<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-22679
ZARING NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-1506058
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 Cornell Park Drive, Suite 500, Cincinnati, Ohio 45242-1825
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
513-489-8849
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
------- -------
Number of common shares outstanding as of March 31, 1998: 4,765,788
Total Pages: 21
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<TABLE>
<CAPTION>
ZARING NATIONAL CORPORATION
INDEX
Page
<S> <C>
PART I FINANCIAL STATEMENTS
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets,
March 31, 1998, March 31, 1997 (unaudited), and
December 31, 1997 (audited) 3
Consolidated Statements of Operations,
Three Months Ended March 31, 1998 and 1997 (unaudited) 5
Consolidated Statement of Shareholders' Equity,
Three Months Ended March 31, 1998 (unaudited) 6
Consolidated Statements of Cash Flows,
Three Months Ended March 31, 1998 and 1997 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
13
PART II OTHER INFORMATION 19
SIGNATURES 21
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ZARING NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31,
-------------------------- DECEMBER 31,
1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash and cash equivalents $ 5,857 $ 3,659 $ 4,160
Receivables:
Related parties 114 90 363
Other 52 669 476
Inventories:
Luxury site-built homes 47,413 39,091 42,405
Entry level site-built homes 1,640 - 1,547
Retail distribution manufactured homes 1,022 849 672
Model homes 17,239 10,441 16,890
Land, development costs and finished lots 46,936 37,336 46,907
Property and equipment, net 12,369 3,082 9,526
Investments in and advances to unconsolidated joint ventures 582 689 622
Future tax benefit 2,479 675 1,058
Cash surrender value of life insurance and other assets 5,756 4,417 5,161
Goodwill 2,327 - 2,356
-------- -------- --------
$143,786 $100,998 $132,143
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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ZARING NATIONAL CORPORATION (CONTINUED)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31,
-------------------------- DECEMBER 31,
1998 1997 1997
------------ ---------- --------------
<S> <C> <C> <C>
Liabilities:
Revolving credit facilities $ 53,892 $ 21,000 $ 46,425
Floor plan financing facility 3,801 - -
Term notes payable 14,995 17,996 15,745
Notes payable to former shareholders 2,007 - 1,896
Accounts payable 9,890 6,299 8,453
Accrued liabilities 6,618 3,714 6,292
Customer deposits 2,764 2,681 2,178
Income taxes payable - 147 -
--------- --------- ---------
Total liabilities 93,967 51,837 80,989
--------- --------- ---------
Minority interest 343 - 424
--------- --------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred shared, no par value, 2,000,000
shares authorized, none issued or outstanding
- - -
Common shares, no par value, 18,000,000
shares authorized, 4,765,788, issued and
outstanding at March 31, 1998, 5,036,480
issued and 4,781,080 outstanding at
March 31, 1997, 4,780,788 issued and
outstanding at December 31, 1997 25,131 25,146 25,146
Additional paid-in capital 5,551 7,687 5,678
Retained earnings 18,794 18,334 19,906
--------- --------- -------
49,476 51,167 50,730
Less- treasury shares, at cost, 255,400
shares at March 31, 1997 - (2,006) -
--------- --------- -------
Total shareholders' equity 49,476 49,161 50,730
--------- --------- -------
$143,786 $100,998 $132,143
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands except per share information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
----------------------------
<S> <C> <C>
Net revenues:
Luxury site-built homes $ 49,877 $ 43,145
Entry level site-built homes 2,205 --
Retail distribution manufactured homes 930 1,012
----------- -----------
Total net revenues 53,012 44,157
----------- -----------
Expenses:
Cost of luxury site-built homes 42,579 35,542
Cost of sales entry level site-built homes 1,715 --
Cost of sales retail distribution manufactured homes 787 755
Interest 993 754
Selling 4,319 3,252
General and administrative 4,684 3,048
----------- -----------
Total expenses 55,077 43,351
----------- -----------
Operating income (loss) (2,065) 806
Other income (expense):
Income (loss) from unconsolidated joint ventures 50 (25)
