31, 1996, was 3,202,769. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement pertaining to the registrant's 1996 annual meeting of shareholders are incorporated by reference into Part III of this report. ================================================================================ 2 INDEX PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 7 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . 7 Item 4. Submission of Matters to a Vote of Security Holders . . 7 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters . . . . . . . . . . . . . . . . . . . 8 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . 10 Item 8. Financial Statements . . . . . . . . . . . . . . . . . . 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . 15 PART III Item 10. Directors and Executive Officers of the Registrant . . . 16 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 16 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . 16 Item 13. Certain Relationships and Related Transactions . . . . . 16 PART IV Item 14. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . 17 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3 PART 1 Item 1. Business THE COMPANY Craftmade International, Inc. (the "Company") was incorporated under the laws of the State of Texas on July 16, 1985 under the name of Mastercraft International, Inc. for the purpose of distributing ceiling fans, furniture, hardware and plumbing products. In January 1986, the Company limited its operations to the marketing and distribution of ceiling fans and related products and accessories. An arrangement with Fanthing Electrical Corp., ("Fanthing"), Taichung, Taiwan was completed in August 1986 for the manufacture of ceiling fans designed to the Company's specifications. The Company's ceiling fan product line consists of 20 series and 127 basic models of premium priced to lower priced ceiling fans, and represents approximately 65% of the Company's current product sales. The Company also markets 100 light kit models in various colors for attachment and use with the Company's ceiling fans or other ceiling fans, as well as parts and accessories for its ceiling fans and light kits. The Company purchases most of its light kits from Sunlit Industries ("Sunlit"), Taipei, Taiwan. The combination of design and functional features which characterize Craftmade ceiling fans have made them, in management's judgement, one of the most reliable, durable, energy efficient and cost effective ceiling fans in the marketplace. The Company's national sales organization, which consists of 32 independent sales representative groups employing approximately 60 sales representatives, markets the Company's products to in excess of 1,400 lighting showrooms and electrical wholesalers which sell primarily to the new home construction, remodeling and replacement markets. These markets are comprised principally of private residences and, to a lesser extent, offices, restaurants and certain public facilities. On July 26, 1990, the Company formed Durocraft International, Inc. ("Durocraft") and completed an agreement and plan of merger with DMI Products, Inc. ("DMI"). Durocraft Design Manufacturing, a division of Durocraft, is a lamp manufacturer whose customer base includes major specialty retail chains. The merger has enabled the Company to expand its market share in the lighting industry. A division of Durocraft, Global Electronics, is a wholesaler of computer cable and accessories. On December 27, 1991, the Company changed its state of incorporation from Texas to Delaware, at which time all of the Company's outstanding common stock was exchanged, share for share, for $.01 par value common stock. On September 30, 1992, the Company formed C/D/R Incorporated located in Wilmington, Delaware for the purpose of holding all of the rights to the Company's trademarks. Management believes that these intangible assets have value and the Company will defend them as necessary. BACKGROUND Prior to the advent of air conditioning, ceiling fans were used in homes and other facilities to make hot weather tolerable by reducing air stratification. Developments in air conditioning technology and the pervasive use of central air conditioning and individual air conditioning units limited the market for ceiling fans until the mid 1970's, when high energy costs led to the rediscovery of ceiling fans primarily due to their potential for energy conservation. Additional benefits of utilizing ceiling fans during winter and less temperate periods to circulate warm air concentrated near ceilings down to floor level were also recognized at this time. The Company estimates that annual unit sales of ceiling fans in the United States grew - 1 - 4 substantially in the 1970's and through 1983, and then declined and have stabilized since that time. Management believes that the principal factors underlying growth of unit sales between 1976 and 1983 were increased penetration of the residential household market, particularly in the northern and western sections of the United States (areas which historically have had a disproportionately low percentage of ceiling fan ownership), a continued shift to lower and medium priced ceiling fans, an increase in multiple fan ownership and replacement purchases. Management attributes the moderation of unit sales since 1983 to the initial saturation in the northern and western sections of the United States following limited usage prior to that time. The Company does not believe that industry unit sales of ceiling fans in the United States market will fluctuate substantially in the foreseeable future. The Company will attempt to expand future sales of its ceiling fans by increasing its market share. PRODUCTS All of the Company's ceiling fans are manufactured by Fanthing, and most of its light kits are purchased from Sunlit. Fanthing manufactures the ceiling fans based on specifications provided by the Company. The finished products are packaged and labelled by the manufacturer under the Company's trade name, Craftmade (R). Light kits used in conjunction with ceiling fans are similarly produced and packaged. CEILING FANS -- The Company's ceiling fan product line consists of 20 series and 127 basic models of ceiling fans for sales to the new construction, remodeling and replacement markets. Series are classified on the basis of cost, air movement and appearance. Craftmade fans are manufactured and assembled in a variety of colors, styles and finishes and can be used either in conjunction with or independent of Craftmade light kits. Series lines include Early American, Traditional and Modern High-Tech Decor and, depending on the size, finish and other features, range in price from the premium Presidential II, Crescent and High-Tech series to various low-end builder series. Suggested retail prices for the various Craftmade fans ranged at June 30, 1996 from $70.00 (builder series) to $780.00 (Cameo Series), which the Company believes are favorably priced relative to other mid-level and premium ceiling fans distributed by Hunter and Casablanca, yet represent comparable quality and performance characteristics. The Company's ceiling fans come in five motor sizes, five blade sizes and 37 different decorative finishes. The range of styles and colors give consumers the ability to select ceiling fans for any style of house, interior decoration or living and working area, including outdoor patios. All Craftmade fans include a dual capacitor system to control motor starting and running; a 16-pole motor for greater efficiency and smoother performance; aluminum rotors die cast for cool running; two sealed heavy duty bearings which are permanently lubricated; balanced blades and blade arms to minimize vibration; blade arm gaskets for quieter performance; reversible switching for summer and winter energy saving; shipping blocks to maintain alignment in transit; and three-speed switches for high, medium, low and off. In management's judgement, although not specifically confirmed by any independent testing service, these features enable the Company's ceiling fans to perform efficiently, consistently and for extended periods. Management also believes that, in addition to these design features, the quality control program adhered to by Fanthing in the course of manufacturing contributes significantly to the quality and durability of the Craftmade fan. All Craftmade fans carry a limited warranty against defects in workmanship and materials covering the entire ceiling fan for one year and also provides a 25 year warranty with respect to the motor contained in all fans except the Presidential I, Presidential II, Cameo, Crescent, Quest, Wellington, Phoenix, CXL, Sergio and High-Tech Series, which carry a limited lifetime warranty. In addition, while the Company's agreement with Fanthing does not contain provisions relating to adjustments or returns as a result of product defect, Fanthing has previously extended the Company full credit for any product returns during the period of their working relationship. - 2 - 5 LIGHT KITS -- The Company markets 100 models of light kits in various colors which may be utilized with the Company's ceiling fans or other ceiling fans. These kits, which consist of the glass shades and fitters, presently represent approximately 15% of the Company's product sales. As of June 30, 1996, suggested retail prices for the Company's light kits ranged from $16.50 to $250.00. Since the demand for the Company's Elegance Collection, which includes lead crystal and alabaster designer shades, has increased, the Company will continue its efforts to expand these premium lines. LAMPS -- The Company assembles and markets a variety of lamp styles for sale to certain major retail chains and catalog houses to be sold under private brand labels. In addition, the Company markets lamps under its own proprietary trade names. The lamps are assembled at the Company's facilities in Coppell, Texas and consist of wood, solid brass, zinc coated, crystal, ceramic and porcelain table, floor and desk lamps as well as hanging lantern kits. At the present time, all of the Company's lamps are sold at retail prices ranging from $58 to $274. Sales of the Company's lamps account for approximately 13% of the Company's product sales. ACCESSORIES AND CABLE COMPONENTS -- The Company also markets a variety of designer and standard wall controls to regulate the speed and intensity of ceiling fans and lighting fixtures and universal downrods for use with ceiling fans. In addition, following the acquisition of DMI Products, Inc. in July 1990, the Company also distributes various cable components, including connectors, switches and compatibles acquired from Far East manufacturers for use with computers and telephone board circuitry. Sales of such accessories and cable components presently account for approximately 7% of the Company's product sales. MANUFACTURING The Company's ceiling fans and most of its light kits and certain accessories are produced by Fanthing and Sunlit. The Company has had a working agreement with Fanthing since August 1986 to provide the Company with all of its ceiling fans and certain fan accessories. The Company selected Fanthing to manufacture the Craftmade fan based on its proven capability to produce and ship a wide variety of ceiling fans on a cost effective basis while at the same time maintaining excellent quality control in the manufacturing process. According to information made available to the Company, Fanthing was organized in 1981 and manufactures ceiling fans from a manufacturing facility consisting of in excess of 21,000 square feet in Taichung, Taiwan. The Company believes that a substantial part of Fanthing's revenues are derived from sales of ceiling fans to the Company. On December 7, 1989, the Company and Fanthing entered into a formal written agreement which is terminable on 180 days prior notice. The written agreement does not obligate Fanthing to produce and sell products to the Company in any specified quantity, nor does it obligate Fanthing to sell products to the Company at a fixed price. Fanthing is permitted under the arrangement to manufacture ceiling fans for other distribution provided such ceiling fans are not a replication of Craftmade's series or models. Fanthing also manufactures certain ceiling fan accessories, such as down rods, which are sold by the Company independently of its ceiling fans. Fanthing has provided the Company with a $1,000,000 credit facility, pursuant to which Fanthing will manufacture and ship ceiling fans prior to receipt of payment from the Company. Accordingly, payment can be deferred until delivery of such products. At present levels, such credit facility is equivalent to approximately one month's supply of ceiling fans and represents a supplier commitment which, in the opinion of the Company, is unusual for the industry. Fanthing is not required to provide this credit facility under its agreement with the Company, and Fanthing may discontinue this arrangement at any time. The Company places orders with Fanthing in anticipation of normally recurring orders. In the ordinary course of business, orders are filled within 60 days which includes approximately 20 days for transport. All orders are in U.S. dollars. In the event of any fluctuation in exchange rates exceeding approximately 5%, any future orders - 3 - 6 placed by the Company may be adjusted accordingly. Ceiling fans are shipped in container-size lots, generally consisting of 1,600 fan units. Delivery is made in Dallas, Texas upon presentment of documents by the Company's designated freight forwarder following payment for such containers at Fanthing's bank in Taiwan. While the Company believes the present arrangement for purchases and delivery has been generally satisfactory, the demand for Craftmade fans has periodically exceeded the Company's delivery capabilities. Under a stock purchase agreement between the Company and Fancy Industrial, Inc. ("Fancy"), a Texas corporation and wholly-owned subsidiary of Fanthing, the Company, at its option, may repurchase 101,196 shares owned by Fancy Industrial, Inc. for an aggregate purchase price of $137,774. The Company has no intention of reacquiring any shares from Fancy at this time. The Company believes that its relationship with Fanthing and its ability to supply quality ceiling fans at competitive prices have been critical to the success of the Company. The Company believes its relationship with Fanthing to be excellent and foresees no reason, based on its association to date, for such relationship to deteriorate. If for any reason Fanthing were to discontinue its relationship with the Company in the future or should it be unable to continue to supply sufficient amounts of Craftmade products, the Company would be required to seek alternative sources of supply. There can be no assurance that any such alternative source of supply will produce products of comparable quality to those produced by Fanthing, or that any such source will sell products to the Company at prices and on terms as favorable as those presently applicable to purchases made by the Company from Fanthing. The Company purchases most of its light kits from Sunlit which is located in Taipei, Taiwan. According to information made available to the Company, Sunlit was organized in January 1989 and occupies a manufacturing facility consisting of approximately 10,000 square feet. The Company believes that substantially all of Sunlit's revenues are derived from the sale of lighting kits to the Company. Light kit orders are placed independently of ceiling fan orders, but are also received in container-size lots generally consisting of up to 4,500 light kit units under payment and delivery arrangements similar to those for ceiling fans. The Company offers a variety of light kits in various finishes and colors, as well as a variety of fixtures designed for ceiling fans. The Company also offers a variety of glass selections for the various light fixtures, including blown glass, beveled glass and crystal. Fixtures and glass are shipped from Sunlit in the light kit containers. The Company's wall controls, timers and switches as well as certain of its ceiling fan blades, representing approximately 1% of the Company's product sales, are manufactured by companies based in the United States. The Company offers a variety of custom blade sets in various sizes and finishes, including unfinished oak, ash and other wood grains and in clear, mirror, gold mirror, black, smoke and antique white acrylic. The finished products are packaged and labeled under the Company's Craftmade brand name. The Company assembles its lamps at its Coppell facility which includes the placement of the base, cap and shade together with the necessary wiring. Substantially all of the components are manufactured by domestic and foreign manufacturers located in Taiwan, China and Germany; however, the Company does undertake limited manufacturing of certain shade components. The Company purchases its components on a non-exclusive basis from such suppliers on either open account or through letters of credit, and no individual manufacturer accounts for in excess of 3% of such components. DISTRIBUTION The Company's products are marketed through in excess of 1,400 lighting showrooms and electrical wholesalers specializing in sales to the new home construction, remodelling and replacement markets. The Company's ceiling fans, light kits and accessory parts are distributed through 32 independent sales representative groups on a national basis (except for Alaska and - 4 - 7 Hawaii). Each sales representative group is selected to represent the Company in a specific market area. The independent sales representative groups comprise a sales force for the Company's products of approximately 60 sales representatives. Sales representatives represent the Company exclusively in the sale of ceiling fans. Sales representatives are paid commissions on such sales. During the fiscal year ended June 30, 1996, no single lighting showroom or electrical wholesaler accounted for more than 2% of the Company's sales. Sales representatives are carefully selected and continually evaluated in order to promote high level representation of the Company's products. Company personnel provide initial field training to new sales representatives covering features, styles, operation and other attributes of Craftmade products to enable representatives to more effectively market the Company's products. Additional training is provided at least annually, especially for new product series, at semi-annual trade shows held in Dallas, Texas and elsewhere. Management believes it has assembled a highly motivated and effective sales representative organization which has demonstrated a strong commitment to the Company and its products. Management further believes that the strength of its sales representative organization is primarily attributable to the quality and competitive pricing of the Company's products as well as the ongoing administrative and marketing support that the Company provides to its sales representatives. As of June 30, 1996, of the Company's lamps sold to major retail chains and catalog houses to be distributed under private brand labels, approximately 89% were sold to Bombay Company. The balance of these lamp sales are made to various catalog houses and other retail chains including Ethan Allen, CBK Ltd, Inc., the Horchow Mail Order Catalog and Dr. Livingston. The Company also markets lamps under proprietary labels through lighting showrooms, furniture stores and mass merchandising and department stores. The Company acts as a distributor for various overseas manufacturers of a range of cable components which account for approximately 3% of the Company's total product sales. MARKETING The Company relies primarily on the reputation of Craftmade ceiling fans and light kits for high quality and competitive prices and the efforts of its sales representative organization in order to promote the sales of the Company's products. The principal market for the Company's products is the new home construction, remodeling and replacement markets. The Company utilizes advertising in home lighting magazines, particularly in special editions devoted to ceiling fans and lighting fixtures, and broadly distributes its product catalog. The Company also promotes its ceiling fans and light kits at semi-annual trade shows in Dallas (January and July), and the Company maintains a showroom at the Dallas Trade Mart. The Company provides the same 25- year limited warranty on the fan motor for each series of its ceiling fans, and includes a one year limited warranty against defects in workmanship and materials to cover the entire ceiling fan. The Company also provides a limited lifetime warranty on the Presidential series, High-Tech series, Sergio, Cameo, Quest, Wellington, Phoenix, CXL and Crescent series ceiling fans. The Company believes these warranties, which are limited to its premium fan series, are highly attractive to dealers and consumers alike. PRODUCT EXPANSION The Company's proposed expansion of its light kit product line will include the development of new lighting fixture product lines to be marketed under the Craftmade name, including under cabinet lighting, bathroom and dressing room lighting, low voltage outside lighting and additional parts and accessories complementing its various product lines. The Company believes that such proposed new product lines will complement its light kit product line and that such product lines - 5 - 8 can be marketed through the same sales representatives, showrooms and electrical wholesalers which presently distribute the Company's ceiling fans and light kit products. The Company has commenced discussions with Sunlit and other manufacturers for the production of such new lighting fixture lines. BACKLOG As substantially all of the Company's ceiling fan and lighting kit products are shipped to customers within 72 hours following receipt of orders, backlog is not material to the Company's operations. The Company at present is accepting orders for ceiling fans and light kits based on product availability. At June 30, 1996, Durocraft had approximately $970,000 in open lamp orders which are expected to be filled in the current fiscal year, compared with $2,300,000 in open lamp orders at June 30, 1995 which were filled during the year ended June 30, 1996. As a result, Durocraft is required to carry significant amounts of inventory to meet rapid delivery requirements of its customers. COMPETITION The ceiling fan and lighting fixture market is highly competitive at all levels of operation. Some of the major companies in this industry include Casablanca, Hunter, Emerson Electric and Fasco. A number of other well established companies are also currently engaged in activities that compete directly with those of the Company. Some of the Company's competitors are better established, have longer operating histories, have substantially greater financial resources or have greater name recognition than the Company; however, the Company believes that the quality of its products, the strength of its marketing organization and the growing recognition of the Craftmade name will enable the Company to compete successfully in these highly competitive markets. INDEPENDENT SAFETY TESTING All of the ceiling fans, light kits and lamps sold by the Company in the United States are tested by UL, which is an independent non-profit corporation which tests certain products, including ceiling fans and lighting fixtures, for public safety. Under its agreement with UL, the Company voluntarily submits its products to UL, and UL tests the products for safety. If the product is acceptable, UL issues a listing report which provides a technical description of the product. UL provides the manufacturers with procedures to follow in manufacturing the products. Electrical products which are manufactured in accordance with the designated procedures display the UL listing mark, which is generally recognized by consumers as an indication of a safe product and which is often required by various governmental authorities to comply with local codes and ordinances. The contract between the Company and UL provides for automatic renewal unless either party cancels as a result of default or gives applicable prior notice. PRODUCT LIABILITY The Company is engaged in a business which could expose it to possible claims for injury resulting from the failure of its products sold. While no material claims have been made against the Company since its inception and the Company maintains $10,000,000 in product liability insurance, there can be no assurance that claims will not arise in the future or that the coverage of such policy will be sufficient to pay such claims. - 6 - 9 PATENTS AND TRADEMARKS The Company does not believe that patent protection is significant to most of the Company's products or current business operations. The Company holds a patent on its Cathedral Ceiling Adapter and the license on the patents for the Crescent Series fan and the Carousel light kit. The Company also holds certain other license agreements which is in the ordinary course of its business. Fanthing holds certain Taiwanese patents covering specific technology employed in Craftmade ceiling fans, but the Company does not believe that such patents are material to the production of Craftmade products. The Company's trademarks, Craftmade (R) and Durocraft (R), are registered with the United States Patent and Trademark office. EMPLOYEES As of July 31, 1996, the Company employed a total of 95 full time employees, including three executive officers, fifteen managers, fifteen clerical and administrative personnel, nine marketing, twenty-seven warehouse and twenty-six production personnel. The Company's employees are not covered by any collective bargaining agreements, and the Company believes its employee relations are satisfactory. Item 2. Properties The Company's headquarters were relocated to Coppell, Texas during December 1995 to a facility consisting of approximately 378,000 square feet of general office and warehouse space. The Company purchased this new facility at a price of approximately $9,225,182. The Company has financed $9,200,000 of the purchase price of this facility through a financial institution at an interest rate of 8.125% for a term of twelve years. Approximately 80,000 square feet of this facility has been leased to an unrelated party for a term of three years at an annual rate of $240,000. The Company's management believes that this facility will be sufficient for its purposes for the foreseeable future. The Company also leases 1,656 square feet of permanent display facilities at the Dallas Trade Mart. The lease will expire in April 1998 and provides for monthly rental payments of approximately $2,993. Item 3. Legal Proceedings Due to the nature of the Company's business, it could be a party in legal or administrative proceedings arising in the ordinary course of business. Although occasional adverse settlements or resolutions may occur and negatively impact earnings in the year of settlement, after consideration of the Company's insurance coverage, it is the opinion of management that the ultimate resolution would not have a materially adverse effect on the Company's financial position or its results of operations. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. - 7 - 10 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters Since the initial public offering of the Company's Common Stock at $3.50 per share on April 16, 1990, the Common Stock has been traded on NASDAQ under the symbol CRFT. On July 16, 1992, the Company was approved for inclusion in the National Market System of NASDAQ. At that time, the Company voluntarily delisted its common shares from the Boston Stock Exchange. Prior thereto, the Company's shares traded on a limited basis on that exchange. Prior to April 16, 1990, there was no public market for the Common Stock. The following table sets forth for the periods indicated the high and low closing sales prices per share of Common Stock on the NASDAQ National Market System, as reported by NASDAQ.
High Low ---- --- Fiscal Year Ended June 30, 1995: First Quarter 10 11/16 9 Second Quarter 10 7/8 9 1/8 Third Quarter 10 1/8 8 1/2 Fourth Quarter 8 3/8 7 1/4 Fiscal Year Ended June 30, 1996: First Quarter 8 1/8 6 1/8 Second Quarter 8 3/8 6 1/4 Third Quarter 7 1/8 5 7/8 Fourth Quarter 8 1/4 6 5/8 Fiscal Year Ended June 30, 1997: First Quarter (Through July 31, 1996) 7 1/2 6 1/4
On July 31, 1996, there were 130 holders of record of the Company's Common Stock. North American Transfer Company, 147 West Merrick Road, Freeport, New York 11520, is the Transfer Agent and Registrar for the Company's Common Stock. On March 15, 1994, the Company's Board of Directors adopted a policy to pay $0.01 per share dividend on a quarter to quarter basis within the discretion of the Board out of the capital surplus or profits of the Company. The quarterly dividends may not exceed 40% of the Company's net profit before taxes as restricted by the Company's revolving line of credit. Pursuant to this policy, the Board has declared and paid a quarterly dividend for each quarter since March 31, 1994. COMPANY COMMON STOCK PRICE PERFORMANCE GRAPH The following graph provides an indicator of and compares the percentage change of cumulative total shareholder return of the Company's Common Stock against the cumulative total return of the Russell 2000 Index and the NASDAQ Composite Index since the initial public - 8 - 11 offering of the Company's common stock on April 16, 1990. This graph assumes $100 was invested on April 16, 1990 in the Company's common stock, the Russell 2000 Index and the NASDAQ Composite Index. Both the Russell 2000 Index and the NASDAQ Composite Index exclude the Company. PRICE PERFORMANCE CHART SHOWN HERE The historical stock price performance of the Company's common stock shown on the graph above is not necessarily indicative of future stock performance. The Company has compared its stock price performance with that of the Russell 2000 Index as it does not believe it can reasonably identify a peer group and no comparable published industry or line-of-business index is available. The Russell 2000 Index consists of companies with market capitalization similar to that of the Company; accordingly, the Company believes the Russell 2000 Index is the best available performance comparison. Item 6. Selected Financial Data The selected financial data in the tables below are for the five fiscal years ended June 30, 1996. The data should be read in conjunction with the financial statements and notes, which are included elsewhere herein. The amounts listed below are in thousands (except per share amounts).
