<PAGE> 1
UNITED STATES
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 February 28, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number 0-24210
AMERICAN HOMESTAR CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0070846
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2450 SOUTH SHORE BOULEVARD, SUITE 300, LEAGUE CITY, TEXAS 77573
(Address of principal executive offices, including zip code)
(281) 334-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares outstanding of each of the issuer's classes of common stock,
as of April 12, 1999.
Common Stock, Par Value $.05 Per Share 18,394,772
<PAGE> 2
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - May 31, 1998 and February 28, 1999....................... 2
Consolidated Statements of Operations - three months ended February 28, 1998
and 1999............................................................................ 3
Consolidated Statements of Operations - nine months ended February 28, 1998
and 1999............................................................................ 4
Consolidated Statements of Cash Flows - nine months ended February 28, 1998
and 1999............................................................................ 5
Notes to Consolidated Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................... 20
</TABLE>
1
<PAGE> 3
PART I -- FINANCIAL INFORMATION
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash .............................................................. $ 20,852,000 $ 9,677,000
Cash in transit from financial institutions ....................... 35,289,000 35,153,000
------------ ------------
Total cash and cash equivalents ............................. 56,141,000 44,830,000
Inventories, net .................................................. 74,076,000 122,153,000
Accounts receivable ............................................... 22,468,000 47,539,000
Manufacturer incentives receivable ................................ 2,839,000 1,248,000
Deferred tax assets ............................................... 4,405,000 4,468,000
Prepaid expenses and other current assets ......................... 9,952,000 9,927,000
------------ ------------
Total current assets ........................................ 169,881,000 230,165,000
Property, plant and equipment, net ................................... 58,984,000 93,147,000
Goodwill (net of accumulated amortization of $9,173,000 and
$10,627,000, respectively) ........................................... 36,952,000 87,480,000
Investment in affiliates ............................................. 3,916,000 5,287,000
Other assets ......................................................... 3,963,000 4,822,000
------------ ------------
$273,696,000 $420,901,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and capital leases .......... $ 941,000 $ 1,556,000
Floor plan payable, net of participations ......................... 43,463,000 81,151,000
Accounts payable .................................................. 27,840,000 32,078,000
Accrued expenses .................................................. 32,510,000 47,162,000
Accrued warranty costs ............................................ 6,260,000 7,753,000
------------ ------------
Total current liabilities ................................... 111,014,000 169,700,000
Notes payable and capital leases, less current installments .......... 63,087,000 119,610,000
Deferred tax liabilities ............................................. 199,000 363,000
Minority interest in consolidated subsidiaries ....................... 933,000 663,000
Shareholders' equity:
Preferred stock, no par value, authorized 5,000,000 shares; no
shares issued ................................................... -- --
Common stock, $0.05 par value; authorized 50,000,000 shares; issued
and outstanding 17,274,667 and 18,394,772 shares,
respectively .................................................... 864,000 920,000
Additional paid-in capital ........................................ 43,468,000 62,157,000
Retained earnings ................................................. 54,131,000 67,488,000
------------ ------------
Total shareholders' equity .................................. 98,463,000 130,565,000
------------ ------------
$273,696,000 $420,901,000
============ ============
</TABLE>
2
<PAGE> 4
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28,
------------------------------
1998 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Net sales .......................................... $ 107,103,000 $ 140,303,000
Other revenues ..................................... 10,216,000 11,097,000
------------- -------------
Total revenues ............................... 117,319,000 151,400,000
------------- -------------
Costs and expenses:
Cost of sales ...................................... 84,958,000 112,545,000
Selling, general and administrative ................ 23,133,000 32,616,000
------------- -------------
Total costs and expenses ..................... 108,091,000 145,161,000
------------- -------------
Operating income ............................. 9,228,000 6,239,000
Interest expense ...................................... (1,869,000) (3,907,000)
Other ................................................. (21,000) (3,000)
------------- -------------
Income before items shown below .............. 7,338,000 2,329,000
Income tax expense .................................... 3,017,000 956,000
------------- -------------
Income before items shown below .............. 4,321,000 1,373,000
Earnings in affiliates ................................ 198,000 410,000
Minority interests .................................... (39,000) 33,000
------------- -------------
Net income ................................... $ 4,480,000 $ 1,816,000
============= =============
Earnings per share - basic:
Net income per share ......................... $ 0.26 $ 0.10
============= =============
Earnings per share - diluted:
Net income per share ......................... $ 0.25 $ 0.10
============= =============
</TABLE>
3
<PAGE> 5
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED FEBRUARY 28,
------------------------------
1998 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Net sales ....................................................... $ 344,847,000 $ 437,560,000
Other revenues .................................................. 22,219,000 30,393,000
------------- -------------
Total revenues ............................................ 367,066,000 467,953,000
------------- -------------
Costs and expenses:
Cost of sales ................................................... 276,249,000 342,792,000
Selling, general and administrative ............................. 62,398,000 95,089,000
Acquisition costs ............................................... 2,425,000 --
------------- -------------
Total costs and expenses .................................. 341,072,000 437,881,000
------------- -------------
Operating income .......................................... 25,994,000 30,072,000
Interest expense ................................................... (5,501,000) (9,382,000)
Other .............................................................. (29,000) 81,000
------------- -------------
Income before items shown below ........................... 20,464,000 20,771,000
Income tax expense ................................................. 9,267,000 8,536,000
------------- -------------
Income before items shown below ........................... 11,197,000 12,235,000
Earnings in affiliates ............................................. 684,000 1,219,000
Minority interests ................................................. (127,000) (97,000)
------------- -------------
Net income before item shown below ........................ 11,754,000 13,357,000
Extraordinary item (net of income tax benefit of $412,000) ......... (634,000) --
------------- -------------
Net income ................................................ $ 11,120,000 $ 13,357,000
============= =============
Earnings per share - basic:
Income before extraordinary item .............................. $ 0.69 $ 0.75
Extraordinary item, net of income tax benefit ................. (0.04) --
------------- -------------
Net income per share ...................................... $ 0.65 $ 0.75
============= =============
Earnings per share - diluted:
Income before extraordinary item .............................. $ 0.66 $ 0.71
Extraordinary item, net of income tax benefit ................. (0.04) --
------------- -------------
Net income per share ...................................... $ 0.62 $ 0.71
============= =============
</TABLE>
4
<PAGE> 6
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED FEBRUARY 28,
------------------------------
1998 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 11,120,000 $ 13,357,000
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization ........................................... 3,983,000 5,056,000
Minority interests in income of unconsolidated subsidiary ............... 127,000 97,000
Earnings in affiliate ................................................... (684,000) (1,219,000)
Deferred taxes .......................................................... 375,000 101,000
Extraordinary item ...................................................... 634,000 --
Conforming of year ends ................................................. (678,000) --
Change in assets and liabilities, net of acquisitions:
Increase in receivables ............................................... (8,112,000) (14,962,000)
Increase in inventories ............................................... (1,185,000) (30,299,000)
(Increase) decrease in prepaid expenses and other current
assets .............................................................. (1,016,000) 2,837,000
Decrease in other assets .............................................. 150,000 861,000
Increase (decrease) in accounts payable ............................... 1,007,000 (432,000)
Increase (decrease) in accrued expenses ............................... 5,367,000 (3,777,000)
------------- -------------
Net cash provided by (used in) operating activities ............ 11,088,000 (28,380,000)
------------- -------------
Cash flows from investing activities:
Payment for purchase of acquisitions, net of cash acquired ................ (1,987,000) (32,696,000)
Purchases of property, plant and equipment, net ........................... (7,882,000) (24,324,000)
------------- -------------
Net cash used in investing activities .......................... (9,869,000) (57,020,000)
------------- -------------
Cash flows from financing activities:
Participation in floor plan payable ....................................... (23,623,000) (8,498,000)
Borrowings under floor plan payable ....................................... 114,656,000 177,648,000
Repayments of floor plan payable .......................................... (115,099,000) (144,882,000)
Proceeds from long-term debt borrowings ................................... 61,000,000 51,000,000
Principal payments of long-term debt ...................................... (33,720,000) (1,184,000)
Exercise of stock options ................................................. 762,000 5,000
Other ..................................................................... (11,000) --
------------- -------------
Net cash provided by financing activities ...................... 3,965,000 74,089,000
------------- -------------
Net increase (decrease) in cash and cash equivalents ......................... 5,184,000 (11,311,000)
Cash and cash equivalents, beginning of period ............................... 43,348,000 56,141,000
------------- -------------
Cash and cash equivalents, end of period ..................................... $ 48,532,000 $ 44,830,000
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest .................................................... $ 5,143,000 $ 9,231,000
Cash paid for income taxes ................................................ 7,300,000 8,409,000
============= =============
</TABLE>
5
<PAGE> 7
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
American Homestar Corporation and subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. On June 10, 1997, the Company completed the acquisition of Brilliant
Holding Corporation ("Brilliant"). This transaction was accounted for as a
pooling of interests; accordingly, the accompanying condensed consolidated
financial statements have been restated to include the results of Brilliant for
all periods presented. Because of the seasonal nature of the Company's business,
operating results for the three and nine months ended February 28, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending May 31, 1999. These condensed consolidated financial statements should be
read in conjunction with the financial statements and the notes thereto included
in the Company's latest annual report on Form 10-K.
PRONOUNCEMENTS
In June 1997, the Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") was issued, which establishes
standards for reporting and display of comprehensive income and its components.
The components of comprehensive income refer to revenues, expenses, gains and
losses that are excluded from net income under current accounting standards,
including foreign currency translation items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. SFAS 130 requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement displayed in equal prominence with other financial
statements and the total of other comprehensive income for a period is required
to be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS 130 for fiscal year 1999 did not have a significant impact on the
consolidated financial statements of the Company.
In June 1997, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") was issued. SFAS 131 establishes standards for
disclosures about segments of an enterprise and related information. SFAS 131
establishes standards for reporting information about operating segments in
annual financial statements and requires the reporting of selected information
about operating segments in interim financial reports issued to stockholders. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. SFAS 131 is not required to be applied to
interim financial statements in the initial year of its application. The
adoption of SFAS 131 during the fourth quarter of fiscal year 1999 will affect
the disclosure of segment information.
RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform to
classifications used in the current period.
BUSINESS COMBINATIONS
On June 10, 1997, Brilliant was acquired by the Company, and 711,149 shares
of the Company's common stock and options to purchase 38,852 shares of the
Company's common stock were issued in exchange for all of Brilliant's
outstanding common stock and options to purchase Brilliant's common stock. This
transaction was accounted for as a pooling of interests. Prior to the
acquisition, Brilliant used a fiscal year ending on December 31. The financial
statements for the three and nine months ended February 28, 1998 combine each
company's three and nine months ended February 28, 1998. Due to the different
fiscal year ends, retained earnings includes an adjustment to record Brilliant's
net loss for the five months ended May 31, 1997, which will not be included in
the restated statements of operations for any fiscal period.
6
<PAGE> 8
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of Brilliant's results of operations for the five months ended
May 31, 1997 follows:
<TABLE>
<S> <C>
Net sales ......................... $ 28,984,000
Total costs and expenses .......... $ 29,845,000
------------
Net loss .......................... $ (678,000)
============
</TABLE>
On June 16, 1997, the Company completed the acquisition of N.C. Mobile Home
Corporation ("NC Homes"), which operated 11 retail sales centers in North
Carolina and one in Virginia. The results of the acquired operations of NC Homes
have been included with those of the Company from the date of the acquisition.
The excess purchase price over the estimated fair value of the net assets
acquired as of the acquisition date of $3.6 million has been recorded as
goodwill and is being amortized over 25 years. The estimated fair value of
assets acquired and liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Current assets....................... $ 7,994,000
Other assets......................... 282,000
Goodwill............................. 3,571,000
Floor plan payable................... (6,691,000)
Accounts payable..................... (442,000)
Accrued liabilities.................. (214,000)
---------------
$ 4,500,000
===============
Consideration:
Cash.............................. $ 1,000,000
Note payable...................... 1,500,000
Common stock...................... 2,000,000
---------------
$ 4,500,000
===============
</TABLE>
7
<PAGE> 9
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On January 6, 1998, the Company completed the acquisition of Davis Homes,
Inc. ("Davis Homes") which operated three retail sales centers in Alabama. The
results of the acquired operations of Davis Homes have been included with those
of the Company from the date of the acquisition. The excess purchase price over
the estimated fair value of the net assets acquired as of the acquisition date
of $2.1 million has been recorded as goodwill and is being amortized over 25
years. The estimated fair value of assets acquired and liabilities assumed is
summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets............................ $ 2,187,000
Other assets.............................. 518,000
Goodwill.................................. 2,075,000
Floor plan payable........................ (1,976,000)
Accrued liabilities....................... (121,000)
-----------------
$ 2,683,000
=================
Consideration:
Cash................................... $ 1,472,000
Note payable........................... 247,000
Common stock........................... 964,000
-----------------
$ 2,683,000
=================
</TABLE>
On July 13, 1998, the Company completed the acquisition of First Value
Homes, Inc. ("First Value") which operated two retail sales centers in North
Carolina. The results of the acquired operations of First Value have been
included with those of the Company effective July 1, 1998. The excess purchase
price over the estimated fair value of the net assets acquired as of the
acquisition date of $6.7 million has been recorded as goodwill and is being
amortized over 25 years. The estimated fair value of assets acquired and
liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Current assets............................ $ 5,383,000
Other assets.............................. 1,179,000
Goodwill.................................. 6,719,000
Floor plan payable........................ (3,024,000)
Accrued liabilities....................... (843,000)
Accounts payable.......................... (349,000)
Notes payable and capital leases.......... (425,000)
-----------------
$ 8,640,000
=================
Consideration:
Cash................................... $ 4,633,000
Common stock........................... 4,007,000
-----------------
$ 8,640,000
=================
</TABLE>
8
<PAGE> 10
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On September 14, 1998, the Company completed the acquisition of DWP
Management, Inc. ("DWP") and its related companies, Value Homes, Inc., Value
Homes of Washington, Inc., Premiere Manufactured Homes, Inc., Premiere
Manufactured Homes, Inc. of Washington, Park Place Mobil Homes, Inc., Kilroy's
M. H., Inc. and Premiere Homes of Moses Lake, Inc. which operated six retail
sales centers in Washington, Oregon and New Mexico. The previous owner retained
a 20% interest in the newly formed corporations, Pacific Northwest Homes, Inc.
and Pacific II Northwest Homes, Inc. The results of the acquired operations of
DWP have been included with those of the Company effective September 1, 1998.
The excess purchase price over the estimated fair value of the net assets
acquired as of the acquisition date of $12.5 million has been recorded as
goodwill and is being amortized over 25 years. The estimated fair value of
assets acquired and liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Current assets............................ $ 12,775,000
Other assets.............................. 2,077,000
Goodwill.................................. 12,513,000
Floor plan payable........................ (8,866,000)
Accrued liabilities....................... (4,789,000)
Minority interests........................ (174,000)
Accounts and notes payable................ (637,000)
-----------------
$ 12,899,000
=================
Consideration:
Cash................................... $ 6,000,000
Note payable.............................. 3,900,000
Common stock........................... 2,999,000
-----------------
$ 12,899,000
=================
</TABLE>
On December 29, 1998, the Company completed the acquisition of R-Anell
Custom Homes, Inc. and its related manufacturing companies, Gold Medal Homes,
Inc. and Gold Medal Homes of North Carolina, Inc. (collectively, "R-Anell").
R-Anell produces manufactured and modular homes in three facilities located in
North Carolina and sells its homes through approximately 100 independent and
Company-owned retail sales centers located primarily in North Carolina, South
Carolina and Virginia. The results of the acquired operations of R-Anell have
been included with those of the Company from the date of acquisition. The excess
purchase price over the estimated fair value of net assets acquired as of the
acquisition date of $29.5 million has been recorded as goodwill and is being
amortized over 40 years. The final determination of the purchase price, which is
subject to certain performance targets, will be made in fiscal 2000. The
estimated fair value of assets acquired and liabilities assumed in these
acquisitions is summarized as follows:
<TABLE>
<S> <C>
Current assets........................ $ 9,439,000
Property, plant and equipment......... 11,073,000
Goodwill.............................. 29,521,000
Current liabilities................... (11,156,000)
Notes payable......................... (6,300,000)
---------------
$ 32,577,000
===============
Consideration:
Cash............................... $ 21,167,000
Common stock....................... 11,113,000
Transaction costs.................. 297,000
---------------
$ 32,577,000
===============
</TABLE>
9
<PAGE> 11
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The pro forma effects related to the NC Homes, Davis Homes, First Value,
DWP and R-Anell acquisitions are not significant.
REPURCHASE AGREEMENTS
The Company has entered into agreements with various financial institutions
and other credit sources under which the Company has agreed to repurchase
manufactured homes sold to independent dealers in the event of default by a
dealer in its obligation to such credit sources. Under the terms of such
agreements, the Company agrees to repurchase manufactured homes at declining
prices over the periods of the agreements (which generally range from 12 to 15
months). At February 28, 1999, the Company's contingent repurchase liability was
approximately $80.9 million.
INVENTORIES
A summary of inventories follows:
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
1998 1999
------------ ------------
<S> <C> <C>
Manufactured homes:
New .................................. $ 50,208,000 $ 85,951,000
Used ................................. 6,744,000 9,982,000
Furniture and supplies ................. 5,884,000 9,454,000
Raw materials and work-in-process ...... 11,240,000 16,766,000
------------ ------------
$ 74,076,000 $122,153,000
============ ============
</TABLE>
INVESTMENT IN AFFILIATE
Summary financial information for the Company's 50% owned subsidiary, 21st
Century Mortgage Corporation, for the three and nine months ended February 28,
1998 and 1999 follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------- -------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues ......... $ 1,477,000 $ 4,312,000 $ 5,798,000 $12,555,000
Net income ............. $ 396,000 $ 820,000 $ 1,368,000 $ 2,438,000
=========== =========== =========== ===========
</TABLE>
10
<PAGE> 12
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
EARNINGS PER SHARE
The consolidated financial statements, including all references to the
number of shares of common stock and all per share information have been
adjusted to reflect the issuance of 711,149 shares of common stock exchanged for
all of the common stock of Brilliant and the 3-for-2 stock split effected on
October 31, 1997.
The following data show the amounts used in computing earnings per share
and the weighted average number of shares of dilutive potential common stock.
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28,
-----------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Net income ....................................... $ 4,480,000 $ 1,816,000
================ ================
Weighted average common shares outstanding ....... 17,231,582 18,192,645
Dilutive effect of stock options ................. 893,734 568,784
---------------- ----------------
Common shares denominator ........................ 18,125,316 18,761,429
================ ================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED FEBRUARY 28,
-----------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Net income ....................................... $ 11,120,000 $ 13,357,000
================ ================
Weighted average common shares outstanding ....... 17,171,427 17,773,783
Dilutive effect of stock options ................. 861,849 929,621
---------------- ----------------
Common shares denominator ........................ 18,033,276 18,703,404
================ ================
</TABLE>
LONG-TERM DEBT
On September 30, 1998, the Company completed the private placement of $46
million of 7.25% Series A Senior Unsecured Notes and $5 million of 7.14% Series
B Senior Unsecured Notes with an average life of eight years and a final
maturity in September 2008. Such notes require semi-annual interest payments and
equal annual principal reductions beginning in 2004. Proceeds from the notes
were used to fund acquisitions and expansions with the remainder used for
general corporate purposes.
The Company's loan agreements related to the 8.32% Senior Unsecured Notes
issued in July 1997 and the 7.25% Series A and 7.14% Series B Senior Unsecured
Notes described above contain certain requirements as to net working capital,
consolidated net worth, disposition of assets, additional long-term debt,
redemption of common stock, payment of dividends and prepayment of subordinated
debt. At February 28, 1999, the Company was in compliance with all such
restrictions.
11
<PAGE> 13
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
EVENTS SUBSEQUENT TO FEBRUARY 28, 1999
In March, 1999, the Company entered into an Amended and Restated Securities
Purchase Agreement (the "Purchase Agreement") with Zaring National Corporation,
("Zaring") and HomeMax, Inc., a wholly-owned subsidiary of Zaring ("HomeMax").
Pursuant to the Purchase Agreement, the Company acquired 25% of the outstanding
common stock of HomeMax from Zaring in exchange for a $4.4 million note, and the
Company loaned HomeMax $4 million in exchange for a subordinated note
convertible into an additional 25% of HomeMax's common stock. The Company also
received an option to acquire all of the remaining HomeMax common stock after
three years at a predefined price. Zaring may require, or the Company may elect,
earlier exercise of this option if HomeMax meets certain performance goals
within the three-year period. In connection with this transaction, the Company
entered into a Management and Consulting Agreement with Zaring and HomeMax
pursuant to which the Company will manage the HomeMax operations, and the
Company, Zaring and HomeMax entered a Securityholders Agreement providing for
the joint control of HomeMax by the Company and Zaring and certain restrictions
on the capital stock of HomeMax. HomeMax currently operates twelve retail sales
centers in North Carolina, South Carolina and Kentucky.
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this document, the words "anticipate,"
"believe," "estimate," "should," and "expect" and similar expressions as they
relate to the Company or management of the Company are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risk factors described in the
Company's most recently filed registration statement. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. The Company does not intend to
update these forward-looking statements.
GENERAL
American Homestar Corporation (the "Company") is one of the fastest growing
vertically integrated manufactured housing companies in the United States with
operations in manufacturing, retailing, financing and insurance.
In fiscal 1993, in response to growing demand for manufactured homes, the
Company began developing its expansion and vertical integration plan by opening
nine new retail sales centers and entering into a new venture (the "Homestar
Venture") with Oak Creek Homes, Inc. ("Oak Creek"), a long-time supplier, to
start-up and operate two manufacturing facilities. The costs associated with the
start-up of two new manufacturing facilities and the new retail sales centers
had an adverse effect on the Company's operating results in the second half of
fiscal 1993 and in the first half of fiscal 1994. By October 1993, both
manufacturing facilities had become profitable.
Effective August 31, 1993, a combination was consummated with the
shareholders of Oak Creek exchanging their shares of Oak Creek common stock for
shares of the Company's common stock (the "Combination"). In connection with the
Combination, all of the retail sales management personnel and manufacturing
management personnel exchanged their shares of common stock in the Company's
subsidiaries for shares of the Company's common stock.
In September 1995, the Company formed 21st Century Mortgage Corporation
("21st Century") to originate, finance, sell and service manufactured housing
sales contracts from the Company and third parties. 21st Century is managed by
two former executive officers of Clayton Homes, Inc. ("Clayton") and its finance
subsidiary, Vanderbilt Mortgage and Finance, Inc. The Company, Clayton and
management of 21st Century own 50%, 25% and 25%, respectively, of the equity
capital of 21st Century. 21st Century commenced operation in October 1995. The
Company accounts for its investment in 21st Century using the equity method of
accounting, showing its proportionate share of 21st Century's earnings or losses
as "earnings or loss in affiliate."
In September 1996, the Company exercised its option to acquire Guerdon
Holdings, Inc. and its subsidiary, Guerdon Homes, Inc. (collectively "Guerdon")
after managing Guerdon's operations under a management agreement since March
1996. Guerdon produces manufactured homes in four facilities located in Oregon,
Idaho, Nebraska and Mississippi, and sells its homes to over 150 independent
retailers located in 17 states in the Pacific Northwest Rocky Mountain and South
Central regions of the United States.
In September 1996, the Company acquired Heartland Homes, Inc.
("Heartland"), a single plant manufacturer of low-to medium-priced homes in
North Carolina. Concurrent with the Heartland acquisition, the Company also
purchased the assets of Manu-Fac Homes Inc., a contractually affiliated group of
15 independent retailers, which have since become franchisees of the Company.
13
<PAGE> 15
In June 1997, the Company acquired Brilliant Holding Corporation
("Brilliant"), which operated three manufacturing plants in Northern Alabama.
Also in June 1997, the Company acquired N.C. Mobile Home Corporation, which
operated twelve retail sales centers in North Carolina and one in Virginia. In
January 1998, the Company acquired Davis Homes, Inc., which operated three
retail sales centers in Alabama. In July 1998, the Company acquired First Value
Homes, Inc. which operated two retail sales centers in North Carolina. In
September 1998, the Company acquired DWP Management, Inc and its related
companies which operated six retail sales centers in Washington, Oregon and New
Mexico.
In December 1998, the Company acquired R-Anell Custom Homes, Inc. and its
related manufacturing companies, Gold Medal Homes, Inc. and Gold Medal Homes of
North Carolina, Inc. (collectively, "R-Anell"). R-Anell produces manufactured
and modular homes in three facilities located in North Carolina and sells its
homes through approximately 100 independent and Company-owned retail sales
centers located primarily in North Carolina, South Carolina and Virginia.
In March, 1999, the Company entered into an Amended and Restated Securities
Purchase Agreement (the "Purchase Agreement") with Zaring National Corporation,
("Zaring") and HomeMax, Inc., a wholly-owned subsidiary of Zaring ("HomeMax").
Pursuant to the Purchase Agreement, the Company acquired 25% of the outstanding
common stock of HomeMax from Zaring in exchange for a note, and the Company made
a loan to HomeMax in exchange for a subordinated note convertible into an
additional 25% of HomeMax's common stock. The Company also received an option to
acquire all of the remaining HomeMax common stock after three years at a
predefined price. HomeMax currently operates twelve retail sales centers in
North Carolina, South Carolina and Kentucky.