Other, net 31 21
----------- -----------
Income (loss) before minority interest and provision
(credit) for income taxes (1,984) 802
Minority interest in loss of subsidiary 81 --
----------- -----------
Income (loss) before provision (credit) for
income taxes (1,903) 802
Provision (credit) for income taxes (791) 322
----------- -----------
Net income (loss) $ (1,112) $ 480
=========== ===========
Basic and diluted earnings (loss) per common share $ (0.23) $ 0.10
=========== ===========
Weighted average shares outstanding 4,776,455 4,781,090
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
ADDITIONAL
SHARES COMMON PAID-IN RETAINED
ISSUED SHARES CAPITAL EARNINGS TOTAL
--------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 4,780,788 $ 25,146 $ 5,678 $ 19,906 $ 50,730
Purchase and retirement of common
shares (15,000) (15) (127) -- (142)
Net loss -- -- -- (1,112) (1,112)
--------- -------- ------- -------- --------
BALANCE, March 31, 1998 4,765,788 $ 25,131 $ 5,551 $ 18,794 $ 49,476
========= ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (1,112) $ 480
Adjustments to reconcile net income to cash provided by
operating activities--
Depreciation and amortization 622 359
Income (loss) from unconsolidated joint ventures (50) 25
Minority interest in loss of subsidiary (81) --
Change in assets and liabilities--
Future tax benefit (1,421) --
Receivables 673 (206)
Inventories (5,829) (4,065)
Cash surrender value of life insurance and other assets (595) (754)
Accounts payable and other accrued liabilities 1,437 898
Accrued expenses 326 --
Customer deposits 586 132
Income taxes payable -- 40
-------- --------
Net cash provided by (used for) operating activities (5,444) (3,091)
-------- --------
Cash Flows from Investing Activities:
Additions to property and equipment (3,436) (812)
Distributions from unconsolidated joint ventures, net 90 372
-------- --------
Net cash provided by (used for) investing activities (3,346) (440)
-------- --------
Cash Flows from Financing Activities:
Borrowings on notes payable 26,354 12,000
Repayments of notes payable (15,725) (7,250)
Purchase of common shares (142) --
-------- --------
Net cash provided by (used for) financing activities 10,487 4,750
-------- --------
Increase in cash and cash equivalents 1,697 1,219
Cash and cash equivalents, beginning of period 4,160 2,440
-------- --------
Cash and cash equivalents, end of period $ 5,857 $ 3,659
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for-
Interest $ 1,292 $ 606
======== ========
Income taxes $ 584 $ 381
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 7
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ZARING NATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION-
-----------------------
Effective in May 1997, Zaring National Corporation (an Ohio corporation)
implemented the formation of a holding company structure which results in
the accompanying consolidated financial statements including the accounts
of Zaring National Corporation and subsidiaries (the Company), formerly
Zaring Homes, Inc. The formation of the holding company had no effect on
the carrying value of assets, liabilities or equity of the Company. The
subsidiaries of the Company include the following: Zaring Homes, Inc. and
its subsidiaries, Zaring Homes of Indiana, LLC and Zaring Homes Kentucky,
LLC; Zaring Holdings, Inc.; HomeMax, Inc. and its subsidiaries, HomeMax
North Carolina, Inc., HomeMax Tennessee, Inc., HomeMax South Carolina,
HomeMax Ohio, Inc., HomeMax Indiana, LLC and HomeMax Kentucky, LLC;
Hearthside Homes, LLC (formerly Zaring Acquisition Company of Indiana,
LLC); and Legacy Mortgage Corporation.
The principal business of the Company's subsidiary, Zaring Homes, Inc.
(Zaring Homes) is the designing, constructing, marketing and selling of
single-family homes, and the acquisition and development of land for sale
as residential building lots in the midwest and southeast United States.
Zaring Homes began operations in Cincinnati, Ohio in 1964 and commenced
operations in Nashville, Tennessee in 1986. In 1994, operations commenced
in Raleigh/Durham, North Carolina, and Indianapolis, Indiana. In 1996,
operations began in Louisville, Kentucky and Charlotte, North Carolina.
In November 1996, the Company formed HomeMax, Inc. (HomeMax) for the
purpose of entering into the retail distribution of manufactured housing.
