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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 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)
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OHIO 31-1506058
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 CORNELL PARK DRIVE, 45242-1825
Suite 500, Cincinnati, Ohio (Zip Code)
(Address of principal executive offices)
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained herein, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. YES [X] NO [ ]
As of March 17, 2000, there were 4,591,488 common shares issued and
outstanding, and the aggregate market value of those shares held by
non-affiliates of the registrant was approximately $5.2 million. Solely for the
purpose of this calculation, all directors and executive officers were excluded
as affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 24, 2000 (Part III).
Total Pages:
Exhibit Index at Page 37
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ZARING NATIONAL CORPORATION
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters......................................... 15
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 34
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 36
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 36
Item 13. Certain Relationships and Related Transactions.............. 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 36
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PART I
ITEM 1. BUSINESS
GENERAL
Effective May 8, 1997, Zaring National Corporation (formerly Zaring Homes,
Inc.) implemented the formation of a holding company structure. The subsidiaries
of Zaring National Corporation (the Company) include the following as of
December 31, 1999: 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 Company's subsidiary, Zaring Homes, Inc. (Zaring Homes or Zaring) is a
recognized regional builder of luxury site-built homes.
In 1997, the Company expanded its operations to include the retail
distribution of manufactured homes through its subsidiary, HomeMax, Inc.
(HomeMax). During 1997, the Company acquired three established retail
distributors of manufactured housing and opened its first Company designed and
constructed Model Home Village. As of December 31, 1999, HomeMax operated twelve
Model Home Villages. Nine Model Home Villages were located in North Carolina,
two in South Carolina and one in Kentucky. The Kentucky village was sold in
January 2000.
On October 1, 1997, the Company, through its then newly formed subsidiary
Hearthside Homes, LLC (Hearthside), entered the area of entry level homes by
acquiring the operating assets of an Indianapolis, Indiana entry level builder.
At the same time, the Company acquired the stock of Legacy Mortgage Corporation,
doing business as Hearthside Home Mortgage (Hearthside Mortgage). Hearthside
Mortgage originated, processed and sold mortgages to third party lenders. In
December 1999, the Board of Directors of the Company approved a plan to
discontinue the operations of Hearthside.
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. 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) respectively, to purchase and leaseback certain model homes.
In October 1998, the Company increased its ownership of Blue Chip Mortgage
Company, LLC (Blue Chip) from 50% to 100%. Effective April 1, 1999, Blue Chip
and Legacy Mortgage Corporation were merged and renamed Zaring Financial
Services, LLC (Zaring Financial Services). Zaring Financial Services originates,
processes and sells mortgages to third party lenders.
Consolidated revenues from continuing operations in 1999, 1998 and 1997
were derived as follows: 92.8%, 95.0% and 96.3%, respectively from luxury
site-built homes, 6.6%, 4.9% and 3.7%, respectively, from retail distribution
manufactured homes, and 0.6% and 0.1% from financial related services. There
were no revenues from financial services in 1997.
The Company was founded by Allen G. Zaring, III in 1964 and completed its
initial public offering of 2,000,000 Common Shares on June 2, 1993.
In 1998, the Board of Directors appointed Allen G. Zaring, III as Chief
Executive Officer. Mr. Zaring continues as the Chairman of the Board.
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RECENT DEVELOPMENTS
WARRANTY ISSUES
During 1999, the Company became aware of certain moisture and mold related
issues in certain luxury site-built homes in Mason, Ohio. The Company has
vigorously pursued various remediation initiatives in an effort to address
homeowner concerns. As of December 31, 1999, the Company estimates the cost of
remediation could approximate $3.8 million of which approximately $2.8 million,
net of estimated insurance recoveries, was expensed. Certain of the remediation
costs are subject to recovery through the Company's insurance. To date, the
Company's primary insurance carrier has accepted certain coverage, however, the
Company's excess insurance carrier has, to date, denied coverage. The Company
continues to vigorously pursue its rights under its insurance policies. The
Company intends to fund the estimated costs of remediation through its
operations and asset reduction plan (as more fully described in management's
discussion and analysis) as well as initial reimbursement from its insurance
carrier.
Through March 27, 2000, the Company had contractual remediation costs of
approximately $2.8 million with certain homeowners in the affected homes. In
March 2000, a purported class action suit was filed by a homeowner. 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 expense, court costs, interest before and after
judgment, and all other available relief. The Company intends to vigorously
defend this matter. Given the preliminary nature of the case, the uncertainties
relative to the potential costs of remediation and scope of insurance coverage
available, the Company is currently uncertain as to the magnitude of the
potential uninsured liability.
DISCONTINUED OPERATIONS
On December 13, 1999, the Board of Directors approved a plan to discontinue
the operations of Hearthside. The disposal of the Hearthside assets through an
orderly sales process is expected to be completed no later than December 13,
2000.
Hearthside's backlog consists of homes for which Hearthside has entered
into a sales contract, but which it has not yet delivered. As of December 31,
1999, Hearthside had a backlog of 65 entry level units under contract, with a
sales value of $7.8 million; all of which will be completed within 12 months. In
addition, at December 31, 1999, Hearthside owned 97 lots and had firm
commitments to purchase an additional 34 lots.
ASSET REDUCTION PLAN
On February 25, 2000, the Company announced that it hired Warburg Dillon
Read LLC to evaluate strategic alternatives, including the possible sale of all
or part of the Company. In addition, initiatives are currently in place to
reduce the number of market homes in each neighborhood and to reduce certain
operating costs in each of the Company's operating segments.
OPERATING STRATEGY
The Company focuses its operating strategy on increasing the rates of
return on invested capital. Through its Zaring Homes subsidiary, the Company's
primary strategy will emphasize continued cycle time compression and increased
inventory turnover. The Company's philosophy will be to emphasize Zaring Homes
operations while maintaining a presence in the manufactured housing market
through its
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investment in HomeMax. As discussed above, the operations of Hearthside Homes
will be discontinued. Net proceeds from the sale of Company assets or operations
will be used to reduce outstanding debt and fund continuing operations. The
Company also plans to modify the terms and conditions of its existing credit
facilities. No additional market expansion is currently planned.
ZARING HOMES (LUXURY SITE-BUILT HOMES)
The Company, through its subsidiary Zaring Homes, identifies existing
markets for housing, purchases and develops land and then designs, constructs
and sells luxury single-family detached homes to meet demand. Zaring's main
focus is to build distinctive, quality neighborhoods, but through the "Zaring
Design Gallery Homes" product, introduced in 1998, a Zaring home can be built on
a lot purchased independently by a customer. A variety of architectural styles
and different models within a community create inviting neighborhoods. Homes
built by Zaring emphasize classic exterior elevations, innovative interior
design and quality construction with attention to detail. Zaring has a
reputation for on-time construction.
Zaring traditionally has marketed to the Luxury/"Move-Up" market, comprised
of individuals who previously owned a principal residence. In executing this
strategy, Zaring builds homes that range in size from 1,900 to 4,000 square feet
at prices that range from approximately $170,000 to $490,000.
MARKETS
Prior to 1994, Zaring conducted its operations in two metropolitan areas:
Cincinnati, Ohio and Nashville, Tennessee. During 1994, Zaring expanded into two
new metropolitan areas: Raleigh, North Carolina and Indianapolis, Indiana. In
1996, Zaring Homes expanded into Charlotte, North Carolina and Louisville,
Kentucky. Zaring believes that all of these metropolitan areas are similar in
that all have relatively low unemployment, steady job growth, diversification of
industry, and satisfactory infrastructure and transportation facilities. In
addition, the continued customer response supports Zaring's strategy of offering
multiple product lines differentiated by price point in the same market.
Cincinnati
Zaring operates in five counties in Ohio and two counties in Northern
Kentucky, which constitute seven of the twelve counties in the Cincinnati
metropolitan statistical area, offering homes that range in price from $170,000
to $490,000. Homes ranging in size from 2,200 to 4,000 square feet are currently
offered in seventeen communities.
Nashville
Zaring operates in four of eight counties in the Nashville metropolitan
statistical area, offering homes that range in price from $190,000 to $370,000.
The product line encompasses homes ranging from 1,900 to 3,500 square feet in
eight communities.
Indianapolis
Zaring operates in two of the nine counties in the Indianapolis
metropolitan statistical area. Zaring markets homes ranging in price from
$210,000 to $400,000 in nine communities. The product line includes homes
ranging from 2,200 to 4,000 square feet.
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Raleigh
Zaring operates in one of the six counties which comprise the
Raleigh-Durham-Chapel Hill metropolitan statistical area. Zaring markets homes
ranging in size from 2,200 to 3,600 square feet and in price from $190,000 to
$375,000 in six communities.
Charlotte
Zaring operates in three of the seven counties which comprise the greater
Charlotte-Gastonia-Rockhill metropolitan statistical area. Zaring markets homes
ranging in size from 2,200 to 3,600 square feet and in price from $240,000 to
$460,000 in ten communities.
Louisville
Zaring operates in two counties of the seven counties of the Louisville
metropolitan statistical area. Zaring markets homes ranging in size from 2,200
to 4,000 square feet and in price from $225,000 to $475,000 in four communities.
PRODUCTS
Zaring homes are purchased for occupancy as primary residences and are
built in a variety of models. The base price of each of the homes includes
standard features such as insulated glass windows, one or more fireplaces,
equipped kitchens and landscaping. Additionally, Zaring provides a complete list
of pre-priced options, ranging from extra electrical outlets to bonus rooms,
three-car garages and flex space additions. Such options permit a buyer to
personalize the home and should result in incremental profits to the Company.
Zaring uses the same portfolio of home designs in similar communities and
develops new designs to replace existing ones as part of its continuing efforts
to assure that its homes are responsive to assessment of market trends and
requirements. For new designs, Zaring engages a number of unaffiliated
architectural firms supervised by an in-house architectural group. During the
design phase, all plans are reviewed at a number of levels within and outside
Zaring. This review attempts to ensure that the plan meets the needs of the
target market and is engineered for the most effective production techniques and
the most economical usage of materials.
Upon approval of a new home design, a prototype is constructed and
evaluated. During construction, all of those involved in planning, as well as
sales personnel, tour the home to analyze its design in light of their
particular area of expertise. Zaring also shows the prototype to potential
customers and actively seeks customer input.
MARKETING AND SALES
Zaring homes are sold primarily through its own staff of sales managers who
are compensated primarily on a commission basis. Zaring's marketing efforts rely
heavily on furnished model homes. The furnished models in all communities are
open seven days a week, and are staffed by sales managers who consult with the
prospective customer regarding floor plans, elevations and available options. At
December 31, 1999, Zaring, Leasing LLC and Leasing 99 LLC maintained 65
furnished model homes. Zaring cooperates with outside real estate agents to whom
it pays commissions at market rates. Other marketing tools include the Multiple
Listing Service, local newspaper advertisements, promotions, newsletters to
realtors, entrance signs and illustrated brochures, all of which utilize the
"Zaring Homes" name.
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Additionally, Zaring operates Design Galleries in Cincinnati, Ohio,
Nashville, Tennessee and Raleigh, North Carolina. The Design Galleries are fully
staffed centers whereby the variety of options available to the customer are
displayed to further enhance the customers' opportunity of choice without the
need to customize the base product line.
Sales of Zaring's homes are made pursuant to standard sales contracts.