VERTICAL INTEGRATION AND INTERNALIZATION
The Company's growth strategy is based on an increasing degree of vertical
integration over time. Vertical integration allows the Company to increase its
profit margins on the manufacture and sale of its products, and provides the
ability to realize additional sources of income from financing the sales and
insuring the Company's products.
Several elements of the Company's growth strategy center on increasing the
rate of "internalization" of its retail sales (i.e. the proportion of new homes
sold by Company-owned retail sales centers that are also manufactured by the
Company). This strategy enables the Company to earn both a manufacturing profit
and a retailing profit on those home sales; however, only retail sales revenue
is recognized. Accordingly, increasing the internalization rate (without
otherwise affecting the Company's level of manufacturing and retailing activity)
has the effect of increasing gross margins and reducing reported revenues;
however, aggregate gross profit (in dollars) is not materially affected by
changes in the internalization rate.
Another key element of the Company's growth strategy is to increase the
degree of retail penetration of its financial services. As insurance product
penetration increases, both reported revenues and earnings should increase
without a corresponding increase in retail sales activity. Similarly, as 21st
Century finances more of the Company's retail sales, the Company's earnings
should increase without a corresponding increase in retail sales activity.
RESULTS OF OPERATIONS
The following table summarizes certain key sales statistics for the three
and nine months ended February 28, 1998 and 1999:
14
<PAGE> 16
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY NINE MONTHS ENDED
28, FEBRUARY 28,
-------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Company-manufactured new homes sold at
retail ............................................ 1,005 1,067 3,053 3,722
Total new homes sold at retail ........................ 1,161 1,232 3,643 4,397
Internalization rate (1) .............................. 87% 87% 84% 85%
Previously-owned homes sold at retail ................. 414 599 1,181 1,594
Average retail selling price--new homes ............... $ 49,453 $ 53,622 $ 48,522 $ 53,081
Average number of new homes sold per retail
sales center ....................................... 15 12 51 45
Number of retail sales centers at end of period ....... 80 121 80 121
Manufacturing shipments ............................... 2,419 2,703 7,664 8,874
Manufacturing shipments to independent
dealers ............................................ 1,407 1,434 4,523 4,506
</TABLE>
(1) The internalization rate is the proportion of new homes sold by
Company-owned retail sales centers that are manufactured by the Company.
The following table summarizes the Company's operating results, expressed
as a percentage of revenues, for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY NINE MONTHS ENDED
28, FEBRUARY 28,
-------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues ........................................ 100.0% 100.0% 100.0% 100.0%
Gross profit .......................................... 27.6% 25.7% 24.8% 26.8%
Selling, general and administrative before
acquisition costs .................................. 19.7% 21.6% 17.0% 20.3%
Acquisition costs ..................................... -- -- 0.7% --
Operating income ...................................... 7.9% 4.1% 7.1% 6.4%
Net income before extraordinary loss .................. 3.8% 1.2% 3.2% 2.9%
Net income ............................................ 3.8% 1.2% 3.0% 2.9%
</TABLE>
Three months ended February 28, 1999 compared to three months ended
February 28, 1998
During the three months ended February 28, 1999 the Company experienced
disappointing levels of retail sales which had a carryover effect to the other
(manufacturing, finance and insurance) operations of the Company. The lower
than expected level of sales resulted in net income which, for the first time
since the Company became public, was substantially lower than net income in the
comparable three month period last year. The Company attributes its lower than
expected sales primarily to three factors: a highly competitive retail
environment, the lack of a full range of competitive retail financing programs
and the fact that high growth in its retail operations has stretched retail
management and experienced sale personnel to the limit.
In response, management is now placing less emphasis on growing the
Company-store base and more on expanding the Company's retail franchise network.
In addition, senior management is focusing on developing a broader range of
retail financing alternatives and on recruiting, training, development and
retention of retail management and sales personnel. Management's stated goal is
to improve retail sales performance and profitability, even at more modest
volume levels and to steadily improve overall operating results. Management is
committed to the goal of building long term shareholder value.
15
<PAGE> 17
Net Sales. Net sales of manufactured homes were $140.3 million for the
three months ended February 28, 1999, compared to $107.1 million for the three
months ended February 28, 1998. The increase was primarily the result of a 16%
increase in the number of new and previously-owned homes sold at retail as well
as an 8% increase in the average selling price of new homes. The weighted
average number of new homes sold per retail sales center in the core Nationwide
Housing Corporation ("Nationwide") operations decreased from 15 in the third
quarter of fiscal 1998 to 12 in the third quarter of fiscal 1999. The Company
added 11 new retail sales centers during the third quarter of fiscal 1999.
Other Revenues. Transportation revenues for the three months ended February
28, 1999 were $2.6 million, an increase of 21.6% from $2.2 million for the three
months ended February 28, 1998. Transportation is not a key growth operation of
the Company and has over time represented a declining proportion of total
revenues and net income. Other revenues increased to $8.5 million for the three
months ended February 28, 1999, compared to $8.1 million for the three months
ended February 28, 1998. This increase in other revenues is primarily due to
increased commissions and premiums generated by the Company's insurance
operations during comparable periods. Revenues from insurance operations
decreased to $4.9 million for the three months ended February 28, 1999, compared
to $6.2 million for the three months ended February 28, 1998. However, revenues
from insurance operations for the three months ended February 28, 1998 include
$4.7 million in earned physical damage insurance premiums which represented the
premiums earned for all of calendar year 1998. In the current fiscal year, these
premiums and the related selling, general and administrative expenses are being
recognized on a quarterly basis.
Cost of Sales. Cost of manufactured homes sold were $112.6 million (80.2%
of net sales) for the three months ended February 28, 1999, as compared to $85.0
million (79.3% of net sales) for the three months ended February 28, 1998. The
increase in cost of sales was primarily due to higher sales volume. The increase
in cost of sales, expressed as a percentage of sales, was primarily the result
of lower gross margins in the Company's manufacturing operations due to the loss
of volume leverage against fixed manufacturing costs. Gross margins in the core
retail operations were slightly higher for the period. Cost of sales
attributable to transportation operations for the three months ended February
28, 1999 were $2.2 million (82.7% of transportation revenues), an increase of
22.3% from $1.8 million (82.2% of transportation revenues) for the three months
ended February 28, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended February 28, 1999, were $32.6
million (21.6% of total revenues), as compared to $23.1 million (19.7% of total
revenues) for the three months ended February 28, 1998. The increase in selling,
general and administrative expenses is attributable to increased sales,
manufacturing and insurance activities as well as an increase in fixed costs and
expenses associated with new retail sales centers and expanded manufacturing
capacity. The increase in selling, general and administrative expenses,
expressed as a percentage of total revenues, was the result of new retail sales
centers which had not yet reached normal operating efficiency.
Interest Expense. Interest expense increased 109% to $3.9 million for the
three months ended February 28, 1999, from $1.9 million for the three months
ended February 28, 1998. This increase was primarily attributable to increased
gross borrowings associated with the Company's private placement of 7.25% Series
A and 7.14% Series B Senior Unsecured Notes totaling $51 million in September
1998 and increased gross borrowings under its floor plan credit facility to
support a higher level of inventory due to the addition of new retail sales
centers.
Income Taxes. The income tax provision, expressed as a percentage of income
before income taxes, earnings in affiliate and minority interests, was 41.1% for
the three months ended February 28, 1998 and 1999.
Nine months ended February 28, 1999 compared to nine months ended
February 28, 1998
Net Sales. Net sales of manufactured homes were $437.6 million for the nine
months ended February 28, 1999, compared to $344.8 million for the nine months
ended February 28, 1998. The increase was primarily the result of a
16
<PAGE> 18
24% increase in the number of new and previously-owned homes sold at retail as
well as a 9% increase in the average selling price of new homes. A decline in
the weighted average number of new homes sold per retail sales center in the
core Nationwide operations from 51 in the first nine months of fiscal 1998 to 45
in the first nine months of fiscal 1999 was primarily attributable to retail
management changes necessitated by the restructuring of the Company's retail
operations. The Company added 33 new retail sales centers during the first nine
months of fiscal 1999.
Other Revenues. Transportation revenues for the nine months ended February
28, 1999 were $8.6 million, an increase of 15.2% from $7.5 million for the nine
months ended February 28, 1998. Transportation is not a key growth operation of
the Company and has over time represented a declining proportion of total
revenues and net income. Other revenues increased to $21.8 million for the nine
months ended February 28, 1999, compared to $14.7 million for the nine months
ended February 28, 1998. This increase in other revenues is primarily due to
increased commissions and premiums generated by the Company's insurance
operations. Revenues from insurance operations increased to $13.4 million for
the nine months ended February 28, 1999, compared to $9.3 million for the nine
months ended February 28, 1998.
Cost of Sales. Cost of manufactured homes sold were $342.8 million (78.3%
of net sales) for the nine months ended February 28, 1999, as compared to $276.2
million (80.1% of net sales) for the nine months ended February 28, 1998. The
increase in cost of sales was primarily due to higher sales volume. The decrease
in cost of sales, expressed as a percentage of sales, was primarily the result
of an increase in the internalization rate from 84% for the nine months ended
February 28, 1998 to 85% for the nine months ended February 28, 1999, improved
gross margins in the core retail operations and a net improvement in gross
margins in the Company's manufacturing operations during the first two quarters
of fiscal year 1999, offset somewhat by lower manufacturing gross margins in the
third quarter. Cost of sales attributable to transportation operations for the
nine months ended February 28, 1999 were $7.1 million (82.0% of transportation
revenues), an increase of 15.4% from $6.2 million (82.3% of transportation
revenues) for the nine months ended February 28, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended February 28, 1999, were $95.1
million (20.3% of total revenues), as compared to $62.4 million (17.0% of total
revenues) for the nine months ended February 28, 1998. The increase in selling,
general and administrative expenses is attributable to increased sales,
manufacturing and insurance activities as well as an increase in fixed costs and
expenses associated with new retail sales centers and expanded manufacturing
capacity. The increase in selling, general and administrative expenses,
expressed as a percentage of total revenues, was a result of an increase in the
internalization rate from 84% from the nine months ended February 28, 1998 to
85% for the nine months ended February 28, 1999 as well as new retail sales
centers which had not yet reached normal operating efficiency.
Acquisition Costs. During the nine months ended February 28, 1998, the
Company incurred $2.4 million in costs related to the Brilliant acquisition.
These acquisition related costs primarily consisted of transaction costs and
severance and termination agreements with two former officers of Brilliant.
Interest Expense. Interest expense increased 71% to $9.4 million for the
nine months ended February 28, 1999, from $5.5 million for the nine months ended
February 28, 1998. This increase was primarily attributable to increased gross
borrowings associated with the Company's private placement of 7.25% Series A and
7.14% Series B Senior Unsecured Notes totaling $51 million in September 1998 and
increased gross borrowings under its floor plan credit facility to support a
higher level of inventory due to the addition of new retail sales centers.
Income Taxes. The income tax provision, expressed as a percentage of income
before income taxes, earnings in affiliate, minority interests and extraordinary
items, was 45.3% and 41.1% for the nine months ended February 28, 1998 and 1999,
respectively. The decrease in the effective tax rate was primarily the result of
nondeductible acquisition costs related to the Brilliant acquisition in fiscal
1998.
17
<PAGE> 19
Extraordinary Loss. In connection with the private placement of $61 million
of 8.32% Senior Unsecured Notes in July 1997, the Company repaid existing
secured bank debt of approximately $31 million. Consequently, the Company
recorded an extraordinary loss of $634,000 (net of income tax benefit) which
represented the write-off of unamortized debt issue costs as well as a
prepayment penalty associated with the repayment of the bank debt.
LIQUIDITY AND CAPITAL RESOURCES.
Cash used in operations was $28.4 million for the nine months ended
February 28, 1999. Net income before depreciation and amortization accounted for
a significant portion of the cash provided by operating activities for the nine
months ended February 28, 1999. The increase in inventories and accounts
receivable accounted for the majority of cash used in operations for the first
nine months of fiscal 1999.
An important part of the Company's growth strategy is to continue to expand
the number of Company-owned retail sales centers and increase its manufacturing
capacity to supply a growing number of Company-owned retail sales centers and
franchises. Management estimates the capital required to open a new retail sales
center is approximately $1.0 million to $1.25 million, primarily for inventory
and working capital. Subject to continued increases in demand, the Company may
incur additional capital expenditures to further increase its manufacturing
capacity. The Company currently plans to curtail new retail sales center
openings for the next six to twelve months and therefore will require relatively
little capital for that purpose.
The Company had capital expenditures of $57.0 million for the nine months
ended February 28, 1999. These expenditures were used primarily to fund
acquisitions, new retail sales centers and expand manufacturing capacity. The
Company paid $4.6 million, net of cash acquired, $6.0 million, net of cash
acquired, and $21.2 million, net of cash acquired, to purchase First Value, DWP
and R-Anell, respectively.
At February 28, 1999, the Company had a $125 million floor plan credit
facility with Associates Housing Finance LLC. (the "Associates"), with an
interest rate of prime less 0.50%. This facility is similar to a revolving
credit facility and is used to finance the purchase of inventory of new homes at
the Company's retail sales centers. In order to satisfy greater working capital
requirements and to fund capital expenditures in connection with the Company's
expanding operations, the Company increased its gross borrowings under the
facility by $46.1 million during the first nine months of fiscal 1999. At
February 28, 1999, the Company had net borrowings of $81.2 million (gross
borrowings of $130.7 million less participations of $49.5 million). The
Company's participations in its floor plan credit facility earn interest at the
Associates' prime rate less 0.75%, and are immediately available to the Company
in cash.
On September 30, 1998, the Company completed the private placement of $46
million of 7.25% Series A Senior Unsecured Notes and $5 million of 7.14% Series
B Senior Unsecured Notes with an average life of eight years and a final
maturity in September 2008. Such notes require semi-annual interest payments and
equal annual principal reductions beginning in 2004. Proceeds from the notes
were used to fund acquisitions and expansion with the remainder used for general
corporate purposes.
Management believes that current cash resources, additional borrowing
capacity and future cash provided from operations will be sufficient to satisfy
internal working capital and capital expenditure requirements for the next two
fiscal years. Management's current focus is on improving performance and
profitability in existing operations rather than substantial near term growth.
18
<PAGE> 20
IMPACT OF YEAR 2000
Beginning in calendar 1998, the Company commenced replacement of its then
current information technology system with a new system. The replacement, which
is expected to be completed in mid-calendar 1999, is required to meet current
and future needs of the Company's business as well as to make more efficient
various administrative and operating functions. Because the Company did not
undertake this replacement for reasons of Year 2000 compliance, the costs of
this conversion have not been identified as Year 2000 compliance costs. The
current upgrading of the Company's software programs and operating systems will
cost approximately $3.1 million and the Company believes that these new programs
and systems will not be subject to the Year 2000 problem. Costs incurred to date
for external consultants for Year 2000 compliance specific costs are $48,000 and
management estimates an additional $69,000 will be required.
The Company relies upon various vendors, utility companies,
telecommunications service companies, delivery service companies and other
service providers, which are outside of the Company's control. There is no
assurance that such parties will not suffer a Year 2000 business disruption,
which could have a material adverse effect on the Company's financial condition
and results of operations.
The Company has implemented a detailed Year 2000 Project plan to assess the
Company's internal business-critical systems upon which the Company depends.
This includes information technology systems and applications ("IT"), as well as
non-IT systems and equipment with embedded technology, such as fax machines and
telephone systems. The main internal IT systems include accounting systems such
as general ledgers. Detailed testing of the Company's internal IT systems is
approximately 85% complete and some remedial work has also been completed. The
Company plans to complete its analysis by May 31, 1999 (the end of its fiscal
year) and expects all corrective action and verification to be complete by
September 30, 1999. Any problems actually encountered by the Company in
addressing its Year 2000 issue which are beyond the Company's control could have
adverse effects on the Company's future operations, results of operations or
financial condition. The Company is developing a Year 2000 contingency plan to
mitigate the effects of business disruption stemming from either internal system
failures or an interruption in critical services or supplies from external
sources over which the Company has no control. The plan is expected to be
complete by September 30, 1999.
The Company has not yet developed a most reasonably likely worst case
scenario with respect to Year 2000 issues, but instead has focused its efforts
on reducing uncertainties through the review described above.
19
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT REPORT WITH WHICH
DESCRIPTION NO. EXHIBIT WAS FILED
- ----------- ------- -----------------
<S> <C> <C>
Note Purchase Agreement, 8.32% Senior Unsecured Notes due July 7, 2007 2.1 August 1997, Form 10-Q
Note Purchase Agreement, 7.25% Series A and 7.14% Series B Senior 2.2 November 1998, Form 10-Q
Unsecured Notes due September 15, 2008
Articles of Amendment and Restated Articles of Incorporation. 3.2 May 1998 Form 10-K
Amended and Restated Bylaws of American Homestar Corporation. 3.3 S-1 Registration Statement
No. 33-78630
Specimen Common Stock Certificate. 4.1 S-1 Registration Statement
No. 33-78630
Amended and Restated Securities Purchase Agreement by and among Zaring 10.1 Filed herewith
National Corporation ("Zaring"), HomeMax, Inc. ("HomeMax"), HomeMax
Operating Properties, L.L.C. ("HOP") and American Homestar
Corporation dated as of March 15, 1999.
Securityholders Agreement by and among Zaring, HomeMax, HOP and 10.2 Filed herewith
American Homestar Corporation dated March 15, 1999.
Promissory Note dated March 15, 1999 in the original principal amount 10.3 Filed herewith
of $4,411,177 payable to Zaring.
Management and Consulting Agreement by and among Zaring, HomeMax and 10.4 Filed herewith
American Homestar Corporation dated March 15, 1999.
None 15
None 18
None 19
None 22
None 24
Financial Data Schedules 27 Filed herewith
None 99
</TABLE>
(b) REPORTS ON FORM 8-K - The Company filed a Current Report on Form 8-K on
January 11, 1999, regarding the acquisition of R-Anell Custom Homes, Inc.
and its related manufacturing companies, Gold Medal Homes, Inc. and Gold
Medal Homes of North Carolina. The Current Report on Form 8-K dated
January 11, 1999 was amended on Form 8-K/A and filed on March 12, 1999.
20
<PAGE> 22
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.
AMERICAN HOMESTAR CORPORATION
Date: April 13, 1999 By: /s/ Craig A. Reynolds
----------------------------------------
Craig A. Reynolds
Executive Vice President, Chief Financial
Officer, Secretary and Director (Duly
Authorized
Officer and Principal Financial and
Accounting Officer)
21
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT REPORT WITH WHICH
DESCRIPTION NO. EXHIBIT WAS FILED
- ----------- ------- -----------------
<S> <C> <C>
Note Purchase Agreement, 8.32% Senior Unsecured Notes due July 7, 2007 2.1 August 1997, Form 10-Q
Note Purchase Agreement, 7.25% Series A and 7.14% Series B Senior 2.2 November 1998, Form 10-Q
Unsecured Notes due September 15, 2008
Articles of Amendment and Restated Articles of Incorporation. 3.2 May 1998 Form 10-K
Amended and Restated Bylaws of American Homestar Corporation. 3.3 S-1 Registration Statement
No. 33-78630
Specimen Common Stock Certificate. 4.1 S-1 Registration Statement
No. 33-78630
Amended and Restated Securities Purchase Agreement by and among Zaring 10.1 Filed herewith
National Corporation ("Zaring"), HomeMax, Inc. ("HomeMax"), HomeMax
Operating Properties, L.L.C. ("HOP") and American Homestar
Corporation dated as of March 15, 1999.
Securityholders Agreement by and among Zaring, HomeMax, HOP and 10.2 Filed herewith
American Homestar Corporation dated March 15, 1999.
Promissory Note dated March 15, 1999 in the original principal amount 10.3 Filed herewith
of $4,411,177 payable to Zaring.
Management Agreement by and among Zaring, HomeMax and American 10.4 Filed herewith
Homestar Corporation dated March 15, 1999.
None 15
None 18
None 19
None 22
None 24
Financial Data Schedules 27 Filed herewith
None 99
</TABLE>
<PAGE> 1
EXHIBIT 10.2
SECURITYHOLDERS AGREEMENT
This Securityholders Agreement (this "Agreement") is made as of March
15, 1999, by and among HomeMax, Inc., a Delaware corporation (the "Company"),
Zaring National Corporation, an Ohio corporation ("ZNC"), and American Homestar
Corporation, a Texas corporation ("AHC"). AHC and ZNC are each sometimes
hereinafter referred to as a "Securityholder", and collectively as the
"Securityholders"). The Company will not issue any Securities (as defined below)
to any person or entity without such person or entity becoming a party to this
Agreement.
A. AHC and ZNC are the sole shareholders of the issued and outstanding
shares of common stock, par value $.01 of the Company (the "Common Stock").
B. The parties hereto desire to enter into this Agreement restricting
certain transfers of, and voting and other rights and obligations with respect
to, the capital stock of the Company, including, without limitation, voting
rights and rights to dividends or distributions, which the Securityholders may
now or hereafter own (collectively, the "Securities"), and certain additional
agreements as provided herein.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1
1.1 Restriction of Transfer. Each Securityholder agrees that it will
not in any way transfer any Securities, whether voluntarily or by operation of
law, except by a transfer made in compliance with this Agreement. Any purported
transfer in violation of any provision of this Agreement will be void and will
not operate to transfer any interest or title in such Securities to the
purported transferee, and will give the Company and the other Securityholders an
option to purchase such Securities in the manner and on the terms and conditions
provided in this Agreement. Each Securityholder agrees that it will not create
or permit to exist any lien, claim or encumbrance at any time on any of its
Securities subject to this Agreement, other than the encumbrance created by this
Agreement. Notwithstanding anything herein to the contrary, neither AHC nor ZNC
may assign, transfer or sell any Securities, or any right or interest in or to
any Securities, from the date hereof through the expiration of the Put/Call
Period (as defined below) (i.e. 3 years and 90 days from the date hereof)
without the consent of the other, except transfers to a wholly-owned subsidiary
of AHC during the one year period following the date hereof and thereafter to an
80% or more owned subsidiary of AHC, which must remain an 80% or more owned
subsidiary of AHC throughout the term of this Agreement.
HomeMax Securityholders' Agreement Page 1
<PAGE> 2
SECTION 2
2.1 Right of First Refusal on Sale by a Securityholder.
(a) If a Securityholder receives a bona fide offer (excluding an offer
from any affiliate of any Securityholder) for the purchase of all or a part of
its Securities (or any right or interest therein) that it now or hereafter owns,
which offer such Securityholder desires to accept, such Securityholder (the
"Offering Securityholder") agrees promptly to give written notice of such offer
to the Board of Directors of the Company (the "Board") and to each
Securityholder (the "Non-Selling Securityholders"), identifying the proposed
transferee, the number of Securities to be transferred (the "Offered
Securities"), the price and all other terms and conditions of the proposed
transfer.
(b) On receipt of the notice with respect to such offer, the Company
shall have the right and option, exercisable at any time during the period of
twenty (20) days from the date of the notice, to purchase all or part of the
Offered Securities at the same price and upon the same terms and conditions
contained in the offer from the third party. If the Company decides to purchase
any or all of the Offered Securities it will give written notice to that effect
to the Offering Securityholder and the Non-Selling Securityholders. The right of
the Company to exercise its option to purchase is subject to the laws of the
state of Delaware governing the rights of a corporation to purchase its own
securities.
(c) If the Company does not wish (or is unable) to purchase all of the
Offered Securities, each Non-Selling Securityholder will then have the right and
option, exercisable at any time during a period of thirty (30) days from the
date after which the option indicated in Section 2.1(b) above has expired, to
purchase the Offered Securities not purchased by the Company, upon the same
terms and conditions contained in the offer from the third party. If a
Non-Selling Securityholder elects to so purchase, it will give notice to the
Secretary of the Company to that effect, and the Secretary of the Company will
promptly notify all other Non-Selling Securityholders. If the total number of
Securities specified in the notices of election which are timely delivered by
any Non-Selling Securityholder to the Secretary exceeds the number of Offered
Securities not purchased by the Company (the "Remaining Securities"), each such
electing Non-Selling Securityholder shall have a five (5) day priority right to
purchase that portion of the Remaining Securities (but not to exceed the number
of Securities specified in its notice of election to purchase) which bears the
same ratio to the number of Remaining Securities as the number of Securities it
holds bears to the total number of Securities held by all Non-Selling
Securityholders electing to purchase. The Remaining Securities not purchased on
such a priority basis shall be allocated in one or more successive allocations
(with a three (3) day offer period in each such allocation) to those Non-Selling
Securityholders electing to exercise such purchase right, up to the number of
Securities specified in their respective notices, in the proportion that the
number of Securities held by each electing Non-Selling Securityholder bears to
the number of Securities held by all electing Non-Selling Securityholders. In
determining the number of outstanding Securities, all Securities (other than
Common Stock) shall be deemed to be on an "as converted" or "as exercised"
basis. The purchase and sale of the Offered Securities must be closed prior to
the expiration of the latest offering allocation period.
HomeMax Securityholders' Agreement Page 2
<PAGE> 3
(d) If the third party fails to purchase the Offered Securities within
a period of sixty (60) days from the expiration of the option under Section
2.1(c) above, any subsequent offers for such Securities must be made pursuant to
the terms of this Agreement. Any third party purchaser, as a requirement of such
purchase, must comply with the last sentence of Section 5.1 below.