HomeMax, based in Raleigh, North Carolina, commenced operations in the
first quarter of 1997. During 1997, HomeMax acquired the assets of three
manufactured housing retailers for approximately $2.4 million in cash.
The acquisitions were recorded using the purchase method of accounting.
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Effective October 1, 1997, the Company, through its newly formed
subsidiary Hearthside Homes, LLC, acquired substantially all of the net
operating assets of Legacy, Inc., an Indianapolis-based builder of entry
level single-family homes for approximately $1.9 million in cash and a
note. The Company also acquired the stock of Legacy Mortgage Corporation
for approximately $138,000. Legacy Mortgage Corporation originates,
processes and sells mortgages to third party investors. The acquisitions
were recorded using the purchase method of accounting.
All significant intercompany transactions and balances have been
eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission for interim financial information. Since such financial
statements do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements, they should be read in conjunction with the consolidated
financial statements and related footnotes included in the Form 10-K for
the fiscal year ended December 31, 1997 filed with the Securities and
Exchange Commission. The financial statements are unaudited, but in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the
Company's unaudited consolidated financial statements as of March 31,
1998 have been included. Operating results for the three months ended
March 31, 1998, are not necessarily indicative of the results for the
entire year.
(2) CAPITALIZED INTEREST-
Interest is capitalized on land in the process of development and
residential housing construction costs during the development and
construction period. The following table summarizes the activity with
respect to capitalized interest:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(dollars in thousands)
--------------------------
1998 1997
----------- -------
<S> <C> <C>
Capitalized interest, beginning of period $ 1,678 $ 1,074
Interest incurred 1,280 731
Interest expensed (993) (739)
------- -------
Capitalized interest, end of period $ 1,965 $ 1,066
======= =======
</TABLE>
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(3) NOTES PAYABLE-
---------------
The Company has an unsecured $87.5 million syndicated credit facility
with PNC Bank acting as agent. This facility consists of a revolving
credit facility, providing for borrowings up to $72.5 million, depending
on the Company's borrowing base, as defined in the agreement, and a $15
million term loan. $10 million of the revolving credit facility may be
used for letters of credit. The revolving credit facility bears interest
at (a) the greater of the prime rate or the Federal Funds rate plus .5%
or (b) the Euro-rate plus 1.25% to 1.625%, depending on the Company's
leverage ratio. The revolving credit facility expires July 1, 1999. As
of March 31, 1998, the Company had outstanding balances of $41.9 million
under the revolving credit facility and $ 5.9 million in letters of
credit.
In February 1998, the Company entered into three additional syndicated
credit facilities with NationsBank as agent. The new facilities consist
of:
- A $33.9 million manufactured housing floor plan financing facility
for inventory and display models with interest equal to the prime
rate or Euro-rate plus 2.35%. Retail inventory borrowings are subject
to repayment upon the earlier of sale, or 10% at the end of six
months following initial borrowing and the balance after nine months.
Borrowings for the cost of display models are subject to payments of
10% after twelve months, with the balance due no later than
twenty-four months after the date of the initial borrowing. As of
March 31, 1998, the Company had outstanding balances of $3.8 million
under the floor plan facility.
- A $12 million sales village mortgage loan for sales village
development, interest at prime plus 2%, convertible into twenty-eight
separate fifteen year amortization loans in amounts ranging from
$250,000 to $500,000 per village, balloon payments due five years
after the initial borrowing for each village, secured by mortgages.
As of March 31, 1998, the Company had not utilized the mortgage loan.
- A $15 million unsecured two-year revolving credit note expiring
March 2000 for working capital needs of HomeMax, Inc. and
subsidiaries with interest equal to the prime rate or Euro-rate plus
1.75% and guaranteed by Zaring Homes, Inc. As of March 31, 1998, the
Company had outstanding balances of $12.0 million under the revolving
credit note.
