<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-22679
ZARING NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-1506058
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 Cornell Park Drive, Suite 500, Cincinnati, Ohio 45242-1825
(Address of principal executive offices) (Zip Code)
513-489-8849
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
----------- -------
Number of common shares outstanding as of September 30, 2000: 4,591,389
Total Pages: 28
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ZARING NATIONAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets,
September 30, 2000, September 30, 1999 (unaudited and, with respect to
1999, as restated) and December 31, 1999 (as restated) 3
Consolidated Statements of Operations (unaudited),
Three Months Ended September 30, 2000 and 1999 (with respect to 1999,
as restated) and Nine Months Ended September 30, 2000 and 1999
(with respect to 1999, as restated) 5
Consolidated Statement of Shareholders' Equity,
Nine Months Ended September 30, 2000 (unaudited) 6
Consolidated Statements of Cash Flows,
Nine Months Ended September 30, 2000 and 1999 (unaudited and, with
respect to 1999, as restated) 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3. Qualitative and Quantitative Disclosures about Market Risk 26
PART II OTHER INFORMATION 27
SIGNATURES 28
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ZARING NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
-----------------------
2000 1999 1999
------- ------------- -------------
(as restated) (as restated)
<S> <C> <C> <C>
Cash and cash equivalents $11,876 $ 8,428 $ 7,102
Receivables:
Related parties 237 3 828
Note from American Homestar Corporation 2,941 4,400 4,400
Manufactured housing rebates and other 639 1,411 124
Inventories:
Retail distribution manufactured homes 6,641 4,918 6,147
Model homes 6,501 7,236 6,556
Property and equipment, net 625 1,025 954
HomeMax Sales Villages, net 3,062 11,343 9,352
Future tax benefit and estimated refunds 1,381 6,280 10,856
Cash surrender value of life insurance and other
assets 3,824 3,351 3,284
Net assets of discontinued operations 3,300 34,365 20,598
------- ------- -------
$41,027 $82,760 $70,201
======= ======= =======
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
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ZARING NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
------------------------
2000 1999 1999
-------- ------------- -------------
Liabilities: (as restated) (as restated)
<S> <C> <C> <C>
Manufactured housing floor plan facility $ 10,532 $ 8,747 $ 9,855
Term notes payable 14,280 15,000 15,000
Accounts payable 1,330 3,064 2,083
Accrued liabilities 3,202 2,274 3,539
Customer deposits 815 878 1,150
Deferred gains 1,765 1,765 1,765
-------- ------- --------
Total liabilities before
subordinated debt and 31,924 31,728 33,392
minority interest -------- ------- --------
Subordinated debt 9,000 9,000 9,000
-------- ------- --------
Minority interest in consolidated entities (1,494) 1,653 766
-------- ------- --------
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, 4,591,389 issued and
outstanding at September 30, 2000, 4,591,488
issued and outstanding at September 30,
1999 and December 31, 1999 24,957 24,957 24,957
Additional paid-in capital 4,286 4,286 4,286
Retained earnings (deficit) (27,646) 11,136 (2,200)
-------- ------- --------
Total shareholders' equity 1,597 40,379 27,043
-------- ------- --------
$ 41,027 $82,760 $ 70,201
======== ======= ========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
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ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
----------- ------------- ----------- -------------
(as restated) (as restated)
Net revenues:
<S> <C> <C> <C> <C>
Retail distribution manufactured homes $ 10,579 $ 4,858 $ 30,800 $ 15,072
----------- ----------- ----------- -----------
Total net revenues 10,579 4,858 30,800 15,072
----------- ----------- ----------- -----------
Expenses:
Cost of sales retail distribution
manufactured homes 9,018 4,495 26,231 13,424
Asset impairment 6,300 -- 6,300 --
Interest 938 672 2,774 2,369
Selling 810 800 2,506 2,538
General and administrative 2,694 3,420 9,205 8,945
----------- ----------- ----------- -----------
Total expenses 19,760 9,387 47,016 27,276
----------- ----------- ----------- -----------
Operating loss (9,181) (4,529) (16,216) (12,204)
Income from unconsolidated joint ventures -- 51 -- 51
Other income (expense), net (66) (24) 409 31
Loss from continuing operations before ----------- ----------- ----------- -----------
minority interest and provision
(benefit) for income taxes (9,247) (4,502) (15,807) (12,122)
Minority interest in consolidated entities 1,817 616 2,310 1,215
----------- ----------- ----------- -----------
Loss from continuing operations
before provision (benefit) for income
taxes (7,430) (3,886) (13,497) (10,907)
Provision (benefit) for income taxes 5,500 (838) 3,789 (3,133)
----------- ----------- ----------- -----------
Net loss from continuing operations (12,930) (3,048) (17,286) (7,774)
Discontinued operations:
Loss of entry level home segment, net
of tax -- (304) -- (993)
Income (loss) of luxury site built home
segment, net of tax (7,543) 3,348 (8,049) 6,314
Income (loss) of financial services
segment, net of tax 37 30 (111) 49
----------- ----------- ----------- -----------
Net income (loss) $ (20,436) $ 26 $ (25,446) $ (2,404)
=========== =========== =========== ===========
Basic and diluted loss per common share
from continuing operations $ (2.82) $ (0.66) $ (3.77) $ (1.69)
=========== =========== =========== ===========
Basic and diluted income (loss) per
common share from discontinued
operations $ (1.63) $ 0.67 $ (1.77) $ 1.17
=========== =========== =========== ===========
Basic and diluted income (loss) per
common share $ (4.45) $ 0.01 $ (5.54) $ (0.52)
=========== =========== =========== ===========
Weighted average shares outstanding 4,591,389 4,591,488 4,591,427 4,591,488
=========== =========== =========== ===========
</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 (DEFICIT) TOTAL
---------- ------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 4,591,488 $24,957 $4,286 $ (2,200) $ 27,043
Purchase and retirement of
common shares (99) -- -- -- --
Net loss -- -- -- (25,446) (25,446)
---------- ------- ------ -------- --------
BALANCE, September 30, 2000 4,591,389 $24,957 $4,286 $(27,646) $ 1,597
========== ======= ====== ======== ========
</TABLE>
The accompanying notes are an integral part
of this consolidated financial statement.
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ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(25,446) $ (2,404)
Adjustments to reconcile net loss to cash used in continuing
operations--
Loss (income) from discontinued operations 8,160 (5,370)
Income from unconsolidated joint ventures -- (51)
Gain on sale of sales villages (529) --
Depreciation and amortization 898 376
Asset impairment 6,300 --
Tax valuation allowance 10,634 --
Minority interest in loss of consolidated entities (2,310) (1,215)
Change in assets and liabilities--
Future tax benefit and estimated tax refunds (1,159) (227)
Receivables 76 (805)
Inventories (439) (3,118)
Cash surrender value of life insurance and other assets (914) 1,274
Accounts payable, accrued liabilities and deferred gains (1,440) 1,001
Customer deposits (335) 286
-------- --------
Net cash used in operating activities of continuing
operations (6,504) (10,253)
-------- --------
Cash Flows from Investing Activities:
Additions to property and equipment and sales villages, net (117) (1,296)
Proceeds from sale of property and equipment and sales villages 791 2,146
Payments on note receivable 1,459 --
Distributions received from unconsolidated joint ventures, net -- 252
-------- --------
Net cash provided by investing activities of continuing
operations 2,133 1,102
-------- --------
Cash Flows from Financing Activities:
Borrowings on notes payable 15,691 19,375
Repayments on notes payable (15,734) (8,710)
Proceeds from minority interest 50 347
-------- --------
Net cash provided by financing activities of continuing
operations 7 11,012
-------- --------
Increase (decrease) in cash and cash equivalents (4,364) 1,861
Net cash provided by (used in) discontinued operations 9,138 (7,566)
Cash and cash equivalents, beginning of period 7,102 14,133
-------- --------
Cash and cash equivalents, end of period $ 11,876 $ 8,428
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for-
Interest, net of amounts capitalized $ 7,003 $ 5,447
======== ========
Income taxes, net of refunds $ (1,564) $ 521
======== ========
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
During the nine months ended September 30, 1999, the Company received a note
receivable in exchange for the sale of an investment in the HomeMax, Inc.
