<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, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-22679
ZARING NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-1506058
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 Cornell Park Drive, Suite 500, Cincinnati, Ohio 45242-1825
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
513-489-8849
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
----- ----
Number of common shares outstanding as of March 31, 1999: 4,591,488
Total Pages: 23
<PAGE> 2
ZARING NATIONAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets,
March 31, 1999, March 31, 1998 (unaudited), and
December 31, 1998 3
Consolidated Statements of Operations (unaudited),
Three Months Ended March 31, 1999 and 1998 5
Consolidated Statement of Shareholders' Equity,
Three Months Ended March 31, 1999 (unaudited) 6
Consolidated Statements of Cash Flows,
Three Months Ended March 31, 1999 and 1998 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II OTHER INFORMATION 22
SIGNATURES 23
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ZARING NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31
------------------- DECEMBER 31,
1999 1998 1998
-------- -------- --------
<S> <C> <C> <C>
Cash and cash equivalents $ 11,973 $ 5,857 $ 15,699
Receivables:
Related parties 74 114 82
Notes 4,734 -- 325
Manufactured housing rebates and other 821 52 885
Inventories:
Luxury site-built homes 38,297 47,413 32,365
Entry level homes 6,500 1,640 6,405
Retail distribution manufactured homes 3,014 1,022 2,746
Model homes 21,897 17,239 21,046
Land, development costs and finished lots 59,758 46,936 50,280
Property and equipment, net 8,097 6,737 8,108
HomeMax Sales Villages, net 12,590 5,632 12,336
Investments in and advances to unconsolidated
joint ventures 201 582 201
Future tax benefit 7,751 2,479 6,053
Cash surrender value of life insurance and other assets 4,642 5,756 5,566
Goodwill, net 254 2,327 259
-------- -------- --------
$180,603 $143,786 $162,356
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 3
<PAGE> 4
ZARING NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31 DECEMBER 31,
------------------ -----------
1999 1998 1998
-------- -------- ----------
<S> <C> <C> <C>
Liabilities:
Revolving credit facility $ 53,031 $ 53,892 $ 44,500
Manufactured housing floor plan facility 7,297 3,801 7,082
Term notes payable 44,012 17,002 41,446
Accounts payable 13,619 9,890 14,766
Accrued liabilities 7,568 6,618 6,829
Customer deposits 5,049 2,764 3,296
Deferred gain 1,775 -- --
-------- -------- --------
Total liabilities 132,351 93,967 117,919
-------- -------- --------
Minority interest in consolidated entities 3,800 343 1,654
-------- -------- --------
Subordinated convertible debt 4,000 -- --
-------- -------- --------
Commitments and contingencies
Shareholders' equity:
Preferred shares, no par value, 2,000,000
shares authorized, none issued or
outstanding -- -- --
Common shares, no par value, 18,000,000
shares authorized, 4,591,488, 4,765,788,
4,591,488 issued and outstanding at March
31, 1999, March 31, 1998, and December
31, 1998, respectively 24,957 25,131 24,957
Additional paid-in capital 4,286 5,551 4,286
Retained earnings 11,209 18,794 13,540
-------- -------- --------
Total shareholders' equity 40,452 49,476 42,783
-------- -------- --------
$180,603 $143,786 $162,356
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 4
<PAGE> 5
ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net revenues:
Luxury site-built homes $ 39,308 $ 49,877
Entry level homes 4,915 2,205
Retail distribution manufactured homes 4,573 930
Financial services 315 --
----------- -----------
Total net revenues 49,111 53,012
----------- -----------
Expenses:
Cost of luxury site-built homes 32,021 42,579
Cost of sales entry level homes 4,593 1,715
Cost of sales retail distribution
manufactured homes 3,894 787
Interest 1,642 993
Selling 4,347 4,319
General and administrative 6,374 4,684
Financial services 300 --
----------- -----------
Total expenses 53,171 55,077
----------- -----------
Operating loss (4,060) (2,065)
Other income :
Income from unconsolidated joint
ventures -- 50
Other, net 54 31
----------- -----------
Loss before minority interest and credit
for income taxes (4,006) (1,984)
Minority interest in loss of subsidiary 160 81
----------- -----------
Loss before credit for income taxes (3,846) (1,903)
Credit for income taxes (1,515) (791)
----------- -----------
Net loss $ (2,331) $ (1,112)
=========== ===========
Basic and diluted loss per
common share $ (0.51) $ (0.23)
=========== ===========
Weighted average shares outstanding 4,591,488 4,776,455
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 5
<PAGE> 6
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, 1998 4,591,488 $24,957 $4,286 $13,540 $42,783
Net loss (2,331) (2,331)
--------- ------- ------ ------- -------
BALANCE, March 31, 1999 4,591,488 $24,957 $4,286 $11,209 $40,452
========= ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 6
<PAGE> 7
ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (2,331) $ (1,112)
Adjustments to reconcile net loss to cash
used in operating activities--
Depreciation and amortization 1,103 622
Income from unconsolidated joint ventures -- (50)
Minority interest in loss of subsidiary (160) (81)
Change in assets and liabilities--
Future tax benefit (1,698) (1,421)
Receivables 74 673
Inventories (16,624) (5,829)
Cash surrender value of life insurance and other assets 716 (595)
Accounts payable (1,147) 1,437
Accrued expenses 624 326
Customer deposits 1,753 586
-------- --------
Net cash used in operating activities (17,690) (5,444)
-------- --------
Cash Flows from Investing Activities:
Additions to property and equipment (1,174) (3,436)
Proceeds from sale of property and equipment 41 --
Distributions received from unconsolidated joint ventures, net -- 90
-------- --------
Net cash used for investing activities (1,133) (3,346)
-------- --------
Cash Flows from Financing Activities:
Borrowings on notes payable 31,455 26,354
Repayments of notes payable (16,143) (15,725)
Purchase of common shares -- (142)
Distributions paid to majority shareholder of affiliate (215) --
-------- --------
Net cash provided by financing activities 15,097 10,487
-------- --------
Increase (decrease) in cash and cash equivalents (3,726) 1,697
Cash and cash equivalents, beginning of period 15,699 4,160
-------- --------
Cash and cash equivalents, end of period $ 11,973 $ 5,857
-------- --------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for-
Interest, net of amounts capitalized $ 1,713 $ 1,292
-------- --------
Income taxes $ 183 $ 584
======== ========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During the three months ended March 31, 1999, the Company received a note
receivable in exchange for the sale of an investment in the HomeMax, Inc.
subsidiary (Note 6):
Note receivable $4,411
Deferred gain (1,775)
Minority interest (2,521)
Accrued expenses (115)
The accompanying notes are an integral part
of these consolidated financial statements.