These contracts generally require a customer to make a deposit of approximately
2% to 20% of the sale price at the time of the execution of the sales contract,
depending on local competitive conditions. Contracts are generally subject to
certain contingencies including the availability of mortgage financing to the
purchaser. Contracts for the sale of homes are at fixed prices. Prices at which
homes are offered normally increase from time to time during the sellout of the
community, reflecting, in part, increased costs. The prices of homes vary with
location as well as style, and standard and optional amenities.
The majority of Zaring's homes are completed after a sales contract has
been signed, but Zaring frequently commences construction of homes that are held
"under roof," with completed exteriors, as inventory for sale (Market Homes).
This practice limits funds committed to construction of the house, but at the
same time permits rapid completion of the interior of the home to a purchaser's
specifications upon execution of a sales contract. Zaring has Market Homes in
each community in order to offer a range of homes to prospective buyers and to
be able to complete a house for occupancy in approximately the same length of
time as required for a loan closing in the resale market. Some sales are of
completed homes, including model homes no longer needed for Zaring's marketing
efforts. At December 31, 1999, Zaring had 144 Market Homes at various stages of
completion. Market Homes are not reflected in Zaring's backlog until placed
under a purchase contract by a third-party purchaser.
BACKLOG AND INVENTORY
Zaring's backlog consists of homes for which Zaring has entered into a
sales contract, but which it has not yet delivered. As of December 31, 1999,
Zaring had a backlog of 433 luxury site-built units under contract, with a sales
value of $126.6 million, substantially all of which will be completed within six
months. Construction of homes in backlog is financed using cash flow from
operations and various credit facilities.
CONSTRUCTION
Zaring Homes enjoys a reputation as a quality builder of site-built luxury
homes. Zaring acts as its own construction manager and general contractor using
even-flow production techniques to produce quality homes on a 90 day cycle. The
entire value delivery system is managed by a process circle consisting of a
Process Control Executive, Senior Builder, Sales Executive and Operations
Manager who work in concert to construct and deliver homes consistently and
predictably.
Zaring uses subcontractors for virtually all of its construction operations
and selects them and its suppliers based on past performance, reputation,
quality, ability to perform and value. Zaring typically attempts to negotiate
one-year arrangements with subcontractors and suppliers. Agreements with
subcontractors and suppliers typically provide for a fixed price for labor and
materials. Such suppliers and subcontractors cannot raise prices to Zaring on
any house on which there is a contract of sale. Many of Zaring's subcontractors
have worked with Zaring for more than 10 years. Zaring recognizes that its
subcontractors and suppliers are an integral part of its success and honors
those who excel in their performance by designating them as "Master Contractors"
at an annual awards luncheon.
Zaring does not have major investments in capital equipment, building
supply inventories or component manufacturing facilities, rather subcontractors
and suppliers are utilized as part of a "just-in-
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time" inventory control system. The use of subcontractors minimizes Zaring's
payroll and increases its flexibility in responding to changes in the demand for
housing. Zaring utilizes a fast-track scheduling system which generally enables
it to complete its homes in less than 90 days from the date a building permit is
issued. A Market Home normally can be completed within 45 days after a contract
is signed.
Zaring utilizes building components, such as wall panels, roof trusses,
pre-hung doors and manufactured kitchen cabinets and stair rails, to control
quality and reduce on-site labor. In addition to increasing construction
efficiencies, the use of such components reduces Zaring's vulnerability to
weather delays, substantially reduces waste and theft, and allows Zaring to
better control material and labor costs.
The principal raw materials used in the construction of Zaring's homes are
brick, wood, concrete and other building materials, as well as plumbing and
electrical supplies. All of these materials are generally available from a
variety of sources, but are subject to periodic price fluctuations. Zaring has
attempted to reduce its exposure to such volatility through the use of
engineered lumber products and pre-assembled building components purchased from
third parties. To increase purchasing efficiency, Zaring utilizes standardized
building materials and products in its homes. Due to Zaring's policy of
carefully selecting its materials, suppliers and subcontractors, it has not
experienced significant construction delays due to the unavailability of
materials or subcontractors.
Zaring builds homes on a year-round basis, with minimal seasonal impact on
its construction operations.
CUSTOMER SERVICE AND QUALITY CONTROL
Zaring believes that its commitment to quality construction and customer
service, as evidenced by its follow-up inspection and warranty program, enhances
its competitive position. Zaring grants a one-year limited warranty on materials
and workmanship and passes on to its customers all warranties provided by
manufacturers or suppliers of components installed in each home. Zaring's
warranty expense approximated $3.5 million (exclusive of the 1999 incremental
warranty provision of $2.8 million), $1.5 million and $1.9 million, in 1999,
1998 and 1997, respectively. Zaring offers a Customer Care program which
includes two inspections of the home by the home buyer and a member of the
Quality Team which supervised construction of the home. The first inspection is
conducted shortly before closing, and the other occurs approximately nine months
after occupancy. The Customer Care Team has authority to make repairs under the
warranty program to meet Zaring standards.
LAND ACQUISITION AND DEVELOPMENT
Zaring typically buys unimproved land, which has been approved for
immediate development into finished lots. Zaring does not buy land for
speculation but only acquires real estate consistent with its planned building
operations.
Zaring has in the past also utilized joint ventures with both affiliated
and non-affiliated parties to develop land and anticipates that any future land
development joint ventures will be with non-affiliated parties. Lots
occasionally are sold to other builders by Zaring and the joint ventures in
which it participates. Zaring also builds in subdivisions developed by
affiliates and third parties. Zaring generally seeks to build on parcels of 30
or more lots, whether those parcels are developed by it, affiliates or third
parties.
In considering the suitability of unimproved land for development, Zaring
reviews such factors as proximity to existing developed areas, population growth
patterns, availability of existing community services, employment growth rates,
the anticipated absorption rates for new housing, transportation availability,
and the estimated costs of development. Development activities include obtaining
any
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necessary zoning, environmental and other regulatory approvals and constructing
roads, sewers, drainage systems, amenities and other improvements. In general,
Zaring has been able to obtain the government approvals required for the
development of land and the construction of homes on a timely basis, in part due
to its reputation for adding value to an area through the construction of
high-quality, attractive neighborhoods.
Zaring generally purchases unimproved land pursuant to contingent purchase
contracts, making only a nominal refundable deposit on the property. Closing of
the land purchase is contingent upon, among other things, Zaring's successful
completion of its own economic, geologic, environmental, engineering and other
feasibility studies and Zaring's ability to obtain all requisite approvals from
government agencies to develop the land.
In the aggregate, at December 31, 1999 Zaring Homes owned, had the ability
to develop or purchase, or had under contract, 4,039 lots. At December 31, 1999,
Zaring owned approximately 964 lots and undeveloped land, including land owned
by Land LLC, which will be developed into approximately 758 lots. Zaring also
had under contract, subject to the satisfaction of Zaring's purchase
contingencies and exercising of option agreements, 1,782 lots and undeveloped
land which, if purchased, would be developed into approximately 535 lots. Of the
1,782 lots under contract, Zaring is committed to 971 lots.
CUSTOMER FINANCING
Zaring does not finance the purchase of homes in its communities and does
not contemplate doing so. Virtually all of Zaring's customers utilize first
mortgage financing obtained from independent third parties, which typically
require down payments of 20%. Zaring attempts to assist its customers in
arranging traditional mortgage financing with third-party lenders through Zaring
Financial Services. In 1999, Zaring Financial Services assisted approximately
58% of Zaring's customers in obtaining mortgages.
COMPETITION
The homebuilding business is highly competitive. Zaring competes in each of
its local market areas with numerous national, regional, and local homebuilders,
some of which have greater financial and other resources than Zaring. Zaring
competes primarily on the basis of location, quality, reputation, service,
design and price. At this time, Zaring views the home resale market, rather than
other builders of new homes, as its principal competition in all of its
geographic markets and attempts to meet the competition from the home resale
market by offering benefits which the resale market cannot provide, notably the
latest design features, the flexibility to select interior and exterior finishes
and a new home warranty. In addition, Zaring competes with other homebuilders in
the acquisition of undeveloped property for lot development.
HOMEMAX (RETAIL DISTRIBUTION MANUFACTURED HOMES)
The Company, through its subsidiary HomeMax, is engaged in the retail
distribution, installation and servicing of manufactured homes under the name
"HomeMax." HomeMax opened its first Model Home Village in Wake Forest, North
Carolina in December 1997. This Model Home Village, a concept unique to HomeMax,
features a 2,700 square foot Welcome Center and more than 14 decorated,
furnished models displayed in a landscaped environment to create a neighborhood
concept.
JOINT VENTURE AGREEMENT 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
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commencing March 15, 2000 and accrues interest payable quarterly, at prime. The
amended and restated securities purchase agreement includes the following terms:
- American Homestar issued a $4.0 million subordinated convertible loan to
HomeMax concurrent with the sale. This subordinated loan accrues interest
at 6.0%, payable quarterly, while the principal is payable on June 15,
2002 unless accelerated as a result of available cash flow of HomeMax, as
defined. The subordinated loan is convertible into an additional 25% of
HomeMax at the discretion of American Homestar.
- The Company retained a $4.0 million receivable due from HomeMax which
accrues interest at 6.0% and is payable quarterly. The $4.0 million of
principal is payable on June 15, 2002, unless accelerated as a result of
available cash flow of HomeMax, as defined.
- The Company agreed to pay up to $3.0 million in connection with certain
annual lease obligations. During the year ended December 31, 1999, $1.1
million was expensed under this commitment.
- Subsequent to the sale, model home inventory was replaced with the
inventory of American Homestar. Costs of replacement were provided by the
Company and American Homestar in amounts up to $1.0 million and $0.5
million, respectively. During the year ended December 31, 1999 the entire
$1.5 million was funded under this commitment.
- 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. As of December 31, 1999, $300,000 of funding was provided
equally by the Company and American Homestar.
- 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. During the year ended
December 31, 1999, $0.9 million was expensed under this arrangement.
- 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. No working capital loans were provided as of December 31, 1999. In
February 2000, the Company and American Homestar each provided $250,000
in the form of loans to HomeMax.
- 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.
MARKETS
As of December 31, 1999, HomeMax operated twelve retail sales centers.
During 1997, HomeMax acquired three sales centers and opened its first Company
designed and constructed Model Home Village. As of December 31, 1999, HomeMax
operated nine Model Home Villages in North Carolina, two in South Carolina and
one in Kentucky. The Model Home Village in Kentucky was sold in January 2000.
PRODUCTS
HomeMax's manufactured homes are principally manufactured by American
Homestar and are purchased for occupancy as primary residences.
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HomeMax displays a variety of models ranging in price from $30,000 to
$95,000 and in size from 900 to 2,200 square feet. The base price of each unit
includes many standard features such as wood cabinet doors, vinyl siding,
shingled roof and equipped kitchens. Additionally, HomeMax provides a complete
list of pre-priced options ranging from additional electrical outlets to brick
exteriors, free standing garages or decks. Such options permit the buyer to
personalize their manufactured home and should result in incremental profits.
MARKETING AND SALES
HomeMax markets its manufactured homes to a variety of customers including
first time buyers and "empty nesters", emphasizing quality, options and customer
satisfaction. HomeMax's manufactured homes are sold through its own staff of
trained home consultants who are compensated through commissions on sales.
HomeMax's marketing efforts, through the Model Home Village concept, emphasize
finished model home units. The finished models at all sales centers are open
seven days a week, and are staffed by home consultants, who consult with
prospective customers regarding floor plans and available options. At December
31, 1999, HomeMax maintained finished model homes in all twelve Villages. Other
marketing tools include local newspaper, radio and television advertisements,
promotion, entrance signs and illustrated brochures all of which utilize the
HomeMax name and trademark. HomeMax's strategy is to display model merchandising
and retailing concepts in line with super retailers.