subsidiary (Note 7):
<TABLE>
<S> <C>
Note receivable $ 4,400
Deferred gain (1,765)
Minority interest (2,521)
Accrued expenses (114)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
(1) Basis of Presentation-
(a) Organizational Considerations Before Discontinued
Operations--Effective in 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, LLC; HomeMax, Inc. and its subsidiaries, HomeMax North
Carolina, Inc., HomeMax Tennessee, Inc., HomeMax South Carolina, Inc.,
HomeMax Ohio, Inc., HM Properties, Inc., HomeMax Indiana, LLC and HomeMax
Kentucky, LLC; Hearthside Homes, LLC; and Zaring Financial Services, LLC.
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 eleven sales villages
located in North Carolina and South Carolina.
Effective October 1, 1997, the Company, through its then newly formed
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. Legacy Mortgage Corporation, doing
business as Hearthside Home Mortgage, originated, processed and sold
mortgages to third-party investors.
In June 1998, the Company's principal shareholder formed First Cincinnati
Leasing LLC (Leasing LLC) and First Cincinnati Land LLC (Land LLC) to
purchase and leaseback certain model homes and purchase certain
undeveloped land, as applicable. In March, 1999 and February, 2000, the
Company's principal shareholder formed First Cincinnati Leasing 99, LLC
(Leasing 99 LLC) and First Cincinnati Leasing 2000 LLC (Leasing 2000 LLC)
to purchase and leaseback certain additional model homes. As a result of,
among others, the principal shareholder's control of Leasing LLC, Leasing
99 LLC, Leasing 2000 LLC and Land LLC, the results of each of these
entities have been consolidated with the Company's activities subsequent
to their formation (see Note 9).
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. Effective April 1, 1999, Blue
Chip and Legacy Mortgage Corporation were merged and renamed Zaring
Financial Services, LLC (Zaring Financial Services). Zaring Financial
Services processes and sells mortgages to third party lenders (see Note
9).
All significant intercompany transactions and balances have been
eliminated in consolidation.
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(b) Discontinued Operations--The Company has plans to discontinue the
operations of Zaring Homes, Hearthside and Zaring Financial Services and
will ultimately no longer be required to consolidate the results of the
LLCs controlled by its principal shareholder (see Note 9). The net assets
and results of operations of these segments are treated as discontinued
operations for all periods presented and, accordingly, prior financial
information has been restated to conform with the current treatment
accorded.
(c) Operating Initiatives--In 1999 and 2000, the Company experienced
losses in each of its operating segments and was unable to comply with
certain terms and conditions of its loan covenants despite its revenue
growth. Management's plans to improve operating results and cashflow
available to fund ongoing operations include initiatives to reduce
certain assets, including the discontinuance of the operations of
Hearthside, Zaring Homes and Zaring Financial Services (Note 9), reduce
certain costs in each of its segments and modify the terms and conditions
of its existing credit facilities (Note 4). In conjunction with the
Company's asset reduction plans, during the first quarter of 2000, the
Company announced that it had hired an investment banker to review
various strategic alternatives including the sale of certain or all of
its operations. During the third quarter 2000, the Company announced it
will negotiate exclusively with The Drees Company (Drees) through
November 22, 2000 and its intention to sell certain net assets of the
Zaring Homes subsidiary to Drees (Note 13).
On September 29, 2000, the Company sold certain of the net assets of its
Louisville division to Olympia Homes LLC for approximately $6.3 million.
On October 13, 2000, the Company sold certain of the net assets of its
Raleigh division to Drees for approximately $11.0 million. In addition,
on November 13, 2000, the Company sold certain of the net assets of its
Charlotte division to St. Lawrence Homes for approximately $3.3 million.
As the Company's operations are sold, net proceeds will be utilized to
reduce outstanding debt and fund continuing operations (see also Note
13).
The Company has been advised by its independent public accountants that
due to its significant operating losses, anticipated future losses from
continuing operations and other factors, the auditors' report on the
Company's December 31, 2000 financial statements will be modified to
reflect the uncertainty of the Company's ability to continue as a going
concern.
(d) Asset Impairment--Through the third quarter of 2000, the losses of
HomeMax continued to adversely impact the consolidated results of the
Company. In response to the actual and anticipated prospective losses and
pursuant to Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121), the Company determined the
undiscounted estimated future cash flows of HomeMax were less than the
carrying value of the long-lived assets of HomeMax. Accordingly, in the
third quarter, the Company adjusted the carrying values of the long-lived
assets of HomeMax to their estimated fair market value through the
recognition of a provision for asset impairment of approximately $6.3
million. The estimated fair value of the assets was based on reviews of
comparable residual asset values.
(e) Income Taxes--The aggregate provisions for income taxes included in
the accompanying consolidated statements of operations include a
valuation allowance recorded during the quarter ended September 30, 2000
of $10.6 million. The aggregate valuation allowance has been allocated
among continuing and discontinued operations based on the origin of the
timing items in amounts approximating $6.2 million and $4.4 million,
respectively. The recognition of the valuation allowance is primarily
attributable to the fact that the previously recorded deferred tax assets
will only be realized through prospective taxable income and there are
substantial uncertainties relative to the prospects of realizing such
taxable income. The future tax benefit of $1,381 included in the
accompanying consolidated balance sheet as of September 30, 2000
represents the estimated tax refunds related to the utilization of
certain tax loss carrybacks.
(f) Interim Reporting--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
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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, 1999 filed with the Securities and Exchange Commission. The financial
statements are unaudited, but in the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the Company's unaudited consolidated
financial statements as of September 30, 2000 have been included.
Operating results for the nine months ended September 30, 2000, are not
necessarily indicative of the results for the entire year.
2) Notes Payable-
The Company's notes payable from continuing operations consist of the
following at September 30, 2000:
<TABLE>
<S> <C>
Manufactured Housing Floor Plan Facility for HomeMax inventory and
display models, payable to Bombardier Capital, Inc., variable interest
rates (10.0% at September 30, 2000), subject to repayment upon the
earlier of sale or fifteen months from the date of initial borrowing,
secured by the inventory, an irrevocable letter of credit from American
Homestar and a repurchase agreement with American Homestar in the event
of default $10,532
-------
Credit Agreement, payable to the Provident Bank, $15.0 million available
for working capital needs of HomeMax and subsidiaries, interest at the
Prime Rate plus 1.0%, (10.5% at September 30, 2000), payable in three
annual installments of $1.47 million commencing March 15, 2000, entire
balance payable at the earlier of September 15, 2002 or 90 days
following the sale of the remaining 50% of HomeMax, secured by $8.4
million of promissory notes, prepayment penalty equal to a percentage of
the gain, if any, upon the sale of additional interests in HomeMax, as
defined per the Credit Agreement, $10.0 million guaranteed by Zaring
Homes, Inc.