Page 7
<PAGE> 8
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(1) BASIS OF PRESENTATION-
Effective in May 1997, Zaring National Corporation (an Ohio corporation)
implemented the formation of a holding company structure which results in
the accompanying consolidated financial statements including the accounts
of Zaring National Corporation and subsidiaries (the Company). The
subsidiaries of the Company include the following: Zaring Homes, Inc. and
its subsidiaries, Zaring Homes of Indiana, LLC and Zaring Homes Kentucky,
LLC; Zaring Holdings, Inc.; HomeMax Operating Properties, L.L.C. (Note
6); HomeMax, Inc. and its subsidiaries, HomeMax North Carolina, Inc.,
HomeMax Tennessee, Inc., HomeMax South Carolina, Inc., HomeMax Ohio,
Inc., HM Properties, Inc., HomeMax Indiana, LLC and HomeMax Kentucky,
LLC; Hearthside Homes, LLC; Legacy Mortgage Corporation doing business as
Hearthside Home Mortgage.
In October 1998, the Company increased its ownership of Blue Chip
Mortgage Company, LLC (Blue Chip) from 50% to 100%. Accordingly, the
financial results of Blue Chip subsequent to September 1998 are
consolidated with the Company's activities whereas activities of Blue
Chip prior to October 1998 were reported using the equity method of
accounting. Effective April 1, 1999 Blue Chip and Legacy Mortgage
Corporation were merged and renamed Zaring Financial Services, LLC.
The principal business of the Company's subsidiary, Zaring Homes, Inc.
(Zaring Homes) is the designing, constructing, marketing and selling of
single-family homes and the acquisition and development of land for sale
as residential building lots in the midwest and southeast United States.
Zaring Homes began operations in Cincinnati, Ohio in 1964 and commenced
operations in Nashville, Tennessee in 1986. In 1994, operations commenced
in Raleigh/Durham, North Carolina and Indianapolis, Indiana. In 1996,
operations commenced in Louisville, Kentucky and Charlotte, North
Carolina.
In November 1996, the Company formed HomeMax, Inc. (HomeMax) for the
purpose of entering into the retail distribution of manufactured housing.
HomeMax, based in Raleigh, North Carolina, commenced operations in the
first quarter of 1997 and currently operates twelve sales villages
located in North Carolina, South Carolina and Kentucky.
Effective October 1, 1997, the Company, through its subsidiary Hearthside
Homes, LLC (Hearthside), acquired substantially all of the net operating
assets of Legacy, Inc., an Indianapolis based builder of entry level
single family homes. The Company also acquired the stock of Legacy
Mortgage Corporation, an entity which originates, processes and sells
mortgages to third-party investors.
In June 1998, the Company's principal shareholder formed First Cincinnati
Leasing LLC (Leasing LLC) and First Cincinnati Land LLC (Land LLC) to
purchase and leaseback certain model homes and purchase certain
undeveloped land, as applicable. As a result of, among others, the
principal shareholder's control of Leasing LLC and Land LLC, the results
of each of these entities have been consolidated with the Company's
activities subsequent to their formation. The LLCs initial capitalization
and related share of income is included as a component of minority
interest in the accompanying consolidated financial statements.
In March 1999, the Company's principal shareholder formed First
Cincinnati Leasing 99 LLC (Leasing 99 LLC) to purchase and leaseback
certain model homes. No model homes were purchased by Leasing 99 LLC
during the period ending March 31, 1999.
All significant intercompany transactions and balances have been
eliminated in consolidation.
Page 8
<PAGE> 9
The accompanying consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission for interim financial information. Since such financial
statements do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements, they should be read in conjunction with the consolidated
financial statements and related footnotes included in the Form 10-K for
the fiscal year ended December 31, 1998 filed with the Securities and
Exchange Commission. The financial statements are unaudited, but in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the
Company's unaudited consolidated financial statements as of March 31,
1999 have been included. Operating results for the three months ended
March 31, 1999, are not necessarily indicative of the results for the
entire year.
(2) CAPITALIZED INTEREST-
Interest is capitalized on land in the process of development,
construction of sales villages and residential housing construction costs
during the development and construction period. The following table
summarizes the activity with respect to capitalized interest:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(DOLLARS IN THOUSANDS)
-----------------------------
1999 1998
------- -------
<S> <C> <C>
Capitalized interest, $ 2,139 $ 1,678
beginning of period
Interest incurred 1,619 1,280
Interest expensed (1,642) (993)
------- -------
Capitalized interest,
end of period $ 2,116 $ 1,965
======= =======
</TABLE>
(3) NOTES PAYABLE-
The Company has an unsecured, $87.5 million syndicated credit facility
with PNC Bank acting as agent. This facility consists of a revolving
credit facility, providing for borrowings up to $72.5 million, depending
on the Company's borrowing base, as defined in the agreement, and a $15
million term loan. Ten million dollars of the revolving credit facility
may be used for letters of credit.