Sales of the HomeMax's manufactured homes are pursuant to standard sales
contracts. The contracts generally require that a customer make a deposit of 5%
to 10% of the sale price at the time of the execution of the sales contract,
depending upon the local competitive conditions and available financing.
Contracts are generally subject to certain contingencies including the
availability of financing to the purchaser. Prices at which homes are offered
normally increase from time to time reflecting the cost of manufacturing the
home and its options. HomeMax attempts to assist its customers in arranging
financing with third-party lenders.
BACKLOG AND INVENTORY
HomeMax's backlog consists of homes for which HomeMax has entered into a
sales contract, but which it has not yet delivered. As of December 31, 1999,
HomeMax had a backlog of 201 units under contract, with a sales value of $15.8
million, which could be completed within 120 days. Installation of homes in
backlog is financed using cash flow from operations and draws on its customers'
construction loans.
LAND ACQUISITION AND DEVELOPMENT
Currently, HomeMax purchases a minor number of lots in existing
communities.
CUSTOMER FINANCING
HomeMax does not finance the purchase of homes in its communities and does
not contemplate doing so. Virtually all of HomeMax's customers utilize financing
obtained from independent third parties, which typically requires down payments
of 5% to 10%.
COMPETITION
The retail manufactured home business is highly competitive. HomeMax
competes in its current market areas with numerous national, regional, and local
retailers, some of which have greater financial and other resources than
HomeMax. HomeMax competes primarily on the basis of quality, service, design,
price and the ability to personalize the manufactured homes.
11
<PAGE> 12
ASSET IMPAIRMENT
In 1997 and through the third quarter of 1998, the losses of HomeMax,
although expected, negatively impacted the consolidated results of the Company.
In response to the actual and anticipated prospective losses, management and the
Board of Directors initiated efforts to consider alternatives to the
pre-existing growth strategies, including the pursuit of joint venture
opportunities with other retailers, alternative operating strategies or an
outright sale of the entity. In conjunction with these reviews 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,"
the Company determined the undiscounted estimated future cash flows of HomeMax
were less than the associated carrying value of the long-lived assets.
Accordingly, in the fourth quarter of 1998, the Company adjusted the carrying
values of the long-lived assets of HomeMax, including goodwill, other
intangibles and sales villages, to their estimated fair market value through the
recognition of a provision for asset impairment of $5.7 million. The estimated
fair market value of the assets was based on anticipated future cash flows
discounted at a rate commensurate with the risks, as well as reviews of
comparable residual asset values. In 1999, given the continued losses of
HomeMax, the Company again evaluated the carrying values associated with the
long-lived assets of HomeMax, and, accordingly, adjusted the carrying value of a
sales village by $753 to the net value realized in conjunction with the sale of
the village subsequent to December 31, 1999.
MAJORITY SHAREHOLDER LLCS
In an effort to provide additional liquidity and financing to the Company,
the Chairman executed agreements to fund long-term capital to the Company and
its subsidiaries through entities controlled by him: Land LLC, Leasing LLC,
Leasing 99 LLC and Leasing 2000 LLC.
During 1998, Land LLC purchased $4.3 million in undeveloped land inventory
from Zaring Homes and $1.5 million of undeveloped land from unrelated third
parties. During 1999, Land LLC purchased $4.1 million of undeveloped land from
unrelated third parties. Land LLC executed a three year land option contract
with Zaring Homes to repurchase the land. The contract requires Zaring to make
monthly land option contract payments equal to Land LLC's cost of carry
(interest, real estate taxes, sewer and water). Zaring Homes' purchase price of
the land will equal Land LLC's original cost plus 15%. In 1999, Zaring Homes
purchased $1.2 million of undeveloped land from Land LLC. To secure its
performance of the option contract, Zaring Homes provided an original
irrevocable letter of credit in the amount of $1.5 million in favor of Land LLC.
As of December 31, 1999, $1.3 million was outstanding on the irrevocable letter
of credit. To finance the purchase of the land, Land LLC entered into a loan
agreement with a bank whereby an amount of up to $10.0 million in borrowings was
available until March 31, 1999. As of December 31, 1999, the loan had an
outstanding balance of $8.7 million and bears interest at LIBOR plus 2.25%. The
loan is guaranteed by the Chairman and his sons and is collateralized by first
mortgage liens on the land inventory.
During 1998, Leasing LLC purchased and subsequently leased-back $11.0
million of model homes from Zaring Homes. Leasing LLC is leasing the model homes
to Zaring on a triple net basis, wherein Zaring is responsible for taxes,
insurance, maintenance and homeowner fees, if applicable. Under the terms of the
agreement, Zaring Homes pays rent equal to the sales price of the model home
times the greater of the prime interest rate or LIBOR plus 1.5%. To finance the
purchase of the model homes, on June 30, 1998, Leasing LLC entered into a loan
agreement with a bank whereby an amount of up to $10.0 million was available to
be borrowed. As of December 31, 1999, the loan had an outstanding balance of
$6.1 million and bears interest at LIBOR plus 1.75%. The loan is guaranteed by
the Chairman and is collateralized by first mortgage liens on the model homes.
12
<PAGE> 13
During 1999, Leasing 99 LLC purchased and subsequently leased back $3.2
million of model homes from Zaring Homes. Leasing terms are the same as those of
Leasing LLC. To finance the purchase of the model homes, on March 24, 1999,
Leasing 99 LLC entered into a loan agreement with a bank whereby an amount of up
to $3.0 million was available. As of December 31, 1999, the loan had an
outstanding balance of $2.9 million and bears interest at LIBOR plus 1.75%. The
loan is guaranteed by the Chairman and is collateralized by first mortgage liens
on the model homes.
During February 2000, Leasing 2000 LLC purchased and subsequently leased
back $5.8 million of model homes from Zaring Homes. The leasing terms are the
same as those of Leasing LLC and Leasing 99 LLC. The financing for the purchase
of the model homes was completed through a member contribution from the
Chairman.
ZARING FINANCIAL SERVICES
The Company's Zaring Financial Services subsidiary provides mortgage
services to the customers of Zaring Homes. Zaring Financial Services originates,
processes and sells mortgages to third party investors. Zaring Financial
Services does not retain or service the mortgages it originates, rather the
mortgages and related servicing rights are sold to investors.
EMPLOYEES
At December 31, 1999, the Company had 650 full-time employees. Although
none of the Company's employees are covered by collective bargaining agreements,
many of the subcontractors and suppliers which the Company engages are
represented by labor unions or are subject to collective bargaining
arrangements. The Company believes that its relations with its employees,
sub-contractors and suppliers are good.
13
<PAGE> 14
ITEM 2. PROPERTIES
The Company's corporate and Cincinnati offices are located at 11300 Cornell
Park Drive, Cincinnati, Ohio 45242. These offices occupy approximately 24,683
square feet under a lease that expires in December 2006. Other locations at
which the Company operates are:
<TABLE>
<S> <C>
Zaring Homes, Inc. Zaring Financial Services, LLC
Cincinnati, Ohio (Design Center) Cincinnati, Ohio
5885 Pfeiffer Road 5889 Pfeiffer Road
Cincinnati, Ohio 45242 Cincinnati, Ohio 45242
Size: 7,512 sq. ft. Size: 1,649 sq. ft.
Lease Expiration Date: November 2001 Lease Expiration Date: November 2001
Zaring Homes, Inc. Zaring Homes, Inc.
Nashville, Tennessee Charlotte, North Carolina
1604 Westgate Circle 1043 East Morehead Street, Suite 200
Brentwood, Tennessee 37027 Charlotte, North Carolina 28204
Size: 15,165 sq. ft. Size: 3,272 sq. ft.
Lease Expiration Date: September 2012 Lease Expiration Date: June 2001
Zaring Homes, Inc. Zaring Homes Kentucky, LLC
Raleigh, North Carolina Louisville, Kentucky
7701 Six Forks Road, Suite 132 303 Hurstbourne Parkway, Suite 100
Raleigh, North Carolina 27615 Louisville, Kentucky 40222
Size: 6,176 sq. ft. Size: 4,054 sq. ft.
Lease Expiration Date: July 2004 Lease Expiration Date: Month to Month
Zaring Homes of Indiana, LLC HomeMax, Inc.
Indianapolis, Indiana Raleigh, North Carolina
2629 Water Front Parkway East Drive, One North Commerce Center
Suite 301 3691 Trust Drive
Indianapolis, Indiana 46214 Raleigh, North Carolina 27604
Size: 5,878 sq. ft. Size: 7,296 sq. ft.
Lease Expiration Date: October 2003 Lease Expiration Date: July 2002
</TABLE>
In addition to the office facilities, the Company maintains operating lease
commitments for land under eight HomeMax Sales Centers which range from one to
nine years and expire at various times from July 2000 to September 2008. As of
December 31, 1999, the total commitment for the land operating leases in the
aggregate amounted to $2.2 million, payable over a nine year period.