Term notes payable at March 31, 1998, include a $15.0 million term loan
($9.8 million outstanding as of March 31, 1998), expiring April 1, 2001,
which bears interest at (a) the greater of the prime rate or the Federal
Funds rate plus .5% or (b) the Euro-rate plus 1.375% to 1.75%, depending
on the Company's leverage ratio, and is payable in quarterly
installments of $750,000, and other term loans of $5.2 million which
bear interest at a fixed rate of 7.95% and are payable in 12 equal
quarterly installments beginning September, 1998.
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As of March 31, 1998, the Company also has $2.0 million of notes to
former shareholders with interest rates of 6% to 8.5%, payable in equal
annual installments and due December, 1999 and August, 2001.
The bank credit agreements include provisions which require, among
others, that the Company maintain certain levels of tangible net worth
and cash flow from operations as well as limiting the Company's dividends
and ratio of debt to equity.
(4) EARNINGS (LOSS) PER SHARE-
---------------------------
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (SFAS 128). In accordance with SFAS128,
basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed similar to basic except the
denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common
shares had been issued.
Options to purchase 125,159 and 66,383 shares of common stock at an
average price of $9.96 and $12.05 per share were outstanding during the
periods ending March 31, 1998 and 1997, respectively, but were not
included in the computation of earnings per share since the options'
exercise prices were greater than the average market price of the common
shares.
Since there are no antidilutive securities, basic and diluted earnings
(loss) per share are identical thus a reconciliation of the numerator and
denominator is not necessary.
SFAS 128 requires the Company to restate reported earnings for all
periods presented. This accounting change had no effect on previously
reported earnings per share.
(5) SHAREHOLDERS' EQUITY-
---------------------
The Company is authorized to issue up to 2,000,000 preferred shares of
which 1,000,000 are voting. No preferred shares have been issued.
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(6) NEW PRONOUNCEMENTS-
-------------------
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which
establishes the standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a
full set of general-purpose financial statements. SFAS 130 is effective
for financial statements for annual periods beginning after December 15,
1997. The Company adopted this statement in the first quarter of fiscal
1998 with no impact on the Company's reported consolidated financial
position, results of operations or cash flow.
In June 1997, the FSAB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (SFAS 131), which requires disclosures for each
segment in which the chief operating decision maker organizes these
segments within a company for making operating decisions and assessing
performance. Reportable segments are based on products and services,
geography, legal structure, management structure and any manner in which
management segregates a company. The Company intends to adopt SFAS 131 in
fiscal 1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1
requires computer software costs incurred in the preliminary project
stage to be expensed and provides capitalization criteria for costs
incurred subsequent to the preliminary project stage. The Company adopted
SOP 98-1 in the first quarter of fiscal 1998 with no impact on the
financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). SOP 98-5 requires the cost of start-up
activities, such as pre-opening expenses, to be expensed as incurred.
Under the Company's current accounting policies, these pre-opening
expenses are deferred until the manufactured housing village has opened
and then amortized over a one-year period. The Company is required to
adopt the provisions of SOP 98-5 no later than the first quarter of
fiscal 1999. Included in the accompanying March 31, 1998 consolidated
balance sheet is approximately $603,000 of unamortized pre-opening
expenses which would have been expensed had SOP 98-5 already been
implemented.
(7) RECLASSIFICATIONS-
------------------
Certain amounts in the consolidated interim financial statements for 1997
have been reclassified to conform to the 1998 presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
The Company's business and the homebuilding industry are subject to changes in
national and local economic conditions, as well as other factors, including
employment levels, availability of financing, interest rates, consumer
confidence and housing demand. The Company's results of operations for the
periods presented include luxury site-built homes, entry level site-built homes,
retail distribution of manufactured homes and reflect the cyclical nature of the
housing industry.
The Company reported consolidated net revenues of $53.0 million for the quarter
ended March 31, 1998, compared to $44.2 million for the same quarter in 1997.
Net loss for the first quarter of 1998 was $ (1.1) million or $ (.23) per share,
compared to net income of $.5 million or $ .10 per share for the first quarter
of 1997.
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The following tables set forth, for the periods indicated, certain information
regarding the Company's operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---- -----
(Dollars in thousands)
<S> <C> <C> <C>
Zaring Homes, Inc.