The Company's notes payable consist of the following at March 31, 1999:
<TABLE>
<S> <C>
Revolving Credit Facility, payable to PNC Bank, as agent, $72.5 million
maximum available borrowings, interest rate options of (a) the greater of
the Prime Rate or the Federal Funds rate plus .50% or the (b) Euro-rate
plus 1.25% to 1.63%, depending on the Company's leverage ratio
(borrowings outstanding at March 31, 1999 are at 7.07%),
expiring in July 2000. $ 53,031
========
Manufactured Housing Floor Plan Facility, payable to Nations Bank, $12.9
million financing facility for inventory and display models, interest at
the Prime Rate or the Euro-rate plus 2.35% (7.31% at March 31, 1999) and
subject to repayment upon the earlier of sale or the end of, in certain
circumstances, six months if held in inventory. Borrowings for the cost
of certain models held for more than twelve months accrue interest at 10%
and are subject to repayment no later than twenty-four months
after the date of initial borrowing. $ 7,297
========
Term Loans, payable to PNC Bank, as agent, borrowings at interest rate
options of (a) the greater of the Prime Rate or the Federal Funds
rate plus .50% or the (b) Euro-rate plus 1.38% to 1.75%, depending on
the Company's leverage ratio (borrowings outstanding at March 31, 1999
are at 6.89%), payable in quarterly installments of
$750 through April 2001. $ 6,750
========
</TABLE>
Page 9
<PAGE> 10
<TABLE>
<S> <C>
Credit Agreement, payable to The Provident Bank, $15.0 million
available for working capital needs of HomeMax, Inc. and subsidiaries,
interest at the Prime Rate plus 1%, (8.75% at March 31, 1999), payable in
three annual installments of $1.47 million commencing March 15, 2000,
entire balance payable at the earlier of June 15, 2002 or 90 days
following the sale of the remaining 50% of HomeMax (Note 6), secured by
$8.4 million of promissory notes, contingent interest equal to a
percentage of the gain, if any, upon the sale of additional interest in
HomeMax, as defined per the Credit Agreement, $10.0 million
guaranteed by Zaring Homes, Inc. 15,000
Notes Payable to Former Shareholders, interest at 6.00% to 8.50%, payable
in equal annual installments, due December 1999 and August 2001. 1,378
Other Term Notes, payable to banks, interest at 7.95%, payable in quarterly
installments of $437 through June 2001. 4,050
Obligation of Zaring Financial Services:
Revolving line of credit payable to a bank, permitted borrowings
of up to $5.0 million, interest at the Prime Rate minus 0.25%. No
borrowings outstanding as of March 31, 1999. -
Obligations of Leasing LLC, Land LLC and Leasing 99 LLC: Notes payable by
Leasing LLC to a bank, permitted borrowings of up to $10.0 million,
interest at LIBOR plus 1.75% (6.69% at March 31, 1999) payable monthly,
secured by model homes and a personal guarantee, payable upon sale of the
models or in annual installments through June 2001. 8,029
Notes payable by Land LLC to a bank, permitted borrowings of up to $10.0
million, interest at LIBOR plus 2.25% (7.19% at March 31, 1999) payable
monthly, secured by land and a personal
guarantee, payable in July 2001. 8,805
Notes payable by Leasing 99 LLC to a bank, permitted borrowings of up to
$3.0 million prior to September 30, 1999, interest at LIBOR
plus 1.75%. No borrowings outstanding as of March 31, 1999. _
-------
$44,012
=======
</TABLE>
The bank credit agreements include provisions which require, among
others, that the Company maintain certain levels of tangible net worth
and cash flow from operations as well as limiting the Company's ratio of
debt to equity. During the quarter ended March 31, 1999, the Company was
not in compliance with certain of the debt covenant requirements. Those
events of noncompliance were waived by the banks.
The Company is contingently liable under letters of credit of
approximately $8.4 million issued as a result of lot and land acquisition
and development activities through March 31, 1999.
(4) EARNINGS (LOSS) PER COMMON SHARE-
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed similar to basic except the
denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common
shares had been issued.
Options to purchase 322,746 and 125,159 shares of common stock at an
average exercise price of $9.98 and $9.96 per share were outstanding as
of March 31, 1999 and 1998, 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. In addition,
inclusion of any options in the computation of diluted earnings per share
would be anti-dilutive due to the net loss incurred.
Since there are no dilutive securities, basic and diluted earnings (loss)
per share are identical thus a reconciliation of the numerator and
denominator is not necessary.
Page 10
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(5) SHAREHOLDERS' EQUITY-
The Company is authorized to issue up to 2,000,000 preferred shares of
which 1,000,000 are voting. No preferred shares have been issued.
(6) HOMEMAX, INC. JOINT VENTURE WITH AMERICAN HOMESTAR CORPORATION
Effective March 15, 1999, after assignment of certain obligations and
other preclosing activities, the Company sold a 25% interest in HomeMax
to American Homestar Corporation (American Homestar) for a note
receivable of approximately $4.4 million. The note receivable is to
be paid in three annual installments commencing March 15, 2000 and
accrues interest payable quarterly, at prime. The amended and restated
securities purchase agreement includes the following terms:
- American Homestar issued a $4.0 million subordinated convertible
loan to HomeMax concurrent with the sale. This subordinated loan
accrues interest at 6%, payable quarterly, while the principal is
payable on June 15, 2002 unless accelerated as a result of
available cash flow of HomeMax, as defined. The subordinated loan
is convertible into an additional 25% of HomeMax at the discretion
of American Homestar.
- The Company retained a $4.0 million receivable due from HomeMax
which accrues interest at 6.0% and is payable quarterly. The $4.0
million of principal is payable on June 15, 2002, unless
accelerated as a result of available cash flow of HomeMax, as
defined.
- The Company agreed to pay up to $3.0 million in connection with
certain annual lease obligations.
- Subsequent to the sale, model home inventory will be replaced with
the inventory of American Homestar. Costs of replacement, if any,
will be provided by the Company and American Homestar in amounts
up to $1.0 million and $0.5 million, respectively.
- Subsequent to the sale, the Company and American Homestar each
agreed to provide up to $50,000 per quarter to support advertising
and promotional initiatives.
- American Homestar agreed to provide certain management and
consulting services for up to three years for compensation of at
least $0.5 million plus an additional fee of up to $750,000 based
upon quarterly losses during the first four quarters following
closing.