$13,530
Working Capital Term Loan of HomeMax, payable to American Homestar,
interest at prime (9.5% at September 30, 2000), payable on demand 750
-------
$14,280
-------
Subordinated Debt:
Subordinated notes payable to Principal Shareholder, interest at
the greater of 9 7/8% or the Prime Rate plus 1 5/8% (11 1/8% at
September 30, 2000) payable monthly, principal due September,
2002 $ 5,000
Subordinated note payable to American Homestar Corporation, interest at
6.00% payable quarterly, payable June 15, 2002 unless accelerated as a
result of available cash flow of HomeMax, as defined, convertible into an
additional 25% equity interest in HomeMax at the discretion of American Homestar 4,000
-------
$ 9,000
-------
</TABLE>
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The Company's notes payable from discontinued operations consist of the
following at September 30, 2000:
<TABLE>
<S> <C>
Revolving Credit Facility, payable to PNC Bank, as agent, $67.5 million
available at September 30, 2000, borrowings outstanding at
September 30, 2000 are at 11.5%, expiring in March 2001 $51,250
Term Loans, payable to PNC Bank, as agent, borrowings outstanding at
September 30, 2000 are at 11.5%, payable in quarterly installments of
$750 through March 2001 2,250
Other Term Notes, payable to banks, interest at 7.95%, payable in
quarterly installments of $437 through March 2001 1,311
Other Term Notes, interest at 7.0% to 12.0%, principal installments of
$72 due January 2002, $2,425 due April 2003 and $692 due April
2005, secured by certain land 2,754
-------
$57,565
=======
Obligations of Leasing LLC, Land LLC, Leasing 99 LLC and Leasing 2000
LLC: Notes payable by Leasing LLC to The Huntington National Bank,
permitted borrowings of up to $10.0 million, interest at LIBOR plus
1.75% (8.367% at September 30, 2000) payable monthly, secured by model
homes and a personal guarantee, payable upon sale of the models or in
annual installments through June 2001
$ 3,850
Notes payable by Leasing 99 LLC to The Huntington National Bank,
permitted borrowings of up to $3.0 million, interest at LIBOR plus 1.75%
(8.375% at September 30, 2000), payable monthly, secured by model homes,
a personal guarantee and a guarantee by Leasing LLC, payable upon sale
of the models or in annual installments through March 2002
2,150
Notes payable by Leasing 2000 LLC to The Huntington National Bank,
interest at LIBOR plus 1.75% (8.378% at September 30, 2000) payable
monthly, secured by model homes and a personal guarantee, 20% of balance
payable annually beginning September 1, 2001 with the balance due August
31, 2003 5,249
Notes payable by Land LLC to the Provident Bank, permitted borrowings
of up to $10.0 million, interest at LIBOR plus 2.25% (8.87% at September
30, 2000) payable monthly, secured by land and a personal guarantee,
payable in July 2001 6,568
-------
$17,817
=======
Obligation of Zaring Financial Services: Revolving line of credit payable
to the Provident Bank, permitted borrowings of up to $5.0 million, $0.9
million available at September 30, 2000, interest at the Prime Rate minus
0.25% (9.25% at September 30, 2000), expiring May 2002 $ 4,061
=======
</TABLE>
The Company's discontinued Zaring Homes segment has a syndicated credit
facility with PNC Bank acting as agent. This facility consists of a
revolving credit facility, including amounts available for letters of
credit, as defined in the agreement, and a term loan.
During 1999 and the first quarter of 2000, the Company was unable to
comply with certain covenants included in its syndicated credit facility.
The banks initially provided a forbearance agreement which extended to
April 14, 2000. Concurrent with the expiration of the forbearance
agreement, the Company entered into a third amendment to the loan
agreements with its banks. The amendment to the syndicated credit
facility included the following modifications:
- The maturity date of the facilities was revised to March 31, 2001
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- Maximum available borrowings under the revolving credit facility of $72.5
million as of March 31, 2000 were reduced by $5.0 million on July 1, 2000
and an additional $5.0 million on October 1, 2000 and an additional $10.0
million on October 13, 2000.
- Interest rates were adjusted to prime plus 1% through August 31, 2000,
with an increase to prime plus 2% if borrowings under the revolving
credit facility exceed $40.0 million on September 1, 2000, an increase to
prime plus 3% if revolver borrowings exceed $25.0 million on November 1,
2000 and prime plus 4% if revolver borrowings exceed $5.0 million on
January 1, 2001. Default rates, if applicable, will be 3% above the
interest rate in effect.
- The third amendment revised preexisting provisions which required, among
others, that the Company maintain certain minimum levels of tangible net
worth and cash flows from operations to certain fixed charges as well as
limiting the Company's ratio of debt to equity, all as defined per the
terms of the agreement. The amendment also established limitations on the
number of market and model homes maintained in inventory, land
acquisition and deviations from expected cash flows (as defined).
- Waivers for loan violations occurring prior to April 14, 2000.
The Company was not in compliance with certain of the terms and
conditions of certain of its credit agreements at September 30, 2000.
Management intends to discuss the potential covenant violations with its
lenders and secure waivers or otherwise amend the agreements to enable
compliance through at least the date of the expected sale to Drees (see
Notes 1, 9 and 13). In addition, management is of the opinion that its
present cash balances, amounts available from its credit agreements and
amounts generated from its asset reduction plans will provide adequate
funds for its future operations through the date of the sale to Drees
provided such sale occurs no later than the first quarter of 2001.
However, there can be no assurances that the banks will provide waivers
or otherwise amend the credit agreements or continue to provide financing
to the Company. In the event the banks do not agree to provide waivers or
otherwise amend the credit agreements and accelerate the payments due per
the agreements, the Company will encounter great difficulty in meeting
the demands of the banks and will need to evaluate various forms of
financial reorganization, the most severe of which could include
bankruptcy. In addition, losses from continuing operations are
anticipated and there are no assurances the Company would be able to
secure capital or other financing to fund these losses. Although
management is pursuing various initiatives to sell certain or all of its
operations there are no assurances the net proceeds would be sufficient
to pay all creditors or provide any distributions to the Company's
shareholders.
As of November 1, 2000 borrowings under the revolving credit facility
were approximately $39.3 million, accordingly interest rates were
adjusted to prime plus 3.0%. Further, as of November 20, 2000, management
believes borrowings under the revolving credit facility will exceed
$5.0 million on January 1, 2001. If borrowings exceed $5.0 million on
January 1, 2001, interest rates will be adjusted to prime plus 4.0%
through the maturity of the facility.
The Company is contingently liable under letters of credit of
approximately $5.4 million issued as a result of lot and land acquisition
and development activities through September 30, 2000.
(5) 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 459,788 and 456,634 shares of common stock at an
average exercise price of $9.50 and $9.32 per share were outstanding as
of September 30, 2000 and 1999, 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 in the event of a net loss from
continuing operations.
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 12
<PAGE> 13
(6) 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.
(7) HomeMax, Inc. Joint Venture with American Homestar Corporation-
Effective March 15, 1999, after assignment of certain obligations and
other preclosing activities, the Company sold a 25% interest in HomeMax
to American Homestar Corporation (American Homestar) for a note
receivable of approximately $4.4 million. The note receivable is to be
paid in three annual installments commencing March 15, 2000 and accrues
interest payable quarterly, at prime. The amended and restated securities
purchase agreement includes the following terms:
- American Homestar issued a $4.0 million subordinated convertible loan to
HomeMax concurrent with the sale. This subordinated loan accrues interest
at 6.0%, payable quarterly, while the principal is payable on June 15,
2002 unless accelerated as a result of available cash flow of HomeMax, as
defined. The subordinated loan is convertible into an additional 25% of
HomeMax at the discretion of American Homestar.
- The Company retained a $4.0 million receivable due from HomeMax which
accrues interest at 6.0% and is payable quarterly. The $4.0 million of
principal is payable on June 15, 2002, unless accelerated as a result of
available cash flow of HomeMax, as defined, and the receivable and
related interest are eliminated in the accompanying consolidated
financial statements.