ITEM 3. 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,
exclusive 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
14
<PAGE> 15
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares (the Shares) have been approved for listing and
are currently traded on Nasdaq Stock Market under the symbol "ZHOM." On March
17, 2000, the last reported sales price of the Shares on the Nasdaq Stock Market
was $4 1/16. The following table shows the high and low sales prices for the
Shares on the Nasdaq Stock Market for the 1999 and 1998 quarterly periods
indicated with respect to each of such periods.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year ended December 31, 1999
Fourth Quarter............................................ $ 6 1/4 $ 4
Third Quarter............................................. 8 1/2 5
Second Quarter............................................ 8 7/8 7 1/4
First Quarter............................................. 9 1/2 7 3/8
Year ended December 31, 1998
Fourth Quarter............................................ $ 9 1/4 $ 5 1/4
Third Quarter............................................. 9 1/2 7
Second Quarter............................................ 11 3/4 8 3/4
First Quarter............................................. 10 5/8 8 1/2
</TABLE>
As of March 17, 2000, there were approximately 1,339 shareholders of
record, and the Company estimates that, as of that date, there were an
additional 696 beneficial shareholders in "street" name. The Company has not
declared any dividends on its shares since the completion of its initial public
offering.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth Selected Financial Data for the continuing
operations of the Company as well as selected financial data related to the
discontinued operations of Hearthside Homes. This information should be read in
conjunction with the financial statements of the Company and Management's
Discussion
15
<PAGE> 16
and Analysis of the Financial Condition and Results of Operations, each included
elsewhere in this Form 10-K.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total Assets........................... $210,230 $159,893 $129,873 $ 94,697 $ 85,438
Net Assets of Discontinued
Operations........................... $ 5,739 $ 7,846 $ 1,148 $ -- $ --
Notes Payable.......................... $117,068 $ 91,650 $ 62,170 $ 34,245 $ 29,561
Subordinated Debt...................... $ 9,000 $ -- $ -- $ -- $ --
Total Liabilities...................... $183,187 $117,110 $ 79,143 $ 46,016 $ 41,127
Shareholders' Equity................... $ 27,043 $ 42,783 $ 50,730 $ 48,681 $ 44,311
STATEMENT OF OPERATIONS DATA
Net Revenues(1)........................ $309,666 $256,844 $222,251 $174,793 $127,084
Cost Of Sales.......................... 259,679 212,478 186,488 143,039 101,172
Incremental Warranty Provision......... 2,806 -- -- -- --
Asset Impairment....................... 753 5,674 -- -- --
Interest............................... 7,187 5,541 3,009 2,359 2,548
Selling, General and Administrative
Expenses............................. 54,289 43,382 29,530 21,732 16,496
-------- -------- -------- -------- --------
Operating Income (Loss)................ (15,048) (10,231) 3,224 7,663 6,868
Other Income, net...................... 125 310 15 162 113
-------- -------- -------- -------- --------
Income (Loss) Before Minority Interest
and Income Taxes..................... (14,923) (9,921) 3,239 7,825 6,981
Minority Interest...................... 2,655 (141) 76 -- --
-------- -------- -------- -------- --------
Income (Loss) from Continuing
Operations Before Income Taxes....... (12,268) (10,062) 3,315 7,825 6,981
Provision (Benefit) For Income Taxes... (1,058) (3,915) 1,296 2,998 2,701
-------- -------- -------- -------- --------
Income (Loss) from Continuing
Operations........................... (11,210) (6,147) 2,019 4,827 4,280
Net Income (Loss) from Discontinued
Operations........................... (4,530) (219) 33 -- --
-------- -------- -------- -------- --------
Net Income (Loss)...................... $(15,740) $ (6,366) $ 2,052 $ 4,827 $ 4,280
======== ======== ======== ======== ========
Earnings (Loss) Per Share From
Continuing Operations................ $ (2.44) $ (1.30) $ 0.42 $ 1.01 $ 0.88
Earnings (Loss) Per Share From
Discontinued Operations.............. (0.99) (0.04) 0.01 -- --
-------- -------- -------- -------- --------
Earnings (Loss) Per Share.............. $ (3.43) $ (1.34) $ 0.43 $ 1.01 $ 0.88
======== ======== ======== ======== ========
Weighted Average Shares Outstanding.... 4,591 4,737 4,781 4,779 4,850
======== ======== ======== ======== ========
</TABLE>
16
<PAGE> 17
SELECTED OPERATING DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
LUXURY SITE-BUILT HOMES
Operating Data (Units):
New Orders(2).................... 1,181 938 856 800 676
Closings(1)...................... 1,004 922 879 754 583
Backlog(3)....................... 433 256 240 263 217
Average Revenue Per Closing........ $ 283 $ 259 $ 241 $ 228 $ 215
Sales Value Of Backlog............. $126,596 $71,996 $60,779 $64,193 $47,033
RETAIL DISTRIBUTION MANUFACTURED
HOMES
Operating Data (Units):
New Orders(2).................... 390 366 180 -- --
Closings(1)...................... 356 239 208 -- --
Backlog(3)(5).................... 201 167 40 -- --
Average Revenue Per Closing........ $ 58 $ 52 $ 41 -- --
Sales Value Of Backlog............. $ 15,801 $10,889 $ 2,365 -- --
</TABLE>
17
<PAGE> 18
SELECTED QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1999 1999 1999 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Revenues(1).............................. $107,152 $84,965 $73,353 $44,196
Cost Of Sales................................ 97,531 67,681 58,552 35,915
Incremental Warranty Provision............... 2,806 -- -- --
Asset Impairment............................. 753 -- -- --
Interest..................................... 2,425 1,817 1,522 1,423
Selling, General and Administrative
Expenses................................... 16,535 14,609 12,643 10,502
-------- ------- ------- -------
Operating Income (Loss)...................... (12,898) 858 636 (3,644)
Other Income (Expense)....................... (23) 129 (32) 51
-------- ------- ------- -------
Income (Loss) Before Minority Interest and
Income Taxes............................... (12,921) 987 604 (3,593)
Minority Interest............................ 1,193 693 609 160
-------- ------- ------- -------
Income (Loss) From Continuing Operations
Before Income Taxes........................ (11,728) 1,680 1,213 (3,433)
Provision (Benefit) For Income Taxes......... (1,929) 1,350 884 (1,363)
-------- ------- ------- -------
Income (Loss) from Continuing Operations..... (9,799) 330 329 (2,070)
Net Loss from Discontinued Operations........ (3,537) (304) (428) (261)
-------- ------- ------- -------
Net Income (Loss)............................ $(13,336) $ 26 $ (99) $(2,331)
======== ======= ======= =======
Earnings (Loss) Per Share From Continuing
Operations................................. $ (2.13) $ 0.07 $ 0.07 $ (0.45)
Earnings (Loss) Per Share From Discontinued
Operations................................. (0.77) (0.06) (0.09) (0.06)
-------- ------- ------- -------
Earnings (Loss) Per Share.................... $ (2.90) $ 0.01 $ (0.02) $ (0.51)
======== ======= ======= =======
Weighted Average Shares Outstanding.......... 4,591 4,591 4,591 4,591
======== ======= ======= =======
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1998 1998 1998 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Revenues(1)............................... $65,539 $71,525 $68,973 $50,807
Cost Of Sales................................. 53,965 58,160 56,987 43,366
Asset Impairment.............................. 5,674 -- -- --
Interest...................................... 1,704 1,371 1,490 976
Selling, General and Administrative
Expenses.................................... 13,113 11,143 10,575 8,551
------- ------- ------- -------
Operating Income (Loss)....................... (8,917) 851 (79) (2,086)
Other Income.................................. 76 44 122 68
------- ------- ------- -------
Income (Loss) Before Minority Interest and
Income Taxes................................ (8,841) 895 43 (2,018)
Minority Interest............................. (303) (21) 102 81
------- ------- ------- -------
Income (Loss) From Continuing Operations
Before Income Taxes......................... (9,144) 874 145 (1,937)
Provision (Benefit) For Income Taxes.......... (3,434) 304 20 (805)
------- ------- ------- -------
Income (Loss) from Continuing Operations...... (5,710) 570 125 (1,132)
Net Income (Loss) from Discontinued
Operations.................................. (66) (7) (166) 20
------- ------- ------- -------
Net Income (Loss)............................. $(5,776) $ 563 $ (41) $(1,112)
======= ======= ======= =======
Earnings (Loss) Per Share From Continuing
Operations.................................. $ (1.23) $ 0.12 $ 0.03 $ (0.24)
Earnings (Loss) Per Share From Discontinued
Operations.................................. (0.01) -- (0.04) 0.01
------- ------- ------- -------
Earnings (Loss) Per Share..................... $ (1.24) $ 0.12 $ (0.01) $ (0.23)
======= ======= ======= =======
Weighted Average Shares Outstanding........... 4,655 4,752 4,765 4,776
======= ======= ======= =======
</TABLE>
19
<PAGE> 20
SELECTED OPERATING DATA (UNITS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1999 1999 1999 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
LUXURY SITE-BUILT HOMES
New Orders(2)................................... 198 327 351 305
Closings(1)..................................... 340 292 231 141
Backlog(3)...................................... 433 575 540 420
RETAIL DISTRIBUTION MANUFACTURED HOMES
New Orders(2)................................... 96 106 64 124
Closings(1)..................................... 94 83 102 77
Backlog(3)...................................... 201 199 176 214
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1998 1998 1998 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
LUXURY SITE-BUILT HOMES
New Orders(2)................................... 217 194 191 336
Closings(1)..................................... 210 250 262 200
Backlog(3)...................................... 256 249 305 376
RETAIL DISTRIBUTION MANUFACTURED HOMES
New Orders(2)................................... 76 127 90 73
Closings(1)..................................... 97 82 41 19
Backlog(3)...................................... 167 188 143 94
</TABLE>
- ---------------
(1) Revenue from a sale is recognized upon the closing of the sale.
(2) New orders represent total new home orders received during the period, net
of cancellations.
(3) Backlog includes new orders that have not yet closed.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the audited consolidated
financial statements of Zaring National Corporation including the respective
notes thereto, all of which are included in this Form 10-K.
OVERVIEW
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 continuing operations
for the periods presented include luxury site-built homes, retail distribution
manufactured homes and financial services all of which reflect, among others,
the cyclical nature of the housing industry.
20
<PAGE> 21
The Company reported consolidated net revenues from continuing operations
of $309.7 million for the year ending December 31, 1999 compared to $256.8
million in 1998, an increase of $52.8 million or 20.6%. The net loss from
continuing operations for 1999 was $(11.2) million or $(2.44) per share,
compared to a net loss of $(6.1) million or $(1.30) per share in 1998.
The Company reported consolidated net revenues from continuing operations
of $256.8 million for the year ending December 31, 1998 compared to $222.3
million in 1997, an increase of $34.5 million or 15.5%. The net loss from
continuing operations for 1998 was $(6.1) million or $(1.30) per share, compared
to net income of $2.0 million or $0.42 per share in 1997.
Sales of the Company's homes generally are made pursuant to a standard
sales contract, which requires a down payment of approximately 2% to 20% of the
sales price. The standard sales contract typically includes a financing
contingency that permits the purchaser to cancel if mortgage financing is
unattainable within a specified period, usually less than six weeks. The
contract may also include other contingencies such as the sale of an existing
house.
Although the Company believes that substantially all backlogs at December
31, 1999 will be completed and closed during 2000, there can be no assurance
that such closings will occur. The Company experienced cancellations of its
contracts from continuing operations at a rate of 43.0%, 35.5% and 19.9% during
1999, 1998 and 1997, respectively. During 1999 and 1998, HomeMax experienced
cancellation rates of 71.2% and 58.2%, respectively, which significantly
contributed to the overall Company cancellation rate increase. Excluding
HomeMax, the Company's cancellation rate for continuing operations was 15.8% and
19.9% during 1999 and 1998, respectively. Cancellations fluctuate due to, among
others, buyer's expectations of mortgage interest rates and their ability to
obtain the appropriate amount of financing. Trends in the Company's backlog are
subject to change from period to period based upon economic conditions including
consumer confidence levels, interest rates and the availability of mortgages.