- American Homestar and the Company each agreed to provide working
capital loans of up to $0.5 million to HomeMax which will accrue
interest at prime.
- The Company has the option to sell and American Homestar has the
option to buy 50% of HomeMax within three years at a defined
price.
- The Company received an option, which expires on March 15, 2004,
to purchase up to 150,000 shares of common stock of American
Homestar with an exercise price of $18.00 per share.
The accompanying financial statements include the results of HomeMax for
all applicable periods. Losses for the period subsequent to the
transaction allocable to American Homestar are included as a component of
minority interest in loss of subsidiary in the consolidated statements of
operations. Similarly, American Homestar's investment net of allocable
losses is included as a component of minority interest in consolidated
subsidiaries in the accompanying balance sheets. The gain resulting from
the Company's sale of a 25% interest in HomeMax to American Homestar has
been deferred until, among other factors, American Homestar converts its
subordinated note into an additional 25% equity interest in HomeMax.
(7) NEW PRONOUNCEMENTS-
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). This statement established accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments imbedded in other contracts) be recorded on the balance sheet
as either an asset or liability measured at its fair value. This
statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS 133 is effective for fiscal years beginning after
June 15, 1999. Upon adoption of this statement, the Company anticipates
no impact on its reported consolidated financial position, results of
operations, cash flows or related disclosures.
Page 11
<PAGE> 12
(8) RECLASSIFICATIONS-
Certain amounts in the consolidated interim financial statements for 1998
have been reclassified to conform to the 1999 presentation.
(9) SEGMENT INFORMATION-
The following tables set forth, for the periods indicated, certain
segment information regarding the Company's operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
Zaring Homes, Inc.
Luxury Site-Built Homes
Revenues $ 39,012 $ 49,877
Cost of sales 31,753 42,579
Interest 2,061 1,520
Selling, general and administrative 6,780 5,860
-------- --------
Operating loss (1,582) (82)
Other income (expense) (9) 8
-------- --------
Pretax Luxury Site-Built Loss (1,591) (74)
Hearthside Homes, LLC
Entry Level Homes
Revenues 4,915 2,205
Cost of sales 4,593 1,715
Interest 219 17
Selling, general and administrative 519 452
-------- --------
Operating income (loss) (416) 21
Other income 3 13
-------- --------
Pretax Entry Level Income (Loss) (413) 34
HomeMax, Inc.
Retail Distribution Manufactured Homes
Revenues 4,573 930
Cost of sales 3,894 787
Interest 545 202
Selling, general and administrative 2,400 2,107
-------- --------
Operating loss (2,266) (2,166)
Other income 18 1
Minority interest 57 81
-------- --------
Pretax Retail Distribution Loss (2,191) (2,084)
Financial Services
Revenues 315 --
Expenses 300 --
-------- --------
Operating income 15 --
Other income 41 --
-------- --------
Pretax Financial Services Income 56 --
Majority Shareholder LLC's
Revenues 296 --
Cost of sales 267 --
Interest 265 --
Selling, general and administrative 24 --
-------- --------
Operating loss (260) --
Other 157 --
Minority interest 103 --
-------- --------
-- --
Corporate
Interest income from subsidiaries, net 1,448 746
General and administrative (1,155) (525)
-------- --------
Loss before taxes (3,846) (1,903)
Credit for income taxes (1,515) (791)
-------- --------
Net Loss $ (2,331) $ (1,112)
======== ========
</TABLE>
Page 12
<PAGE> 13
Other pertinent information regarding the Company's segment operations are as
follows:
<TABLE>
<CAPTION>
Zaring Hearthside
Homes, Inc. Homes, LLC HomeMax, Inc. Majority
Luxury Site-Built Entry Level Financial Retail Distribution Shareholder
Homes Homes Services Manufactured Homes LLC,s Corporate Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Segment assets
As of March 31, 1999 $102,355 $11,992 $219 $ 23,135 $ 17,849 $34,439 $189,989
</TABLE>
RECONCILIATION OF SEGMENT ASSETS TO TOTAL ASSETS
AS OF MARCH 31, 1999:
Total segment assets $189,989
Elimination of inter-entity (21,359)
investments
Cash and cash equivalents * 11,973
========
$180,603
========
* Management excludes cash and cash equivalents from assessing a segment's
operating performance.
Page 13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO MARCH 31, 1998
RESULTS OF OPERATIONS
The Company's business and the homebuilding industry are subject to changes in
national and local economic conditions, as well as other factors, including
employment levels, availability of financing, interest rates, consumer
confidence and housing demand. The Company's results of operations for the
periods presented include luxury site-built homes, entry level homes, retail
distribution manufactured homes and financial services and reflect the cyclical
nature of the housing industry.
The Company reported consolidated net revenues of $49.1 million for the quarter
ended March 31, 1999, compared to $53.0 million for the same quarter in 1998.
Net loss for the first quarter of 1999 was $(2.3) million or $(0.51) per share,
compared to net loss of $ (1.1) million or $ (0.23) per share for the first
quarter of 1998.
The following tables set forth, for the periods indicated, certain segment
information regarding the Company's operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
------- -------
(Dollars in thousands)
<S> <C> <C>
Zaring Homes, Inc.
Luxury Site-Built Homes
Revenues (1) $39,012 $49,877
Cost of sales 31,753 42,579
Interest 2,061 1,520
Selling, general and administrative 6,780 5,860
------- -------
Operating loss (1,582) (82)
Other income (expense) (9) 8
------- -------
Pretax Luxury Site-Built Loss (1,591) (74)
Hearthside Homes, LLC
Entry Level Homes
Revenues (1) 4,915 2,205
Cost of sales 4,593 1,715
Interest 219 17
Selling, general and administrative 519 452
------- -------
Operating income (loss) (416) 21
Other income 3 13
------- -------
Pretax Entry Level Income (Loss) (413) 34
HomeMax, Inc.