For years ended ------------------------------------------------------------------ June 30, June 30, June 30, June 30, June 30, 1992 1993 1994 1995 1996 ----------- ---------- ---------- ---------- ----------- Selected Operating Results: - -------------------------- Net sales $ 22,750 $ 27,479 $ 32,130 $ 34,353 $36,320 Gross profit 7,555 9,043 11,729 12,381 12,884 Income before income taxes 1,618 2,600 3,688 2,977 2,850 Net income 1,060 1,646 2,385 1,903 1,826 Net income per common share .31 .48 .69 .55 .56 Cash dividends declared per common share $ - $ - $ .02 $ .04 $ .04 Weighted average common shares outstanding 3,395 3,454 3,472 3,431 3,256
- 9 - 12
June 30, June 30, June 30, June 30, June 30, 1992 1993 1994 1995 1996 ---------- ---------- ---------- ---------- ---------- Summary Balance Sheet: - --------------------- Current assets $ 9,517 $ 11,513 $ 14,878 $ 16,720 $17,835 Current liabilities 5,472 5,535 6,444 8,065 8,799 Long-term debt 53 15 - - 8,519 Total assets 10,615 12,474 15,853 17,631 27,996 Retained earnings 1,799 3,445 5,761 7,528 9,224 Shareholders' equity 4,982 6,853 9,373 9,565 10,633 Book value per common share $ 1.48 $ 2.00 $ 2.71 $ 2.90 $ 3.31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations With the exception of historical information, the matters discussed herein contain forward-looking statements. There are certain important factors which could cause results to differ materially than those anticipated by some of the 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, changes from anticipated levels of sales, whether due to future national or regional economic and competitive conditions, changes in relationships with customers including, but not limited to, Durocraft's relationship with its major customer, customer acceptance of existing and new products, pricing pressures due to excess capacity, raw material cost increases, change of tax rates, change of interest rates, unfavorable political developments in the Republic of Taiwan, the location of the Company's principal vendor, declining condition in the home construction industry, and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. Year Ended June 30, 1996 compared to June 30, 1995 Net sales increased to $36,320,034 for the year ended June 30, 1996 from $34,352,775 for the year ended June 30, 1995, representing an increase of $1,967,259 or 5.7%. This increase in sales was primarily attributable to a 9.6% increase in sales from the Company's fan division as a result of the recovery of this division's market through the stabilization of new home construction and the continued success of this division's marketing strategy of selective expansion of its distribution base and new product introductions. This increase in sales was partially offset by an 8.3% decrease in lamp sales due to delays in raw materials delivery. The Company's management anticipates resolving these delays during fiscal 1997. In addition, the Company's fan division is experiencing strong customer order rates resulting from the resurgence of new home construction. The Company's management anticipates that, provided new home construction does not experience a downturn similar to 1995, this division's sales should achieve sales growth at its historical levels. Sales to one of the lamp division's customers represented approximately 89% of that division's fiscal 1996 net sales. Should this customer experience weak sales, this may in turn adversely impact this Customer's level of purchases from the lamp division; however, the Company's management anticipates developing a broader customer base in the lamp division to help minimize any negative impact this decline would have. Gross profit increased to $12,884,051, or 35.5% of sales, for the year ended June 30, 1996, as compared to $12,380,599, or 36.0% of sales, for the year ended June 30, 1995. The Company experienced a decrease in gross profit percentage primarily as a result of increased raw materials cost incurred in the latter part of fiscal 1995 associated with the manufacture of its products and the addition of a lower end line of fans to the product mix of the Company's fan division towards - 10 - 13 the end of fiscal 1995. The Company's management anticipates that gross margins will begin to improve with the stabilization of raw materials costs achieved during fiscal 1996 and with the recent introduction of additional higher end products into the market. Total selling, general and administrative expenses increased $335,318 to $8,975,954, or 24.7% of sales, for the year ended June 30, 1996 from $8,640,636, or 25.2% of sales, for the year ended June 30, 1995. This increase was primarily attributable to an increase in commissions and certain other costs directly correlated to the increase in sales and one- time charges in excess of $200,000 related to the acquisition of and relocation to the Company's new facility completed in December 1995. As a result of this relocation, fiscal 1996 lease expense declined approximately $310,000 from prior year levels. However, the decline in this component of selling, general and administrative expenses was fully offset by increases in depreciation and interest costs also attributable to the relocation to the new facility. In the future, management anticipates selling, general and administrative expenses as a percentage of sales to follow a more consistent trend. Net interest expense increased $375,272 to $895,931 for the year ended June 30, 1996 from $520,659 for the year ended June 30, 1995. This increase was primarily the result of $309,187 in interest incurred relating to the financing of the Company's newly-acquired facility. The Company's management anticipates that the increase in interest expense will be partially offset by the decrease in operating lease expense. In addition, management believes the long-term ownership of this facility should prove advantageous for the Company as future lease arrangements for adequate facility space would have resulted in an obligation in excess of the current annual debt requirement under the new facility note payable and related depreciation and interest expense. The provision for income taxes decreased to $1,024,466, or 36.0% of income before income taxes, for the year ended June 30, 1996 from $1,073,551, or 36.1% of income before income taxes, for the year ended June 30, 1995. Net income decreased slightly to $1,825,567, or $.56 per share, for the year ended June 30, 1996 from $1,903,117, or $.55 per share, for the year ended June 30, 1995. The decrease in net income was primarily the result of the decrease in the Company's gross profit percentage, increases in selling, general and administrative expenses and the increase in interest expense, partially offset by the sales increase. Net income per common share improved slightly despite the decrease in net income as a result of the Company's repurchase of 106,500 common shares during fiscal 1996 which effectively reduced weighted average common shares outstanding at June 30, 1996. Year Ended June 30, 1995 compared to June 30, 1994 Net sales increased to $34,352,775 for the year ended June 30, 1995 from $32,130,223 for the year ended June 30, 1994, representing an increase of $2,222,552, or 6.9%. This increase in sales was primarily attributable to a 6.5% increase in sales from the Company's fan division as a result of the expansion of this division's customer base in excess of 10% and the continued success of new product introductions, despite the significant weakness in new home construction throughout the nation that affected the entire industry. This increase was supported by a 17% increase in lamp sales, primarily attributable to the addition of several new lamp styles to this division's major customer. Gross profit increased to $12,380,599, or 36.0% of sales, for the year ended June 30, 1995, as compared to $11,728,649, or 36.5% of sales, for the year ended June 30, 1994. The Company experienced a decrease in its gross profit percentage primarily as a result of a 9% increase in costs of certain raw materials associated with the manufacture of its products, partially offset by a price increase to the Company's customers implemented during May 1995. - 11 - 14 Total selling, general and administrative expenses increased $1,198,107 to $8,640,636, or 25.2% of sales, for the year ended June 30, 1995 from $7,442,529, or 23.2% of sales, for the year ended June 30, 1994. This increase was primarily attributable to (i) an increase in commissions and certain other costs directly correlated to the increase in sales and (ii) an increase in costs associated with the growth in the Company's work force during the year ended June 30, 1995. Net interest expense increased $181,232 to $520,659 for the year ended June 30, 1995 from $339,427 for the year ended June 30, 1994. This increase was primarily the result of increases in the bank's prime lending rate, coupled with increases in indebtedness required to finance the Company's current growth and its stock repurchase program. The provision for income taxes decreased to $1,073,551, or 36.1% of income before income taxes for the year ended June 30, 1995 from $1,303,320, or 35.3% of income before income taxes, for the year ended June 30, 1994. Net income decreased to $1,903,117, or $.55 per share, for the year ended June 30, 1995 from $2,385,026, or $.69 per share, for the year ended June 30, 1994. This decrease was primarily the result of the decrease in the Company's gross profit percentage and increases in selling, general and administrative expenses. Year Ended June 30, 1994 compared to June 30, 1993 Net sales increased to $32,130,223 for the year ended June 30, 1994 from $27,479,068 for the year ended June 30, 1993, representing an increase of $4,651,155, or 16.9%. This increase in sales was primarily attributable to a 24.5% increase in fan sales through the Company's continuing increase in market share, the success of new product introduction and the rise in housing starts. Improved fan sales were partially offset by an 11.1% decrease in lamp sales as the division adjusted to the loss of a major customer in 1992. Gross profit increased to $11,728,649, or 36.5% of sales, for the year ended June 30, 1994, from $9,043,013, or 32.9% of sales, for the year ended June 30, 1993. This increase was primarily the result of a continuing growth in sales of the Company's higher end product line as consumers began to focus on the decorative as well as functional aspects of ceiling fans. Total selling, general and administrative expenses increased $1,565,507 to $7,442,529, or 23.2% of sales, for the year ended June 30, 1994 from $5,877,022, or 21.4% of sales, for the year ended June 30, 1993. This increase was attributable to (i) an increase in freight expense related to a change in the Company's freight policy, (ii) an increase in commissions and certain other costs directly correlated to sales and (iii) an increase in costs associated with a 21% increase in the Company's work force. Net interest expense decreased $595 to $339,427 for the year ended June 30, 1994 from $340,022 for the year ended June 30, 1993. This decrease was primarily the result of reductions in the bank's prime lending rate throughout the year, partially offset by the Company's higher borrowing base over the prior year necessary to finance the Company's current growth. The provision for income taxes increased to $1,303,320, or 35.3% of income before income taxes, for the year ended June 30, 1994 from $954,105, or 36.7% of income before income taxes, for the year ended June 30, 1993. Net income increased to $2,385,026, or $.69 per share, for the year ended June 30, 1994 from $1,646,137, or $.48 per share, for the year ended June 30, 1993. This increase was primarily the - 12 - 15 result of the increase in sales and gross margins, partially offset by increases in selling, general and administrative expenses. LIQUIDITY AND CAPITAL RESOURCES Fiscal year ended June 30, 1996 - The Company's cash increased $394,354, from $268,703 at June 30, 1995 to $663,057 at June 30, 1996. The Company's operating activities provided cash of $1,136,852 during fiscal 1996 compared to $364,186 during fiscal 1995. The increase in cash provided by operating activities is primarily attributable to net income and a fairly constant level of inventory during 1996 compared to an approximate $1,400,000 increase during 1995. This increase was partially offset by increases in accounts receivable of $821,448 relating to increased sales as a result of the stabilization of the new home construction market. Cash used by investing activities of $9,152,822 related to the purchase of the Company's new facility in December 1995 and purchases of warehouse equipment, computer equipment and general office furniture necessary to facilitate relocation to this new facility. Cash provided by financing activities of $8,410,324 was primarily from $9,200,000 in financing obtained for the new facility, less principal payments of $192,213, and $220,000 in additional borrowings from the Company's line of credit, partially offset by the repurchase of 106,500 shares of the Company's Common Stock at an aggregate cost of $699,955 and dividends paid totalling $129,653. On November 15, 1995, The Company's managment obtained an additional $2,000,000 on its line of credit during its renewal, increasing its line to $12,000,000. On May 31, 1996, the Company's management renegotiated this line of credit with another financial institution at a more favorable interest rate of LIBOR plus 1.50%. At June 30, 1996, pursuant to the continued compliance with certain covenants and restrictions, the Company had an additional $4,300,000 available on its existing line of credit. 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, annual payments under the note payable related to the facility acquisition approximating $1,600,000, anticipated treasury stock purchases and its projected growth over the next twelve months. Fanthing has provided the Company with a $1,000,000 credit facility, pursuant to which Fanthing will manufacture and ship ceiling fans prior to receipt of payment from the Company. Accordingly, payment can be deferred until delivery of such products. At present levels, such credit facility is equivalent to approximately one month's supply of ceiling fans and represents a supplier commitment which, in the opinion of the Company, is unusual for the industry. Fanthing is not required to provide this credit facility under its agreement with the Company, and Fanthing may discontinue this arrangement at any time. Pursuant to the Company's stock repurchase program, the Company to date has purchased a total of 298,500 shares of the Company's Common Stock at an agggregate cost of $2,457,273. Under the terms of this program, the Company, at its option, may purchase an additional 1,500 shares of the Company's Common Stock. On August 7, 1996, the Company's Board of Directors authorized the Company's management to repurchase up to an additional 300,000 shares of the Company's outstanding Common Stock. In December 1995 the Company purchased a new 378,000 square foot facility consisting of general office and warehouse space at an aggregate cost of $9,225,182 and relocated its operation to this facility. Of this purchase price, $9,200,000 was financed through a financial institution at an interest rate of 8.125% for a term of twelve years. The Company has leased 80,000 square feet of - 13 - 16 this facility to an unrelated party for a period of three years at a lease rate of $20,000 per month. The Company's management believes that this facility will be sufficient for its purposes for the foreseeable future. Fiscal year ended June 30, 1995 - The Company's cash increased $152,392, from $116,311 at June 30, 1994 to $268,703 at June 30, 1995. The Company's operating activities provided cash of $364,186, primarily from net income and decreases in accounts receivable of $452,062, offset by increases in inventory of $1,437,940 and prepaid assets of $678,046. The cash used by investing activities of $84,610 related to the purchase of warehouse equipment and general office furniture. Cash used by financing activities of $127,184 was primarily the result of the repurchase of 192,000 of the Company's common stock at an aggregate cost of $1,757,318, coupled with dividends paid totalling $136,141, but partially offset by $1,755,000 in additional borrowings on the Company's line of credit. Fiscal year ended June 30, 1994 - The Company's cash decreased $94,696, from $211,007 at June 30, 1993 to $116,311 at June 30, 1994. The Company used $559,427 in cash from operations. This use of cash was primarily due to increases in inventory of $1,220,873 and accounts receivable of $1,979,647, partially offset by net income and from certain expenses not requiring cash. The cash used by investing activities of $283,093 related to the purchase of warehouse equipment, the upgrading of the Company's computer system and the addition of office space to accommodate the lamp division. Cash provided by financing activities of $747,824 was primarily the result of $825,000 in additional borrowings on the Company's line of credit, partially offset by quarterly dividends of $68,921. ACCOUNTING CHANGES Impairment of Assets - FAS 121 In March 1995, the Financial Accounting Standards Board issued FAS 121 on "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires companies to investigate potential impairments of long-lived assets, certain identifiable intangibles, and associated goodwill on an exception basis, when there is evidence that events or changes in circumstances have made recovery of an asset's carrying value unlikely. An impairment loss will be recognized if the sum of the expected future cash flows undiscounted and before interest from the use of the asset is less than the net book value of the asset. The amount of the impairment loss will generally be measured as the difference between the net book value of the assets and their estimated fair value. The Company is required to adopt this statement by July 1, 1996; however, such adoption is not expected to have a material impact on the Company's results of operations or financial condition. Stock-Based Compensation - FAS 123 In October 1995, the Financial Accounting Standards Board issued FAS 123, "Accounting for Stock-Based Compensation", which is effective for fiscal years beginning after December 15, 1995. Effective July 1, 1996, the Company will adopt FAS 123 which establishes financial accounting and reporting standards for stock-based employee compensation plans. The pronouncement defines a fair value based method of accounting for an employee stock option or similar equity instrument - 14 - 17 and encourages all entities to adopt that method of accounting for all of their employee stock option compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in FAS 123 had been applied. The Company will continue to account for stock-based employee compensation plans under the intrinsic method pursuant to APB 25 and will make the disclosures in its footnotes as required by FAS 123. INFLATION Although the Company experienced an increase in its product costs during fiscal year 1995 which resulted in lower margins, generally inflation has not had, and the Company does not expect it to have, a material impact upon operating results. However, there can be no assurance that the Company's business will not be affected by inflation in the future. Item 8. Financial Statements The financial statements and supplementary data are included under Item 14(a)(1) and (2) of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. - 15 - 18 PART III Item 10. Directors and Executive Officers of the Registrant The information relating to the Company's directors and nominees for election as directors of the Company is incorporated herein by reference from the Company's Proxy Statement for its 1996 Annual Meeting of Shareholders, specifically the discussion under the heading "Election of Directors." It is currently anticipated that the Proxy Statement will be publicly available and mailed to shareholders in September 1996. Item 11. Executive Compensation The discussion under "Remuneration of Directors and Officers and Certain Transactions" in the Company's Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The discussion under "Voting and Principal Shareholders" in the Company's Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Not applicable. - 16 - 19 PART IV Item 14. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as a part of this report: 1. Financial Statements - The financial statements listed in the "Index to Consolidated Financial Statements" described at F-1. 2. Exhibits - Refer to (b) below. Financial Statement Schedules have been omitted since they are either not required, not applicable or the required information is shown in the financial statements or related notes. (b) Exhibits 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 10Q 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 10Q 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 10Q 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., NationsBank of Texas, N.A., as Agent and the Lenders defined therein (including exhibits), previously filed as an exhibit in Form 10Q 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 10Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.6 - Revolving credit facility with Texas Commerce Bank. 22 - Subsidiaries of the Registrant 27 - Financial Data Schedule - 17 - 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on August 30, 1996. Craftmade International, Inc. By: /s/ James Ridings --------------------------------------- James Ridings, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Capacity Date - ---------- -------- ---- /s/ James Ridings Chairman of the Board, President, August 30, 1996 - ---------------------- Chief Executive Officer and James Ridings Director (Principal Executive Officer) /s/ Clifford Crimmings Vice President of Sales and August 30, 1996 - ---------------------- Director Clifford Crimmings /s/ Ken Cancienne Chief Financial Officer, Principal August 30, 1996 - ---------------------- Accounting Officer and Director Ken Cancienne Director August 30, 1996 - ---------------------- Aaron Shenkman Director August 30, 1996 - ---------------------- William Maloney
- 18 - 21 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Financial Statements: - -------------------- Report of Independent Accountants F-2 Consolidated Statements of Income F-3 Consolidated Balance Sheets F-4 Consolidated Statements of Cash Flows F-6 Consolidated Statements of Changes in Shareholders' Equity F-8 Notes to Consolidated Financial Statements F-9
Financial statement schedules have been omitted since they are either not required, not applicable, or the required information is shown in the financial statements or related notes. F-1 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Craftmade International, Inc. In our opinion, the consolidated financial statements listed in the index appearing on page F-1 present fairly, in all material respects, the financial position of Craftmade International, Inc. and its wholly-owned subsidiaries (the "Company") at June 30, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Fort Worth, Texas August 15, 1996 F-2 23 CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
For the years ended -------------------------------------------- June 30, June 30, June 30, 1994 1995 1996 ----------- ------------- ------------- Net sales $32,130,223 $34,352,775 $36,320,034 Cost of goods sold 20,401,574 21,972,176 23,435,983 ----------- ----------- ----------- Gross profit 11,728,649 12,380,599 12,884,051 Selling, general and administrative expenses 7,442,529 8,640,636 8,975,954 Depreciation and amortization 258,347 242,636 282,133 ----------- ----------- ----------- Operating profit 4,027,773 3,497,327 3,625,964 Other income (expense): Interest expense 339,427 520,659 895,931 Other, net - - (120,000) ----------- ----------- ----------- Income before income taxes 3,688,346 2,976,668 2,850,033 Provision for income taxes 1,303,320 1,073,551 1,024,466 ----------- ----------- ----------- Net income $ 2,385,026 $ 1,903,117 $ 1,825,567 =========== =========== =========== Net income per common share $.69 $.55 $.56 ---- ---- ----
The accompanying notes are an integral part of these consolidated financial statements. F-3 24 CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
June 30, June 30, 1995 1996 ----------- ----------- Current assets: Cash $ 268,703 $ 663,057 Accounts receivable - trade, net of allowance of $145,000 and $164,000, respectively 6,142,937 7,104,357 Other receivables 240,134 135,100 Inventory 8,605,483 8,680,625 Deferred income taxes 448,299 395,556 Prepaid expenses and other current assets 1,014,691 856,537 ----------- ----------- Total current assets 16,720,247 17,835,232 ----------- ----------- Property and equipment, at cost: Land - 1,534,894 Building - 7,690,288 Office furniture and equipment 887,373 1,061,383 Leasehold improvements 77,386 54,970 ----------- ----------- 964,759 10,341,535 Less: accumulated depreciation (568,001) (627,943) ----------- ----------- Total property and equipment, net 396,758 9,713,592 Goodwill, net of accumulated amortization of $286,924 and $342,567, respectively 282,857 227,214 Deferred income taxes 27,850 7,752 Other assets 206,656 211,818 ----------- ----------- Total other assets 914,121 10,160,376 ----------- ----------- $17,634,368 $27,995,608 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 25 CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, June 30, 1995 1996 ------------- ------------ Current liabilities: Note payable, facility - current portion $ - $ 488,656 Revolving line of credit 7,480,000 7,700,000 Accounts and commissions payable 346,303 465,239 Income taxes payable 136,961 - Accrued liabilities 101,987 144,774 ----------- ------------ Total current liabilities 8,065,251 8,798,669 Other non-current liabilities: Deferred Taxes 3,733 44,977 Note payable, facility - long term portion - 8,519,131 ----------- ------------ Total liabilities 8,068,984 17,362,777 ----------- ------------ Shareholders' equity: Series A cumulative, convertible, callable preferred stock, $1.00 par value, 2,000,000 shares authorized; 32,000 shares issued 32,000 32,000 Common stock, $.01 par value, 15,000,000 shares authorized; 4,092,483 and 4,110,683 shares issued, respectively 40,925 41,107 Additional paid-in capital 7,024,265 7,095,571 Retained earnings 7,528,338 9,224,252 ----------- ------------ 14,625,528 16,392,930 Less: treasury stock, 801,414 and 907,914 common shares at cost, respectively, and 32,000 preferred shares at cost (5,060,144) (5,760,099) ----------- ------------ 9,565,384 10,632,831 Commitments and contingencies (Notes 8 and 9) ----------- ------------ $17,634,368 $ 27,995,608 =========== =============
The accompanying notes are an integral part of these consolidated financial statements. F-5 26 CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended ----------------------------------------------- June 30, June 30, June 30, 1994 1995 1996 ------------ ----------- ----------- Cash flows from operating activities: Net income $ 2,385,026 $ 1,903,117 $ 1,825,567 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 258,347 242,636 282,133 Loss on sale of property and equipment - 3,732 - Changes in assets and liabilities providing (using) cash: Accounts receivable (1,979,647) 452,062 (821,448) Inventory (1,220,873) (1,437,940) (101,955) Prepaid expenses and other assets (97,744) (678,046) (217,412) Accounts and commissions payable (31,884) 40,069 118,936 Income taxes payable 216,188 36,214 (105,448) Deferred income taxes (150,695) (122,804) 93,987 Other accrued liabilities 61,855 (74,854) 62,492 ----------- ----------- ----------- Net cash provided by (used for) operating activities (559,427) 364,186 1,136,852 ----------- ----------- ----------- Cash flows used for investing activities: Additions to property and equipment ( 283,093) (84,610) (9,152,822) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from note payable, facility - - 9,200,000 Principal payments for note payable, facility - - (192,213) Net proceeds from revolving line of credit 825,000 1,755,000 220,000 Stock repurchase - (1,757,318) (699,955) Cash dividends (68,921) (136,141) (129,653) Principal payments under capital lease obligations (37,235) ( 14,625) (595) Proceeds from exercise of employee stock options 28,980 25,900 12,740 ----------- ----------- ----------- Net cash provided by (used for) financing activities 747,824 (127,184) 8,410,324 ----------- ----------- ----------- Net increase (decrease) in cash (94,696) 152,392 394,354 Cash at beginning of year 211,007 116,311 268,703 ----------- ----------- ----------- Cash at end of year $ 116,311 $ 268,703 $ 663,057 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 27 CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Supplemental disclosures of cash flow information:
For the years ended ----------------------------------------------- June 30, June 30, June 30, 1994 1995 1996 ------------ ------------ ----------- Cash paid during the year for: Interest $ 339,427 $ 520,659 $ 895,931 =========== =========== =========== Income taxes $ 1,219,722 $ 1,142,509 $ 1,016,346 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-7 28 CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE YEARS ENDED JUNE 30, 1996
SERIES A ADDITIONAL VOTING PREFERRED PAID-IN RETAINED COMMON STOCK STOCK CAPITAL EARNINGS ---------------------- ------- ---------- ---------- SHARES AMOUNT --------- ------- BALANCE AS OF JUNE 30, 1993 4,014,083 $40,141 $32,000 $6,638,383 $3,445,257 EXERCISE OF EMPLOYEE STOCK OPTIONS 41,400 414 - 203,105 - CASH DIVIDENDS - - - - (68,921 NET INCOME FOR THE YEAR ENDED JUNE 30, 1994 - - - - 2,385,026 --------- ------- ------- ---------- ---------- BALANCE AS OF JUNE 30, 1994 4,055,483 40,555 32,000 6,841,488 5,761,362 EXERCISE OF EMPLOYEE STOCK OPTIONS 37,000 370 - 182,777 - STOCK REPURCHASE - - - - - CASH DIVIDENDS - - - - (136,141 NET INCOME FOR THE YEAR ENDED JUNE 30, 1995 - - - - 1,903,117 --------- ------- ------- ---------- ---------- BALANCE AS OF JUNE 30, 1995 4,092,483 40,925 32,000 7,024,265 7,528,338 EXERCISE OF EMPLOYEE STOCK OPTIONS 18,200 182 - 71,306 - STOCK REPURCHASE - - - - - CASH DIVIDENDS - - - - (129,653 NET INCOME FOR THE YEAR ENDED JUNE 30, 1996 - - - - 1,825,567 --------- ------- ------- ---------- ---------- 4,110,683 $41,107 $32,000 $7,095,571 $9,224,252 ========= ======= ======= ========== ==========
TREASURY STOCK TOTAL ---------------------- ----------- SHARES AMOUNT ------- ---------- BALANCE AS OF JUNE 30, 1993 641,414 ($3,302,826) $ 6,852,955 EXERCISE OF EMPLOYEE STOCK OPTIONS - - 203,519 CASH DIVIDENDS - - (68,921) NET INCOME FOR THE YEAR ENDED JUNE 30, 1994 - - 2,385,026 ------- ---------- ----------- BALANCE AS OF JUNE 30, 1994 641,414 (3,302,826) 9,372,579 EXERCISE OF EMPLOYEE STOCK OPTIONS - - 183,147 STOCK REPURCHASE 192,000 (1,757,318) (1,757,318) CASH DIVIDENDS - - (136,141) NET INCOME FOR THE YEAR ENDED JUNE 30, 1995 -- - 1,903,117 ------- ---------- ----------- BALANCE AS OF JUNE 30, 1995 833,414 (5,060,144) 9,565,384 EXERCISE OF EMPLOYEE STOCK OPTIONS - - 71,488 STOCK REPURCHASE 106,500 (699,955) (699,955) CASH DIVIDENDS - - (129,653) NET INCOME FOR THE YEAR ENDED JUNE 30, 1996 - - 1,825,567 ------- ---------- ----------- 939,914 ($5,760,099) $10,632,831 ======= ========== ===========
29 CRAFTMADE INTERNATIONAL, INC.AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY ORGANIZATION Craftmade International, Inc. ("Craftmade") was incorporated in the state of Texas in July 1985 under the name of Mastercraft International, Inc. In January 1987, Craftmade's Articles of Incorporation were amended to reflect Craftmade's current name. On July 26, 1990, Craftmade formed Durocraft International, Inc. ("Durocraft"), a wholly- owned subsidiary of Craftmade International, Inc., and consummated an agreement and plan of merger with Durocraft and DMI Products, Inc., a lamp manufacturer based in Fort Worth, Texas. Craftmade and Durocraft are located in Coppell, Texas. NATURE OF THE COMPANY Craftmade is principally engaged in the design, distribution and marketing of ceiling fans, light kits and related accessories to a nationwide network of lighting showrooms and electrical wholesalers specializing in sales to the remodeling and new home construction markets, as well as the restaurant and commercial building market. Primarily all of the fans and accessories are provided to Craftmade through one supplier. In addition to the principal business of ceiling fans, Durocraft has two divisions. The Durocraft Design Manufacturing division assembles build-to-order floor and table lamps primarily for sale to a mid-price retailer with locations in the United States and Canada. The other division, Global Electronics, Inc., imports and distributes a variety of cables and components for telephone and communications industries. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements of the Company include the accounts of Craftmade International, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. Substantially all of the fan division's customers are lighting showrooms; however, credit risk is limited due to this division's large number of customers and their dispersion across many different geographic locations. As of June 30, 1996, the fan division had no significant concentration of credit risk. The lamp division's customer base consists primarily of one mid-price retailer with locations in the United States and Canada. INVENTORIES - Inventories are stated at the lower of cost or market, with cost being determined using the average cost method which approximates the first-in, first-out (FIFO) method. The cost of inventory includes freight-in and duties on imported goods. Property and equipment - Property and equipment is recorded at cost. Depreciation is determined using the straight-line method over the estimated useful lives of the property and equipment, which range from three to 40 years. Maintenance and repairs are charged to expense as incurred; renewals and betterments are F-9 30 charged to appropriate property or equipment accounts. Upon sale or retirement of depreciable assets, the cost and related accumulated depreciation is removed from the accounts, and the resulting gain or loss is included in the results of operations in the period of the sale or retirement. ADVERTISING COST - THE COMPANY'S ADVERTISING EXPENDITURES ARE EXPENSED IN THE PERIOD THE ADVERTISING FIRST OCCURS. ADVERTISING EXPENSE FOR THE FISCAL YEARS ENDED JUNE 30, 1994, 1995 AND 1996 WAS $266,236, $279,126 AND $338,744, RESPECTIVELY. Goodwill - Goodwill related to the Company's acquisition of DMI Products, Inc. in 1990 is being amortized using the straight-line method over 10 years. Accordingly, goodwill amortization has been recorded in the accompanying consolidated statements of income of $40,344, $55,644 and $55,643 for the years ended June 30, 1994, 1995 and 1996, respectively. INCOME TAXES - The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactments of changes in the tax law or rates are considered. Impairment of Assets - In March 1995, the Financial Accounting Standards Board issued FAS 121 on "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires companies to investigate potential impairments of long-lived assets, certain identifiable intangibles, and associated goodwill on an exception basis, when there is evidence that events or changes in circumstances have made recovery of an asset's carrying value unlikely. An impairment loss will be recognized if the sum of the expected future cash flows undiscounted and before interest from the use of the asset is less than the net book value of the asset. The amount of the impairment loss will generally be measured as the difference between the net book value of the assets and their estimated fair value. The Company is required to adopt this statement by July 1, 1996; however, such adoption is not expected to have a material impact on the Company's results of operations or financial condition. STOCK-BASED COMPENSATION - IN OCTOBER 1995, THE FINANCIAL ACCOUNTING STANDARDS BOARD ISSUED FAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION", WHICH IS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1995. EFFECTIVE JULY 1, 1996, THE COMPANY WILL ADOPT FAS 123 WHICH ESTABLISHES FINANCIAL ACCOUNTING AND REPORTING STANDARDS FOR STOCK-BASED EMPLOYEE COMPENSATION PLANS. THE PRONOUNCEMENT DEFINES A FAIR VALUE BASED METHOD OF ACCOUNTING FOR AN EMPLOYEE STOCK OPTION OR SIMILAR EQUITY INSTRUMENT AND ENCOURAGES ALL ENTITIES TO ADOPT THAT METHOD OF ACCOUNTING FOR ALL OF THEIR EMPLOYEE STOCK OPTION COMPENSATION PLANS. HOWEVER, IT ALSO ALLOWS AN ENTITY TO CONTINUE TO MEASURE COMPENSATION COST FOR THOSE PLANS USING THE INTRINSIC VALUE BASED METHOD OF ACCOUNTING AS PRESCRIBED BY ACCOUNTING PRINCIPLES BOARD OPINION NO. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" (APB 25). ENTITIES ELECTING TO REMAIN WITH THE ACCOUNTING IN APB 25 MUST MAKE PRO FORMA DISCLOSURES OF NET INCOME AND EARNINGS PER SHARE AS IF THE FAIR VALUE BASED METHOD OF ACCOUNTING DEFINED IN FAS 123 HAD BEEN APPLIED. THE COMPANY WILL CONTINUE TO ACCOUNT FOR STOCK-BASED EMPLOYEE COMPENSATION PLANS UNDER THE INTRINSIC METHOD PURSUANT TO APB 25 AND WILL MAKE THE DISCLOSURES IN ITS FOOTNOTES AS REQUIRED BY FAS 123. EARNINGS PER COMMON SHARE - Earnings per common share is based upon the weighted average number of shares of common stock and common stock equivalents outstanding during the periods. For purposes of computing earnings per common share, stock options outstanding during each of the years in the three year period ended June 30, 1996 were treated as common stock equivalents using the treasury stock method. The aggregate number of common stock equivalents F-10 31 added to weighted average shares outstanding at June 30, 1994, 1995 and 1996 were 41,362, 14,719 and 1,800, respectively. Weighted average number of shares including common stock equivalents, outstanding at June 30, 1994, 1995 and 1996 were, 3,472,302, 3,431,436 and 3,255,717, respectively. Pervasiveness of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications - Certain fiscal 1995 and 1994 amounts were reclassified to conform with the current year presentation. NOTE 3 - REVOLVING LINE OF CREDIT On November 15, 1995, the Company negotiated an additional $2,000,000 availability on its existing line of credit, increasing its line to $12,000,000. On May 31, 1996, the Company renegotiated this line of credit with another financial institution and obtained an interest rate of LIBOR plus 1.5% (6.5% at June 30, 1996). The line of credit is due on demand; however, if no demand is made, it is scheduled to mature November 30, 1997. The line of credit contains certain financial covenants, which include consolidated debt to consolidated tangible net worth, funded debt to EBDIT ratio and capital expenditures and restricts the Company's payment of quarterly dividends to 40% of the Company's net profit before taxes, of which the Company is in compliance at June 30, 1996. This line of credit is secured by inventory, accounts receivable and equipment. NOTE 4 - NOTES PAYABLE, FACILITY On December 21, 1995 the Company obtained a $9,200,000 recourse term loan to finance the purchase of its new facility. The loan bears interest at 8.125% and is payable in equal monthly installments of principal and interest of $100,280 until it matures on January 1, 2008. The loan is secured by the building and land.