(e) Any rights of any Securityholder under this Section 2 may be
assigned or transferred, in whole or in part, to any other Securityholder.
SECTION 3
3.1 Board of Directors. The Board of Directors of the Company (the
"Board") shall consist of four members, two of whom shall be designated by AHC,
and two of whom shall be designated by ZNC; provided, however, that should AHC
or ZNC fail to designate a person for election as a director of the Company, the
holders of voting stock of the Company shall have the right to nominate for
election such a director to fill such vacancy. Each Securityholder agrees that,
at every regular or special meeting of the stockholders of the Company, and
whenever the consent of stockholders, at which meeting or in which consent, one
or more of the directors of the Company are to be elected, such Securityholder
will vote all Securities entitled to vote owned by such Securityholder or which
such Securityholder is entitled to vote, whether by proxy or agreement or
otherwise, in favor of the director nominee designated by AHC or ZNC as provided
above. Each Securityholder may remove any director designated by such
Securityholder, and each other Securityholder agrees, if requested, to vote in
favor of any such removal and in favor of any replacement thereof. Any vacancy
in the Board shall be filled by the party who designated such departing Board
member. The parties hereto agree that the initial directors of the Company after
the date hereof shall be Finis F. Teeter and Laurence A. Dawson, Jr. (each
designees of AHC) and Ronald G. Gratz and Allen G. Zaring, III (each designees
of ZNC).
Without the unanimous consent of the Securityholders, the
Securityholders will not take any action which would change the size of the
Board from four or diminish the prospects of the designees of any Securityholder
from being elected to the Board as provided in this Section 3.1. Each director
designated and elected by the Securityholders shall be reimbursed for all
reasonable costs of travel and out-of-pocket expenses incurred in connection
with attending any meetings of the Board or any committees thereof.
3.2 Board Approval. The Company and Securityholders agree that the
Company shall not, and shall not permit any subsidiary to, without the prior
unanimous written consent of the all of the directors of the Company then in
office:
(a) Acquire any capital stock or substantially all of the assets of any
other entity (including, without limitation, the formation of any new
subsidiaries);
(b) Issue any capital stock, or securities convertible, exchangeable or
exercisable into shares of capital stock (including, without limitation, stock
options or warrants to purchase capital stock);
HomeMax Securityholders' Agreement Page 3
<PAGE> 4
(c) Consummate a merger involving the Company or a subsidiary of the
Company in which the Company or such subsidiary is not the surviving entity, or
any sale, lease or other disposition of all or substantially all of its assets,
or any liquidation, dissolution, recapitalization or reorganization, in any form
of transaction, by the Company or a subsidiary of the Company;
(d) Amend its articles of incorporation or bylaws in any manner;
(e) Authorize or approve any liquidation, dissolution, reorganization
or bankruptcy;
(f) Declare or pay any dividends on, or make any other distributions
with respect to, its capital stock;
(g) Change the authorized number of directors from the present four
(4) members; or
(h) Authorize the Company to open, close, acquire, sell, mortgage or
lease a sales center village.
Notwithstanding the above, if at any time a majority of the members of
the Board reasonably determine that the Company is, or in the near future
reasonably may become, insolvent, the items set forth above in this Section 3.2
shall only require the affirmative vote of a majority of the members of the
Board with respect to actions undertaken by the Board intended to resolve, in
whole or in part, such insolvency.
Notwithstanding anything in this Agreement or any other agreement
between AHC and ZNC to the contrary, upon the written request of AHC to the
Company, AHC, ZNC and the Company will each take all actions necessary or
advisable to convert the Company and/or any of its subsidiaries into limited
liability companies (as so requested by AHC), the cost of which conversion shall
be borne by the Company.
SECTION 4
4.1 Put and Call. (a) During the 90-day period (the "Put/Call Period")
beginning on the third anniversary of the date hereof, ZNC shall have the right
to sell to AHC and AHC shall be required to purchase from ZNC (the "Put"), and
AHC shall have the right to purchase from ZNC and ZNC shall be required to sell
to AHC (the "Call"), all but not less than all of the Securities owned by ZNC
(the "ZNC Interest"); provided, that the Put or Call may be exercised earlier if
the Companies (as defined in that certain Amended and Restated Securities
Purchase Agreement, dated as of March 15, 1999, (the "Purchase Agreement"), by
and among the parties hereto and HomeMax Operating Properties, L.L.C., a
Delaware limited liability company ("HOP")) achieve an aggregate of $5,000,000
in consolidated earnings before interest and taxes ("EBIT") for any four
consecutive calendar quarters.
HomeMax Securityholders' Agreement Page 4
<PAGE> 5
(b) If ZNC or AHC elects to exercise the Put or Call it shall send
written notice thereof to the other party in the manner set forth in Section 7.8
(the date of such notice being hereafter referred to as the "Put Notice Date")
during the Put/Call Period. The purchase price for the ZNC Interest (the
"Put/Call Price") shall be equal to the greater of (i) 50% of the Net Book Value
(as defined in the Purchase Agreement) of the Companies as of the end of the
quarter following the Put Notice Date or (ii) (7 times (the Companies' EBIT for
the preceding four calendar quarters) less the Companies' outstanding debt
(including floor plan debt)) times (50%).
(c) The Put/Call Price shall be payable in full in cash; provided,
however, that AHC, in its sole discretion and upon written notice to ZNC, may
elect to pay a portion of the Put/Call Price in Common Stock of AHC, par value
$0.05 per share (the "AHC Common Stock). AHC shall provide such notice in
writing to ZNC on the Put Notice Date or within five (5) days after the Put
Notice Date, if ZNC exercises its Put (the "Percentage Election Notice"). If AHC
elects to pay a portion of the Put/Call Price in AHC Common Stock (the "Share
Election"), the portion shall be an amount up to 40% (the "Elected Percentage")
multiplied by the sum of the Put/Call Price plus the amount of the Company's
consolidated indebtedness as reported on the Put Notice Date, which amount shall
be the "Share Amount." The Percentage Election Notice shall include the Elected
Percentage.
(d) If AHC elects the Share Election, AHC shall file a registration
statement under the Securities Act of 1933, as amended (the "Registration
Statement"), registering a number of shares of AHC Common Stock equal to the
Share Amount divided by the average of the high and low prices of the AHC Common
Stock as reported on the NASDAQ National Market (or another exchange or trading
system on which the AHC Common Stock is then traded or reported) for the ten
(10) trading days prior to the Put Notice Date (the "Registered Shares").
(e) AHC shall use all commercially reasonable efforts to file the
Registration Statement on an appropriate form with the Securities and Exchange
Commission no later than thirty (30) days after the Put Notice Date (the
"Required Filing Date"). AHC shall use all commercially reasonable efforts to
cause the Registration Statement to be declared effective no later than sixty
(60) days after filing the Registration Statement.
(f) If AHC elects the Share Election, ZNC shall inform AHC, in writing,
within ten (10) days after the Put Notice Date whether ZNC elects to (i) receive
the Registered Shares or (ii) have AHC control and direct the sale of the
Registered Shares on behalf of ZNC; in which case (x) AHC shall have complete
and absolute authority over the sale of the Registered Shares, and (y) AHC shall
receive all proceeds from the sale of the Registered Shares, subject to the
payment to ZNC specified in (h) below.
(g) If ZNC elects to receive the Registered Shares, AHC shall cause the
Registration Statement to remain effective for one (1) year from the effective
date of the Registration Statement.
HomeMax Securityholders' Agreement Page 5
<PAGE> 6
(h) In the event that AHC sells the Registered Shares on behalf of ZNC
and receives the cash proceeds, AHC shall pay to ZNC, in cash, an amount equal
to the Share Amount together with interest on the outstanding balance of the
Share Amount, which shall accrue at a rate equal to the daily prime rate per
annum as announced from time to time by PNC Bank, National Association, or its
successor for the period from the Cash Closing Date (as defined below) to the
closing of the Share Election portion of the Put/Call Price specified below. In
the event that the proceeds of the sale of the Registered Shares exceed the
Share Amount, AHC is entitled to retain such excess, provided that ZNC receives
the amount of interest, as previously specified. In the event that the proceeds
of the sale of the Registered Shares are less than the Share Amount, or a sale
of the Registered Shares does not occur for whatever reason, then AHC owes ZNC
the Share Amount in cash with interest as specified above.
(i) In the event that AHC does not elect the Share Election, AHC shall
pay the Put/Call Price in cash to ZNC within ten (10) business days after the
determination of the Put/Call Price pursuant to Section 4.1(j) below (the "Cash
Closing Date"). If AHC elects the Share Election, the closing of the cash
portion of the Put/Call Price shall occur on the Cash Closing Date and the
closing of the Share Amount portion of the Put/Call Price shall occur as soon as
practicable and in any event within (i) ninety-five (95) days after the
effectiveness of the Registration Statement or (ii) sixty (60) days from the end
of the quarter in which the Net Book Value is determined for purposes of
calculating the Put/Call Price, whichever is longer. If the Registration
Statement is not declared effective, then the closing of the Share Amount
portion of the Put/Call Price shall occur within the longer of: (i) one-hundred
and twenty (120) days after the Put Notice Date or (ii) the time period set
forth in item (ii) above.
(j) The Company shall cause an audit of the Companies' books and
records to be undertaken as of the quarter following the Put Notice Date in
order to verify the Put/Call Price. The "Put/Call Price" shall be determined as
follows:
(i) By mutual agreement of AHC and ZNC;
(ii) If AHC and ZNC are unable to reach agreement, then by
mutual agreement of the ZNC's Auditors (as defined in the Purchase
Agreement) and AHC's Auditors (as defined in the Purchase Agreement);
or
(iii) If the AHC's Auditors and ZNC's Auditors are unable to
reach agreement on the calculation of the Put/Call Price (being defined
as amounts in excess of $100,000 in the aggregate), then, at the
request of either Auditors, the disagreement shall be submitted to the
Third-Party Auditors (as defined in the Purchase Agreement) for its
determination, which determination shall be final and binding on the
Parties. The closing of the Put or Call shall be extended during any
period in which there is a dispute regarding the Put/Call Price for the
length of time during which the dispute exists.
HomeMax Securityholders' Agreement Page 6
<PAGE> 7
(k) The parties acknowledge and agree that there shall not exist as a
basis for disagreement any previously utilized and disclosed capitalization
policies of the Companies. Each Party shall bear its own cost and expense in
connection with this Section 4.1 (with the costs and expenses of the Companies
being borne by ZNC), with the cost and expenses of the Third-Party Auditors
being split equally between AHC and ZNC.
(l) Simultaneously with the closing of the Put or Call (as the case may
be), ZNC shall assign and transfer, or cause to be assigned and transferred,
over to AHC for $10.00 all membership interests of HOP then held by ZNC or any
transferee or assignee of ZNC (such that, after such assignment, AHC and any of
its transferees will own 100% of the membership interests of HOP on a
fully-diluted basis).
SECTION 5
5.1 Stock Legend. The Company and each Securityholder agree that all
certificates or agreements representing Securities (or options or other
instruments to purchase Securities) that at any time are subject to the
provisions of this Agreement will have endorsed upon them in capitalized type a
legend in substantially the following form:
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO A
SECURITYHOLDERS AGREEMENT ("AGREEMENT"), DATED AS OF MARCH 15, 1999, AS
MAY BE AMENDED FROM TIME TO TIME, AMONG THE COMPANY AND CERTAIN OF ITS
SECURITYHOLDERS, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THE COMPANY. THE AGREEMENT CONTAINS CERTAIN RESTRICTIONS ON SUCH
SECURITIES, AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED, HYPOTHECATED, OR OTHERWISE DISPOSED OF EXCEPT IN STRICT
ACCORDANCE WITH THE TERMS OF THE AGREEMENT. A COPY OF THE AGREEMENT
WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER OF THIS CERTIFICATE UPON
RECEIPT BY THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED
OFFICE OF A WRITTEN REQUEST FROM THE HOLDER REQUESTING SUCH A COPY.
Each holder of Securities (or options or other instruments to purchase
Securities) subject to the provisions of this Agreement issued prior to the date
hereof agrees to deliver all certificates and agreements representing Securities
to the Company for the purpose of endorsing said legend thereon. The Company
agrees to maintain a counterpart of this Agreement in its principal and/or
registered office. Under no circumstances will any sale or other transfer of any
Securities subject to this Agreement be valid until the proposed transferee has
executed and become a party to an Agreement substantially similar to this
Agreement and thereby becomes subject to all provisions of this Agreement,
unless the requirement is waived by written consent of the parties to this
Agreement as provided below; and notwithstanding any other provisions of this
Agreement, no such sale or other
HomeMax Securityholders' Agreement Page 7
<PAGE> 8
transfer of any kind will in any event result in the nonapplicability of the
provisions of this Agreement at any time to any of the Securities subject to
this Agreement.
SECTION 6
6.1 Termination. This Agreement shall terminate automatically upon the
dissolution of the Company or upon the occurrence of any event which reduces the
number of Securityholders to one.
SECTION 7
7.1 Further Assurances. Each party to this Agreement agrees to perform
all further acts and to execute and deliver all further documents that may be
reasonably necessary to carry out the provisions of this Agreement.
7.2 Severability. In the event that any of the provisions of this
Agreement is held to be unenforceable or invalid by any court of competent
jurisdiction, the validity and enforceability of the remaining provisions will
not be affected, and in lieu of such unenforceable provision there shall be
added automatically as part of this Agreement a provision as similar in terms as
may be valid and enforceable.
7.3 Terms; Captions. Whenever used in this Agreement, the singular
number will include the plural, and the plural number will include the singular,
and pronouns in the masculine, feminine, or neuter gender will include each
other gender. The captions of this Agreement are for convenience of reference
only and shall not limit or otherwise affect any of the terms or provisions
hereof.
7.4 Applicable Law. This Agreement has been executed in and will be
governed by the laws of the State of Delaware, without regard to the choice of
law provisions thereof.
7.5 Binding Effect. Subject to the restrictions against transfer or
assignment as contained in this Agreement, the provisions of this Agreement will
benefit and will be binding on the assigns, successors in interest, personal
representatives, estates, heirs and legatees of each of the parties hereto.
Neither this Agreement nor any right or obligation created hereby shall be
assignable by any party hereto.
7.6 Amendment; Waiver. This Agreement may only be amended, or provision
waived, by the written consent of AHC, ZNC and the Company.
7.7 Entire Agreement. This Agreement contains the entire understanding
among the parties concerning the subject matter contained in this Agreement.
There are no representations, agreements, arrangements or understandings, oral
or written, between or among the parties hereto, relating to the subject matter
of this Agreement, which are not fully expressed herein. This Agreement may be
signed in one or more counterparts, all of which shall be considered one and the
same agreement.
HomeMax Securityholders' Agreement Page 8
<PAGE> 9
7.8 Notices. All notices required or permitted to be given hereunder
will be deemed to be duly given (a) on the date of delivery if delivered in
person, (b) one (1) days after sent by overnight delivery or by telecopy, where
receipt of delivery or confirmation of telecopy is received, or (c) three (3)
days after the date of mailing if mailed by registered or certified mail, first
class postage prepaid, return receipt requested, to the Company or the
Securityholder(s), as appropriate, at the respective addresses indicated on the
signature page of this Agreement. The addresses of the Company and the
Securityholders, or any of them, may be changed only by giving written notice of
such change of address to all of the other parties hereto in the manner provided
above.
7.9 Injunctive Relief. The parties acknowledge that in the event a
party to this Agreement fails to perform, observe or discharge any of its
respective obligations under this Agreement, any other party hereto shall be
entitled to temporary and permanent injunctive relief in such case without the
necessity of proving actual damages, and such remedy shall be in addition to
other relief as may be provided by law or in equity, including specific
performance. If any legal action is required to enforce the terms of this
Agreement, the prevailing party shall be entitled to the reasonable costs of
enforcement, including attorneys' fees.
7.10 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
HomeMax Securityholders' Agreement Page 9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
as of the date first indicated above.
HOMEMAX, INC.
By:
------------------------------------------
Its:
-----------------------------------------
Address: 3691 Trust Drive
Raleigh, North Carolina 27606
Attention: President
AMERICAN HOMESTAR CORPORATION
By:
------------------------------------------
Laurence A. Dawson, Jr.,
President
Address: 2221 East Lamar Blvd., Suite 790
Arlington, Texas 76006
Attention: President
ZARING NATIONAL CORPORATION
By:
------------------------------------------
Its:
-----------------------------------------
Address: 11300 Cornell Park Drive, Suite 500
Cincinnati, Ohio 45202-1825
Attention: Chief Financial Officer
HomeMax Securityholders' Agreement Page 10
<PAGE> 11
EXHIBIT 10.1
AMENDED AND RESTATED
SECURITIES PURCHASE AGREEMENT
BY AND AMONG
ZARING NATIONAL CORPORATION,
HOMEMAX, INC.,
HOMEMAX OPERATING PROPERTIES, L.L.C.
AND
AMERICAN HOMESTAR CORPORATION
DATED AS OF MARCH 15, 1999
<PAGE> 12
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Article 1.
Definitions.............................................................1
1.1 Definitions....................................................1
Article 2.
Purchase and Sale; Investment Covenants.................................1
2.1 Investor's Purchase of Common Stock and HOP Interests..........1
2.2 Investor's Loan to the Company.................................3
2.3 Option to Purchase Common Stock of Investor....................3
2.4 Working Capital Loans..........................................3
2.5 Operating Leases...............................................3
2.6 Replacement of Model Homes.....................................4
2.7 Management and Consulting Agreement............................4
2.8 Noncompetition Agreement.......................................4
2.9 Securityholders Agreement......................................4
2.10 Registration Rights Agreement..................................5
2.11 Cooperation....................................................5
2.12 Conversion of Debt.............................................5
Article 3.
Closing; Conditions to Closing..........................................5
3.1 Closing........................................................5
3.2 Conditions to Closing of Investor..............................5
3.3 Conditions to Closing of ZNC, the Company and HOP..............7
Article 4.
Representations and Warranties of ZNC...................................9
4.1 Organization...................................................9
4.2 Power..........................................................9
4.3 Authorization..................................................9
4.4 Capitalization................................................10
4.5 Preemptive Rights; Registration Rights........................10
4.6 Financial Statements..........................................10
4.7 Liabilities and Obligations...................................10
4.8 Employee Matters..............................................11
4.9 Employee Benefit Plans........................................12
4.10 Absence of Certain Changes....................................13
4.11 Commitments...................................................15
4.12 Insurance.....................................................17
4.13 Patents, Trademarks, Service Marks and Copyrights.............17
4.14 Tax Matters...................................................17
4.15 Title to Assets; Condition of Assets..........................18
4.16 Real Property.................................................19
4.17 Effect of Transactions; Compliance with Obligations...........19
4.18 Litigation....................................................19
</TABLE>
<PAGE> 13
<TABLE>
<S> <C> <C>
4.19 Legal Compliance..............................................19
4.20 Subsidiaries; Joint Ventures..................................19
4.21 Brokerage.....................................................19
4.22 Disclosure....................................................19
4.23 Ownership Interests of Interested Persons.....................20
4.24 Investments in Competitors....................................20
4.25 Environmental Matters.........................................20
4.26 Certain Payments..............................................20
4.27 Government Inquiries..........................................20
4.28 Consents......................................................20
4.29 Inventory.....................................................21
4.30 Books of Account..............................................21
4.31 Accounts Receivable...........................................21
4.32 Distributions and Repurchases.................................21
4.33 Product Warranties............................................21
4.34 Year 2000 Compliance..........................................21
4.35 Completion of Villages........................................22
Article 5.
Representations of Investor............................................22
5.1 Authorization.................................................22
5.2 Status of Investor............................................22
5.3 Shares Purchased for Investment...............................22
5.4 Brokerage.....................................................23
5.5 Litigation....................................................23
5.6 Organization..................................................23
5.7 Effect of Transactions........................................23
5.8 Financial Statements..........................................23
5.9 Power.........................................................24
5.10 Consents......................................................24
5.11 1934 Act......................................................24
Article 6.
ZNC's, the Company's and HOP's Covenants...............................24
6.1 Consummation of Agreement.....................................24
6.2 Business Operations...........................................24
6.3 Access........................................................25
6.4 Material Change...............................................25
6.5 Approvals of Third Parties....................................25
6.6 No Negotiation with Others....................................25
6.7 Amendment of Schedules........................................25
Article 7.
Investor's Covenants...................................................26
7.1 Consummation of Agreement.....................................26
7.2 Approvals of Third Parties....................................26
7.3 Material Change...............................................26
</TABLE>
<PAGE> 14
<TABLE>
<S> <C> <C>
Article 8.
Indemnification........................................................26
8.1 Indemnification by ZNC........................................26
8.2 Indemnification by Investor...................................27
8.3 Limitations on Indemnification Obligations....................27
8.4 Conditions of Indemnification.................................27
8.5 Waiver........................................................28
8.6 Remedies Exclusive............................................29
8.7 Offset........................................................29
8.8 Indemnification, Costs, Expenses and Legal Fees...............29
8.9 Specific Performance..........................................29
8.10 Insurance and Warranties......................................29
8.11 Survival of Representations and Warranties....................29
Article 9.
Termination............................................................30
9.1 Termination...................................................30
Article 10.
Post-Closing Covenants ................................................31
10.1 ..............................................................31
10.2 ..............................................................31
10.3 ..............................................................31
10.4 ..............................................................31
10.5 ..............................................................31
Article 11.
General................................................................31
11.1 Amendments....................................................31
11.2 Headings......................................................31
11.3 Governing Law.................................................32
11.4 Notices and Demands...........................................32
11.5 Severability..................................................32
11.6 Expenses......................................................32
11.7 Publicity and Disclosures.....................................32
11.8 Entire Agreement..............................................32
11.9 Assignment....................................................33
11.10 Parties in Interest; No Third Party Beneficiaries.............33
11.11 Counterparts..................................................33
</TABLE>
<PAGE> 15
EXHIBITS
A Definitions
B Investor Note
C Company Note
D Option Agreement
E Form of Working Capital Note
F ZNC Note
G Management and Consulting Agreement
H Noncompetition Agreement
I Securityholders Agreement
J Registration Rights Agreement
K Frost & Jacobs Opinion
L Jackson Walker L.L.P. Opinion
M HOP Operating Agreement
N Operating Leases Assignment and Assumption Agreement
O Sublease Agreement
<PAGE> 16
AMENDED AND RESTATED
Securities Purchase Agreement
Zaring National Corporation, an Ohio corporation (the "ZNC"), HomeMax,
Inc., a Delaware corporation and wholly-owned subsidiary of ZNC (the "Company"),
HomeMax Operating Properties, L.L.C., a Delaware limited liability company and
wholly-owned subsidiary of ZNC ("HOP"), and American Homestar Corporation, a
Texas corporation ("Investor"), enter into this Amended and Restated Securities
Purchase Agreement, dated as of March 15, 1999 (this "Agreement"). This
Agreement amends, restates and replaces in its entirety that certain Securities
Purchase Agreement by and among ZNC, the Company, HOP and Investor dated as of
February 24, 1999 and all references to such agreement shall now mean this
Agreement.
ARTICLE 1.
DEFINITIONS
1.1 Definitions. Certain terms used in this Agreement have the meanings
set forth in Exhibit A attached hereto.
ARTICLE 2.
PURCHASE AND SALE; INVESTMENT COVENANTS
2.1 Investor's Purchase of Common Stock and HOP Interests.
(a) At the Closing, (i) Investor shall purchase from ZNC, and ZNC
shall sell to Investor, 25% of the Outstanding Common Stock (the "Investor
Shares") at a purchase price (the "Purchase Price") equal to 25% of the Net Book
Value as of December 31, 1998, for which Investor shall issue to ZNC a
promissory note, in substantially the form set forth in Exhibit B attached
hereto (the "Investor Note"); (ii) HOP, Investor and ZNC shall execute and
deliver the Operating Agreement, and ZNC shall sell to Investor 25% of the
Outstanding HOP Interests (the "Investor Interests") at a purchase price of
$10.00; and (iii) upon conversion of the Company Note (as defined below), ZNC
shall, and shall cause any transferee of ZNC to, assign 25% of the outstanding
Investor Interests to Investor at a purchase price of $10.00 (such that such
assigned Investor Interests, together with the Investor Interests assigned in
(ii) above, equal 50% of the then issued and outstanding Investor Interests).
(b) The Company will cause Arthur Andersen L.L.P. (the "Company's
Auditors") to perform an audit of the Company (the "Audit"). The Audit shall
include a schedule depicting Net Book Value as of December 31, 1998 shall be
prepared by the Company in accordance with GAAP applied on a basis consistent
with those applied in the preparation of the Company's 1997 financial statements
except that the schedule will not give effect to any asset impairment reserves,
if any, which would otherwise be required by GAAP. In addition, the schedule
depicting Net Book Value shall give effect to the inclusion of the Total
Intercompany Financing Transactions (including
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assignments, if any, referred to in 3.2(h)) in Net Book Value as of December 31,
1998 and otherwise be presented in a form consistent with Schedule II, Exhibit
A. The Net Book Value schedule shall be accompanied by a certified special
purpose report ("Special Purpose Report") which identifies procedures to be
performed by the Company's Auditors as determined by the Company and Investor.