Retail Distribution Manufactured Homes
Revenues (1) 4,573 930
Cost of sales 3,894 787
Interest 545 202
Selling, general and administrative 2,400 2,107
------- -------
Operating loss (2,266) (2,166)
Other income 18 1
Minority interest 57 81
------- -------
Pretax Retail Distribution Loss (2,191) (2,084)
Financial Services
Revenues 315 -
Expenses 300 -
------- -------
Operating income 15 -
Other income 41 -
------- -------
Pretax Financial Services Income 56 -
Majority Shareholder LLC's
Revenues (1) 296 -
Cost of sales 267 -
Interest 265 -
Selling, general and administrative 24 -
------- -------
Operating loss (260) -
Other 157 -
Minority interest 103 -
------- -------
</TABLE>
Page 14
<PAGE> 15
<TABLE>
<S> <C> <C>
- -
Corporate
Interest income from subsidiaries, net 1,448 746
General and administrative (1,155) (525)
------- -------
Loss before taxes (3,846) (1,903)
Credit for income taxes (1,515) (791)
------- -------
Net Loss $(2,331) $(1,112)
======= =======
</TABLE>
(1) Revenue from sale is recognized upon the closing of the sale.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MARCH 31,
----------------------
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
Luxury Site-Built Homes
Operating data:
Units
New Orders (1) 305 336
Closings (2) 141 200
Backlog (3) 420 376
Average revenue per closing $ 277 $ 250
Average value of new order sales $ 287 $ 253
Sales value of backlog $120,511 $ 95,809
Entry Level Homes
Operating data:
Units
New Orders (1) 66 39
Closings (2) 39 19
Backlog (3) 79 44
Average revenue per closing $ 127 $ 116
Average value of new order sales $ 131 $ 128
Sales value of backlog $ 10,211 $ 5,852
Retail Distribution Manufactured Homes
Operating data:
Units
New Orders (1) 124 73
Closings (2) 77 19
Backlog (3) 214 94
Average revenue per closing $ 59 $ 48
Average value of new order sales $ 68 $ 55
Sales value of backlog $ 14,706 $ 5,458
</TABLE>
(1) New orders represent total new home orders received during the period, net
of cancellations.
(2) Revenue from a sale is recognized upon the closing of the sale.
(3) Backlog includes new orders which have not yet closed.
Page 15
<PAGE> 16
ZARING HOMES, INC., LUXURY SITE-BUILT HOMES- Net revenues for the three months
ended March 31, 1999 decreased 21.2% as compared to the same period 1998. Zaring
Homes delivered 141 homes in the first quarter of 1999, compared to 200 homes in
1998, a 29.5% decrease. These decreases are attributable to the slowing of net
sales during the fourth quarter of 1998 which impacted closings in the first
quarter of 1999. The average selling price of a home was $287,000 and $253,000
for the three months ended March 31, 1999 and 1998 respectively, representing a
13.4% increase from the corresponding period in 1998. Backlog increased 25.8%
with a total sales value of $120.5 million as of March 31, 1999 as compared to
$95.8 million as of March 31, 1998.
Gross profit decreased $39,000 in the first quarter of 1999 as compared to the
first quarter of 1998. Gross profit as a percentage of revenue increased 27.2%
to 18.6% of revenues during the first quarter of 1999 as compared to 14.6%
during the first quarter of 1998. The increase in gross profit is attributable
to, among other factors, the closing of contracts with higher margins and
decreased subcontractor and other production costs. Interest expense increased
$541,000 in the three months ended March 31, 1999, compared to the same period
in 1998 . This increase is mainly attributable to a larger investment in model
home and land inventories as of March 31, 1999.
As a percentage of revenue, selling expenses increased from 7.1% during the
three month period ended March 31, 1998 to 8.4% during the three month period
ended March 31, 1999. This increase is a result of increased sales staffing
levels and design center expenses. As a percentage of revenue, general and
administrative expenses increased to 8.9% during the first quarter of 1999 from
4.7% during the first quarter of 1998. General and administrative expenses
increased $1.2 million or 50.2% in the first quarter of 1999, compared to the
first quarter of 1998. This increase was primarily attributable to increased
corporate staffing, additional office space and related expenses. As a
percentage of revenues, selling, general and administrative expenses were 17.4%
and 11.7% for the three month period ended March 31, 1999 and 1998,
respectively. The increase in this percentage is attributed to the timing of
closings, as well as increased corporate overhead cost.
As a result of the foregoing, Zaring Homes reported a pretax loss of $1.6
million or 4.1% of net revenues in the first quarter of 1999, an increase in the
pre-tax loss of $1.5 million from the same period in 1998.
HEARTHSIDE HOMES, LLC, ENTRY LEVEL HOMES- Net revenues for the three months
ended March 31, 1999 and March 31, 1998 were $4.9 million and $2.2 million,
respectively. Hearthside delivered 39 and 19 homes in the three months ended
March 31, 1999 and March 31, 1998, respectively. The average selling price of a
home was $131,000 and $128,000 for the three months ended March 31, 1999 and
1998, respectively, representing a 2.3% increase from the corresponding period
1998. Backlog increased 74.5% with a total sales value of $10.2 million as of
March 31, 1999 as compared to $5.9 million as of March 31, 1998. The backlog
increase was directly attributable to the expansion into the Louisville,
Kentucky and Nashville, Tennessee markets during the fourth quarter 1998.
Gross profit was $322,000, or 6.5% and $490,000, or 22.2% for the three months
ended March 31, 1999 and March 31, 1998, respectively. The decrease in the gross
profit percentage is attributable to the conversion of precision built home
processes to site-built and the expansion efforts in Louisville, Kentucky and
Nashville, Tennessee. Selling, general and administrative expenses were
$519,000, or 10.6% and $452,000, or 20.5% of revenues, for the three months
ended March 31, 1999 and March 31, 1998, respectively, reflecting Hearthside's
increased closing revenues to cover such expenses. Interest expense was $219,000
and $17,000 for the three months ended March 31, 1999 and March 31, 1998,
respectively. The increase in interest expense is directly attributable to
increased inventory levels. As a result of the foregoing, Hearthside reported a
pretax loss of $413,000 as compared to $34,000 in pretax income for the three
months ended March 31, 1999 and March 31, 1998, respectively.