- The Company agreed to pay up to $3.0 million in connection with certain
annual lease obligations. During the nine months ended September 30,
2000, $1.2 million was expensed under this commitment.
- Subsequent to the sale, model home inventory was replaced with the
inventory of American Homestar. Costs of replacement was provided by the
Company and American Homestar.
- Subsequent to the sale, the Company and American Homestar each agreed to
provide up to $50 per quarter for the four quarters subsequent to March
15, 1999 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 $0.75 million based upon quarterly losses
during the first four quarters following closing. During the nine months
ended September 30, 2000, $288 was expensed under this agreement.
Beginning April 1, 2000, the Company is committed to pay $1,000 per month
to American Homestar for such services through March 15, 2002.
- 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. During the nine months ended September 30, 2000, the Company
provided additional financing of $0.5 million and American Homestar
provided additional financing of $0.75 million.
- 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.
Page 13
<PAGE> 14
The accompanying financial statements include the results of HomeMax for
all applicable periods. Losses for the periods subsequent to the
transaction allocable to American Homestar are included as a component of
minority interest in loss of consolidated entities in the consolidated
statements of operations. Losses in excess of American Homestar's initial
investment have continued to be allocated given American Homestar's
additional funding to HomeMax through its $4.0 million subordinated
convertible loan as well as other financing provided. American Homestar's
investment, net of allocable losses, is included as a component of
minority interest in the accompanying balance sheets. The gain resulting
from the Company's sale of a 25% interest in HomeMax to American Homestar
($1,765) has been deferred until, among other factors, American Homestar
converts its subordinated note into an additional 25% equity interest in
HomeMax.
(8) Litigation-
During 1999, the Company became aware of certain moisture and mold
related issues in certain of its luxury site-built home communities in
Mason, Ohio. The Company has vigorously pursued various remediation
initiatives in an effort to address the various homeowner concerns. As of
December 31, 1999 and through September 30, 2000, the Company estimated
the cost of remediation approximates $3.8 million. Certain of the costs
associated with the remediation efforts are subject to recovery through
the Company's insurance. To date, the Company's primary carrier has
accepted certain coverage, however, the excess insurance carrier has to
date denied coverage. The Company continues to vigorously pursue its
rights under its insurance policies. In the opinion of management and
legal counsel it is remote that insurance recoveries will be less than
$1.0 million. Through September 30, 2000 the Company received insurance
proceeds of approximately $432. Adjustments to the estimated costs of
remediation as well as the related minimum insurance recoveries will be
recorded in the periods in which the facts and circumstances which
warrant such adjustments become known. Through September 30, 2000, the
Company incurred costs of approximately $3.3 million related to the
remediation efforts.
As of September 30, 2000, the Company had contractual remediation costs
of approximately $2.9 million with certain homeowners in the communities.
In March 2000, a purported class action suit was filed by a homeowner
which claimed compensatory damages of more than $25, treble and
punitive damages and other costs. The Company intends to vigorously
defend this matter. However, given the preliminary nature of the case,
the uncertainty relative to the potential costs of remediation and the
uncertainties relative to the scope of insurance coverage available, the
Company is currently uncertain as to the magnitude of the potential
uninsured liability associated with the case.
(9) Discontinued Operations-
(a) Entry Level Home Segment--On December 13, 1999, the Board of
Directors approved plans to discontinue the affairs of Hearthside.
Accordingly, in 1999 the Company recorded a provision of $1.75 million as
the estimate of the costs of discontinuing the Hearthside operations. As
of September 30, 2000, approximately $275,000 of this amount is unused.
The net losses associated with the operations of Hearthside for the three
months and nine months ended September 30, 1999 are included in the
accompanying consolidated statements of operations as discontinued
operations. In addition, net assets (liabilities) of Hearthside are
included in net assets of discontinued operations in the accompanying
balance sheets. The results of the discontinued Hearthside segment
reflect an allocation of interest expense based on assets deployed.
Summary financial information of Hearthside is as follows:
Page 14
<PAGE> 15
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------------
2000 1999 2000 1999
---- ------- ------- --------
<S> <C> <C> <C> <C>
Net revenues $388 $ 7,591 $11,989 $ 18,716
Interest allocation $ 4 $ 303 $ 183 $ 762
Pretax operating loss $-- $ (481) $ -- $ (1,571)
Benefit for income taxes -- 177 -- 578
---- ------- ------- --------
Net loss $-- $ (304) $ -- $ (993)
==== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------
2000 1999
------- --------
<S> <C> <C>
Land and home inventories $ -- $ 14,232
Other assets 394 585
Liabilities (1,465) (3,196)
------- --------
Net assets (liabilities) of discontinued operations $(1,071) $ 11,621
======= ========
</TABLE>
The disposal of Hearthside assets through an orderly sales process is
expected to be completed no later than December 13, 2000.
(b) Luxury Site-Built Homes Segment--On November 13, 2000, the Board of
Directors approved plans to discontinue the operations of the Zaring
Homes segment. As indicated previously, the Company has reached a
tentative agreement with Drees to sell certain of the assets of the
Zaring Homes Cincinnati, Nashville and Indianapolis divisions to Drees.
In addition, on October 13, 2000, the Company sold certain of the assets
of the Raleigh division to Drees and on November 13, 2000, the Company
sold certain of the assets of the Charlotte division to St. Lawrence
Homes (see Note 13).
The Company expects to close on the sale of the net assets of the
Cincinnati, Nashville and Indianapolis divisions within the next twelve
months. In the event the sale to Drees does not materialize, the Company
will aggressively pursue other purchasers for these three divisions.
Accordingly, the net income (losses) associated with the operations of
Zaring Homes are included in the accompanying statements of operations as
discontinued operations for each of the periods presented. In addition,
the net assets of Zaring Homes are included in net assets of discontinued
operations in the accompanying consolidated balance sheets.