The Company shall submit the Special Purpose Report, together with all
applicable workpapers of Investor and their auditors, KPMG Peat Marwick LLP
("Investors's Auditors") for review and acceptance. If the Audit is reviewed and
accepted by Investor's Auditors prior to the Closing, then the Purchase Price
shall be as determined utilizing the Audit. If the Audit is not reviewed and
accepted by Investor's auditors on or prior to the Closing, then ZNC shall
provide its best estimate of Net Book Value (the "Estimate") to Investor at
least five business days prior to the Closing, and Investor shall have the
opportunity to review and accept the estimate (which acceptance shall not be
unreasonably withheld). If the Estimate is used and accepted by Investor, then
the Investor Note will be issued utilizing the Estimate. Following the Closing,
when Net Book Value is finally determined as provided in Section 2.1, the
Investor Note shall be canceled and replaced with an Investor Note that reflects
the Purchase Price determined utilizing the Audit.
(c) If following the Closing Date, the Company's Auditors and
Investor's Auditors reach agreement on the Audit, then the Net Book Value as of
December 31, 1998, shall be as so agreed, and the Investor Note shall be
accordingly completed to reflect such Net Book Value determination; provided,
that (i) if the difference between the Estimate and the Audit is an amount that
exceeds the Estimate multiplied by five percent (5%) (the "5% Amount"), then the
Net Book Value used to determine the Purchase Price shall be an amount equal to
(A) the Estimate plus (B) the 5% Amount and (ii) if the difference between the
Estimate and the Audit is an amount that is less than the 5% Amount, then the
Net Book Value used to determine the Purchase Price shall be an amount equal to
(A) the Estimate minus (B) the 5% Amount (the "Lowest Net Book Value");
provided, further that if the Net Book Value is determined by the Audit to be
less than the Lowest Net Book Value, ZNC shall contribute capital to the Company
(without receiving any capital stock, promissory notes or other securities) in
an amount equal to the difference between the Net Book Value determined by the
Audit and the Lowest Net Book Value, in order to increase the Company's actual
Net Book Value to equal the Lowest Net Book Value. If following the Closing Date
the Company's Auditors and Investor's Auditors are unable to reach agreement on
any material term of the Audit (being defined as amounts in excess of $100,000
in the aggregate), then, at the request of either auditors, the disagreement
shall be submitted to PricewaterhouseCoopers, L.L.P. (the "Third-Party
Auditors") for its determination, which determination shall be final and binding
on the Parties. The Parties acknowledge and agree that there shall not exist as
a basis for disagreement any previously utilized and disclosed capitalization
policies of the Companies. Each Party shall bear its own cost and expense in
connection with this Section 2.1 (with the costs and expenses of the Companies
being borne by ZNC), with the cost and expenses of the Third-Party Auditors
being split equally between Investor and ZNC.
(d) In addition to the possible adjustment provided in
subparagraphs (b) and (c) above, upon the date of the actual Closing, an
adjustment to the Purchase Price (and a corresponding adjustment to the Investor
Note (either an increase or decrease, as the case may be)), shall be made
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to reflect the operating results of the Companies for the period from January
29, 1999 to the Closing Date (with the Investor Note either being: (i) decreased
by an amount equal to 25% of the consolidated net income of the Companies for
such period; or (ii) increased by an amount equal to 25% of the consolidated net
loss of the Companies for such period.
2.2 Investor's Loan to the Company. At the Closing, Investor shall loan
to the Company, and the Company shall borrow from Investor, $4,000,000 (the
"Company Note Amount"), for which the Company will issue to Investor a
subordinated convertible promissory note, substantially in the form set forth in
Exhibit C attached hereto (the "Company Note"). The proceeds of the Company Note
shall by used for working capital purposes. Upon conversion of the Company Note,
ZNC, AHC and HOP will amend the Operating Agreement so that AHC will own an
additional twenty-five percent (25%) of the issued and outstanding HOP Interests
on a fully-diluted basis in addition to any other HOP Interests owned by AHC; it
being understood and agreed that (i) at the Closing AHC will own 25% of the
issued and outstanding HOP Interests on a fully-diluted basis, and (ii) upon
conversion of the Company Note, AHC will then own 50% of the issued and
outstanding HOP Interests on a fully-diluted basis.
2.3 Option to Purchase Common Stock of Investor. At the Closing,
Investor shall grant to ZNC options to purchase up to 150,000 shares of common
stock, par value $0.05 per share, of the Investor (the "Investor Common Stock"),
pursuant to an option agreement, substantially in the form set forth in Exhibit
D (the "Option Agreement").
2.4 Working Capital Loans. Investor and ZNC shall each agree to loan to
the Company up to $500,000, for which the Company will issue to each of Investor
and ZNC a promissory note, substantially in the form set forth in Exhibit E
(collectively, the "Working Capital Notes"). The Company may request drawdowns
under the Working Capital Notes from time to time upon written request to
Investor and ZNC as provided in the Working Capital Notes; it being agreed that
all such drawdowns shall be split equally between Investor and ZNC. The proceeds
of the Working Capital Notes shall be used by the Company for short-term working
capital needs of the Companies. Any future working capital needs of the
Companies that are not obtained from a third party may be obtained from Investor
and ZNC, each at their sole option, and in any event, unless agreed otherwise by
Investor and ZNC, on an equal basis.
2.5 Operating Leases.
(a) Immediately prior to the Closing, (i) the Companies shall
assign to HOP, and HOP shall assume, all operating leases of the Companies,
which operating leases are described in Schedule 2.5(a) (the "Operating
Leases"), and the Companies and HOP shall execute and deliver the Operating
Leases Assignment and Assumption Agreement; and (ii) the Companies and HOP shall
enter into a Sublease Agreement, pursuant to which the Companies shall sublease
the Operating Leases from HOP. The Operating Leases include all lease
obligations of the Companies as of the Closing Date and all operating leases to
be entered into after the Closing by the Companies which are of the type which
the Companies generally enter into with respect to their operating retail sales
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centers, in each case, as of the Closing Date, excluding real estate ground
leases, which real estate ground leases are described in Schedule 2.5(b), and
which shall remain the obligation of the Companies.
(b) With respect to each Operating Lease (except for those listed on
Schedule 2.5(a) with an *), Zaring represents that HOP shall have the right to
purchase the assets underlying the Operating Leases (the "Underlying Assets") at
fair market value at the end of the applicable term. In the event that the
aggregate purchase price of the Underlying Assets so purchased by HOP exceeds
20% of the aggregate fair market value of such Underlying Assets as of the date
that they were first placed in service by the Companies (which fair market
values for each Underlying Asset is as set forth on Schedule 2.5(a) attached
hereto) (each, a "Previous FMV"), then ZNC shall, upon the written request of
Investor, pay to HOP an amount equal to the amount by which the aggregate
purchase price for the Underlying Assets so purchased exceeds 20% of the
Previous FMVs for the Underlying Assets so purchased; provided that ZNC is
permitted to be involved in the asset purchase negotiation.
(c) Upon the dissolution or winding up of HOP, Investor and ZNC shall
assign the Operating Leases and/or Underlying Assets (as the case may be) to the
Companies and contribute to the Companies any other assets, including but not
limited to cash, received by the Members upon liquidation of HOP.
2.6 Replacement of Model Homes. After the Closing, the Companies and
HOP shall replace the model home inventory of the Companies described on
Schedule 2.6 with homes manufactured by Investor and its affiliates, with such
replacements being done in a manner that both: (i) maximizes the Companies'
profits after the Closing; and (ii) methodically and expeditiously converts such
model home inventory. The costs and expenses of replacing such model home
inventory will be payable by HOP, but pursuant to capital contributions to HOP
made by Investor and ZNC as set forth in the HOP Operating Agreement. The costs
and expenses of replacing such model home inventory shall be allocated at a rate
of $7,500 per single-section homes and $12,500 per multi-section homes or in
such greater amounts as approved by the Company's Board of Directors.
2.7 Management and Consulting Agreement. At the Closing, ZNC, the
Company and Investor shall enter into a Management and Consulting Agreement, in
substantially the form attached hereto as Exhibit G (the "Management
Agreement").
2.8 Noncompetition Agreement. At the Closing, ZNC and Investor shall
enter into a Noncompetition Agreement, in substantially the form attached hereto
as Exhibit H (the "Noncompetition Agreement").
2.9 Securityholders Agreement. At the Closing, the Parties shall enter
into a Securityholders Agreement, in substantially the form attached hereto as
Exhibit I (the "Securityholders Agreement").
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2.10 Registration Rights Agreement. At the Closing, Investor and ZNC
shall enter into a Registration Rights Agreement, in substantially the form
attached hereto as Exhibit J (the "Registration Rights Agreement.").
2.11 Cooperation. Between the date hereof and the Closing, the Parties
agree to review, in good faith, all the documents contemplated by this Agreement
and to make such changes thereto as may be necessary to properly document the
transactions contemplated by this Agreement and such other documents.
2.12 Conversion of Debt. The Parties agree that as of the Closing Date,
all loans and advances made by ZNC to the Company which are outstanding as of
the Closing Date, such amounts being equal to the Total Intercompany Financing
Transactions (except for $4,000,000 of such amount, which amount shall be
converted to a promissory note in the principal amount of $4,000,000, and
substantially in the form of Exhibit "F" attached hereto (the "ZNC Note"), shall
be deemed to have been converted into a capital contribution by ZNC to the
Company, which capital contribution shall be added to the Company's capital, but
for which ZNC shall not receive any capital stock.
ARTICLE 3.
CLOSING; CONDITIONS TO CLOSING
3.1 Closing. The closing of the transactions contemplated herein (the
"Closing") will take place at the offices of Jackson Walker L.L.P., 901 Main
Street, Suite 6000, Dallas, Texas 75202, at 10:00 a.m., on or before March 12,
1999, unless extended by the mutual written agreement of ZNC and Investor (the
"Closing Date").
3.2 Conditions to Closing of Investor. Except as may be waived in
writing by Investor, the obligations of Investor to consummate the transactions
contemplated herein shall be subject to the fulfillment at or prior to the
Closing Date of each of the following conditions:
(a) ZNC shall deliver to Investor the Investor Shares and the
Investor Interests.
(b) ZNC, the Company and HOP shall deliver to Investor the
following executed documents:
(i) the Management Agreement;
(ii) the Noncompetition Agreement;
(iii) the Securityholders Agreement;
(iv) the Option Agreement;
(v) the Registration Rights Agreement; and
(vi) the HOP Operating Agreement.
(c) The Company shall deliver to Investor (i) its Working
Capital Note; and (ii) the Company Note.
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(d) The President of each of ZNC and the Company shall have
delivered to Investor an Officer's Certificate certifying to Investor that
(i) the representations and warranties of ZNC and the
Company contained in the Transaction Documents were true and
correct in all material respects when initially made and,
after delivery of the Schedule Amendment, are true and correct
in all material respects as of the Closing Date;
(ii) ZNC and the Companies have performed and complied in
all material respects with all covenants and conditions
required by this Agreement to be performed and complied with
by ZNC and the Company prior to the Closing Date;
(iii) no bona fide investigation, action, suit, proceeding
or order by any court or governmental body or agency has been
threatened, orally or in writing, asserted, instituted or
entered to restrain or prohibit the carrying out of the
transactions contemplated hereby; and
(iv) no material adverse change in the condition
(financial or otherwise), operations, assets, liabilities, or
business of ZNC or any of the Companies has occurred, and no
such material adverse disclosure has been made, since the date
of this Agreement.
(e) The Secretary of each of ZNC, the Company and HOP shall
deliver to Investor a Secretary's Certificate certifying to Investor:
(i) the resolutions of the Boards of Directors of ZNC, the
Company and HOP authorizing the execution, delivery and
performance of the Transaction Documents; and
(ii) the incumbency of the officers of ZNC, the Company
and HOP executing the Transaction Documents.
(f) ZNC shall deliver to Investor certificates, dated within
ten days of the Closing Date, of the Secretary of State of each State in which:
(i) ZNC and the Companies were organized; and (ii) any of the Companies are
qualified to do business, in each case of (i) and (ii) above, such certificate
shall state that such corporation is in existence and is in good standing to
transact business in such State.
(g) Frost & Jacobs, LLP, counsel for ZNC, the Company and HOP,
shall deliver to Investor a legal opinion, dated as of the Closing Date, in
substantially the form attached hereto as Exhibit K.
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(h) The representations and warranties of ZNC and the Company
contained herein shall have been true and correct in all material respects when
initially made and, after the delivery of the Schedule Amendment, shall be true
and correct in all material respects as of the Closing Date.
(i) No bona fide investigation, action, suit, proceeding or
order by any court or governmental body or agency shall have been threatened
orally or in writing, asserted, instituted or entered to restrain or prohibit
the carrying out of the transactions contemplated hereby.
(j) No material adverse change in the condition (financial or
otherwise), operations, assets, liabilities or business of ZNC or the Companies
shall have occurred, and no such material adverse development shall have been
disclosed, since the date of this Agreement.
(k) All authorizations, approvals, consents and waivers of any
governmental authority or third party, each as required to permit the
consummation of the transactions contemplated by this Agreement, shall have been
obtained and shall not be terminated, suspended or withdrawn as of the Closing
Date.
(l) ZNC, the Company and HOP shall have performed and complied
in all material respects with all covenants and conditions required by the
Agreement to be performed and complied with by them prior to the Closing Date.
(m) In the event the Village Obligations (as defined in
Section 4.35 below) have not been paid in full, then ZNC shall deliver to the
Companies an assumption agreement pertaining to the assumption of the Village
Obligations, which assumption agreement shall be in form and substance
reasonably acceptable to the Parties.
3.3 Conditions to Closing of ZNC, the Company and HOP. Except as may be
waived in writing by ZNC, the Company and HOP, the obligations of ZNC, the
Company and HOP to be performed hereunder are subject to fulfillment at or prior
to the Closing Date of each of the following conditions:
(a) Investor shall have delivered to ZNC, the Company or HOP
(as the case may be) the following executed documents:
(i) the Investor Note;
(ii) the Management Agreement;
(iii) the Noncompetition Agreement;
(iv) the Option Agreement;
(v) the Securityholders Agreement;
(vi) the Registration Rights Agreement; and
(vii) the HOP Operating Agreement.
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(b) The President of Investor shall have delivered to ZNC, the
Company and HOP an Officer's Certificate certifying to ZNC, the Company and HOP
that:
(i) the representations and warranties of Investor
contained in the Transaction Documents were true and correct
in all material respects when initially made and are true and
correct in all material respects as of the Closing Date;
(ii) Investor has performed and complied in all material
respects with all covenants and conditions required by this
Agreement to be performed and complied with by Investor prior
to the Closing Date; and
(iii) no bona fide investigation, action suit, proceeding
or order by any court or governmental body or agency has been
threatened, orally or in writing, asserted, instituted or
entered to restrain or prohibit the carrying out of the
transactions contemplated hereby.
(c) The Secretary of Investor shall have delivered to ZNC, the
Company and HOP a Secretary's Certificate certifying to ZNC, the Company and
HOP:
(i) that the resolutions of the Boards of Directors of
Investor authorizing the execution, delivery and performance
of the Transaction Documents are true and correct copies of
the originals thereof subject to no modifications or
amendments; and
(ii) the incumbency of the officers of Investor executing
the Transaction Documents.
(d) Jackson Walker L.L.P., counsel for Investor, shall deliver
to ZNC a legal opinion, dated as of the Closing Date, in substantially the form
attached hereto as Exhibit L.
(e) The representations and warranties of Investor contained
herein shall have been true and correct in all material respects when initially
made and shall be true and correct in all material respects as of the Closing
Date.
(f) Investor shall have performed and complied in all material
respects with all covenants and conditions required by this Agreement to be
performed and complied with by it prior to the Closing Date.
(g) No bona fide investigation, action, suit, proceeding or
order by any court or governmental body or agency shall have been threatened
orally or in writing, asserted, instituted or entered to restrain or prohibit
the carrying out of the transactions contemplated hereby.
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<PAGE> 24
(h) No material adverse change in the condition (financial or
otherwise), operations, assets, liabilities or business of Investor shall have
occurred, and no such material adverse development shall have been disclosed,
since the execution of this Agreement.
(i) Investor shall have delivered to ZNC a certificate, dated
within ten days of the Closing Date, of the Secretary of State of Texas which
shall state that Investor is in existence and good standing to transact business
in Texas.
(j) All authorizations, approvals, consents and waivers of any
governmental authority or third party, each as required to permit the
consummation of the transactions contemplated by this Agreement, shall have been
obtained and shall not be terminated, suspended or withdrawn as of the Closing
Date.
(k) The Company shall deliver to ZNC (i) its Working Capital
Note; and (ii) the ZNC Note.
(l) Investor shall deliver to the Company the Company Note
Amount.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF ZNC
ZNC represents and warrants to Investor that the following are true and
correct as of the date hereof and will be true and correct, after delivery of
the Schedule Amendment, as of the Closing Date as if made on that date:
4.1 Organization. ZNC and each of the Companies is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. The Companies are qualified to do business in
the States listed on Schedule 4.1, and none of the Companies are required to be
qualified to do business as a foreign corporation in any other jurisdiction
where the failure to so qualify would have a material adverse effect on such
Company.
4.2 Power. ZNC and each of the Companies have all required corporate
power and authority to own their respective properties and to carry on their
respective businesses as presently conducted. ZNC, the Company and HOP have all
required power and authority to execute and deliver the Transaction Documents
and to carry out the transactions contemplated by the Transaction Documents. The
Certificate of Incorporation and Bylaws of each of the Companies (including the
Articles of Formation of HOP), copies of which have been provided to Investor,
are correct and complete.
4.3 Authorization. All action on the part of ZNC, the Company and HOP
necessary for the authorization, execution, delivery and performance of the
Transaction Documents by ZNC, the Company and HOP and the performance of all of
ZNC's, the Company's and HOP's obligations hereunder have been taken. The
Transaction Documents executed by ZNC, the Company and HOP
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are valid and binding obligations of ZNC, the Company and HOP enforceable
according to their terms, except as may be limited by (a) applicable bankruptcy,
insolvency, reorganization or other similar laws of general application relating
to or affecting the enforcement of creditor rights or the relief of debtors, (b)
laws and judicial decisions regarding indemnification for violations of federal
securities laws, and (c) the availability of specific performance or other
equitable remedies. The execution, delivery and performance of the Transaction
Documents have been duly authorized by all necessary action of ZNC, the Company
and HOP.
4.4 Capitalization. The authorized and issued capital stock of each of
the Companies and the names and ownership interests of their respective
shareholders is as set forth in Schedule 4.4. All of the presently outstanding
shares of capital stock of the Companies have been validly authorized and issued
and are fully paid and nonassessable. Except as provided in Schedule 4.4, none
of the Companies has issued any other shares of its capital stock and there are
no outstanding options, warrants, subscriptions or other rights or obligations
to purchase or acquire any of such shares, nor any outstanding securities
convertible into or exchangeable for such shares. Except as set forth on
Schedule 4.4 or as contemplated under the Transaction Documents, there are no
agreements to which ZNC or any of the Companies is a party or has knowledge
regarding the issuance, registration, voting or transfer of its outstanding
shares of capital stock of the Companies. No dividends are accrued but unpaid on
any capital stock of any of the Companies.
4.5 Preemptive Rights; Registration Rights. There are no preemptive
rights affecting the issuance or sale of any of the Companies' capital stock.
None of the Companies is under any contractual obligation to register (in
compliance with the filing requirements and being deemed effective under the
Securities Act) any of its presently outstanding securities or any of its
securities which may hereafter be issued.
4.6 Financial Statements. Schedule 4.6(a) contains correct and complete
copies of the Financial Statements. The Financial Statements are in accordance
with the books and records of the Companies, have been prepared consistent with
past practices, have been prepared in accordance with GAAP (except as set forth
in Schedule 4.6(b)) consistently applied and present fairly the financial
position of the Companies on the dates of such statements and the results of
their operations on a consolidated basis for the periods covered. The Companies
maintain their books, records and accounts in accordance with good business
practice and in sufficient detail to reflect accurately and fairly the
transactions and dispositions of its assets, liabilities and securities.
4.7 Liabilities and Obligations. Except as set forth in Schedule 4.7,
the Financial Statements reflect all liabilities of the Companies required to be
included therein in accordance with GAAP, and arising out of transactions
effected or events occurring on or prior to the date hereof and the Closing
Date. Except as set forth in the Financial Statements, none of the Companies is
liable upon or with respect to, or obligated in any other way to provide funds
in respect of or to guarantee or assume in any manner, any debt, obligation or
dividend of any person, corporation, association, partnership, joint venture,
trust or other entity (except of other Companies), and none of the Companies
knows of any basis for the assertion of any other claims or liabilities of any
nature or in
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any amount. HOP has no assets or liabilities, except it will assume the
Operating Leases prior to Closing as provided in this Agreement.
4.8 Employee Matters.
(a) Cash Compensation. Schedule 4.8(a) contains a complete and
accurate list of the names, titles and Cash Compensation of all executive
management of the Companies, regardless of compensation levels and all other
employees as of the date hereof. In addition, Schedule 4.8(a) contains a
complete and accurate description of (i) all increases in Cash Compensation of
such employees during the current calendar year, (ii) any promised increases in
Cash Compensation of such employees that have not yet been effected and (iii)
the amount of all accrued but unpaid incentive compensation as of December 31,
1998.
(b) Compensation Plans. Schedule 4.8(b) contains a complete
and accurate list of all Compensation Plans sponsored by the Companies or to
which any of the Companies contributes on behalf of its employees, other than
Employee Benefit Plans listed in Schedule 4.9(a) . The Compensation Plans
include without limitation plans, arrangements or practices that provide for
severance pay, deferred compensation, incentive, bonus or performance awards,
and stock ownership or stock options.
(c) Employment Agreements. Schedule 4.8(c) contains a complete
and accurate list of all written employment agreements and the terms of all oral
arrangements (other than those for normal employer/employee relationships which
are terminable at will) of the Companies (the "Employment Agreements"). The
Employment Agreements include, without limitation, employee leasing agreements,
employee services agreements, severance agreements and noncompetition
agreements.
(d) Employee Policies and Procedures. Schedule 4.8(d) contains
a complete and accurate list of all written Employee Policies and Procedures.
There are no material unwritten Employee Policies or Procedures.
(e) Unwritten Amendments. No material unwritten amendments
have been made, whether by oral communication, pattern of conduct or otherwise,
with respect to any Compensation Plans, Employment Agreements or Employee
Policies and Procedures.
(f) Labor Compliance. Except as set forth in Schedule 4.8(f),
since November 26, 1996, each of the Companies (i) has been and is in compliance
with all laws, rules, regulations and ordinances respecting employment and
employment practices, terms and conditions of employment and wages and hours,
and (ii) is not liable for any arrears of wages or penalties for failure to
comply with any of the foregoing. Except as set forth in Schedule 4.8(f), since
November 26, 1996, none of the Companies has engaged in any unfair labor
practice or discriminated on the basis of race, color, religion, sex, national
origin, age or handicap in its employment conditions or practices. Except as set
forth in Schedule 4.8(f), since November 26,
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1996, there are no (i) unfair labor practice charges or complaints or racial,
color, religious, sex, national origin, age or handicap discrimination charges
or complaints pending or threatened against any of the Companies before any
federal, state or local court, board, department, commission or agency nor to
its knowledge does any basis therefor exist or (ii) existing or threatened labor
strikes, disputes, grievances, controversies or other labor troubles affecting
any of the Companies, nor to its knowledge does any basis therefor exist.
(g) Unions. None of the Companies is a party to any agreement
with any union, labor organization or collective bargaining unit. No employees
of any of the Companies are represented by any union, labor organization or
collective bargaining unit. None of the employees of any of the Companies have
threatened to organize or join a union, labor organization or collective
bargaining unit.
(h) Aliens. To its knowledge, all of the employees of the
Companies are citizens of, or are authorized to be employed in, the United
States.
4.9 Employee Benefit Plans.
(a) Identification. Schedule 4.9(a) contains a complete and
accurate list of all Employee Benefit Plans sponsored by ZNC or any of the
Companies to which employees of the Companies participate in or are entitled to
benefits under or to which ZNC or any of the Companies contributes on behalf of
the employees of any of the Companies and all Employee Benefit Plans previously
sponsored or contributed to on behalf of those employees within the three years
preceding the date hereof. No unwritten amendment exists with respect to any
Employee Benefit Plan. Neither ZNC, any of the Companies nor any member of a
Controlled Group is or ever has been obligated to contribute to a multiemployer
plan within the meaning of Section 3(37) of ERISA.
(b) Administration. Each Employee Benefit Plan has been
administered and maintained in substantial compliance with all laws, rules and
regulations. No Employee Benefit Plan is currently the subject of an audit,
investigation, enforcement action or other similar proceeding conducted by any
state or federal agency. No prohibited transactions (within the meaning of
Section 4975 of the Code) have occurred with respect to any Employee Benefit
Plan. To its knowledge, no threatened or pending claims, suits or other
proceedings exist with respect to any Employee Benefit Plan other than normal
benefit claims filed by participants or beneficiaries.