21
<PAGE> 22
Management has organized the Company in operating segments by the types of
products offered. The following tables set forth for the years indicated,
financial information regarding the Company's operating segments:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
ZARING HOMES
Luxury Site-Built Homes
Revenues............................................ $284,602 $241,599 $214,042
Cost of sales....................................... 237,792 199,867 179,568
Incremental warranty provision...................... 2,806 -- --
Interest............................................ 8,356 6,943 5,563
Selling, general and administrative................. 36,880 28,256 24,346
-------- -------- --------
Operating income (loss)............................. (1,232) 6,533 4,565
Other income........................................ 82 198 15
-------- -------- --------
Pretax Luxury Site-Built Income (Loss).............. (1,150) 6,731 4,580
ZARING FINANCIAL SERVICES
Revenues............................................ 1,677 526 --
Expenses............................................ 1,707 531 --
Interest............................................ 48 -- --
-------- -------- --------
Pretax Financial Services Loss...................... (78) (5) --
HOMEMAX
Retail Distribution Manufactured Homes
Revenues............................................ 20,551 12,411 8,209
Cost of sales....................................... 19,451 10,724 6,920
Interest............................................ 1,568 1,807 312
Asset impairment.................................... 753 5,674 --
Selling, general and administrative................. 11,688 11,704 3,370
-------- -------- --------
Operating loss...................................... (12,909) (17,498) (2,393)
Other income (expense).............................. 43 (5) 48
Minority interest................................... 2,406 263 --
-------- -------- --------
Pretax Retail Distribution Loss..................... (10,460) (17,240) (2,345)
MAJORITY SHAREHOLDER LLCS
Revenues............................................ 2,836 2,308 --
Cost of sales....................................... 2,436 1,887 --
Interest............................................ 1,221 465 --
Selling, general and administrative................. 178 112 --
-------- -------- --------
Operating loss...................................... (999) (156) --
Other income........................................ 750 560 --
Minority interest................................... 249 (404) --
-------- -------- --------
CORPORATE
Interest income from subsidiaries, net.............. 4,006 3,674 2,866
General and administrative.......................... (4,586) (3,222) (1,786)
-------- -------- --------
Income (loss) before income taxes and
discontinued operations..................... (12,268) (10,062) 3,315
Provision (credit) for income taxes................. (1,058) (3,915) 1,296
-------- -------- --------
Net income (loss) before discontinued operations.... (11,210) (6,147) 2,019
Net income (loss) from discontinued operations...... (4,530) (219) 33
-------- -------- --------
Net Income (Loss).............................. $(15,740) $ (6,366) $ 2,052
======== ======== ========
</TABLE>
22
<PAGE> 23
Other pertinent information regarding the Company's segment operations are
as follows:
<TABLE>
<CAPTION>
ZARING HOMEMAX
HOMES RETAIL
LUXURY DISTRIBUTION MAJORITY
SITE-BUILT FINANCIAL MANUFACTURED SHAREHOLDER
HOMES SERVICES HOMES LLCS CORPORATE TOTAL
---------- --------- ------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Segment assets:
1999.................. $134,521 $3,983 $22,898 $18,723 $84,873 $264,998
1998.................. 91,110 181 23,152 14,998 58,303 187,744
1997.................. 107,132 -- 12,044 -- 56,014 175,190
Depreciation and
amortization expense:
1999.................. $ 3,512 $ 31 $ 916 $ -- $ 57 $ 4,516
1998.................. 2,480 32 2,024 -- -- 4,536
1997.................. 2,065 -- 134 -- -- 2,199
Expenditures for
long-lived assets
(excluding
acquisitions):
1999.................. $ 2,136 $ 69 $ 675 $ -- $ -- $ 2,880
1998.................. 4,604 -- 14,064 -- -- 18,668
1997.................. 3,646 -- 5,252 -- -- 8,898
</TABLE>
Reconciliation of segment assets to total assets:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total segment assets.......................... $264,998 $187,744 $175,190
Elimination of inter-entity investments....... (68,462) (50,502) (50,625)
Cash and cash equivalents*.................... 7,955 14,805 4,160
Net assets of discontinued operations......... 5,739 7,846 1,148
-------- -------- --------
Total assets........................ $210,230 $159,893 $129,873
======== ======== ========
</TABLE>
- ---------------
* Management excludes cash and cash equivalents from assessing a segment's
operating performance.
FISCAL 1999 COMPARED TO FISCAL 1998
ZARING HOMES (LUXURY SITE-BUILT HOMES)
Net revenues for the year ended December 31, 1999 as compared to 1998
increased $43.0 million, or 17.8%. Zaring Homes delivered 1,004 homes in 1999,
compared to 922 homes in 1998, an 8.9% increase. The increases in revenues and
homes delivered were primarily due to the continued strength of the luxury
housing market in substantially all of the Company's market areas. In addition,
the average selling price per home increased 9.3% to $283,000 in 1999 from
$259,000 in 1998.
Gross profit dollars and percentages before incremental warranty provision
and interest were $46.8 million and 16.4% in 1999 as compared to $41.7 million
and 17.3% in 1998. Gross profit dollars increased between years primarily due to
the increase in the number of homes delivered. Gross profit percentages,
however, decreased primarily due to increased recurring warranty, subcontractor
and other production related costs.
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The incremental warranty provision of $2.8 million, or approximately 1.0%
of net revenues, represents the estimated cost of remediation of certain
moisture and mold related issues noted in certain of the Company's luxury
site-built homes in Mason, Ohio, net of estimated insurance recoveries.
Interest expense increased $1.4 million in 1999 as compared to 1998. As a
percentage of net revenues, interest expense remained essentially constant at
2.9%. Interest expense increases are primarily attributable to increased
borrowings. Interest expense as a percentage of net revenues, however, did not
increase due to the increase noted in net revenues in 1999 as compared to 1998.
As a percentage of revenues, selling expenses increased from 6.7% in 1998
to 7.7% in 1999. Selling expenses for the year ended December 31, 1999 increased
$5.8 million as compared to the corresponding period in 1998. This increase was
primarily due to increases in volume related expenses such as sales staffing and
sales commissions. As a percentage of revenues, general and administrative
expenses increased to 5.2% in 1999 from 5.0% in 1998. General and administrative
expenses increased $2.8 million or 23.7% in 1999 compared to 1998, due primarily
to increased staffing and payroll costs, additional office space and related
expenses and costs associated with replacement of the core information system.
As a percentage of revenues, selling, general and administrative expenses were
13.0% and 11.7% for the years ended December 31, 1999 and 1998, respectively.
As a result of the foregoing, Zaring Homes reported a pretax loss of ($1.2)
million for the year ended December 31, 1999, a decrease of $7.9 million from
the $6.7 million of income reported in the same period in 1998.
FINANCIAL SERVICES
In October 1998, the Company increased its ownership of Blue Chip from 50%
to 100%. Accordingly, the financial results of Blue Chip subsequent to September
are consolidated with the Company's activities. The financial services segment
reported revenues of $1.7 million for the year ended December 31, 1999 as
compared to $0.5 million in 1998. After deducting $1.8 million in expenses
associated with the mortgage company operations in 1999 and $0.5 million in
1998, the financial services segment reported pretax losses of $0.1 million in
1999 and essentially break even in 1998, respectively.
HOMEMAX (RETAIL DISTRIBUTION MANUFACTURED HOMES)
Net revenues for the year ended December 31, 1999 increased $8.1 million to
$20.6 million from $12.4 million for the year ended December 31, 1998. HomeMax
closed 356 units in 1999 as compared to 239 units closed in 1998. The increase
in net revenues is primarily attributable to additional unit sales as a result
of the 12 sales villages being open for all of 1999 versus various partial years
in 1998 along with an increase in the average unit sales price from $52,000 in
1998 to $58,000 in 1999. Nonetheless, unit sales were less than anticipated as a
result of product transitioning and other operational changes resulting from the
joint venture with American Homestar which was effective March 15, 1999.
Gross profit was $1.1 million or 5.4% for the year ended December 31, 1999
as compared to $1.7 million or 13.6% for the same period in 1998. The decrease
in gross profit percentage is due to increases in costs to facilitate the
transition from the Champion product previously sold at the sales villages to
American Homestar units as a result of the joint venture agreement and the
composition of units sold.
Interest expense was $1.6 million and $1.8 million for the years ended
December 31, 1999 and 1998, respectively, a decrease of $0.2 million. As a
percentage of revenues, interest expense decreased from 14.6% in 1998 to 7.6% in
1999. The decrease in interest expense is primarily attributable to the
recapitalization of the operations in conjunction with the joint venture
agreement which resulted in a net
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reduction of the interest bearing debt of HomeMax. Interest expense as a
percentage of revenues declined primarily due to the increase in revenues and
the decrease in interest expense in 1999.
Selling, general and administrative expenses for HomeMax totaled $11.7
million in 1999 as compared to $11.7 million in 1998. Selling expenses were $3.0
million or 14.6% of revenues in 1999 compared to $3.0 million or 24.1% of
revenues in 1998. General and administrative expenses were $8.7 million or 42.3%
of revenues in 1999 as compared to $8.7 million or 70.2% of revenues in 1998.
The decreases in selling, general and administrative expenses as a percentage of
revenues is primarily due to increased revenues without corresponding increases
in expenses. Expenses were essentially flat even though 12 villages were open
during all of 1999, as compared to various partial years in 1998, due to various
cost reduction initiatives at substantially all of the villages and reductions
in depreciation and amortization due to the impairment loss recorded in 1998.
In response to the actual and anticipated losses of HomeMax, management
initiated efforts to consider alternatives to pre-existing growth strategies. In
conjunction with these efforts, 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, including goodwill, other intangibles and sales villages to
their estimated fair market value through the recognition of a provision for
asset impairment of $5.7 million during the year ended December 31, 1998. During
1999, the Company adjusted the carrying value of one sales village to its
estimated fair value through a recognition of a provision for asset impairment
of $0.8 million. The estimated fair market value of the assets was based on
anticipated future cash flows discounted at a rate commensurate with the risks,
as well as reviews of comparable residual asset values. Two other sales villages
which have never opened are being listed for sale at amounts in excess of the
applicable carrying values.
Effective March 15, 1999, American Homestar purchased a 25% interest in
HomeMax. In 1998, certain employees were minority shareholders, however, their
shares were redeemed in conjunction with the American Homestar venture
arrangement. As a result of these changes in minority interest, the resulting
minority interest in the losses of HomeMax increased $2.1 million to $2.4
million in 1999 as compared to $0.3 million in 1998.
As a result of the foregoing, HomeMax reported a pretax loss of $10.5
million for the year ended December 31, 1999, as compared to a $17.2 million
pretax loss for the year ended December 31, 1998.
MAJORITY SHAREHOLDER LLCS
Leasing 99 LLC, Leasing LLC and Land LLC are limited liability companies
owned by the Chairman of Zaring National Corporation. These companies purchase
model homes and land and lease these assets to the Company until such time as
the models are sold to third parties or land development commences. Revenues and
cost of sales are the result of ten model home closings in 1999 as compared to
eight closings in 1998. Interest expense of $1.2 million in 1999 and $0.5
million in 1998 represents interest incurred related to 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
was approximately $0.8 million in 1999 as compared to essentially no deferrals
in 1998.
CORPORATE
Interest income from subsidiaries represents the allocation of interest
cost to the subsidiaries. Corporate general and administrative expenses were
$4.6 million in 1999 as compared to $3.2 million in 1998. The increase in
general and administrative expenses is primarily attributable to additional
personnel,
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costs associated with new systems initiatives and Year 2000 compliance programs
as well as other professional expenses.
PROVISION (CREDIT) FOR INCOME TAXES
The income tax benefit associated with losses reported in 1999 and 1998
decreased from $3.9 million to $1.1 million primarily due to the losses of
HomeMax subsequent to March 15, 1999 not being benefited for financial reporting
purposes given these losses are no longer included in the consolidated tax
return of the Company and the recognition of certain tax valuation allowances
related to certain deferred tax assets recorded by HomeMax prior to March 15,
1999.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
On December 13, 1999, the Board of Directors of the Company approved plans
to discontinue the affairs of Hearthside. The disposal of Hearthside's assets
through an orderly sales process is expected to be completed no later than
December 13, 2000. The 1999 net loss of $4.5 million includes provisions to
write down assets to estimated net realizable values and estimated costs of
discontinuing this segment's operations of approximately $1.75 million, before
applicable tax benefits, whereas the 1998 net loss of $.2 million represents the
net loss of the segment as previously reported.
FISCAL 1998 COMPARED TO FISCAL 1997
ZARING HOMES, INC. (LUXURY SITE-BUILT HOMES)
Net revenues for the year ended December 31, 1998 as compared to 1997
increased $27.6 million, or 12.9%. Zaring Homes delivered 922 homes in 1998,
compared to 879 homes in 1997, a 4.9% increase. The increases in revenues and
homes delivered were primarily due to the continued strength of the luxury
housing market and 182 closings in the expansion cities of Charlotte and
Louisville, in 1998, as compared to 77 closings in 1997. In addition, the
average selling price of a home increased 6.5% to $259,000 in 1998 from $241,000
in 1997.