For the period ended September 30, 2000, the loss on discontinued
operations includes the write down of assets to estimated realizable
value and a provision for anticipated closing costs and operating losses
until disposal aggregating approximately $3.0 million. The results of the
Zaring Homes segment reflect an allocation of interest expense based on
assets deployed. Summary financial information of the Zaring Homes
segment is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED,
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2000 1999 2000 1999
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 75,747 $78,595 $ 234,961 $183,847
Cost of sales 63,497 62,209 199,893 146,468
Interest, net 1,658 797 4,435 1,507
Selling, general and administrative 9,600 10,187 30,636 25,617
-------- ------- --------- --------
Operating income (loss) 992 5,402 (3) 10,255
Provision for discontinued operations 3,000 -- 3,000 --
Other income (expense) (989) 113 (794) 30
-------- ------- --------- --------
Pretax operating income (loss) (2,997) 5,515 (3,797) 10,285
Provision (benefit) for taxes 4,546 2,167 4,252 3,971
-------- ------- --------- --------
Net income (loss) $ (7,543) $ 3,348 $ (8,049) $ 6,314
======== ======= ========= ========
</TABLE>
Page 15
<PAGE> 16
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Land $ 43,816 $ 53,759
Luxury site-built homes 38,717 67,506
Property and equipment, net 4,870 6,306
Other assets 2,135 1,686
Accounts payable (13,654) (21,435)
Accrued expenses (9,504) (6,277)
Customer deposits (5,163) (8,059)
Notes payable (57,565) (71,187)
-------- --------
Net assets of discontinued operations $ 3,652 $ 22,299
======== ========
</TABLE>
(c) Financial Services Segment--Upon closing the sale of the last
remaining division of the Zaring Homes segment, the operations of the
Zaring Financial Services segment will be discontinued. As a result, the
net income (losses) associated with the operations of Zaring Financial
Services are included in the accompanying consolidated statements of
operations as discontinued operations for all periods presented. In
addition, the net assets of Zaring Financial Services are included in net
assets of discontinued operations in the accompanying consolidated
balance sheets. Summary financial information of Zaring Financial
Services is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
2000 1999 2000 1999
------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 514 $ 434 $ 1,335 $ 1,102
Pretax operating income (loss) 58 51 (176) 82
Provision (benefit) for income taxes 21 21 (65) 33
------- -------- --------- ---------
Net income (loss) $ 37 $ 30 $ (111) $ 49
======= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30
-------------------------
2000 1999
-------- -------
<S> <C> <C>
Mortgage receivables $ 4,663 $ 585
Other assets 249 193
Revolving credit note (4,061) (289)
Other liabilities (132) (44)
-------- -------
Net assets of discontinued operations $ 719 $ 445
======== =======
</TABLE>
(d) Majority Shareholder LLCs--Upon closing the sale of the Zaring Homes
divisions the agreements between Zaring Homes and the Majority
Shareholder LLCs will be terminated and the Majority Shareholder LLCs
will enter into new agreements with the third party purchasers. As a
result, the activities of these entities will no longer be required to be
consolidated with the results of the Company. The Majority Shareholder
LLCs are included as a component of discontinued operations in the
accompanying financial statements of the Company. Summary information of
the Majority Shareholder LLCs is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues $1,565 $1,078 $4,866 $2,493
Cost of sales 1,230 977 3,920 2,256
Interest, net 298 336 963 873
Selling, general and administrative 40 52 89 147
------ ------ ------ ------
Operating loss (3) (287) (106) (783)
Other income 268 209 811 535
Minority interest (265) 78 (705) 248
------ ------ ------ ------
$ -- $ -- $ -- $ --
====== ====== ====== ======
</TABLE>
Page 16
<PAGE> 17
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Model homes $ 11,916 $ 10,184
Land 5,207 8,731
Other assets 2,859 837
Notes payable (17,817) (17,828)
Other liabilities (105) (868)
Minority interest (2,060) (1,056)
-------- --------
Net assets of discontinued operations $ -- $ --
======== ========
</TABLE>
(10) New Pronouncements-
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). This statement established accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments imbedded in other contracts) be recorded on the balance sheet
as either an asset or liability measured at its fair value. This
statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS 133 is effective for fiscal years beginning after
June 15, 2000. Upon adoption of this statement, the Company anticipates
no impact on its reported consolidated financial position, results of
operations, cash flows or related disclosures.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements"(SAB 101). SAB 101 interprets and expands upon existing
guidance regarding revenue recognition. The implementation of SAB 101 is
required no later than the fourth quarter of 2000. The Company does not
expect SAB 101 to have a material impact on revenue recognition.
(11) Reclassifications-
Certain amounts in the consolidated interim financial statements for 1999
have been reclassified to conform to the 2000 presentation.
(12) Segment Information-
The following tables set forth, for the periods indicated, certain
segment information regarding the Company's operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED,
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2000 1999 2000 1999
-------- ------- -------- --------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
HomeMax, Inc.
Retail Distribution Manufactured Homes
Revenues $ 10,579 $ 4,858 $ 30,800 $ 15,072
Cost of sales 9,018 4,495 26,231 13,424
Interest 422 309 1,240 1,223
Asset impairment 6,300 -- 6,300 --
Selling, general and administrative 2,387 3,306 8,066 8,164
-------- ------- -------- --------
Operating loss (7,548) (3,252) (11,037) (7,739)
Other income (expense) (66) -- 409 44
Minority interest 1,817 616 2,310 1,215
-------- ------- -------- --------
Pretax Retail Distribution Loss (5,797) (2,636) (8,318) (6,480)
</TABLE>
Page 17
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED,
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Corporate
Interest (516) (363) (1,533) (1,146)
General and administrative (1,117) (887) (3,646) (3,281)
-------- ------- -------- --------
Loss before taxes and discontinued
operations (7,430) (3,886) (13,497) (10,907)
Provision (benefit) for income taxes 5,500 (838) 3,789 (3,133)
-------- ------- -------- --------
Net loss before discontinued operations (12,930) (3,048) (17,286) (7,774)
Income (loss) from discontinued
operations, net of tax (7,506) 3,074 (8,160) 5,370
-------- ------- -------- --------
Net income (loss) $(20,436) $ 26 $(25,446) $ (2,404)
======== ======= ======== ========
</TABLE>
Other pertinent information regarding the Company's segment operations is as
follows:
<TABLE>
<CAPTION>
HOMEMAX, INC.
RETAIL
DISTRIBUTION
MANUFACTURED
HOMES CORPORATE TOTAL
------------- ---------- -------
<S> <C> <C> <C>
Segment assets:
as of September 30, 2000 $17,650 $8,141 $25,791
RECONCILIATION OF SEGMENT ASSETS TO TOTAL ASSETS AS
OF SEPTEMBER 30, 2000:
Total segment assets $25,791
Elimination of inter-entity investments 60
Net assets of discontinued operations 3,300
-------
Cash and cash equivalents* 11,876
$41,027
=======
</TABLE>
*Management excludes cash and cash equivalents from assessing a segment's
operating performance.
(13) Subsequent Event-
On November 1, 2000, the Company announced that its agreement to
negotiate exclusively with The Drees Company (Drees), a privately-owned
homebuilder headquartered in Northern Kentucky, had been extended through
November 22, 2000. Per the terms of the proposed transaction Drees would
purchase certain of the net assets of Zaring Homes' Cincinnati, Nashville
and Indianapolis divisions. On October 13, 2000, Drees acquired certain
of the operating assets of Zaring Homes' Raleigh division for
approximately $11.0 million
On November 13, 2000, St. Lawrence Homes, a privately-owned single family
homebuilder based in Raleigh, North Carolina acquired substantially all
of the real estate assets and assumed the lot purchase contracts of
Zaring Homes' Charlotte division for $3.3 million. Zaring Homes
discontinued accepting customer contracts for new construction in
Charlotte on August 24, 2000. All Zaring homes under contract of sale in
Charlotte will be completed and warranted by Zaring Homes.
Page 18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
SEPTEMBER 30, 1999
RESULTS OF OPERATIONS
The Company has plans to discontinue the operations of its Zaring Homes,
Hearthside and Zaring Financial Services segments and will ultimately no longer
be required to consolidate the results of the LLCs controlled by its principal
shareholder. Accordingly, the results of operations include the results of the
continuing operations of HomeMax and Corporate and the results of the Zaring
Homes, Hearthside, Zaring Financial Services and Majority Shareholders LLC
segments as discontinued operations.
The Company's business and the manufactured housing 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 continuing operations
for the periods presented include retail distribution manufactured homes and
reflect the cyclical nature of that industry.
The Company reported consolidated net revenues from continuing operations of
$10.6 million for the quarter ended September 30, 2000, compared to $4.9 million
for the same quarter in 1999, an increase of 117.8%. The net loss from
continuing operations for the quarter was $(12.9) million or $(2.82) per share,
compared to a net loss of $(3.0) million or $(0.66) per share for the same
quarter of 1999.
For the nine months ended September 30, 2000, consolidated revenues from
continuing operations were $30.8 million, compared to $15.1 million for the same
period in 1999, an increase of 104.3%. The net loss from continuing operations
for the nine months ended September 30, 2000 was $(17.3) million or $(3.77) per
share, compared to a net loss of $(7.8) million or $(1.69) per share for the
nine months ended September 30, 1999.
The following tables set forth, for the periods indicated, certain financial
information regarding the Company's operating segments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2000 1999 2000 1999
-------- ------- -------- --------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
HomeMax, Inc.