(c) Qualification. ZNC or the Companies (as the case may be)
has received a favorable determination letter or ruling from the Internal
Revenue Service for each Employee Benefit Plan intended to be qualified within
the meaning of Section 401(a) of the Code and/or tax-exempt within the meaning
of Section 501(a) of the Code (although any such determination letter does not
apply to any requirements applicable to such plan with respect to which the
remedial amendment period for making amendments to such plan has not yet expired
under Revenue procedures, notices or other guidance of the Internal Revenue
Service.) No proceedings exist or to
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its knowledge have been threatened that could result in the revocation of any
such favorable determination letter or ruling.
(d) Funding Status. No accumulated funding deficiency (within
the meaning of Section 412 of the Code), whether waived or unwaived, exists with
respect to any Employee Benefit Plan or any plan sponsored by any member of a
Controlled Group. With respect to each Employee Benefit Plan subject to Title IV
of ERISA, the assets of each such plan are at least equal in value to the
present value of accrued benefits determined on an ongoing basis as of the date
hereof. With respect to each Employee Benefit Plan described in Section
501(c)(9) of the Code, the assets of each such plan are at least equal in value
to the present value of accrued benefits as of the date hereof. Neither ZNC, any
of the Companies nor any member of a Controlled Group has any liability to pay
excise taxes with respect to any Employee Benefit Plan under applicable
provisions of the Code or ERISA. The Financial Statements contain an accrual for
any liabilities as of the date thereof under any Employee Benefit Plans.
(e) PBGC. No facts or circumstances exist that would result in
the imposition of liability against Investor by the Pension Benefit Guaranty
Company as a result of any act or omission by ZNC, any of the Companies, or any
member of a Controlled Group. No reportable event (within the meaning of Section
4043 of ERISA) for which the notice requirement has not been waived has occurred
with respect to any Employee Benefit Plan subject to the requirements of Title
IV of ERISA.
(f) Retirees. None of the Companies has any obligation or
commitment to provide medical, dental or life insurance benefits to or on behalf
of any of its employees who may retire or any of its former employees who have
retired from employment with any of the Companies other than coverage mandated
by Sections 601 through 608 of ERISA and 4980(f) of the Code, short-term
extensions of coverage (such as for six months in the event of disability) or
other extensions required by law.
4.10 Absence of Certain Changes. Except as set forth in Schedule
4.10, since October 31, 1998, none of the Companies has:
(a) suffered any material adverse change, whether or not
caused by any deliberate act or omission of ZNC, any of the Companies or any
shareholder of ZNC or any of the Companies in its condition (financial or
otherwise), operations, assets, liabilities or business;
(b) contracted for the purchase of any capital assets having a
cost in excess of $100,000 or paid any capital expenditures in excess of
$100,000, except for any such purchases or payments related to the completion of
the Villages;
(c) incurred any indebtedness for borrowed money or issued or
sold any debt securities except in the ordinary course of business;
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(d) incurred or discharged any liabilities or obligations
except in the ordinary course of business;
(e) paid any amount on any indebtedness prior to the due date,
forgiven or canceled any debts or claims or released or waived any rights or
claims, except in the ordinary course of business;
(f) mortgaged, pledged or subjected to any security interest,
lien, lease or other charge or encumbrance any of its properties or assets,
except in the ordinary course of business;
(g) suffered any damage or destruction to or loss of any
assets (whether or not covered by insurance) that has materially adversely
affected, or could materially adversely affect, its business;
(h) acquired or disposed of any assets except in the ordinary
course of business;
(i) written up or written down the carrying value of any of
its assets;
(j) changed any accounting principles, methods or practices
followed or changed the costing system or depreciation methods of accounting for
its assets;
(k) waived any rights or forgiven any claims of over $10,000;
(l) lost, terminated or been advised of any substantial change
in the relationship with any salaried employee, customer or supplier, which
termination or change has materially and adversely affected, or could materially
and adversely affect, its business or assets;
(m) increased the compensation of any director or officer;
(n) increased the compensation of any employee except in the
ordinary course of business;
(o) made any payments to or loaned any money to any person or
entity referred to in Section 4.23;
(p) formed or acquired or disposed of any interest in any
corporation, partnership, joint venture or other entity;
(q) redeemed, purchased or otherwise acquired, or sold,
granted or otherwise disposed of, directly or indirectly, any of its capital
stock or securities or any rights to acquire such capital stock or securities,
or agreed to change the terms and conditions of any such rights or paid any
dividends or made any distribution to the holders of its capital stock;
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(r) entered into any material agreement with any person or
group, or modified or amended in any material respect the terms of any such
existing material agreement except in the ordinary course of business; or
(s) entered into, adopted or amended any Employee Benefit
Plan.
4.11 Commitments.
(a) Commitments; Defaults. Except as set forth in Schedule
4.11, none of the Companies has entered into and remains obligated under, nor
are the stock, the assets or the business of any of the Companies bound by,
whether or not in writing, any
(i) partnership or joint venture agreement;
(ii) deed of trust or other security agreement in
respect of any obligation in excess of $10,000;
(iii) guaranty or suretyship, indemnification or
contribution agreement or performance bond in respect of any obligation
in excess of $10,000;
(iv) employment, consulting or compensation
agreement or arrangement (other than those for normal employer/employee
relationships which are terminable at will), including the election or
retention in office of any director or officer;
(v) labor or collective bargaining agreement;
(vi) debt instrument, loan agreement or other
obligation relating to indebtedness for borrowed money or money lent or
to be lent to another in excess of $10,000;
(vii) deed or other document currently in effect
evidencing an interest in or contract to purchase or sell real
property;
(viii) agreement with dealers or sales or commission
agents, investment bankers, financial advisors, business brokers,
public relations or advertising agencies, accountants or attorneys
providing for payments in excess of $10,000 in any year;
(ix) lease of real or personal property, whether as
lessor, lessee, sublessor or sublessee (excluding the real estate
leases set forth on Schedule 2.5(a) and (b)) providing for payments in
excess of $10,000 in any year;
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(x) agreement between any of the Companies and any
affiliate of ZNC or any of the Companies;
(xi) agreement relating to any material matter or
transaction in which a material interest is held by a person or entity
that is an affiliate of ZNC or any of the Companies;
(xii) any agreement out of the ordinary course of
business for the acquisition of services, supplies, equipment or other
personal property and involving more than $100,000 in the aggregate;
(xiii) powers of attorney;
(xiv) contracts containing noncompetition covenants;
(xv) any other contract or arrangement that
involves either an unperformed commitment in excess of $100,000 or in
excess of $5,000 if it terminates more than 30 days after the date
hereof;
(xvi) agreement relating to any matter or
transaction in excess of $5,000 and in which an interest is held by any
person or entity referred to in Section 4.23;
(xvii) agreement providing for the purchase from a
supplier of all or substantially all of the requirements of any of the
Companies of a particular product or service for an amount in excess of
$5,000; or
(xviii) any other agreement or commitment not made in
the ordinary course of business providing for payments in amounts or
the provisions of services having a value in excess of $10,000.
All of the foregoing are hereinafter collectively referred to as the
"Commitments." True, correct and complete copies of the written Commitments, and
true, correct and complete written descriptions of the oral Commitments, have
heretofore been delivered or made available to Investor. There are no existing
material defaults, events of default or events, occurrences, acts or omissions
that, with the giving of notice or lapse of time or both, would constitute
defaults by any of the Companies, and no penalties have been incurred nor are
amendments pending, with respect to the Commitments. The Commitments are in full
force and effect and are valid and enforceable obligations of the parties
thereto in accordance with their respective terms, and no defenses, off-sets or
counterclaims have been asserted or to its knowledge may be made by any party
thereto, nor has any of the Companies waived any rights thereunder.
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(b) No Cancellation or Termination of Commitment. Except as
contemplated hereby, neither ZNC nor any of the Companies has received written
notice of any plan or intention of any other party to any Commitment to exercise
any right to cancel or terminate any Commitment or agreement, and neither ZNC
nor any of the Companies knows of any fact that would justify the exercise of
such a right. Neither ZNC nor any of the Companies currently contemplates, or
has reason to believe any other person or entity currently contemplates, any
amendment or change to any Commitment.
4.12 Insurance. A list and brief description of all insurance policies
of each of the Companies are set forth in Schedule 4.12.
4.13 Patents, Trademarks, Service Marks and Copyrights.
(a) Ownership. The Company or ZNC owns the federally registered
trademark and tradename "HomeMax" and "Home Sweet Home" without conflict with
the rights of others and at the Closing, if ZNC is the owner, it shall assign
all of its rights in and to such trademark and tradename to the Company. Each of
the Companies owns all other patents, trade-marks, software, service marks and
copyrights, if any, necessary to conduct their business, or possess adequate
licenses or other rights, if any, therefor, without conflict with the rights of
others.
(b) Conflicting Rights of Third Parties. Each of the Companies has
the sole and exclusive right to use the Proprietary Rights without infringing or
violating the rights of any third parties. Except as set forth in Schedule
4.13(b), use of the Proprietary Rights does not require the consent of any other
person and the Proprietary Rights are freely transferable. No claim has been
asserted by any person to the ownership of or right to use any Proprietary Right
or challenging or questioning the validity or effectiveness of any license or
agreement constituting a part of any Proprietary Right. Each of the Proprietary
Rights is valid and subsisting, has not been canceled, abandoned or otherwise
terminated and, if applicable, has been duly issued or filed.
(c) Claims of Other Persons. Neither ZNC nor any of the Companies
has knowledge of any claim that, or inquiry as to whether, any product, activity
or operation of any of the Companies infringes upon or involves, or has resulted
in the infringement of, any proprietary right of any other person, corporation
or other entity; and no proceedings have been instituted, are pending or to its
knowledge are threatened that challenge the rights of any of the Companies with
respect thereto. None of the Companies has given and is bound by any agreement
of indemnification for any Proprietary Right as to any property manufactured,
used or sold by it.
4.14 Tax Matters. All required foreign, federal, state, local and other
tax returns, notices and reports (including, without limitation, income,
property, sales, use, franchise, capital stock, excise, added value, employees'
income withholding, social security and unemployment tax returns) of each of the
Companies have been accurately prepared and duly and timely filed, and all
foreign, federal, state, local and other taxes required to be paid with respect
to the periods covered by such returns have been paid. The Companies are not and
have not been delinquent in the payment of any
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tax, assessment or governmental charge. The Companies are not and never had any
tax deficiency proposed or assessed against them and have not executed any
waiver of any statute of limitations on the assessment or collection of any tax
or governmental charge. Except for sales tax audits, none of the Companies'
franchise tax returns has ever been audited by governmental authorities. No tax
audit, action, suit, proceeding investigation or claim is now pending nor to its
knowledge threatened against any of the Companies, and to its knowledge no issue
or question has been raised (and is currently to its knowledge pending) by any
taxing authority in connection with any of the Companies' tax returns or
reports.
The reserves for taxes, assessments and governmental charges reflected
in the Financial Statements are sufficient for the payment of all unpaid taxes
and governmental charges payable by the Companies with respect to the period
ended December 31, 1998. Since January 1, 1998, the Companies have made adequate
provisions on their respective books of account for all taxes, assessments and
governmental charges with respect to their respective businesses, properties and
operations for such period. The Companies have withheld or collected from each
payment made to each of its employees, the amount of all taxes (including, but
not limited to, federal income taxes, Federal Insurance Contribution Act taxes
and Federal Unemployment Tax Act taxes) required to be withheld or collected
therefrom, and have paid the same to the proper tax receiving officers or
authorized depositories. ZNC is responsible for, and shall pay, any tax
liability arising from the business of the Companies prior to the Closing Date
except as provided for in the Financial Statements.
4.15 Title to Assets; Condition of Assets. Except as disclosed on
Schedule 4.15(a), the Companies have good and marketable title to, or a valid
leasehold interest in, their respective assets, including, without limitation,
those reflected on the Financial Statements (other than those since disposed of
in the ordinary course of business), free and clear of all security interests,
liens, charges and other encumbrances, except for (a) liens for taxes and
assessments, as listed on Schedule 4.15(b), not yet due and payable or being
contested in good faith in appropriate proceedings, as listed on Schedule
4.15(b), and (b) encumbrances that are incidental to the conduct of their
respective businesses or ownership of property, not incurred in connection with
the borrowing of money or the obtaining of credit, and which do not in the
aggregate materially detract from the value of the assets affected or materially
impair their use by the Company or the Subsidiaries, as the case may be, and (c)
easements, restrictions, encroachments and conditions which do not have a
material adverse effect on the use of such asset (collectively, the "Permitted
Exceptions"). The Companies lease the personal property with a value in excess
of $1,000 described on Schedule 2.5(a) attached hereto, all of which leases are
valid and subsisting and none of them is in default. The Companies possess all
tools which have been provided to them by any suppliers or which they lease, all
of which tools are in good working order, wear and tear excepted, except for
such tools at any manufacturing plant where the obligation with respect to
returning any such tools that are missing or do not work does not exceed $5,000
in the aggregate. All real property leases under which the Companies are
operating are valid and subsisting and none of them is in default. A listing of
said leases, their terms and current monthly lease payments is attached hereto
as Schedule 2.5(b).
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4.16 Real Property. A description of all interests in real property
owned by the Companies (collectively, the "Real Property") is set forth on
Schedule 4.16 and Schedule 4.29(b). Except as set forth on Schedule 4.15(a), the
Companies have good, valid and marketable title to all the Real Property,
subject to Permitted Exceptions.
4.17 Effect of Transactions; Compliance with Obligations. Except as set
forth on Schedule 4.17, the execution, delivery and performance of this
Agreement by ZNC, the Company and HOP, and the consummation of the transactions
contemplated by the Transaction Documents and the performance of the businesses
of the Companies as now conducted, does not and will not violate any terms of
the articles of incorporation or bylaws of any of the Companies or violate any
judgment, decree or order, or any material contract or obligation of ZNC or any
of the Companies, or any statute, rule or regulation of any federal, state or
local government or agency applicable to ZNC or any of the Companies, or any
material contract to which any employee of any of the Companies is bound.
4.18 Litigation. Except as set forth in Schedule 4.18, there is no
litigation, arbitration or governmental proceeding or investigation pending or,
to the knowledge of ZNC or the Companies threatened (a) against the Companies,
(b) affecting any of the properties or assets of any of the Companies or (c)
against any officer, director, shareholder or employee of any of the Companies
in such capacity or relating to his prior employment relationships.
4.19 Legal Compliance. Each of the Companies has all material
franchises, permits, licenses and other rights and privileges necessary to
permit it to own its properties and to conduct its business as presently
conducted. Except as set forth on Schedule 4.19, the business and operations of
each of the Companies has been and is being conducted in all material respects
in accordance with all applicable laws, rules and regulations, and none of the
Companies is in material violation of any judgment, law or regulation.
4.20 Subsidiaries; Joint Ventures. Except as listed in Schedule 4.20,
the Company does not have any direct or indirect Subsidiary. The Company and HOP
are each wholly-owned by ZNC, and each of the entities listed in Schedule 4.20
is wholly-owned by the Company.
4.21 Brokerage. There are no claims for brokerage commissions, finder's
fees or similar compensation in connection with the transactions contemplated by
this Agreement based on any arrangement or agreement made by ZNC or any of the
Companies. ZNC agrees to indemnify and hold Investor harmless for any such
brokerage commissions, finders fees or similar compensation.
4.22 Disclosure. To the knowledge of ZNC, this Agreement, the Exhibits
and Schedules hereto and the information furnished in writing to Investor, when
taken as a whole, do not contain any untrue statement of material fact or, to
the knowledge of ZNC and the Companies, omit any material fact necessary in
order to make the statements not misleading.
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4.23 Ownership Interests of Interested Persons. Except as set forth in
Schedule 4.23, and except for the ownership of less than 1% of the equity of a
publicly-traded company, no officer, director or member of management of any of
the Companies, or their respective spouses or children, owns directly or
indirectly, on an individual or joint basis, any material interest in, or serves
as an officer or director of, any customer, supplier, any organization that has
a material contract or arrangement with any of the Companies, or any
organization that has a material contract or arrangement with a competitor of
any of the Companies.
4.24 Investments in Competitors. Except for the ownership of less than
1% of the equity of a publicly-traded company, no officer, director or member of
management of any of the Companies owns directly or indirectly any interests or
has any investment in any corporation, business or other person that is a
competitor of any of the Companies.
4.25 Environmental Matters. Neither the Companies nor any of their
respective assets is currently in violation of, or subject to any existing,
pending or to its knowledge threatened investigation or inquiry by any
governmental authority or to any remedial obligations under, any laws or
regulations pertaining to health or the environment (hereinafter sometimes
collectively called "Environmental Laws"), and this representation and warranty
would continue to be true and correct following disclosure to the applicable
governmental authorities of all relevant facts, conditions and circumstances, if
any, pertaining to the assets and operations of the Companies. The assets of the
Companies have never been used by the Companies in a manner that would be in
violation of any of the Environmental Laws. The Companies have obtained all
permits, licenses or similar authorizations to construct, occupy, operate or use
any buildings, improvements, fixtures and equipment owned or leased by the any
of the Companies by reason of any Environmental Laws. None of the assets owned
or leased by the Companies are on any federal or state "Superfund" list or
subject to any environmentally related liens.
4.26 Certain Payments. Neither the Companies nor any of their
respective directors, officers or employees has paid or caused to be paid,
directly or indirectly, in connection with the business of any of the Companies:
(a) to any government or agency thereof or any agent of any supplier or customer
any bribe, kick-back or other similar payment; or (b) any contribution to any
political party or candidate (other than from personal funds of directors,
officers or employees not reimbursed by their respective employers or as
otherwise permitted by applicable law).
4.27 Government Inquiries. Except as set forth in Schedule 4.27, since
November 26, 1996, there have been no material inspection reports,
questionnaires, inquiries, demands or requests for information received by any
of the Companies, or any material statement, report or other document filed by
any of the Companies with, the federal government or any federal administrative
agency.
4.28 Consents. Except as set forth on Schedule 4.28, no consent,
authorization, approval, permit or license of, or filing with, any governmental
or public body or authority, any lender or lessor or any other person or entity
is required to authorize, or is required in connection with, the
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execution, delivery and performance of the Transaction Documents on the part of
ZNC, the Company or HOP.
4.29 Inventory. The inventory included in the Financial Statements is
valued in accordance with GAAP, with appropriate reserves. Each of the Companies
has sufficient quantities of inventories appropriate, taken as a whole, to
conduct its business consistently with past practices. All of such inventories
are in good, current, standard and merchantable condition and are not obsolete
or defective. Set forth on Schedule 4.29(a) is a listing of new and used homes
(by brand, model and single/double wide) for each home on the Companies' retail
sales centers (excluding display inventory under Schedule 2.6) as of December
31, 1998 and included in the Financial Statements. Set forth on Schedule 4.29(b)
is a listing of retail lots owned by or under contract with the Companies.
4.30 Books of Account. The books of account of each of the Companies
have been kept accurately in the ordinary course of business, the transactions
entered therein represent bona fide transactions and the revenues, expenses,
assets and liabilities of the Companies have been properly recorded in such
books.
4.31 Accounts Receivable. The Financial Statements set forth the
accounts receivable of the Companies from sales made as of December 31, 1998,
and the payments and rights to receive payments related thereto. All such
accounts receivable have arisen from bona fide transactions in the ordinary
course of business and are valid and enforceable claims subject to no right of
set-off or counterclaim.
4.32 Distributions and Repurchases. Since January 1, 1998, no
distribution, payment or dividend of any kind has been declared or paid by any
of the Companies on any of their capital stock. No repurchase of any of the
capital stock of any of the Companies has been approved or effected.
4.33 Product Warranties. There are no claims against any of the
Companies on account of product warranties or with respect to the manufacture,
sale or rental of defective products and there is no basis for any such claim on
account of defective products heretofore manufactured, sold or rented that is
not fully covered by insurance or the reserves for warranties shown in the
Financial Statements.
4.34 Year 2000 Compliance. The Company has made a detailed inquiry of
its own business and the Subsidiaries with respect to Year 2000 Compliance. The
Companies' information technology systems are in all respects Year 2000
Compliant. Year 2000 Compliance will not cause the Companies to suffer an
adverse change in their business condition (financial or otherwise), operating,
properties or prospects. To the Company's knowledge, the Companies' suppliers
and vendors are or will be Year 2000 Compliant for their own computer
applications.
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4.35 Completion of Villages. As of December 31, 1998, all construction
of the Companies fourteen (14) villages as described on Schedule 4.35(i) (the
"Villages") has been completed in all material respects and except as set forth
on Schedule 4.35(ii), the Villages are fully operational or are in a state ready
to be fully operational (e.g., model homes have been set up and furnished,
office has been furnished and fully functional) and all construction payables
and all other obligations of the Companies with respect to the Villages have
been paid in full (the "Village Obligations").
ARTICLE 5.
REPRESENTATIONS OF INVESTOR
Investor represents and warrants to ZNC that the following are true as
of the date hereof and will be true and correct through the Closing Date as if
made on that date:
5.1 Authorization. All action on the part of Investor necessary for the
authorization, execution, delivery and performance of the Transaction Documents
by Investor and the performance of all of Investor's obligations hereunder have
been taken. The Transaction Documents executed by Investor are valid and binding
obligations of Investor enforceable according to their terms, except as may be
limited by (a) applicable bankruptcy, insolvency, reorganization or other
similar laws of general application relating to or affecting the enforcement of
creditor rights or the relief of debtors, (b) laws and judicial decisions
regarding indemnification for violations of federal securities laws, and (c) the
availability of specific performance or other equitable remedies. The execution,
delivery and performance of the Transaction Documents have been duly authorized
by all necessary action of Investor.
5.2 Status of Investor. Investor is knowledgeable and experienced in
making venture capital investments, is able to bear the economic risk of loss of
its investment in the Company. Investor is an "accredited investor," as that
term is defined in Rule 501(a) of Regulation D under the Securities Act.
Investor is acting on its own behalf in connection with the investigation and
examination of the Company and its decision to execute these documents.
5.3 Shares Purchased for Investment. Investor agrees that any shares of
Common Stock acquired in accordance with the transactions contemplated by this
Agreement shall be acquired solely for Investor's own account and not as a
nominee or agent for any other person, for investment, and not with a view to,
or for offer or resale in connection with, any distribution thereof within the
meaning of the Securities Act or other applicable securities laws. Investor
understands that if any shares of Common Stock so acquired have not been
registered under the Securities Act or under any applicable blue sky or other
state securities law or regulation (hereinafter collectively referred to as
"blue sky laws"), Investor cannot offer for sale, sell, pledge, transfer or
otherwise dispose of such shares of Common Stock unless such shares of Common
Stock have been registered under the Securities Act and under any applicable
blue sky laws, or unless an exemption from such registration is available with
respect to any such proposed offer, sale, pledge, transfer or other disposition.
Investor agrees that a restrictive legend addressing the foregoing restrictions
on transfer may be placed on certificates representing any shares of Common
Stock so acquired and that transfer of such
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shares of Common Stock may be refused by the Company or its transfer agent, if
any, if in the opinion of counsel to the Company any proposed sale or other
disposition thereof by Investor would not be in compliance with the Securities
Act or any other applicable federal securities laws or blue sky laws.
5.4 Brokerage. There are no claims for brokerage commissions, finder's
fees or similar compensation in connection with the transactions contemplated by
this Agreement based on any arrangement or agreement made by Investor. Investor
agrees to indemnify and hold ZNC harmless for any such brokerage commissions,
finders fees or similar compensation.
5.5 Litigation. There is no litigation, arbitration or governmental
proceeding or investigation pending or, to the knowledge of Investor, threatened
in writing against Investor, which conflicts with the rights of ZNC, the Company
or HOP hereunder or the performance of Investor's obligations hereunder or have
a material adverse effect on Investor's financial position. Investor is not
subject to any judgment, order or decree which may prevent Investor from
conducting its business. Investor is not a party to any litigation, arbitration,
proceeding or investigation pending, or to the knowledge of Investor threatened,
involving any federal, state or local government or agency which would conflict
with, or in any way impact, Investor's ability to perform its duties hereunder,
or have a material adverse effect on Investor's financial position.
5.6 Organization. Investor is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas. Investor is
not barred or otherwise prevented from doing business in any jurisdiction where
the failure to conduct such business would have a material adverse effect on
Investor.
5.7 Effect of Transactions. The execution, delivery and performance of
this Agreement by Investor, and the consummation of the transactions
contemplated by the Transaction Documents, does not and will not violate any
terms of the Articles of Incorporation or Bylaws of Investor or violate any
judgment, decree or order, or any material contract or obligation of Investor,
or any material statute, rule or regulation of any federal, state or local
government or agency applicable to Investor.
5.8 Financial Statements. The consolidated balance sheets and the
related statements of income, shareholders' equity and cash flow (including the
notes related thereto) of Investor and its consolidated subsidiaries included in
the forms, documents and reports filed by Investor with the Securities and
Exchange Commission (the "Commission") complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the Commission with respect thereto, have been prepared in
accordance with GAAP applied on a basis consistent with prior periods (except as
otherwise noted therein) and present fairly the consolidated financial position
of Investor and its consolidated subsidiaries as of their respective dates, and
the results of their operations and their cash flow for the periods presented
therein. Investor has not suffered any material adverse change, whether or not
caused by any deliberate act or omission of
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Investor or any shareholders of Investor, in its condition (financial or
otherwise), operations, assets, disabilities or business since November 30,
1998.
5.9 Power. Investor has all required corporate power and authority to
own its properties and to carry on its business as presently conducted. Investor
has all required power and authority to execute and deliver the Transaction
Documents and to carry out the transactions contemplated by the Transaction
Documents.
