<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-22679
ZARING NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-1506058
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 Cornell Park Drive, Suite 500, Cincinnati, Ohio 45242-1825
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
513-489-8849
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
(Title of Class)
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 twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Number of common shares outstanding as of September 30, 1999: 4,591,488
Total Pages: 24
<PAGE> 2
ZARING NATIONAL CORPORATION
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets,
September 30, 1999, September 30, 1998 (unaudited), and
December 31, 1998 3
Consolidated Statements of Operations (unaudited),
Three Months Ended September 30, 1999 and 1998 and
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statement of Shareholders' Equity,
Nine Months Ended September 30, 1999 (unaudited) 6
Consolidated Statements of Cash Flows,
Nine Months Ended September 30, 1999 and 1998 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
15
Item 3. Qualitative and Quantitative Disclosure About Market Risk 23
PART II OTHER INFORMATION 24
SIGNATURES 25
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ZARING NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
------------------------- ------------
1999 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
Cash and cash equivalents $ 9,194 $ 7,364 $ 15,699
Receivables:
Related parties 28 365 82
Notes 4,645 -- 325
Manufactured housing rebates and other 2,280 494 885
Inventories:
Luxury site-built homes 62,911 36,450 32,365
Entry level homes 9,038 3,769 6,405
Retail distribution manufactured homes 4,918 1,962 2,746
Model homes 23,260 20,444 21,046
Land, development costs and finished lots 66,440 47,897 50,280
Property and equipment, net 7,682 7,406 8,108
HomeMax Sales Villages, net 11,343 12,782 12,336
Investments in and advances to unconsolidated joint ventures -- 639 201
Future tax benefit 6,280 2,258 6,053
Cash surrender value of life insurance and other assets 4,727 5,924 5,566
Goodwill, net 254 2,274 259
-------- -------- --------
$213,000 $150,028 $162,356
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
ZARING NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
-------------------------- ------------
1999 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
Liabilities:
Revolving credit facility $ 59,831 $ 45,156 $ 44,500
Manufactured housing floor plan facility 8,747 6,338 7,082
Term notes payable 45,852 26,436 41,446
Accounts payable 25,688 11,818 14,766
Accrued liabilities 9,140 6,061 6,829
Customer deposits 9,004 2,967 3,296
Deferred gains 2,650 -- --
-------- -------- ------------
Total liabilities before minority interest
and subordinated debt 160,912 98,776 117,919
-------- -------- ------------
Minority interest in consolidated entities 2,709 1,512 1,654
Subordinated debt 9,000 -- --
-------- -------- ------------
Commitments and contingencies
Shareholders' equity:
Preferred shares, no par value, 2,000,000 shares
authorized, none issued or outstanding -- -- --
Common shares, no par value, 18,000,000 shares
authorized, 4,591,488, 4,734,388, 4,591,488
issued and outstanding at September 30, 1999,
September 30, 1998, and December 31, 1998,
respectively 24,957 25,099 24,957
Additional paid-in capital 4,286 5,325 4,286
Retained earnings 11,136 19,316 13,540
-------- -------- ------------
Total shareholders' equity 40,379 49,740 42,783
-------- -------- ------------
$213,000 $150,028 $162,356
======== ======== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenues:
Luxury site-built homes $ 79,673 $ 66,983 $ 186,340 $ 183,786
Entry level homes 7,591 3,328 18,716 6,995
Retail distribution manufactured homes 4,858 4,542 15,072 7,519
Financial services 434 -- 1,102 --
----------- ----------- ----------- -----------
Total net revenues 92,556 74,853 221,230 198,300
----------- ----------- ----------- -----------
Expenses:
Cost of sales luxury site-built homes 63,186 54,323 148,724 152,044
Cost of sales entry level homes 7,209 2,854 17,860 5,718
Cost of sales retail distribution
manufactured homes 4,495 3,837 13,424 6,469
Interest 2,120 1,468 5,524 4,055
Selling 8,223 4,766 18,716 14,613
General and administrative 6,584 6,748 19,665 16,986
Financial services 362 -- 1,044 --
----------- ----------- ----------- -----------
Total expenses 92,179 73,996 224,957 199,885
----------- ----------- ----------- -----------
Operating income (loss) 377 857 (3,727) (1,585)
Other income (expense):
Income from unconsolidated joint
ventures 51 72 51 217
Other, net 78 (45) 103 28
----------- ----------- ----------- -----------
Income (loss) before minority interest and
provision (credit) for income taxes 506 884 (3,573) (1,340)
Minority interest in (income) loss of consolidated
entities 693 (21) 1,462 162
----------- ----------- ----------- -----------
Income (loss) before provision
(credit) for income taxes 1,199 863 (2,111) (1,178)
Provision (credit) for income taxes 1,173 300 293 (588)
----------- ----------- ----------- -----------
Net income (loss) $ 26 $ 563 $ (2,404) $ (590)
=========== =========== =========== ===========
Basic and diluted earnings (loss) per
common share $ 0.01 $ 0.12 $ (0.52) $ (0.12)
=========== =========== =========== ===========
Weighted average shares outstanding 4,591,488 4,752,978 4,591,488 4,764,988
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
SHARES ISSUED COMMON SHARES PAID-IN CAPITAL EARNINGS TOTAL
------------- ------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 4,591,488 $ 24,957 $ 4,286 $ 13,540 $ 42,783
Net loss -- -- -- (2,404) (2,404)
--------- ---------- ---------- ---------- ----------
BALANCE, September 30, 1999
4,591,488 $ 24,957 $ 4,286 $ 11,136 $ 40,379
========= ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
<TABLE>
<CAPTION>
ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (2,404) $ (590)
Adjustments to reconcile net loss to cash used in operating activities--
Depreciation and amortization 3,006 2,766
Income from unconsolidated joint ventures (51) (217)
Minority interest in loss of consolidated entities (1,462) (162)
Change in assets and liabilities--
Future tax benefit (227) (1,200)
Receivables (1,250) 130
Inventories (53,725) (2,101)
Cash surrender value of life insurance and other assets 369 (1,744)
Accounts payable 10,922 3,365
Accrued expenses and deferred gains 3,071 (231)
Customer deposits 5,708 789
-------- --------
Net cash (used in) provided by operating activities (36,043) 805
-------- --------
Cash Flows from Investing Activities:
Additions to property and equipment, net (3,258) (13,587)
Proceeds from sale of property and equipment 2,146 1,222
Distributions received from unconsolidated joint ventures, net 252 200
-------- --------
Net cash used for investing activities (860) (12,165)
-------- --------
Cash Flows from Financing Activities:
Borrowings on notes payable 76,602 96,220
Repayments of notes payable (46,200) (82,356)
Net distributions (paid to) received from majority shareholder of affiliates (4) 1,100
Purchase of common shares -- (400)
-------- --------
Net cash provided by financing activities 30,398 14,564
-------- --------
Increase (decrease) in cash and cash equivalents (6,505) 3,204
Cash and cash equivalents, beginning of period 15,699 4,160
-------- --------
Cash and cash equivalents, end of period $ 9,194 $ 7,364
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for-
Interest, net of amounts capitalized $ 5,447 $ 3,880
======== ========
Income taxes $ 521 $ 608
======== ========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the nine months ended September 30, 1999, the Company received
a note receivable in exchange for the sale of an investment in the
HomeMax, Inc. subsidiary (Note 6):
Note receivable $ 4,411
Deferred gain (1,775)
Minority interest (2,521)
Accrued expenses (115)
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
7
<PAGE> 8
ZARING NATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(1) BASIS OF PRESENTATION-
----------------------
Effective in May 1997, Zaring National Corporation (an Ohio corporation)
implemented the formation of a holding company structure which results in
the accompanying consolidated financial statements including the accounts
of Zaring National Corporation and subsidiaries (the Company). The
subsidiaries of the Company include the following: Zaring Homes, Inc. and
its subsidiaries, Zaring Homes of Indiana, LLC and Zaring Homes Kentucky,
LLC; Zaring Holdings, Inc.; HomeMax Operating Properties, L.L.C. (Note
6); HomeMax, Inc. and its subsidiaries, HomeMax North Carolina, Inc.,
HomeMax Tennessee, Inc., HomeMax South Carolina, Inc., HomeMax Ohio,
Inc., HM Properties, Inc., HomeMax Indiana, LLC and HomeMax Kentucky,
LLC; Hearthside Homes, LLC; and Zaring Financial Services, LLC.
In October 1998, the Company increased its ownership of Blue Chip
Mortgage Company, LLC (Blue Chip) from 50% to 100%. Accordingly, the
financial results of Blue Chip subsequent to September 1998 are
consolidated with the Company's activities whereas activities of Blue
Chip prior to October 1998 were reported using the equity method of
accounting. Effective April 1, 1999, Blue Chip and Legacy Mortgage
Corporation were merged and renamed Zaring Financial Services, LLC.