Retail Distribution Manufactured Homes
Revenues (1) $ 10,579 $ 4,858 $ 30,800 $ 15,072
Cost of sales 9,018 4,495 26,231 13,424
Interest 422 309 1,240 1,223
Asset impairment 6,300 -- 6,300 --
Selling, general and administrative 2,387 3,306 8,066 8,164
-------- ------- -------- --------
Operating loss (7,548) (3,252) (11,037) (7,739)
Other income (expense) (66) -- 409 44
Minority interest 1,817 616 2,310 1,215
-------- ------- -------- --------
Pretax Retail Distribution Loss (5,797) (2,636) (8,318) (6,480)
Corporate
Interest (516) (995) (1,533) (1,146)
General and administrative (1,117) (887) (3,646) (3,281)
-------- ------- -------- --------
Loss before taxes and discontinued
operations (7,430) (4,518) (13,497) (10,907)
Provision (benefit) for income taxes 5,500 (1,470) 3,789 (3,133)
-------- ------- -------- --------
Net loss before discontinued operations (12,930) (3,048) (17,286) (7,774)
Income (loss) from discontinued operations,
net of tax (7,506) 3,074 (8,160) 5,370
-------- ------- -------- --------
Net income (loss) $(20,436) $ 26 $(25,446) $ (2,404)
======== ======= ======== ========
</TABLE>
(1) Revenue from sale is recognized upon the closing of the sale.
Page 19
<PAGE> 20
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2000 1999 2000 1999
------- ------- ------- -------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Retail Distribution Manufactured Homes
Operating data:
Units
New Orders (1) 105 106 414 294
Closings (2) 153 83 467 262
Backlog (3) 148 199 148 199
Average revenue per closing $ 63 $ 57 $ 63 $ 56
Average value of new order sales $ 59 $ 67 $ 62 $ 61
Sales value of backlog $12,295 $14,268 $12,295 $14,268
</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.
HOMEMAX, INC., RETAIL DISTRIBUTION MANUFACTURED HOMES- Net revenues for the
three months ended September 30, 2000 increased $5.7 million from $4.9 million
in the third quarter of 1999 to $10.6 million. HomeMax closed 153 units in the
third quarter of 2000, an increase of 84.3% from the 83 units closed in the same
period of 1999. Net revenues for the nine months ended September 30, 2000
increased $15.7 million or 104.4% from $15.1 million for the first nine months
of 1999 to $30.8 million for the first nine months of 2000. HomeMax closed 467
units during the first nine months of 2000, an increase of 78.2% from the 262
units closed in the same period of 1999. The increase is due to the maturity of
the sales villages and new management at a majority of the villages.
Gross profit was $1.6 million or 14.8% for the three months ended September 30,
2000 as compared to $363 or 7.5% for the same period in 1999. Gross profit
dollars and percentages were $4.6 million and 14.8% during the first nine months
of 2000 as compared to $1.6 million and 10.9% during the first nine months of
1999. The increase in gross profit dollars is due mainly to the increase in
average net revenues per unit.
Interest expense was $422 or 4.0% of revenues in the third quarter of 2000
compared to $309 or 6.4% of revenues in the corresponding quarter of 1999.
Interest expense was $1.2 million, 4.0% of revenues for the first nine months of
2000 as compared to $1.2 million, 8.1% of revenues for the first nine months of
1999. The decrease in interest expense as a percentage of revenues is primarily
attributable to the increase in revenues and the recapitalization of the
operations in conjunction with the joint venture agreement with American
Homestar, signed March 15, 1999.
In response to the actual and anticipated losses of HomeMax and the planned
consolidation of certain of the sale villages, management determined the
undiscounted estimated future cash flows of HomeMax were less than the carrying
value of the associated long-lived assets. Accordingly, HomeMax adjusted the
carrying value of the long-lived assets of HomeMax to their estimated fair
market value through the recognition of a provision for asset impairment of
approximately $6.3 million. The estimated fair value of the assets was based on
reviews of comparable asset values.
Selling, general and administrative expenses for HomeMax were $2.4 million or
22.6% of revenues for the three months ended September 30, 2000 compared to $3.3
million or 68.0% of revenues for the same period in 1999. Selling expenses were
$644 or 6.1% of revenues in the third quarter of 2000 compared to $667 or 13.5%
of revenues in the third quarter of 1999. General and administrative expenses
were $1.7 million or 16.5% of revenues in the third quarter of 2000 compared to
$2.6 million or 54.3% of revenues in the third quarter of 1999. Selling, general
and administrative expenses for the nine months ended September 30, 2000 were
$8.1 million or 26.2% of revenues as compared to $8.2 million or 54.1% of
revenues for the same period of 1999. Selling expenses were $2.0 million or 6.6%
of revenues for the nine months ended September 30, 2000 versus $2.2 million or
14.7% of revenues for the same period of 1999. General and administrative
expenses were $6.0 million or 19.6% of revenues
Page 20
<PAGE> 21
for the nine months ended September 30, 2000 as compared to $5.9 million or
39.5% of revenues for the first nine months of 1999. The decrease in selling
expenses as a percentage of revenues for the quarter and the nine month periods
ended September 30, 2000 as compared to the same periods in 1999 is due mainly
to a decrease in the number of sales associates and a decrease in advertising
costs. The decrease in selling, general and administrative expenses as a
percentage of revenues is due mainly to the increase in net revenues.
Other income for the nine months ended September 30, 2000 includes a gain of
$529 related to the second quarter sale of two unopened sales villages.
As a result of the foregoing, HomeMax reported a pretax loss of $(5.8) million
or (54.8)% of revenues in the third quarter of 2000 compared to a pretax loss of
$(2.6) million, (53.6)% of revenues, in the third quarter of 1999. In the nine
months ended September 30, 2000, HomeMax reported a pretax loss of $(8.3)
million or (27.0)% of net revenues versus a pretax loss of $(6.4) million or
(42.8)% of net revenues for the nine months ended September 30, 1999.
CORPORATE- Corporate general and administrative expenses were $1.1 million for
the three month period ended September 30, 2000, as compared to $887 for the
three month period ended September 30, 1999. Corporate general and
administrative expenses were $3.6 million and $3.3 million for the nine months
ended September 30, 2000 and 1999, respectively. The increase in Corporate
general and administrative expenses is attributed mainly to increases in legal
and professional costs related to the efforts to sell certain of the Company's
segments.
INCOME TAXES- The aggregate provisions for income taxes included in the
accompanying consolidated statements of operations includes a valuation
allowance recorded during the quarter ended September 30, 2000 of $10.6 million.
The aggregate valuation allowance has been allocated among continuing and
discontinued operations based on the origin of the timing items in amounts
approximating $6.2 million and $4.4 million, respectively. The recognition of
the valuation allowance is primarily attributable to the fact that the
previously recorded deferred tax assets will only be realized through
prospective taxable income and there are substantial uncertainties relative to
the prospects of realizing such taxable income. The future tax benefit of $1,381
included in the accompanying consolidated balance sheet as of September 30, 2000
represents the estimated tax refunds related to the utilization of certain tax
loss carrybacks.
DISCONTINUED OPERATIONS-
(a) Zaring Homes, Inc., Luxury Site-Built Homes Segment--On November 13, 2000,
the Board of Directors approved plans to discontinue the operations of the
Zaring Homes segment. The Company has reached a tentative agreement with The
Drees Company (Drees) to sell certain of the assets of the Zaring Homes'
Cincinnati, Nashville and Indianapolis divisions to Drees. In addition, on
October 13, 2000, the Company sold certain of the assets of the Raleigh division
to Drees and on November 13, 2000, the Company sold certain of the assets of the
Charlotte division to St. Lawrence Homes.
