<PAGE> 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.
================================================================================
<PAGE> 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
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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.
<TABLE>
<CAPTION>
High Low
---- ---
Fiscal Year Ended June 30, 1995:
<S> <C> <C>
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
</TABLE>
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 -
<PAGE> 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).
<TABLE>
<CAPTION>
For years ended
------------------------------------------------------------------
June 30, June 30, June 30, June 30, June 30,
1992 1993 1994 1995 1996
----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- 9 -
<PAGE> 12
<TABLE>
<CAPTION>
June 30, June 30, June 30, June 30, June 30,
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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 -
<PAGE> 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.
<TABLE>
<CAPTION>
Signatures Capacity Date
- ---------- -------- ----
<S> <C> <C>
/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
</TABLE>
- 18 -
<PAGE> 21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 23
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended
--------------------------------------------
June 30, June 30, June 30,
1994 1995 1996
----------- ------------- -------------
<S> <C> <C> <C>
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
---- ---- ----
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
<PAGE> 24
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, June 30,
1995 1996
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
<PAGE> 25
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, June 30,
1995 1996
------------- ------------
<S> <C> <C>
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
=========== =============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
<PAGE> 26
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended
-----------------------------------------------
June 30, June 30, June 30,
1994 1995 1996
------------ ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
<PAGE> 27
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental disclosures of cash flow
information:
<TABLE>
<CAPTION>
For the years ended
-----------------------------------------------
June 30, June 30, June 30,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 339,427 $ 520,659 $ 895,931
=========== =========== ===========
Income taxes $ 1,219,722 $ 1,142,509 $ 1,016,346
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-7
<PAGE> 28
CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
SERIES A ADDITIONAL
VOTING PREFERRED PAID-IN RETAINED
COMMON STOCK STOCK CAPITAL EARNINGS
---------------------- ------- ---------- ----------
SHARES AMOUNT
--------- -------
<S> <C> <C> <C> <C> <C>
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
========= ======= ======= ========== ==========
</TABLE>
<TABLE>
TREASURY STOCK TOTAL
---------------------- -----------
SHARES AMOUNT
------- ----------
<S> <C> <C> <C>
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
======= ========== ===========
</TABLE>
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
Scheduled maturities of long-term debt are as follows:
<S> <C>
1997 $ 488,656
1998 529,872
1999 574,564
2000 623,025
2001 675,575
Thereafter 6,116,095
----------
$9,007,787
==========
</TABLE>
F-11
<PAGE> 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:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
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%
=========== =========== ===========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------
1989 1992
PLAN PLAN TOTAL
--------------------------------
<S> <C> <C> <C>
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
=====
</TABLE>
F-13
<PAGE> 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:
<TABLE>
<CAPTION>
Year ending June 30:
--------------------
<S> <C>
1997 $ 36,186
1998 27,747
--------
$ 63,933
========
</TABLE>
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
<PAGE> 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
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description Page
----------- ------------------- ----
<S> <C> <C>
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
</TABLE>
<PAGE> 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
********************************************************************************
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
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
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
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
</TABLE>
Page 3
<PAGE> 4
<TABLE>
<S> <C>
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
</TABLE>
Page 4
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 44
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit Description of Exhibit
<S> <C>
"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
</TABLE>
Page 40
<PAGE> 45
EXHIBIT "A"
Note
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 50
EXHIBIT "B"
Advance Request Form
Page 3
<PAGE> 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
<TABLE>
<S> <C>
(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) $ _______________
</TABLE>
Page 5
<PAGE> 52
<TABLE>
<S> <C>
(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__
</TABLE>
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
<PAGE> 53
EXHIBIT "C"
Borrowing Base Report
Page 6
<PAGE> 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.
<TABLE>
<S> <C> <C>
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% $ _____________
</TABLE>
g:\group\mmls\wpdata\!!c|0402610c.doc Page 1
<PAGE> 55
<TABLE>
<S> <C> <C>
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) $ ________________
</TABLE>
Page 8
<PAGE> 56
<TABLE>
<S> <C>
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 $ _____________
</TABLE>
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
<PAGE> 57
EXHIBIT "A"
TO
BORROWING BASE REPORT
Accounts Receivable Aging Report
Page 10
<PAGE> 58
EXHIBIT "D"
Security Agreement
Page 11
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 68
EXHIBIT "E"
Durocraft Security Agreement
Page 20
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 80
EXHIBIT "F"
COVENANT COMPLIANCE CERTIFICATE
Page 31
<PAGE> 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).
<TABLE>
<S> <C> <C>
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 $__________________
</TABLE>
Page 32
<PAGE> 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
<PAGE> 83
EXHIBIT "G"
C/D/R/ GUARANTY
Page 34
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 92
EXHIBIT "H"
Form of Application
Page 1
<PAGE> 93
EXHIBIT "I"
Form of Assignment and Acceptance
Page 1
<PAGE> 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
<PAGE> 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
<PAGE> 96
Fax No.:( )
--- -------------------------
Telephone No.:( )
--- --------------------
Attention:
----------------------------
ACCEPTED BY:
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION as Agent for the Lenders
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
Page 3
<PAGE> 97
EXHIBIT "F"
COVENANT COMPLIANCE CERTIFICATE
<PAGE> 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).
<TABLE>
<S> <C>
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) $_________________
</TABLE>
g:\group\mmls\wpdata\!!c\0402610c.doc Page 1
<PAGE> 99
<TABLE>
<S> <C> <C>
4. Funded Debt to EBDIT Ratio
(a) Funded Debt .........................................$__________________
(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) .._________________
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Corporate Name State of Organization Percent Owned by Company
-------------- --------------------- ------------------------
<S> <C> <C>
Durocraft International, Inc. Texas 100%
C/D/R Incorporated Delaware 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 663
<SECURITIES> 0
<RECEIVABLES> 7,403
<ALLOWANCES> 164
<INVENTORY> 8,681
<CURRENT-ASSETS> 17,835
<PP&E> 10,342
<DEPRECIATION> 628
<TOTAL-ASSETS> 27,996
<CURRENT-LIABILITIES> 8,799
<BONDS> 8,519
<COMMON> 41
0
32
<OTHER-SE> 16,320
<TOTAL-LIABILITY-AND-EQUITY> 27,996
<SALES> 36,320
<TOTAL-REVENUES> 36,320
<CGS> 23,436
<TOTAL-COSTS> 23,436
<OTHER-EXPENSES> 9,258
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 896
<INCOME-PRETAX> 2,850
<INCOME-TAX> 1,024
<INCOME-CONTINUING> 1,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,826
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