Page 16
<PAGE> 17
HOMEMAX, INC., RETAIL DISTRIBUTION MANUFACTURED HOMES- Net revenues for the
three months ended March 31, 1999 increased $3.6 million from $930,000 in the
first quarter of 1998 to $4.6 million in the first quarter of 1999. HomeMax
closed 77 units in the first quarter of 1999, an increase of 305.3% from the 19
units closed in the same period of 1998. The overall increase for the three
month period is attributable to the fact that 12 sales villages were open as of
March 31, 1999 compared to six sales villages open as of March 31, 1998. Sales
of the new product have been improving, as reflected in the backlog of 214 units
as of March 31, 1999, compared to 94 units in 1998; however, the time from
contract to close has lengthened due mainly to the receipt of customer financing
approvals.
Gross profit was $679,000 or 14.9% for the three months ended March 31, 1999 as
compared to $143,000 or 15.4% for the same period in 1998, a decrease of 3.2%.
This decrease is due to production expenses that were not able to be passed on
to the consumer. Interest expense increased $343,000 in the three months ended
March 31, 1999, as compared to the corresponding period in 1998. This increase
is due to the increase in the number of open HomeMax villages from six as of
March 31, 1998 to twelve in 1999. Each village necessitates a significant
investment which includes sales office units, model units and related
furnishings. Also contributing 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. As a
percentage of revenues, interest expense decreased from 21.7% in the first
quarter of 1998 to 11.9% in the first quarter of 1999. Such percentage of
revenue decrease was directly attributable to the increased closing revenues
during the three months ended March 31, 1999 as compared to the same period in
1998.
Selling, general and administrative expenses for HomeMax, including
infrastructure costs to leverage the expansion efforts, totaled $2.4 million for
the three months ended March 31, 1999 compared to $2.1 million for the same
period in 1998. Selling expenses were $750,000 or 16.4% of revenues in the first
quarter of 1999 compared to $779,000, or 83.8% of revenues for the same period
in 1998. The decrease as a percentage of revenues is primarily due to increased
closing revenues during the first quarter 1999 as compared to first quarter
1998. General and administrative expenses were $1.6 million in the first quarter
of 1999 versus $1.3 million for the same period in 1998, an increase of
$322,000. The increase in general and administrative expense is attributable to
the increased number of stores open as of March 31, 1999 as compared to March
31, 1998.
As a result of the foregoing, HomeMax reported a pretax loss of $2.2 million in
the first quarter of 1999 compared to a pretax loss of $2.1 million in the first
quarter of 1998.
The Company entered into a joint venture agreement with American Homestar.
Refer to Note 6 of the Notes to the Consolidated Financial Statements.
FINANCIAL SERVICES - The financial services segment reported revenues of
$315,000 for the three months ended March 31, 1999. After deducting $300,000 in
expenses associated with the mortgage company operations offset by $41,000 in
miscellaneous other income, the financial services segment reported pretax
income of $56,000 for the first quarter 1999. The 1998 financial services
results were minor.
MAJORITY SHAREHOLDER LLCS - First Cincinnati Leasing LLC and First Cincinnati
Land LLC are reported as "Majority Shareholder LLC's". Leasing LLC closed one
home during the three months ended March 31, 1999 for $296,000. Interest expense
of $267,000 during the three months ended March 31, 1999 represents interest
incurred for model home and undeveloped land holdings. Other income of $157,000
represents model home rental income for the three months ended March 31, 1999.
OTHER OPERATING RESULTS- Interest income from subsidiaries represents the
allocation of interest cost to the subsidiaries. Corporate general and
administrative expenses were $1.2 million for the three month period ended March
31, 1999, as compared to $525,000 for the three month period ended March 31,
1998. The increase in Corporate general and administrative expenses is
attributed to the additional support being provided to the HomeMax and
Hearthside expansion activities as well as the necessary support for continued
Zaring Homes growth.
Page 17
<PAGE> 18
YEAR 2000 ISSUE
BACKGROUND--At midnight on December 31, 1999, unless the proper modifications
have been made, the program logic in many of the world's computer systems will
start to produce erroneous results because, among other things, the systems will
incorrectly read the date "01/01/00" as being January 1 of the year 1900 or
another incorrect date. In addition, certain systems may fail to detect that the
year 2000 is a leap year. Problems can also arise earlier than January 1, 2000,
as dates in the next millennium are entered into non-Year 2000 compliant
programs.
ZARING NATIONAL CORPORATION YEAR 2000 COMPLIANCE PROGRAM--During 1998, the
Company initiated a comprehensive corporate wide Year 2000 Compliance Program
(the Compliance Program) to evaluate and address the impact of the Year 2000
issue on its entire operations. The Compliance Program covers all aspects of the
Company's business that may be affected by the Year 2000 issue. The issue is
segregated into three main categories of possible risk: internal systems,
supplier exposure, and environmental risk. All internal systems will be reviewed
for Year 2000 compliance. This includes all server, client, and communication
hardware, all related peripheral hardware, and all "embedded" system hardware.
Additionally, all of the application software that runs on the internal system
hardware will be reviewed for compliance. Supplier exposure is also being
considered in this review. Supplier exposure includes a review of any products
or services used directly by the Company throughout its value delivery process.
The supplier category also includes analysis of possible first and second tier
supplier work interruptions caused by the Year 2000 issue. The last category of
review is the environmental impact of the issue on operations, including
internal work interruptions caused by external events such as power delivery and
physical access. This Compliance Program encompasses the review of all three
categories of risk at Zaring Homes, Hearthside, HomeMax and all other Company
subsidiary organizations.
YEAR 2000 COMPLIANCE PROGRAM PROCESS--The Company's process to achieve Year 2000
compliance involves four major steps: inventory of assets and suppliers, risk
assessment, action plan development, and testing.