The Company expects to close on the sale of the net assets of the Cincinnati,
Nashville and Indianapolis divisions within the next twelve months. In the event
the sale to Drees does not materialize, the Company will aggressively pursue
other purchasers for these three divisions.
For the period ended September 30, 2000, the loss on discontinued operations
includes the writedown of assets to estimated realizable value and a provision
for anticipated closing costs and operating losses until disposal aggregating to
approximately $3.0 million.
Net revenues for the three months ended September 30, 2000 were $75.6 million, a
decrease of 3.6% from the $78.6 million reported in the same period in 1999.
Zaring Homes delivered 245 homes in the third quarter of 2000, compared to 292
homes in 1999, a 16% decrease. This decrease in revenues and homes delivered for
the quarter ended September 30, 2000 as compared to the same quarter in 1999 was
primarily due to the slowing of the luxury housing market in substantially all
of the Company's markets offset by an increase in revenue per home closed of
$39,000. Net revenues for the nine months ended September 30, 2000 were $234.9
million on 779 closings as compared to $183.8 million on 664 closings for the
nine months ended September 30, 1999, a 27.8% increase in revenues and 17.3%
increase in closings. The total sales value of backlog was $89.4 million as of
September 30, 2000 as compared to $162.9 million as of September 30, 1999, a
45.1% decrease.
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Gross profit dollars and percentages were $12.2 million and 16.2% in the third
quarter of 2000 as compared to $16.4 million and 20.8% in the third quarter of
1999. Gross profit dollars decreased in the third quarter of 2000 as compared to
the third quarter of 1999 primarily due to the decrease in the number of homes
delivered and increased subcontractor and other production related costs. Gross
profit dollars and percentages were $35.1 million and 14.9% during the first
nine months of 2000 as compared to $37.4 million and 20.3% during the first nine
months of 1999. The decline in gross profit dollars and percentages through
September 30, 2000 is attributable to increased subcontractor and other
production related costs.
Interest increased $0.9 million in the third quarter of 2000 as compared to the
third quarter of 1999. As a percentage of net revenues, interest expense
increased to 2.2% from 1.0%. This increase in interest expense is due to the
increase in interest rates related to the third amendment to the syndicated
credit facility which became effective April 14, 2000 and increases in average
borrowings outstanding. Interest expense for the nine months ended September 30,
2000 increased $2.9 million from $1.5 million in 1999 to $4.4 million in 2000.
As a percentage of net revenues interest expense increased to 1.9% for the nine
months ended September 30, 2000 from 0.8% for the same period in 1999. The
increase in interest in dollars and as a percentage of net revenues were
similarly due to higher average borrowings and rates.
As a percentage of revenues, selling expenses decreased to 6.7% of revenues for
the three months ended September 30, 2000 as compared to 9.0% of revenues for
the same period in 1999. Selling expenses for the quarter ended September 30,
2000 decreased $1.9 million as compared to the corresponding period in 1999.
This decrease is primarily due to the decrease in the number of homes delivered
and decreases in the sales staff. Selling expenses for the nine months ended
September 30, 2000 increased $2.4 million to $17.6 million from $15.2 million.
As a percentage of revenues, selling expenses were 7.5% for the nine months
ended September 30, 2000 as compared to 8.3% for the same period of 1999. This
decrease as a percentage of revenues is due to the decrease in sales staff. As a
percentage of revenues, general and administrative expenses increased to 5.9% in
the third quarter of 2000 from 4.0% in the third quarter of 1999. General and
administrative expenses increased $1.3 million or 42.8% in the third quarter of
2000 compared to the third quarter of 1999, due primarily to increases in
payroll and office related costs. General and administrative expenses increased
$2.7 million or 25.6% in the first nine months of 2000 compared to the same
period of 1999. As a percentage of revenues, general and administrative expenses
remained relatively flat at 5.6% in the first nine months of 2000 compared to
the same period in 1999. As a percentage of revenues, selling, general and
administrative expenses were 12.7% and 13.0% for the three month period ended
September 30, 2000 and 1999, respectively, and 13.0% and 13.9% for the nine
month period ended September 30, 2000 and 1999, respectively. The decrease in
this percentage is mainly due to the increase in revenues.
Other expense for the three months ended September 30, 2000 includes a loss of
$(824) on the sale of the Louisville division.
As a result of the foregoing, Zaring Homes reported pretax loss of $(3.0)
million or (4.0)% of net revenues in the third quarter of 2000, a decrease of
$8.5 million from pre-tax income of $5.5 million in the same period in 1999. For
the nine months ended September 30, 2000, Zaring Homes reported a pre-tax loss
of $(3.8) million or (1.6)% of net revenues as compared to pre-tax income of
$10.3 million or 5.6% of net revenues in the same period of 1999.
(b)Hearthside Homes LLC, Entry Level Homes Segment-- On December 13, 1999, the
Board of Directors approved plans to discontinue the affairs of Hearthside.
Accordingly, in 1999 the Company recorded a provision of $1.75 million as the
estimate of the cost of discontinuing the Hearthside operations. As of September
30, 2000, approximately $275,000 of this amount was unused.
(c) Financial Services Segment--Upon closing the sale of the last remaining
division of the Zaring Homes segment, the operations of the Zaring Financial
Services segment will be discontinued. The financial services segment reported
revenues of $0.5 million and $1.3 million for the three months and nine months
ended September 30, 2000, respectively. After deducting expenses associated with
the mortgage company operations, the financial services segment reported pretax
income of $37 and a pretax loss of $(111) for the three months and nine months
ended September 30, 2000, respectively. In the third quarter of 1999, the
financial services segment reported pretax income of $51 on revenues of $434. In
the nine months ended September 30, 1999, the financial services segment
reported pretax income of $82 on revenues of $1.1 million.
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(d) Majority Shareholder LLCs--Upon closing the sale of the Zaring Homes
divisions the agreements between Zaring Homes and the Majority Shareholder LLCs
will be terminated and the Majority Shareholder LLCs will enter into new
agreements with the third party purchasers. As a result, the activities of these
entities will no longer be required to be consolidated with the results of the
Company. First Cincinnati Leasing LLC, First Cincinnati Leasing 99 LLC, First
Cincinnati Leasing 2000 LLC and First Cincinnati Land LLC are reported as
"Majority Shareholder LLCs". Leasing LLC and Leasing 99 LLC closed 6 homes
during the three months ended September 30, 2000 for $1.6 million versus 4 home
closings for $1.1 million during the three months ended September 30, 1999.
Leasing LLC and Leasing 99 LLC closed 17 homes during the nine months ended
September 30, 2000 for $4.9 million in revenues as compared to 9 homes closed
for $2.5 million in revenues during the same period of 1999. Interest expense
was $298 and $963 during the three months and nine months ended September 30,
2000 as compared to $336 and $873 during the same periods in 1999. Interest
expense represents interest incurred for model home and undeveloped land
holdings. Other income, net represents rental income for model homes and land
option payments from the Company net of income deferred until land parcels are
sold to unrelated third parties. Deferred income of the LLCs approximated $1.8
million at September 30, 2000 as compared to $1.1 million at September 30, 1999.
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CAPITAL RESOURCES AND LIQUIDITY
The Company had cash and equivalents and available borrowings on its revolving
credit facility of approximately $11.9 million and $10.8 million, respectively,
as of September 30, 2000 as compared to $9.2 million and $9.0 million available
as of September 30, 1999. These amounts are available to fund the ongoing
operations of the Company and the operations of the discontinued segments
through their disposal dates.