The principal business of the Company's subsidiary, Zaring Homes, Inc.
(Zaring Homes) is the designing, constructing, marketing and selling of
single-family homes and the acquisition and development of land for sale
as residential building lots in the midwest and southeast United States.
Zaring Homes began operations in Cincinnati, Ohio in 1964 and commenced
operations in Nashville, Tennessee in 1986. In 1994, operations commenced
in Raleigh/Durham, North Carolina and Indianapolis, Indiana. In 1996,
operations commenced in Louisville, Kentucky and Charlotte, North
Carolina.
In November 1996, the Company formed HomeMax, Inc. (HomeMax) for the
purpose of entering into the retail distribution of manufactured housing.
HomeMax, based in Raleigh, North Carolina, commenced operations in the
first quarter of 1997 and currently operates twelve sales villages
located in North Carolina, South Carolina and Kentucky. Effective March
15, 1999, the Company sold a 25% interest in HomeMax to American Homestar
Corporation (Note 6).
Effective October 1, 1997, the Company, through its subsidiary Hearthside
Homes, LLC (Hearthside), acquired substantially all of the net operating
assets of Legacy, Inc., an Indianapolis based builder of entry level
single family homes. The Company also acquired the stock of Legacy
Mortgage Corporation, an entity which originates, processes and sells
mortgages to third-party investors.
In June 1998, the Company's Principal Shareholder formed First Cincinnati
Leasing LLC (Leasing LLC) and First Cincinnati Land LLC (Land LLC) to
purchase and leaseback certain model homes and purchase certain
undeveloped land, as applicable. In March 1999, the Company's Principal
Shareholder formed First Cincinnati Leasing 99 LLC (Leasing 99 LLC) to
purchase and leaseback certain model homes. As a result of, among others,
the Principal Shareholder's control of Leasing LLC, Leasing 99 LLC and
Land LLC (collectively Majority Shareholder LLCs), the results of each of
these entities have been consolidated with the Company's activities
subsequent to their formation. The LLCs' initial capitalization and
related share of income is included as a component of minority interest
in the accompanying consolidated financial statements.
All significant intercompany transactions and balances have been
eliminated in consolidation.
8
<PAGE> 9
The accompanying consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission for interim financial information. Since such financial
statements do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements, they should be read in conjunction with the consolidated
financial statements and related footnotes included in the Form 10-K for
the fiscal year ended December 31, 1998 filed with the Securities and
Exchange Commission. The financial statements are unaudited, but in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the
Company's unaudited consolidated financial statements as of September 30,
1999 have been included. Operating results for the nine months ended
September 30, 1999, are not necessarily indicative of the results for the
entire year.
(2) CAPITALIZED INTEREST-
Interest is capitalized on land in the process of development,
construction of sales villages and residential housing construction costs
during the development and construction period. The following table
summarizes the activity with respect to capitalized interest:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Capitalized interest,
beginning of period $ 2,522 $ 2,161 $ 2,139 $ 1,678
Interest incurred 2,356 1,321 6,143 4,391
Interest expensed (2,120) (1,468) (5,524) (4,055)
------- ------- ------- -------
Capitalized interest,
end of period $ 2,758 $ 2,014 $ 2,758 $ 2,014
======= ======= ======= =======
</TABLE>
(3) NOTES PAYABLE-
--------------
The Company has an unsecured, $87.5 million syndicated credit facility
with PNC Bank acting as agent. This facility consists of a revolving
credit facility, providing for borrowings up to $72.5 million, depending
on the Company's borrowing base, as defined in the agreement, and a $15
million term loan. Fifteen million dollars of the revolving credit
facility may be used for letters of credit.
<TABLE>
<S> <C> <C>
The Company's notes payable consist of the following at September 30,
1999:
Revolving Credit Facility, payable to PNC Bank, as agent, $72.5 million
maximum available borrowings, interest rate options of (a) the greater of
the Prime Rate or the Federal Funds rate plus .50% or the (b) Euro-rate
plus 1.50% to 2.30%, depending on the Company's leverage ratio
(borrowings outstanding at September 30, 1999 are at 7.72%),
expiring in July 2001. $ 59,831
========
Manufactured Housing Floor Plan Facility, payable to Nations Bank, $12.9
million financing facility for inventory and display models, interest at
the Prime Rate or the Euro-rate plus 2.35% (7.73% at September 30, 1999)
and subject to repayment upon the earlier of sale or the end of, in
certain circumstances, six months if held in inventory. Borrowings for
the cost of certain models held for more than twelve months accrue
interest at 10% and are subject to repayment no later than twenty-four
months
after the date of initial borrowing. $ 8,747
========
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C> <C>
Term Loans, payable to PNC Bank, as agent, borrowings at interest rate
options of (a) the greater of the Prime Rate or the Federal Funds
rate plus .50% or the (b) Euro-rate plus 1.50% to 2.30%, depending on
the Company's leverage ratio (borrowings outstanding at September 30,
1999 are at 7.88%), payable in quarterly installments of
$750 through April 2001. $ 5,250
Credit Agreement, payable to The Provident Bank, $15.0 million
available for working capital needs of HomeMax and subsidiaries, interest
at the Prime Rate plus 1%, (9.25% at September 30, 1999), payable in
three annual installments of $1.47 million commencing March 15, 2000,
entire balance payable at the earlier of September 15, 2002 or 90 days
following the sale of the remaining 50% of HomeMax (Note 6), secured by
$8.4 million of promissory notes, contingent interest equal to a
percentage of the gain, if any, upon the sale of additional interest in
HomeMax, as defined per the Credit Agreement, $10.0 million
guaranteed by Zaring Homes. 15,000
Notes Payable to Former Shareholders, interest at 6.00% to 8.50%,
payable in annual installments, $424 due October 1999 through 2001 and
$106 due December 1999. 1,378
Term Notes Payable to Banks, interest at 7.95%, payable in quarterly
installments of $437 through September 2001. 3,176
Other Term Notes, interest at 7.00% to 12.00%, principal installments of $72
due January 2002, $2,425 due April 2003 and $692 due April 2005. 2,931
Obligation of Zaring Financial Services:
Revolving line of credit payable to a bank, permitted borrowings of up to
$5.0 million, interest at the Prime Rate minus 0.25% (8.0%
at September 30, 1999). 289
Obligations of Leasing LLC, Land LLC and Leasing 99 LLC:
Notes payable by Leasing LLC to a bank, permitted borrowings of up to $10.0 million,
interest at LIBOR plus 1.75% (7.13% at September 30, 1999) payable
monthly, secured by model homes and a personal guarantee, payable upon
sale of the models or in annual installments through June 2001. 6,306
Notes payable by Land LLC to a bank, permitted borrowings of up to $10.0
million, interest at LIBOR plus 2.25% (7.63% at September 30, 1999)
payable monthly, secured by land and a personal
guarantee, payable in July 2001. 8,663
Notes payable by Leasing 99 LLC to a bank, permitted borrowings of up to
$3.0 million prior to September 30, 1999, interest at LIBOR plus 1.75%
(7.13% at September 30, 1999), payable monthly, secured by model homes, a
personal guarantee and a guarantee by Leasing LLC, payable upon sale of
the models or in annual installments through
March 2002. 2,859
---------
$45,852
=========
Subordinated notes payable to Principal Shareholder, interest at the
greater of 9 7/8% or the Prime Rate plus 1 5/8% (9 7/8 % at September 30,
1999) payable monthly, principal due September, 2002. $ 5,000
Subordinated note payable to American Homestar Corporation, interest at
6.00% payable quarterly, payable June 15, 2002 unless accelerated as a result
of available cash flow of HomeMax, as defined, convertible into an additional
25% equity interest in HomeMax at the discretion of American Homestar. 4,000
=========
$ 9,000
=========
</TABLE>
10
<PAGE> 11
The bank credit agreements include provisions which require, among
others, that the Company maintain certain levels of tangible net worth
and cash flow from operations as well as limiting the Company's ratio of
debt to equity. As of September 30, 1999, the Company did not meet the
debt to equity covenant (as defined) at the Zaring National level. The
banks have not waived these covenant violations. Management intends to
secure waivers, amend certain of the loan provisions currently included
in the credit agreements or refinance the facilities to enable
prospective compliance. The banks have not waived their right to
accelerate payments under the agreements for any period. In the event
such payments were accelerated, the Company may be unable to secure
financing with comparable terms and conditions.
The Company is contingently liable under letters of credit of
approximately $8.2 million issued as a result of lot and land acquisition
and development activities through September 30, 1999.
(4) EARNINGS (LOSS) PER COMMON SHARE-
---------------------------------
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed similar to basic except the
denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common
shares had been issued.
Options to purchase 456,634 and 318,784 shares of common stock at an
average exercise price of $9.32 and $10.07 per share were outstanding as
of September 30, 1999 and 1998, respectively, but were not included in
the computation of earnings (loss) per share since the options' exercise
prices were greater than the average market price of the common shares.