Step one of the processes involves an inventory of all hardware, software and
suppliers that could entail risk to the Company because of date sensitivity. The
result of this process is a list of all suppliers that could have a significant
effect on the business if their work was interrupted or if their products or
services are not Year 2000 compliant. The hardware and software inventory
includes all makes, models and versions of information systems. This information
is then used in Step two of the process, risk assessment.
Step two involves a risk assessment of individual systems and suppliers
resulting in a three-tier risk structure (high, medium, low) for the systems and
suppliers. This assessment involves a combination of several criteria: business
impact, likelihood of failure, and effort to remediate. The high and medium risk
items that are identified as non-compliant will be further addressed in Step
three of the project.
Step three entails the development of action plans to address systems or
suppliers that are deemed not compliant in the previous phases and that have a
significant impact on the Company's business. Each non-compliant system or
supplier will have a customized action contingency plan. These plans may include
remediation through wholesale replacement of non-compliant systems, upgrades of
systems, or identification of alternate sources of supply. Each action plan will
include the development of a contingency plan in the remote case that the
identified remediation is not completed in time. The Audit Committee of the
Board of Directors continues to review these action plans and each plan will
have its own timeline and program for completion.
The final step of this process will involve testing of all relevant systems to
verify that any remediation efforts were successful in making the systems
compliant with the Year 2000 issue.
Page 18
<PAGE> 19
TIME TO COMPLETE THE YEAR 2000 COMPLIANCE PROGRAM--As of March 31, 1999, the
Company has entered into Step two of the Compliance Program, with the exception
of the implementation of the core management information system, which is
complete. The timeline for completion of all four phases of the program, in all
operations of the Company, is July 1999. The Company believes that this is a
realistic time frame and that it permits sufficient time prior to first "date
events" to insure the Company has adequately addressed the issue.
ZARING NATIONAL'S CORE INFORMATION SYSTEM--Prior to the undertaking of the
Compliance Program, the Company realized that one of its core information
systems was not compliant and that there was a significant risk that the
software supplier could not develop an upgrade in sufficient time. For this
reason, and other operational benefits, the Company decided to replace this core
non-compliant system with a new and compliant product. This effort was formally
launched in January 1998 and was complete as of March 31, 1999. Year 2000
compliant core accounting, purchasing, payables and management information
system was installed in all of the Company's relevant operations, and the
non-compliant system was decommissioned. This project has met all major
milestones to date and is within the budgeted amount of $3.0 million. As of
March 31, 1999, a total of $2.4 million of costs have been capitalized in
association with this project in accordance with the guidelines established in
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" issued in March 1998.
COST OF THE YEAR 2000 COMPLIANCE PROGRAM--At the present time, management
estimates that the costs associated with completing the comprehensive Compliance
Program will be approximately $125,000. This estimate represents external vendor
consulting and excludes the expense associated with management's oversight and
review of the Compliance Program. In addition, this estimate excludes any
non-core information system hardware or software remediation cost. However,
miscellaneous hardware and software remediation costs, other than the core
management information system discussed previously, are anticipated to be
immaterial to the overall Company's operations. Compliance Program review costs
are expensed as incurred. The Company intends to finance the cost of the core
management information system and Year 2000 compliance review through internal
sources of funds.
RISKS OF NON-COMPLIANCE AND CONTINGENCY PLANS--The transmission and distribution
by automation systems affecting the building of a home and the internal
management information systems affecting cash flow management are major business
applications which pose the greatest Year 2000 risks for the Company if
implementation of the Compliance Program is not successful. The potential
problems related to these systems are interruptions of service to customers,
interrupted revenue and cost data gathering, delays in the cash payment
function, and poor customer relations resulting from a delayed building process.
Although the Company intends to complete all Year 2000 remediation and testing
activities by the end of July 1999, and although the Company has initiated Year
2000 communications with significant vendors and other parties material to the
Company's operations (and is diligently monitoring the progress of such third
parties in the Year 2000 compliance area), such third parties nonetheless
represent a significant risk that cannot be assessed with precision or
controlled with certainty. The Company's ability to meet the target date of July
1999 in finalizing its Compliance Program is heavily dependent upon the timely
provision of necessary upgrades and modifications by the Company's suppliers and
contractors. In some instances, it is anticipated that third party upgrades and
modifications to hardware and software are not expected to be available until
second quarter 1999. In addition, the Company cannot guarantee that third
parties on whom it depends for essential services (such as lumber, building
materials, subcontractor labor, electric utilities, exchange carriers, phone and
fax systems, etc.) will convert their critical systems and processes in a timely
manner. Failure or delay by any of these parties could significantly disrupt the
Company's business. However, the Company has established a supplier compliance
program to work with key vendors to minimize such risks. For these reasons, the
Company intends to develop contingency plans to address alternatives in the
event that Year 2000 failures of automatic systems and equipment occur,
including contingencies for the potential failures of key vendors to become Year
2000 compliant. A final contingency plan is scheduled to be completed prior to
July 1999.
Page 19
<PAGE> 20
CAPITAL RESOURCES AND LIQUIDITY
Net cash used in operating activities increased from a $5.4 million use of cash
during the three months ended March 31, 1998 to a $17.7 million use of cash
during the three months ended March 31, 1999. This overall increase in the use
of cash is a result of the following: a net loss for the three months ended
March 31, 1999 of $2.3 million compared to a net loss of $1.1 million for the
three months ended March 31, 1998, a decrease in the future tax benefit
($277,000), decreases in accounts payable ($2.6 million), increases in accounts
receivable ($599,000) and additional investments in both site-built and
manufactured housing inventories ($10.8 million). Such uses of cash were offset
by increases in depreciation and amortization and other non cash activities
($452,000), increases in accrued expenses and customer deposits ($1.5 million)
and decreases in the cash surrender value of life insurance and other assets
($1.3 million). Since December 31, 1998, the Company has utilized $16.6 million
in cash for investments in both site-built and manufactured housing inventories.