Scheduled maturities of long-term debt are as follows: 1997 $ 488,656 1998 529,872 1999 574,564 2000 623,025 2001 675,575 Thereafter 6,116,095 ---------- $9,007,787 ==========
F-11 32 NOTE 5 - INCOME TAXES Components of the provision for income taxes for the years ended June 30, 1994, 1995 and 1996 consist of the following:
1994 1995 1996 ---------- ---------- ----------- Current Expense: Federal $1,224,371 $1,018,292 $ 836,983 State 98,575 59,666 33,760 Charge in Lieu of Income Taxes Payable 131,069 118,397 39,638 ---------- ---------- ---------- Total Current Expense 1,454,015 1,196,355 910,381 ---------- ---------- ---------- Total Deferred (Benefit) Expense (150,695) (122,804) 114,085 ---------- ---------- ---------- Total Provision $1,303,320 $1,073,551 $1,024,466 ========== ========== ==========
Deferred taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The temporary differences that give rise to deferred tax assets and liabilities at June 30, 1994, 1995 and 1996 are as follows:
1994 1995 1996 ----------- ----------- ----------- Inventory capitalized for tax $ 247,460 $ 382,806 $ 322,203 Unutilized purchased NOL carryforward 47,948 27,850 7,752 Freight reserves 40,800 49,300 55,760 Rent expense not deductible for tax 12,122 - - Other 26,999 16,193 17,593 ----------- ----------- ----------- Total deferred tax assets 375,329 476,149 403,308 ----------- ----------- ----------- Total deferred tax liabilities - depreciation (5,619) (3,733) (44,977) ----------- ----------- ----------- Deferred tax assets valuation allowance - - - ----------- ----------- ----------- $ 369,710 $ 472,416 $ 358,331 =========== =========== ===========
The differences between the Company's effective tax rate and the federal statutory rate of 34% for the years ended June 30, 1994, 1995 and 1996 are as follows:
1994 1995 1996 ----------- ----------- ----------- Tax at the statutory corporate rate $ 1,254,038 $ 1,012,067 $ 969,011 State income taxes, net of federal benefit 65,059 39,380 22,282 Other (15,777) 22,104 33,173 ----------- ----------- ----------- Provision for income taxes $ 1,303,320 $ 1,073,551 $1,024,466 =========== =========== =========== Effective tax rate 35% 36% 36% =========== =========== ===========
Upon adoption of FAS 109 for the fiscal year ended June 30, 1994, the Company recognized a deferred tax benefit of $47,948 representing the expected tax benefit of an unutilized net operating loss carryforward acquired in the purchase of the assets of DMI Products, Inc. in July 1990. The Company correspondingly reduced goodwill by this amount. A valuation allowance F-12 33 has not been established as the Company believes that it is more likely than not to realize this benefit before it expires in fiscal year 2005. During the years ended June 30, 1994 and 1995, the Company utilized $20,098 and $20,098, respectively, of this deferred tax benefit. NOTE 6 - SHAREHOLDERS' EQUITY EMPLOYEE STOCK OPTION PLANS On December 15, 1989, the Company granted to five key employees, including the President, options to purchase an aggregate of 200,000 shares of common stock of the Company at $.70 per share. Under the terms of the grant, the right to exercise such options fully vested in fiscal 1994, provided such individuals remained in the employ of the Company. The options were exercisable for a five-year period subsequent to vesting. The fair value of the common stock underlying the options at date of grant was appraised at $1.75 per share. The difference between the appraised value and the aggregate exercise price of such shares was deemed future compensation to the recipients of such options and compensation was charged to operations through June 30, 1994. The Company charged $42,928 to operations for the year ended June 30, 1994 related to such options. On December 31, 1992, the Company granted to two additional key employees options to purchase an aggregate of 30,000 shares of common stock of the Company at $6.56 per share, the average market value of common stock at date of grant. Under the terms of the grant, the right to exercise such options fully vested in fiscal 1994, provided such individuals remained in the employ of the Company. The options are exercisable for a five-year period subsequent to vesting, except that following departure from the Company, exercisable options that have accrued must be exercised within three months of termination of employment. The exercise period is accelerated in the event of death, disability or early retirement. A summary of outstanding options are as follows:
NUMBER OF SHARES -------------------------------- 1989 1992 PLAN PLAN TOTAL -------------------------------- OUTSTANDING AT JUNE 30, 1994 55,200 30,000 85,200 EXERCISED (37,000) - (37,000) -------------------------------- OUTSTANDING AT JUNE 30, 1995 18,200 30,000 48,200 EXERCISED (18,200) - (18,200) -------------------------------- OUTSTANDING AT JUNE 30, 1996 - 30,000 30,000 ================================ EXERCISABLE AT JUNE 30, 1996 - 30,000 30,000 ================================ PRICE RANGE AT JUNE 30, 1996 $6.56 =====
F-13 34 Stock Repurchase On January 27, 1995, the Company's Board of Directors authorized the Company's management to repurchase up to 200,000 shares of the Company's outstanding Common Stock. During fiscal 1996, the Company's Board of Directors amended the stock repurchase plan by 100,000 shares to allow the Company to repurchase up to 300,000 shares of its issued and outstanding Common Stock. During the years ended June 30, 1995 and 1996, the Company acquired 192,000 and 106,500 shares, respectively, of its Common Stock related to this repurchase program at an aggregate cost of $1,757,318 and $699,955, respectively. These repurchased shares are reflected as treasury stock at June 30, 1996 on the accompanying consolidated balance sheet. On August 7, 1996, the Company's Board of Directors authorized the Company's management to repurchase up to an additional 300,000 shares of the Company's outstanding Common Stock. NOTE 7 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash, receivables, accounts and commissions payable, accrued liabilities and amounts outstanding under various debt agreements. Management believes the fair values of these instruments approximate the related carrying values as of June 30, 1996 because of their short-term nature. In the case of the facility note payable fair value is estimated at $10,024,000. Carrying value of the facility note payable at June 30, 1996 is $9,007,787. NOTE 8 - COMMITMENTS OPERATING LEASES The Company leases various equipment and real estate under long-term, non-cancelable operating lease agreements which require future cash payments. The required future cash payments relating to the Company's non-cancelable operating leases with terms in excess of one year are as follows:
Year ending June 30: -------------------- 1997 $ 36,186 1998 27,747 -------- $ 63,933 ========
The Company incurred rental expense under its operating lease agreements of $647,154, $682,600 and $372,576 for fiscal 1994, 1995 and 1996, respectively. The Company leases 80,000 square feet of its new facility to an unaffiliated company for $20,000 a month. At June 30, 1996 the remaining term under this lease agreement is twenty nine months. F-14 35 NOTE 9 - CONTINGENCIES Due to the nature of the Company's business, it could be a party in legal or administrative proceedings arising in the ordinary course of business. Although occasional adverse settlements or resolutions may occur and negatively impact earnings in the year of settlement, after consideration of the Company's insurance coverage, it is the opinion of management that the ultimate resolution would not have a materially adverse effect on the Company's financial position or its results of operations. The Company provides a limited warranty against workmanship or materials for its ceiling fans for one year and also provides a 25 year warranty with respect to the motor contained in all fans except for certain high-end models which carry a limited lifetime warranty. Since inception of the Company's relationship with its major supplier of such fans, the supplier has extended the Company full credit for all product returns. Accordingly, no reserve for warranty has been accrued in the accompanying consolidated financial statements. Should the Company's relationship change in the future with respect to such supplier, the Company would be liable for any claims received during the warranty period. Based upon historical experience, management believes future claims resulting from defects in workmanship or materials are not significant to the Company's operations. NOTE 10 - 401(k) DEFINED CONTRIBUTION PLAN On July 1, 1992, the Company established a qualified 401(k) defined contribution plan which covers substantially all full-time employees who have met certain eligibility requirements. Employees are allowed to tax defer the lesser of 10% of their annual compensation or $8,994. The Company will match one-half of the participant's contributions up to 6% of their annual compensation. The Company's matching contribution for the years ended June 30, 1994, 1995 and 1996 aggregated approximately $31,000, $42,000 and $47,000, respectively. NOTE 11 - MAJOR SUPPLIER, MAJOR CUSTOMER AND RELATED PARTY On December 7, 1989, the Company and its major Supplier (the "Supplier") entered into a written agreement, terminable on 180 days prior notice, pursuant to which the Supplier has agreed to manufacture Craftmade ceiling fans for the Company. The Supplier is permitted under the arrangement to manufacture ceiling fans for other distribution provided such ceiling fans are not a replication of the Craftmade series or models. Fans and accessories manufactured and sold to the Company by the Supplier account for approximately 86%, 90% and 85% of the Company's purchases in fiscal 1994, 1995 and 1996, respectively. As of June 30, 1995 and 1996, the Supplier owned 101,196 shares of the Company's common stock, representing 3% of outstanding common stock. The Company, at its option, may repurchase the shares for an aggregate purchase price of $137,774. Sales during fiscal 1996 to one of Durocraft's customers aggregated $3,978,241. Sales to this customer represented approximately 89% of that division's fiscal 1996 net sales. F-15 36 EXHIBIT INDEX
Exhibit No. Exhibit Description Page ----------- ------------------- ---- 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 10Q 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 10Q 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 10Q 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., NationsBank of Texas, N.A., as Agent and the Lenders defined therein (including exhibits), previously filed as an exhibit in Form 10Q 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 10Q for the quarter ended December 31, 1995, and herein incorporated by reference. 10.6 - Revolving credit facility with Texas Commerce Bank. 22 - Subsidiaries of the Registrant 27 - Financial Data Schedule
EX-10.6 2 REVOLVING CREDIT FACILITY 1 ******************************************************************************** CREDIT AGREEMENT among CRAFTMADE INTERNATIONAL, INC. and DUROCRAFT INTERNATIONAL, INC. as Borrower TEXAS COMMERCE BANK NATIONAL ASSOCIATION as Agent AND THE LENDERS which are parties hereto ******************************************************************************** 2 TABLE OF CONTENTS
Page ARTICLE 1 - Definitions 1 Section 1.1 Definitions 1 Section 1.2 Other Definitional Provisions 9 ARTICLE 2 - Advances 9 Section 2.1 Advances 9 Section 2.2 The Notes 9 Section 2.3 Repayment of Advances 9 Section 2.4 Interest 9 Section 2.5 Requests for Advances. 10 Section 2.6 Use of Proceeds 10 Section 2.7 Reduction or Termination of Commitments 10 Section 2.8 Letters of Credit 10 ARTICLE 3 - Payments, Conversions and Continuations 11 Section 3.1 Method of Payment 11 Section 3.2 Voluntary Prepayment 12 Section 3.3 Mandatory Prepayment 12 Section 3.4 Computation of Interest and Fees 12 Section 3.5 Conversions and Continuations 12 ARTICLE 4 - Yield Protection and Illegality 12 Section 4.1 Additional Cost 12 Section 4.2 Limitation on Types of Advances 13 Section 4.3 Substitute Prime Rate Advances 13 Section 4.4 Compensation 13 Section 4.5 Capital Adequacy 14 Section 4.6 Changes in Law Rendering Loan Unlawful 14 ARTICLE 5 - Conditions Precedent 14 Section 5.1 Initial Advance 14 Section 5.2 All Advances 16 ARTICLE 6- Representations and Warranties 16 Section 6.1 Corporate Existence 16 Section 6.2 Financial Statements 17 Section 6.3 Corporate Action; No Breach 17 Section 6.4 Operation of Business 17 Section 6.5 Litigation and Judgments 17 Section 6.6 Rights in Properties; Liens 17 Section 6.7 Enforceability 17 Section 6.8 Approvals 18
3 Section 6.9 Debt 18 Section 6.10 Taxes 18 Section 6.11 Use of Proceeds; Margin Securities 18 Section 6.12 ERISA 18 Section 6.13 Disclosure 18 Section 6.14 Subsidiaries 18 Section 6.15 Compliance with Laws and Agreements 18 Section 6.16 Environmental Matters 18 Section 6.17 Current Locations 19 Section 6.18 Security Interest and Liens 19 Section 6.19 Corporate Name 19 ARTICLE 7 - Positive Covenants 20 Section 7.1 Reporting Requirements 20 Section 7.2 Maintenance of Existence; Conduct of Business 21 Section 7.3 Maintenance of Properties 21 Section 7.4 Taxes and Claims 22 Section 7.5 Insurance 22 Section 7.6 Inspection Rights 22 Section 7.7 Keeping Books and Records 22 Section 7.8 Compliance with Laws 22 Section 7.9 Compliance with Agreements 22 Section 7.10 Further Assurances 22 Section 7.11 ERISA 22 ARTICLE 8 - Negative Covenants 23 Section 8.1 Debt 23 Section 8.2 Limitation on Liens 23 Section 8.3 Mergers, Acquisitions and Dissolutions 23 Section 8.4 Restricted Payments 23 Section 8.5 Loans and Investments 24 Section 8.6 Transactions With Affiliates 24 Section 8.7 Disposition of Assets 24 Section 8.8 Prepayment of Debt 24 Section 8.9 Nature of Business 24 Section 8.10 Compliance with Environmental Laws 24 Section 8.11 Accounting 25 ARTICLE 9 - Financial Covenants 25 Section 9.1 Consolidated Tangible Net Worth 25 Section 9.2 Fixed Charge Coverage Ratio 25 Section 9.3 Leverage Ratio 25 Section 9.4 Capital Expenditures 25 ARTICLE 10 - Default 30
Page 3 4 Section 10.1 Events of Default 25 Section 10.2 Remedies Upon Default 27 Section 10.3 Performance by Agent and Lenders 27 Section 10.4 Setoff 27 ARTICLE 11 - The Agent 27 Section 11.1 Appointment, Powers and Immunities 27 Section 11.2 Rights of Agent as a Lender 28 Section 11.3 Defaults 28 Section 11.4 Indemnification 28 Section 11.5 Independent Credit Decisions 29 Section 11.6 Several Commitments 29 Section 11.7 Successor Agent. 29 ARTICLE 12- Miscellaneous 30 Section 12.1 Expenses of Agent and Lenders 30 Section 12.2 Indemnification 30 Section 12.3 Limitation of Liability 30 Section 12.4 Lender Not Fiduciary 31 Section 12 5 No Waiver; Cumulative Remedies 31 Section 12 6 Successors and Assigns 31 Section 12.7 Survival 33 Section 12.8 Entire Agreement 33 Section 12.9 Maximum Interest Rate 33 Section 12.10 Notices 34 Section 12.11 Applicable Law; Venue; Service of Process 34 Section 12.12 Counterparts 35 Section 12.13 Severability 35 Section 12.14 Headings 35 Section 12.15 Non-Application of Chapter 15 of Texas Credit Code 35 Section 12.16 Waiver Of Jury Trial 35 Section 12.17 Arbitration 35 INDEX TO EXHIBITS 39 INDEX TO SCHEDULES 39
Page 4 5 CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "Agreement") is dated as of May 30, 1996 and is among CRAFTMADE INTERNATIONAL, INC., a Delaware corporation, and DUROCRAFT INTERNATIONAL, INC., a Texas corporation (jointly and severally, "Borrower"), TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, in its capacity as agent for the Lenders which are parties hereto ("Agent"), and the Lenders named on the signature pages to this Agreement (the "Lenders"). RECITALS: A. Craftmade International, Inc. and Durocraft International, Inc. have requested that the Lenders extend a credit facility to them in order to enable them to borrow on a revolving credit basis on and after the date hereof, on the terms and conditions set forth herein, a principal amount not in excess of $12,000,000.00 at any time outstanding. B. The proceeds of all such borrowings are to be used for general corporate purposes of Craftmade International, Inc. and Durocraft International, Inc., with the initial borrowing being used to pay all amounts outstanding under the Second Amended and Restated Credit Agreement dated as of November 14, 1995, among Craftmade International, Inc., as Borrower, NationsBank of Texas, N. A., as Agent for the Lenders, and Nations Bank of Texas, N.A. and Overton Bank and Trust as Lenders. AGREEMENTS: NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1 Definitions Section 1.1 Definitions. As used in this Agreement, the following terms have the following meanings: "Accounts Receivable Aging Report" means a report, in form satisfactory to Agent, showing current accounts receivable of Borrower and all other accounts receivable of Borrower aged in intervals of thirty, sixty, ninety and ninety-one days or more past due. "Additional Costs" has the meaning specified in SECTION 4.1. "Advance" means an advance of funds by Lenders to Borrower pursuant to ARTICLE 2. "Advance Request Form" means a certificate, in substantially the form of EXHIBIT "B" hereto, properly completed and signed by Borrower requesting an Advance. "Affiliate" means, as to any Person, any other Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control win, such Person; (b) that directly or indirectly beneficially owns or holds five percent (5%) or more of any class of voting stock of such Person; or (c) five percent (5%) or more of the voting stock of which is directly or Page 1 6 indirectly beneficially owned or held by the Person in question. The term "control" means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise; provided, however, in no event shall the Agent or any Lender be deemed an Affiliate of Borrower or any of its Subsidiaries. "Agent" means Texas Commerce Bank National Association in its capacity as Agent for the Lenders. "Applicable Rate" means: (a) during the period that an Advance is a Prime Rate Advance, the Prime Rate minus 1/2 of one percent (.5%) and (b) during the period that an Advance is a Eurodollar Advance, the Eurodollar Rate plus (i) at all times when the most recent compliance certificate delivered in accordance with SECTION 7.1(C) shows that the Funded Debt to EBDIT Ratio is less than or equal to 1.25 to 1.0, one and one quarter percent (1.25 %), (ii) at all times when the most recent compliance certificate delivered in accordance with SECTION 7.1(C) shows that the Funded Debt to EBDIT Ratio is greater than 1.25 to 1.0 but less than 3.0 to 1.0, one and one half percent (1.5%), and (iii) at all times when the most recent compliance certificate delivered in accordance with Section 7.1(c) shows that the Funded Debt to EBDIT Ratio is equal to or greater than 3.0 to 1.0, one and three quarters percent (1.75%). "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and its Assignee and accepted by the Agent pursuant to SECTION 12.6, in substantially the form of EXHIBIT "I" hereto. "Assignment of Life Insurance" means the Assignment of Life Insurance of James R. Ridings in favor of the Agent and Lenders in substantially the form of EXHIBIT "J" hereto. "Borrowing Base" means, at any particular time, an amount equal to the sum of (a) eighty percent (80%) of Eligible Accounts, plus (b) fifty percent (50%) of Eligible Inventory; provided, however, at no time shall the Eligible Inventory component of the Borrowing Base ever be greater than sixty (60%) percent of the aggregate amount of outstanding Advances. "Borrowing Base Report" means a report, substantially in the form of EXHIBIT "C" hereto, properly completed and executed by an authorized officer of Borrower. "Business Day" means any day on which commercial banks are not authorized or required to close in Dallas, Texas. "Capital Lease Obligation" means Debt represented by obligations under any lease of real or personal property that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of such Debt shall be the capitalized amount of such obligations determined in accordance with GAAP. "C/D/R" means C/D/R Incorporated, a Delaware corporation. "C/D/R Guaranty" means the Guaranty of C/D/R in favor of the Agent and the Lenders in substantially the form of EXHIBIT "G" hereto, as the same may be amended, supplemented or otherwise modified from time to time. Page 2 7 "Change of Management" means the failure of James R. Ridings to continue to perform his current or similar duties. "Change of Ownership" means the ownership, legally and beneficially, by any Person of fifty-one percent (51 %) or more of the capital stock of Borrower. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder. "Collateral" includes all of the collateral covered by the Craftmade Security Agreement, the Durocraft Security Agreement, and the Assignment of Life Insurance . "Commitments" means, as to any Lender, the obligation of such Lender to make Advances thereunder in an aggregate principal amount not to exceed the amount set forth opposite the name of such Lender on the signature pages hereto under the heading "Commitment", and "Commitments" means such obligation of all Lenders, as such amounts may be reduced pursuant to SECTION 2.7 or otherwise. "Consolidated Debt" means, at any particular time, all amounts which, in conformity with GAAP, would be included as liabilities on a consolidated balance sheet of Borrower and the Subsidiaries. 'Consolidated Debt to Consolidated Tangible Net Worth Ratio" means, at any particular time, the ratio of Consolidated Debt to Consolidated Tangible Net Worth. "Consolidated Tangible Net Worth" means, at any particular time, all amounts which, in conformity with GAAP, would be included as stockholders' equity on a consolidated balance sheet of Borrower and the Subsidiaries; provided, however, there shall be excluded therefrom: (a) any amount at which shares of capital stock of Borrower appear as an asset on Borrower's balance sheet, (b) goodwill, including any amounts, however designated, that represent the excess of the purchase price paid for assets or stock over the value assigned thereto, (c) patents, trademarks, trade names, and copyrights, (d) deferred expenses, (e) loans and advances to any stockholder, director, officer, or employee of Borrower or any Subsidiary or any Affiliate, and (f) all other assets which are properly classified as intangible assets. "Continue," "Continuation" and "Continued" shall refer to the continuation pursuant to Section 3.5 of a Eurodollar Advance as a Eurodollar Advance from one Interest Period to the next Interest Period. "Convert," "Conversion" and "Converted" shall refer to a conversion pursuant to SECTION 3.5 or ARTICLE 4 of one Type of Advance into another Type of Advance. "Craftmade" means Craftmade International, Inc. a Delaware corporation. "Debt" means as to any Person at any time (without duplication) all items which would be properly characterized as liabilities on a balance sheet of such Person prepared in accordance with GAAP. "Default Rate" means the Maximum Rate or, if no Maximum Rate exists, the sum of the Prime Rate in effect from day to day plus four percent (4%). "Dollars" and "$" mean lawful money of the United States of America. "Durocraft" means Durocraft International, Inc., a Texas corporation. Page 3 8 "Durocraft Security Agreement" means the Security Agreement of Durocraft in favor of the Agent and the Lenders in substantially the form of EXHIBIT "E" hereto, as the same may be amended, supplemented or otherwise modified from time to time. "EBDIT" means, for any period, the sum of net earnings (plus or minus any material non-recurring charges or credits) of the Borrower plus each of the following, to the extent actually deducted in arriving at such net earnings: (a) depreciation and amortization, (b) Interest Expense, and (c) Tax Expense. "Eligible Accounts" means the aggregate of all accounts receivable of Borrower on a consolidated basis that are acceptable to the Agent in its sole discretion and satisfy the following conditions: (a) have been outstanding less than sixty (60) days past the due date thereof; (b) have arisen in the ordinary course of business; (c) represent complete bona fide transactions which require no further act under any circumstances on the part of Borrower to make such accounts receivable payable by the account debtor; (d) the goods of sale which gave rise to such accounts receivable have been shipped or delivered to the account debtor on an absolute sale basis and not on consignment, a sale or return basis, a guaranteed sale basis, a bill and hold basis, or on the basis of any similar understanding; (e) the goods of sale which gave rise to such accounts receivable were not, at the time of sale thereof, subject to any Lien, except as permitted by SECTION 8.2; (f) are not subject to any provision prohibiting assignment or requiring notice of or consent to such assignment; (g) are subject to a perfected, first priority security interest in favor of the Agent and the Lenders and are not subject to any other Lien except as permitted by SECTION 8.2; (h) are not subject to setoff, counterclaim, defense, allowance, dispute, or adjustment other than normal discounts for prompt payment, and the goods of sale which gave rise to such accounts receivable have not been returned, rejected, repossessed, lost, or damaged; (i) the account debtor is not insolvent or the subject of any bankruptcy or insolvency proceeding and has not made an assignment for the benefit of creditors, suspended normal business operations, dissolved, liquidated, terminated its existence, ceased to pay its debts as they become due, or suffered a receiver or trustee to be appointed for any of its assets or affairs; (j) are not evidenced by chattel paper or an instrument of any kind; (k) are owed by a Person or Persons that are citizens of or organized under the laws of the United States or any State and are not owed by any Person located outside of the United States of America; (1) if any accounts receivable are owed by the United States of America or any department, agency, or instrumentality thereof, the Federal Assignment of Claims Act shall have been complied with; (m) are not owed by an Affiliate of Borrower; and (n) with respect to any account debtor whose accounts receivable total $150,000.00 or more, if twenty (20%) percent or more of the accounts receivable of such account debtor are 60 days or more past due, then all accounts receivable of such account debtor shall ineligible; provided however, that the exclusion described in Clause (n) shall be in effect only at such times when 18% or more of Borrower's total accounts receivable are more than 60 days past due. The amount of any Eligible Accounts owed by an account debtor to Borrower shall be reduced by the amount of all "contra accounts" and other obligations owed by Borrower to such account debtor. "Eligible Assignee" means (a) any Affiliate of a Lender, or (b) any commercial bank, savings and loan association, savings bank, finance company, insurance company, pension fund, mutual fund or other financial institution (whether a corporation, partnership or other entity) acceptable to the Agent. "Eligible Inventory" means, at any time, all inventory of finished goods and unassembled lamp parts then owned by (and in the possession or under the control of) Craftmade or Durocraft and held for sale or disposition in the ordinary course of their business, in which the Agent, for the ratable benefit of the Lenders, has a perfected, first priority security interest, valued at the lower of actual cost or fair market value. Eligible Inventory shall not include (a) inventory that has been shipped or delivered to a Page 4 9 customer on consignment, a sale or return basis, or on the basis of any similar understanding, (b) inventory with respect to which a claim exists disputing their title to or right to possession of such inventory, (c) inventory that is not in good condition or does not comply with any applicable laws, rules, or regulations or the standards imposed by any governmental authority with respect to its manufacture, use, or sale, and (d) inventory that the Agent, in its sole discretion, has determined to be unmarketable. "Environmental Laws" means any and all federal, state, and local laws, regulations, and requirements pertaining to health, safety, or the environment, as such laws, regulations, and requirements may be amended or supplemented from time to time. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereunder. "Eurodollar Advances" means Advances the interest rates on which are determined with reference to the Eurodollar Rate. "Eurodollar Business Day" means a Business Day on which dealings in United States Dollars are carried out in the London interbank market. "Eurodollar Rate" means, for any Eurodollar Advance for any Interest Period therefore, a rate per annum equal to (a) the Interbank Offered Rate, divided by (b) 1.00 minus the Reserve Requirement applicable to Eurodollar Advances. "Event of Default" has the meaning specified in SECTION 10.01. "Funded Debt" means, with respect to any Person, all Debt of such Person which by its terms or by the terms of any instrument or agreement relating thereto matures, or which is otherwise payable or unpaid, one year or more from, or is directly or indirectly renewable or extendible at the option of the obligor in respect thereof to a date one year or more (including, without limitation, an option of such obligor under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of one year or more) from, the date of the creation thereof, provided that Funded Debt shall include, as at any date of determination, current maturities of Funded Debt, provided further, that Funded Debt shall not include Mortgage Debt. "Funded Debt to EBDIT Ratio" means, at any particular time, the ratio of Funded Debt (including Senior Bank Debt and Capital Lease Obligations, but excluding Mortgage Debt) to EBDIT. "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles observed in a current period are comparable In all material respects to those accounting principles applied in a preceding period. Page 5 10 "Guaranty" means the C/D/R Guaranty. "Guarantor" means C/D/R. "Hazardous Substance" means any substance, product, waste, pollutant, material, chemical, contaminant, constituent, or over material which is or becomes listed, regulated, or addressed under any Environmental Law, including, without limitation, asbestos, petroleum, and polychlorinated biphenyl. "Interbank Offered Rate" means, with respect to each Interest Period, the rate of interest per annum at which deposits in immediately available freely transferable funds in Dollars are offered by Texas Commerce Bank (at approximately 1:00 p.m. Dallas, Texas time, two (2) Eurodollar Business Days prior to the first day of such Interest Period) to first class banks in the London interbank market for delivery on the first day of such Interest Period, such deposits being for a period of time equal or comparable to such Interest Period and in an amount equal or comparable to the principal amount of the Eurodollar Advance to which such Interest Period relates. Each determination of the Interbank Offered Rate by Agent shall be conclusive in the absence of manifest error. "Interest Expense" means, for any period, total interest expense, whether paid or accrued (including the interest component of Capital Lease Obligation), of the Borrower for such period, all as determined in conformity with GAAP. "Interest Period" means, with respect to any Eurodollar Advances, each period commencing on the date such Eurodollar Advances are made or Converted from Advances of another Type, or, in the case of each subsequent, successive Interest Period applicable to a Eurodollar Advance, the last day of the next preceding Interest Period with respect to such Advance, and ending on the day which is one, two, three, or six months thereafter, as Borrower may select as provided in SECTION 2.5 or 3.5 hereof. Notwithstanding the foregoing: (a) each Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall end on the next succeeding Eurodollar Business Day; (b) any Interest Period which would otherwise extend beyond the Termination Date shall end on the Termination Date; (c) no more than three (3) Interest Periods for Eurodollar Advances shall be in effect at the same time; (d) no Interest Period shall have a duration of less than thirty (30) days and, if the Interest Period for any Eurodollar Advances would otherwise be a shorter period, such Advances shall not be available hereunder; and (e) no Interest Period may extend beyond a principal repayment date unless, after giving effect thereto, the aggregate principal amount of the Eurodollar Advances having Interest Periods that and after such principal payment date shall be equal to or less than the Advances to be outstanding hereunder after such principal repayment date. "Lien" means any lien, mortgage, security interest, tax lien, financing statement, pledge, charge, hypothecation, assignment, preference, priority, or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law, or otherwise. "Loan Documents" means this Agreement and all promissory notes, security agreements, pledge agreements, deeds of trust, assignments, letters of credit, applications for letters of credit, guaranties, and Page 6 11 other instruments, agreements and documentation executed and delivered pursuant to or in connection with this Agreement, as such instruments, agreements and documentation may be amended, modified, renewed, extended, amended and restated or supplemented from time to time. "Maximum Rate" means the maximum rate of nonusurious interest permitted from day to day by applicable law, including as to Article 5069-1.04, Vernon's Texas Civil Statutes (and as the same may be incorporated by reference in other Texas statutes), but otherwise without limitation, that rate based upon the "indicated rate ceiling" and calculated after taking into account any and all relevant fees, payments, and other charges in respect of the Loan Documents which are deemed to be interest under applicable law. "Mortgage Debt" means Debt permitted by Section 8.1(c). "Multiemployer Plan" means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by Borrower or any Subsidiary and which is covered by Title IV of ERISA. "Net Income" means, for any period, the consolidated net income of Borrower and the Subsidiaries for such period as determined in accordance with GAAP. "Notes" means the promissory notes of Borrower payable to the order of each Lender, in substantially the form of EXHIBIT "A" hereto, and all extensions, renewals, and modifications thereof. "Obligated Party" means any Guarantor or any other Person who is or becomes party to any agreement that guarantees or secures payment and performance of the Obligations or any part thereof "Obligations" means all obligations, indebtedness, and liabilities of Borrower to the Agent and the Lenders, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several, or joint and several, including, without limitation, the obligations, Indebtedness, and liabilities of Borrower under this Agreement and the over Loan Documents (including, without limitation, all of Borrower's contingent reimbursement obligations in respect of letters of credit), and all interest accruing thereon and all attorneys' fees and other expenses incurred in the enforcement or collection thereof. "Operating Lease" means any lease (other than a lease constituting a Capital Lease Obligation) of real or personal property. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Person" means any individual, corporation, business trust, association, company, partnership, joint venture, governmental authority, or other entity. "Plan" means any employee benefit or other plan established or maintained by Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA. "Potential Default" means any condition or event which, after notice or lapse of time or both, would constitute an Event of Default. Page 7 12 "Pretax Income" means, for any period, Net Income for such period plus (but only to the extent deducted in the determination of Net Income) tax expense for such period. "Prime Rate" means, at any time, the rate of interest per annum then most recently established by Texas Commerce Bank as its prime rate. The Prime Rate is a reference rate set by Texas Commerce Bank after taking into account such factors as it may deem appropriate and does not necessarily represent the lowest or best rate actually charged to any customer. The Prime Rate may not correspond with future increases or decreases in interest rates charged by other lenders or market rates in general and Texas Commerce Bank may make various commercial or other loans at rates of interest having no relationship to such rate. "Prime Rate Advance" means Advances that bear interest at rates based upon the Prime Rate. "Prior Credit Agreement" means that certain Amended and Restated Credit Agreement dated as of November 14, 1995, among Craftmade International, Inc. as Borrower, NationsBank of Texas, N.A., as Agent for the Lenders and NationsBank of Texas, N.A. and Overton Bank and Trust as Lenders. "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code. "Regulatory Change" means, with respect to any Lender, any change after the date of this Agreement in United States federal, state, or foreign laws or regulations including Regulation D) or the adoption or making after such date of any interpretations, directives, or requests applying to a class of banks including either Lender of or under any United States federal or state, or any foreign, laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Reportable Event" means any of the events set forth in Section 4043 of ERISA. "Required Lenders" means Lenders holding fifty-one percent or more of the outstanding Advances, or, if no Advances are outstanding, fifty-one percent or more of the Commitments. "Reserve Requirement" means, on any day, that percentage (expressed as a decimal fraction) 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 requirements (including, without limitations basic, supplemental, marginal and emergency reserves) applicable to "eurocurrency liabilities" as currently defined in Regulation D or under any other then applicable similar or successor regulation which prescribes reserve requirements applicable to eurocurrency liabilities or eurocurrency fundings. Each determination by Agent of the Reserve Requirement shall be conclusive in the absence of manifest error. "RICO" means the Racketeer Influenced and Corrupt Organization Act of 1970, as amended from time to time. "Security Agreement" means the Security Agreement of Craftmade in favor of the Agent and the Lenders in substantially the form of EXHIBIT "D" hereto, as the same may be amended, supplemented or otherwise modified from time to time. Page 8 13 "Senior Bank Debt" means Debt for borrowed money of the Borrower, including the Obligations, but excluding Subordinated Debt. "Subordinated Debt" means indebtedness of the Borrower for borrowed money which is expressly made subordinate and junior in right of payment to the Obligations. "Subsidiary" means any corporation of which more than fifty percent (50%) of the issued and outstanding securities having ordinary voting power for the election of a majority of directors is owned or controlled, directly or indirectly, by Borrower, by Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. "Tax Expense" means, for any period, total Federal and state income taxes, before adjustment for extraordinary items, as shown in the financial statements of the Borrower for such period, all as determined in conformity with GAAP. "Termination Date" means 11:00 a.m. Dallas, Texas time on November 30, 1997, or such earlier date and time on which the Commitments terminate as provided in this Agreement. "Texas Commerce Bank" means Texas Commerce Bank National Association, a national banking association. "Type" means any type of Advance (i.e., Prime Rate Advance or Eurodollar Advance). Section 1.2 Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words "hereof", "herein, and "hereunder" and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all Article and Section references pertain to this Agreement. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. Terms used herein that are defined in the Uniform Commercial Code as adopted by the State of Texas, unless otherwise defined herein, shall have the meanings specified in the Uniform Commercial Code as adopted by the State of Texas. ARTICLE 2 Advances Section 2.1 Advances. Subject to the terms and conditions of this Agreement, each Lender severally agrees to make one or more Advances to Borrower from time to time from the date hereof to and including the Termination Date, provided that (a) the aggregate outstanding amount of all Advances shall not at any time exceed the lesser of the Commitments or the Borrowing Base and (b) the outstanding Advances supported only by the Eligible Inventory component of the Borrowing Base shall not at any time exceed sixty percent (60%) of the aggregate outstanding amount of all Advances. Subject to the foregoing limitations, and the other terms and provisions of this Agreement, Borrower may borrow, repay, and reborrow hereunder. Section 2.2 The Notes. The obligation of Borrower to repay the Advances shall be evidenced by the Notes executed by Borrower, and payable to the order of each Lender, in the aggregate principal amount of the Commitments as originally in effect and dated the date hereof. Page 9 14 Section 2.3 Repayment of Advances. Borrower shall repay the unpaid principal amount of all Advances outstanding under the Notes on the Termination Date. Section 2.4 Interest. The unpaid principal amount of the Advances shall bear interest prior to maturity at a varying rate per annum equal from day to day to the lesser of (a) the Maximum Rate or (b) the Applicable Rate, each such change in the rate of interest charged on the Advances to become effective, without notice to Borrower, on the effective date of each change in the Applicable Rate or the Maximum Rate, as the case may be; provided , however, from the date of the initial advance to the date which is one hundred eighty (180) days thereafter, the Applicable Rate on the aggregate amount of outstanding Advances shall be discounted at a per annum rate of one half of one percent ( 1/2%) provided, however, if at any time the rate of interest specified in clause (b) preceding shall exceed the Maximum Rate, thereby causing the interest on the Advances to be limited to the Maximum Rate, then any subsequent reduction in the Applicable Rate shall not reduce the rate of interest on the Advances below the Maximum Rate until such time as the aggregate amount of interest accrued on the Advances equals the aggregate amount of interest which would have accrued on the Advances if the interest rate specified in clause (b) preceding had at all times been in effect. Accrued and unpaid interest on the Advances shall be payable on the last Business Day of each month and at the end of each Interest Period, commencing on June 28, 1996, and on the Termination Date. All past due principal and interest shall bear interest at the Default Rate. Section 2.5 Requests for Advances. Borrower shall give Agent notice by means of an Advance Request Form of each requested Advance, at least three (3) Eurodollar Business Days before the requested date of each Eurodollar Advance, and by 12:00 p.m. (Dallas, Texas time) on the requested date of each Prime Rate Advance specifying: (a) the requested date of such Advance (which shall be a Business Day and, with respect to Eurodollar Advances, a Eurodollar Business Day), (b) the amount of such Advance, (c) the Type of the Advance and (d) in the case of a Eurodollar Advance, the duration of the Interest Period for such Advance. Agent at its option may accept telephonic requests for Advances, provided that such acceptance shall not constitute a waiver of Agent's right to require delivery of an Advance Request Form in connection with subsequent Advances. Any telephonic request for an Advance by Borrower shall be promptly confirmed by submission of a properly completed Advance Request Form to Agent. Each Eurodollar Advance shall be in a minimum principal amount of One Hundred Thousand Dollars ($100,000.00) or an integral multiple thereof and each Prime Rate Advance shall be in a minimum principal amount of Fifty Thousand Dollars ($50,000.00). The aggregate amount of Eurodollar Advances having the same Interest Period shall be at least equal to One Hundred Thousand Dollars ($100,000.00). All notices under this SECTION 2.5 shall be irrevocable and shall be given not later than 12:00 p.m. (Dallas, Texas time) on the day specified above for such notice. Any Advance Request Form requesting an Advance received after 12:00 p.m. (Dallas, Texas time) on a Business Day shall be deemed to be received on the next succeeding Business Day. Section 2.6 Use of Proceeds. The proceeds of Advances shall be used for working capital support of accounts receivable and inventory of Borrower. Section 2.7 Reduction or Termination of Commitments. Borrower shall have the right at any time to terminate in whole or from time to time to irrevocably reduce in part the Commitments upon at least three (3) Business Days prior written notice to Agent specifying the effective date thereof, whether a termination or reduction is being made, and the amount of any partial reduction; provided, however, that each partial reduction shall be in the amount of Two Hundred Fifty Thousand Dollars ($250,000.00) or an integral multiple thereof and Borrower shall simultaneously prepay the amount by which the aggregate outstanding amount of all Advances exceeds the Commitments (after giving effect to such notice) plus accrued and unpaid interest on the principal amount so prepaid. The Commitments may not Page 10 15 be reinstated after they have been terminated or reduced. Any reduction in the Commitments will reduce the Commitment of each Lender pro rata based on its Commitment amount. Section 2.8 Letters of Credit. At the request of Borrower, and upon execution of letter of credit documentation satisfactory to Texas Commerce Bank (including, without limitation, an Application and Agreement for Commercial Letter of Credit [for documentary letters of credit] or Standby Letter of Credit Application and Agreement [for standby letters of credit] for each such letter of credit in the form attached hereto as EXHIBIT "H") (the "Application"), Texas Commerce Bank shall issue documentary or standby letters of credit ("Letters of Credit") from time to time for the account of Borrower for its benefit or the benefit of its Subsidiaries in a face amount not exceeding in the aggregate at any time outstanding the lesser of (a) $1,000,000.00 or (b) $12,000,000 minus the aggregate outstanding principal balance of all Advances. The Commitments shall at all times be reduced by the aggregate face amount of outstanding Letters of Credit. The Letters of Credit shall be on terms mutually acceptable to Borrower and Texas Commerce Bank and no Letter of Credit shall have an expiration date later than the Termination Date. Any amount paid by Texas Commerce Bank on any Letter of Credit which is not immediately reimbursed by Borrower shall be treated as an Advance without the necessity for any request by Borrower. Immediately upon the issuance of any Letter of Credit, Texas Commerce Bank shall be deemed to have sold and transferred to each other Lender, and each such other Lender shall be deemed unconditionally and irrevocably to have purchased and received from Texas Commerce Bank, without recourse or warranty, an undivided interest and participation, pro-rata based upon such other Lender's Commitment compared to the aggregate Commitments, in such Letter of Credit (as the same may thereafter be amended, renewed or extended pursuant to this Agreement), each drawing thereunder and the obligations of Borrower under this Agreement and the Application with respect thereto and any security therefor or guaranty pertaining thereto. In the event and to the extent that any draft drawn under any Letter of Credit shall not have been promptly reimbursed by Borrower, Texas Commerce Bank shall promptly notify Agent, and Agent shall promptly notify each other Lender, of such failure, and each such other Lender shall, on the first Business Day following such notification, and notwithstanding (A) anything to the contrary contained in SECTION 2.L or elsewhere in this Agreement or (B) the existence of any Event of Default or the inability of or failure by Borrower or any Subsidiary to comply with any condition precedent set forth in ARTICLE 5, make an Advance, which Advance shall be a Prime Rate Advance and shall be used to repay the applicable portion of Texas Commerce Bank's Advance thereon resulting from such drawing, in an amount equal to such Lender's pro rata share of such drawing (based upon its Commitment compared to the aggregate Commitments), which amount shall promptly and unconditionally be made available to Agent for the account of Texas Commerce Bank as reimbursement for such drawing and interest accrued thereon, in immediately available funds. Borrower shall pay to Texas Commerce Bank, at the time of issuance of each Letter of Credit, a fee equal to the greater of (a) (i) one percent (1.0%) per annum for documentary letters of credit or (ii) one and one-half (1.50) percent per annum for standby letters of credit, times the face amount of the Letter of Credit or (b) One Hundred Dollars ($100.00). In connection with the issuance of any Letters of Credit, Borrower shall pay to Texas Commerce Bank its standard fees and charges, including the standard fees and charges provided for in the Application. The obligations and indebtedness of Borrower to Lender under this SECTION 2.8, the Letters of Credit, and the Applications, shall be part of the Obligations. ARTICLE 3 Payments, Conversions and Continuations Section 3. 1 Method of Payment. All payments of principal, interest, and other amounts to be made by Borrower under this Agreement, the Notes, and the other Loan Documents shall be made to Agent, for the ratable benefit of the Lenders, at its office at 2200 Ross Avenue, Dallas, Texas 75201, without setoff, Page 11 16 deduction, or counterclaim, in Dollars and in immediately available funds. Borrower shall, at the time of making each such payment, specify to Agent the sums payable by Borrower under this Agreement, the Notes, or other Loan Document to which such payment is to be applied (and in the event Borrower fails to so specify, or if an Event of Default has occurred and is continuing, Agent may apply such payment to the Obligations in such order and manner as it may elect in its sole discretion). Whenever any payment under this Agreement, the Notes, or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest. Section 3.2 Voluntary Prepayment. Borrower may prepay the Notes in whole at any time or from time to time in part without premium or penalty but with accrued interest to the date of prepayment on the amount so prepaid, provided that (a) Eurodollar Advances may be prepaid only on the last day of the Interest Period for such Advances and (b) each partial prepayment shall be in the principal amount of $25,000.00 or an integral multiple thereof. Section 3.3 Mandatory Prepayment. If at any time (a) the aggregate amount of outstanding Advances exceeds the lesser of the Commitments or the Borrowing Base or (b) the outstanding Advances supported by the Eligible Inventory component of the Borrowing Base exceeds sixty percent (60%) of the aggregate amount of outstanding Advances, Borrower shall promptly prepay the amount of the excess plus (x) accrued and unpaid interest on the amount so prepaid and (y) any amounts for the compensation of funding losses of the Lenders pursuant to SECTION 4.4. Section 3.4 Computation of Interest and Fees. Interest on the indebtedness evidenced by the Notes and all fees provided for herein shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day) unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. Section 3.5 Conversions and Continuations. Borrower shall have the right from time to time to Convert all or part of one Type of Advance into another Type of Advance or to Continue all or part of any Eurodollar Advance by giving the Agent written notice at least one (1) Eurodollar Business Day before Conversion into a Prime Rate Advance and at least three (3) Eurodollar Business Days before Conversion into or Continuation of a Eurodollar Advance, specifying: (a) the Type of Advance to be converted, (b) the Conversion or Continuation date, (c) the amount of the Advance to be Converted or Continued, (d) in the case of Conversions, the Type of Advance to be Converted into and (e) in the case of a Continuation of or Conversion into a Eurodollar Advance, the duration of the Interest Period applicable thereto; provided that (i) Eurodollar Advances may only be Converted on the last day of the Interest Period and (ii) except for Conversions into Prime Rate Advances, no Conversions shall be made while an Event of Default or Potential Default has occurred and is continuing. All notices given under this SECTION 3.5 shall be irrevocable and shall be given not later than 11:00 a.m. (Dallas, Texas time) on the date which is not less than the number of Business Days or Eurodollar Business Days specified above for such notice. If Borrower shall fail to give Agent the notice as specified above for Continuation or Conversion of a Eurodollar Advance prior to the end of the Interest Period with respect thereto, such Eurodollar Advance shall automatically be Converted into a Prime Rate Advance on the last day of the Interest Period for such Eurodollar Advance. ARTICLE 4 Yield Protection and Illegality Page 12 17 Section 4. 1 Additional Costs. Borrower shall pay directly to each Lender from time to time such amounts as such Lender may determine to be necessary to compensate it for any costs incurred by such Lender which such Lender determines are attributable to its making or maintaining of any Eurodollar Advances hereunder or its obligation to make any of such Eurodollar Advances hereunder, or any reduction in any amount receivable by such Lender hereunder in respect of any such Eurodollar Advance or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change which: (a) changes the basis of taxation of any amounts payable to such Lender under this Agreement or the Notes in respect of any of such Advances (other than taxes imposed on the overall net income of such Lender for any of such Advances); (b) imposes or modifies any reserve, special deposit, minimum capital, capital ratio, or similar requirement relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender (including any of such Advances or any deposits referred to in the definition of "Eurodollar Rate" in SECTION 1.1 hereof); (c) increases such Lender's costs relating to Advances, the Commitments, or any part thereof; (d) reduces the yield or rate of return of such Lender on Advances, the Commitments, or any part thereof, to a level below that which such Lender could have achieved but for such Regulatory Change; or (e) imposes any other condition affecting this Agreement or the Notes or any of such extensions of credit or liabilities or commitments. Each Lender will notify Borrower of any event occurring after the date of this Agreement which will entitle such Lender to compensation pursuant to this SECTION 4.1 as promptly as practicable after it obtains knowledge thereof and determines to request such compensation, and will designate a different lending office for the Advances affected by such event if such designation win avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Lender, violate any law, rule, or regulation or be in any way disadvantageous to such Lender. Such Lender will finish Borrower with a certificate setting forth the basis and the amount of each request of such Lender for compensation under this section. If any Lender requests compensation from Borrower under this section, Borrower may, by notice to such Lender suspend the obligation of such Lender to make additional Eurodollar Advances until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of SECTION 4.3 hereof shall be applicable). Determinations and allocations by any Lender for purposes of this section shall be conclusive, provided that such determinations and allocations are made on a reasonable basis. Section 4.2 Limitation on Types of Advances. Anything herein to the contrary notwithstanding, if with respect to any Eurodollar Advances for any Interest Period therefor, any Lender determines (which determination shall be conclusive) that the relevant rates of interest referred to in the definition of "Eurodollar Rate" in SECTION 1.1 hereof on the basis of which the rate of interest for Eurodollar Advances for such Interest Period is to be determined do not accurately reflect the cost to such Lender of making or maintaining Eurodollar Advances for such Interest Period, then such Lender shall give Borrower prompt notice thereof specifying the relevant amounts or periods, and so long as such condition remains in effect, such Lender shall be under no obligation to make additional Eurodollar Advances or to Convert Prime Rate Advances into Eurodollar Advances and Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Advances either prepay such Eurodollar Advances or Convert such Eurodollar Advances into Prime Rate Advances in accordance with the terms of this Agreement. Page 13 18 Section 4.3 Substitute Prime Rate Advances. If the obligation of any Lender to make Eurodollar Advances shall be suspended pursuant to SECTION 4.1 or 4.2 hereof, all Advances which would be otherwise made by such Lender as Eurodollar Advances shall be made instead as Prime Rate Advances and all Advances which would otherwise be Converted into Eurodollar Advances shall be Converted instead into (or shall remain as) Prime Rate Advances and, to the extent that Eurodollar Advances are so made as (or Converted into) Prime Rate Advances, all payments and prepayments of principal which would otherwise be applied to such Lender's Eurodollar Advances shall be applied instead to its Prime Rate Advances Section 4.4 Compensation. Borrower shall pay to each Lender, upon the request of such Lender, such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost, or expense incurred by it as a result of: (a) Any payment, prepayment or Conversion of a Eurodollar Advance for any reason (including, without limitation, the acceleration of outstanding Advances pursuant to Section 10.2) on a date other than the last day of an Interest Period for such Eurodollar Advance; or (b) Any failure by Borrower for any reason (including, without limitation, the failure of any conditions precedent specified in ARTICLE 5 to be satisfied) to borrow, Convert, Continue, or prepay a Eurodollar Advance on the date for such borrowing, Conversion, Continuation, or prepayment, specified in the relevant notice of borrowing, prepayment, Conversion, or Continuation under this Agreement. Section 4.5 Capital Adequacy. If after the date hereof, any Lender shall have determined that the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender (or its parent) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's (or its parent's) capital as a consequence of its obligations hereunder or the transactions contemplated hereby to a level below that which such Lender (or its parent) could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, within ten (10) Business Days after demand by such Lender, Borrower shall pay to such Lender such additional amount or amounts as win compensate such Lender (or its parent) for such reduction. A certificate of such Lender claiming compensation under this SECTION 4.5 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive, provided that the determination thereof is made on a reasonable basis. In determining such amount or amounts, such Lender may use any reasonable averaging and attribution methods. Section 4.6 Changes in Law Rendering Loan Unlawful. In the event that (i) any change in applicable law, treaty or regulation or the interpretation thereof (whether or not having the force of law) shall make it unlawful or impossible for any Lender to make or continue to maintain all or any portion of a Eurodollar Advance contemplated hereunder, or (ii) any central bank or other fiscal, monetary or other authority having jurisdiction over such Lender or all or any portion of a Eurodollar Advance shall request such Lender in writing to comply with restrictions (whether or not having the force of law) which seek to prohibit such Lender from making or continuing to maintain such a Eurodollar Advance, then such Lender shall so notify Borrower, and Borrower shall, upon demand by such Lender, either, at the option of Borrower, prepay such Eurodollar Advance or convert such Eurodollar Advance to a Prime Rate Advance in accordance with SECTION 3.5 hereof, except that, subject to the provisions of SECTION 4.4 hereof, such prepayment or conversion need not be effected on the last day of the Interest Period applicable to the Eurodollar Advance, and upon such demand or upon notice by such Lender, the obligation of such Lender Page 14 19 to make such Eurodollar Advance hereunder shall terminate. Failure to prepay any such portion of a Eurodollar Advance shall be deemed an election to convert to a Prime Rate Advance. Such demand or notice shall be accompanied by a certificate of such Lender provided to Borrower as to the reasons why it is no longer feasible for such Lender to make or continue to maintain Eurodollar Advance hereunder and such certificate shall, in the absence of manifest error in calculation, be conclusive and binding. ARTICLE 5 Conditions Precedent Section 5.1 Initial Advance. The obligation of each Lender to make any Advance concurrently with or subsequent to the execution of this Agreement is subject to the condition precedent that Agent shall have received on or before the day of such Advance all of the following, each dated (unless otherwise indicated) effective as of the date hereof, in form and substance satisfactory to Agent: (a) Resolutions. Resolutions of the Board of Directors of Borrower and each Guarantor certified by their respective Secretary or Assistant Secretary which authorize the execution, delivery, and performance by Borrower and each Guarantor of the Loan Documents to which Borrower or such Guarantor, as applicable, is or is to be a party; (b) Incumbency Certificate. A certificate of incumbency certified by the respective Secretary or Assistant Secretary of Borrower and each Guarantor certifying the names of the officers of Borrower and such Guarantor authorized to sign each of the Loan Documents to which Borrower or such Guarantor, as applicable, is or is to be a party Concluding the certificates contemplated herein), together with specimen signatures of such officers; (c) Articles of Incorporation. The articles of incorporation of Borrower and each Guarantor, each certified by the Secretary of State of its respective state of incorporation and dated within ten (10) days prior to the date of execution hereof; (d) Bylaws. The bylaws of Borrower and each Guarantor certified by its respective Secretary or Assistant Secretary; (e) Governmental Certificates. Certificates of the appropriate government officials of the state of incorporation of Borrower and each Guarantor as to the existence and good standing of such Persons, together with certificates of the appropriate government officials of the State of Texas as to the qualification to do business as a foreign corporation and good standing of Borrower and each Guarantor in the State of Texas, each dated within ten (10) days prior to the date of execution hereof; (f) Notes. The Notes executed by Borrower; (g) Craftmade Security Agreement. The Craftmade Security Agreement executed by Craftmade; (h) Financing Statements, Assignments and Subordinations. Uniform Commercial Code financing statements or amendments executed by Borrower or Guarantor, as applicable, and covering such Collateral as Agent may request, and Uniform Commercial Code terminations, assignments or lien subordinations relating to the Liens identified on SCHEDULE 6 hereto as Agent may request; (i) Guaranty. The C/D/R Guaranty executed by C/D/R; Page 15 20 (j) Durocraft Security Agreement. The Durocraft Security Agreement executed by Durocraft; (k) Assignment of Life Insurance. The Assignment of Life Insurance of James R. Ridings executed by Craftmade. (l) Initial Borrowing Base Report. A Borrowing Base Report dated April 30, 1996, properly completed and executed by an authorized officer of Borrower reflecting the information required thereby as of April 30, 1996; (m) Landlord and Mortgagee Agreements. Landlord and mortgagee subordination or waivers executed by each landlord and mortgagee identified on Schedule 1 hereto; (n) Insurance Policies. Summaries of all insurance policies required by Section 7.5, together with loss payable endorsements in favor of the Agent and the Lenders with respect to all insurance policies covering Collateral; (o) UCC Search. The results of Uniform Commercial Code searches showing all financing statements and other documents or instruments on file against Borrower or Guarantor in each applicable jurisdiction listed on SCHEDULE 5 hereto, such searches to be as of a date no more than ten (10) days prior to the date of execution hereof; (p) Instruments, Documents and Chattel Paper. All Collateral consisting of instruments, documents and chattel paper (except as otherwise provided by the Security Agreement or the Durocraft Security Agreement) endorsed, if applicable, payable to the order of Agent and the Lenders; and (q) Attorneys' Fees and Expenses. Evidence that the costs and expenses (including reasonable attorneys' fees) referred to in SECTION 11.1, to the extent incurred, shall have been paid in full by Borrower. (r) Prior Credit Agreement. Instructions that the proceeds of the initial advance shall be used to pay in full all outstanding obligations under the prior Credit Agreement, and evidence that the Commitment under the prior Credit Agreement has been terminated. Section 5.2 All Advances. The obligation of each Lender to make any Advance (including the initial Advance) is subject to the following additional conditions precedent: (a) Advance Request Form. Agent shall have received in accordance with Section 2.5 an Advance Request Form dated the date of such Advance and executed by an authorized officer of Borrower, all of the statements in which shall be true and correct on and as of such date; (b) No Default. No Event of Default or Potential Default shall have occurred and be continuing; and (c) Additional Documentation. Agent shall have received such additional approvals, opinions, or documentation as Agent or its legal counsel may request. Page 16 21 ARTICLE 6 Representations and Warranties To induce the Agent and the Lenders to enter into this Agreement, Borrower represents and warrants to the Agent and the Lenders that, as of the execution hereof: Section 6.1 Corporate Existence. Borrower and each Subsidiary (a) is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation; (b) has all requisite corporate power and authority to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would have a material adverse effect on its business, condition (financial or otherwise), operations, prospects, or properties. Borrower has the corporate power and authority to execute, deliver, and perform its obligations under this Agreement and the other Loan Documents to which it is or may become a party. Section 6.2 Financial Statements. Borrower has delivered to Agent audited consolidated financial statements of Borrower and its Subsidiaries as at and for the fiscal year ended June 30, 1995, and unaudited consolidated financial statements of Borrower and its Subsidiaries for the nine (9) month period ended March 31, 1996. Such financial statements are true and correct, have been prepared in accordance with GAAP, and fairly and accurately present, on a consolidated basis, the financial condition of Borrower and its Subsidiaries as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. Neither Borrower nor any of its Subsidiaries has any material contingent liabilities, liabilities for taxes, material forward or long-term commitments, or unrealized or anticipated losses from any unfavorable commitments not reflected in such financial statements. There has been no material adverse change in the business, condition (financial or otherwise), operations, prospects, or properties of Borrower or any of its Subsidiaries since the effective date of the most recent financial statements referred to in this section. Section 6.3 Corporate Action; No Breach. The execution, delivery, and performance by Borrower of this Agreement and the other Loan Documents to which Borrower is or may become a party have been duly authorized by all requisite action on the part of Borrower and do not and will not violate or conflict with the articles of incorporation or bylaws of Borrower or any law, rule, or regulation or any order, writ, injunction, or decree of any court, governmental authority, or arbitrator, and do not and will not conflict with, result in a breach of, or constitute a default under, or result in the creation or imposition of any Lien (except those Liens in favor of the Agent and the Lenders) upon any of the revenues or assets of Borrower or any Subsidiary pursuant to the provisions of any indenture, mortgage, deed of trust, security agreement, franchise, permit, license, or other instrument or agreement by which Borrower or any Subsidiary or any of their respective properties is bound. Section 6.4 Operation of Business. Borrower and each of its Subsidiaries possess all licenses, permits, franchises, patents, copyrights, trademarks, and tradenames, or rights thereto, to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted, and Borrower and each of its Subsidiaries are not in violation of any valid rights of others with respect to any of the forgoing. Section 6.5 Litigation and Judgments. To the knowledge of Borrower, there is no action, suit, investigation, or proceeding before or by any court, governmental authority, or arbitrator pending or threatened against or affecting Borrower or any Subsidiary, that would, if adversely determined, have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or Page 17 22 properties of Borrower or any Subsidiary or the ability of Borrower to pay and perform the Obligations. There are no outstanding judgments against Borrower or any Subsidiary. Section 6.6 Rights In Properties; Liens. Borrower and each Subsidiary have good and indefeasible title to or valid leasehold interests in their respective properties and assets, real and personal, including the properties, assets, and leasehold interests reflected in the financial statements described in SECTION 6.2, and none of the properties, assets, or leasehold interests of Borrower or any Subsidiary is subject to any Lien, except as permitted by SECTION 8.2. Section 6.7 Enforceability. This Agreement constitutes, and the other Loan Documents to which Borrower is party, when delivered, shall constitute the legal, valid, and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditor's rights. Section 6.8 Approvals. No authorization, approval, or consent of, and no filing or registration with, any court, governmental authority, or third party is or will be necessary for the execution, delivery, or performance by Borrower of this Agreement and the other Loan Documents to which Borrower is or may become a party or the validity or enforceability thereof. Section 6.9 Debt. Borrower and its Subsidiaries have no Debt, except as permitted by SECTION 8.1. Section 6. 10 Taxes. Borrower and each Subsidiary have filed all talc returns (federal, state, and local) required to be filed, including all income, franchise, employment, property, and sales taxes, and have paid all of their respective liabilities for taxes, assessments, governmental charges, and other levies that are due and payable, and Borrower knows of no pending investigation of Borrower or any Subsidiary by any taxing authority or of any pending but unassessed tax liability of Borrower or any Subsidiary. Section 6.11 Use of Proceeds; Margin Securities. Neither Borrower nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T. U. or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any extension of credit under this Agreement will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. Section 6.12 ERISA. Borrower and each Subsidiary have complied with all applicable minimum funding requirements and all other applicable and material requirements of ERISA and there are no existing conditions that would give rise to liability thereunder. No Reportable Event has occurred in connection with any Plan that might constitute grounds for the termination thereof by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer such Plan. Section 6. 13 Disclosure. No statement, information, report, representation or warranty made by Borrower in this Agreement or in any other Loan Document or furnished to the Agent or any Lender in connection with this Agreement or any transaction contemplated hereby contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to Borrower which has a material adverse effect, or which might in the future have a material adverse effect, on the business' condition (financial or otherwise), operations, prospects, or properties of Borrower or any Subsidiary that has not been disclosed in writing to the Agent and the Lenders. Page 18 23 Section 6.14 Subsidiaries. Borrower has no Subsidiaries other than those listed on Schedule 3 hereto, and Schedule 3 sets forth the jurisdiction of incorporation of each Subsidiary and the percentage of Borrower's ownership of the outstanding voting stock of each Subsidiary. All of the outstanding capital stock of each Subsidiary has been validly issued, is fully paid, and is nonassessable. Section 6.15 Compliance with Laws and Agreements. Neither Borrower nor any Subsidiary is in violation in any material respect of any law, rule, regulation, order, or decree of any court, governmental authority, or arbitrator. Neither Borrower nor any Subsidiary is in default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which it is a party. Section 6.16 Environmental Matters. (a) Borrower, each Subsidiary, and all of their respective properties, assets, and operations are in full compliance win all Environmental Laws. Borrower is not aware of, nor has Borrower received notice of, any past, present, or future conditions, events, activities, practices, or incidents which may interfere with or prevent the compliance or continued compliance of Borrower and the Subsidiaries with all Environmental Laws. (b) Borrower and each Subsidiary have obtained all permits, licenses, and authorizations which are required under Environmental Laws. (c) No Hazardous Substances exist on, about, or within or have been used, generated, stored, transported, disposed of on, or released from any of the properties or assets of Borrower or any Subsidiary. the use which Borrower and the Subsidiaries make and intend to make of their respective properties and assets will not result in the use, generation, storage, transportation' accumulation, disposal, or release of any Hazardous Substance on, in, or from any such properties or assets. (d) There is no action, suit, proceeding, investigation, or inquiry before any court, administrative agency, or other governmental authority pending or, to the knowledge of Borrower, threatened against Borrower or any Subsidiary relating in any way to any Environmental Law. Neither Borrower nor any Subsidiary has (i) any liability for remedial action under any Environmental Law, (ii) received any request for information by any governmental authority with respect to the condition, use, or operation of any of its properties or assets, or (iii) received any notice from any governmental authority or other Person with respect to any violation of or liability under any Environmental Law. (e) No Lien arising under any Environmental Law has attached to any of the properties or assets of Borrower or any of its Subsidiaries. Section 6. 17 Current Locations. The principal place of business and chief executive office of the Borrower is located at the address for notices specified below the Borrower's name on the signature pages hereto. Schedule 1 attached hereto sets forth all the locations where any of the Obligated Parties maintain any books or records relating to any of the Collateral and all other locations where any of the Obligated Parties has a place of business. No Obligated Party does business in any location other than as set forth on SCHEDULE 1 AND SCHEDULE 1 correctly identifies each address where any of the Obligated Parties' inventory or equipment are located. SCHEDULE 1 correctly identifies the landlords or mortgagees (other than the Lenders), if any, of each location identified on SCHEDULE 1. SCHEDULE 1 sets forth the names and addresses of all Persons other than the Obligated Parties who have possession of any of the Obligated Page 19 24 Parties' Collateral. None of the Collateral has been located in any location within the past four months other than as set forth on SCHEDULE 1. Section. 