In addition, inclusion of any options in the computation of diluted
earnings per share would be anti-dilutive in periods incurring a net
loss.
Since there are no dilutive securities, basic and diluted earnings (loss)
per share are identical thus a reconciliation of the numerator and
denominator is not necessary.
(5) SHAREHOLDERS' EQUITY-
---------------------
The Company is authorized to issue up to 2,000,000 preferred shares of
which 1,000,000 are voting. No preferred shares have been issued.
(6) HOMEMAX, INC. JOINT VENTURE WITH AMERICAN HOMESTAR CORPORATION-
---------------------------------------------------------------
Effective March 15, 1999, after assignment of certain obligations
and other preclosing activities, the Company sold a 25% interest in
HomeMax to American Homestar Corporation (American Homestar) for a note
receivable of approximately $4.4 million. The note receivable is to be
paid in three annual installments commencing March 15, 2000 and accrues
interest payable quarterly, at prime. The amended and restated
securities purchase agreement includes the following terms:
- American Homestar issued a $4.0 million subordinated convertible
loan to HomeMax concurrent with the sale. This subordinated loan
accrues interest at 6.0%, payable quarterly, while the principal
is payable on June 15, 2002 unless accelerated as a result of
available cash flow of HomeMax, as defined. The subordinated loan
is convertible into an additional 25% of HomeMax at the discretion
of American Homestar.
- The Company retained a $4.0 million receivable due from HomeMax
which accrues interest at 6.0% and is payable quarterly. The $4.0
million of principal is payable on June 15, 2002, unless
accelerated as a result of available cash flow of HomeMax, as
defined.
- The Company agreed to pay up to $3.0 million in connection with
certain annual lease obligations.
- Subsequent to the sale, model home inventory will be replaced with
the inventory of American Homestar. Costs of replacement, if any,
will be provided by the Company and American Homestar in amounts
up to $1.0 million and $0.5 million, respectively.
- Subsequent to the sale, the Company and American Homestar each
agreed to provide up to $50,000 per quarter to support advertising
and promotional initiatives.
11
<PAGE> 12
- American Homestar agreed to provide certain management and
consulting services for up to three years for compensation of at
least $0.5 million plus an additional fee of up to $750,000 based
upon quarterly losses during the first four quarters following
closing.
- American Homestar and the Company each agreed to provide working
capital loans of up to $0.5 million to HomeMax which will accrue
interest at prime.
- The Company has the option to sell and American Homestar has the
option to buy 50% of HomeMax within three years at a defined
price.
- The Company received an option, which expires on March 15, 2004,
to purchase up to 150,000 shares of common stock of American
Homestar with an exercise price of $18.00 per share.
The accompanying financial statements include the results of HomeMax for
all applicable periods. Losses for the period subsequent to the
transaction allocable to American Homestar are included as a component of
minority interest in loss of consolidated entities in the accompanying
consolidated statements of operations. Similarly, American Homestar's
investment, net of allocable losses, is included as a component of
minority interest in consolidated entities in the accompanying balance
sheets. The gain resulting from the Company's sale of a 25% interest in
HomeMax to American Homestar ($1,775) has been deferred until, among
other factors, American Homestar converts its subordinated note into an
additional 25% equity interest in HomeMax.
(7) INCOME TAXES-
-------------
Through March 15, 1999, the operating results of HomeMax were included in
the consolidated tax return of the Company. Subsequent to March 15, 1999,
HomeMax is not included in the Company's consolidated return.
Accordingly, losses of HomeMax subsequent to March 15, 1999 have not been
benefited for financial reporting purposes after giving effect to
applicable valuation allowances.
(8) NEW PRONOUNCEMENTS-
-------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). This statement established accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments imbedded in other contracts) be recorded on the balance sheet
as either an asset or liability measured at its fair value. This
statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS 133 is effective for fiscal years beginning after
June 15, 2000. Upon adoption of this statement, the Company anticipates
no impact on its reported consolidated financial position, results of
operations, cash flows or related disclosures.
(9) CONTINGENCIES-
------------------
During the third quarter, the Company became aware that entrapped
moisture had resulted in mold or mildew developing in certain brick-
faced, exterior walls in homes where tar paper was used as a vapor
barrier as required by the City of Mason, Ohio's building code. The
Company believes a combination of factors in the construction process
caused conditions that led to the abnormal entrapment of moisture;
however, the tar paper is believed to be a contributing factor. The
problem is limited to certain homes in Mason where tar paper was used
and exterior brick was applied after August 1997. The Company has
commenced discussions with insurance carriers and other pertinent
parties to address the potential financial impacts of the moisture items.
However, given the preliminary nature of the process, further review and
analysis will be necessary to determine the impact on the prospective
results of the operations or financial condition of the Company.
(10) RECLASSIFICATIONS-
------------------
Certain amounts in the consolidated interim financial statements for 1998
have been reclassified to conform to the 1999 presentation.
12
<PAGE> 13
(10) SEGMENT INFORMATION-
The following tables set forth, for the periods indicated, certain
segment information regarding the Company's operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
(dollars in thousands)
<S> <C> <C> <C> <C>
Zaring Homes, Inc.
Luxury Site-Built Homes
Revenues $ 78,595 $ 66,705 $ 183,847 $ 183,508
Cost of sales 62,209 54,104 146,468 151,825
Interest, net 2,008 1,840 5,954 5,252
Selling, general and administrative expenses 10,198 7,634 25,628 20,576
--------- --------- --------- ---------
Operating income 4,180 3,127 5,797 5,855
Other income (expense) 117 (25) 34 (11)
--------- --------- --------- ---------
Pretax Luxury Site-Built Income 4,297 3,102 5,831 5,844
Hearthside Homes, LLC
Entry Level Homes
Revenues 7,591 3,328 18,716 6,995
Cost of sales 7,209 2,854 17,860 5,718
Interest, net 303 97 762 218
Selling, general and administrative expenses 560 371 1,671 1,330
--------- --------- --------- ---------
Operating income (loss) (481) 6 (1,577) (271)
Other income (expense) -- (17) 6 11
--------- --------- --------- ---------
Pretax Entry Level Loss (481) (11) (1,571) (260)
Financial Services
Revenues 434 -- 1,102 --
Expenses 362 -- 1,044 --
--------- --------- --------- ---------
Operating income 72 -- 58 --
Other income (expense) (9) -- 36 --
--------- --------- --------- ---------
Pretax Financial Services Income 63 -- 94 --
HomeMax, Inc.
Retail Distribution Manufactured Homes
Revenues 4,858 4,542 15,072 7,519
Cost of sales 4,495 3,837 13,424 6,469
Interest, net 277 444 1,190 1,243
Selling, general and administrative expenses 3,306 2,742 8,164 7,562
--------- --------- --------- ---------
Operating loss (3,220) (2,481) (7,706) (7,755)
Other income -- 13 44 30
Minority interest 615 60 1,214 243
--------- --------- --------- ---------
Pretax Retail Distribution Loss (2,605) (2,408) (6,448) (7,482)
Majority Shareholder LLCs
Revenues 1,078 278 2,493 278
Cost of sales 977 219 2,256 219
Interest, net 336 201 873 201
Selling, general and administrative
expenses 52 26 147 26
--------- --------- --------- ---------
Operating loss (287) (168) (783) (168)
Other income 209 249 535 249
Minority interest 78 (81) 248 (81)
--------- --------- --------- ---------
0 0 0 0
Corporate
Interest income from subsidiaries, net 849 1,034 3,301 2,779
General and administrative expenses (924) (854) (3,318) (2,059)
--------- --------- --------- ---------
Income (loss) before income taxes 1,199 863 (2,111) (1,178)
Provision (credit) for income taxes 1,173 300 293 (588)
--------- --------- --------- ---------
Net income (loss) $ 26 $ 563 $ (2,404) $ (590)
========= ========= ========= =========
</TABLE>
13
<PAGE> 14
Other pertinent information regarding the Company's segment operations are as
follows:
<TABLE>
<CAPTION>
Zaring
Homes, Inc. Hearthside HomeMax, Inc.
Luxury Homes, LLC Retail Majority
Site-Built Entry Level Financial Distribution Shareholder
Homes Homes Services Manufactured Homes LLCs Corporate Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Segment assets:
As of September 30, $132,000 $ 14,818 $ 779 $ 25,985 $ 18,987 $ 75,709 $ 268,278
1999
As of December 31, 1998 91,110 10,355 113 23,152 14,998 16,852 156,580
<CAPTION>
RECONCILIATION OF SEGMENT ASSETS TO TOTAL
ASSETS:
AS OF SEPTEMBER 30, 1999 AS OF DECEMBER 31, 1998
------------------------ -----------------------
<S> <C> <C> <C>
Total segment assets $ 268,278 Total segment assets $ 156,580
Elimination of Elimination of
inter-entity (64,472) inter-entity (9,923)
investments investments
Cash and cash equivalents 9,194 Cash and cash 15,699
* equivalents *
---------------- -------------
$213,000 $ 162,356
================ =============
<FN>
* Management excludes cash and cash equivalents from assessing a segment's
operating performance.