Net cash used for investing activities decreased $2.2 million from $3.3 million
during the three months ended March 31, 1998 to $1.1 million during the three
months ended March 31, 1999. This decrease is directly related to a decrease in
property and equipment purchases, particularly at HomeMax for sales village
development. Since December 31, 1998, the Company expended $1.2 million for
purchases of property and equipment.
Net cash provided by financing activities for the three months ended March 31,
1999 was $15.1 million, an increase of $4.6 million from the same period in
1998. This increase was due to net bank borrowings increasing by $4.7 million
from $10.6 million for the three months ended March 31, 1998 to $15.3 million
for the three months ended March 31, 1999. The borrowings were primarily used to
finance additional investments in inventories, support working capital needs and
purchase property and equipment. In addition, $215,000 of distributions were
paid to the owner of Leasing LLC.
Financing for Zaring Homes and Hearthside Homes is provided through a $72.5
million bank revolving credit facility, $6.8 million of bank term borrowings,
$19.8 million of term facilities available from entities controlled by the
Company's chairman and approximately $5.4 million of other financing.
Financing for HomeMax is provided through a bank floor plan credit facility, a
$15.0 million bank term facility secured in March 1999 to refinance preexisting
obligations, or a $4.0 million subordinated convertible debt facility, as well
as other commitments provided by American Homestar and the Company.
During the quarter ended March 31, 1999, the Company was not in compliance with
certain of the debt covenant requirements. Those events of noncompliance were
waived by the banks. The Company has made and continues to have the ability to
make timely payments to its banks. It is anticipated that the Company will be
able to comply with the covenants at the appropriate measurement dates during
the remainder of the year.
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.
LOT COMMITMENTS- In the aggregate, as of March 31, 1999, Zaring Homes owned, had
the ability to develop or purchase, or had under contract 4,238 lots. At March
31, 1999, Zaring Homes owned approximately 787 lots and undeveloped land,
including land owned by Land LLC, which will be developed into approximately 868
lots. Zaring also had under contract, subject to the satisfaction of Zaring's
purchase contingencies and exercising of option agreements, 1,259 lots and
undeveloped land which, if purchased, would be developed into approximately
1,324 lots. Of the 1,259 lots under contract, Zaring Homes is committed to 435
lots.
Page 20
<PAGE> 21
As of March 31, 1999, Hearthside Homes owned, had the ability to purchase, or
had under contract 1,061 lots. At March 31, 1999, Hearthside owned approximately
131 lots. Hearthside Homes also had under contract, subject to the satisfaction
of Hearthside Homes'purchase contingencies and exercising of option agreements,
930 lots, of which Hearthside Homes is committed to 129 lots.
PROVISIONS FOR WRITEDOWN TO NET REALIZABLE VALUE- The Company periodically
reviews the value of assets held by its reporting segments, including: land,
inventories, property and equipment, and intangibles and determines whether any
write-downs need to be recorded to reflect declines in value. The estimated net
realizable value of real estate inventories and property and equipment
represents management's estimate based on present plans and intentions, selling
prices in the ordinary course of business and anticipated economic and market
conditions. Accordingly, the realization of the value of the Company's real
estate inventories, property and equipment and certain intangibles is dependent
upon future events and conditions that may cause actual results to differ from
amounts presently estimated.
INFLATION- Housing demand, in general, is affected adversely by increases in
interest rates. If mortgage interest rates, material and labor costs increase
significantly, the Company's revenues, gross profit, and net income could be
adversely affected.
CAUTIONARY STATEMENTS - Certain statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" are "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements involve known and unknown risks, uncertainties and
other factors that may cause results to differ materially. Such risks,
uncertainties and other factors include, but are not limited to, changes in
general real estate, general economic and other conditions, fluctuations in
interest rates, increases in raw materials and labor costs, levels of
competition and other factors described in Zaring National Corporation's Form
10-Q for the quarter ended September 30, 1998.
ITEM 3. QUALTITATIVE AND QUANTITATIVE DISCLOSURE
ABOUT MARKET RISK
There were no material changes in the qualitative and quantitative disclosures
about market risk as of March 31, 1999 from that presented in the Company's
annual report on Form 10-K for the fiscal year ended December 31, 1998.
Page 21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL INFORMATION
The Company is subject to various claims, lawsuits and administrative
proceedings arising in the ordinary course of business activities which seek
remedies or damages. The Company believes that any liability that may be
determined will not have a material effect on its financial position or results
of operation.
ITEM 2. NONE
ITEM 3. NONE
ITEM 4. NONE
ITEM 5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27, Financial Data Schedule
(b) During the first quarter ended March 31, 1999, the Company filed a
Form 8-K reporting information under Item 2 regarding the
completion of an agreement whereby American Homestar Corporation
acquired 25% of the outstanding common stock of HomeMax, Inc.
Page 22
<PAGE> 23
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 17, 1999 By: /s/ Allen G. Zaring III
-------------------------------------
Allen G. Zaring III
Chairman of the Board, President and
Chief Executive Officer
Date: May 17, 1999 By: /s/ Ronald G. Gratz
-------------------------------------
Ronald G. Gratz
Chief Financial Officer
Secretary and Treasurer
(Principal Financial and Accounting Officer)
Page 23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ZARING
NATIONAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,973
<SECURITIES> 0
<RECEIVABLES> 5,629
<ALLOWANCES> 0
<INVENTORY> 129,466
<CURRENT-ASSETS> 0
<PP&E> 27,835
<DEPRECIATION> (7,148)
<TOTAL-ASSETS> 180,603
<CURRENT-LIABILITIES> 0
<BONDS> 53,031
0
0
<COMMON> 24,957
<OTHER-SE> 15,495
<TOTAL-LIABILITY-AND-EQUITY> 180,603
<SALES> 49,111
<TOTAL-REVENUES> 49,111
<CGS> 40,508
<TOTAL-COSTS> 52,957
<OTHER-EXPENSES> 10,807
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,642
<INCOME-PRETAX> (3,846)
<INCOME-TAX> (1,515)
<INCOME-CONTINUING> (2,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,331)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