6.18 Security Interest and Liens. The Security Agreement, the Durocraft Security Agreement and the Assignment of Life Insurance create in favor of the Agent and the Lenders valid and enforceable Liens on the Collateral described therein which secure the payment and performance of the Obligations, including without limitation, all future Advances pursuant to this Agreement and the Notes and all extensions, renewals and other modifications thereof. Upon the filing of Uniform Commercial Code Financing Statements naming Craftmade or Durocraft, as applicable, as debtor and the Agent as secured party in the applicable jurisdictions set forth in Schedule 5 hereto and the release or assignment to Agent of the Liens described on SCHEDULE 6 hereto, the Liens created by the Loan Documents shall constitute perfected, first priority Liens upon the Collateral which shall be superior and prior to the rights of all third Persons now existing or hereafter arising. Section 6.19 Corporate Name. The exact corporate name of Borrower as it appears in its certificate of incorporation is set forth in the introduction to this Agreement, and Borrower has not done business in any location under any other name. ARTICLE 7 Positive Covenants Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Lender has any Commitment hereunder, Borrower will perform and observe the following positive covenants, unless the Agent and each Lender shall otherwise consent in writing: Section 7.1 Reporting Requirements. Borrower will furnish to Agent: (a) Annual Financial Statements. As soon as available, and in any event within ninety (90) days after the end of each fiscal year of Borrower, beginning with the fiscal year ending June 30, 1996, a copy of the annual audit report of Borrower and the Subsidiaries for such fiscal year containing, on a consolidated basis, balance sheets, statements of income, and statements of cash flows as at the end of such fiscal year and for the twelve-month period then ended, in each case setting form in comparative form the figures for the preceding fiscal year, all in reasonable detail and audited and certified by independent certified public accountants of recognized standing acceptable to Agent, to the effect that such report has been prepared in accordance with GAAP. (b) Monthly Financial Statements. As soon as available, and in any event within thirty (30) days after the end of each month, a copy of an unaudited financial report of Borrower and the Subsidiaries as of the end of such month, and for the portion of the fiscal year then ended, containing, on a consolidated and consolidating basis, balance sheets and statements of income, all in reasonable detail certified by the chief financial officer of Borrower to have been prepared in accordance with GAAP and to fairly and accurately present (subject to year-end audit adjustments) the financial condition and results of operations of Borrower and the Subsidiaries, on a consolidated and consolidating basis, at the date and for the periods indicated therein: Page 20 25 (c) Covenant Compliance Certificate. Within thirty (30) days after the end of each calendar month, a certificate of the chief executive officer or chief financial officer of Borrower (i) stating that to the best of such officer's knowledge, no Event of Default and no Potential Default has occurred and is continuing, or if an Event of Default or Potential Default has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto, and (ii) showing in reasonable detail the calculations demonstrating compliance with ARTICLE 9; (d) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits, and proceedings before any court or governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, affecting Borrower or any Subsidiary which, if determined adversely to Borrower or such Subsidiary, could have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of Borrower or such Subsidiary; (e) Notice of Default. As soon as possible and in any event within five (5) days after the occurrence of each Event of Default and Potential Default, a written notice setting forth the details of such Event of Default or Potential Default and the action which Borrower has taken and proposes to take with respect thereto; (f) ERISA Reports. Promptly after the filing or receipt thereof, copies of all reports, including annual reports, and notices which Borrower or any Subsidiary files with or receives from the PBGC or the U.S. Department of Labor under ERISA; and as soon as possible and in any event within five (5) days after Borrower or any Subsidiary knows or has reason to know that any Reportable Event or Prohibited Transaction has occurred win respect to any Plan or that the PBGC or Borrower or any Subsidiary has instituted or will institute proceedings under Title IV of ERISA to terminate any Plan, a certificate of the chief financial officer of Borrower setting forth the details as to such Reportable Event or Prohibited Transaction or Plan termination and the action that Borrower proposes to take with respect thereto; (g) Notice of Environmental Law Violation. As soon as possible and in any event within five (5) days after the occurrence thereof, written notice of any violation of any Environmental Law that Borrower or any Subsidiary reports or is required to report to any governmental authority; (h) Notice of Material Adverse Effect. As soon as possible and in any event within five (5) days after the occurrence thereof, written notice of any matter that could have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of Borrower or any Subsidiary; (i) Borrowing Base Report and Accounts Receivable Aging Report. As soon as available, and in any event within thirty (30) days after the end of each calendar month, a Borrowing Base Report and an Accounts Receivable Aging Report, each certified by the chief executive officer or chief financial officer of Borrower; (j) Proxy Statements, Etc. As soon as available, one copy of each financial statement, report, notice or proxy statement sent by Borrower or any Subsidiary to its stockholders generally and one copy of each regular, periodic or special report, registration statement, or prospectus filed by Borrower or any Subsidiary with any securities exchange or the Securities and Exchange Commission or any successor agency; Page 21 26 (k) Uninsured Liabilities. Promptly upon receipt of notice thereof, written notice of any actual or potential uninsured liabilities of Borrower or any Subsidiary in excess of One Hundred Thousand Dollars ($100,000.00); and (l) General Information. Promptly, such other information concerning Borrower or any Subsidiary as Agent may from time to time reasonably request. Section 7.2 Maintenance of Existence; Conduct of Business. Borrower will preserve and maintain, and will cause each Subsidiary to preserve and maintain, its corporate existence and all of its leases, privileges, licenses, permits, franchises, qualifications and rights that are necessary or desirable in the ordinary conduct of its business, and conduct, and cause each Subsidiary to conduct, its business as presently conducted in an orderly and efficient manner in accordance with good business practices. Section 7.3 Maintenance of Properties. Borrower will maintain, keep, and preserve, and cause each Subsidiary to maintain, keep, and preserve, all of its properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition. Section 7.4 Taxes and Claims. Borrower will pay or discharge, and will cause each Subsidiary to pay or discharge, at or before maturity or before becoming delinquent (a) all taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its property, and (b) all lawful claims for labor, material, and supplies, which, if unpaid, might become a Lien upon any of its property; provided, however, that neither Borrower nor any Subsidiary shall be required to pay or discharge any tax, levy, assessment, or governmental charge which is being contested in good faith by appropriate proceedings diligently pursued, and for which adequate reserves have been established. Section 7.5 Insurance. Borrower will maintain, and will cause each Subsidiary to maintain, with financially sound and reputable insurance companies worker's compensation insurance, liability insurance, and insurance on its property, assets, and business at least in such amounts and against such risks as are usually insured against by Persons engaged in similar businesses. Each insurance policy covering Collateral shall name Agent and the Lenders as loss payee and provide that such policy will not be canceled without thirty (30) days prior written notice to Agent. Section 7.6 Inspection Rights and Asset Audit. At any reasonable time and from time to time, Borrower will permit, and will cause each Subsidiary to permit, representatives of Agent to examine and make copies of the books and records of, and visit and inspect the properties of Borrower and any Subsidiary, and to discuss the business, operations, and financial condition of Borrower and the Subsidiaries with their respective officers and employees and with their independent certified public accountants. Borrower agrees to permit the Agent to conduct an audit of it's assets, at Lenders' expense, annually, with the first such audit to occur in June, 1996. Section 7.7 Keeping Books and Records. Borrower will maintain, and will cause each Subsidiary to maintain, proper books of record and account in which full, true, and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities. Section 7.8 Compliance with Laws. Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations, and orders of any court, governmental authority, or arbitrator. Page 22 27 Section 7.9 Compliance with Agreements. Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all contracts, agreements, and instruments binding on it or affecting its properties or business. Section 7. 10 Further Assurances. Borrower will execute and deliver, and will cause each Subsidiary to execute and deliver, such further instruments as may be requested by Agent to carry out the provisions and purposes of this Agreement and the other Loan Documents and to preserve and perfect the Liens of the Agent and the Lenders in the Collateral. Section 7. 11 ERISA. Borrower will comply, and will cause each Subsidiary to comply, with all minimum funding requirements, and all other material requirements, of ERISA, if applicable, so as not to give rise to any liability thereunder. ARTICLE 8 Negative Covenants Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Lender has any Commitment hereunder, Borrower will perform and observe the following negative covenants, unless the Agent and each Lender shall otherwise consent in writing: Section 8.1 Debt. Borrower will not incur, create, assume, or permit to exist, and will not permit any Subsidiary to incur, create, assume, or permit to exist, any Debt, except: (a) Debt to the Agent and the Lenders; (b) Existing Debt described on Schedule 2 hereto; and (c) Debt incurred finance the purchase of property to be used in the ordinary course of Borrower's business in an aggregate amount during any one fiscal year not to exceed Four Hundred Thousand Dollars ($400,000.00) or, during the fiscal year commencing July 1, 1995, Nine Million Six Hundred Thousand Dollars ($9,600,000.00). Section 8.2 Limitation on Liens. Borrower will not, and will not permit C/D/R to incur, create, assume, or permit to exist, and win not permit any Subsidiary to incur, create, assume, or permit to exist, any Lien upon any of its property, assets, or revenues, whether now owned or hereafter acquired, except: (a) Liens disclosed on SCHEDULE 4 hereto; (b) Liens in favor of the Agent and the Lenders; (c) Encumbrances consisting of minor easements, zoning restrictions, or other restrictions on the use of real property that do not (individually or in the aggregate) materially affect the value of the assets encumbered thereby or materially impair the ability of Borrower or the Subsidiaries to use such assets in their respective businesses, and none of which is violated in any material respect by existing or proposed strictures or land use; (d) Liens for taxes, assessments, or other governmental charges which are not delinquent or which are being contested in good faith and for which adequate reserves have been established; Page 23 28 (e) Liens of mechanics, materialmen, warehousemen, carriers or other similar statutory Liens securing obligations that are not yet due and are incurred in the ordinary course of business; (f) Liens resulting from good faith deposits to secure payments of worker's compensation or other social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, or contracts (other than for payment of Debt) in the ordinary course of business, and (g) Liens created to secure purchase money Debt permitted by SECTION 8.1(C) provided that such Liens do not extend to or cover any property of Borrower other than the property being acquired with the Debt permitted by SECTION 8.1(C). Section 8.3 Mergers, Acquisitions and Dissolutions. Without the prior written consent of the Agent and the Lenders, Borrower will not, and will not permit any Subsidiary to, become a party to a merger or consolidation, or purchase or otherwise acquire all or a substantial part of the assets of any Person or any shares or other evidence of beneficial ownership of any Person, or dissolve or liquidate. Section 8.4 Restricted Payments. Without the prior written consent of the Agent and the Lenders, Borrower will not declare or pay any dividends or make any other payment or distribution (in cash, property, or obligations) on account of its capital stock or redeem, purchase, retire, or otherwise acquire any of its capital stock, or set apart any money for a sinking or other analogous fund for any dividend or other distribution on its capital stock or for any redemption, purchase, retirement, or other acquisition of any of its capital stock, or grant or issue any capital stock or any warrant, right, or option pertaining to its capital stock, or issue any security convertible into capital stock, or permit any of its Subsidiaries to purchase or otherwise acquire any capital stock of Borrower or another Subsidiary; provided, however, that so long as no Potential Default or Event of Default exists, Borrower may pay quarterly dividends on its capital stock, in an amount not to exceed forty percent (40%) of Borrower's net profit before taxes, as determined on a quarterly basis in accordance with GAAP (as reflected in the monthly financial statements delivered by Borrower to Agent in accordance with SECTION 7.1(B) of this Agreement and as confirmed by the annual financial statements delivered by Borrower to Agent In accordance with SECTION 7.1(A) of this Agreement), unless the payment of any such dividend would create or result in the existence of an Event of Default or Potential Default; provided, however, Borrower may purchase treasury stock so long as it remains in compliance with the Consolidated Debt to Consolidated Tangible Net Worth Ratio as evidenced by a Covenant Compliance Certificate showing the effect of any treasury stock purchase submitted to Agent on the date of such purchase. Section 8.5 Loans and Investments. Borrower will not make, and will not permit any Subsidiary to make, any advance, loan, extension of credit, or capital contribution to or investment in, or purchase, or permit any Subsidiary to purchase, any stock, bonds, notes, debentures, or other securities of any Person, except: (a) readily marketable direct obligations of the United States of America; (b) fully insured certificates of deposit with maturities of one year or less from the date of acquisition issued by any commercial bank operating in the United States of America having capital and surplus in excess of $50,000,000.00. (c) loans or advances to employees of Borrower in an aggregate amount not to exceed $25,000.00. Page 24 29 Section 8.6 Transactions With Affiliates. Borrower will not enter into, and will not permit any Subsidiary to enter into, any transaction, including, without limitation, the purchase, sale; or exchange of property or the rendering of any service, with any Affiliate of Borrower or such Subsidiary, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to Borrower or such Subsidiary than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate of Borrower or such Subsidiary. Section 8.7 Disposition of Assets. Borrower will not sell, lease, assign, transfer, or otherwise dispose of any of its assets, or permit any Subsidiary to do so with any of its assets, except (a) dispositions of inventory in the ordinary course of business and (b) from the date of this Agreement until the Termination Date, dispositions of assets other than inventory) in the ordinary course of business having an aggregate fair market value of $100,000.00 or less. Section 8.8 Prepayment of Debt. Borrower will not prepay, and will not permit any Subsidiary to prepay, any Debt, except the Obligations. Section 8.9 Nature of Business. Borrower will not, and will not permit any Subsidiary to, engage in any business other than the businesses in which they are engaged as of the date hereof. Section 8. 10 Compliance with Environmental Laws. Borrower will not, and will not permit any of its Subsidiaries to, (a) use (or permit any tenant to use) any of their respective properties or assets for the handling, processing, storage, transportation, or disposal of any Hazardous Substance, (b) generate any Hazardous Substance, (c) conduct any activity which is likely to cause a release or threatened release of any Hazardous Substance, or (d) otherwise conduct any activity or use any of their respective properties or assets in any manner that is likely to violate any Environmental Law. Section 8.11 Accounting. Borrower will not make, and will not permit any of its Subsidiaries to make, any change in accounting treatment or reporting practices, except as required by GAAP. ARTICLE 9 Financial Covenants Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Lender has any Commitment hereunder, Borrower will observe and perform the following financial covenants, unless the Agent and each Lender shall otherwise consent in writing: Section 9.1 Consolidated Debt to Consolidated Tangible Net Worth Ratio. Borrower will at all times maintain a Consolidated Debt to Consolidated Tangible Net Worth Ratio of not greater than 2.5 to 1.0. Section 9.2 Capital Expenditures. Borrower will not permit the aggregate capital expenditures of Borrower and the Subsidiaries to exceed Four Hundred Thousand Dollars ($400,000.00) during any fiscal year or during the fiscal year commencing July 1, 1995 Nine Million Six Hundred Thousand Dollars ($9,600,000.00). Section 9.3 Funded Debt to EBDIT Ratio. Borrower will at all times maintain a Funded Debt to EBDIT Ratio, measured monthly on a rolling twelve month basis, of not greater than 3.5 to 1.0. Page 25 30 ARTICLE 10 Default Section 10.1 Events of Default. Each of the following shall be deemed an "Event of Default": (a) Borrower shall fail to pay when due the Obligations or any part thereof. (b) Any representation, warranty, certification or statement made or deemed made by Borrower or any Obligated Party (or any of their respective officers) in any Loan Document or in any certificate, report, notice, or financial statement furnished at any time in connection with this Agreement shall be false, misleading, or erroneous in any material respect when made or deemed to have been made. (c) Borrower or any Obligated Party shall fail to perform, observe, or comply with any covenant, agreement, or term contained in this Agreement or any other Loan Document. (d) Borrower, any Subsidiary, or any Obligated Party shall commence a voluntary proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or a substantial part of its property or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors or shall generally fail to pay its debts as they become due or shall take any corporate action to authorize any of the foregoing. (e) An involuntary proceeding shall be commenced against Borrower, any Subsidiary, or any Obligated Party seeking liquidation, reorganization, or other relief with respect to it or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or a substantial part of its property, and such involuntary proceeding shall remain undismissed and unstayed for a period of thirty (30) days. (f) Borrower, any Subsidiary, or any Obligated Party shall fail to discharge within a period of thirty (30) days after the commencement thereof any attachment, sequestration, or similar proceeding or proceedings involving an aggregate amount in excess of Fifty Thousand Dollars ($50,000.00) against any of its assets or properties. (g) Borrower, any Subsidiary, or any Obligated Party shall fail to satisfy and discharge promptly any judgment or judgments against it for the payment of money in an aggregate amount in excess of Fifty Thousand Dollars ($50,000.00). (h) Borrower, any Subsidiary, or any Obligated Party shall fail to pay when due any principal of or interest on any Debt (other than the Obligations), or the maturity of any such Debt shall have been accelerated, or any such Debt shall have been required to be prepaid prior to the stated maturity thereof, or any event shall have occurred that permits (or, win the giving of notice or lapse of time or both, would permit) any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity thereof or require any such prepayment. (i) This Agreement or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by Page 26 31 Borrower, any Subsidiary, any Obligated Party or any of their respective shareholders, or Borrower or any Obligated Party shall deny that it has any further liability or obligation under any of the Loan Documents, or any lien or security interest created by the Loan Documents shall for any reason cease to be a valid, first priority perfected security interest in and lien upon any of the Collateral purported to be covered thereby. (j) Any of the following events shall occur or exist with respect to Borrower or any Subsidiary: (i) any Prohibited Transaction involving any Plan; (ii) any Reportable Event with respect to any Plan; (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (iv) any event or circumstance that might constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Plan, or the institution by the PBGC of any such proceedings; (v) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan or the reorganization, insolvency, or termination of any Multiemployer Plan; and in each case above, such event or condition, together with all other events or conditions, if any, have subjected or could in the reasonable opinion of Agent subject Borrower to any tax, penalty, or other liability to a Plan, a Multiemployer Plan, the PBGC, or otherwise (or any combination thereof) which in the aggregate exceed or could reasonably be expected to exceed Fifty Thousand Dollars ($50,000.00). (k) The occurrence of a Change of Ownership or Change of Management. (1) Borrower, any of its Subsidiaries, or any Obligated Party, or any of their properties, revenues, or assets, shall become subject to an order of forfeiture, seizure, or divestiture (whether under RICO or otherwise) and the same shall not have been discharged within thirty (30) days from the date of entry thereof. Section 10.2 Remedies Upon Default. If any Event of Default shall occur, the Lenders may without notice terminate their Commitments to make Advances and declare the Obligations or any part thereof to be immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Borrower; provided, however, that upon the occurrence of an Event of Default under SECTION 10.1 (D) or SECTION 10.1(E), the Commitments of Lenders to make Advances shall automatically terminate, and the Obligations shall become immediately due and payable without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Borrower. If any Event of Default shall occur, the Agent and the Lenders may exercise all rights and remedies available to them in law or in equity, under the Loan Documents, or otherwise. Section 10.3 Performance by Agent and Lenders. If Borrower shall fail to perform any covenant, duty, or agreement contained in any of the Loan Documents, Agent and Lenders may perform or attempt to perform such covenant, duty, or agreement on behalf of Borrower. In such event, Borrower shall, at the request of Agent, promptly pay any amount expended by the Agent and any Lender in such performance or attempted performance to Agent, together with interest thereon at the Default Rate from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly agreed that neither the Agent nor any Lender shall have any liability or responsibility for the performance of any obligation of Borrower under this Agreement or any other Loan Document. Page 27 32 Section 10.4 Setoff. Each Lender shall have the right to set off and apply against the Obligations in such manner as such Lender may determine, at any time and without notice to Borrower, any and all deposits (general or special, time or demand, provisional or final) or other sums at any time credited by or owing from such Lender to Borrower whether or not the Obligations are then due. As further security for the Obligations, Borrower hereby grants to each Lender a security interest in all money, instruments, and other property of Borrower now or hereafter held by such Lender, including, without limitation, property held in safekeeping. In addition to each Lender's right of setoff and as further security for the Obligations, Borrower hereby grams to each Lender a security interest in all deposits (general or special, time or demand, provisional or final) and other accounts of Borrower now or hereafter on deposit with or held by any Lender and all other sums at any time credited by or owing from any Lender to Borrower. The rights and remedies of Lenders hereunder are in addition to other rights and remedies (including, without limitation, other rights of setoff) which Lenders may have. ARTICLE 11 The Agent Section 11.1 Appointment, Powers and Immunities. Each Lender hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Neither the Agent nor any of its Affiliates, officers, directors, employees, attorneys or agents shall be liable for any action taken or omitted to be taken by any of them hereunder or otherwise in connection with this Agreement or any of the other Loan Documents except for its or their own gross negligence or willful misconduct. Without limiting the generality of the preceding sentence, the Agent (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent, (b) shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee or fiduciary for any Lender, (c) shall not be required to initiate any litigation or collection proceedings hereunder or under any other Loan Document except to the extent requested by the Required Lenders, (d) shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement or any other Loan Document, or any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, validity, effectiveness, enforceability or sufficiency of this Agreement or any other Loan Document, or any other document referred to or provided for herein or therein or for any failure by any Person to perform any of his or its obligations hereunder or thereunder, (e) may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it In accordance with the advice of such counsel, accountants or experts, and (f) shall incur no liability under or in respect of any Loan Document, by acting upon any notice, consent, certificate or other instrument or writing reasonably believed by it to be genuine and signed or sent by the proper party or parties. As to any matters not expressly provided for by this Agreement, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Lenders, and such instructions of the Required Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Banks; provided, however, that the Agent shall not be required to take any action which exposes the Agent to liability or which is contrary to this Agreement or any other Loan Document or applicable law. Section 11.2 Rights of Agent as a Lender. With respect to its Commitment, the Advances made by it and the Note issued to it, Texas Commerce Bank (and any successor acting as Agent) in its capacity as a Page 28 33 Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to, act as trustee under indentures of, provide merchant barking services to, own securities of, and generally engage in any kind of banking, trust or other business with, the Borrower, the Guarantors or any of their Affiliates and any other Person who may do business with or own securities of the Borrower, the Guarantors, or any of their Affiliates, all as if it were not acting as the Agent and without any duty to account therefor to the Lenders. Section 11.3 Defaults. The Agent shall not be deemed to have knowledge or notice of the occurrence of an Event of Default or Potential Default unless the Agent has received notice from a Lender or the Borrower specifying such Event of Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of an Event of Default or Potential Default, the Agent shall give prompt notice thereof to the Lenders. The Agent shall (subject to SECTION 11.1 take such action with respect to such Event of Default as shall be directed by the Required Lenders, provided that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall seem advisable and in the best interest of the Lenders. Section 11.4 INDEMNIFICATION. THE LENDERS HEREBY AGREE TO INDEMNIFY THE AGENT FROM AND HOLD THE AGENT HARMLESS AGAINST, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE BORROWER AND THE GUARANTORS UNDER THIS AGREEMENT, RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE COMMITMENTS, ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES) AND DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY THE AGENT UNDER OR IN RESPECT OF ANY OF THE LOAN DOCUMENTS; PROVIDED, FURTHER, THAT NO LENDER SHALL BE LIABLE FOR ANY PORTION OF THE FOREGOING TO THE EXTENT CAUSED BY THE AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, IT IS THE EXPRESS INTENTION OF THE LENDERS THAT THE AGENT SHALL BE INDEMNIFIED HEREUNDER FROM AND HELD HARMLESS AGAINST ALL OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES) AND DISBURSEMENTS OF ANY KIND OR NATURE DIRECTLY OR INDIRECTLY ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE AGENT (EXCEPT TO THE EXTENT THE SAME ARE CAUSED BY THE AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT). WITHOUT LIMITING ANY OTHER PROVISION OF THIS SECTION 11.4, EACH LENDER AGREES TO REIMBURSE THE AGENT PROMPTLY UPON DEMAND FOR SUCH LENDER'S PRO RATA SHARE (CALCULATED ON THE BASIS OF ITS COMMITMENT) OF ANY AND ALL OUT-OF-POCKET EXPENSES (INCLUDING ATTORNEYS' FEES) INCURRED BY THE AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF OBLIGATIONS, RIGHTS, REMEDIES OR RESPONSIBILITIES UNDER, THE LOAN DOCUMENTS, TO THE EXTENT THAT THE AGENT IS NOT PROMPTLY REIMBURSED FOR SUCH EXPENSES BY THE BORROWER. Page 29 34 Section 11.5 Independent Credit Decisions. Each Lender agrees that it has independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrower and the Guarantors, and its own decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Lender, and based upon such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in talking or not taking action under this Agreement or any of the other Loan Documents. The Agent shall not be required to keep itself informed as to the performance or observance by the Borrower or Guarantors of this Agreement or any other Loan Document, or to inspect the properties or books of the Borrower or Guarantors. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder or under the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other financial information concerning the affairs, financial condition or business of the Borrower or Guarantors (or any of their Affiliates) which may come into the possession of the Agent or any of its Affiliates. Section 11.6 Several Commitments. The Commitments and other obligations of the Lenders under this Agreement are several. The default by any Lender in making an Advance in accordance with its Commitment shall not, in and of itself, relieve the other Lenders of their obligations under this Agreement (which obligations, however, shall continue to be subject to the conditions set forth in the Loan Documents). In the event of any default by any Lender in making any Advance, each nondefaulting Lender shall not be obligated to advance the amount which the defaulting Lender was required to advance hereunder. In no event shall any Lender be required to advance an amount or amounts which would in the aggregate exceed such Lender's Commitment. No Lender shall be responsible for any act or omission of any other Lender. Section 11.7 Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint another Lender as successor Agent. If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the U.S. or any state thereof and having combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as successor Agent, such successor Agent shall thereupon succeed to and become vested with all rights, powers, privileges, immunities and duties of the resigning Agent, and the resigning Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents. After any Agent's resignation as Agent, the provisions of this ARTICLE 11 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was the Agent. ARTICLE 12 Miscellaneous Section 12.1 Expenses of Agent and Lenders. Borrower hereby agrees to pay Agent and Lenders on demand: (a)all costs and expenses incurred by Agent and Lenders in with the enforcement of this Agreement or any other Loan Document, including, without limitation, the fees and expenses of Agent and Lenders' legal counsel, and (b) all other costs and expenses incurred by Agent and Lenders in connection with this Agreement or any other Loan Document, including, without limitation, all costs, expenses, taxes, assessments, filing fees, and other charges levied by a governmental authority or Page 30 35 otherwise payable in respect of this Agreement or any other Loan Document or in obtaining or performing any audit or appraisal in respect of the Collateral. Section 12.2 Indemnification. Borrower hereby indemnifies the Agent, each Lender and each Affiliate thereof and their respective officers, directors, employees, attorneys, and agents from, and holds each of them harmless against, any and all losses, liabilities, claims, damages, penalties, judgments, disbursements, costs, and expenses (including attorneys' fees) to which any of them may become subject which directly or indirectly arise from or relate to (a) the negotiation, execution, delivery, performance, administration, or enforcement of any of the Loan Documents, (b) any of the transactions contemplated by the Loan Documents, (c) any breach by Borrower of any representation, warranty, covenant, or other agreement contained in any of the Loan Documents, (d) the presence, release, threatened release, disposal, removal, or cleanup of any Hazardous Substance located on, about, within, or affecting any of the properties or assets of Borrower or any Subsidiary or (e) any investigation, litigation, or other proceeding, including, without limitation, any threatened investigation, litigation, or other proceeding relating to any of the foregoing. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS' FEES) ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE PERSON TO BE INDEMNIFIED. Section 12.3 Limitation of Liability. Neither the Agent, any Lender nor any Affiliate, officer, director, employee, attorney, or agent of the Agent or any Lender shall have any liability with respect to, and Borrower hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by Borrower in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Borrower hereby waives, releases, and agrees not to sue the Agent or any Lender or any of the Agent's or any Lender's Affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Section 12.4 Lender Not Fiduciary. The relationship between Borrower, on the one hand, the Agent and/or Lenders on the other hand, is solely that of debtor and creditor, and neither the Agent nor any Lender has any fiduciary or other special relationship with Borrower, and no term or condition of any of the Loan Documents shall be construed so as to deem the ,relationship among Borrower, the Agent and the Lenders to be other than that of debtor and creditor. Section 12.5 No Waiver; Cumulative Remedies. No failure on the part of the Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law. Section 12.6 Successors and Assigns. Page 31 36 (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Neither the Borrower nor any Guarantor may assign or transfer any of his or its rights or obligations hereunder or under the other Loan Documents without the prior written consent of the Agent and the Lenders. Any Lender may sell participations to one or more banks or other institutions in all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitment and the Advances owing to it); provided, however, that (i) such Lender's obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitment) shall remain unchanged, (ii) such Lender shall remain solely responsible to the Borrower and the Guarantor (as applicable) for the performance of such obligations, (iii) such Lender shall remain the holder of its Note for all purposes of this Agreement, (iv) the Borrower and the Guarantors shall continue to deal solely and directly with such Lender in connection with such Lender's or the Borrower or such Guarantor's rights and obligations under this Agreement and the other Loan Documents, and (v) such Lender shall not sell a participation that conveys to the participant the right to vote or give or withhold consents under this Agreement or any other Loan Document, other than (if and to the extent that such Lender so agrees) the right to vote upon or consent to (A) any increase of such Lender's Commitment (other than an increase resulting from an assignment to or in favor of such Lender from another Lender in accordance with this Agreement), (B) any reduction of the principal amount of, or interest to be paid on, the Advances of such Lender, (C) any reduction of any fee or other amount payable to such Lender under any Loan Document if and to the extent that such reduction would decrease the fee or over amount payable to the participant, (D) any postponement of any date for the payment of any amount payable in respect of the Advances of such Lender, (E) any release of a material portion of the Collateral from the Liens created by the Security Documents and not otherwise expressly authorized by the Loan Documents, and (F) any release of the Borrower or any Guarantor from liability under the Loan Documents. (b) The Borrower and each of the Lenders agree that any Lender (the "Assigning Lender") may at any time assign to one or more Eligible Assignees all, or a proportionate part of all, of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitment and Advances) (each an Assignees; provided, however, that (i) each such assignment shall be of constant (as opposed to varying) percentage of the Assigning Lender's rights and obligations under this Agreement and the other Loan Documents, (ii) except in the case of an assignment of all of a Lender's rights and obligations under this Agreement and the other Loan Documents, the amount of the Commitment and Advances of the Assigning Lender being assigned pursuant to each assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $1,000,000, and (iii) the parties to each such assignment shad execute and deliver to the Agent for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance, together with the Note subject to such assignment, and a processing and recordation fee of $2,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, or, if so specified in such Assignment and Acceptance, the date of acceptance thereof by the Agent, (A) the Assignee thereunder shall be a party hereto as a Lender and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and under the Loan Documents, and (B) the Assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of a Lender's rights and obligations under the Loan Documents, such Lender shall cease to be a party thereto). Page 32 37 (c) By executing and delivering an Assignment and Acceptance, the Assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such Assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Documents, or the execution, legality, validity, enforceability, genuineness, sufficiency or value thereof or any other instrument or document furnished pursuant thereto; (ii) such Assigning Lender makes no representation or warrant and assumes no responsibility with respect to the financial condition or performance of the Borrower or any Guarantor or the performance or observance by Borrower or any Guarantor of his or its obligations under the Loan Documents, (iii) such Assignee confirms that it has received a copy of the other Loan Documents, together with copies of the financial statements referred to in Section 6.2 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such Assignee will, independently and without reliance upon the Agent or such Assigning Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents; (v) such Assignee confirms that it is an Eligible Assignee; (vi) such Assignee appoints and authorizes the Agent to take such action as agent on its behalf and exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (vii) such Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender. The Agent shall maintain at its office a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lender and the Commitment of, and principal amount of the Advances owing to, each Lender from tune to time (the "Register". The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Guarantors, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes under the Loan Documents. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an Assigning Lender and Assignee representing that it is an Eligible Assignee, together with the Note subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of EXHIBIT "J" hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt written notice thereof to the Borrower. Within five Business Days after its receipt of such notice the Borrower, at its expense, shall execute and deliver to the Agent in exchange for each surrendered Note, a new Note payable to the order of such Eligible Assignee in an amount equal to the portion of such Note assigned to it and, if the Assigning Lender has retained any Commitment, a new Note evidencing each such Commitment payable to the order of the Assigning Lender in the amount of such Commitment retained by it (each such promissory note shall constitute a "Note" for purposes of the Loan Documents). Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of EXHIBIT A hereto. (e) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this SECTION 12.6, disclose to the Assignee or participant or proposed Assignee or participant any information relating to the Borrower, any Guarantor or any of his or its Affiliates furnished to such Lender by or on behalf of such Person. Page 33 38 (f) Any Lender may assign and pledge the Note held by it to any Federal Reserve Bank or the U.S. Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve System and/or Federal Reserve Bank; provided, that, any payment made by the Borrower for the benefit of such assigning and/or pledging Lender in accordance with the terms of the Loan Documents shall satisfy the Borrower's obligations under the Loan Documents in respect thereof to the extent of such payment. No such assignment and/or pledge shall release the assigning and/or pledging Lender from its obligations hereunder. Section 12.7 Survival. All representations and warranties made in this Agreement or any other Loan Document or in any documentation, statement, or certificate furnished in connection win this Agreement shall survive the execution and delivery of this Agreement and the other Loan Documents, and no investigation by the Agent or any Lender or any closing shall affect the representations and warranties or the right of the Agent and the Lenders to rely upon them. Without prejudice to the survival of any other obligation of Borrower hereunder, the obligations of Borrower under ARTICLE 4 AND SECTIONS 12.1 and 12.2 shall survive repayment of the Notes and termination of the Commitments. SECTION 12.8 ENTIRE AGREEMENT; AMENDMENT. THIS AGREEMENT, THE NOTES, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. No amendment or waiver of any provision of this Agreement, the Notes or any other Loan Document to which the Borrower or any Guarantor is a party, nor any consent to any departure by the Borrower or any Guarantor therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Required Lenders and the Borrower or such Guarantor (as applicable) in writing, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, that no amendment, waiver or consent shall, unless in writing and signed by all of the Lenders and the Borrower, do any of the following: (a) increase the Commitments of the Lenders or subject the Lenders to any additional obligations; (b) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder; (c) postpone any date fixed for any payment (including, without limitation, any mandatory prepayment) of principal of, or interest on, the Notes or any fees or other amounts payable hereunder; (d) waive any of the conditions precedent specified in ARTICLE 5, (e) change any Commitment or the aggregate unpaid principal amount of any Note or the number of Lenders which shall be required for the Lenders or any of them to take any action under this Agreement or any other Loan Document; (f) modify the definition of "Required Lenders" contained in SECTION 1.1; g) except as expressly authorized by this Agreement, release any Collateral from any of the Liens created by any of the Loan Documents; or (h) waive any Event of Default or amend any covenant contained herein. Section 12.9 Maximum Interest Rate. No provision of this Agreement or of any other Loan Document shall require the payment or the collection of interest in excess of the Maximum Rate. If any excess of interest in such respect is hereby provided for, or shall be adjudicated to be so provided, in any Loan Document or otherwise in connection with this loan transaction, the provisions of this SECTION 12.9 shall Page 34 39 govern and prevail and neither Borrower nor the sureties, guarantors, successors, or assigns of Borrower shall be obligated to pay the excess amount of such interest or any other excess sum paid for the use, forbearance, or detention of sums loaned pursuant hereto. In the event the Agent or any Lender ever receives, collects, or applies as interest any such sum, such amount which would be in excess of the maximum amount permitted by applicable law shall be applied as a payment and reduction of the principal of the indebtedness evidenced by the Notes; and, if the principal of the Notes have been paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable exceeds the Maximum Rate, Borrower, Agent and Lenders shall, to the extent permitted by applicable law, (a) characterize any nonprincipal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by the Notes so that interest for the entire term does not exceed the Maximum Rate. Section 12.10 Notices. All notices and other communications provided for in this Agreement and the other Loan Documents to which Borrower is a party shall be given or made in writing and telecopied, mailed by certified mail return receipt requested, or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party at such other address as shall be designated by such party in a notice to the other party given in accordance with this SECTION 12.10. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopy, subject to telephone confirmation of receipt, or when personally delivered or, in the case of a mailed notice, when duly deposited in the mails, in each case given or addressed as aforesaid; provided, however, notices to Agent pursuant to ARTICLE 2 AND SECTION 3.5 shall not be effective until received by Agent. Section 12.11 Applicable Law: Venue: Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. This Agreement has been entered into in Dallas County, Texas, and it shall be performable for all purposes in Dallas County, Texas. Any action or proceeding against Borrower under or in connection with any of the Loan Documents may be brought in any state or federal court in Dallas County, Texas. Borrower hereby irrevocably (a) submits to the nonexclusive jurisdiction of such courts, and (b) waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in any such court or that any such court is an inconvenient fund. Borrower agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified or determined in accordance with the provisions of SECTION 12.10. Nothing herein or in any of the other Loan Documents shall affect the right of the Agent and the Lenders to serve process in any other manner permitted by law or shall limit the right of the Agent and the Lenders to bring any action or proceeding against Borrower or with respect to any of its property in courts in other jurisdictions. Any action or proceeding by Borrower against the Agent or any Lender shall be brought only in a court located in Dallas County, Texas. Section 12.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. Section 12. 13 Severability. Any provision of this Agreement held by a court of competent jurisdiction to be Invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. Page 35 40 Section 12.14 Headings. The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section 12.15 Non-Application of Chapter 15 of Texas Credit Code. The provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article 5069-15) are specifically declared by the parties hereto not to be applicable to this Agreement or any of the other Loan Documents or to the transactions contemplated hereby. Section 12.16 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF THE AGENT AND THE LENDERS IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. Section 12.17 ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW). THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. i. Special Rules. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF THE BORROWER'S DOMICILE AT TIME OF THIS AGREEMENT'S EXECUTION AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AND ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. ii. Reservation of Rights. NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS AGREEMENT; OR (II) BE A WAIVER BY THE AGENT OR ANY LENDER OF THE PROTECTION AFFORDED TO IT BY 12 U.S. C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE AGENT AND THE LENDERS (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR Page 36 41 ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE AGENT AND THE LENDERS MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. WITNESS IN WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. BORROWER: CRAFTMADE INTERNATIONAL, INC., a Delaware corporation By: --------------------------- Name: James R. Ridings Title: Chief Executive Officer Page 37 42 Address for Notices: 650 S. Royal Lane, Suite 100 Coppell, Texas 75019 Fax No.: (214) 304-3754 Telephone No.: (214) 393-3800 Attention: Kenneth M. Cancienne Chief Financial Officer DUROCRAFT INTERNATIONAL, INC., a Texas corporation By: --------------------------- Name: James R. Ridings Title: Chief Executive Officer Address for Notices: 650 S. Royal Lane, Suite 100 Coppell, Texas 75019 Fax No.: (214) 304-3754 Telephone No.: (214) 393-3800 Attention: Kenneth M. Cancienne Chief Financial Officer TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: --------------------------- Name: Jerry Petrey Title: Vice President Address for Notices: 500 East Border Street PO Box 250 Arlington, Texas 76004 Fax No.: (817) 856-3183 Telephone No.: (817) 856-3125 Attention: Jerry Petrey Title: Vice President LENDER: ------- TEXAS COMMERCE BANK NATIONAL ASSOCIATION Commitment: ---------- $6,000,000.00 By: Name: Jerry Petrey Title: Vice President Address for Notices: 500 East Border Street PO Box 250 Arlington, Texas 76004 Fax No.: (817) 856-3183 Telephone No.: (817) 856-3125 Page 38 43 Attention: Jerry Petrey Title: Vice President OVERTON BANK AND TRUST Commitment: - ---------- $6,000,000.00 By: Name: Dale Griggs Title: Executive Vice President Address for Notices: 4200 South Hulen Fort Worth, Texas 76109 Fax No.: (817) 731-9123 Telephone No.: (817) 731-0101 Attention:Dale Griggs Executive Vice President Page 39 44
INDEX TO EXHIBITS Exhibit Description of Exhibit "A" Note "B" Advance Request Form "C" Borrowing Base Report "D" Craftmade Security Agreement "E" Durocraft Security Agreement "F" Covenant Compliance Certificate "G" C/D/R Guaranty "H" Form of Application "I" Form of Assignment and Acceptance "J" Assignment of Life Insurance INDEX TO SCHEDULES Schedule Description of Schedule 1 Locations of Collateral 2 Existing Debt 3 List of Subsidiaries 4 Existing Liens 5 UCC Filing Jurisdictions 6 Liens to be Released, Assigned or Subordinated
Page 40 45 EXHIBIT "A" Note 46 PROMISSORY NOTE $6,000,000.00 Dallas, Texas May 30, 1996 FOR VALUE RECEIVED, the undersigned, CRAFTMADE INTERNATIONAL, INC., a Delaware corporation, and DUROCRAFT INTERNATIONAL, INC., a Texas corporation (jointly and severally "Maker"), hereby promises to pay to the order of TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("Payee"), at the offices of the Agent at 2200 Ross Avenue, P.O. Box 660197, Dallas, Dallas County, Texas 75266-0197, in lawful money of the United States of America, the principal sum of SIX MILLION DOLLARS AND 00/100ths ($6,000,000.00), or so much thereof as may be advanced and outstanding thereunder, together with interest on the outstanding principal balance as thereinafter described. This Note is one of the Notes provided for in that certain Credit Agreement of even date therewith among Maker, Texas Commerce Bank National Association as Agent, and the Lenders which are parties thereto (as the same may be amended or otherwise modified, therein referred to as the "Agreements"). Capitalized terms not otherwise defined therein shall have the same meanings as set forth in the Agreement. Reference is hereby made to the Agreement for provisions affecting this Note, including, without limitation, provisions regarding the Maker's rights to borrow, repay and reborrow thereunder, the limitation of interest charged thereunder, the Collateral securing this Note, Potential Defaults and Events of Default and Payee's rights arising as a result of the occurrence thereof. Subject to the terms of the Agreement, the outstanding principal balance thereunder shall bear interest prior to maturity at a varying rate per annum which shall from day to day be equal to the lesser of (a) the Maximum Rate or (b) the Applicable Rate, each such change in the rate of interest charged hereunder to become effective, without notice to Maker, on the effective date of each change in the Applicable Rate or the Maximum Rate, as the case may be; provided, however, if at any time the rate of interest specified in clause (b) preceding shall exceed the Maximum Rate, thereby causing the interest rate thereon to be limited to the Maximum Rate, then any subsequent reduction in the Applicable Rate shall not reduce the rate of interest thereon below the Maximum Rate until such time as the aggregate amount of interest accrued thereon equals the aggregate amount of interest which would have accrued thereon if the interest rate specified in clause (b) preceding shall at all times been in effect. All outstanding principal advanced under this Note shall be due and payable on the Termination Date. Accrued and unpaid interest on this Note shall be due and payable on the last Business Day of each month, commencingJune 28, 1996, and on the Termination Date. All past due principal and interest shall bear interest at the Default Rate. Interest on the indebtedness evidenced by this Note shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day) unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. If the holder thereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder thereunder, or if this Note is placed in the hands of an attorney for Page 1 47 collection, or if it is collected through any legal proceedings, Maker agrees to pay all costs, expenses and fees incurred by the holder, including reasonable attorneys' fees. This Note shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. This Note is performable in Dallas County, Texas. Maker and each surety, guarantor, endorser and over party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. Maker hereby authorizes the holder thereof to record in its records all advances made to Maker hereunder and all payments made on account of the principal thereof, which records shall be prima facie evidence as to the outstanding principal amount of this Note; provided, however, any failure by the holder thereof to make any such records shall not limit or otherwise affect the obligations of Maker under the Agreement or this Note. THIS WRITTEN AGREEMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENTS THE FINAL AGREEMENT BETWEEN MAKER AND PAYEE AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF MAKER AND PAYEE. THERE ARE NO ORAL AGREEMENTS BETWEEN MAKER AND PAYEE. CRAFTMADE INTERNATIONAL, INC. By: ----------------------------------- Name: James R. Ridings Title: Chief Executive Officer DUROCRAFT INTERNATIONAL, INC. By: ----------------------------------- Name:: James R. Ridings Title: Chief Executive Officer Page 2 48 PROMISSORY NOTE $6,000,000.00 Dallas, Texas May 30, 1996 FOR VALUE RECEIVED, the undersigned, CRAFTMADE INTERNATIONAL, INC., a Delaware corporation, and DUROCRAFT INTERNATIONAL, INC., a Texas corporation (jointly and severally "Maker"), hereby promises to pay to the order of ("Payee"), at the offices of the Agent at 2200 Ross Avenue, P.O. Box 660197, Dallas, Dallas County, Texas 75266-0197, in lawful money of the United States of America, the principal sum of SIX MILLION DOLLARS AND 00/100ths ($6,000,000.00), or so much thereof as may be advanced and outstanding thereunder, together with interest on the outstanding principal balance as thereinafter described. This Note is one of the Notes provided for in that certain Credit Agreement of even date therewith among Maker, Texas Commerce Bank National Association as Agent, and the Lenders which are parties thereto (as the same may be amended or otherwise modified, therein referred to as the "Agreements"). Capitalized terms not otherwise defined therein shall have the same meanings as set forth in the Agreement. Reference is hereby made to the Agreement for provisions affecting this Note, including, without limitation, provisions regarding the Maker's rights to borrow, repay and reborrow thereunder, the limitation of interest charged thereunder, the Collateral securing this Note, Potential Defaults and Events of Default and Payee's rights arising as a result of the occurrence thereof. Subject to the terms of the Agreement, the outstanding principal balance thereunder shall bear interest prior to maturity at a varying rate per annum which shall from day to day be equal to the lesser of (a) the Maximum Rate or (b) the Applicable Rate, each such change in the rate of interest charged hereunder to become effective, without notice to Maker, on the effective date of each change in the Applicable Rate or the Maximum Rate, as the case may be; provided, however, if at any time the rate of interest specified in clause (b) preceding shall exceed the Maximum Rate, thereby causing the interest rate thereon to be limited to the Maximum Rate, then any subsequent reduction in the Applicable Rate shall not reduce the rate of interest thereon below the Maximum Rate until such time as the aggregate amount of interest accrued thereon equals the aggregate amount of interest which would have accrued thereon if the interest rate specified in clause (b) preceding shall at all times been in effect. All outstanding principal advanced under this Note shall be due and payable on the Termination Date. Accrued and unpaid interest on this Note shall be due and payable on the last Business Day of each month, commencing June 28, 1996, and on the Termination Date. All past due principal and interest shall bear interest at the Default Rate. Interest on the indebtedness evidenced by this Note shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day) unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. If the holder thereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder thereunder, or if this Note is placed in the hands of an attorney for Page 1 49 collection, or if it is collected through any legal proceedings, Maker agrees to pay all costs, expenses and fees incurred by the holder, including reasonable attorneys' fees. This Note shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. This Note is performable in Dallas County, Texas. Maker and each surety, guarantor, endorser and over party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. Maker hereby authorizes the holder thereof to record in its records all advances made to Maker hereunder and all payments made on account of the principal thereof, which records shall be prima facie evidence as to the outstanding principal amount of this Note; provided, however, any failure by the holder thereof to make any such records shall not limit or otherwise affect the obligations of Maker under the Agreement or this Note. THIS WRITTEN AGREEMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENTS THE FINAL AGREEMENT BETWEEN MAKER AND PAYEE AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF MAKER AND PAYEE. THERE ARE NO ORAL AGREEMENTS BETWEEN MAKER AND PAYEE. CRAFTMADE INTERNATIONAL, INC. By: ----------------------------------- Name: James R. Ridings Title: Chief Executive Officer DUROCRAFT INTERNATIONAL, INC. By: ----------------------------------- Name:: James R. Ridings Title: Chief Executive Officer Page 2 50 EXHIBIT "B" Advance Request Form Page 3 51 ADVANCE REQUEST FORM TO: Texas Commerce Bank National Association Attention: Jerry G. Petrey Vice President 500 East Border Street PO Box 250 Arlington, Texas 76004 Gentlemen: The undersigned is an officer of Craftmade International, Inc./Durocraft International, Inc. (jointly and severally, the "Borrower") and is authorized to make and deliver this certificate pursuant to that certain Credit Agreement dated as of May 30, 1996, among Borrower, Texas Commerce Bank National Association., as Agent, and the Lenders which are parties thereto (the "Credit Agreements"). All capitalized terms defined in the Credit Agreement shall have the same meanings therein. In accordance with the Agreement, Borrower hereby requests that Lenders make an Advance in the amount set forth in item (e) below. In connection with the foregoing and pursuant to the terms and provisions of the Credit Agreement, the undersigned hereby certifies that the following statements are true and correct: (i) The representations and warranties contained in Article 6 of the Credit Agreement and in each of the other Loan documents are true and correct on and as of the date thereof with the same force and effect as if made on and as of such date. (ii) No Event of Default or Potential Default has occurred and is continuing. (iii) There has been no material adverse change in the business, condition (financial or otherwise), operations, prospects, or properties of Borrower or any Subsidiary. (iv) Borrower has not, and will not after giving effect to the credit extended pursuant to this request, exceed the credit limits set forth in the Credit Agreement. (v) All information supplied below is true, correct, and complete as of the date thereof. ADVANCE REQUEST INFORMATION (a) Commitments $ _______________ (b) Borrowing Base (as reflected on most recent Borrowing Base Report) $ _______________ (c) Aggregate outstanding of Advances $ _______________ (d) Net availability $ _______________ (i) (Lesser of Commitments or Borrowing Base) minus line (c) $ _______________
Page 5 52 (ii) Outstanding Advances supported by Eligible Inventory (not to exceed 60% of line (c) $ _______________ (e) Amount of requested Advance (not to exceed line (d)(i) in aggregate) Advance Type Interest Period (if Eurodollar Advance) Amount of (Prime Rate or Eurodollar) (30, 60, 90 or 180 days) Advance ------------------------ ------- 1. ________________________ __________________________________ $ ______ 2. ________________________ __________________________________ $ ______ 3. ________________________ __________________________________ $ ______ (f) Date of requested Advance ___________, 19__
BORROWER: CRAFTMADE INTERNATIONAL, INC. By: ----------------------------------- Name: James R. Ridings Title: Chief Executive Officer DUROCRAFT INTERNATIONAL, INC. By: ----------------------------------- Name: James R. Ridings Title: Chief Executive Officer Dated as of: [insert date of requested Advance] Page 5 53 EXHIBIT "C" Borrowing Base Report Page 6 54 BORROWING BASE REPORT TO: Texas Commerce Bank National Association Attention: Jerry G. Petrey Vice President 500 East Border Street PO Box 250 Arlington, Texas 76004 Gentlemen:: This Borrowing Base Report ("Report") for the month ending , 199_ is executed and delivered by Craftmade International, Inc., and Durocraft International, Inc., (jointly and severally, the "Borrower") to Texas Commerce Bank National Association as Agent (the "Agent"), pursuant to that certain Credit Agreement (the "Credit Agreement") dated as of May 30, 1996 among Borrower, the Agent and the Lenders which are parties thereto. All capitalized terms used therein shall have the meanings assigned to them in the Credit Agreement. Borrower represents and warrants to the Agent and the Lenders that all information contained therein is the, correct, and complete, and that the total Eligible Accounts and Eligible Inventory referred to below represent the Eligible Accounts and Eligible Inventory that qualify for purposes of determining the Borrowing Base under the Credit Agreement. Borrower further represents and warrants to the Agent and the Lenders that attached hereto as Exhibit "A" is an Accounts Receivable Aging Report dated as of the date thereof. 1. Eligible Accounts (a) Gross Accounts $ _____________ (b) Less: (i) Accounts over 60 days past due $ _____________ (ii) Accounts, not already included in (i) of any account debtor whose accounts total $150,000.00 or more if 20% of the dollar amount of all accounts of such acount debtor are 60 days or more past due. [Applicable only if 18% or more of Borrower's total Accounts are 60 days or more past due. % currently past due ________ ]. $ _____________ (iii) Affiliate Accounts . . . $ _____________ (iv) Accounts subject to setoff or dispute $ _____________ (v) Other ineligibles $ _____________ (vi) Total Ineligible Accounts (sum of lines (i)-(v)) . $ _____________ (c) Total Eligible Accounts (line (a) minus line (b)(vi)) . . . $________________ x 80% $ _____________
g:\group\mmls\wpdata\!!c|0402610c.doc Page 1 55 2. Eligible Inventory (a) Gross finished inventory (at lesser of cost or market) $ _____________ (b) Gross unassembled lamp parts (at lesser of cost or market) $ _____________ (c) Total Gross Inventory (sum of (a) + (b)) $ _____________ (d) Less: Ineligibles $ _____________ (e) Total Eligible Inventory (line (c) minus line (d)) $ _____________ x 50%= $ ________________ 3. Total Borrowing Base -------------------- (line 1(c) plus line 2(e) $ ________________
Page 8 56 4. Outstanding principal amount of Advances $ _____________ 5. Net Availability (a) (Lesser of Commitments [minus outstanding face amount of Letters of Credit] or Borrowing Base (line 3)) minus line 4 $ _____________ (b) Outstanding Advances supported by Eligible Inventory (not to exceed 60% of line 4) $ _____________ (c) Amount by which line 5(b) exceeds 60% of line 4 $ _____________
If the number listed on line 5(a) is a negative number or if any amount is listed on line 5(c), Borrower will promptly repay such amount plus accrued interest thereon to the Agent, for the ratable benefit of the Lenders, in accordance with the Credit Agreement. Borrower further represents and warrants to the Agent and the Lenders that the representations and warranties contained in Article 6 of the Credit Agreement and in each of the over Loan documents are true and correct on and as of the date of this Report as if made on and as of the date thereof, and that no Event of Default or Potential Default has occurred and is continuing. Date: BORROWER: CRAFTMADE INTERNATIONAL, INC. By: ----------------------------------- Name: Ken Cancienne Title: Chief Financial Officer DUROCRAFT INTERNATIONAL, INC. By: ----------------------------------- Name: Ken Cancienne Title: Chief Financial Officer Page 9 57 EXHIBIT "A" TO BORROWING BASE REPORT Accounts Receivable Aging Report Page 10 58 EXHIBIT "D" Security Agreement Page 11 59 SECURITY AGREEMENT THIS SECURITY AGREEMENT (The "Agreement") dated as of May 30, 1996, is by and between CRAFTMADE INTERNATIONAL, INC., a Delaware corporation (the ''Debtor") and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, as Agent for the Lenders (as defined below) (in such capacity, the "Secured Party ''). RECITALS: A. Concurrently herewith, Craftmade International, Inc. and Durocraft International, Inc., jointly and severally as Borrower, Texas Commerce Bank National Association as Agent for Lenders and Texas Commerce Bank National Association and Overton Bank and Trust as Lenders entered into a Credit Agreement providing for a revolving line of credit in the maximum principal amount of $12,000,000.00. B. The Secured Party and the Lenders have required the Debtor to execute and deliver this Agreement as a condition to their execution of the Credit Agreement. NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 Definitions Section 1.1 Definitions. Capitalized terms used in this Agreement, to the extent not otherwise defined herein, shall have the same meanings as set forth in the Credit Agreement. Terms used herein which are defined in the Uniform Commercial Code as adopted by the State of Texas, unless otherwise defined herein or in the Credit Agreement, shall have the meanings set forth in the Uniform Commercial Code as adopted by the State of Texas. ARTICLE 2 Security Interest Section 2.1 Security Interest. Subject to the terms of this Agreement and to secure the Obligations and all present and future obligations of Debtor under this Agreement (collectively the "Secured Obligations"), Debtor hereby grants to Secured Party, for the ratable benefit of the Lenders, a security interest in any and all of Debtor's right, title and interest in and to all accounts, equipment, inventory, chattel paper, documents, instruments, and general intangibles of Debtor, whether now owned or hereafter acquired and wherever arising or located, and all accessions and attachments thereto and all products and proceeds thereof, including, without limitation, all patents, patent applications, trademarks, trademark applications, trade names, trade name applications and other intellectual property rights (all of the foregoing property hereinafter sometimes referred to as the "Collateral"). ARTICLE 3 Representations and Warranties Page 12 60 To induce Secured Party and the Lenders to enter into this Agreement and the Credit Agreement, Debtor represents and warrants to Secured Party and the Lenders that: Section 3.1 Title. Except for the security interests granted herein, Debtor owns, and with respect to Collateral acquired after the date hereof Debtor will own, the Collateral free and clear of any lien, security interest, or other encumbrance. Section 3.2 Accounts. Unless Debtor has given Secured Party written notice to the contrary, whenever the security interest granted hereunder attaches to an account, Debtor shall be deemed to have represented and warranted to Secured Party and the Lenders as to each and all of its accounts that (a) each account is genuine and in all respects what it purports to be, (b) each account represents the legal, valid, and binding obligation of the account debtor evidencing indebtedness unpaid and owed by such account debtor arising out of the performance of labor or services by Debtor or the sale or lease of goods by Debtor, (c) the amount of each account represented as owing is the correct amount actually and unconditionally owing except for normal trade discounts granted in the ordinary course of business, and (d) no account is subject to any offset, counterclaim, or other defense. Section 3.3 Delivery of Collateral. Except as otherwise contemplated by SECTION 4. 13, all of Debtor's existing instruments, documents and chattel paper pledged pursuant hereto have been delivered to Secured Party. Section 3.4 Organization and Authority. Debtor is a corporation duly organized, validly existing, and in good standing under the laws of its state of incorporation and is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would have a material adverse effect on its business, financial condition or operations. Debtor has the corporate power and authority to execute, deliver, and perform this Agreement, and the execution, delivery, and performance of this Agreement by Debtor have been authorized by all necessary corporate action on the part of Debtor and do not and win not violate any law, rule or regulation or the articles of incorporation or bylaws of Debtor and do not and will not conflict with, result in a breach of, or constitute a default under the provisions of any indenture, mortgage, deed of trust, security agreement, or other instrument or agreement pursuant to which Debtor or any of its property is bound. Section 3.5 Principal Place of Business; Corporate Name. The principal place of business and chief executive office of Debtor, and the office where Debtor keeps its books and records, is located at the "Address for Notices" set forth below Debtor's name on the signature pages hereof. The exact corporate name of Debtor as it appears in its certificate of incorporation is set forth in the induction to this Agreement and Debtor has not done business in any location under any over mine. Section 3.6 Validity of Security Interest. The security interests granted by Debtor constitute valid, legal and perfected first priority security interests (except for security interests permitted under the Credit Agreement) in all the Collateral which secure the payment and performance of the Secured Obligations. Section 3.7 Benefit to Debtor. The operations of Debtor and Borrower are interrelated and interdependent and, therefore, loans and extensions of credit to Borrower produce direct financial benefits to the Debtor. The value of the consideration received and to be received by Debtor as a result of Borrower, Secured Party and the Lenders entering into the Credit Agreement and Debtor's executing and delivering this Agreement is reasonably worth at least as much as the liability and obligations of Debtor hereunder and under the other Loan Documents to which it is a party, is necessary and convenient to the conduct, promotion and attainment of the business of Debtor, and such liability and obligations have benefited and may reasonably be expected to benefit Debtor directly and indirectly. Section 3.8 No Reliance. Debtor has, independently and without reliance upon the Secured Party, and based upon such information as it has deemed appropriate, made its own business analysis and decision to enter into this Agreement and the other Loan Documents to which it is a party. Section 3.9 Enforceability. This Agreement constitutes the legal, valid, and binding obligation of Debtor enforceable against Debtor in accordance with its terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditors' rights. Section 3.10 Location of Collateral. All inventory and equipment of Debtor is located at the places specified for Debtor on Schedule 1 to the Credit Agreement. Debtor has exclusive possession and control of its inventory and equipment. Page 13 61 ARTICLE 4 Covenants Debtor covenants and agrees with Secured Party and the Lenders that until the Obligations are paid and performed in full and as long as any Lender has any Commitment under the Credit Agreement, Debtor shall observe and perform the following covenants, unless Secured Party shall otherwise consent in writing: Section 4.1 Maintenance. Debtor shall maintain the Collateral in good operating condition and repair and shall not permit any waste or destruction of the Collateral or any part thereof. Debtor shall not use or permit the Collateral to be used in violation of any law or inconsistently with the terms of any policy of insurance Debtor shall not use or permit the Collateral to be used in any manner or for any purpose that would impair the value of the Collateral or expose the Collateral to unusual risk. Section 4.2 Encumbrances. Debtor shall not create, permit, or suffer to exist, and shall defend the Collateral against, any lien, security interest, or other encumbrance on the Collateral except the security interest of Secured Party hereunder, and shall defend Debtor's rights in the Collateral and Secured Party's security interest in the Collateral against the claims of all persons and entities. Section 4.3 Modification of Collateral. Except as contemplated by SECTION 4. 14, Debtor shall not impair the rights of Secured Party in the Collateral and without the prior written consent of Secured Party, Debtor shall not grant any extension of time for any payment with respect to the Collateral, or compromise, compound, or settle any of the Collateral, or release in whole or in part any person or entity liable for payment with respect to the Collateral, or allow any credit or discount for payment with respect to the Collateral other than normal trade discounts granted in the ordinary course of business, or release any lien, security interest, or assignment securing the Collateral, or otherwise amend or modify any of the Collateral. Section 4.4 Disposition of Collateral. Debtor shall not sell, lease, or otherwise dispose of the Collateral or any part thereof without the prior written consent of Secured Party, except Debtor may sell inventory and equipment in the ordinary course of business. Section 4.5 Further Assurances. At any tune and from time to time, upon the request of Secured Party, and at the sole expense of Debtor, Debtor shall promptly execute and deliver all such further instruments and documents and take such further action as Secured Party may deem necessary or desirable to preserve and perfect its security interest in the Collateral and carry out the provisions and purposes of this Agreement, including, without limitation, the execution and filing of such financing statements as Secured Party may require. A carbon, photographic, or over reproduction of this Agreement or of any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement and may be filed as a financing statement. Section 4.6 Insurance. Debtor, at its own expense, shall maintain, with financially sound and reputable companies, insurance policies (a) insuring the Collateral against loss by fire, explosion, theft, and such other risks and casualties as are customarily insured against by companies engaged in the same or a similar business, and (b) insuring Debtor and Secured Party against liability for personal injury and property damage relating to the Collateral, such policies to be in such amounts and covering such risks as are customarily insured against by companies engaged in the same or a similar business, win losses payable to Debtor and Secured Party as their respective interests may appear. All insurance with respect to the Collateral shall provide that no cancellation, reduction in amount, or change in coverage thereof shall be effective unless Secured Party has received thirty (30) days prior written notice thereof. Debtor shall deliver to Secured Party copies of all insurance policies covering the Collateral or any part thereof. Section 4.7 Warehouse Receipts Non-Negotiable. Debtor agrees that if any warehouse receipt or receipt in the nature of a warehouse receipt is issued with respect to any of its inventory, such warehouse receipt or receipt in the nature thereof shall not be "negotiable" (as such term is used in Section 7-104 of the Uniform Commercial Code as adopted by the State of Texas). Section 4.8 Inspection Rights. Debtor shall permit Secured Party and its representatives to examine or inspect the Collateral wherever located and to examine, inspect, and copy Debtor's books and records at any reasonable Page 13 62 time and as often as Secured Party may desire. Section 4.9 Notification. Debtor shall promptly notify Secured Party of (a) any lien, security interest, encumbrance, or claim made or threatened against the Collateral, (b) any material change in the Collateral, including, without limitation, any material damage to or loss of the Collateral, and (c) the occurrence or existence of any Event of Default or Potential Default. Section 4.10 Corporate Changes. Debtor shall not change its name, identity, or corporate structure in any manner that might make any financing statement filed in connection with this Agreement seriously misleading unless Debtor shall have given Secured Party thirty (30) days prior written notice thereof and shall have taken all action deemed necessary or desirable by Secured Party to make each financing statement not seriously misleading. Debtor shall not change its principal place of business, chief executive office, or the place where it keeps its books and records unless it shall have given Secured Party thirty (30) days prior written notice thereof and shall have taken all action deemed necessary or desirable by Secured Party to cause its security interest in the Collateral to be perfected with the priority required by this Agreement. Section 4.11 Compliance with Agreements and Loans. Debtor shall comply in all material respects win all mortgages, deeds of trust, instruments, and other agreements binding on it or affecting its properties or business. Debtor shall comply with all applicable laws, rules, regulations, and orders of any court or governmental authority. Section 4.12 Location of Collateral. Debtor shall not move any of its equipment or inventory from the locations specified for Debtor on Schedule 1 of the Credit Agreement, unless Debtor shall have obtained Secured Party's prior written consent. Notwithstanding the foregoing, in the ordinary course of business Debtor may move inventory from any location identified for Debtor on Schedule 1 to the Credit Agreement to any other location identified for Debtor on Schedule 1 to the Credit Agreement. Debtor shall not establish any place of business in any location other than the locations listed for Debtor on Schedule 1 to the Credit Agreement. Debtor shall not permit any Persons other than Secured Party to have possession of Collateral unless Debtor shall have obtained Secured Party's prior written consent. Section 4.13 Delivery of Collateral. Upon receipt, Debtor shall deliver to Secured Party, properly endorsed to Secured Party, if applicable, all of its instruments, documents, and chattel paper pledged pursuant hereto; provided that so long as no Event of Default or Potential Default exists, Debtor may retain for collection in the ordinary course of business any instrument received by it in the ordinary course of business and any documents received and further negotiated in the ordinary course of business. After the occurrence and during the continuance of an Event of Default or Potential Default and if Secured Party so requests, Debtor shall deliver to Secured Party the instruments retained for collection in the ordinary course of its business and the documents retained in the ordinary course of its business. Subject to the limitations imposed by the Credit Agreement on the disposition of assets, Debtor shall promptly inform Secured Party of any material additions to or material deletions from the Collateral pledged by Debtor outside the ordinary course of business and shad not permit any items of property pledged pursuant hereto to become a fixture to real property or an accession to other personal property (except such personal property covered hereby or personal property otherwise subject to a perfected security interest in favor of Secured Party). Section 4.14 Collection of Accounts. Debtor shall collect from its account debtors, as and when due, any and all amounts owing under or on account of each account (including without limitation accounts which are delinquent, such accounts to be collected in accordance with lawful collection procedures) and apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such account, except that, unless an Event of Default or a Potential Default has occurred and is continuing, Debtor may allow in the ordinary course of business as adjustments to amounts owing under its accounts (a) an extension or renewal of the tune or tunes of payment, or settlement for less than the total unpaid balance, which Debtor finds appropriate in accordance with sound business judgment, and (b) a refund or a credit due as a result of a return of or damage to merchandise, or in accordance with Debtor's ordinary course of business consistent with its historical collection practices. Page 14 63 ARTICLE 5 RIGHTS OF SECURED PARTY Section 5. 