Gross profit increased $7.3 million or 21.1% for the year ended December
31, 1998 as compared to the corresponding period in 1997. Gross profit as a
percentage of revenue increased 1.2% to 17.3% of revenues in 1998. The increase
in gross profit is attributable to, among other factors, the closing of
contracts with higher margins, decreased subcontractor and other production
costs coupled with strong overall market conditions.
Interest expense increased $1.4 million for the year ended December 31,
1998, compared to the same period in 1997. As a percentage of revenues interest
expense increased 0.3% from 2.6% in 1997 to 2.9% in 1998. This increase is
mainly attributable to overall higher debt levels and an increase in the
interest rate charged by Corporate to Zaring Homes.
As a percentage of revenue, selling expenses decreased from 7.0% in 1997 to
6.7% in 1998. Selling expenses for the year ended December 31, 1998 increased
$1.3 million as compared to the corresponding periods in 1997. This increase was
primarily due to increases in volume related expenses such as sales staffing,
design center expenses and sales commissions. As a percentage of revenues,
general and administrative expenses increased to 5.0% in 1998 from 4.4% in 1997.
General and administrative expenses increased $2.6 million or 27.8% in 1998
compared to 1997, due primarily to increased payroll costs, additional office
space and related expenses and costs associated with the replacement of the core
information system. As a percentage of revenues, selling, general and
administrative expenses were 11.7% and 11.4% for the years ended December 31,
1998 and 1997, respectively.
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As a result of the foregoing, Zaring Homes reported pretax income of $6.7
million or 2.8% of net revenues for the year ended December 31, 1998, an
increase of $2.2 million or 46.9% from the same period in 1997.
FINANCIAL SERVICES
In October 1998, the Company increased its ownership of Blue Chip from 50%
to 100%. Accordingly, the financial results of Blue Chip subsequent to September
are consolidated with the Company's activities. Both revenues and expenses
during this period approximated $0.5 million resulting in a pretax breakeven.
HOMEMAX, INC. (RETAIL DISTRIBUTION MANUFACTURED HOMES)
Net revenues for the year ended December 31, 1998 increased $4.2 million to
$12.4 million from $8.2 million for the year ended December 31, 1997. HomeMax
closed 239 units in 1998, an increase of 14.9% from the 208 units closed in
1997. The increase in 1998 is due mainly to the fact that 12 sales villages were
open as of December 31, 1998 compared to four sales villages open as of December
31, 1997. Sales of the new product have increased, as reflected in the backlog
of 167 units as of December 31, 1998, compared to 40 units at December 31, 1997;
however, the time from contract to close has lengthened due primarily to
availability of land and receipt of customer financing approvals.
Gross profit was $1.7 million or 13.6% for the year ended December 31, 1998
as compared to $1.3 million or 15.7% for the same period in 1997, a decrease of
2.1%. The decrease in gross profit percentage is due to increases in production
expenses which were not able to be passed on to the consumer.
Interest expense was $1.8 million and $0.3 million for the years ended
December 31, 1998 and 1997, respectively, an increase of $1.5 million. As a
percentage of revenues, interest expense increased from 3.8% in 1997 to 14.6% in
1998. This increase is due to the increase in the number of open HomeMax
villages from four as of December 31, 1997 to 12 as of December 31, 1998. Each
village necessitates a significant investment that 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.
Selling, general and administrative expenses for HomeMax, including
infrastructure costs to leverage the expansion efforts, totaled $11.7 million in
1998, compared to $3.4 million in 1997. At December 31, 1998, HomeMax operated
twelve villages versus four villages at December 31, 1997. Selling expenses were
$3.0 million or 24.1% of revenues in 1998 compared to $0.9 million or 11.0% of
revenues in 1997. This increase is primarily due to start-up marketing and
advertising costs. General and administrative expenses were $8.7 million in 1998
as compared to $2.5 million in 1997, an increase of $6.2 million. The increase
in general and administrative expense was a direct result of the above mentioned
expansion efforts of the HomeMax operations and noncapitalized costs associated
with the replacement of the core information system.
In response to the actual and anticipated losses of HomeMax, management
initiated efforts to consider alternatives to pre-existing growth strategies. In
conjunction with this, management determined the undiscounted estimated future
cash flows of HomeMax were less than the associated carrying value of the
long-lived assets. Accordingly, HomeMax adjusted the carrying value of the
long-lived assets, including goodwill, other intangibles and sales villages to
their estimated fair market value through the recognition of a provision for
asset impairment of $5.7 million. The estimated fair market value of the assets
was based on anticipated future cash flows discounted at a rate commensurate
with the risks, as well as reviews of comparable residual asset values.
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As a result of the foregoing, HomeMax reported a pretax loss of $17.2
million for the year ended December 31, 1998, as compared to a $2.3 million
pretax loss for the year ended December 31, 1997.
Effective March 15, 1999, American Homestar Corporation acquired 25% of the
outstanding common stock of HomeMax, Inc. from the Company and will make a
subordinated loan to HomeMax, convertible into an additional 25% of HomeMax
common stock. In addition, the Company has the option to sell and American
Homestar has the option to buy the remaining 50% of HomeMax within three years
at a defined price.
MAJORITY SHAREHOLDER LLCS
Leasing LLC and Land LLC are limited liability companies owned by the
Chairman of Zaring National Corporation. These companies purchase model homes
and land and lease these assets to the Company until such time as the models are
sold to third parties or land development commences. Revenues and costs of sales
are the result of eight model home closings in 1998. Interest expense of $.5
million represents interest incurred related to model homes and undeveloped land
holdings. Other income, net represents primarily rental income from model homes
as well as certain land option payments from the Company, net of income deferred
until land parcels are sold to unrelated third parties.
CORPORATE
Interest income from subsidiaries represents the allocation of interest
cost to the subsidiaries. Corporate general and administrative expenses were
$3.2 million in 1998 as compared to $1.8 million in 1997. This increase in
general and administrative expenses is attributed to the additional support
provided to the HomeMax, and Majority Shareholder LLC expansion activities as
well as the ongoing support necessary for Zaring Homes growth.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
On December 13, 1999, the Board of Directors of the Company approved plans
to wind up the affairs of Hearthside. The net loss of this discontinued
operation was $0.2 million in 1998 as compared to essentially breakeven
operations in 1997.
YEAR 2000 ISSUE
BACKGROUND -- At midnight on December 31, 1999, unless the proper
modifications were made, the program logic in many of the world's computer
systems would have started to produce erroneous results because, among other
things, the systems would incorrectly read the date "01/01/00" as being January
1 of the year 1900 or another incorrect date. In addition, certain systems might
have failed to detect that the year 2000 is a leap year. Problems may also have
arisen earlier than January 1, 2000, as dates in the next millennium were
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 covered all
aspects of the Company's business that may have been affected by the Year 2000
issue. The issue was segregated into three main categories of possible risk:
internal systems, supplier exposure and environmental risk. All internal systems
were reviewed for year 2000 compliance. This included 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 was reviewed for compliance. Supplier exposure was also
considered in this review. Supplier exposure included
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a review of any products or services used directly by the Company throughout its
value delivery process. The supplier category also included analysis of possible
first and second tier supplier work interruptions caused by the Year 2000 issue.
The last category of review was the environmental impact of the issue on
operations, including internal work interruptions caused by external events such
as power delivery and physical access. This Compliance Program encompassed the
review of all three categories of risk at Zaring Homes, Hearthside Homes,
HomeMax and all other Company subsidiary organizations.
YEAR 2000 COMPLIANCE PROGRAM PROCESS -- The Company's process to achieve
Year 2000 compliance involved four major steps: inventory of assets and
suppliers, risk assessment, action plan development and testing.
Step one of the processes involved an inventory of all hardware,
software and suppliers that could entail risk to the Company because of
date sensitivity. The result of this process was a list of all suppliers
that could have a significant effect on the business if their work was
interrupted or if their products or services were not Year 2000 compliant.
The hardware and software inventory included all makes, models and versions
of information systems. This information was then used in Step two of the
process, risk assessment.
Step two involved a risk assessment of individual systems and
suppliers resulting in a three-tier risk structure (high, medium, low) for
the systems and suppliers. This assessment involved a combination of
several criteria: business impact, likelihood of failure and effort to
remediate. The high and medium risk items identified as non-compliant were
further addressed in Step three of the project.
Step three entailed the development of action plans to address systems
or suppliers deemed not compliant in the previous phases and having a
significant impact on the Company's business. Each non-compliant system or
supplier has a customized action contingency plan. These plans included
remediation through wholesale replacement of non-compliant systems,
upgrades of systems, or identification of alternate sources of supply. Each
action plan included the development of a contingency plan in the remote
case that the identified remediation was not completed in time. The Audit
Committee of the Board of Directors reviewed these action plans and each
plan had its own timeline and program for completion.
The final step of this process (Step four) involved testing of all
relevant systems to verify that any remediation efforts were successful in
making the systems compliant with the Year 2000 issue.
As of December 31, 1999, the Company completed all phases of the Compliance
Program.
ZARING NATIONAL'S CORE INFORMATION SYSTEM -- Prior to the undertaking of
the Compliance Program, the Company realized that one of its core information
systems was not compliant and that there was a significant risk that the
software supplier could not develop an upgrade in sufficient time. For this
reason, and other operational benefits, the Company decided to replace this core
non-compliant system with a new and compliant product. This effort was formally
launched in January 1998 and was complete as of March 31, 1999. A year 2000
compliant core accounting, purchasing, payables and management information
system was installed in all of the Company's relevant operations, and the
non-compliant system was decommissioned. This project met all major milestones
to date and was within the budgeted amount of $3.0 million. As of December 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 -- As of December 31, 1999 the
cost associated with completing the comprehensive Compliance Program was
approximately $100,000. This represents external
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vendor consulting and excludes the expense associated with management's
oversight and review of the Compliance Program. In addition, this 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, were immaterial to the
overall Company's operations. Compliance Program review costs were expensed as
incurred. The Company financed 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 posed the greatest Year 2000 risks for the Company
if implementation of the Compliance Program was not successful. The potential
problems related to these systems were 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 completed all Year 2000 remediation and testing activities,
and although the Company 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 finalize its Compliance Program was heavily dependent upon
the timely provision of necessary upgrades and modifications by the Company's
suppliers and contractors. 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.) would 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 finalized the development of contingency plans to address
alternatives in the event that Year 2000 failures of automatic systems and
equipment occurred, including contingencies for the potential failures of key
vendors to become Year 2000 compliant. All final contingency plans were
completed prior to December 31, 1999.
RESULTS OF YEAR 2000 COMPLIANCE PROGRAM -- To date, the Company has not
experienced any significant business disruptions as a result of the Year 2000.
The Company continues to monitor its major business application in order to be
able to prevent or detect potential problems or concerns.
LOAN AGREEMENTS
The Company's loan agreements and other financing arrangements include:
- A $72.5 million revolving credit facility with banks, available
borrowings limited by the borrowing base (as defined) and the Company's
outstanding letters of credit. As of December 31, 1999 revolving credit
borrowings approximated $61.2 million with approximately $8.5 million of
available borrowings. Interest rates relative to the revolving credit
facility are variable (8.76% at December 31, 1999).
- Manufactured housing floor plan facilities for inventory and display
models, subject to repayment upon the earlier of sale or certain periods
subsequent to the initial borrowings, at variable interest rates which
approximated 9.0% at December 31, 1999. Approximately $9.9 million was
outstanding as of December 31, 1999.
- HomeMax working capital credit agreement, $15.0 million available and
outstanding at December 31, 1999, at prime plus 1% (9.5% at December 31,
1999), payable in annual installments of
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$1.47 million commencing in March 2000, with the remainder due the
earlier of September 15, 2000 or 90 days following the sale of HomeMax
(as defined).