</TABLE>
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
The Company's business and the homebuilding industry are subject to changes in
national and local economic conditions, as well as other factors, including
employment levels, availability of financing, interest rates, consumer
confidence and housing demand. The Company's results of operations for the
periods presented include luxury site-built homes, entry level homes, retail
distribution manufactured homes and reflect the cyclical nature of the housing
industry.
The Company reported consolidated net revenues of $92.6 million for the quarter
ended September 30, 1999, compared to $74.9 million for the same quarter in
1998. The net income for the third quarter 1999 was $26,000 or $0.01 per share,
compared to a net income of $563,000 or $0.12 per share for the third quarter of
1998.
For the nine months ended September 30, 1999, consolidated revenues were $221.2
million compared to $198.3 million for the nine months ended September 30, 1998.
The net loss for the nine months ended September 30, 1999 was ($2.4 million) or
($ 0.52) per share, compared to ($590,000) or ($0.12) per share for the nine
months ended September 30, 1998.
The following tables set forth, for the periods indicated, certain information
regarding the Company's operations (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Zaring Homes, Inc.
Luxury Site-Built Homes
Revenues $ 78,595 $ 66,705 $ 183,847 $ 183,508
Cost of sales 62,209 54,104 146,468 151,825
Interest, net 2,008 1,840 5,954 5,252
Selling, general and administrative expenses 10,198 7,634 25,628 20,576
--------- --------- --------- ---------
Operating income 4,180 3,127 5,797 5,855
Other income (expense) 117 (25) 34 (11)
--------- --------- --------- ---------
Pretax Luxury Site-Built Income 4,297 3,102 5,831 5,844
Hearthside Homes, LLC
Entry Level Homes
Revenues 7,591 3,328 18,716 6,995
Cost of sales 7,209 2,854 17,860 5,718
Interest, net 303 97 762 218
Selling, general and administrative expenses 560 371 1,671 1,330
--------- --------- --------- ---------
Operating income (loss) (481) 6 (1,577) (271)
Other income (expense) -- (17) 6 11
--------- --------- --------- ---------
Pretax Entry Level Loss (481) (11) (1,571) (260)
Financial Services
Revenues 434 -- 1,102 --
Expenses 362 -- 1,044 --
--------- --------- --------- ---------
Operating loss 72 -- 58 --
Other income (expense) (9) -- 36 --
--------- --------- --------- ---------
Pretax Financial Services Income 63 -- 94 --
HomeMax, Inc.
Retail Distribution Manufactured Homes
Revenues 4,858 4,542 15,072 7,519
Cost of sales 4,495 3,837 13,424 6,469
Interest, net 277 444 1,190 1,243
Selling, general and administrative expenses 3,306 2,742 8,164 7,562
--------- --------- --------- ---------
Operating loss (3,220) (2,481) (7,706) (7,755)
Other income -- 13 44 30
Minority interest 615 60 1,214 243
--------- --------- --------- ---------
Pretax Retail Distribution Loss (2,605) (2,408) (6,448) (7,482)
Majority Shareholder LLCs
Revenues 1,078 278 2,493 278
Cost of sales 977 219 2,256 219
Interest, net 336 201 873 201
Selling, general and administrative
expenses 52 26 147 26
--------- --------- --------- ---------
Operating loss (287) (168) (783) (168)
Other income 209 249 535 249
Minority interest 78 (81) 248 (81)
--------- --------- --------- ---------
0 0 0 0
Corporate
Interest income from subsidiaries, net 849 1,034 3,301 2,779
General and administrative expenses (924) (854) (3,318) (2,059)
--------- --------- --------- ---------
Income (loss) before income taxes 1,199 863 (2,111) (1,178)
Provision (credit) for income taxes 1,173 300 293 (588)
--------- --------- --------- ---------
Net income (loss) $ 26 $ 563 $ (2,404) $ (590)
========= ========= ========= =========
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
LUXURY SITE-BUILT HOMES
Operating data:
Units
New Orders (2) 327 194 983 721
Closings (1) 292 250 664 712
Backlog (3) 575 249 575 249
Average revenue per closing $ 276 $ 267 $ 277 $ 257
Average value of new order sales $ 279 $ 277 $ 280 $ 263
Sales value of backlog $162,954 $ 67,604 $162,954 $ 67,604
ENTRY LEVEL HOMES
Operating data:
Units
New Orders (2) 66 33 187 83
Closings (1) 54 24 143 55
Backlog (3) 96 52 96 52
Average revenue per closing $ 132 $ 127 $ 128 $ 124
Average value of new order sales $ 124 $ 131 $ 127 $ 129
Sales value of backlog $ 12,037 $ 6,928 $ 12,037 $ 6,928
RETAIL DISTRIBUTION MANUFACTURED HOMES
Operating data:
Units
New Orders (2) 106 127 294 290
Closings (1) 83 82 262 142
Backlog (3) 199 188 199 188
Average revenue per closing $ 57 $ 55 $ 56 $ 53
Average value of new order sales $ 67 $ 58 $ 61 $ 56
Sales value of backlog $ 14,268 $ 11,189 $ 14,268 $ 11,189
<FN>
(1) Revenue from a sale is recognized upon the closing of the sale.
(2) New orders represent total new home orders received during the period, net
of cancellations.
(3) Backlog includes new orders which have not yet closed.
</TABLE>
16
<PAGE> 17
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
ZARING HOMES, INC., LUXURY SITE-BUILT HOMES- Net revenues for the three months
ended September 30, 1999 increased 17.8% from $66.7 million for the period ended
September 30, 1998 to $78.6 million in 1999. Zaring Homes delivered 292 homes in
the third quarter of 1999, compared to 250 homes in the third quarter of 1998, a
16.8% increase. Net revenues for the nine months ended September 30, 1999
increased a nominal amount from the same period in 1998. Zaring Homes delivered
664 homes during the nine months ended September 30, 1999, compared to 712 homes
in the corresponding period in 1998, a 6.7% decrease. The decrease in home
closings for the nine month period was directly attributable to the slowing of
net sales during the fourth quarter of 1998 and the first quarter of 1999 which
impacted closings during the first and second quarters of 1999. However, overall
average revenue per closing increased $20,000 per home during the nine months
ended September 30, 1999, compared to the corresponding period in 1998. New
orders during the third quarter of 1999 increased 68.6% to 327 units from 194
units in the third quarter of 1998. New orders increased 36.3% in the first nine
months of 1999 from 721 units in the first nine months of 1998 to 983 units in
1999. As a result of the increase in new orders and the closings above, backlog
at September 30, 1999 is 575 units, an increase of 326 units or 130.9% from
September 30, 1998.
Gross profit, excluding net interest expense increased $3.8 million or 29.9% in
the third quarter of 1999 as compared to the third quarter of 1998. Gross profit
increased $5.7 million or 18.0% for the nine months ended September 30, 1999 as
compared to the corresponding period in 1998. Gross profit as a percentage of
revenues was 20.8% for the third quarter 1999 as compared to 18.9% for the third
quarter of 1998. The gross profit percentage for the nine-month period ended
September 30, 1999 was 20.3% as compared to 17.3% for the corresponding period
in 1998. The increase in gross profit is attributable to, among other factors,
the closing of contracts with higher margins which resulted from a change in
pricing strategy late in 1998. Interest expense increased by $168,000 during the
three months ended September 30, 1999 as compared to the same period in 1998.
Interest expense for the nine months ended September 30, 1999 increased $702,000
as compared to the corresponding period in 1998 due to increased inventory
investments in land development and increases in the number of sold units in
process.
Selling expenses for the three and nine month periods ended September 30, 1999
increased $2.4 million and $2.5 million, respectively, as compared to the
corresponding periods in 1998. As a percentage of revenues, selling expenses
increased to 9.0% during the three-month period ended September 30, 1999 from
7.0% during the three-month period ended September 30, 1998. As a percentage of
revenues, selling expenses increased to 8.3% during the nine-month period ended
September 30, 1999 from 6.9% for the corresponding period in 1998. These
increases are due to increased staffing levels and design center expenses.
General and administrative expenses increased $169,000 in the third quarter of
1999 compared to the third quarter of 1998 and $2.5 million in the nine months
ended September 30, 1999, compared to the nine months ended September 30, 1998.