5.10 Consents. Except as set forth on Schedule 5.10, no consent,
authorization, approval, permit or license of, or filing with, any governmental
or public body or authority, any lender or lessor or any other person or entity
is required to authorize, or is required in connection with, the execution,
delivery and performance of the Transaction Documents on the part of Investor.
5.11 1934 Act. Investor has furnished or made available to ZNC a true
and complete copy of its definitive proxy statement in connection with the most
recent annual meeting of its shareholders, its annual report and Form 10-K for
the fiscal year ended May 31, 1998, and its Form 10-Q for the quarters ended
August 31, 1998 and November 30, 1998 and any other document dated on or after
the date of its last Form 10-K which Investor filed under the Securities
Exchange Act of 1934, as amended with the Securities and Exchange Commission.
ARTICLE 6.
ZNC'S, THE COMPANY'S AND HOP'S COVENANTS
ZNC, the Company and HOP, jointly and severally, agree that between the
date hereof and the Closing:
6.1 Consummation of Agreement. ZNC, the Company and HOP shall use their
best efforts to cause the consummation of the transactions contemplated hereby
in accordance with their terms and conditions.
6.2 Business Operations. The Company and HOP shall, and ZNC shall cause
the Company and HOP to, operate the businesses of the Companies in the ordinary
course, consistent with past practices and except as contemplated herein, the
Companies shall not: (a) declare, pay or make any dividends or distributions on
their capital stock; (b) enter into any agreement (oral or written) with their
directors, officers or salaried employees except as agreed to by Investor; (c)
increase the compensation of their directors or officers; (d) increase the
compensation of any employee except in the ordinary course of business; (e) make
capital expenditures (or enter into commitments to make capital expenditures) in
excess or $100,000 (either individually or in the aggregate) except for the
planned expenditures to complete construction of the Villages; (f) issue any
capital stock or capital stock equivalents (including options and warrants) to
purchase capital stock; or (g) incur indebtedness or other liabilities other
than in the ordinary course of business and consistent with past practice. ZNC,
the Company and HOP shall use reasonable commercial efforts
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to preserve the business of the Companies intact, to retain the present
customers and suppliers so that they will be available to the Companies after
the Closing.
6.3 Access. ZNC, the Company and HOP shall permit Investor and its
authorized representatives for any reasonable purpose access to, and make
available for inspection, at all reasonable times, all of the assets and
business of the Companies, including their respective employees (after receiving
written consent from Ronald Gratz, Chief Financial Officer of ZNC), customers,
suppliers, properties contracts, books and records and all other documents and
data and permit Investor and its authorized representatives to inspect and make
copies of all documents, records and information with respect to the affairs of
the Companies as Investor and its representatives may request, all for the sole
purpose of permitting Investor to become familiar with the business and assets
and liabilities of the Companies.
6.4 Material Change. ZNC shall promptly inform Investor in writing of
any material adverse change in the condition (financial or otherwise),
operations, assets, liabilities, or business prospects of any of the Companies.
Notwithstanding the disclosure to Investor of any such material adverse change,
neither ZNC, the Company nor HOP shall be relieved of any liability for, nor
shall the providing of such information by ZNC, the Company or HOP to Investor
be deemed a waiver by Investor of, the breach of any representation, warranty or
covenant of ZNC, the Company or HOP contained in this Agreement.
6.5 Approvals of Third Parties. ZNC, the Company and HOP shall use
their best efforts to secure, as soon as practicable after the date hereof, all
necessary approvals and consents of third parties to the consummation of the
transactions contemplated hereby.
6.6 No Negotiation with Others. Neither ZNC, the Company nor HOP shall
solicit or participate in negotiations with (and ZNC, the Company and HOP shall
use their best efforts to prevent any affiliate, shareholder, director, officer,
employee or other representative or agent of ZNC or the Companies from
negotiating with, soliciting or participating in negotiations with) any person,
entity of organization with respect to any proposal for a business combination,
acquisition or purchase involving any of the assets or capital stock of any of
the Companies or any transaction inconsistent with those contemplated hereby.
6.7 Amendment of Schedules. The Company, ZNC and HOP shall amend the
Schedules attached hereto by providing written notice of such amendment to
Investor at least five business days before the Closing Date (the "Schedule
Amendment"). Any such notice shall clearly state that it is being delivered
pursuant to this Section 6.7 and that it is a Schedule Amendment.
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ARTICLE 7.
INVESTOR'S COVENANTS
Investor agrees that between the date hereof and the Closing:
7.1 Consummation of Agreement. Investor shall use its best efforts to
cause the consummation of the transactions contemplated hereby in accordance
with their terms and conditions.
7.2 Approvals of Third Parties. Investor shall use its best efforts to
secure, as soon as practicable after the date hereof, all necessary approvals
and consents of third parties to the consummation of the transactions
contemplated hereby.
7.3 Material Change. Investor shall promptly inform ZNC in writing of
any material adverse change in the condition (financial or otherwise),
operations, assets, liabilities, or business prospects of Investor.
Notwithstanding the disclosure to ZNC of any such material adverse change,
Investor shall not be relieved of any liability for, nor shall the providing of
such information by Investor to ZNC be deemed a waiver by ZNC of, the breach of
any representation, warranty or covenant of Investor contained in this
Agreement.
ARTICLE 8.
INDEMNIFICATION
8.1 Indemnification by ZNC. Subject to the terms and conditions of this
Article 8, ZNC agrees to indemnify, defend and hold Investor and its directors,
officers, agents, attorneys and affiliates harmless from and against all losses,
claims, obligations, demands, assessments, penalties, liabilities, costs,
damages, attorneys' fees and expenses (collectively, "Damages"), asserted
against or incurred by such indemnitees by reason of or resulting from: (a) a
breach of any representation, warranty or covenant of ZNC, the Company or HOP
contained herein, in any exhibit, schedule, certificate or financial statement
delivered hereunder, or in any Transaction Document; (b) any investigation,
testing or remediation work on, or permits required for, the properties of the
Companies which is necessary or advisable under or pursuant to Environmental
Laws arising out of conditions occurring after acquisition of such property by
the Companies and prior to the Closing Date (it being specifically agreed that
ZNC shall be responsible for all Damages pertaining to the matters set forth on
Schedule 8.1); (c) except as provided for in the Financial Statements, any
liabilities, contingent or otherwise (known or unknown and asserted or
unasserted) of any of the Companies arising out of transactions effected or
events occurring on or prior to the Closing Date; (d) except as provided for in
the Financial Statements, all taxes of the Companies for periods occurring on or
prior to the Closing Date; (e) except as provided for in the Financial
Statements, any legal actions relating to any acts or occurrences which happened
prior to the Closing on or prior to the Closing Date. In addition, ZNC shall
indemnify and hold harmless the above indemnities for all Damages in connection
with (i) the termination of the Company Option Plan and Repurchase Plan as
provided in Section 10.5 below (including, without limitation, payments made to
repurchase
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<PAGE> 42
options issued under the Company Option Plan) or (ii) any material adverse
change contained in any Schedule Amendment, which material adverse change was
not known by ZNC, the Company or HOP prior to the date of this Agreement.
8.2 Indemnification by Investor. Subject to the terms and conditions of
this Article 8, Investor hereby agrees to indemnify, defend and hold ZNC and its
directors, officers, agents, attorneys and affiliates harmless from and against
all Damages asserted against or incurred by any of such indemnitees by reason of
or resulting from a breach of any representation, warranty or covenant of
Investor contained herein or in any exhibit, schedule or certificate delivered
hereunder, or in any Transaction Document.
8.3 Limitations on Indemnification Obligations.
(a) Except as provided in (b) below, neither ZNC nor Investor
shall be liable for Damages in an amount exceeding $8 million (the "Maximum
Amount").
(b) Neither ZNC nor Investor shall be liable for indemnification
under Article 8 until the aggregate amount of Damages incurred by the other
party exceeds One Hundred Thousand Dollars ($100,000) (the "Threshold Amount");
provided, however, that if the Damages exceed the Threshold Amount, then such
indemnifying party's obligation under this Article 8 shall be the difference
between the Maximum Amount of the Damages and the Threshold Amount; and provided
further, however, that the Threshold Amount shall not apply to the Damages in
excess of $10,000 arising out of the matters set forth in Schedule 4.8(f); and
provided further, however, that neither the Maximum Amount nor the Threshold
Amount shall apply to the matters set forth in the last sentence of Section 8.1
above.
8.4 Conditions of Indemnification. The respective obligations and
liabilities of ZNC and Investor (the "indemnifying party") to the other (the
"party to be indemnified") under Sections 8.1 and 8.2 with respect to claims
resulting from the assertion of liability by third parties shall be subject to
the following terms and conditions:
(a) Within 20 days (or such earlier time as might be required to
avoid prejudicing the indemnifying party's position) after receipt of notice of
commencement of any action evidenced by service of process or other legal
pleading, the party to be indemnified shall give the indemnifying party written
notice thereof together with a copy of such claim, process or other legal
pleading, and the indemnifying party shall have the right to undertake the
defense thereof by representatives of its own choosing and at its own expense;
provided that the party to be indemnified may participate in the defense with
counsel of its own choice, the fees and expenses of which counsel shall be paid
by the party to be indemnified unless (i) the indemnifying party has agreed to
pay such fees and expenses, (ii) the indemnifying party has failed to assume the
defense of such action or (iii) the named parties to any such action (including
any impleaded parties) include both the indemnifying party and the party to be
indemnified and the party to be indemnified has been advised by counsel that
there may be one or more legal defenses available to it that are different from
or additional to
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those available to the indemnifying party (in which case, if the party to be
indemnified informs the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action on behalf of
the party to be indemnified, it being understood, however, that the indemnifying
party shall not, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of more than one separate firm of attorneys at any time for the
party to be indemnified, which firm shall be designated in writing by the party
to be indemnified).
(b) In the event that the indemnifying party, by the 30th day
after receipt of notice of any such claim (or, if earlier, by the 10th day
preceding the day on which an answer or other pleading must be served in order
to prevent judgment by default in favor of the person asserting such claim),
does not elect to defend against such claim, the party to be indemnified will
(upon further notice to the indemnifying party) have the right to undertake the
defense, compromise or settlement of such claim on behalf of and for the account
and risk of the indemnifying party and at the indemnifying party's expense,
subject to the right of the indemnifying party to assume the defense of such
claims at any time prior to settlement, compromise or final determination
thereof.
(c) Notwithstanding the foregoing, the indemnifying party shall
not settle any claim without the consent of the party to be indemnified unless
such settlement involves only the payment of money and the claimant provides to
the party to be indemnified a release from all liability in respect of such
claim. If the settlement of the claim involves more than the payment of money,
the indemnifying party shall not settle the claim without the prior consent of
the party to be indemnified.
(d) The party to be indemnified and the indemnifying party will
each cooperate with all reasonable requests of the other.
(e) Any claim shall be net of the receipt of any insurance
proceeds paid to a Party under any policy or policies of insurance covering the
loss giving rise to the claim. Each Party will use reasonable efforts to collect
any such insurance and will account to the other Party therefor. Each Party
agrees to respond promptly to any inquiry by the other Party as to the status of
any such insurance payment.
8.5 Waiver. No waiver by any party of any default or breach by another
party of any representation, warranty, covenant or condition contained in this
Agreement, any exhibit or any document, instrument or certificate contemplated
hereby shall be deemed to be a waiver of any subsequent default or breach by
such party of the same or any other representation, warranty, covenant or
condition. No act, delay, omission or course of dealing on the part of any party
in exercising any right, power or remedy under this Agreement or at law or in
equity shall operate as a waiver thereof or otherwise prejudice any of such
party's rights, powers and remedies. All remedies, whether at law or in equity,
shall be cumulative and the election of any one or more shall not constitute a
waiver of the right to pursue other available remedies.
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8.6 Remedies Exclusive. The remedies provided in this Article 8 shall
be the exclusive remedies available to the parties, except in the case of fraud.
8.7 Offset. Any and all amounts owing or to be paid by any Party to any
other Party, hereunder or otherwise, shall be subject to offset and reduction
pro tanto by any amounts ("Offset Amounts") that have been determined by a court
of competent jurisdiction or by settlement of the Parties or by agreement of the
Parties to be owing at any time by such other Party to such Party in respect of
any failure or breach of any representation, warranty or covenant of such other
Party under or in connection with the Transaction Documents with such Party or
any transaction contemplated hereby or thereby.
8.8 Indemnification, Costs, Expenses and Legal Fees. Each Party that is
shown to have breached the Transaction Documents hereby agrees to pay the costs
and expenses (including reasonable attorneys' fees and expenses) incurred by any
other Party in successfully (i) enforcing any of the terms of this Agreement
against such breaching Party or (ii) proving that another Party breached any of
the terms of this Agreement.
8.9 Specific Performance. The Parties acknowledge that a refusal by a
Party to consummate the transactions contemplated hereby will cause irreparable
harm to the other Parties, for which there may be no adequate remedy at law and
for which the ascertainment of damages would be difficult. Therefore, a Party
shall be entitled, in addition to, and without having to prove the inadequacy
of, other remedies at law, to specific performance of this Agreement, as well as
injunctive relief (without being required to post bond or other security).
8.10 Insurance and Warranties. With respect to Damages that may be
subject to insurance recovery or manufacturer's warranty, Article 8 shall not be
enforced against the indemnifying party until the party to be indemnified has
first made a claim for Damages against the appropriate insurer or manufacturer.
Notwithstanding the foregoing, the party to be indemnified may (a) give notice
of such possible claim immediately and (b) pursue indemnification against the
indemnifying party under this Article 8 upon the earlier of (i) rejection of
such claim; or (ii) the passage of nine months from the date such claim was
submitted if no resolution has been reached with the insurer or manufacturer.
The indemnifying party shall be entitled to an assignment of the rights against
such insurer or manufacturer upon payment of such indemnification claim up to
the amount so indemnified.
8.11 Survival of Representations and Warranties. The representations
and warranties contained herein shall survive the Closing and all statements
contained in any certificate, exhibit or other instrument delivered by or on
behalf of ZNC, the Company or Investor pursuant to this Agreement shall be
deemed to have been representations and warranties by ZNC, the Company or
Investor, as the case may be, and, notwithstanding any provision in this
Agreement to the contrary, shall survive the Closing for a period of eighteen
months from the Closing Date; provided, however, that the representations
contained in (a) Section 4.14 above shall survive until the expiration of the
applicable statute of limitations, and (b) Section 4.25 above shall survive the
Closing for a period
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<PAGE> 45
of three years from the Closing Date. Notwithstanding the above, if prior to any
expiration date the indemnifying party shall have been notified of a claim for
indemnity hereunder and such claim shall not have been finally resolved or
disposed of at such date, any representation or warranty that is the basis for
such claim shall continue to survive as to such claim and shall remain a basis
for indemnity, to the extent of such claim only, until such claim is finally
resolved or disposed of.
ARTICLE 9.
TERMINATION
9.1 Termination. This Agreement may be terminated:
(a) At any time prior to the Closing Date by mutual agreement of
ZNC and Investor.
(b) At any time prior to the Closing Date by Investor if any
representation or warranty of ZNC, the Company or HOP contained in this
Agreement or in any certificate or other document executed and delivered by ZNC,
the Company or HOP pursuant to this Agreement is untrue when made or if ZNC, the
Company or HOP fails to comply in any material respect with any covenant
contained herein, and any such misrepresentation, noncompliance or breach is not
cured, waived or eliminated within five days after written notice.
(c) At any time prior to the Closing Date by ZNC if any
representation or warranty of Investor contained in this Agreement or in any
certificate or other document executed and delivered by Investor pursuant to
this Agreement is untrue when made or if Investor fails to comply in any
material respect with any covenant contained herein, and any such
misrepresentation, noncompliance or breach is not cured, waived or eliminated
within five days after written notice.
(d) By either Investor or ZNC if the Closing has not occurred by
the Closing Date.
In the event this Agreement is terminated pursuant to subparagraph (b), (c) or
(d) above, Investor and ZNC shall each be entitled to pursue, exercise and
enforce any and all remedies, rights, powers and privileges available at law or
in equity. In the event of a termination of this Agreement under the provisions
of this Article, a Party not then in material breach of this Agreement shall
stand fully released and discharged of any and all obligations under this
Agreement.
Notwithstanding any termination, this Agreement remains in full force
and effect as to the deliveries made at signing (as provided in Section 2.11
above) such that the representations, warranties and indemnification provided
herein apply to such deliveries and actions taken at signing.
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ARTICLE 10.
POST-CLOSING COVENANTS
10.1 Within thirty-five days following the Closing Date, ZNC shall
provide to Investor evidence that, at the end of the thirty day period
immediately following the Closing Date, the cash balance of the Company equals
$250,000, plus cash receipts of the Company during such thirty day period
(excluding amounts received under the Company Note or the Working Capital
Notes), less cash disbursements made during such thirty day period (with all
disbursements being paid when due and on a timely basis), less net losses during
such thirty day period, plus depreciation and amortization for such thirty day
period. If such amount is less than $250,000, ZNC shall promptly (within five
days) pay an amount equal to the difference to the Company and, if such amount
is greater than $250,000, the Company shall promptly (within five days) pay an
amount equal to the difference to ZNC.
10.2 At anytime after Closing upon the request of AHC, ZNC shall
convert each of the Companies into a limited liability company by the date
requested by AHC, which date shall be no sooner than 30 days after such request.
10.3 Until such time as ZNC no longer owns the majority of the
outstanding shares of Common Stock of the Company, ZNC shall provide the
Companies and their employees with the Employee Benefit Plans as set forth on
Schedule 4.9(a) or, in the event those Employee Benefit Plans are no longer
offered to ZNC employees, with the same Employee Benefit Plans that are provided
to ZNC's employees.
10.4 Until such time as ZNC no longer owns the majority of the
outstanding shares of Common Stock of the Company, ZNC shall provide the
Companies with the insurance coverage set forth in Schedule 4.12, or such other
coverage as ZNC purchases to insure ZNC and its other subsidiaries.
10.5 In addition, within sixty (60) days following the Closing, AHC and
ZNC shall cause the Board of Directors of the Company to: (i) terminate the 1998
Stock Option Plan of the Company (the "Company Option Plan"); and (ii)
repurchase and terminate all options issued under the Company Option Plan (the
"Repurchase Plan").
ARTICLE 11.
GENERAL
11.1 Amendments. This Agreement may not be amended, except in a written
document signed by ZNC, the Company and Investor.
11.2 Headings. The headings of the Sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
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11.3 Governing Law. THIS AGREEMENT IS TO BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE
CHOICE OF LAW PROVISIONS THEREOF.
11.4 Notices and Demands. Any notice or demand which is permitted or
required hereunder will be deemed to have been sufficiently received (except as
otherwise provided herein) (a) upon receipt when personally delivered, (b) or
one (1) day after sent by one-day overnight delivery providing confirmation or
receipt of delivery, or (c) three (3) days after being sent by certified or
registered mail, postage and charges prepaid, return receipt requested to the
addresses listed on Schedule 11.4 attached hereto, or at any other address
designated by any party hereto to all other parties hereto in writing.
11.5 Severability. If any provision of this Agreement is held invalid
under applicable law, such provision will be ineffective to the extent of such
invalidity, and such invalid provision will be modified to the extent necessary
to make it valid and enforceable. Any such invalidity will not invalidate the
remainder of this Agreement.
11.6 Expenses. Each Party will bear its own fees for counsel and
accountants and other expenses relating to the transactions contemplated herein
(including any broker's or finder's fees); provided, however, that ZNC shall
bear all the fees and expenses incurred by the Companies (other than the Audit
which will be an expense of the Companies as such expenses are accrued or
provided for in the December 31, 1998 consolidated balance sheet of the
Companies, such that the Companies shall not incur any fees or expenses in
connection with or related to this Agreement or the transactions contemplated
herein.
11.7 Publicity and Disclosures. Each Party shall keep this Agreement
and its terms confidential, and shall make no press release or public
disclosure, either written or oral, regarding the transactions contemplated by
this Agreement without the prior knowledge and consent of the other Parties
hereto; provided that the foregoing shall not prohibit any disclosure (i) by
press release, filing or otherwise that is required by law (including, without
limitation, federal securities laws), regulation or court or administrative
order, (ii) to advisors, financiers or lenders of any Party or to any Party's
directors, officers, employees and representatives involved in the transactions
contemplated herein or (iii) by Investor in connection with obtaining financing
for the transactions contemplated by this Agreement and conducting an
examination of the operations and assets of the Companies. In addition, the
Parties agree not to purchase or sell any common stock of Investor or ZNC until
two (2) business days after a public announcement of the transactions
contemplated herein has been made by Investor and ZNC.
11.8 Entire Agreement. This Agreement and the Schedules and Exhibits to
this Agreement constitute the entire agreement of the Parties with respect to
the subject matter hereof and supersede all prior agreements and understanding,
both written and oral, among the Parties, or any of them, with respect to the
subject matter hereof; provided, however, that the Confidentiality Agreement,
dated November 16, 1998, by and between ZNC and Investor shall remain in full
force and effort.
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11.9 Assignment. Neither this Agreement nor any right or obligation
created hereby or in any agreement entered into in connection with the
transactions contemplated hereby shall be assignable by any party hereto, except
as permitted therein or by Investor to a wholly-owned subsidiary of Investor
during the one-year period following the Closing and thereafter to any 80% or
more owned subsidiary of Investor, which must remain an 80% or more owned
subsidiary of Investor throughout the term of any obligation under this
Agreement and/or the Transaction Documents, provided that AHC guarantees full
payment and performance by such subsidiary.
11.10 Parties in Interest; No Third Party Beneficiaries. Except as
otherwise provided herein, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective heirs, legal
representatives, successors and assigns of the Parties. Neither this Agreement
nor any other agreement contemplated hereby shall be deemed to confer upon any
person not a Party any rights or remedies hereunder or thereunder.
11.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be taken to be an original; but such
counterparts will together constitute one document.
[The remainder of this page is left blank intentionally.]
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The undersigned have executed this Agreement as of the date first
written above.
ZARING NATIONAL CORPORATION
By:
---------------------------------------
Title:
----------------------------------
HOMEMAX, INC.
By:
---------------------------------------
Title:
----------------------------------
HOMEMAX OPERATING PROPERTIES, L.L.C.
By:
---------------------------------------
Title:
----------------------------------
AMERICAN HOMESTAR CORPORATION
By:
---------------------------------------
Laurence A. Dawson, Jr., President
<PAGE> 50
EXHIBIT A
DEFINITIONS
As used in the Agreement, the following terms shall have the corresponding
meaning. All references to Sections in this Exhibit A shall refer to Section
numbers in the Agreement.
"Audit" shall have the meaning set forth in Section 2.1(a).
"Call" shall have the meaning set forth in Section 2.1.
"Cash Compensation" shall mean wages, salaries, bonuses (discretionary
and formula) and other compensation paid or payable in cash.
"Closing" shall have the meaning set forth in Section 3.1.
"Closing Date" shall have the meaning set forth in Section 3.1.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commitments" shall mean the agreements, contracts, arrangements and
commitments described in Section 4.11.
"Common Stock" shall mean the common stock, par value $.01 per share,
of the Company.
"Companies" shall mean HOP and the Company and all of its subsidiaries,
which subsidiaries are listed on Schedule I to this Exhibit A.
"Companies Auditors" shall have the meaning set forth in Section
2.1(b).
"Company Note" shall have the meaning set forth in Section 2.2.
"Company Option Plan" shall have the meaning set forth in Section
10.5.
"Compensation Plans" shall mean compensation plans, arrangements and
practices of the Companies.
"Controlled Group" shall mean a controlled group (within the meaning of
Section 412(n)(6)(B) of the Code) in which any of the Companies is a member.
"Damages" shall have the meaning set forth in Section 8.1.
"Employee Benefit Plans" shall mean employee benefit plans within
Section 3(3) of ERISA.
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"Employee Policies and Procedures" shall mean all employee manuals,
policies, procedures and work related rules that apply to employees of the
Companies.
"Environmental Laws" shall have the meaning set forth in Section 4.25.
"Estimate" shall have the meaning set forth in Section 2.1(b).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Financial Statements" shall mean (i) the consolidated audited balance
sheet, statement of operations and statements of cash flow of the Companies as
of December 31, 1997, and (ii) the consolidated unaudited statements of
operations and statements of cash flow of the Companies for the 10-month period
ended October 31, 1998 or, if the Audit is reviewed and accepted prior to
Closing, the consolidated audited balance sheet, statement of operations and
statements of cash flow of the Companies as of December 31, 1998.
"GAAP" shall mean generally accepted accounting principles.
"HOP Interests" shall mean the Company Interests (as defined in the HOP
Operating Agreement).
"HOP Operating Agreement" shall mean the Limited Liability Company
Agreement of HOP, the form of which is attached hereto as Exhibit M.
"Investor's Auditors" shall have the meaning set forth in Section
2.1(b).
"Investor Common Stock" shall have the meaning set forth in Section
2.3.
"Investor Note" shall have the meaning set forth in Section 2.1(a).
"Investor Shares" shall have the meaning set forth in Section 2.1(a).
"Management Agreement" shall have the meaning set forth in Section 2.7.
"Net Book Value" shall mean the Total Assets minus the Total
Liabilities of the Companies after excluding from Total Liabilities the Total
Intercompany Financing Transactions and any outstanding part of the Company
Note. For example Net Book Value as of October 31, 1998, would be as calculated
in Schedule II to this Exhibit A.