Luxury Site-Built Homes
Revenues (1) $ 49,877 $ 43,101
Cost of sales 42,579 35,580
Interest 1,520 1,448
Selling, general and administrative expenses 5,860 5,152
---------- ----------
Operating income (loss) (82) 921
Other income 8 6
---------- ----------
Pretax Luxury Site-Built Income (Loss) (74) 927
HomeMax, Inc.
Retail Distribution Manufactured Homes
Revenues (1) 930 1,012
Cost of sales 787 755
Interest 202 20
Selling, general and administrative expenses 2,107 503
---------- ----------
Operating loss (2,166) (266)
Other income 1 64
Minority interest 81 -
---------- ----------
Pretax Retail Distribution Loss (2,084) (202)
Hearthside Homes, LLC
Entry Level Site-Built Homes
Revenues (1) 2,205
Cost of sales 1,715
Interest 17
Selling, general and administrative expenses 452
----------
Operating income 21
Other income 13
----------
Pretax Entry Level Site-Built Income 34
Corporate (income) and expense:
Interest income from subsidiaries, net (746) (714)
General and administrative 525 637
---------- ----------
Income (loss) before taxes (1,903) 802
Provision (credit) for income taxes (791) 322
---------- ----------
Net income (loss) $ (1,112) $ 480
=========== ============
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Luxury Site-Built Homes
Operating data:
Units
New Orders (2) 336 198
Closings (1) 200 178
Backlog (3) 376 283
Average revenue per closing $ 250 $ 239
Average value of new order sales $ 253 $ 245
Sales value of backlog $95,809 $70,140
Retail Distribution Manufactured Homes
Operating data:
Units
New Orders (2) 73 21
Closings (1) 19 38
Backlog (3) 94 11
Average revenue per closing $ 48 $ 29
Average value of new order sales $ 55 $ 26
Sales value of backlog $ 5,458 $ 460
Entry Level Site-Built Homes
Operating data:
Units
New Orders (2) 39
Closings (1) 19
Backlog (3) 44
Average revenue per closing $ 116
Average value of new order sales $ 128
Sales value of backlog $ 5,852
</TABLE>
(1) Revenue from a sale is recognized upon the closing of the sale.
(2) New orders represent total new home orders received during the period, net
of cancellations.
(3) Backlog includes new orders which have not yet closed.
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THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
ZARING HOMES, INC., LUXURY SITE-BUILT HOMES- Net revenues for the three months
ended March 31, 1998 increased 15.7% over the same period 1997. The Company
delivered 200 homes in the first quarter of 1998, compared to 178 homes in 1997,
a 12.4% increase. This increase is attributable to the strength of the luxury
housing market and first quarter 1998 closings in the expansion cities of
Charlotte and Louisville versus no closings in Charlotte and Louisville in the
first quarter of 1997.
Gross profit decreased $223,000 or 3.0% in the first quarter of 1998 as compared
to the first quarter of 1997. Gross profit as a percentage of revenue declined
2.9% to 14.6% of revenues. The decline in gross profit is attributable to, among
other factors, the acceptance of contracts with lower margins in an effort to
increase velocity, particularly of market homes and homes in substantially
complete neighborhoods and increased subcontractor and other production costs.
Interest expense increased $72,000 in the first quarter of 1998 compared to the
same period in 1997. This increase is mainly attributable to a larger
investment in model homes and market homes and the number of units in process.
Selling expenses increased $0.4 million. As a percentage of revenue, selling
expenses decreased from 7.3% to 7.1%. General and administrative expenses
increased $0.3 million or 16% in the first quarter of 1998, compared to the
first quarter of 1997. As a percentage of revenue, general and administrative
expenses remained relatively flat at 4.6%. Selling, general and administrative
expenses increased $0.7 million, or 13.7%, in the first quarter of 1998
compared to the first quarter of 1997. As a percentage of revenues, selling,
general and administrative expenses remained constant at 12%.
As a result of the foregoing, Zaring Homes reported a pretax loss of $74,000 or
0.15% of net revenues in the first quarter of 1998, a decrease of $1.0 million
from the same period in 1997.