These increases are primarily attributable to increased corporate staffing,
compensation increases and related expenses coupled with increased technology
costs. As a percentage of revenue, general and administrative expenses decreased
to 4.0% in the third quarter of 1999 from 4.5% during the third quarter 1998 and
increased to 5.6% for the nine months ended September 30, 1999 from 4.3% during
the same period in 1998. On a combined basis, selling, general and
administrative expenses increased $2.6 million, or 33.6% in the third quarter
1999 compared to the third quarter of 1998 and $5.1 million, or 24.6% for the
nine months ended September 30, 1999, compared to the corresponding period in
1998. As a percentage of revenues, selling, general and administrative expenses
increased to 13.0% for the three months ended September 30, 1999 from 11.4% for
the three months ended September 30, 1998 and to 13.9% for the nine months ended
September 30, 1999 from 11.2% for the nine months ended September 30, 1998. The
increase as a percentage of revenues is due to increased selling expenses to
generate an additional 326 units in backlog at September 30, 1999 as compared to
September 30, 1998, and increases in personnel and other expenses as noted.
As a result of the foregoing, the Zaring Homes segment reported pretax income of
$4.3 million or 5.5% of net revenues in the third quarter of 1999, an increase
of $1.2 million or 38.5% from the same period in 1998. For the nine month period
ended September 30, 1999, Zaring Homes reported pretax income of $5.8 million or
3.2% of net revenues consistent with $5.8 million or 3.2% for the same period in
1998.
17
<PAGE> 18
HEARTHSIDE HOMES, LLC, ENTRY LEVEL HOMES- Net revenues for the three and nine
months ended September 30, 1999 were $7.6 million and $18.7 million,
respectively, compared to $3.3 million and $7.0 million, respectively, for the
corresponding periods in 1998. Hearthside Homes delivered 54 and 143 homes,
respectively, in the three and nine months ended September 30, 1999, as compared
to 24 and 55 homes, respectively, for the three and nine months ended September
30, 1998. The increase in homes closed is directly attributable to the expansion
into Louisville, Kentucky and Nashville, Tennessee during the fourth quarter of
1998.
Gross profit, excluding net interest expense was $382,000, or 5.0% and $856,000,
or 4.6% for the three and nine months ended September 30, 1999, respectively, as
compared to $474,000, or 14.2% and $1.3 million, or 18.3% for the corresponding
periods in 1998. The overall gross profit decrease for the three and nine month
periods ended September 30, 1999 is a result of converting operations in all
markets to produce site-built homes rather than precision built homes, which
were determined to have a higher cost per unit to produce and reducing sales
prices on existing precision built homes to expedite the conversion. Selling,
general and administrative expenses were $560,000, or 7.4% of revenues and $1.7
million, or 8.9% of revenues for the three and nine months ended September 30,
1999, respectively, versus 11.1% and 19.0% of revenues for the three months and
nine months ended September 30, 1998. The decrease as a percentage of revenues
is a result of the increase in closing revenues which cover such expenses,
offset by the cost of the expansion into Nashville and Louisville. Interest
expense was $303,000 and $762,000 for the three and nine months ended September
30, 1999, respectively, representing significant increases from the
corresponding periods in 1998 due mainly to increased investments in model and
market homes as well as the number of sold units in process.
As a result of the foregoing, the Hearthside segment reported pretax losses of
$481,000 and $1.6 million for the three and nine months ended September 30,
1999, respectively, as compared to pre-tax losses of $11,000 and $260,000 for
the three and nine months ended September 30, 1998, respectively. Management
intends to build out existing Hearthside communities then phase out the
Hearthside operations.
HOMEMAX, INC., RETAIL DISTRIBUTION MANUFACTURED HOMES- Net revenues for the
three months ended September 30, 1999 increased $316,000 from $4.5 million in
the third quarter of 1998 to $4.9 million in the third quarter of 1999. Net
revenues for the nine months ended September 30, 1999 increased $7.6 million
from $7.5 million for the nine months ended September 30, 1998 to $15.1 million
for the nine months ended September 30, 1999. HomeMax closed 83 units in the
third quarter of 1999, versus 82 units in the same period of 1998. The less than
expected increase in third quarter 1999 closings was a direct result of the
impact of the hurricane in delaying closings in North Carolina and South
Carolina. HomeMax closed 262 units in the nine-month period ended September 30,
1999, an increase of 84.5% from the 142 units closed in the same period of 1998.
The overall increase for the nine month period is due mainly to the fact that 12
sales villages were open during the nine month period ended September 30, 1999
compared to eight sales villages being open during the period ending September
30, 1998.
Gross profit, excluding net interest expense was $363,000 or 7.5% for the three
months ended September 30, 1999 compared to $705,000 or 15.5% for the same
period in 1998. Gross profit was $1.6 million or 10.9% for the nine months ended
September 30, 1999 compared to $1.0 million or 14.0% for the same period in
1998. This decrease in gross profit is primarily due to the conversion process
of changing to products offered by American Homestar during the second and third
quarter 1999. Interest expense decreased $167,000 from 9.8% of revenues in the
third quarter of 1998 to 5.7% of revenues in 1999. The decrease is a result of
the sale of 25% of HomeMax to American Homestar which took place March 15, 1999.
In conjunction with the sale, certain intercompany debt was converted to equity
with the remaining debt and the subordinated note payable to American Homestar
carrying interest at lower rates. Interest expense decreased $53,000 in the nine
months ended September 30, 1999 compared to the same period in 1998. As a
percentage of revenues, interest expense decreased to 7.9% for the nine months
ended September 30, 1999 from 16.5% in the corresponding period of 1998. The
decrease as a percentage of revenues is due to the transaction discussed above
coupled with higher revenues.
Selling, general and administrative expenses for HomeMax totaled $3.3 million
and $8.2 million for the three and nine months ended September 30, 1999,
respectively, compared to
18
<PAGE> 19
$2.7 million and $7.6 million for the same periods in 1998. Selling expenses
were $657,000 or 13.5% of revenues in the third quarter of 1999 compared to
$72,000, or 1.6% of revenues for the same period in 1998. Selling expenses were
$2.2 million or 14.7% of revenues for the nine-month period ended September 30,
1999 compared to $1.6 million or 20.7% of revenues for the same period in 1998.
This overall nine month decrease as a percentage of revenues is primarily due to
the increase in closing revenues and the maturity of the sales center
operations. General and administrative expenses were $2.6 million or 54.5% of
revenues in the third quarter of 1999 versus $2.7 million or 58.8% of revenues
for the same period in 1998. General and administrative expenses were $5.9
million or 3.2% of revenues for the nine-month period ended September 30, 1999
versus $6.0 million or 79.8% of revenues for the same period in 1998. The
decrease as a percentage of revenues is due to specific cost containment efforts
initiated in the fourth quarter of 1998 coupled with the increase in closing
revenues.
As a result of the foregoing, HomeMax reported a pretax loss of $2.6 million in
the third quarter of 1999 compared to $2.4 million in the third quarter of 1998
and a pretax loss of $6.5 million for the nine months ended September 30, 1999
compared to $7.5 million for the corresponding period in 1998.
FINANCIAL SERVICES - The financial services segment reported revenues of
$434,000 and $1.1 million for the three and nine months ended September 30,
1999. After deducting $362,000 and $1.0 million in expenses associated with the
mortgage company operations for the three and nine months ended September 30,
1999, respectively, offset by miscellaneous other income (expense), the
financial services segment reported a pretax income of $63,000 and $94,000 for
the three and nine months ended September 30, 1999, respectively.
MAJORITY SHAREHOLDER LLCS - First Cincinnati Leasing LLC (Leasing LLC), First
Cincinnati Leasing 99 LLC and First Cincinnati Land LLC are reported as
"Majority Shareholder LLCs". Leasing LLC closed four and nine homes during the
three and nine months ended September 30, 1999, respectively, for total revenues
of $1.1 million and $2.5 million, respectively. One home was closed during the
three and nine months ended September 30, 1998. Interest expense of $336,000 and
$873,000 during the three and nine months ended September 30, 1999,
respectively, and $201,000 for the three and nine months ended September 30,
1998 represents interest incurred related to model home and undeveloped land
holdings. Other income of $209,000 and $535,000 for the three and nine months
ended September 30, 1999 and $249,000 for the three and nine months ended
September 30, 1998 represents model home rental income.
OTHER OPERATING RESULTS - Interest income from subsidiaries, net represents the
allocation of interest cost to the subsidiaries. Corporate general and
administrative expenses were $924,000 and $3.3 million for the three and
nine-month periods ended September 30, 1999, respectively, as compared to
$854,000 and $2.1 million for the three and nine-month periods ended September
30, 1998. The overall increase represents additional corporate staff, personnel
costs as well as administrative expenses necessary to support the organization's
various initiatives.
YEAR 2000 ISSUE
BACKGROUND--At midnight on December 31, 1999, unless the proper modifications
have been made, the program logic in many of the world's computer systems will
start to produce erroneous results because, among other things, the systems will
incorrectly read the date "01/01/00" as being January 1 of the year 1900 or
another incorrect date. In addition, certain systems may fail to detect that the
year 2000 is a leap year. Problems can also arise earlier than January 1, 2000,
as dates in the next millennium are entered into non-Year 2000 compliant
programs.