- Revolving credit agreement of Zaring Financial Services, available
borrowings of up to $5.0 million with approximately $3.2 million
outstanding at December 31, 1999. Interest is at prime less 1/4% (8.25%
at December 31, 1999).
- Bank and other term notes, approximately $10.2 million outstanding as of
December 31, 1999, at rates ranging from 7.95% to 12.0%, payable through
2005.
- Financing provided by LLCs owned by the Company's Chairman, approximately
$17.6 million outstanding as of December 31, 1999 at variable rates of
LIBOR plus 1.75% to 2.25%, payable through March 2002 or upon sale of the
model homes or land, as applicable.
- Subordinated notes payable due to the Company's Chairman and to American
Homestar Corporation, $9.0 million outstanding as of December 31, 1999,
interest at 6% to prime plus 1 5/8%, payable in 2002, the $4.0 million
due to American Homestar is convertible into an additional 25% equity
interest in HomeMax at the discretion of American Homestar.
The Company's $87.5 million syndicated credit facility comprised of the
$72.5 million revolving credit and an original $15.0 million term loan ($4.5
million outstanding as of December 31, 1999) includes various 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 levels of
debt and equity. (See also Capital Resources and Liquidity for additional
discussions relative to amendments to these agreements subsequent to December
31, 1999.)
COMMITMENTS
As of December 31, 1999 and December 31, 1998, the Company had committed to
purchase residential lots from third parties in the aggregate amount of $42.7
million and $22.1 million, respectively, through 2005. As of December 31, 1999,
the Company also had commitments under various operating leases in the aggregate
amount of $12.3 million payable over a thirteen-year period. It is anticipated
that funding for these commitments will be through the Company's working
capital.
CAPITAL RESOURCES AND LIQUIDITY
The Company had cash and equivalents and available borrowings on its
revolving credit facility of approximately $8.0 million and $8.5 million,
respectively, as of December 31, 1999 as compared to $14.8 million and $6.4
million available as of December 31, 1998. These amounts are available to fund
ongoing operations of the Company.
Net cash used in operations in 1999 approximated $38.7 million as compared
to approximately $6.0 million provided by operations in 1998. Net cash used in
1999 is primarily attributable to the net loss ($15.7 million) and increases in
inventories of luxury site-built homes, model homes, land, related development
costs, finished lots and retail distribution manufactured homes ($49.1 million)
and other net changes in certain assets and liabilities ($3.5 million) offset by
increases in trade payables, accruals and deposits ($29.6 million).
Net cash used for investing activities decreased from $16.8 million in 1998
to $0.5 million in 1999. This reduction is primarily attributable to reductions
in additions to property, equipment and sales villages ($15.8 million) and
increases in proceeds from sales of property and equipment and distributions
from the joint venture ($0.5 million).
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Net cash provided by financing activities increased to $34.7 million in
1999 from $28.5 million in 1998. Net sources of financing in 1999 consisted
primarily of additional borrowings from the revolving credit facility ($16.8
million), subordinated debt provided by the Company's Chairman and American
Homestar ($9.0 million), the LLCs owned by the Company's Chairman ($3.6
million), the financial services credit facility ($3.2 million), seller
financing for land ($2.9 million) and the manufactured housing floor plan ($2.8
million), net of reductions of term financing ($3.6 million).
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:
- Sell the remaining assets of Hearthside and wind up the related
operations
- Sell certain model homes to the Company's Chairman
- Reduce the number of market homes per community
- Sell certain idle HomeMax sales villages
- Defer certain land development initiatives
- Sell certain other homebuilding operations
During 1999 and subsequent to yearend 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 includes 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 will be reduced by $5.0 million on July
1, 2000 and an additional $5.0 million on October 1, 2000.
- Interest rates will be 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, 2000. Default rates, if applicable, will be 3% above the
interest rate in effect.
- The third amendment revises 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 establishes 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.
Management is of the opinion that, based on its operating initiatives (as
discussed in Note 1 to the financial statements) and related plans, it is
probable the Company will be in compliance with the terms and conditions of its
credit agreements through the remainder of 2000. In addition, management is of
the opinion that its present cash balances, amounts available from its credit
agreements, amounts generated from its asset reduction plans and amounts
generated from future operations will provide adequate funds for its future
operations.
32
<PAGE> 33
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 and certain intangibles is
dependent upon future events and conditions that may cause actual results to
differ from amounts presently estimated.
As previously discussed, in response to the actual and anticipated losses
of HomeMax, management initiated efforts to consider alternatives to the
pre-existing growth strategies. In conjunction with this, 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, including goodwill, other
intangibles and sales villages to their estimated fair market value through the
recognition of a provision for asset impairment of $5.7 million during 1998. The
estimated fair market value of the assets was based on anticipated future cash
flows discounted at a rate commensurate with the risk, as well as reviews of
comparable residual asset values. During 1999, the Company adjusted the carrying
value of one sales village to its estimated fair value through the recognition
of a provision for asset impairment of $753,000. The village was sold in
January, 2000.
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.
CONTINGENCIES
During the third quarter of 1999, the Company became aware that entrapped
moisture had resulted in mold or mildew developing in certain brick-faced,
exterior walls in homes where tar paper was used as a vapor barrier as required
by the City of Mason, Ohio's Building Code. The Company believes a combination
of factors in the construction process caused conditions that led to the
abnormal entrapment or moisture; however, the tar paper is believed to be a
contributing factor. The Company is diligently investigating appropriate
procedures to correct the situation, including, but not limited to, the removal
and replacement of exterior brick and the treatment of internal wall areas to
the installation of ventilation louvers. The Company has commenced discussions
with insurance carriers and other pertinent parties to address the potential
financial impacts of the moisture items.
As of December 31, 1999, the Company estimates the cost of remediation at
approximately $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 the insurance policies. In the opinion of
management and legal counsel, it is remote that insurance recoveries will be
less than $1.0 million. Accordingly, as of December 31, 1999, the Company has
recorded the estimated accrued warranty of $3.8 million, the estimated recovery
of $1.0 million and the resulting incremental warranty expense of $2.8 million.
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.
33
<PAGE> 34
Through March 27, 2000, the Company had contractual remediation costs of
approximately $2.8 million with certain homeowners in the communities. In March
2000, a purported class action suit was filed by a homeowner in one of the
communities which claimed compensatory damages of more than $25,000, along with
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. Accordingly, 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.
CAUTIONARY STATEMENT
Certain statements contained in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" section that are not related
to historical results are forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements involve a
number of risks and uncertainties. Any forward-looking statements made by the
Company herein and in future reports and statements are not guarantees of future
performance and actual results may differ materially from those in
forward-looking statements as a result of various factors. These forward looking
statements involve risks and uncertainties including but not limited to those
referred to under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations; Cautionary Statements On Forward Looking
Information" in the Company's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1998, filed with the Securities and Exchange Commission.
Readers should carefully review those risk factors and uncertainties in
conjunction with reading this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily as a result
of its investing and financing activities. Investing activity includes operating
cash accounts and investments with an original maturity of three months or less.
The financing activities of the Company are comprised of long-term variable and
fixed rate obligations utilized to fund business operations and maintain
liquidity. The following table presents the
34
<PAGE> 35
principle cash repayments and related weighted average interest rates by
maturity date for the Company's variable and fixed rate obligations as of
December 31, 1999:
EXPECTED MATURITY DATE
(IN MILLIONS)
<TABLE>
<CAPTION>
FAIR
LONG-TERM DEBT 2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
-------------- ---- ----- ----- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$61.2 Million revolving credit
facility........................... $-- $61.2 $ -- $-- $-- $ -- $61.2 $61.2
Average interest rate.............. 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
$15.0 Million credit agreement....... $1.5 $ 1.5 $12.0 $-- $-- $ -- $15.0 $15.0
Average interest rate.............. 9.3% 9.3% 9.3% 9.3% 9.3% 9.3% 9.3%
$6.0 Million Leasing LLC facility.... $4.0 $ 2.0 $ -- $-- $-- $ -- $ 6.0 $ 6.0
Average interest rate.............. 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
$8.6 Million Land LLC facility....... $-- $ 8.6 $ -- $-- $-- $ -- $ 8.6 $ 8.6
Average interest rate.............. 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%
$3.0 Million Leasing 99 LLC
facility........................... $1.0 $ 1.0 $ 1.0 $-- $-- $ -- $ 3.0 $ 3.0
Average interest rate.............. 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
$9.5 Million manufactured housing
floor plan facility................ $9.5 $ -- $ -- $-- $-- $ -- $ 9.5 $ 9.5
Average interest rate.............. 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
$3.1 Million revolving
line-of-credit..................... $-- $ -- $ 3.1 $-- $-- $ -- $ 3.1 $ 3.1
Average interest rate.............. 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3%
Other variable-rate debt
obligations........................ $3.3 $ 1.5 $ 5.1 $-- $-- $ -- $ 9.9 $ 9.9
Average interest rate.............. 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%
Other fixed-rate debt obligations.... $1.9 $ 0.8 $ 4.1 $2.2 $-- $0.7 $ 9.7 $ 9.7
Average interest rate.............. 6.9% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9%
</TABLE>
- ---------------
(a) For the long-term variable rate debt obligations, the weighted average
interest rate assumes no changes in interest rates and is based on the
variable rate of the debt, as of December 31, 1999, that is maturing in the
year reported. The weighted average interest rate excludes the effect of
amortization of deferred financing costs.
(b) For the long-term fixed rate debt obligations, the weighted average interest
rate is based on the stated rate of the debt that is maturing in the year
reported. The weighted average interest rate excludes the effect of the
amortization of deferred financing costs.
(c) The fair values of long-term debt obligations approximate their respective
historical carrying amounts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of Zaring National Corporation and the Report of
Independent Public Accountants thereon are filed pursuant to this Item 8 and are
included in this report in Item 14.
See Item 14(a) hereof.
35
<PAGE> 36
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
No disagreements with accountants on any accounting or financial disclosure
occurred during the period covered by this report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth under the caption
"Executive Officers of the Registrant" at page 3 through page 5 of the
registrant's definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on May 24, 2000, and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation" at page 8 through page 13 of the registrant's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
May 24, 2000, and incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth at page 6 through page 7
of the registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 24, 2000, and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Transactions Involving Directors and Executive Officers" at page 15 through
page 16 of the registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 24, 2000, and incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
1. The Financial Statements are set forth on pages F-1 through F-26 hereof.
The index to the Financial Statements is found on page 41.