Net cash used in continuing operations during the nine months ended September
30, 2000 approximated $6.5 million as compared to $10.2 million during the nine
months ended September 30, 1999. Net cash used in the first nine months of 2000
is primarily attributable to the net loss ($25.4 million), offset by the
provision for asset impairment and the tax valuation allowance.
Net cash provided by investing activities of continuing operations was $2.1
million in the first nine months of 2000 compared to $1.1 in the same period of
1999. The change is primarily attributable to a payment received on the note
from American Homestar ($1.5 million) and proceeds of $0.8 million from the sale
of sales villages and property and equipment offset by property and equipment
additions of $0.1 million.
Net cash provided by financing activities of continuing operations for the nine
months ended September 30, 2000 was $0, as compared to $11.0 million in the same
period in 1999. The change is primarily due to essentially net payments on debt
of $43,000 in 2000 versus net borrowings of debt of $10.6 million in 1999.
The Company has embarked on an asset reduction plan to provide internally
generated funds to be utilized for 2000 operating initiatives. The plan consists
of, among others:
- Selling the remaining assets of Hearthside and wind up the related
operations
- Selling and leaseback certain model homes to the Company's Chairman
- Reducing the number of market homes per community
- Selling certain idle HomeMax sales villages
- Selling the remaining assets of Zaring Homes and wind up the related
operations
- Selling certain or all of its operations
During 1999 and the first quarter of 2000, the Company was unable to comply with
certain covenants included in its credit agreements. The banks initially
provided a forbearance agreement which extended to April 14, 2000. Concurrent
with the expiration of the forbearance agreement, the Company negotiated a third
amendment to the loan agreements with its banks. The amendment to the syndicated
credit facility included the following modifications:
- The maturity date of the facilities was revised to March 31, 2001
- Available borrowings under the revolving credit facility which were $72.5
million as of December 31, 1999 were reduced by $5.0 million on July 1,
2000, $5.0 million on October 1, 2000 and an additional $10.0 million on
October 13, 2000.
- Interest rates were adjusted to prime plus 1% through August 31, 2000,
with an increase to prime plus 2% if borrowings under the revolving
credit facility exceed $40.0 million on September 1, 2000, an increase to
prime plus 3% if revolver borrowings exceed $25.0 million on November 1,
2000 and prime plus 4% if revolver borrowings exceed $5.0 million on
January 1, 2001. Default rates, if applicable, will be 3% above the
interest rate in effect.
- The third amendment revised preexisting provisions which required, among
others, that the Company maintain certain minimum levels of tangible net
worth and cash flows from operations to certain fixed charges as well as
limiting the Company's ratio of debt to equity, all as defined per the
terms of the agreement. The amendment also established limitations on the
number of market and model homes maintained in inventory, land
acquisition and deviations from expected cash flows (as defined).
- Waivers for loan violations occurring prior to April 14, 2000.
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The Company was not in compliance with certain of the terms and conditions of
certain of its credit agreements at September 30, 2000. Management intends to
discuss the potential covenant violations with its lenders and secure waivers or
otherwise amend the agreements to enable compliance through at least the date of
the expected sale to Drees. In addition, management is of the opinion that its
present cash balances, amounts available from its credit agreements and amounts
generated from its asset reduction plans will provide adequate funds for its
future operations through the date of the sale to Drees provided such sale
occurs no later than the first quarter of 2001. However, there can be no
assurances that the banks will provide waivers or otherwise amend the credit
agreements or continue to provide financing to the Company. In the event the
banks do not agree to provide waivers or otherwise amend the credit agreements
and accelerate payments due per the agreements, the Company will encounter great
difficulty in meeting the demands of the banks and will need to evaluate various
forms of financial reorganization, the most severe of which could include
bankruptcy. In addition, losses from continuing operations are anticipated and
there are no assurances the Company would be able to secure capital or other
financing to fund these losses. Although management is pursuing various
initiatives to sell certain or all of its operations there are no assurances the
net proceeds would be sufficient to pay all creditors or provide any
distributions to the Company's shareholders.
As of November 1, 2000, borrowings under the revolving credit facility were
approximately $39.3 million, accordingly interest rates were adjusted to prime
plus 3.0%. Further, as of November 20, 2000, management believes borrowings
under the revolving credit facility will exceed $5.0 million on January 1, 2001.
If borrowings were to exceed $5.0 million on January 1, 2001, interest rates
will be adjusted to prime plus 4.0% through the maturity of the facility.
On November 1, 2000 the Company announced that it extended its agreement with
Drees through November 22, 2000. Per the terms of the proposed transaction Drees
acquired Raleigh operations from Zaring for approximately $11.0 million on
October 13, 2000 and Drees will acquire certain of the assets of Zaring Homes
Cincinnati, Nashville and Indianapolis divisions. In addition, on November 13,
2000, St. Lawrence Homes, a privately-owned single family home builder based in
Raleigh, North Carolina, purchased substantially all of the real estate assets
and assumed the lot purchase of Zaring Home Charlotte division. Zaring Homes
discontinued accepting customer contracts for new construction in Charlotte on
August 24, 2000. All Zaring Homes in Charlotte under contract of sale will be
completed and warranted by Zaring Homes.
LOT COMMITMENTS- In the aggregate, as of September 30, 2000, Zaring Homes owned,
had the ability to develop or purchase, or had under contract 2,939 lots. At
September 30, 2000, Zaring Homes owned approximately 775 lots and undeveloped
land, including land owned by Land LLC, which will be developed into
approximately 533 lots. Of the 884 lots under contract, Zaring Homes is
committed to 257 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. (see Note 1 to the financial statements)
INFLATION- Housing demand, in general, is affected adversely by increases in
interest rates. If mortgage interest rates, and 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.
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the qualitative and quantitative disclosures
about market risk as of September 30, 2000 from that presented in the Company's
annual report on Form 10-K for the fiscal year ended December 31, 1999.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various claims, lawsuits and administrative
proceedings arising in the ordinary course of business with respect to real
estate, environmental zoning, and other matters, which seek remedies or damages.
The Company believes that any liability that may finally be determined, without
consideration of the litigation discussed below, will not have a material effect
on its financial position, cash flows, or results of operations.
On March 14, 2000, a lawsuit was filed by Felix and Wanda Martinez in the Court
of Common Pleas, Hamilton County, Ohio against Zaring National Corporation (the
"Company") and its subsidiary, Zaring Homes, Inc., in the form of a purported
class action whose members own homes in the "White Blossom" residential
development of Zaring Homes in Mason, Ohio. The suit alleges that the home
owners have been damaged because of defects in their homes including water and
moisture in wall cavities; water damage to wood and other materials used to
build the homes; mold and mildew growth inside the homes; excessive humidity;
and poor air quality inside the homes. The suit requests compensatory damages of
more than $25,000, treble damages, punitive damages, attorney fees, litigation
expenses, court costs, interest before and after judgement, and all other
available relief. The Company intends to vigorously contest this suit.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
ITEM 5. OTHER INFORMATION - The Company was notified April 28, 2000 that it
failed to maintain the minimum market value of public float for continued
listing on the Nasdaq National Market and that it had until July 27, 2000 to
regain compliance. The Company submitted an application to transfer to the
Nasdaq SmallCap Market and effective August 14, 2000 the Company's shares were
transferred to the Nasdaq SmallCap Market.
On November 14, 2000, Murat H. Davidson resigned as a director of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - NONE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZARING NATIONAL CORPORATION
(Registrant)
Date: November 20, 2000 By: /s/Allen G. Zaring III
--------------------------------------
Allen G. Zaring III
Chairman of the Board, President and
Chief Executive Officer
Date: November 20, 2000 By: /s/Ronald G. Gratz
------------------------
Ronald G. Gratz
Chief Financial Officer
Secretary and Treasurer
(Principal Financial and Accounting Officer)
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