ZARING NATIONAL CORPORATION YEAR 2000 COMPLIANCE PROGRAM--During 1998, the
Company initiated a comprehensive corporate wide Year 2000 Compliance Program
(the Compliance Program) to evaluate and address the impact of the Year 2000
issue on its entire operations. The Compliance Program covers all aspects of the
Company's business that may be affected by the Year 2000 issue. The issue is
segregated into three main categories of possible risk: internal systems,
supplier exposure, and environmental risk. All internal systems have been
reviewed for Year 2000 compliance. This includes all server, client, and
communication hardware, all related peripheral hardware, and all "embedded"
system
19
<PAGE> 20
hardware. Additionally, all of the application software that runs on the
internal system hardware has been reviewed for compliance. Supplier exposure has
also been considered in this review. Supplier exposure includes a review of any
products or services used directly by the Company throughout its value delivery
process. The supplier category also includes analysis of possible first and
second tier supplier work interruptions caused by the Year 2000 issue. The last
category of review was the environmental impact of the issue on operations,
including internal work interruptions caused by external events such as power
delivery and physical access. This Compliance Program encompasses the review of
all three categories of risk at Zaring Homes, Hearthside, HomeMax and all other
Company subsidiary organizations.
YEAR 2000 COMPLIANCE PROGRAM PROCESS--The Company's process to achieve Year 2000
compliance involves four major steps: inventory of assets and suppliers, risk
assessment, action plan development, and testing.
Step one of the processes involved an inventory of all hardware, software and
suppliers that could entail risk to the Company because of date sensitivity. The
result of this process was a list of all suppliers that could have a significant
effect on the business if their work was interrupted or if their products or
services are not Year 2000 compliant. The hardware and software inventory
included all makes, models and versions of information systems. This information
is then used in Step two of the process, risk assessment.
Step two involved a risk assessment of individual systems and suppliers
resulting in a three-tier risk structure (high, medium, low) for the systems and
suppliers. This assessment involved a combination of several criteria: business
impact, likelihood of failure, and effort to remediate. The high and medium risk
items identified as non-compliant were further addressed in Step three of the
project.
Step three entailed the development of action plans to address systems or
suppliers deemed not compliant in the previous phases and that have a
significant impact on the Company's business. Each non-compliant system or
supplier has a customized action contingency plan. These plans may include
remediation through wholesale replacement of non-compliant systems, upgrades of
systems, or identification of alternate sources of supply. Each action plan
includes the development of a contingency plan in the remote case that the
identified remediation is not completed in time. The Audit Committee of the
Board of Directors continues to review these action plans and each plan has its
own timeline and program for completion.
The final step of this process (Step four) involves testing of all relevant
systems to verify that any remediation efforts were successful in making the
systems compliant with the Year 2000 issue.
TIME TO COMPLETE THE YEAR 2000 COMPLIANCE PROGRAM--As of September 30, 1999, the
Company has substantially completed all phases of the Compliance Program. The
Company has completed the development of all contingency plans, in all
operations of the Company, and will continue to implement the contingency plans.
ZARING NATIONAL'S CORE INFORMATION SYSTEM--Prior to the undertaking of the
Compliance Program, the Company realized that one of its core information
systems was not compliant and that there was a significant risk that the
software supplier could not develop an upgrade in sufficient time. For this
reason, and other operational benefits, the Company decided to replace this core
non-compliant system with a new and compliant product. This effort was formally
launched in January 1998 and was complete as of March 31, 1999. A Year 2000
compliant core accounting, purchasing, payables and management information
system was installed in all of the Company's relevant operations, and the
non-compliant system was decommissioned. This project met all major milestones
to date and is within the budgeted amount of $3.0 million. As of September 30,
1999, a total of $2.4 million of costs have been capitalized in association with
this project in accordance with the guidelines established in Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" issued in March 1998.
COST OF THE YEAR 2000 COMPLIANCE PROGRAM--At the present time, management
estimates that the costs associated with completing the comprehensive Compliance
Program will be approximately $125,000. This estimate represents external vendor
consulting and excludes
20
<PAGE> 21
the expense associated with management's oversight and review of the Compliance
Program. In addition, this estimate excludes any non-core information system
hardware or software remediation cost. However, miscellaneous hardware and
software remediation costs, other than the core management information system
discussed previously, are anticipated to be immaterial to the overall Company's
operations. Compliance Program review costs are expensed as incurred. The
Company is financing the cost of the core management information system and Year
2000 compliance review through internal sources of funds.
RISKS OF NON-COMPLIANCE AND CONTINGENCY PLANS--The transmission and distribution
by automation systems affecting the building of a home and the internal
management information systems affecting cash flow management are major business
applications which pose the greatest Year 2000 risks for the Company if
implementation of the Compliance Program is not successful. The potential
problems related to these systems are interruptions of service to customers,
interrupted revenue and cost data gathering, delays in the cash payment
function, and poor customer relations resulting from a delayed building process.
Although the Company has substantially completed all Year 2000 remediation and
testing activities, the Year 2000 compliance of third parties poses a risk. The
Company has surveyed significant vendors and other parties material to the
Company's operations to assess their Year 2000 compliance and is diligently
monitoring the progress of such third parties in the Year 2000 compliance area.
Although all of the Company's significant vendors have indicated Year 2000
readiness, such third parties nonetheless represent a significant risk that
cannot be assessed with precision or controlled with certainty. The Company's
ability to finalize its Compliance Program is heavily dependent upon the timely
provision of necessary upgrades and modifications by the Company's suppliers and
contractors. In some instances, it is anticipated that third party upgrades and
modifications to hardware and software are not expected to be available until
fourth quarter 1999. In addition, the Company cannot guarantee that third
parties on whom it depends for essential services (such as lumber, building
materials, subcontractor labor, electric utilities, exchange carriers, phone and
fax systems, etc.) will convert their critical systems and processes in a timely
manner. Failure or delay by any of these parties could significantly disrupt the
Company's business. However, the Company has established a supplier compliance
program to work with key vendors to minimize such risks. For these reasons, the
Company is finalizing the development of contingency plans to address
alternatives in the event that Year 2000 failures of automatic systems and
equipment occur, including contingencies for the potential failures of key
vendors to become Year 2000 compliant. All contingency plans have been developed
and will be implemented prior to December 31, 1999.
CAPITAL RESOURCES AND LIQUIDITY
Net cash used in operating activities increased from a $805,000 source of cash
during the nine months ended September 30, 1998 to a $36.0 million use of cash
during the nine months ended September 30, 1999. This overall increase in the
use of cash is due mainly to additional investments in luxury site-built homes
as well as investments in land developments and developed lots which aggregate
$53.7 million, tempered by financing provided through trade payables, accruals
and customer deposits of $19.7 million. The increase in inventories is primarily
attributable to response to market demands for the Company's housing products
and efforts to maintain appropriate levels of land and finished lots.
Net cash used for investing activities decreased $11.3 million from $12.2
million during the nine months ended September 30, 1998 to $860,000 during the
nine months ended September 30, 1999. This decrease is directly related to the
fact that HomeMax sales villages which were in the development phase in 1998
were substantially complete and operating commencing in 1998.
Net cash provided by financing activities for the nine months ended September
30, 1999 was $30.4 million, an increase of $15.8 million from the same period in
1998. This increase is due to net borrowings which were primarily used to
finance additional investments in inventories and support working capital needs.
The Company's financing is comprised of:
- - A $72.5 million bank revolving credit facility of which $59.8 million was
outstanding and $9.0 million was available (as per the agreement) as of
September 30, 1999
21
<PAGE> 22
- - $17.8 million of term facilities provided to the Majority Shareholder
LLCs which are controlled by the Company's Principal Shareholder
- - $5.0 million in subordinated loans from the Principal Shareholder
- - $8.4 million of bank term loans
- - A $5.0 million bank revolving credit arrangement for Zaring Financial
Services of which $4.7 million was available as of September 30, 1999
- - Other term loans of $4.3 million
- - Financing for HomeMax provided through:
- - A bank floor plan credit facility of which $8.7 million was
outstanding as of September 30, 1999
- - A $15.0 million bank term facility
- - A $4.0 million subordinated convertible note payable to American Homestar
- - Financing commitments by the Company and American Homestar of
approximately $4.6 million and $1.1 million, respectively
As of September 30, 1999, the Company did not meet the debt to equity covenant
at the Zaring National level. The banks have not waived these violations.
Management intends to secure waivers, amend certain of the loan provisions
currently included in the credit agreements or refinance the facilities to
enable continued compliance. However, in the event such waivers or amendments
are required and not received, the banks have the right to accelerate the
scheduled payments stipulated per the agreements. In the event such payments
were accelerated, the Company may be unable to secure financing on comparable
terms and conditions.