"Noncompetition Agreement" shall have the meaning set forth in Section
2.8.
"Offset amounts" shall have the meaning set forth in Section 8.7.
A-2
<PAGE> 52
"Operating Leases" shall have the meaning set forth in Section 2.5.
"Operating Leases Assignment and Assumption Agreement" shall mean that
certain Operating Leases and Assignment Agreement, by and between the Company
and HOP, the form of which is attached hereto as Exhibit N.
"Option Agreement"shall have the meaning set forth in Section 2.3.
"Outstanding Common Stock" shall mean the issued and outstanding Common
Stock.
"Outstanding HOP Interests" shall mean the issued and outstanding HOP
Interests.
"Party" shall mean each party to this Agreement, and "Parties" shall
mean collectively all of such parties.
"Permitted Exceptions" shall have the meaning set forth in Section
4.15.
"Previous FMV" shall have the meaning set forth in Section 2.5.
"Proprietary Rights" shall mean (i) all trade-marks, trade-names,
service marks and other trade designations, registrations and applications
therefor, and all patents, copyrights and applications currently owned, in whole
or in part, by any of the Companies with respect to its business, and all
licenses, royalties, assignments and other similar agreements relating to the
foregoing to which any of the Companies is a party; and (ii) all agreements
relating to technology, know-how or processes that any of the Companies is
licensed or authorized to use by others, or which it licenses or authorizes
others to use.
"Purchase Price" shall have the meaning set forth in Section 2.1(a).
"Put" shall have the meaning set forth in Section 2.1.
"Put/Call Period" shall have the meaning set forth in Section 2.1.
"Put Notice Date" shall have the meaning set forth in Section 2.1.
"Registration Rights Agreement" shall have the meaning set forth in
Section 2.10.
"Repurchase Plan" shall have the meaning set forth in Section 10.5.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securityholders Agreement" shall have the meaning set forth in Section
2.9.
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"Shareholders Agreement" shall have the meaning set forth Section 2.9.
"Subsidiary" shall mean any corporation, partnership, joint venture or
other legal entity of which the Company or a subsidiary of the Company owns,
directly or indirectly, an equity interest in.
"Sublease Agreement" shall mean that certain Sublease Agreement by and
between the Company and HOP, substantially in the form of Exhibit O attached
hereto.
"Third-Party Auditors" shall have the meaning set forth in Section
2.1(c).
"Threshold Amount" shall have the meaning set forth in Section 8.3.
"Total Assets" shall mean all tangible and intangible assets of the
Company required to be reflected on its balance sheet in accordance with GAAP.
"Total Intercompany Financing Transactions" shall have the meaning used
in the internal financial statements of the Companies and shall include all
amounts owed by the Companies to ZNC.
"Total Liabilities" shall mean all liabilities of the Company required
to be reflected on its balance sheet in accordance with GAAP.
"Transaction Documents" shall mean this Agreement and all other
documents, instruments and agreements contemplated by the transactions contained
in this Agreement including, but not limited to, the Management Agreement, the
Noncompetition Agreement, the Company Note, the Investor Note, the Working
Capital Notes, the Securityholders Agreement, the Registration Rights Agreement,
the Option Agreement and the HOP Operating Agreement.
"Underlying Assets" shall have the meaning set forth in Section 2.5.
"Underlying Shares" shall have the meaning set forth in Section 10.1.
"Villages" shall have the meaning set forth in Section 3.2(h).
"Working Capital Note Amount" shall have the meaning set forth in
Section 2.4.
"Working Capital Notes" shall have the meaning set forth in Section
2.4.
"Year 2000 Compliance" means, with respect to the Companies'
information technology, the information technology is designed to be used prior
to, during and after the calendar year 2000 A.D., and the information technology
used during each such time period will accurately receive, provide and process
date/time data (including, but not limited to, calculating, comparing and
A-4
<PAGE> 54
sequencing) from, into and between the 20th and 21st centuries, including the
years 1999 and 2000, and leap-year calculations and will not malfunction, cease
to function, or provide invalid or incorrect results as a result of date/time
data, to the extent that other information technology, used in combination with
the information technology being acquired, properly exchanges date/time data
with it.
"ZNC Interest" shall have the meaning set forth in Section 2.1.
"ZNC Note" shall have the meaning set forth in section 2.12.
A-5
<PAGE> 55
SCHEDULE I TO
EXHIBIT A
SUBSIDIARIES
HomeMax, Inc.
HomeMax North Carolina, Inc.
HomeMax South Carolina, Inc.
HomeMax Tennessee, Inc.
HomeMax Kentucky, LLC
HomeMax Indiana, LLC
HomeMax Ohio, Inc.
HM Properties, Inc.
HM Services, Inc.
A-I
<PAGE> 56
SCHEDULE II TO
EXHIBIT A
Representative Calculation of "Net Book Value"
of HomeMax on Consolidated Basis as of 10/31/98
based upon the attached HomeMax balance
sheet, 10/31/98, by legal entity
<TABLE>
<S> <C>
Total Assets $ 26,412,465
Less Total Liabilities (23,558,673)
2,853,792
Plus Intercompany Financing Transactions:
o Provision for Taxes (3,474,000)
o PNC Disbursement Account (706,096)
o Intercompany Payables 296,562
o Intercompany Notes 16,927,713
Total Intercompany Financing Transactions 13,044,179
Net Book Value $ 15,897,971
=============
</TABLE>
A-II
<PAGE> 1
EXHIBIT 10.2
SECURITYHOLDERS AGREEMENT
This Securityholders Agreement (this "Agreement") is made as of March
15, 1999, by and among HomeMax, Inc., a Delaware corporation (the "Company"),
Zaring National Corporation, an Ohio corporation ("ZNC"), and American Homestar
Corporation, a Texas corporation ("AHC"). AHC and ZNC are each sometimes
hereinafter referred to as a "Securityholder", and collectively as the
"Securityholders"). The Company will not issue any Securities (as defined below)
to any person or entity without such person or entity becoming a party to this
Agreement.
A. AHC and ZNC are the sole shareholders of the issued and outstanding
shares of common stock, par value $.01 of the Company (the "Common Stock").
B. The parties hereto desire to enter into this Agreement restricting
certain transfers of, and voting and other rights and obligations with respect
to, the capital stock of the Company, including, without limitation, voting
rights and rights to dividends or distributions, which the Securityholders may
now or hereafter own (collectively, the "Securities"), and certain additional
agreements as provided herein.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1
1.1 Restriction of Transfer. Each Securityholder agrees that it will
not in any way transfer any Securities, whether voluntarily or by operation of
law, except by a transfer made in compliance with this Agreement. Any purported
transfer in violation of any provision of this Agreement will be void and will
not operate to transfer any interest or title in such Securities to the
purported transferee, and will give the Company and the other Securityholders an
option to purchase such Securities in the manner and on the terms and conditions
provided in this Agreement. Each Securityholder agrees that it will not create
or permit to exist any lien, claim or encumbrance at any time on any of its
Securities subject to this Agreement, other than the encumbrance created by this
Agreement. Notwithstanding anything herein to the contrary, neither AHC nor ZNC
may assign, transfer or sell any Securities, or any right or interest in or to
any Securities, from the date hereof through the expiration of the Put/Call
Period (as defined below) (i.e. 3 years and 90 days from the date hereof)
without the consent of the other, except transfers to a wholly-owned subsidiary
of AHC during the one year period following the date hereof and thereafter to an
80% or more owned subsidiary of AHC, which must remain an 80% or more owned
subsidiary of AHC throughout the term of this Agreement.
HomeMax Securityholders' Agreement Page 1
<PAGE> 2
SECTION 2
2.1 Right of First Refusal on Sale by a Securityholder.
(a) If a Securityholder receives a bona fide offer (excluding an offer
from any affiliate of any Securityholder) for the purchase of all or a part of
its Securities (or any right or interest therein) that it now or hereafter owns,
which offer such Securityholder desires to accept, such Securityholder (the
"Offering Securityholder") agrees promptly to give written notice of such offer
to the Board of Directors of the Company (the "Board") and to each
Securityholder (the "Non-Selling Securityholders"), identifying the proposed
transferee, the number of Securities to be transferred (the "Offered
Securities"), the price and all other terms and conditions of the proposed
transfer.
(b) On receipt of the notice with respect to such offer, the Company
shall have the right and option, exercisable at any time during the period of
twenty (20) days from the date of the notice, to purchase all or part of the
Offered Securities at the same price and upon the same terms and conditions
contained in the offer from the third party. If the Company decides to purchase
any or all of the Offered Securities it will give written notice to that effect
to the Offering Securityholder and the Non-Selling Securityholders. The right of
the Company to exercise its option to purchase is subject to the laws of the
state of Delaware governing the rights of a corporation to purchase its own
securities.
(c) If the Company does not wish (or is unable) to purchase all of the
Offered Securities, each Non-Selling Securityholder will then have the right and
option, exercisable at any time during a period of thirty (30) days from the
date after which the option indicated in Section 2.1(b) above has expired, to
purchase the Offered Securities not purchased by the Company, upon the same
terms and conditions contained in the offer from the third party. If a
Non-Selling Securityholder elects to so purchase, it will give notice to the
Secretary of the Company to that effect, and the Secretary of the Company will
promptly notify all other Non-Selling Securityholders. If the total number of
Securities specified in the notices of election which are timely delivered by
any Non-Selling Securityholder to the Secretary exceeds the number of Offered
Securities not purchased by the Company (the "Remaining Securities"), each such
electing Non-Selling Securityholder shall have a five (5) day priority right to
purchase that portion of the Remaining Securities (but not to exceed the number
of Securities specified in its notice of election to purchase) which bears the
same ratio to the number of Remaining Securities as the number of Securities it
holds bears to the total number of Securities held by all Non-Selling
Securityholders electing to purchase. The Remaining Securities not purchased on
such a priority basis shall be allocated in one or more successive allocations
(with a three (3) day offer period in each such allocation) to those Non-Selling
Securityholders electing to exercise such purchase right, up to the number of
Securities specified in their respective notices, in the proportion that the
number of Securities held by each electing Non-Selling Securityholder bears to
the number of Securities held by all electing Non-Selling Securityholders. In
determining the number of outstanding Securities, all Securities (other than
Common Stock) shall be deemed to be on an "as converted" or "as exercised"
basis. The purchase and sale of the Offered Securities must be closed prior to
the expiration of the latest offering allocation period.
HomeMax Securityholders' Agreement Page 2
<PAGE> 3
(d) If the third party fails to purchase the Offered Securities within
a period of sixty (60) days from the expiration of the option under Section
2.1(c) above, any subsequent offers for such Securities must be made pursuant to
the terms of this Agreement. Any third party purchaser, as a requirement of such
purchase, must comply with the last sentence of Section 5.1 below.
(e) Any rights of any Securityholder under this Section 2 may be
assigned or transferred, in whole or in part, to any other Securityholder.
SECTION 3
3.1 Board of Directors. The Board of Directors of the Company (the
"Board") shall consist of four members, two of whom shall be designated by AHC,
and two of whom shall be designated by ZNC; provided, however, that should AHC
or ZNC fail to designate a person for election as a director of the Company, the
holders of voting stock of the Company shall have the right to nominate for
election such a director to fill such vacancy. Each Securityholder agrees that,
at every regular or special meeting of the stockholders of the Company, and
whenever the consent of stockholders, at which meeting or in which consent, one
or more of the directors of the Company are to be elected, such Securityholder
will vote all Securities entitled to vote owned by such Securityholder or which
such Securityholder is entitled to vote, whether by proxy or agreement or
otherwise, in favor of the director nominee designated by AHC or ZNC as provided
above. Each Securityholder may remove any director designated by such
Securityholder, and each other Securityholder agrees, if requested, to vote in
favor of any such removal and in favor of any replacement thereof. Any vacancy
in the Board shall be filled by the party who designated such departing Board
member. The parties hereto agree that the initial directors of the Company after
the date hereof shall be Finis F. Teeter and Laurence A. Dawson, Jr. (each
designees of AHC) and Ronald G. Gratz and Allen G. Zaring, III (each designees
of ZNC).
Without the unanimous consent of the Securityholders, the
Securityholders will not take any action which would change the size of the
Board from four or diminish the prospects of the designees of any Securityholder
from being elected to the Board as provided in this Section 3.1. Each director
designated and elected by the Securityholders shall be reimbursed for all
reasonable costs of travel and out-of-pocket expenses incurred in connection
with attending any meetings of the Board or any committees thereof.
3.2 Board Approval. The Company and Securityholders agree that the
Company shall not, and shall not permit any subsidiary to, without the prior
unanimous written consent of the all of the directors of the Company then in
office:
(a) Acquire any capital stock or substantially all of the assets of any
other entity (including, without limitation, the formation of any new
subsidiaries);
(b) Issue any capital stock, or securities convertible, exchangeable or
exercisable into shares of capital stock (including, without limitation, stock
options or warrants to purchase capital stock);
HomeMax Securityholders' Agreement Page 3
<PAGE> 4
(c) Consummate a merger involving the Company or a subsidiary of the
Company in which the Company or such subsidiary is not the surviving entity, or
any sale, lease or other disposition of all or substantially all of its assets,
or any liquidation, dissolution, recapitalization or reorganization, in any form
of transaction, by the Company or a subsidiary of the Company;
(d) Amend its articles of incorporation or bylaws in any manner;
(e) Authorize or approve any liquidation, dissolution, reorganization
or bankruptcy;
(f) Declare or pay any dividends on, or make any other distributions
with respect to, its capital stock;
(g) Change the authorized number of directors from the present four
(4) members; or
(h) Authorize the Company to open, close, acquire, sell, mortgage or
lease a sales center village.
Notwithstanding the above, if at any time a majority of the members of
the Board reasonably determine that the Company is, or in the near future
reasonably may become, insolvent, the items set forth above in this Section 3.2
shall only require the affirmative vote of a majority of the members of the
Board with respect to actions undertaken by the Board intended to resolve, in
whole or in part, such insolvency.
Notwithstanding anything in this Agreement or any other agreement
between AHC and ZNC to the contrary, upon the written request of AHC to the
Company, AHC, ZNC and the Company will each take all actions necessary or
advisable to convert the Company and/or any of its subsidiaries into limited
liability companies (as so requested by AHC), the cost of which conversion shall
be borne by the Company.
SECTION 4
4.1 Put and Call. (a) During the 90-day period (the "Put/Call Period")
beginning on the third anniversary of the date hereof, ZNC shall have the right
to sell to AHC and AHC shall be required to purchase from ZNC (the "Put"), and
AHC shall have the right to purchase from ZNC and ZNC shall be required to sell
to AHC (the "Call"), all but not less than all of the Securities owned by ZNC
(the "ZNC Interest"); provided, that the Put or Call may be exercised earlier if
the Companies (as defined in that certain Amended and Restated Securities
Purchase Agreement, dated as of March 15, 1999, (the "Purchase Agreement"), by
and among the parties hereto and HomeMax Operating Properties, L.L.C., a
Delaware limited liability company ("HOP")) achieve an aggregate of $5,000,000
in consolidated earnings before interest and taxes ("EBIT") for any four
consecutive calendar quarters.
HomeMax Securityholders' Agreement Page 4
<PAGE> 5
(b) If ZNC or AHC elects to exercise the Put or Call it shall send
written notice thereof to the other party in the manner set forth in Section 7.8
(the date of such notice being hereafter referred to as the "Put Notice Date")
during the Put/Call Period. The purchase price for the ZNC Interest (the
"Put/Call Price") shall be equal to the greater of (i) 50% of the Net Book Value
(as defined in the Purchase Agreement) of the Companies as of the end of the
quarter following the Put Notice Date or (ii) (7 times (the Companies' EBIT for
the preceding four calendar quarters) less the Companies' outstanding debt
(including floor plan debt)) times (50%).
(c) The Put/Call Price shall be payable in full in cash; provided,
however, that AHC, in its sole discretion and upon written notice to ZNC, may
elect to pay a portion of the Put/Call Price in Common Stock of AHC, par value
$0.05 per share (the "AHC Common Stock). AHC shall provide such notice in
writing to ZNC on the Put Notice Date or within five (5) days after the Put
Notice Date, if ZNC exercises its Put (the "Percentage Election Notice"). If AHC
elects to pay a portion of the Put/Call Price in AHC Common Stock (the "Share
Election"), the portion shall be an amount up to 40% (the "Elected Percentage")
multiplied by the sum of the Put/Call Price plus the amount of the Company's
consolidated indebtedness as reported on the Put Notice Date, which amount shall
be the "Share Amount." The Percentage Election Notice shall include the Elected
Percentage.
(d) If AHC elects the Share Election, AHC shall file a registration
statement under the Securities Act of 1933, as amended (the "Registration
Statement"), registering a number of shares of AHC Common Stock equal to the
Share Amount divided by the average of the high and low prices of the AHC Common
Stock as reported on the NASDAQ National Market (or another exchange or trading
system on which the AHC Common Stock is then traded or reported) for the ten
(10) trading days prior to the Put Notice Date (the "Registered Shares").
(e) AHC shall use all commercially reasonable efforts to file the
Registration Statement on an appropriate form with the Securities and Exchange
Commission no later than thirty (30) days after the Put Notice Date (the
"Required Filing Date"). AHC shall use all commercially reasonable efforts to
cause the Registration Statement to be declared effective no later than sixty
(60) days after filing the Registration Statement.
(f) If AHC elects the Share Election, ZNC shall inform AHC, in writing,
within ten (10) days after the Put Notice Date whether ZNC elects to (i) receive
the Registered Shares or (ii) have AHC control and direct the sale of the
Registered Shares on behalf of ZNC; in which case (x) AHC shall have complete
and absolute authority over the sale of the Registered Shares, and (y) AHC shall
receive all proceeds from the sale of the Registered Shares, subject to the
payment to ZNC specified in (h) below.
(g) If ZNC elects to receive the Registered Shares, AHC shall cause the
Registration Statement to remain effective for one (1) year from the effective
date of the Registration Statement.
HomeMax Securityholders' Agreement Page 5
<PAGE> 6
(h) In the event that AHC sells the Registered Shares on behalf of ZNC
and receives the cash proceeds, AHC shall pay to ZNC, in cash, an amount equal
to the Share Amount together with interest on the outstanding balance of the
Share Amount, which shall accrue at a rate equal to the daily prime rate per
annum as announced from time to time by PNC Bank, National Association, or its
successor for the period from the Cash Closing Date (as defined below) to the
closing of the Share Election portion of the Put/Call Price specified below. In
the event that the proceeds of the sale of the Registered Shares exceed the
Share Amount, AHC is entitled to retain such excess, provided that ZNC receives
the amount of interest, as previously specified. In the event that the proceeds
of the sale of the Registered Shares are less than the Share Amount, or a sale
of the Registered Shares does not occur for whatever reason, then AHC owes ZNC
the Share Amount in cash with interest as specified above.
(i) In the event that AHC does not elect the Share Election, AHC shall
pay the Put/Call Price in cash to ZNC within ten (10) business days after the
determination of the Put/Call Price pursuant to Section 4.1(j) below (the "Cash
Closing Date"). If AHC elects the Share Election, the closing of the cash
portion of the Put/Call Price shall occur on the Cash Closing Date and the
closing of the Share Amount portion of the Put/Call Price shall occur as soon as
practicable and in any event within (i) ninety-five (95) days after the
effectiveness of the Registration Statement or (ii) sixty (60) days from the end
of the quarter in which the Net Book Value is determined for purposes of
calculating the Put/Call Price, whichever is longer. If the Registration
Statement is not declared effective, then the closing of the Share Amount
portion of the Put/Call Price shall occur within the longer of: (i) one-hundred
and twenty (120) days after the Put Notice Date or (ii) the time period set
forth in item (ii) above.
(j) The Company shall cause an audit of the Companies' books and
records to be undertaken as of the quarter following the Put Notice Date in
order to verify the Put/Call Price. The "Put/Call Price" shall be determined as
follows:
(i) By mutual agreement of AHC and ZNC;
(ii) If AHC and ZNC are unable to reach agreement, then by
mutual agreement of the ZNC's Auditors (as defined in the Purchase
Agreement) and AHC's Auditors (as defined in the Purchase Agreement);
or
(iii) If the AHC's Auditors and ZNC's Auditors are unable to
reach agreement on the calculation of the Put/Call Price (being defined
as amounts in excess of $100,000 in the aggregate), then, at the
request of either Auditors, the disagreement shall be submitted to the
Third-Party Auditors (as defined in the Purchase Agreement) for its
determination, which determination shall be final and binding on the
Parties. The closing of the Put or Call shall be extended during any
period in which there is a dispute regarding the Put/Call Price for the
length of time during which the dispute exists.
HomeMax Securityholders' Agreement Page 6
<PAGE> 7
(k) The parties acknowledge and agree that there shall not exist as a
basis for disagreement any previously utilized and disclosed capitalization
policies of the Companies. Each Party shall bear its own cost and expense in
connection with this Section 4.1 (with the costs and expenses of the Companies
being borne by ZNC), with the cost and expenses of the Third-Party Auditors
being split equally between AHC and ZNC.
(l) Simultaneously with the closing of the Put or Call (as the case may
be), ZNC shall assign and transfer, or cause to be assigned and transferred,
over to AHC for $10.00 all membership interests of HOP then held by ZNC or any
transferee or assignee of ZNC (such that, after such assignment, AHC and any of
its transferees will own 100% of the membership interests of HOP on a
fully-diluted basis).
SECTION 5
5.1 Stock Legend. The Company and each Securityholder agree that all
certificates or agreements representing Securities (or options or other
instruments to purchase Securities) that at any time are subject to the
provisions of this Agreement will have endorsed upon them in capitalized type a
legend in substantially the following form:
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO A
SECURITYHOLDERS AGREEMENT ("AGREEMENT"), DATED AS OF MARCH 15, 1999, AS
MAY BE AMENDED FROM TIME TO TIME, AMONG THE COMPANY AND CERTAIN OF ITS
SECURITYHOLDERS, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THE COMPANY. THE AGREEMENT CONTAINS CERTAIN RESTRICTIONS ON SUCH
SECURITIES, AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED, HYPOTHECATED, OR OTHERWISE DISPOSED OF EXCEPT IN STRICT
ACCORDANCE WITH THE TERMS OF THE AGREEMENT. A COPY OF THE AGREEMENT
WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER OF THIS CERTIFICATE UPON
RECEIPT BY THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED
OFFICE OF A WRITTEN REQUEST FROM THE HOLDER REQUESTING SUCH A COPY.
Each holder of Securities (or options or other instruments to purchase
Securities) subject to the provisions of this Agreement issued prior to the date
hereof agrees to deliver all certificates and agreements representing Securities
to the Company for the purpose of endorsing said legend thereon. The Company
agrees to maintain a counterpart of this Agreement in its principal and/or
registered office. Under no circumstances will any sale or other transfer of any
Securities subject to this Agreement be valid until the proposed transferee has
executed and become a party to an Agreement substantially similar to this
Agreement and thereby becomes subject to all provisions of this Agreement,
unless the requirement is waived by written consent of the parties to this
Agreement as provided below; and notwithstanding any other provisions of this
Agreement, no such sale or other
HomeMax Securityholders' Agreement Page 7
<PAGE> 8
transfer of any kind will in any event result in the nonapplicability of the
provisions of this Agreement at any time to any of the Securities subject to
this Agreement.
SECTION 6
6.1 Termination. This Agreement shall terminate automatically upon the
dissolution of the Company or upon the occurrence of any event which reduces the
number of Securityholders to one.
SECTION 7
7.1 Further Assurances. Each party to this Agreement agrees to perform
all further acts and to execute and deliver all further documents that may be
reasonably necessary to carry out the provisions of this Agreement.
7.2 Severability. In the event that any of the provisions of this
Agreement is held to be unenforceable or invalid by any court of competent
jurisdiction, the validity and enforceability of the remaining provisions will
not be affected, and in lieu of such unenforceable provision there shall be
added automatically as part of this Agreement a provision as similar in terms as
may be valid and enforceable.
7.3 Terms; Captions. Whenever used in this Agreement, the singular
number will include the plural, and the plural number will include the singular,
and pronouns in the masculine, feminine, or neuter gender will include each
other gender. The captions of this Agreement are for convenience of reference
only and shall not limit or otherwise affect any of the terms or provisions
hereof.
7.4 Applicable Law. This Agreement has been executed in and will be
governed by the laws of the State of Delaware, without regard to the choice of
law provisions thereof.
7.5 Binding Effect. Subject to the restrictions against transfer or
assignment as contained in this Agreement, the provisions of this Agreement will
benefit and will be binding on the assigns, successors in interest, personal
representatives, estates, heirs and legatees of each of the parties hereto.
Neither this Agreement nor any right or obligation created hereby shall be
assignable by any party hereto.
7.6 Amendment; Waiver. This Agreement may only be amended, or provision
waived, by the written consent of AHC, ZNC and the Company.
7.7 Entire Agreement. This Agreement contains the entire understanding
among the parties concerning the subject matter contained in this Agreement.
There are no representations, agreements, arrangements or understandings, oral
or written, between or among the parties hereto, relating to the subject matter
of this Agreement, which are not fully expressed herein. This Agreement may be
signed in one or more counterparts, all of which shall be considered one and the
same agreement.