1 Power of Attorney. Debtor hereby irrevocably constitutes and appoints Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the name of Debtor or in its own name, to take any and all action and to execute any and all documents and instruments which Secured Party at any time and from time to time deems necessary or desirable to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, Debtor hereby gives Secured Party the power and right on behalf of Debtor and in its own name to do any of the following, without notice to or the consent of Debtor: a. to demand, sue for, collect, or receive in the name of Debtor or in its own name, any money or property at any time payable or receivable on account of or in exchange for any of the Collateral and, in connection therewith, endorse checks, notes, drafts, acceptances, money orders, documents of title, or any over instruments for the payment of money under the Collateral or any policy of insurance; b. to pay or discharge taxes, liens, security interests, or other encumbrances levied or placed on or threatened against the Collateral; c. to send requests for verification to account debtors and other obligors; d. (i) to direct account debtors and any other parties liable for any payment under any of the Collateral to make payment of any and all monies due and to become due thereunder directly to Secured Party or as Secured Party shall direct; (ii) to receive payment of and receipt for any and all monies, claims, and other amounts due and to become due at any time in respect of or arising out of any Collateral; (iii) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, proxies, stock powers, verifications, and notices in connection with accounts and other documents relating to the Collateral; (iv) to commence and prosecute any suit' action, or proceeding at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (v) to defend any suit action, or proceeding brought against Debtor with respect to any Collateral; (vi) to settle, compromise, or adjust any suit, action, or proceeding described above and, in connection therewith, to give such discharges or releases as Secured Party may deem appropriate; (vii) to exchange any of the Collateral for other property upon any merger, consolidation, reorganization, recapitalization, or other readjustment of the issuer thereof and, in connection therewith, deposit any of the Collateral with any committee, depository, transfer agent, registrar, or other designated agency upon such terms as Secured Party may determine; (viii) to add or release any guarantor, endorser, surety, or other party to any of the Collateral or the Obligations; (ix) to renew, extend, or otherwise change the terms and conditions of any of the Collateral or Obligations; (x) to insure, and to make, settle, compromise, or adjust claims under any insurance policy covering, any of the Collateral; and (xi) to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Debtor's expense, at any time, or from time to time, all acts and things which Secured Party deems necessary to protect, preserve, or realize upon the Collateral and Secured Party's security interest therein. This power of attorney is a power coupled with an interest and shall be irrevocable. Secured Party shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges, and options expressly or implicitly granted to Secured Party in this Agreement, and shall not be liable for any failure to do so or any delay in doing so. Secured Party shall not be liable for any act or omission or for any error of judgment or any mistake of fact or law in its individual capacity or in its capacity as attorney-in-fact except acts or omissions resulting from its willful misconduct. This power of attorney is conferred on Secured Party solely to protect, preserve, and realize upon its security interest in the Collateral. Secured Party shall not be responsible for any decline in the value of the Collateral and shall not be required to take any steps to preserve rights against prior parties or to protect, preserve, or maintain any security interest or lien given to secure the Collateral. Section 5.2 Performance by Secured Party. If Debtor fails to perform or comply with any of its agreements contained herein, Secured Party itself may, at its sole discretion, cause or attempt to cause Page 15 64 performance or compliance with such agreement and the expenses of Secured Party, together with interest thereon at the Default Rate, shall be payable by Debtor to Secured Party on demand and shall constitute Secured Obligations. Notwithstanding the foregoing, it is expressly agreed that Secured Party shall not have any liability or responsibility for the performance of any obligation of Debtor under this Agreement. Section 5.3 Assignment by Secured Party. Subject to the provisions of Section 12.6 of the Credit Agreement, Secured Party and the Lenders may from time to time assign the Obligations and any portion thereof and/or the Collateral and any portion thereof, and the assignee shall be entitled to all of the rights and remedies of Secured Party and the Lenders under this Agreement in relation thereto. ARTICLE 6 Default Section 6. 1 Rights and Remedies. Upon the occurrence of an Event of Default, Secured Party shall have the following rights and remedies and may do any one or more of the following: a. in addition to all over rights and remedies granted to Secured Party in this Agreement and under the Loan Documents, Secured Party shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as adopted by the State of Texas. Without limiting the generality of the foregoing, Secured Party may (A) without demand or notice to Debtor, collect, receive, or take possession of the Collateral or any part thereof and for that purpose Secured Party may enter upon any premises on which the Collateral is located and remove the Collateral therefrom or render it inoperable, and/or (B) sell, lease, or otherwise dispose of the Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at Secured Party's offices or elsewhere, for cash, on credit, or for future delivery. Upon the request of Secured Party, Debtor shall assemble the Collateral and make it available to Secured Party at any place designated by Secured Party that is reasonably convenient to Debtor and Secured Party. Debtor agrees that Secured Party shall not be obligated to give more than ten (10) days written notice of the time and place of any public sale or of the time after which any private sale may take place and that such notice shall constitute reasonable notice of such matters. Debtor shall be liable for all expenses of retaking, holding, preparing for sale, or the like, and all attorneys' fees, legal expenses, and all other costs and expenses incurred by Secured Party in connection with the collection of the Secured Obligations and the enforcement of Secured Party's rights under this Agreement. Secured Party may apply the Collateral against the Secured Obligations in such order and manner as Secured Party may elect in its sole discretion. Debtor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay the Secured Obligations in full. Debtor waives all rights of marshaling in respect of the Collateral. b. Secured Party may cause any or all of the Collateral held by it to be transferred into the name of Secured Party or the name or names of Secured Party's nominee or nominees. c. Secured Party may exercise or cause to be exercised all voting rights and corporate powers in respect of the Collateral. ARTICLE 7 Miscellaneous Section 7.1 No Waiver; Cumulative Remedies. No failure on the part of Secured Party or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right' power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any over or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement are cumulative and not exclusive of any rights and remedies provided by law. Section 7.2 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Debtor, Secured Party and the Lenders and their respective successors and assigns, except that Debtor may not assign any of its rights or obligations under this Agreement without the prior written consent of Secured Party. Any assignment in violation of this Section 7.2 shall be void. Page 16 65 Section 7.3 Entire Agreement; Amendment. This Agreement embodies the final, entire agreement among the parties hereto and supersedes any and all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof and may not be contradicted or varied by evidence of prior, contemporaneous or subsequent oral agreements or discussions of the parties hereto. There are no oral agreements among the parties hereto. The provisions of this Agreement may be amended or waived only by an instrument in writing signed by the parties hereto. Section 7.4 Notices. All notices and other communications provided for in this Agreement shall be given or made in writing and telecopied, mailed by certified mail return receipt requested, or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party at such over address as shall be designated by such party in a notice to the over party given accordance with this Section. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopy, subject to telephone confirmation of receipt, or when personally delivered or, in the case of a mailed notice, when duly deposited in the mails, in each case given or addressed as aforesaid. Section 7.5 Applicable Law; Venue; Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. This Agreement has been entered into in Dallas County, Texas, and it shall be performable for all purposes in Dallas County, Texas. Any action or proceeding against Debtor under or in connection with this Agreement or any other instrument or agreement securing, evidencing, or relating to the Secured Obligations or any part thereof may be brought in any state or federal court in Dallas County, Texas. Debtor hereby irrevocably (a) submits to the nonexclusive jurisdiction of such courts, and (b) waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in such court or that such court is an inconvenient forum. Debtor agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified or determined in accordance with the provisions of Section 7.4 of this Agreement. Noting in this Agreement or any other instrument or agreement securing, evidencing, or relating to the Secured Obligations or any part thereof shall affect the right of Secured Party or any Lender to serve process in any other manner permitted by law or shall Limit the right of Secured Party or any Lender to bring any action or proceeding against Debtor or with respect to any of the Collateral in any state or federal court in any over jurisdiction. Any action or proceeding by Debtor against Secured Party or any Lender shall be brought only in a court located in Dallas County, Texas. Section 7.6 Headings. The headings, captions and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section 7.7 Survival of Representations and Warranties. All representations and warranties made in this Agreement or in any certificate delivered pursuant hereto shall survive the execution and delivery of this Agreement, and no investigation by Secured Party or any Lender shall affect the representations and warranties or the right of Secured Party and the Lenders to rely upon them. Section 7.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. Section 7.9 Waiver of Bond. In the event Secured Party seeks to take possession of any or all of the Collateral by judicial process, Debtor hereby irrevocably waives any bonds and any surety or security relating thereto that may be required by applicable law as an incident to such possession, and waives any demand for possession prior to the commencement of any such suit or action. Section 7.10 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaking provisions of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any over jurisdiction. Section 7.11 Construction. Debtor and Secured Party acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement with its legal counsel and that this Agreement shall be construed as if jointly drafted by Debtor and Secured Party. Page 17 66 Section 7.12 Obligations Absolute. Until the Obligations are paid in full and the obligation of Secured Party and the Lenders under the Credit Agreement have been terminated, the obligations of Debtor under this Agreement shall be absolute and unconditional and shall not be released, discharged, reduced, or in any way impaired by any circumstance whatsoever, including, without limitation, any amendment, modification, extension, or renewal of any Loan Documents (other than this Agreement), the Obligations, or any release or subordination of collateral, or any waiver, consent, extension, indulgence, compromise, settlement, or other action or inaction in respect of this Agreement, any other Loan Documents, or the Obligations, or any exercise or failure to exercise any right, remedy, power, or privilege in respect of the Obligations. Section 7. 13 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, DEBTOR HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THE ACTIONS OF SECURED PARTY AND THE LENDERS IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. Page 18 67 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. DEBTOR: CRAFTMADE INTERNATIONAL, INC. By: ----------------------------------- Name: James R. Ridings Title: Chief Executive Officer Address for Notices: 650 S. Royal Lane, Suite 100 Coppell, Texas 75019 Fax No: (214) 304-3754 Telephone No.: (214) 393-3800 Attention: Kenneth M. Cancienne Chief Financial Officer SECURED PARTY: TEXAS COMMERCE BANK NATIONAL ASSOCIATION as Agent By: ----------------------------------- Name: Jerry G. Petrey Title: Vice President Address for Notices: 500 East Border Street PO Box 250 Arlington, Texas 76004 Fax No.: (817) 856-3183 Telephone No.: (817) 856-2125 Attention: Jerry G. Petrey Vice President Page 19 68 EXHIBIT "E" Durocraft Security Agreement Page 20 69 SECURITY AGREEMENT THIS SECURITY AGREEMENT (The "Agreement") dated as of May 30, 1996, is by and between DUROCRAFT INTERNATIONAL, INC., a Texas corporation (the ''Debtor") and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, as Agent for the Lenders (as defined below) (in such capacity, the "Secured Party ''). RECITALS: A. Concurrently herewith, Craftmade International, Inc. and Durocraft International, Inc., jointly and severally as Borrower, Texas Commerce Bank National Association as Agent for Lenders and Texas Commerce Bank National Association and Overton Bank and Trust as Lenders entered into a Credit Agreement providing for a revolving line of credit in the maximum principal amount of $12,000,000.00. B. The Secured Party and the Lenders have required the Debtor to execute and deliver this Agreement as a condition to their execution of the Credit Agreement. NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 Definitions Section 1.1 Definitions. Capitalized terms used in this Agreement, to the extent not otherwise defined herein, shall have the same meanings as set forth in the Credit Agreement. Terms used herein which are defined in the Uniform Commercial Code as adopted by the State of Texas, unless otherwise defined herein or in the Credit Agreement, shall have the meanings set forth in the Uniform Commercial Code as adopted by the State of Texas. ARTICLE 2 Security Interest Section 2.1 Security Interest. Subject to the terms of this Agreement and to secure the Obligations and all present and future obligations of Debtor under this Agreement (collectively the "Secured Obligations"), Debtor hereby grants to Secured Party, for the ratable benefit of the Lenders, a security interest in any and all of Debtor's right, title and interest in and to all accounts, equipment, inventory, chattel paper, documents, instruments, and general intangibles of Debtor, whether now owned or hereafter acquired and wherever arising or located, and all accessions and attachments thereto and all products and proceeds thereof, including, without limitation, all patents, patent applications, trademarks, trademark applications, trade names, trade name applications and other intellectual property rights (all of the foregoing property hereinafter sometimes referred to as the "Collateral"). Page 21 70 ARTICLE 3 Representations and Warranties To induce Secured Party and the Lenders to enter into this Agreement and the Credit Agreement, Debtor represents and warrants to Secured Party and the Lenders that: Section 3.1 Title. Except for the security interests granted herein, Debtor owns, and with respect to Collateral acquired after the date hereof Debtor will own, the Collateral free and clear of any lien, security interest, or other encumbrance. Section 3.2 Accounts. Unless Debtor has given Secured Party written notice to the contrary, whenever the security interest granted hereunder attaches to an account, Debtor shall be deemed to have represented and warranted to Secured Party and the Lenders as to each and all of its accounts that (a) each account is genuine and in all respects what it purports to be, (b) each account represents the legal, valid, and binding obligation of the account debtor evidencing indebtedness unpaid and owed by such account debtor arising out of the performance of labor or services by Debtor or the sale or lease of goods by Debtor, (c) the amount of each account represented as owing is the correct amount actually and unconditionally owing except for normal trade discounts granted in the ordinary course of business, and (d) no account is subject to any offset, counterclaim, or other defense. Section 3.3 Delivery of Collateral. Except as otherwise contemplated by SECTION 4. 13, all of Debtor's existing instruments, documents and chattel paper pledged pursuant hereto have been delivered to Secured Party. Section 3.4 Organization and Authority. Debtor is a corporation duly organized, validly existing, and in good standing under the laws of its state of incorporation and is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would have a material adverse effect on its business, financial condition or operations. Debtor has the corporate power and authority to execute, deliver, and perform this Agreement, and the execution, delivery, and performance of this Agreement by Debtor have been authorized by all necessary corporate action on the part of Debtor and do not and win not violate any law, rule or regulation or the articles of incorporation or bylaws of Debtor and do not and will not conflict with, result in a breach of, or constitute a default under the provisions of any indenture, mortgage, deed of trust, security agreement, or other instrument or agreement pursuant to which Debtor or any of its property is bound. Section 3.5 Principal Place of Business; Corporate Name. The principal place of business and chief executive office of Debtor, and the office where Debtor keeps its books and records, is located at the "Address for Notices" set forth below Debtor's name on the signature pages hereof. The exact corporate name of Debtor as it appears in its certificate of incorporation is set forth in the induction to this Agreement and Debtor has not done business in any location under any over mine. Section 3.6 Validity of Security Interest. The security interests granted by Debtor constitute valid, legal and perfected first priority security interests (except for security interests Page 22 71 permitted under the Credit Agreement) in all the Collateral which secure the payment and performance of the Secured Obligations. Section 3.7 Benefit to Debtor. The operations of Debtor and Borrower are interrelated and interdependent and, therefore, loans and extensions of credit to Borrower produce direct financial benefits to the Debtor. The value of the consideration received and to be received by Debtor as a result of Borrower, Secured Party and the Lenders entering into the Credit Agreement and Debtor's executing and delivering this Agreement is reasonably worth at least as much as the liability and obligations of Debtor hereunder and under the other Loan Documents to which it is a party, is necessary and convenient to the conduct, promotion and attainment of the business of Debtor, and such liability and obligations have benefited and may reasonably be expected to benefit Debtor directly and indirectly. Section 3.8 No Reliance. Debtor has, independently and without reliance upon the Secured Party, and based upon such information as it has deemed appropriate, made its own business analysis and decision to enter into this Agreement and the other Loan Documents to which it is a party. Section 3.9 Enforceability. This Agreement constitutes the legal, valid, and binding obligation of Debtor enforceable against Debtor in accordance with its terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditors' rights. Section 3. 10 Location of Collateral. All inventory and equipment of Debtor is located at the places specified for Debtor on Schedule 1 to the Credit Agreement. Debtor has exclusive possession and control of its inventory and equipment. ARTICLE 4 Covenants Debtor covenants and agrees with Secured Party and the Lenders that until the Obligations are paid and performed in full and as long as any Lender has any Commitment under the Credit Agreement, Debtor shall observe and perform the following covenants, unless Secured Party shall otherwise consent in writing: Section 4.1 Maintenance. Debtor shall maintain the Collateral in good operating condition and repair and shall not permit any waste or destruction of the Collateral or any part thereof. Debtor shall not use or permit the Collateral to be used in violation of any law or inconsistently with the terms of any policy of insurance Debtor shall not use or permit the Collateral to be used in any manner or for any purpose that would impair the value of the Collateral or expose the Collateral to unusual risk. Section 4.2 Encumbrances. Debtor shall not create, permit, or suffer to exist, and shall defend the Collateral against, any lien, security interest, or other encumbrance on the Collateral except the security interest of Secured Party hereunder, and shall defend Debtor's rights in the Collateral and Secured Party's security interest in the Collateral against the claims of all persons and entities. Page 23 72 Section 4.3 Modification of Collateral. Except as contemplated by SECTION 4.14, Debtor shall not impair the rights of Secured Party in the Collateral and without the prior written consent of Secured Party, Debtor shall not grant any extension of time for any payment with respect to the Collateral, or compromise, compound, or settle any of the Collateral, or release in whole or in part any person or entity liable for payment with respect to the Collateral, or allow any credit or discount for payment with respect to the Collateral other than normal trade discounts granted in the ordinary course of business, or release any lien, security interest, or assignment securing the Collateral, or otherwise amend or modify any of the Collateral. Section 4.4 Disposition of Collateral. Debtor shall not sell, lease, or otherwise dispose of the Collateral or any part thereof without the prior written consent of Secured Party, except Debtor may sell inventory and equipment in the ordinary course of business. Section 4.5 Further Assurances. At any tune and from time to time, upon the request of Secured Party, and at the sole expense of Debtor, Debtor shall promptly execute and deliver all such further instruments and documents and take such further action as Secured Party may deem necessary or desirable to preserve and perfect its security interest in the Collateral and carry out the provisions and purposes of this Agreement, including, without limitation, the execution and filing of such financing statements as Secured Party may require. A carbon, photographic, or over reproduction of this Agreement or of any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement and may be filed as a financing statement. Section 4.6 Insurance. Debtor, at its own expense, shall maintain, with financially sound and reputable companies, insurance policies (a) insuring the Collateral against loss by fire, explosion, theft, and such other risks and casualties as are customarily insured against by companies engaged in the same or a similar business, and (b) insuring Debtor and Secured Party against liability for personal injury and property damage relating to the Collateral, such policies to be in such amounts and covering such risks as are customarily insured against by companies engaged in the same or a similar business, win losses payable to Debtor and Secured Party as their respective interests may appear. All insurance with respect to the Collateral shall provide that no cancellation, reduction in amount, or change in coverage thereof shall be effective unless Secured Party has received thirty (30) days prior written notice thereof. Debtor shall deliver to Secured Party copies of all insurance policies covering the Collateral or any part thereof. Section 4.7 Warehouse Receipts Non-Negotiable. Debtor agrees that if any warehouse receipt or receipt in the nature of a warehouse receipt is issued with respect to any of its inventory, such warehouse receipt or receipt in the nature thereof shall not be "negotiable" (as such term is used in Section 7-104 of the Uniform Commercial Code as adopted by the State of Texas). Section 4.8 Inspection Rights. Debtor shall permit Secured Party and its representatives to examine or inspect the Collateral wherever located and to examine, inspect, and copy Debtor's books and records at any reasonable time and as often as Secured Party may desire. Section 4.9 Notification. Debtor shall promptly notify Secured Party of (a) any lien, Page 24 73 security interest, encumbrance, or claim made or threatened against the Collateral, (b) any material change in the Collateral, including, without limitation, any material damage to or loss of the Collateral, and (c) the occurrence or existence of any Event of Default or Potential Default. Section 4. 10 Corporate Changes. Debtor shall not change its name, identity, or corporate structure in any manner that might make any financing statement filed in connection with this Agreement seriously misleading unless Debtor shall have given Secured Party thirty (30) days prior written notice thereof and shall have taken all action deemed necessary or desirable by Secured Party to make each financing statement not seriously misleading. Debtor shall not change its principal place of business, chief executive office, or the place where it keeps its books and records unless it shall have given Secured Party thirty (30) days prior written notice thereof and shall have taken all action deemed necessary or desirable by Secured Party to cause its security interest in the Collateral to be perfected with the priority required by this Agreement. Section 4.11 Compliance with Agreements and Loans. Debtor shall comply in all material respects win all mortgages, deeds of trust, instruments, and other agreements binding on it or affecting its properties or business. Debtor shall comply with all applicable laws, rules, regulations, and orders of any court or governmental authority. Section 4.12 Location of Collateral. Debtor shall not move any of its equipment or inventory from the locations specified for Debtor on Schedule 1 of the Credit Agreement, unless Debtor shall have obtained Secured Party's prior written consent. Notwithstanding the foregoing, in the ordinary course of business Debtor may move inventory from any location identified for Debtor on Schedule 1 to the Credit Agreement to any other location identified for Debtor on Schedule 1 to the Credit Agreement. Debtor shall not establish any place of business in any location other than the locations listed for Debtor on Schedule 1 to the Credit Agreement. Debtor shall not permit any Persons other than Secured Party to have possession of Collateral unless Debtor shall have obtained Secured Party's prior written consent. Section 4.13 Delivery of Collateral. Upon receipt, Debtor shall deliver to Secured Party, properly endorsed to Secured Party, if applicable, all of its instruments, documents, and chattel paper pledged pursuant hereto; provided that so long as no Event of Default or Potential Default exists, Debtor may retain for collection in the ordinary course of business any instrument received by it in the ordinary course of business and any documents received and further negotiated in the ordinary course of business. After the occurrence and during the continuance of an Event of Default or Potential Default and if Secured Party so requests, Debtor shall deliver to Secured Party the instruments retained for collection in the ordinary course of its business and the documents retained in the ordinary course of its business. Subject to the limitations imposed by the Credit Agreement on the disposition of assets, Debtor shall promptly inform Secured Party of any material additions to or material deletions from the Collateral pledged by Debtor outside the ordinary course of business and shad not permit any items of property pledged pursuant hereto to become a fixture to real property or an accession to other personal property (except such personal property covered hereby or personal property otherwise subject to a perfected security interest in favor of Secured Party). Section 4.14 Collection of Accounts. Debtor shall collect from its account debtors, as and when due, any and all amounts owing under or on account of each account (including Page 25 74 without limitation accounts which are delinquent, such accounts to be collected in accordance with lawful collection procedures) and apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such account, except that, unless an Event of Default or a Potential Default has occurred and is continuing, Debtor may allow in the ordinary course of business as adjustments to amounts owing under its accounts (a) an extension or renewal of the tune or tunes of payment, or settlement for less than the total unpaid balance, which Debtor finds appropriate in accordance with sound business judgment, and (b) a refund or a credit due as a result of a return of or damage to merchandise, or in accordance with Debtor's ordinary course of business consistent with its historical collection practices. ARTICLE 5 RIGHTS OF SECURED PARTY Section 5.1 Power of Attorney. Debtor hereby irrevocably constitutes and appoints Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the name of Debtor or in its own name, to take any and all action and to execute any and all documents and instruments which Secured Party at any time and from time to time deems necessary or desirable to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, Debtor hereby gives Secured Party the power and right on behalf of Debtor and in its own name to do any of the following, without notice to or the consent of Debtor: a. to demand, sue for, collect, or receive in the name of Debtor or in its own name, any money or property at any time payable or receivable on account of or in exchange for any of the Collateral and, in connection therewith, endorse checks, notes, drafts, acceptances, money orders, documents of title, or any over instruments for the payment of money under the Collateral or any policy of insurance; b. to pay or discharge taxes, liens, security interests, or other encumbrances levied or placed on or threatened against the Collateral; c. to send requests for verification to account debtors and other obligors; d. (i) to direct account debtors and any other parties liable for any payment under any of the Collateral to make payment of any and all monies due and to become due thereunder directly to Secured Party or as Secured Party shall direct; (ii) to receive payment of and receipt for any and all monies, claims, and other amounts due and to become due at any time in respect of or arising out of any Collateral; (iii) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, proxies, stock powers, verifications, and notices in connection with accounts and other documents relating to the Collateral; (iv) to commence and prosecute any suit' action, or proceeding at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (v) to defend any suit action, or proceeding brought against Debtor with respect to any Collateral; (vi) to settle, compromise, or adjust any suit, action, or proceeding described above and, in connection therewith, to give such discharges or releases as Secured Party may deem appropriate; (vii) to Page 26 75 exchange any of the Collateral for other property upon any merger, consolidation, reorganization, recapitalization, or other readjustment of the issuer thereof and, in connection therewith, deposit any of the Collateral with any committee, depository, transfer agent, registrar, or other designated agency upon such terms as Secured Party may determine; (viii) to add or release any guarantor, endorser, surety, or other party to any of the Collateral or the Obligations; (ix) to renew, extend, or otherwise change the terms and conditions of any of the Collateral or Obligations; (x) to insure, and to make, settle, compromise, or adjust claims under any insurance policy covering, any of the Collateral; and (xi) to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Debtor's expense, at any time, or from time to time, all acts and things which Secured Party deems necessary to protect, preserve, or realize upon the Collateral and Secured Party's security interest therein. This power of attorney is a power coupled with an interest and shall be irrevocable. Secured Party shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges, and options expressly or implicitly granted to Secured Party in this Agreement, and shall not be liable for any failure to do so or any delay in doing so. Secured Party shall not be liable for any act or omission or for any error of judgment or any mistake of fact or law in its individual capacity or in its capacity as attorney-in-fact except acts or omissions resulting from its willful misconduct. This power of attorney is conferred on Secured Party solely to protect, preserve, and realize upon its security interest in the Collateral. Secured Party shall not be responsible for any decline in the value of the Collateral and shall not be required to take any steps to preserve rights against prior parties or to protect, preserve, or maintain any security interest or lien given to secure the Collateral. Section 5.2 Performance by Secured Party. If Debtor fails to perform or comply with any of its agreements contained herein, Secured Party itself may, at its sole discretion, cause or attempt to cause performance or compliance with such agreement and the expenses of Secured Party, together with interest thereon at the Default Rate, shall be payable by Debtor to Secured Party on demand and shall constitute Secured Obligations. Notwithstanding the foregoing, it is expressly agreed that Secured Party shall not have any liability or responsibility for the performance of any obligation of Debtor under this Agreement. Section 5.3 Assignment by Secured Party. Subject to the provisions of Section 12.6 of the Credit Agreement, Secured Party and the Lenders may from time to time assign the Obligations and any portion thereof and/or the Collateral and any portion thereof, and the assignee shall be entitled to all of the rights and remedies of Secured Party and the Lenders under this Agreement in relation thereto. ARTICLE 6 Default Section 6. 1 Rights and Remedies. Upon the occurrence of an Event of Default, Secured Party shall have the following rights and remedies and may do any one or more of the following: a. in addition to all over rights and remedies granted to Secured Party in this Page 27 76 Agreement and under the Loan Documents, Secured Party shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as adopted by the State of Texas. Without limiting the generality of the foregoing, Secured Party may (A) without demand or notice to Debtor, collect, receive, or take possession of the Collateral or any part thereof and for that purpose Secured Party may enter upon any premises on which the Collateral is located and remove the Collateral therefrom or render it inoperable, and/or (B) sell, lease, or otherwise dispose of the Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at Secured Party's offices or elsewhere, for cash, on credit, or for future delivery. Upon the request of Secured Party, Debtor shall assemble the Collateral and make it available to Secured Party at any place designated by Secured Party that is reasonably convenient to Debtor and Secured Party. Debtor agrees that Secured Party shall not be obligated to give more than ten (10) days written notice of the time and place of any public sale or of the time after which any private sale may take place and that such notice shall constitute reasonable notice of such matters. Debtor shall be liable for all expenses of retaking, holding, preparing for sale, or the like, and all attorneys' fees, legal expenses, and all other costs and expenses incurred by Secured Party in connection with the collection of the Secured Obligations and the enforcement of Secured Party's rights under this Agreement. Secured Party may apply the Collateral against the Secured Obligations in such order and manner as Secured Party may elect in its sole discretion. Debtor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay the Secured Obligations in full. Debtor waives all rights of marshaling in respect of the Collateral. b. Secured Party may cause any or all of the Collateral held by it to be transferred into the name of Secured Party or the name or names of Secured Party's nominee or nominees. c. Secured Party may exercise or cause to be exercised all voting rights and corporate powers in respect of the Collateral. ARTICLE 7 Miscellaneous Section 7.1 No Waiver; Cumulative Remedies. No failure on the part of Secured Party or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right' power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any over or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement are cumulative and not exclusive of any rights and remedies provided by law. Section 7.2 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Debtor, Secured Party and the Lenders and their respective successors and assigns, except that Debtor may not assign any of its rights or obligations under this Agreement without the prior written consent of Secured Party. Any assignment in violation of this Section 7.2 shall be void. Section 7.3 Entire Agreement; Amendment. This Agreement embodies the final, entire agreement among the parties hereto and supersedes any and all prior commitments, agreements, Page 28 77 representations, and understandings, whether written or oral, relating to the subject matter hereof and may not be contradicted or varied by evidence of prior, contemporaneous or subsequent oral agreements or discussions of the parties hereto. There are no oral agreements among the parties hereto. The provisions of this Agreement may be amended or waived only by an instrument in writing signed by the parties hereto. Section 7.4 Notices. All notices and other communications provided for in this Agreement shall be given or made in writing and telecopied, mailed by certified mail return receipt requested, or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party at such over address as shall be designated by such party in a notice to the over party given accordance with this Section. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopy, subject to telephone confirmation of receipt, or when personally delivered or, in the case of a mailed notice, when duly deposited in the mails, in each case given or addressed as aforesaid. Section 7.5 Applicable Law; Venue; Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. This Agreement has been entered into in Dallas County, Texas, and it shall be performable for all purposes in Dallas County, Texas. Any action or proceeding against Debtor under or in connection with this Agreement or any other instrument or agreement securing, evidencing, or relating to the Secured Obligations or any part thereof may be brought in any state or federal court in Dallas County, Texas. Debtor hereby irrevocably (a) submits to the nonexclusive jurisdiction of such courts, and (b) waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in such court or that such court is an inconvenient forum. Debtor agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified or determined in accordance with the provisions of Section 7.4 of this Agreement. Noting in this Agreement or any other instrument or agreement securing, evidencing, or relating to the Secured Obligations or any part thereof shall affect the right of Secured Party or any Lender to serve process in any other manner permitted by law or shall Limit the right of Secured Party or any Lender to bring any action or proceeding against Debtor or with respect to any of the Collateral in any state or federal court in any over jurisdiction. Any action or proceeding by Debtor against Secured Party or any Lender shall be brought only in a court located in Dallas County, Texas. Section 7.6 Headings. The headings, captions and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section 7.7 Survival of Representations and Warranties. All representations and warranties made in this Agreement or in any certificate delivered pursuant hereto shall survive the execution and delivery of this Agreement, and no investigation by Secured Party or any Lender shall affect the representations and warranties or the right of Secured Party and the Lenders to rely upon them. Section 7.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. Page 29 78 Section 7.9 Waiver of Bond. In the event Secured Party seeks to take possession of any or all of the Collateral by judicial process, Debtor hereby irrevocably waives any bonds and any surety or security relating thereto that may be required by applicable law as an incident to such possession, and waives any demand for possession prior to the commencement of any such suit or action. Section 7.10 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaking provisions of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any over jurisdiction. Section 7.11 Construction. Debtor and Secured Party acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement with its legal counsel and that this Agreement shall be construed as if jointly drafted by Debtor and Secured Party. Section 7.12 Obligations Absolute. Until the Obligations are paid in full and the obligation of Secured Party and the Lenders under the Credit Agreement have been terminated, the obligations of Debtor under this Agreement shall be absolute and unconditional and shall not be released, discharged, reduced, or in any way impaired by any circumstance whatsoever, including, without limitation, any amendment, modification, extension, or renewal of any Loan Documents (other than this Agreement), the Obligations, or any release or subordination of collateral, or any waiver, consent, extension, indulgence, compromise, settlement, or other action or inaction in respect of this Agreement, any other Loan Documents, or the Obligations, or any exercise or failure to exercise any right, remedy, power, or privilege in respect of the Obligations. Section 7. 13 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, DEBTOR HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THE ACTIONS OF SECURED PARTY AND THE LENDERS IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. DEBTOR: DUROCRAFT INTERNATIONAL, INC. By: ----------------------------------- Name: James R. Ridings Title: Chief Executive Officer Page 30 79 Address for Notices: 650 S. Royal Lane, Suite 100 Coppell, Texas 75019 Fax No: (214) 304-3754 Telephone No.: (214) 393-3800 Attention: Kenneth M. Cancienne Chief Financial Officer SECURED PARTY: TEXAS COMMERCE BANK NATIONAL ASSOCIATION as Agent By: ----------------------------------- Name: Jerry G. Petrey Title: Vice President Address for Notices: 500 East Border Street PO Box 250 Arlington, Texas 76004 Fax No.: (817) 856-3183 Telephone No.: (817) 856-2125 Attention: Jerry G. Petrey Vice President Page 31 80 EXHIBIT "F" COVENANT COMPLIANCE CERTIFICATE Page 31 81 COVENANT COMPLIANCE CERTIFICATE Texas Commerce Bank National Association Attention: Jerry G. Petrey, Vice President 500 East Border Street PO Box 250 Arlington, Texas 76004 Gentlemen: This Covenant Compliance Certificate covers the period from _________, 19_ to _________, 19_ and is delivered pursuant to that certain Credit Agreement (the "Credit Agreement") dated as of May 30, 1996 among Craftmade International, Inc., Durocraft International, Inc., Texas Commerce Bank National Association as Agent, and the Lenders which are parties thereto. All capitalized terms used herein, unless otherwise defined herein, shall have the same meanings as set forth in the Credit Agreement. The undersigned, an authorized officer of Borrower, does hereby certify to the Agent and the Lenders that: 1. No Default. To the best of the undersigned's knowledge, no Event of Default and no Potential Default has occurred and is continuing (or if an Event of Default or Potential Default has occurred and is continuing, Exhibit "A" attached hereto outlines the nature thereof and the action which is proposed to be taken by Borrower with respect thereto). 2. Consolidated Debt to Consolidated Tangible Net Worth Ratio (a) Consolidated Debt $__________________ (b) Consolidated Tangible Net Worth $__________________ (c) Ratio [(a) divided by (b)] (must not be greater than 2.5) __________________ 3. Capital Expenditures (the beginning of current fiscal year through date hereof) (must not exceed $400,000 in any fiscal year, excluding Mortgage Debt) $__________________ 4. Funded Debt to EBDIT Ratio (calculated on a rolling 12 month basis) (a) Funded Debt $__________________ (b) EBDIT Net income (after interest & tax expenses) $__________________ Plus: Interest Expense $__________________ Tax Expense $__________________ Depreciation $__________________ Amortization $__________________ Equals: EBDIT $__________________
Page 32 82 [(a) divided by (b)](must not be greater than 3.50) __________________ Attached hereto are Schedules setting forth the calculations supporting the computations set forth in items 2, 3 and 4, of this certificate. All information contained herein and on the attached Schedules is true and correct. IN WITNESS WHEREOF, the undersigned has executed this certificate effective this _______ day of _________________, 199_. CRAFTMADE INTERNATIONAL, INC. By: ----------------------------------- Name: Ken Cancienne Title: Chief Financial Officer DUROCRAFT INTERNATIONAL, INC. By: ----------------------------------- Name: Ken Cancienne Title: Chief Financial Officer Page 33 83 EXHIBIT "G" C/D/R/ GUARANTY Page 34 84 GUARANTY AGREEMENT (C/D/R) This GUARANTY AGREEMENT (the "Guaranty Agreement") is executed effective as of May 30, 1996 by C/D/R INCORPORATED, a Delaware corporation (the "Guarantor") to and in favor of the AGENT and the LENDERS, as such terms are defined below. RECITALS: A. Concurrently herewith, Craftmade International, Inc. and Durocraft International, Inc., jointly and severally as Borrower, Texas Commerce Bank National Association as Agent for Lenders and Texas Commerce Bank National Association and Overton Bank and Trust as Lenders entered into a Credit Agreement providing for a revolving line of credit in the maximum principal amount of $12,000,000.00. B. The Agent and the Lenders require the Guarantor to deliver this Guaranty Agreement as a condition to entering into the Credit Agreement. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, Guarantor hereby irrevocably and unconditionally guarantees to the Agent and the Lenders the full and prompt payment and performance of the Guaranteed Indebtedness (as hereinafter defined), this Guaranty Agreement being upon the following terms: 1. The term "Guaranteed Indebtedness" as used herein means all of the "Obligations" as defined in the Credit Agreement. The term "Guaranteed Indebtedness" shall include any and all post-petition interest and expenses (including attorneys' fees) whether or not allowed under any bankruptcy, insolvency, or other similar law. All initially capitalized terms not specifically otherwise defined herein shall have the meanings prescribed in the Credit Agreement. 2. This instrument shall be an absolute, continuing, irrevocable, and unconditional guaranty of payment and performance, and not a guaranty of collection, and Guarantor shall remain liable on its obligations hereunder until the payment and performance in full of the Guaranteed Indebtedness. No setoff, counterclaim, recoupment, reduction, or diminution of any obligation, or any defense of any kind or nature which Borrower may have against the Agent or any Lender or any other party, or which Guarantor may have against Borrower, the Agent or any Lender, or any other partner, shall be available to, or shall be asserted by, Guarantor against the Agent or any Lender or any subsequent holder of the Guaranteed Indebtedness or any part thereof or against payment of the Guaranteed Indebtedness or any part thereof. 3. The obligations of Guarantor hereunder shall be limited to an aggregate amount equal to the largest amount that would not render Guarantor's obligations hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code, as amended (or any successor statute), or to being set aside, avoided, or annulled under any applicable state or federal law relating to fraudulent or preferential transfers or obligations. 4. If Guarantor becomes liable for any indebtedness owing by Borrower to the Agent or any Lender by endorsement or otherwise, other than under this Guaranty Agreement, such liability shall not be in any manner impaired or affected hereby, and the rights of the Agent and the Lenders hereunder shall be cumulative of any and all other rights that the Agent and the Page 1 85 Lenders may ever have against Guarantor. The exercise by the Agent or any Lender of any right or remedy hereunder or under any other instrument, or at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy. 5. In the event of default by Borrower in payment or performance of the Guaranteed Indebtedness, or any part thereof, when such Guaranteed Indebtedness becomes due, whether by its terms, by acceleration, or otherwise, Guarantor shall promptly pay the amount due thereon to the Agent, for the ratable benefit of the Lenders, without notice or demand in lawful currency of the United States of America, and it shall not be necessary for the Agent or any Lender, in order to enforce such payment by Guarantor, first to institute suit or exhaust its remedies against Borrower or others liable on such Guaranteed Indebtedness, or to enforce any rights against any collateral which shall ever have been given to secure such Guaranteed Indebtedness. 6. Notwithstanding anything to the contrary contained in this Guaranty Agreement, Guarantor hereby irrevocably waives any and all rights it may now or hereafter have under any agreement or at law or in equity to assert any claim against or seek subrogation, contribution, indemnification or any other form of reimbursement from Borrower or any other party liable for payment of any or all of the Guaranteed Indebtedness for any payment made by Guarantor under or in connection with this Guaranty Agreement or otherwise until the Guaranteed Indebtedness shall have been paid in full in cash. 7. This Guaranty Agreement shall continue to be effective, or be automatically reinstated, as the case may be, if at any time payment, in whole or in part, of any of the Guaranteed Indebtedness is rescinded or must otherwise be restored or returned by the Agent or any Lender as a preference, fraudulent conveyance or otherwise under any bankruptcy, insolvency or similar law, all as though such payment had not been made; provided that in the event any Guaranteed Indebtedness is rescinded or must be restored or returned, all costs and expenses (including without limitation any legal fees and disbursements) incurred by the Agent or any Lender in defending or enforcing such reinstatement shall be deemed to be included as Guaranteed Indebtedness hereunder. 8. If acceleration of the time for payment of any amount payable by Borrower under the Guaranteed Indebtedness is stayed upon the insolvency, bankruptcy, or reorganization of Borrower, all such amounts otherwise subject to acceleration under the terms of the Guaranteed Indebtedness shall nonetheless be payable by Guarantor hereunder forthwith on demand by Agent. 9. Guarantor hereby agrees that its obligations under this Guaranty Agreement shall not be released, discharged, diminished, impaired, reduced, or affected for any reason or by the occurrence of any event, including, without limitation, one or more of the following events, whether or not with notice to or the consent of Guarantor: (a) the taking or accepting of collateral as security for any or all of the Guaranteed Indebtedness or the release, surrender, exchange, or subordination of any collateral now or hereafter securing any or all of the Guaranteed Indebtedness; (b) any partial release of the liability of Guarantor hereunder, or the full or partial release of any other guarantor from liability for any or all of the Guaranteed Indebtedness; (c) any disability of Borrower, or the dissolution, insolvency, or bankruptcy of Borrower, Guarantor, or any other party at any time liable for the payment of any or all of the Guaranteed Indebtedness; (d) any renewal, extension, modification, waiver, amendment, or rearrangement of any or all of the Page 2 86 Guaranteed Indebtedness or any instrument, document, or agreement evidencing, securing, or otherwise relating to any or all of the Guaranteed Indebtedness; (e) any adjustment, indulgence, forbearance, waiver, or compromise that may be granted or given by the Agent or the Lenders to Borrower, Guarantor, or any other party ever liable for any or all of the Guaranteed Indebtedness; (f) any neglect, delay, omission, failure, or refusal of the Agent or the Lenders to take or prosecute any action for the collection of any of the Guaranteed Indebtedness or to foreclose or take or prosecute any action in connection with any instrument, document, or agreement evidencing, securing, or otherwise relating to any or all of the Guaranteed Indebtedness; (g) the unenforceability or invalidity of any or all of the Guaranteed Indebtedness or of any instrument, document, or agreement evidencing, securing, or otherwise relating to any or all of the Guaranteed Indebtedness; (h) any payment by Borrower or any other party to the Agent or any Lender is held to constitute a preference under applicable bankruptcy or insolvency law or for any other reason the Agent or any Lender is required to refund any payment or pay the amount thereof to someone else; (i) the settlement or compromise of any of the Guaranteed Indebtedness; (j) the non-perfection of any security interest or lien securing any or all of the Guaranteed Indebtedness; (k) any impairment or release of any collateral securing any or all of the Guaranteed Indebtedness; (l) the failure of the Agent or any Lender to sell any collateral securing any or all of the Guaranteed Indebtedness in a commercially reasonable manner or as otherwise required by law; (m) any change in the corporate existence, structure, or ownership of Borrower; or (n) any over circumstance which might otherwise constitute a defense available to, or discharge of, Borrower or Guarantor. 10. Guarantor represents and warrants to the Agent and the Lenders as follows: (a) Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and Guarantor is qualified to do business in all jurisdictions in which the nature of the business conducted by Guarantor makes such qualification necessary and where failure to so qualify would have a material adverse effect on the business, financial condition, or operations of Guarantor. (b) Guarantor has the corporate power and authority and legal right to execute, deliver, and perform its obligations under this Guaranty Agreement, and this Guaranty Agreement constitutes the legal, valid, and binding obligation of Guarantor, enforceable against Guarantor in accordance with its respective terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditor's rights. (c) The execution, delivery, and performance by Guarantor of this Guaranty Agreement have been duly authorized by all requisite action on the part of Guarantor and do not and will not violate or conflict with the articles of incorporation or bylaws of Guarantor or any law, rule, or regulation or any order, writ, injunction or decree of any court, governmental authority or agency, or arbitrator and do not and will not conflict with, result in a breach of, constitute a default under, or result in the imposition of any lien upon any assets of Guarantor pursuant to the provisions of any indenture, mortgage, deed of trust, security agreement, franchise, permit, license, or other instrument or agreement by which Guarantor or its properties is bound. (d) No authorization, approval, or consent of, and no filing or registration with, any court, governmental authority, or third party is necessary for the execution, delivery or performance by Guarantor of dais Agreement or the validity or enforceability hereof. Page 3 87 (e) The value of the consideration received and to be received by Guarantor as a result of Borrower, the Agent and the Lenders entering into the Credit Agreement and Guarantor executing and delivering this Guaranty Agreement is reasonably worth at least as much as the liability and obligation of Guarantor hereunder, and such liability and obligation and the Credit Agreement have benefited and may reasonably be expected to benefit Guarantor directly or indirectly. (f) Guarantor has, independently and without reliance upon the Agent or any Lender and based upon such documents and information as Guarantor has deemed appropriate, made its own analysis and decision to enter into this Guaranty Agreement. 11. Guarantor covenants and agrees that, as long as the Guaranteed Indebtedness or any part thereof is outstanding or any Lender has any Commitment under the Credit Agreement. (a) Guarantor will furnish promptly to the Agent written notice of the occurrence of any default under this Guaranty Agreement or any Event of Default or Potential Default under the Credit Agreement of which Guarantor has knowledge. (b) Guarantor will promptly furnish to the Agent any and all such information, writings, and further assurances relating to Guarantor or this Guaranty Agreement as the Agent may from time to time request. (c) Guarantor will from time to time obtain any and all authorizations, licenses, consents, or approvals as may now or hereafter be necessary or desirable under applicable laws or regulations or otherwise in connection with the execution, delivery, and performance of this Guaranty Agreement and will promptly furnish copies thereof to the Agent. (d) Guarantor will at all times own directly or indirectly and free and clear of all liens or encumbrances whatsoever at least the same percentage of voting shares of Borrower, if any, as Guarantor owns directly or indirectly on the date hereof. 12. The Agent and each Lender shall have the right to set off and apply against this Guaranty Agreement or the Guaranteed Indebtedness or both, at any tune and without notice to Guarantor, any and all deposits (general or special, time or demand, provisional or final) or other sums at any time credited by or owing from the Agent or any Lender to Guarantor, whether or not the Guaranteed Indebtedness is then due and irrespective of whether or not any Lender shall have made any demand under this Guaranty Agreement. As security for this Guaranty Agreement and the Guaranteed Indebtedness, Guarantor hereby grants to the Agent, for the ratable benefit of the Lenders, a security interest in all money, instruments, certificates of deposit, and other property of Guarantor now or hereafter held by the Agent or any Lender, including without limitation, property held in safekeeping. in addition to the Agent's and the Lenders' right of setoff and as further security for this Guaranty Agreement and the Guaranteed Indebtedness, Guarantor hereby grants to the Agent, for the ratable benefit of the Lenders, a security interest in all deposits (general or special, time or demand, provisional or finals and all other accounts of Guarantor now or hereafter on deposit with or held by the Agent or any Lender and all other sums at any time credited by or owing from the Agent or any Lender to Guarantor. The rights and remedies of the Agent and the Lenders hereunder are in addition to other rights and remedies (including without initiation other rights of setoff) which the Agent and the Lenders may have. Page 4 88 13. For purposes of this Guaranty Agreement, the term "Subordinated Indebtedness" means all indebtedness, liabilities, and obligations of Borrower to Guarantor, whether such indebtedness, liabilities, and obligations now exist or are hereafter incurred or arise, or whether the obligations of Borrower thereon are direct, indirect, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such indebtedness, liabilities, or obligations are evidenced by a note, contract, open account, or otherwise, and irrespective of the person or persons in whose favor such indebtedness, obligations, or liabilities at their inception have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by Guarantor. With respect to the Subordinated Indebtedness, Guarantor hereby agrees as follows: (a) The Subordinated Indebtedness shall be subordinate and junior in right of payment to the prior payment in full of all Guaranteed Indebtedness, and Guarantor hereby assigns the Subordinated Indebtedness to the Agent, for the ratable benefit of the Lenders, as security for the Guaranteed Indebtedness. If any sums shall be paid to Guarantor by Borrower or any other person or entity on account of the Subordinated Indebtedness, such sums shall be held in trust by Guarantor for the benefit of the Agent and the Lenders and shall forthwith be paid to the Agent without affecting the liability of Guarantor under this Guaranty Agreement and may be applied by the Agent against the Guaranteed Indebtedness in such order and manner as the Agent may determine in its sole discretion. Upon the request of the Agent, Guarantor shall execute, deliver, and endorse to the Agent such documents and instruments as the Agent may request to perfect, preserve, and enforce its rights and the rights of the Lenders hereunder. (b) Any and all liens, security interests, judgment liens, charges, or other encumbrances upon Borrower's assets securing payment of any Subordinated Indebtedness shall be and remain inferior and subordinate to any and all liens, security interests, judgment liens, charges, or other encumbrances upon Borrower's assets securing payment of the Guaranteed Indebtedness or any part thereof, regardless of whether such encumbrances in favor of Guarantor, the Agent or any Lender presently exist or are hereafter created or attached. Without the prior written consent of the Agent, Guarantor shall not (i) file suit against Borrower or exercise or enforce any other creditor's right it may have against Borrower, or (ii) foreclose, repossess, sequester, or otherwise take steps or institute any action or proceedings judicial or otherwise, including without initiation the commencement of, or joinder in, any liquidation, bankruptcy, rearrangement, debtor's relief or insolvency proceeding) to enforce any liens, security interests, collateral rights, judgments or other encumbrances held by Guarantor on assets of Borrower. (c) In the event of any receivership, bankruptcy, reorganization, rearrangement, debtor's relief, or other insolvency proceeding involving Borrower as debtor, the Agent and the Lenders shall have the right to prove and vote any claim under the Subordinated Indebtedness and to receive directly from the receiver, tastes or other court custodian all dividends, distributions, and payments made in respect of the Subordinated Indebtedness. The Agent may apply any such dividends, distributions, and payments against the Guaranteed Indebtedness in such order and manner as the Agent may determine in its sole discretion. (d) All promissory notes, accounts receivable, ledgers, records, or any other evidence of Subordinated Indebtedness shall contain a specific written notice thereon that the indebtedness evidenced thereby is subordinated under the terms of this Guaranty Agreement. 14. No amendment or waiver of any provision of this Guaranty Agreement or consent to any departure by the Guarantor therefrom shall in any event be effective unless the same shall Page 5 89 be in writing and signed by the Agent. No failure on the part of the Agent to exercise, and no delay in exercising, any right, power, or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 15. Any acknowledgment or new promise, whether by payment of principal or interest or otherwise and whether by Borrower or any others (including Guarantor) with respect to any of the Guaranteed Indebtedness shall, if the statute of limitations in favor of Guarantor against the Agent and the Lenders shall have commenced to run, toll the running of such statute of limitations and, if the period of such statute of limitations shall have expired, prevent the operation of such statute of limitations. 16. This Guaranty Agreement is for the benefit of the Agent and the Lenders and their respective successors and assigns, and in the event of an assignment of the Guaranteed Indebtedness, or any part thereof, the rights and benefits hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Guaranty Agreement shall be binding not only on Guarantor but also on Guarantor's successors and assigns. 17. Guarantor recognizes that the Agent and the Lenders are relying upon this Guaranty Agreement and the undertakings of Guarantor hereunder in making and continuing to make extensions of credit to Borrower under the Credit Agreement and further recognizes that the execution and delivery of this Guaranty Agreement is a material inducement to the Agent and the Lenders in entering into the Credit Agreement. Guarantor hereby acknowledges that there are no conditions to the full effectiveness of this Guaranty Agreement. 18. This Guaranty Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 19. Guarantor shall pay on demand all reasonable attorneys' fees and all other reasonable costs and expenses incurred by the Agent and the Lenders in connection with the administration, enforcement and collection of this Guaranty Agreement. 20. Guarantor hereby waives promptness, diligence, notice of any default under the Guaranteed Indebtedness, demand of payment, notice of acceptance of this Guaranty Agreement, presentment, notice of protest, notice of dishonor, notice of the incurring by Borrower of additional indebtedness, notice of intent to accelerate, notice of acceleration, and all other notices and demands with respect to the Guaranteed Indebtedness and this Guaranty Agreement. 21. The Credit Agreement, and all of the terms thereof, are incorporated herein by reference, the same as if stated verbatim herein, and Guarantor agrees that the Agent and the Lenders may exercise any and all rights granted to them under the Credit Agreement and the other Loan Documents (as defined in the Credit Agreement) without affecting the validity or enforceability of this Guaranty Agreement. 22. Guarantor hereby represents and warrants to the Agent and the Lenders that Guarantor has adequate means to obtain from Borrower on a continuing basis information concerning the financial condition and assets of Borrower and that Guarantor is not relying upon Page 6 90 the Agent or any Lender to provide (and neither the Agent nor any Lender shall have any duty to provide) any such information to Guarantor either now or in the future. 23. THIS GUARANTY AGREEMENT EMBODIES THE FINAL, ENTIRE AGREEMENT OF GUARANTOR, AGENT AND THE LENDERS WITH RESPECT TO GUARANTOR'S GUARANTY OF THE GUARANTEED INDEBTEDNESS AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF. THIS GUARANTY AGREEMENT IS INTENDED BY GUARANTOR, THE AGENT AND THE LENDERS AS A FINAL AND COMPLETE EXPRESSION OF THE TERMS OF THE GUARANTY AGREEMENT, AND NO COURSE OF DEALING BETWEEN GUARANTOR ON THE ONE HAND, AND THE AGENT AND THE LENDERS ON THE OTHER HAND, NO COURSE OF PERFORMANCE, NO TRADE PRACTICES, AND NO EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OR OTHER EXTRINSIC EVIDENCE OF ANY NATURE SHALL BE USED TO CONTRADICT, VARY, SUPPLEMENT OR MODIFY ANY TERM OF THIS GUARANTY AGREEMENT. THERE ARE NO ORAL AGREEMENTS AMONG GUARANTOR, THE AGENT AND THE LENDERS. 24. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, GUARANTOR HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS GUARANTY AGREEMENT OR THE TRANSACTIONS CONTEMPT ARE HEREIN OR THE ACTIONS OF THE AGENT AND THE LENDERS IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. 25. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE GUARANTOR, ON THE ONE HAND, AND THE AGENT AND THE LENDERS ON THE OTHER HAND, CLUNG BUT NOT ALOTTED TO THOSE ARISING OUT OF OR RELATING TO THIS GUARANTY AGREEMENT OR ANY RELATED AGREES OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW). THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. GUARANTOR, THE AGENT OR ANY LENDER MAY BANG AN ACTION, INCLUDING A SAY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS GUARANTY AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. (a) Special Rules. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF THE GUARANTOR'S DOMICILE AT TIME OF THIS GUARANTY AGREEMENT'S EXECUTION AND ADMINISTERED BY J.A.M.S. WHO WILL Page 7 91 APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. (b) RESERVATION OF RIGHTS. NOTHING IN THIS GUARANTY AGREEMENT SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS GUARANTY AGREEMENT; OR (II) BE A WAIVER BY THE AGENT OR ANY LENDER OF THE PROTECTION AFFORDED TO IT BY 12 U.S. C. SEC. 91 MR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE AGENT AND THE LENDERS (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE AGENT AND THE LENDERS MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS GUARANTY AGREEMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR FINANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CENT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. EXECUTED as of the __ day of _________, 1996. GUARANTOR: C/D/R INCORPORATED, A Delaware Corporation By: ----------------------------------- Name: Title: Address: 300 Delaware Avenue, Suite 1704 Wilmington, DE 19801 Fax No.: Telephone No.: Attention: Cliff Cummings Page 8 92 EXHIBIT "H" Form of Application Page 1 93 EXHIBIT "I" Form of Assignment and Acceptance Page 1 94 ASSIGNMENT AND ACCEPTANCE Date:_______________, 19_ Reference is made to the Credit Agreement dated as of May 30, 1996 (as the same may be amended and in effect from time to time, the "Credit Agreement"), among Craftmade International, Inc., a Delaware corporation, Durocraft International, Inc., a Texas corporation (jointly and severally, the "Borrower"), the Lenders named therein (the "Lenders"), and Texas Commerce Bank National Association as agent for the Lenders (in such capacity, the "Agent"). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. This Assignment and Acceptance is being executed pursuant to Section 12.6 of the Credit Agreement. _____________________________(the "Assignor.) and _______________________ (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, the following interest in and to the Assignor's rights and obligations under the Credit Agreement and the other Loan Documents as of the Effective Date (as defined below): A____% interest in the Commitments (which percentage interest represents a $_________Commitment with respect to the aggregate Commitments of $12,000,000.00. After giving effect to this Assignment and Acceptance, the Commitment of Assignor will be $___________________. 2. The Assignor (i) represents that, as of the date hereof, its Commitment is $_________________and its pro rata share of the Letters of Credit outstanding under its Commitment is $_______________ (all as unreduced by any assignments which have not yet become effective); (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other Loan Document; and (iv) attaches the Note held by Assignor and requests that the Agent exchange such Note for a new Note payable to the order of (A) the Assignee in an amount equal to the principal amount of Assignor's Commitment assumed by Assignee hereunder, and (B) the Assignor in an amount equal to the principal amount of the Commitment retained by Assignor. 3. The Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (ii) confirms that it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 7. 1 thereof, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (iii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement and the other Loan Documents; (iv) confirms that it is an Eligible Assignee; (v) appoints and authorizes the Agent to take such action on the Assignee's behalf and to exercise Page 1 95 such powers under the Loan Documents as are delegated to the Agent by the terns thereof, together with such powers as are reasonably incidental thereto; and (vi) agrees that it will perform in accordance with their terms all obligations which by the terms of the Credit Agreement and the other Loan Documents are required to be performed by it as a Lender. 4. The effective date for this Assignment and Acceptance shall be,_______, 19_ (the "Effective Date"1). Following the execution of this Assignment and Acceptance, it will be delivered to the Agent for acceptance and recording by the Agent. 5. Upon such acceptance and recording, from and after the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, shall have the rights and obligations of a Lender thereunder and under the other Loan Documents and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement and the over Loan Documents. 6. Upon such acceptance and recording, from and after the Effective Date, the Agent shall make all payments in respect of the interest assigned hereby (including payments of principal, interest, fees and other amounts) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES) AND APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. 8. The Assignee's address for notices for purposes of the Credit Agreement (until such address is subsequently changed in accordance with the Credit Agreement) is specified below its name on the signature pages of this Assignment and Acceptance. 1 Such date shall be at least five (5) Business Days after the execution of this Assignment and Acceptance and delivery thereof to the Agent (unless otherwise agreed by the Agent). [NAME OF ASSIGNOR] By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- [NAME OF ASSIGNEE] By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Address for Notices: --------------------------------------- Page 2 96 Fax No.:( ) --- ------------------------- Telephone No.:( ) --- -------------------- Attention: ---------------------------- ACCEPTED BY: TEXAS COMMERCE BANK NATIONAL ASSOCIATION as Agent for the Lenders By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Page 3 97 EXHIBIT "F" COVENANT COMPLIANCE CERTIFICATE 98 COVENANT COMPLIANCE CERTIFICATE Texas Commerce Bank National Association Attention: Jerry G. Petrey, Vice President 500 East Border Street PO Box 250 Arlington, Texas 76004 Gentlemen: This Covenant Compliance Certificate covers the period from _________, 19_ to _________, 19_ and is delivered pursuant to that certain Credit Agreement (the "Credit Agreement") dated as of May 30, 1996 among Craftmade International, Inc., Durocraft International, Inc., Texas Commerce Bank National Association as Agent, and the Lenders which are parties thereto. All capitalized terms used herein, unless otherwise defined herein, shall have the same meanings as set forth in the Credit Agreement. The undersigned, an authorized officer of Borrower, does hereby certify to the Agent and the Lenders that: 1. No Default. To the best of the undersigned's knowledge, no Event of Default and no Potential Default has occurred and is continuing (or if an Event of Default or Potential Default has occurred and is continuing, Exhibit "A" attached hereto outlines the nature thereof and the action which is proposed to be taken by Borrower with respect thereto). 2. Consolidated Debt to Consolidated Tangible Net Worth Ratio (a) Consolidated Debt......................................$__________________ (b) Consolidated Tangible Net Worth........................$__________________ (c) Ratio [(a) divided by (b)] (must not be greater than 2.5)..........................__________________ 3. Capital Expenditures (the beginning of current fiscal year through date hereof) (must not exceed $400,000 in any fiscal year, excluding Mortgage Debt) $_________________
g:\group\mmls\wpdata\!!c\0402610c.doc Page 1 99 4. Funded Debt to EBDIT Ratio (a) Funded Debt .........................................$__________________ (b) EBDIT Net income (after interest & tax expenses)......................$__________________ Plus: Interest Expense.............................$__________________ Tax Expense..................................$__________________ Depreciation.................................$__________________ Amortization.................................$__________________ Equals: EBDIT........................................$__________________ [(a) divided by (b)](must not be greater than 3.50) .._________________
Attached hereto are Schedules setting forth the calculations supporting the computations set forth in items 2, 3 and 4, of this certificate. All information contained herein and on the attached Schedules is true and correct. IN WITNESS WHEREOF, the undersigned has executed this certificate effective this _______ day of _________________, 199_. CRAFTMADE INTERNATIONAL, INC. By: ----------------------------------- Name: Ken Cancienne Title: Chief Financial Officer DUROCRAFT INTERNATIONAL, INC. By: ----------------------------------- Name: Ken Cancienne Title: Chief Financial Officer Page 2 EX-22 3 SUBSIDIARIES OF THE REGISTRANT 1 CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES EXHIBIT 22 The following schedule lists the subsidiaries of Craftmade International, Inc., a Texas corporation, as of August 30, 1996:
Corporate Name State of Organization Percent Owned by Company -------------- --------------------- ------------------------ Durocraft International, Inc. Texas 100% C/D/R Incorporated Delaware 100%
EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1996 JUL-01-1995 JUN-30-1996 663 0 7,403 164 8,681 17,835 10,342 628 27,996 8,799 8,519 41 0 32 16,320 27,996 36,320 36,320 23,436 23,436 9,258 0 896 2,850 1,024 1,826 0 0 0 1,826 .56 .56
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