Through September 30, 1999, the Company had not expanded its preexisting bank
credit facilities given its efforts to finance its growth through profitable
operations, asset management initiatives, subordinated financing provided by the
Company's Principal Shareholder, financing provided to Land LLC, Leasing LLC and
Leasing 99 LLC controlled by the Company's Chairman and Principal Shareholder,
as well as other financing sources available to the Company.
In October 1999, the Chairman and Principal Shareholder announced his intentions
to provide an additional $15.0 million of subordinated financing to the
Company in addition to the $5.0 million of subordinated financing provided as of
September 30, 1999. At the present time, the Chairman has indefinitely suspended
his efforts to provide additional subordinated debt financing. The Company
intends to closely monitor current and prospective capital requirements and will
explore alternative financial arrangements to the extent deemed appropriate.
CONTINGENCIES- During the third quarter of 1999, the Company became aware that
entrapped moisture had resulted in mold or mildew developing in certain
brick-faced, exterior walls in homes where tar paper was used as a vapor
barrier as required by the City of Mason, Ohio's Building Code. The Company
believes a combination of factors in the construction process caused conditions
that led to the abnormal entrapment of moisture; however, the tar paper is
believed to be a contributing factor. The problem is limited to certain homes
in Mason where tar paper was used and exterior brick was applied after August
1997. The Company is diligently investigating appropriate procedures to correct
the situation, including, but not limited to, the removal and replacement of
exterior brick and the treatment of internal wall areas to the installation of
ventilation louvers. The Company has commenced discussions with insurance
carriers and other pertinent parties to address the potential financial
impacts of the moisture items. However, given the preliminary nature of the
process, further review and analysis will be necessary to determine the impact
on the prospective results of the operations or financial condition of the
Company.
LOT COMMITMENTS- In the aggregate, as of September 30, 1999, Zaring Homes owned,
had the ability to develop or purchase, or had under contract 4,697 lots. Of
this amount, Zaring Homes owned approximately 705 lots and undeveloped land,
including land owned by Land LLC, which will be developed into approximately 905
lots. Zaring also had under contract, subject to the satisfaction of Zaring's
purchase contingencies and exercising of option agreements, 1,075 lots and
undeveloped land which, if purchased, would be developed into approximately
2,012 lots. Of the 1,075 lots under contract, Zaring Homes is committed to 399
lots.
As of September 30, 1999, Hearthside Homes owned, had the ability to purchase,
or had under contract 492 lots. Of this amount, Hearthside owned approximately
155 lots and had under contract, subject to the satisfaction of Hearthside's
purchase contingencies and exercising of option agreements, 337 lots, of which
Hearthside is committed to 39 lots.
PROVISIONS FOR WRITEDOWN TO NET REALIZABLE VALUE- The Company periodically
reviews
22
<PAGE> 23
the value of assets held by its reporting segments, including: land,
inventories, property and equipment, and intangibles and determines whether any
write-downs need to be recorded to reflect declines in value. The estimated net
realizable value of real estate inventories and property and equipment
represents management's estimate based on present plans and intentions, selling
prices in the ordinary course of business and anticipated economic and market
conditions. Accordingly, the realization of the value of the Company's real
estate inventories, property and equipment and certain intangibles is dependent
upon future events and conditions that may cause actual results to differ from
amounts presently estimated.
INFLATION- Housing demand, in general, is affected adversely by increases in
interest rates. If mortgage interest rates, material and labor costs increase
significantly, the Company's revenues, gross profit and net income could be
adversely affected.
CAUTIONARY STATEMENTS - Certain statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" are "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements involve known and unknown risks, uncertainties and
other factors that may cause results to differ materially. Such risks,
uncertainties and other factors include, but are not limited to, changes in
general real estate, general economic and other conditions, fluctuations in
interest rates, increases in raw materials and labor costs, levels of
competition and other factors described in Zaring National Corporation's Form
10-Q for the quarter ended September 30, 1998.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
There were no material changes in the qualitative and quantitative disclosures
about market risk as of September 30, 1999 from that presented in the Company's
annual report on Form 10-K for the fiscal year ended December 31, 1998.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL INFORMATION
The Company is subject to various claims, lawsuits and administrative
proceedings arising in the ordinary course of business activities which seek
remedies or damages. The Company believes that any liability that may be
determined will not have a material effect on its financial position or results
of operation.
ITEM 2. NONE
ITEM 3. NONE
ITEM 4. NONE
ITEM 5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.24 - $5.0 Million Subordinated Loans from Principal Shareholder
(Form of Term Note)
27 Financial Data Schedule
(b) The Company did not file a report on form 8-K during the quarter
for which this report is filed.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZARING NATIONAL CORPORATION.
(Registrant)
Date: November 15, 1999 By: /s/Allen G. Zaring III
----------------------
Allen G. Zaring III
Chairman of the Board, Chief
Executive Officer
Date: November 15, 1999 By: /s/Ronald G. Gratz
-------------------
Ronald G. Gratz
Chief Financial Officer
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
25
<PAGE> 1
Exhibit 10.24
TERM NOTE
$500,000.00 Cincinnati, Ohio
September 23, 1999
For value received, Zaring National Corporation ("Borrower"), promises to
pay to the order of Allen G. Zaring, III, Rollover IRA, Account
#70-70-1001-1090870 ("Lender"), at his offices located at 11300 Cornell Park
Drive, Suite 500, Cincinnati, Ohio 45242-1825 or such other location as Lender
may from time to time designate the principal sum of FIVE HUNDRED THOUSAND
DOLLARS ($500,000.00) or such lesser amount as may be advanced and outstanding
hereunder, together with interest thereon as provided below from the date of
disbursement thereof until paid, all in lawful money of the United States of
America and in immediately available funds.
1. RATE OF INTEREST. The outstanding principal balance of this Note will
bear interest at a rate per annum of the greater of 9 7/8% or 1 5/8% plus
the Prime Rate. All interest calculations under this Note will be made
based on a year of 360 days for the actual number of days in each
interest period. In no event will the rate of interest hereunder exceed
25% per annum. As used herein, "Prime Rate" will mean the rate per annum
established by PNC Bank, National Association from time to time based
upon its consideration of various factors, including money market,
business and competitive factors, and it is not necessarily PNC Bank,
National Association's most favored interest rate. Subject to any maximum
or minimum interest rate limitations specified herein or by applicable
law, if and when such Prime Rate changes while any indebtedness remains
outstanding under this Note, then in each such event the rate of interest
payable under the Note will change automatically without notice to
Borrower effective the date of such changes.
2. PAYMENTS AND APPLICATION OF PAYMENTS. This Note will be payable to Lender
as follows: Accrued interest will be due and payable monthly, commencing
on October 23, 1999, and on the 23rd day of each month thereafter until
September 23, 2002, on which date the entire outstanding principal
balance hereunder and all accrued and unpaid interest will be due and
payable.
Payments received will be applied in the following order: (i) to
repayment of any amounts owed to Lender for charges, fees and expenses
(including (Attorneys' Fees), (ii) to accrued interest, and (iii) to
principal. Additional payments may be made under this Note at any time
without premium or penalty but each such payment will be applied in the
foregoing order and, to the extent applied to principal, will be applied
to installments of principal payable hereunder in the inverse order of
maturity.
<PAGE> 2
3. LATE PAYMENTS. Any payment under this Note must be received by Lender by
2:00 p.m. Cincinnati time on a Business Day in order to be credited on
such date. If any payment of principal, interest or other amount due
under this Note is not paid within 15 calendar days of the date due,
Borrower also will pay to Lender a late charge equal to the lesser of 5%
of the amount of such payment or $50. The foregoing charge is imposed for
the purpose of defraying Lender's expenses incident to the handling of
delinquent payments.
4. CHANGE OF CONTROL. Change of control shall mean any transaction or group
of transactions after which (i) Allen G. Zaring, III and Anne M. Zaring
(together with their respective executors, administrators or heirs in the
event of the death of either of them) shall directly or indirectly own
less than twenty-five percent (25%) of Zaring National Corporation's
issued and outstanding common stock, (ii) another partnership, limited
partnership, syndicate or other group which is deemed a "person" within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
owns more of Zaring National Corporation's issued and outstanding common
stock than is owned directly or indirectly in the aggregate by Allen G.
Zaring, III and Anne M. Zaring (together with their executors,
administrators or heirs in the event of the death of either of them), or
(iii) Zaring National Corporation ceases to own all of the issued and
outstanding capital stock and have full voting control of Zaring Homes,
Inc., and Zaring Holdings, Inc., LLC.