HomeMax Securityholders' Agreement Page 8
<PAGE> 9
7.8 Notices. All notices required or permitted to be given hereunder
will be deemed to be duly given (a) on the date of delivery if delivered in
person, (b) one (1) days after sent by overnight delivery or by telecopy, where
receipt of delivery or confirmation of telecopy is received, or (c) three (3)
days after the date of mailing if mailed by registered or certified mail, first
class postage prepaid, return receipt requested, to the Company or the
Securityholder(s), as appropriate, at the respective addresses indicated on the
signature page of this Agreement. The addresses of the Company and the
Securityholders, or any of them, may be changed only by giving written notice of
such change of address to all of the other parties hereto in the manner provided
above.
7.9 Injunctive Relief. The parties acknowledge that in the event a
party to this Agreement fails to perform, observe or discharge any of its
respective obligations under this Agreement, any other party hereto shall be
entitled to temporary and permanent injunctive relief in such case without the
necessity of proving actual damages, and such remedy shall be in addition to
other relief as may be provided by law or in equity, including specific
performance. If any legal action is required to enforce the terms of this
Agreement, the prevailing party shall be entitled to the reasonable costs of
enforcement, including attorneys' fees.
7.10 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
HomeMax Securityholders' Agreement Page 9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
as of the date first indicated above.
HOMEMAX, INC.
By:
------------------------------------------
Its:
-----------------------------------------
Address: 3691 Trust Drive
Raleigh, North Carolina 27606
Attention: President
AMERICAN HOMESTAR CORPORATION
By:
------------------------------------------
Laurence A. Dawson, Jr.,
President
Address: 2221 East Lamar Blvd., Suite 790
Arlington, Texas 76006
Attention: President
ZARING NATIONAL CORPORATION
By:
------------------------------------------
Its:
-----------------------------------------
Address: 11300 Cornell Park Drive, Suite 500
Cincinnati, Ohio 45202-1825
Attention: Chief Financial Officer
HomeMax Securityholders' Agreement Page 10
<PAGE> 1
EXHIBIT 10.3
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE
PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNTIL (1) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY
APPLICABLE STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF
COUNSEL REASONABLY SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY'S COUNSEL
THAT THIS PROMISSORY NOTE MAY BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.
AMERICAN HOMESTAR CORPORATION
PROMISSORY NOTE
Dallas, Texas
March 15, 1999 $4,411,177.00
FOR VALUE RECEIVED, American Homestar Corporation, a Texas corporation
("Maker"), hereby promises to pay to the order of Zaring National Corporation,
an Ohio corporation ("Payee"), at such place as Payee or any subsequent holder
may from time to time direct Maker in writing, the principal sum of Four Million
Four Hundred and Eleven Thousand One Hundred and Seventy-Seven Dollars
($4,411,177.00), together with interest thereon which shall accrue at a rate
equal to the daily prime rate per annum as announced from time to time by PNC
Bank, National Association or its successor. Subject to any maximum interest
rate limitations specified by applicable law, if and when such prime rate
changes, then in each such event, the rate of interest hereunder will change
automatically without notice to Maker effective as of the date of such change.
All payments on this note (this "Note") shall be due and payable in lawful money
of the United States of America. This Note was issued in connection with the
transactions described in that certain Amended and Restated Securities Purchase
Agreement, dated as of March 15, 1999, by and among Maker, Payee, HomeMax, Inc.,
a Delaware corporation, and HomeMax Operating Properties, L.L.C., a Delaware
limited liability company (the "Purchase Agreement").
1. Principal and Interest Payments. Interest on this Note shall be due
and payable on the first day of each calendar quarter commencing on April 1,
1999 and continuing until the Note has been paid in full. The principal,
together with all accrued but unpaid interest hereon, shall be due and payable
in three annual installments beginning on the first anniversary of the date of
this Note with the first two annual installments to be in the amount of
$1,470,392.00 each and the third and final installment to be in the amount of
$1,470,393.00.
2. Prepayments. At the option of Maker, the unpaid principal balance of
this Note may be prepaid in whole together with all accrued but unpaid interest
at any time.
American Homestar Corporation Promissory Note Page 1
<PAGE> 2
3. Method of Payment. All payments made under this Note, whether of
principal or interest, shall be made by Maker to the holder hereof on the date
specified or provided herein and shall be delivered by means of certified or
cashiers' check or wire transfer of immediately available funds to an account
specified by the holder hereof. Whenever payment hereunder shall be due on a day
which is not a Business Day (as hereinafter defined), the date for payment
thereof shall be extended to the next succeeding Business Day. If the date for
any payment is extended by operation of law or otherwise, interest thereon shall
be payable for such extended time. "Business Day" means every day which is not a
Saturday, Sunday or legal holiday.
4. Events of Default. The following shall constitute events of default
("Events of Default") hereunder:
(a) failure of Maker to make any payment on this Note as and when
the same becomes due and payable in accordance with the terms hereof and the
continuance of such failure for a period of five (5) days after written notice
specifying such default has been delivered to Maker by Payee;
(b) failure of Maker to perform any other covenant contained herein,
if the same has continued for thirty (30) days after written notice specifying
such default has been delivered to Maker by Payee;
(c) if Maker makes an assignment for the benefit of creditors, or
petitions or applies for the appointment of a liquidator, receiver or custodian
(or similar official) of it or of any substantial part of its assets, or if
Maker commences any proceeding or case relating to it under the Bankruptcy Code
or any other bankruptcy, reorganization, arrangement, insolvency, readjustment
of debt, dissolution or liquidation or similar law of any jurisdiction, or takes
any action to authorize any of the foregoing; or
(d) if any petition or application of the type described in
subparagraph (c) immediately above is filed or if any such proceeding or case
described in subparagraph (c) is commenced against Maker and is not dismissed
within sixty (60) days, or if Maker indicates its approval thereof, consents
thereto or acquiesces therein, or if an order is entered appointing any such
liquidator or receiver or custodian (or similar official), or adjudicating Maker
bankrupt or insolvent, or approving a petition in any such proceeding, or if a
decree or order for relief is entered in respect of Maker in an involuntary case
under the Bankruptcy Code or any other bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar law of
any jurisdiction.
In the event any one or more of the Events of Default specified above
occurs and is continuing, the holder of this Note may (i) accelerate the
maturity of this Note with notice to Maker at which time all such amounts shall
be immediately due and payable, (ii) proceed to protect and enforce its rights
either by suit in equity or by action at law, or by other appropriate
proceedings, whether for the specific performance of any covenant or agreement
contained in this Note or in aid of the exercise of any power or right granted
by this Note, or (iii) enforce any other legal or equitable right of the holder
of this Note.
5. Delay or Omission Not Waiver. No delay or omission on the part of the
holder of this
American Homestar Corporation Promissory Note Page 2
<PAGE> 3
Note in the exercise of any power, remedy or right under this Note, or under any
other instrument executed pursuant hereto, shall operate as a waiver thereof,
nor shall a single or partial exercise of any such power or right preclude any
other or further exercise thereof or the exercise of any other right or power
hereunder.
6. Waiver. Any term, covenant, agreement or condition of this Note may,
only with the written consent of Maker and Payee, be amended or compliance
therewith may be waived (either generally or in a particular instance and either
retroactively or prospectively), altered, modified or amended.
7. Attorneys' Fees and Costs. In the event an Event of Default shall
occur, and in the event that thereafter this Note is placed in the hands of an
attorney for collection, or in the event this Note is collected in whole or in
part through legal proceedings of any nature, then and in any such case Maker
promises to pay all costs of collection, including, but not limited to,
reasonable attorneys' fees and court costs incurred by the holder hereof on
account of such collection, whether or not suit is filed.
8. Successors and Assigns. All of the covenants, stipulations, promises
and agreements in this Note made by Maker and Payee (by virtue of its acceptance
of this Note) shall bind its successors and assigns, whether so expressed or
not.
9. Maximum Lawful Rate. It is the intent of the Maker and holder of
this Note to conform to and contract in strict compliance with applicable usury
law from time to time in effect. In no way, nor in any event or contingency
(including but not limited to prepayment, default, demand for payment, or
acceleration of the maturity of any obligation), shall the rate of interest
taken, reserved, contacted for, charged or received under this Note exceed the
highest lawful interest rate permitted under applicable law. If the holder of
this Note shall ever receive anything of value which is characterized as
interest under applicable law and which would apart from this provision be in
excess of the highest lawful interest rate permitted under applicable law, an
amount equal to the amount which would have been excessive interest shall,
without penalty, be applied to the reduction of the principal amount owing on
this Note in the inverse order of its maturity and not to the payment of
interest, or refunded to Maker or the other payor thereof if and to the extent
such amount which would have been excessive exceeds such unpaid principal. All
interest paid or agreed to be paid to the holder hereof shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full stated term (including any renewal or extension) of this
Note so that the amount of interest on account of such obligation does not
exceed the maximum permitted by applicable law. As used in this Section, the
term "applicable law" shall mean the laws of the State of Texas or the federal
laws of the United States, whichever laws allow the greater interest, as such
laws now exist or may be changed or amended or come into effect in the future.
American Homestar Corporation Promissory Note Page 3
<PAGE> 4
10. Offset. Any and all amounts owing or to be paid by Maker hereunder
shall be subject to offset and reduction pro tanto by Offset Amounts (as that
term is defined in the Purchase Agreement) then due and payable by Payee to
Maker under the Purchase Agreement (whether or not Payee has pledged, sold,
assigned, hypothecated or otherwise transferred this Note), and any subsequent
holder of this Note takes the same subject to this Section 10.
11. Governing Law. This Note shall be governed by and construed in
accordance with the substantive laws (but not the rules governing conflicts of
laws) of the State of Texas.
12. Notice. All notices, demands or requests provided for or permitted
to be given under this Note must be in writing, and shall be given and be deemed
received as set forth in the Purchase Agreement.
13. Severability. In case any one or more of the provisions contained
in this Note shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or `unenforceability
shall not affect any other provision hereof.
EXECUTED as of the date first set forth above.
AMERICAN HOMESTAR CORPORATION
By:
--------------------------------------
Laurence A. Dawson, Jr., President
American Homestar Corporation Promissory Note Page 4
<PAGE> 1
EXHIBIT 10.4
MANAGEMENT AND CONSULTING AGREEMENT
THIS MANAGEMENT AND CONSULTING AGREEMENT (this "Agreement") is made and
effective as of the 15th day of March, 1999, by and among American Homestar
Corporation, a Texas corporation ("Manager"), Zaring National Corporation, an
Ohio corporation ("ZNC"), and HomeMax, Inc., a Delaware corporation ("Company").
The Company, ZNC and Manager are sometimes referred to herein as a "Party" and
collectively as the "Parties".
WITNESSETH:
WHEREAS, the Parties have entered into an Amended and Restated
Securities Purchase Agreement, dated as of March 15, 1999 (the "Purchase
Agreement"), pursuant to which, among other things, the Manager has made an
investment in the Company; and
WHEREAS, the Parties desire to enter into an agreement whereby Manager
will provide to ZNC certain consulting services with respect to its investment
in the Company and will provide to the Company certain services to assist the
Company in the operation of the businesses and assets of the Company and its
subsidiaries (the Company and its subsidiaries are sometime collectively
referred to herein as the "Affiliated Companies"); and
WHEREAS, Manager is willing to enter into such arrangement in
accordance with the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the Parties hereby mutually covenant and agree as follows:
I.
DEFINITIONS
For purposes of this Agreement, each of the following terms shall have
the meaning ascribed thereto unless otherwise specified or clearly required by
the context in which such term is used.
1.1 "Affiliates" means, with respect to a Party, entities that directly
or indirectly through one or more intermediaries control, or are
controlled by, or are under common control with, such Party, and
the term "control" shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of an entity, whether through the ownership
of voting securities, by contract or otherwise; provided, however,
such term, with respect to each Party, shall not mean the other
Party or Parties.
1.2 "Term" shall have the meaning set forth in Section 7.1 below.
Management and Consulting Agreement Page 1
<PAGE> 2
II.
AUTHORITY AND RESPONSIBILITY OF THE COMPANY
2.1 Consistent with applicable law, the Board of Directors of the
Company (the "Board") shall retain the ultimate legal responsibility for the
operation and management of the business and assets of the Company during the
Term. Manager shall have only the authority and responsibility delegated to it
under this Agreement or by the Board from time to time.
III.
STATUS OF MANAGER
3.1 Manager shall have the authority and responsibility to deal with
the businesses and assets of the Affiliated Companies as delegated to it under
this Agreement. Manager shall render services hereunder as the Affiliated
Companies' agent to the extent specifically provided herein or as further
delegated from time to time by the Board. The relationship created by this
Agreement is one of principal and agent, and nothing to the contrary shall be
inferred from this Agreement. Employees of Manager shall be under the
supervision and control of Manager, and shall not be considered employees of any
of the Affiliated Companies.
IV.
AUTHORITY AND RESPONSIBILITY OF MANAGER
4.1 General. Manager shall consult with and provide advice to ZNC with
respect to ZNC's ownership interest in and management of the Affiliated
Companies. As an agent for the Affiliated Companies, Manager shall have the
authority and responsibility for supervising the management of the operation of
the Affiliated Companies' businesses and assets. In performing such duties,
Manager shall: (i) designate from time-to-time an executive of Manager or its
affiliates to provide direct supervision to the Chief Operating Officer of the
Company (currently Matthew Massarelli) with respect to the day-to-day operations
of the Affiliated Companies, subject to the policies and strategic direction of
the Board; and (ii) make available to the Affiliated Companies various industry
expertise and programs of Manager (e.g., advertising, marketing, training and
benefits), at a cost equal to Manager's direct cost of providing such expertise
and programs. Manager shall notify the Board if there is a dispute between the
Manager and the Chief Operating Officer of the Company prior to taking any
action with regard to such dispute. The Parties agree that it is their intent
and desire to specifically have the Affiliated Companies operated in the manner
set forth on Exhibit A, and Manager shall have the specific power and authority
to take, or refrain from taking, any actions in order to fulfill such
intentions. Manager hereby acknowledges that certain actions require the
approval of the Board as set forth in Section 3.2 of that certain
Securityholders Agreement dated of even date herewith by and among Manager, ZNC
and the Company. Manager shall review and provide suggested revisions to the
existing 1999 operating plan within 120 days of the Closing (as that term is
defined in the Purchase Agreement).
Management and Consulting Agreement Page 2
<PAGE> 3
Notwithstanding anything to the contrary contained herein, Manager
agrees, as agent for the Affiliated Companies, to supervise the management of
the businesses and assets of the Affiliated Companies in a lawful and prudent
manner, consistent with generally accepted standards of the manufactured housing
industry, this Agreement and the goals of the Company set forth on Exhibit A. In
performing its duties and responsibilities hereunder, ZNC and the Company
expressly agree that Manager may undertake business dealings with Manager's
subsidiaries on commercially reasonable terms typically available in the market
place. Manager's supervision activities under this Agreement shall be subject to
the terms hereof and the approval of the Board as provided for herein. Manager
will not be required to assume any existing guarantees by ZNC of any of the
obligations or liabilities of the Affiliated Companies.
4.2 Books and Records. In connection with the performance of its duties
hereunder, Manager shall have full access to the books, records and employees of
the Affiliated Companies. At the request of the Company or ZNC from time to
time, Manager will make available to the requesting party the books and records
of Manager relating to the performance of Manager's duties hereunder. Manager
shall provide to the Board monthly consolidated financial statements of the
Affiliated Companies and such other information as reasonably requested by the
Board. ZNC shall have full and complete access to all financial information of
the Affiliated Companies, including, but not limited to, information necessary
or appropriate to meet the requirements for full and complete reporting of the
financial condition of the Affiliated Companies.
V.
COMPENSATION OF MANAGER
5.1 In consideration for the services provided to the Affiliated
Companies by Manager hereunder, Manager shall be entitled to receive from ZNC a
management and consulting fee (the "Management Fee") equal to (i) $500,000 (the
"Firm Fee"); plus (ii) an amount equal to 25% of the cumulative calendar quarter
losses over $500,000 per calendar quarter of the Affiliated Companies for the
first four consecutive calendar quarters following the Closing, up to a maximum
additional fee of $750,000 (the "Additional Fee"). The Firm Fee shall consist of
$476,000 for the first year of the term (which first year compensation shall be
invoiced by Manager on a calendar quarterly basis, in amounts per quarter as
determined by Manager, and shall be due and payable within fifteen (15) days
after the date of invoice of the last of such four (4) calendar quarters) and
$1,000 per month thereafter (which monthly amount shall be due and payable on
the first day of each month). The Additional Fee shall be invoiced by Manager on
a calendar quarterly basis and shall be due and payable within fifteen (15) days
after the date of invoice of the last of such four (4) calendar quarters. Except
as provided in Section 4.1 above, the Management Fee shall be the sole
compensation of Manager for performing its duties hereunder. The Management Fee
does not include salaries, compensation and expenses associated with personnel
and services to be provided by employees of the Affiliated Companies, which
salaries, compensation and expenses shall be paid directly by the Affiliated
Companies.
Management and Consulting Agreement Page 3
<PAGE> 4
VI.
COVENANTS OF MANGER
6.1 Product Distinction. During the Term (as defined below), Manager
agrees that it shall give the Company-owned retail centers the same treatment
with respect to product distinction as it does to Manager's franchisees and
Manager-owned retail sales centers (specifically, Manager will provide
distinctive product lines in terms of brand name, floor plan designs and certain
decor features for Company-owned stores within a specific market area).
6.2 Retail Sites. During the Term, Manager shall allow the Company to
have access to Manager-controlled retail home sites on the same basis as
Manager's franchisees and Manager- owned retail sales centers.
VII.
TERM OF THE AGREEMENT
7.1 Term. The term of this Agreement shall begin on the date hereof and
shall continue until the earlier of: (i) three (3) years and ninety (90) days
from the date hereof; (ii) the mutual agreement of ZNC and Manager; (iii) a
default by Manager under any material term of this Agreement which default is
not cured within thirty (30) days after written notice to Manager (the "Term");
(iv) a default by Manager for failure to pay any principal or interest under the
Investor Note (as defined in the Purchase Agreement), which default is not cured
within the applicable cure period; or (v) a default by Manager for failure,
under the Securityholders Agreement (as defined in the Purchase Agreement) to
perform its obligation under 4.1 of the Securityholders Agreement with respect
to the Put (as that term is defined in the Securityholders Agreement).
VIII.
INDEMNIFICATION
8.1 Indemnification by the Company. The Company hereby agrees to
indemnify and hold Manager and its officers, directors, agents and
representatives (collectively the "Indemnitees") harmless from and against any
and all losses, liabilities, costs and damages (or actions or claims in respect
thereof) which any Indemnitee may suffer or incur, insofar as such claims,
liabilities, costs or damages (or actions or claims in respect thereof) arise
out of or are based upon the performance by Manager of its duties hereunder
(including, without limitation, any and all reasonable legal and other expenses
reasonably incurred by Indemnitee in connection with investigating, defending or
prosecuting any of such matters whether or not resulting in any loss, liability
or damage), except to the extent the same is caused by the gross negligence or
willful misconduct of any Indemnitee.
8.2 Indemnification by Manager. Manager hereby agrees to indemnify and
hold the Company and its officers, directors, agents and representatives
(collectively, the "Company Indemnitees") harmless from and against any and all
losses, liabilities, costs and damages (or actions
Management and Consulting Agreement Page 4
<PAGE> 5
or claims in respect thereof) which any Company Indemnitee may suffer or incur,
insofar as such claims, liabilities, costs or damages (or actions or claims in
respect thereof) arise out of or are based upon the gross negligence or willful
misconduct of Manager (including, without limitation, any and all reasonable
legal and other expenses reasonably incurred by Company Indemnitee in connection
with investigating, defending or prosecuting any of such matters whether or not
resulting in any loss, liability or damage).
IX.
MISCELLANEOUS
9.1 Relationship of Parties. This Agreement does not create a
partnership, joint venture, or association; nor does this Agreement, or the
operations hereunder, create the relationship of lessor and lessee or bailor and
bailee. Nothing contained in this Agreement or in any agreement made pursuant
hereto shall ever be construed to create a partnership, joint venture, or
association, or the relationship of lessor and lessee or bailor and bailee, or
to impose any duty, obligation, or liability that would arise therefrom with
respect to any of the Parties.
9.2 No Third Party Beneficiaries. Except to the extent a third party is
expressly given rights herein, any agreement to pay an amount and any assumption
of liability herein contained, expressed or implied, shall be only for the
benefit of the Parties and their respective legal representatives, successors,
and assigns, and such agreements or assumption shall not inure to the benefit of
the obligees of any indebtedness of any Party whomsoever, it being the intention
of the Parties hereto that no person or entity shall be deemed a third party
beneficiary of this Agreement except to the extent a third party is expressly
given rights herein.
9.3 Governing Law. THIS AGREEMENT HAS BEEN EXECUTED AND
DELIVERED IN AND SHALL BE INTERPRETED, CONSTRUED, AND ENFORCED
PURSUANT TO AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF
DELAWARE.
9.4 Assignment. No assignment of this Agreement or any of the rights or
obligations set forth herein by either Party shall be valid without the specific
written consent of the other Party to such assignment.
9.5 Enforcement. In the event either Party shall resort to legal action
to enforce the terms and provisions of this Agreement, the prevailing Party may
recover from the other Party the costs of such action including, without
limitation, reasonable attorneys' fees.
9.6 Severability. In the event any provision of this Agreement is held
to be unenforceable for any reason, such provision shall be severable from this
Agreement if it is capable of being identified with and apportioned to
reciprocal consideration or to the extent that it is a provision that is not
essential and the absence of which would not have prevented the parties from
entering into this
Management and Consulting Agreement Page 1
<PAGE> 6
Agreement. The unenforceability of a provision that has been performed shall not
be grounds for invalidation of this Agreement under circumstances in which the
true controversy between the parties does not involve such provision.
9.7 Entire Agreement. This Agreement supersedes all previous contracts,
agreements and understandings between the Parties concerning the subject matter
hereof, and constitutes the entire agreement between the Parties with respect to
the subject matter hereof. No oral statements or prior written material not
specifically incorporated herein shall be of any force and effect, and no
changes in or additions to this Agreement shall be recognized unless
incorporated herein by amendment, such amendment(s) to become effective on the
date(s) stipulated therein.
9.8 Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented without the prior written consent of all
Parties.
9.9 Headings. The headings of the Sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
9.10 Notices and Demands. Any notice or demand which is permitted or
required hereunder will be deemed to have been sufficiently made and received as
provided in Section 10.5 of the Purchase Agreement.
9.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be taken to be an original; but such
counterparts will together constitute one document.
Management and Consulting Agreement Page 6
<PAGE> 7
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their respective duly authorized representatives as of the day and
year first above written.
AMERICAN HOMESTAR CORPORATION
By:
------------------------------------------
Laurence A. Dawson, Jr., President
ZARING NATIONAL CORPORATION
By:
------------------------------------------
Its:
-----------------------------------------
HOMEMAX, INC.
By:
------------------------------------------
Its:
-----------------------------------------
Management and Consulting Agreement Page 7
<PAGE> 8
EXHIBIT A
a. Restructure the consolidated balance sheets of the Affiliated Companies
with longer term assets, including working with ZNC to explore the
potential early termination of Operating Leases.
b. Obtain a stand alone credit facility for the working capital needs of
the Affiliated Companies.
c. 21st Century Mortgage Corporation, a subsidiary of Manager, will be the
primary supplier of financial services to the Affiliated Companies
customers at competitive rates and with competitive retailer programs.
Manager agrees to work with the Company to improve its funding rates.
d. Manager's insurance subsidiaries will be the primary supplier of
insurance products to the Affiliated Companies' customers at
competitive rates and with competitive retailer programs. Manager
agrees to use the staff in its insurance subsidiaries to assist the
Affiliated Companies in training, licensing and developing the skills
of the employees of the Affiliated Companies with regard to maximizing
the goal of insurance penetration.
e. Manager and its subsidiaries will be the exclusive suppliers of homes
to the Affiliated Companies, subject to market demands and the product
or production limitations of Manager and its subsidiaries.
f. All pricing, volume incentives and other programs offered by Manager to
the Affiliated Companies will be equal to or better than those offered
to Manager's franchisees or Manager-owned stores. Outsourcing of
products will be allowed by Manager at those locations where adequate
product lines are not available, production capacity is limited, or in
instances where customer service levels are substandard to industry
norms, until such time as those issues are resolved by Manager.
g. Manager shall manage the Affiliated Companies with a goal of building
and enhancing long term profitability, including building the HomeMax
brand and image.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 44,830,000
<SECURITIES> 0
<RECEIVABLES> 47,539,000
<ALLOWANCES> 0
<INVENTORY> 122,153,000
<CURRENT-ASSETS> 230,165,000
<PP&E> 93,147,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 420,901,000
<CURRENT-LIABILITIES> 169,700,000
<BONDS> 0
0
0
<COMMON> 920,000
<OTHER-SE> 129,645,000
<TOTAL-LIABILITY-AND-EQUITY> 420,901,000
<SALES> 437,560,000
<TOTAL-REVENUES> 467,953,000
<CGS> 342,792,000
<TOTAL-COSTS> 437,881,000
<OTHER-EXPENSES> 81,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,382,000
<INCOME-PRETAX> 20,771,000
<INCOME-TAX> 8,536,000
<INCOME-CONTINUING> 13,357,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,357,000
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.71
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