HOMEMAX, INC., RETAIL DISTRIBUTION MANUFACTURED HOMES- Net revenues for the
three months ended March 31, 1998 decreased 8.1% from $1.0 million in the first
quarter of 1997 to $0.9 million in the first quarter of 1998. HomeMax closed 19
units in the first quarter of 1998, a decrease of 50% from the 38 units closed
in the same period of 1997. This decrease is mainly due to the fact that a new
product line was introduced in the fourth quarter of 1997 in conjunction with
the opening of the first Super Model Home Village. Sales of the new product have
been strong, as reflected in the backlog of 94 units at March 31, 1998, compared
to 11 units in 1997; however, the time from order to close has lengthened
principally due to land availability and processing customer financing.
Gross profit was $143,000 or 15.4% for the three months ended March 31, 1998, as
compared to $257,000 or 25.4% for the same period in 1997, a decrease of 44.4%.
This
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decrease is primarily due to the mix of units sold and production expenses
which were not able to be passed on to the consumer. Interest expense increased
$182,000 in the first quarter of 1998. As a percentage of revenues, interest
expense increased from 2.0% in the first quarter of 1997 to 21.7% in the first
quarter of 1998. This increase is due to the increase in the number of HomeMax
villages from 1 in 1997 to 7 in 1998. Each village necessitates a significant
investment which includes sales office units, model units and related
furnishings. Also attributing to the increase in interest expense is the
increase in the number of units in backlog and the financing of the
infrastructure expansion for selling and administrative initiatives.
Selling, general and administrative expenses for Home Max, including
infrastructure costs to leverage the expansion efforts, totaled $2.1 million for
the three months ended March 31, 1998 compared to $0.5 million for the same
period in 1997. In the first quarter of 1997, HomeMax acquired the assets of one
manufactured housing retailer. In the first quarter of 1998, HomeMax was
operating 3 acquired manufactured housing retailers and 4 Super Model Home
Villages. Selling expenses were $715,000 or 76.9% of revenues in the first
quarter of 1998 compared to $95,000, or 9.4% of revenues in 1997. This increase
is primarily due to start-up marketing and advertising costs. General and
administrative expenses were $1.4 million in the first quarter of 1998 versus
$0.4 million for the same period in 1997, an increase of $1.0 million due to the
above mentioned expansion efforts.
As a result of the foregoing, HomeMax reported a pretax loss of $2.1 million in
the first quarter of 1998 compared to a loss of $0.2 million in the first
quarter of 1997.
HEARTHSIDE HOMES, LLC, ENTRY LEVEL SITE-BUILT HOMES- Net revenues in the first
quarter of 1998 were $2.2 million. Nineteen homes were delivered in the first
three months of 1998.
Gross profit was $0.5 million, or 22.2%. Selling, general and administrative
expenses were $452,000, or 20.5% of revenues. As a result of the foregoing,
Hearthside reported pretax income of $34,000, 1.5% of revenues for the quarter
ended March 31, 1998.
OTHER OPERATING RESULTS
- -----------------------
Interest income from subsidiaries represents the allocation of interest cost to
the subsidiaries. General and administrative expenses decreased $112,000 in the
first quarter of 1998 compared to the same period 1997.
YEAR 2000 AND ACCOUNTING SOFTWARE COSTS
- ---------------------------------------
The Company has several information improvement initiatives in process. In
particular, the Company plans to replace its core management information system
over the next three years in order to be year 2000 compliant. Management's
current estimate of the cost of the system replacement approximates $3.0
million. Certain of these costs will be capitalized in
Page 17
<PAGE> 18
accordance with the guidelines established in Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" issued in March 1998.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Net cash used by operating activities increased $2.4 million from net cash used
in the first quarter of 1997 of $3.1 million to net cash used of $5.4 million in
the first quarter of 1998. This is a result of the net loss in the first quarter
of 1998 and increased investments in both site-built and manufactured housing
inventories offset by increases in payables and customer deposits. Net cash used
for investing activities increased $2.9 million due to greater purchases of
property and equipment. Net cash provided by financing activities in the first
quarter of 1998 was $10.5 million, an increase of $5.7 million over the same
period in 1997 due to net bank borrowings of $10.6 million.