5. EVENTS OF DEFAULT. The occurrence of any of the following events will be
deemed to be an "Event of Default" under this Note: (i) the nonpayment of
any sums, whether principal or interest, when due under this Note, (ii)
the occurrence of any Event of Default under the Borrower's $87,500,000
Second Amended and Restated Credit Agreement with PNC Bank, National
Association dated June 28, 1999, as amended from time to time hereafter
(the "PNC Credit Agreement") and the lapse of any notice or cure period
provided with respect to such default, (iii) the repayment of all
indebtedness and the satisfaction of all the Borrower's obligations
pursuant to the PNC Credit Agreement; (iv) any Change in Control as
defined in Section 4 above; or (v) the filing by or against Borrower of a
petition in bankruptcy, for a reorganization, arrangement or debt
adjustment, or for a receiver, trustee, or similar creditors'
representative for its, his or her property or any part thereof, or of
any other proceeding under any federal or state insolvency or similar law
(and if such petition or proceeding is an involuntary petition or
proceeding filed against Borrower without his, her or its acquiescence
therein or thereto at any time, the same is not promptly contested and,
within 60 days of the filing of such involuntary petition or proceeding,
dismissed or discharged), or the making of any general assignment by
Borrower for the benefit of creditors, or Borrower dissolves or is the
subject of any dissolution, winding up or liquidation. Immediately and
automatically upon the occurrence of any Event of Default hereunder, and
without demand or notice of any kind (which are hereby expressly waived):
(i) the outstanding principal balance hereunder, together with all
accrued and unpaid interest thereon will be accelerated and become
immediately due and payable, (ii) Borrower will pay to Lender all
reasonable costs and expenses (including but not limited to Attorneys'
Fees) incurred by Lender in connection with Lender's efforts to collect
the indebtedness evidenced hereby, and (iii) Lender may exercise from
time to time any of the rights and remedies available to Lender
- 2 -
<PAGE> 3
under applicable law. Upon and after the occurrence of any Event of
Default or the maturity of this Note (by acceleration or otherwise), the
principal balance under this Note, together with any arrearage of
interest, will bear interest until paid in full, whether before or after
judgment. Borrower, all other makers, co-signers and indorsers waive
presentment, demand, protest, and notice of demand, protest, non-payment
and dishonor. Borrower also waives all defenses based on suretyship or
impairment of collateral.
6 MISCELLANEOUS.
6.1 Nothing contained in this Note regarding late charges will be
construed in any way to extend the due date of any payment or
waive any payment default, and each such right is in addition to,
and not in lieu of, the other and any other rights and remedies of
Lender hereunder, or under applicable law (including, without
limitation, the right to interest, Attorneys' Fees and other
expenses).
6.2 If this Note is executed by more than one person or entity as
"Borrower", the obligations of such parties hereunder will be
joint and several and, unless otherwise specified herein, each
reference to "Borrower" will mean each of such parties
individually and all of such parties collectively.
6.3 This Note will bind Borrower and the heirs, executors,
administrators, successors and assigns of Borrower, and the
benefits hereof will inure to the benefit of Lender and its
successors and assigns. All references herein to the "Borrower"
and "Lender" will include the respective heirs, administrators,
successors and assigns thereof; provided, however, that Borrower
may not assign this Note in whole or in part without the prior
written consent of Lender and Lender at any time may assign this
Note in whole or in part (but no assignment by the Lender of less
than all of this Note will operate to relieve Borrower from any
duty to Lender with respect to the unassigned portion of this
Note).
6.4 If any provision of this Note is prohibited by or invalid under
applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity without invalidating the
remainder of such provision and without invalidating any other
provision in this Note; provided, however, that if the provision
that is the subject of such prohibition or invalidity pertains to
repayment of this Note, then, at the option of Lender, all of the
obligations hereunder will become immediately due and payable.
6.5 Without limiting the generality of the foregoing, if from any
circumstances whatsoever the fulfillment of any provision of this
Note involves transcending the limit of validity prescribed by any
applicable usury statute or any other applicable law with regard
to obligations of like character and amount, then the obligation
to be fulfilled will be reduced to the limit of such validity as
provided in such statute or law, so that in no event will any
exaction of interest be possible under this Note in excess of the
limit of such validity and the right to demand any such excess is
hereby expressly waived by Lender. As used in this paragraph,
"applicable usury statute" and "applicable law" mean such statute
and law in effect on the date
- 3 -
<PAGE> 4
hereof, subject to any change therein that results in a higher
permissible rate of interest.
6.6 No delay or failure on the part of Lender to exercise any right,
remedy or power hereunder, or under applicable law will impair or
waive any such right, remedy or power (or any other right, remedy
or power), be considered a waiver of or an acquiescence in any
breach, default or Event of Default or affect any other or
subsequent breach, default or Event of Default of the same or a
different nature. No waiver of any breach, default or Event of
Default, nor any modification, waiver, discharge or termination of
any provision of this Note, nor consent to any departure by
Borrower therefrom, will be established by conduct, custom or
course of dealing; and no modification, waiver, discharge,
termination or consent will in any event be effective unless the
same is in writing, signed by Lender and specifically refers to
this Note, and then such modification, waiver, discharge or
termination or consent will be effective only in the specific
instance and for the specific purpose for which given. No notice
to or demand on Borrower in any case will entitle Borrower to any
other or further notice or demand in the same or any similar or
other circumstance.
6.7 No single or partial exercise of any right or remedy by Lender
will preclude any other or further exercise thereof or the
exercise of any other right or remedy. All remedies hereunder, or
now or hereafter existing at law or in equity are cumulative and
none of them will be exclusive of the others or of any other right
or remedy. All such rights and remedies may be exercised
separately, successively, concurrently, independently or
cumulatively from time to time and as often and in such order as
Lender may deem appropriate.
6.8 If at any time all or any part of any payment or transfer of any
kind received by Lender with respect to all or any part of this
Note is repaid, set aside or invalidated by reason of any
judgment, decree or order of any court or administrative body, or
by reason of any agreement, settlement or compromise of any claim
made at any time with respect to the repayment, recovery, setting
aside or invalidation of all or any part of such payment or
transfer, Borrower's obligations under this Note will continue
(and/or be reinstated) and Borrower will be and remain liable, and
will indemnify, defend and hold harmless Lender for, the amount or
amounts so repaid, recovered, set aside or invalidated and all
other claims, demands, liabilities, judgments, losses, damages,
costs and expenses incurred in connection therewith. The
provisions of this Section will be and remain effective
notwithstanding any contrary action which may have been taken by
Borrower in reliance upon such payment or transfer, and any such
contrary action so taken will be without prejudice to Lender's
rights hereunder and will be deemed to have been conditioned upon
such payment or transfer having become final and irrevocable. The
provisions of this Section will survive any termination,
cancellation or discharge of this Note.
6.9 Time is of the essence in the performance of this Note.
- 4 -
<PAGE> 5
6.10 This Note has been delivered and accepted at and will be deemed to
have been made at Cincinnati, Ohio and will be interpreted and the
rights and liabilities of the parties hereto determined in
accordance with the laws of the State of Ohio, without regard to
conflicts of law principles.
6.11 BORROWER HEREBY IRREVOCABLY AGREES AND SUBMITS TO THE EXCLUSIVE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN HAMILTON
COUNTY, OHIO, OR, AT THE OPTION OF LENDER IN ITS SOLE DISCRETION,
OF ANY STATE OR FEDERAL COURT(S) LOCATED WITHIN ANY OTHER COUNTY,
STATE OR JURISDICTION IN WHICH LENDER AT ANY TIME OR FROM TIME TO
TIME CHOOSES IN ITS SOLE DISCRETION TO BRING AN ACTION OR
OTHERWISE EXERCISE A RIGHT OR REMEDY, AND BORROWER WAIVES ANY
OBJECTION BASED ON FORUM NON CONVENIENS AND ANY OBJECTION TO VENUE
OF ANY SUCH ACTION OR PROCEEDING. BORROWER HEREBY IRREVOCABLY
CONSENTS THAT ALL SERVICE OF PROCESS BE MADE BY CERTIFIED MAIL
DIRECTED TO BORROWER AT ITS ADDRESS SET FORTH IN THE LOAN
AGREEMENT ABOVE FOR NOTICES AND SERVICE SO MADE WILL BE DEEMED TO
BE COMPLETED UPON BORROWER'S ACTUAL RECEIPT THEREOF, POSTAGE
PREPAID. NOTHING CONTAINED HEREIN WILL PREVENT LENDER FROM SERVING
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BORROWER AND LENDER
EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
RELATING TO THIS NOTE, THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS,
THE LOAN AGREEMENT OR ANY ACTUAL OR PROPOSED TRANSACTION OR OTHER
MATTER CONTEMPLATED IN OR RELATING TO ANY OF THE FOREGOING.
ZARING NATIONAL
CORPORATION
By:____________________________
Print Name: Ronald G. Gratz
Title: Chief Financial Officer
- 5 -
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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0
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<COMMON> 24,957
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