The Company believes its present cash balances, amounts available under existing
borrowing agreements and amounts generated from future operations will provide
adequate funds for its future plans.
PROVISIONS FOR WRITEDOWN TO NET REALIZABLE VALUE
- -------------------------------------------------
The Company periodically reviews the value of land, inventories and intangibles
and determines whether any write-downs need to be recorded to reflect declines
in value. The estimated net realizable value of real estate inventories
represents management's estimate based on present plans and intentions, selling
prices in the ordinary course of business and anticipated economic and market
conditions. Accordingly, the realization of the value of the Company's real
estate inventories and certain intangibles is dependent upon future events and
conditions that may cause actual results to differ from amounts presently
estimated.
INFLATION
- ---------
Housing demand, in general, is affected adversely by increases in interest
rates. If mortgage interest rates, material and labor costs increase
significantly, the Company's revenues, gross profit, and net income could be
adversely affected.
CAUTIONARY STATEMENTS
- ---------------------
Certain statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section that are not related to
historical results are forward looking statements. Actual results may differ
materially from those projected or implied in the forward looking statements.
Further, certain forward looking statements are based upon assumption of future
events which may not prove to be accurate. These forward looking statements
involve risks and uncertainties including but not limited to
Page 18
<PAGE> 19
those referred to under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations; Cautionary Statements" in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
filed with the Securities and Exchange Commission. Readers should carefully
review those risk factors and uncertainties in conjunction with reading this
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
PART II - OTHER INFORMATION
Item 1. Legal Information
------------------
The Company is subject to various claims, lawsuits and administrative
proceedings arising in the ordinary course of business activities which seek
remedies or damages. The Company believes that any liability that may be
determined will not have a material effect on its financial position or results
of operation.
Item 2. None
----
Item 3. None
----
<PAGE> 20
Item 4. Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
A) The Annual Meeting of Shareholders of Zaring National Corporation
was held on April 23, 1998.
B) Not applicable
C) 1) Seven nominees were elected to the Board of Directors at the
1998 annual meeting:
Allen G. Zaring III was elected by a vote of 3,300,229 for and
3,979 withheld.
John R. Brooks was elected by a vote of 3,300,232 for and 3,976
withheld.
Murat H. Davidson was elected by a vote of 3,300,232 for and
3,976 withheld.
Daniel W. Geeding was elected by a vote of 3,300,232 for and
3,976 withheld.
Robert N. Sibcy was elected by a vote of 3,300,232 for and 3,976
withheld.
John H. Wyant was elected by a vote of 3,300,232 for and 3,976
withheld.
2) At the meeting, the following additional matters were voted upon
with the voting results for each matter as indicated:
a) The shareholders approved the amendments to the Zaring
National Corporation Key Employee Stock Option Plan. There
were 6,980 votes cast in opposition, 6,433 abstentions,
1,461,580 broker non-votes and 3,290,795 votes cast in
favor.
b) The shareholders approved amendments to the Zaring National
Corporation Outside Directors Stock Option Plan. There were
6,418 votes cast in opposition, 8,516 abstentions, 1,461,580
broker non-votes and 3,289,274 votes cast in favor.
c) The shareholders confirmed the appointment of Arthur
Andersen, L.L.P. as independent auditors of the Company for
fiscal 1998. There were 2,136 votes cast in opposition,
3,007 abstentions, 1,461,580 broker non-votes and 3,299,065
votes cast in favor.
D) Not applicable
Page 20
<PAGE> 21
Item 5. None
----
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27, Financial Data Schedule
(b) The Company did not file a report on Form 8-K during the
quarter for which this report is filed.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZARING NATIONAL CORPORATION
(Registrant)
Date: May 15, 1998 By:/s/Allen G. Zaring III
---------------------------------------------
Allen G. Zaring III
Chairman of the Board, Chief Executive Officer
Date: May 15, 1998 By:/s/Ronald G. Gratz
---------------------------------------------
Ronald G. Gratz
Chief Financial Officer
Secretary and Treasurer
(Principal Financial and Accounting Officer)
Page 21
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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