2. Financial Statement Schedules
36
<PAGE> 37
SCHEDULE I
ZARING NATIONAL CORPORATION
RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Reserve for Costs of Discontinued Operations
Balance, December 31, 1996.................................. $ --
Additions charged to expense.............................. --
Deductions................................................ --
------
Balance, December 31, 1997.................................. --
Additions charged to expense.............................. --
Deductions................................................ --
------
Balance, December 31, 1998.................................. --
Additions charged to expense.............................. 1,752
Deductions................................................ --
------
Balance, December 31, 1999.................................. $1,752
======
</TABLE>
3. Exhibits required to be filed by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
<S> <C>
3.1* Amended Articles of Incorporation
3.2* Amended Regulations
10.1** Key Employees Stock Option Plan
10.2** Outside Directors Stock Option Plan
10.3*** Zaring Homes Retirement Benefit Plan
10.4* Amendments to Zaring Homes, Inc. Retirement Benefit Plan,
effective as of January 1, 1996 and as of May 8, 1997
10.5**** Loan Agreement between the Company and The Fifth Third Bank
dated as of March 31, 1994
10.6**** Loan Agreement between the Company and The Provident Bank
dated as of March 31, 1994
10.7**** Loan Agreement between the Company and PNC Bank, Ohio,
National Association dated as of March 31, 1994
10.8+ Tax Indemnification Agreement
10.9++ Zaring Homes Executive Deferred Compensation Plan
10.10* Amendment to Zaring Homes, Inc. Executive Deferred
Compensation Plan, effective May 8, 1997
10.11+++ Second Amended and Restated Credit Agreement by and among
Zaring Homes, Inc. and Zaring Holdings, Inc. and Hearthside
Homes, LLC as borrowers and guarantors and Zaring National
Corporation and Zaring Homes of Indiana, L.L.C. and Zaring
Homes Kentucky, LLC, as guarantors and the banks party
hereto and PNC Bank, National Association, as agent and Bank
of America NT&SA and Bank One, Michigan, as co-agents dated
as of June 28, 1999
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
<S> <C>
10.12++ Promissory Note between First Cincinnati Leasing LLC and The
Huntington National Bank dated as of June 30, 1998
10.13++ Loan and Security Agreement between First Cincinnati Leasing
LLC and The Huntington National Bank dated as of June 30,
1998
10.14++ Loan and Security Agreement between First Cincinnati Land
LLC and The Provident Bank dated as of July 10, 1998
10.15++ Promissory Note between First Cincinnati Land LLC and The
Provident Bank, dated as of July 10, 1998
10.16++++ Zaring National Corporation $15,000,000 Credit Agreement
10.17++++ HomeMax, Inc. $12,000,000 Credit Agreement
10.18++++ HomeMax, Inc. Group $33,920,000 Floor Plan Agreement
10.19++++++ Zaring Homes, Inc. 1997 Stock Option Plan
10.20+++ Loan and Security Agreement between The Provident Bank and
Zaring National Corporation, dated as of March 31, 1999
10.21+++ Term Promissory Note between The Provident Bank and Zaring
National Corporation
10.22+++ Loan and Security Agreement between First Cincinnati Leasing
99 LLC and The Huntington National Bank
10.23+++ Promissory Note between First Cincinnati Leasing 99 LLC and
The Huntington National Bank
10.24++++ $5.0 Million Subordinated Loans from Principal Shareholder
(form of term note)
10.25 Bombardier Capital, Guaranty by Corporation (Master
Guaranty)
10.26 Bombardier Capital, Inventory Security Agreement and Power
of Attorney (Form of Agreement)
13.1 Zaring Homes, Inc. 1999 Annual Report to Shareholders
(furnished for the information of the Securities and
Exchange Commission only and not to be deemed to be filed as
part of this Report)
21.1 List of Subsidiaries
23.1 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Incorporated by reference to Form 10-K 1997
** Incorporated by reference to Proxy Statement for Annual
Meeting held April 23, 1998
*** Incorporated by reference to Exhibit 4.b to Form S-8,
Registration No. 33-85588, effective October 26, 1994
**** Incorporated by reference to Form 10-K 1994
+ Incorporated by reference to Exhibit 10.11 to Form S-1
++ Incorporated by reference to Form 10-K 1995
+++ Incorporated by reference to Form 10-Q, June 30, 1999
++++ Incorporated by reference to Form 10-Q, September 30, 1999
++ Incorporated by reference to Form 10-Q, June 30, 1998
</TABLE>
38
<PAGE> 39
<TABLE>
<C> <S>
xx Incorporated by reference to Form 10-Q, September 30, 1998
xxx Incorporated by reference to Proxy Statement for Annual
Meeting held April 7, 1997
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
39
<PAGE> 40
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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
<TABLE>
<S> <C>
Date: April 14, 2000 By: /s/ ALLEN G. ZARING, III
-------------------------------
Allen G. Zaring, III
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C>
Date: April 14, 2000 By: /s/ ALLEN G. ZARING, III
---------------------------
Allen G. Zaring, III
Chairman of the Board,
Chief Executive Officer and Director
Date: April 14, 2000 By: /s/ RONALD G. GRATZ
---------------------------
Ronald G. Gratz
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
Date: April 14, 2000 By: /s/ DANIEL W. GEEDING
---------------------------
Daniel W. Geeding
Director
Date: April 14, 2000 By: /s/ ROBERT NELSON SIBCY
---------------------------
Robert Nelson Sibcy
Director
Date: April 14, 2000 By: /s/ JOHN H. WYANT
---------------------------
John H. Wyant
Director
Date: April 14, 2000 By: /s/ JOHN R. BROOKS
---------------------------
John R. Brooks
Director
Date: April 14, 2000 By: /s/ MURAT H. DAVIDSON
---------------------------
Murat H. Davidson
Director
</TABLE>
40
<PAGE> 41
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets as of December 31, 1999 and F-2
1998......................................................
Consolidated Statements of Operations for the Years Ended F-3
December 31, 1999, 1998 and 1997..........................
Consolidated Statements of Shareholders' Equity for the F-4
Years Ended December 31, 1999, 1998 and 1997..............
Consolidated Statements of Cash Flows for the Years Ended F-5
December 31, 1999, 1998 and 1997..........................
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
41
<PAGE> 42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Zaring National Corporation:
We have audited the accompanying consolidated balance sheets of ZARING
NATIONAL CORPORATION AND SUBSIDIARIES (Note 1) as of December 31, 1999 and 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Zaring National Corporation
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
March 27, 2000
F-1
<PAGE> 43
ZARING NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS................................... $ 7,955 $ 14,805
RECEIVABLES:
Related parties........................................... 779 82
Note from American Homestar Corporation................... 4,400 --
Manufactured housing rebates.............................. 217 455
Mortgage, insurance and other............................. 7,030 1,599
INVENTORIES:
Luxury site-built homes................................... 66,300 32,365
Retail distribution manufactured homes.................... 6,147 2,746
Model homes............................................... 22,722 20,304
Land, development costs and finished lots................. 56,943 47,611
PROPERTY AND EQUIPMENT, net................................. 7,265 7,534
HOMEMAX SALES VILLAGES, net................................. 9,352 12,687
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT
VENTURES.................................................. -- 201
FUTURE TAX BENEFIT AND ESTIMATED TAX REFUNDS................ 10,856 6,053
CASH SURRENDER VALUE OF LIFE INSURANCE AND OTHER ASSETS..... 4,525 5,605
NET ASSETS OF DISCONTINUED OPERATIONS (Note 13)............. 5,739 7,846
-------- --------
$210,230 $159,893
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Revolving credit facility................................. $ 61,250 $ 44,500
Manufactured housing floor plan facility.................. 9,855 7,082
Revolving credit note..................................... 3,181 --
Term notes payable........................................ 42,782 40,068
Accounts payable.......................................... 29,076 14,134
Accrued liabilities....................................... 16,318 6,402
Customer deposits......................................... 8,024 3,270
Deferred gains............................................ 1,860 --
-------- --------
Total liabilities before minority interest and
subordinated debt................................ 172,346 115,456
-------- --------
MINORITY INTEREST IN CONSOLIDATED ENTITIES.................. 1,841 1,654
-------- --------
SUBORDINATED DEBT........................................... 9,000 --
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares, no par value, 2,000,000 shares
authorized, none issued or outstanding.................. -- --
Common shares, no par value, 18,000,000 shares authorized,
4,591,488 issued and outstanding at December 31, 1999
and 1998................................................ 24,957 24,957
Additional paid-in capital................................ 4,286 4,286
Retained earnings (deficit)............................... (2,200) 13,540
-------- --------
Total shareholders' equity......................... 27,043 42,783
-------- --------
$210,230 $159,893
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-2
<PAGE> 44
ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NET REVENUES:
Luxury site-built homes.................................. $ 287,438 $ 243,907 $ 214,042
Retail distribution manufactured homes................... 20,551 12,411 8,209
Financial services....................................... 1,677 526 --
---------- ---------- ----------
Total net revenues................................ 309,666 256,844 222,251
EXPENSES:
Cost of sales luxury site-built homes.................... 240,228 201,754 179,568
Incremental warranty provision (Note 2(j))............... 2,806 -- --
Cost of sales retail distribution manufactured homes..... 19,451 10,724 6,920
Asset impairment (Note 2(g))............................. 753 5,674 --
Financial services....................................... 1,707 531 --
Interest................................................. 7,187 5,541 3,009
Selling.................................................. 24,916 19,064 14,901
General and administrative............................... 27,666 23,787 14,629
---------- ---------- ----------
Total expenses.................................... 324,714 267,075 219,027
---------- ---------- ----------
Operating income (loss)......................... (15,048) (10,231) 3,224
OTHER INCOME (EXPENSE):
Income from unconsolidated joint ventures................ 51 242 33
Other, net............................................... 74 68 (18)
---------- ---------- ----------
125 310 15
---------- ---------- ----------
Income (loss) from continuing operations before
minority interest and provision (benefit) for income
taxes................................................ (14,923) (9,921) 3,239
MINORITY INTEREST IN CONSOLIDATED ENTITIES................. 2,655 (141) 76
---------- ---------- ----------
Income (loss) from continuing operations before
provision (benefit) for income taxes................. (12,268) (10,062) 3,315
PROVISION (BENEFIT) FOR INCOME TAXES....................... (1,058) (3,915) 1,296
---------- ---------- ----------
Net income (loss) from continuing operations......... (11,210) (6,147) 2,019
DISCONTINUED OPERATIONS (Note 13):
Income (loss) of entry level home segment, net of tax.... (4,530) (219) 33
---------- ---------- ----------
Net income (loss).................................... $ (15,740) $ (6,366) $ 2,052
========== ========== ==========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE FROM
CONTINUING OPERATIONS.................................... $ (2.44) $ (1.30) $ 0.42
========== ========== ==========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE FROM
DISCONTINUED OPERATIONS.................................. $ (0.99) $ (0.04) $ 0.01
========== ========== ==========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE......... $ (3.43) $ (1.34) $ 0.43
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING........................ 4,591,488 4,737,220 4,780,931
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-3
<PAGE> 45
ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
SHARES ADDITIONAL RETAINED
--------------------- COMMON PAID-IN EARNINGS TREASURY
COMMON TREASURY SHARES CAPITAL (DEFICIT) SHARES TOTAL
--------- -------- ------- ---------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996................ 5,036,480 (255,370) $25,146 $7,687 $17,854 $(2,006) $48,681
Purchase of common and
treasury shares..... (253) (30) -- (3) -- -- (3)
Retirement of common
and treasury
shares.............. (255,439) 255,400 -- (2,006) -- 2,006 --
Net income............ -- -- -- -- 2,052 -- 2,052
--------- -------- ------- ------ ------- ------- -------
BALANCE, December 31,
1997................ 4,780,788 -- 25,146 5,678 19,906 -- 50,730
Purchase and
retirement of common
shares.............. (189,300) -- (189) (1,392) -- -- (1,581)
Net loss.............. -- -- -- -- (6,366) -- (6,366)
--------- -------- ------- ------ ------- ------- -------
BALANCE, December 31,
1998................ 4,591,488 -- 24,957 4,286 13,540 -- 42,783
Net loss.............. -- -- -- -- (15,740) -- (15,740)
--------- -------- ------- ------ ------- ------- -------
BALANCE, December 31,
1999................ 4,591,488 -- $24,957 $4,286 $(2,200) $ -- $27,043
========= ======== ======= ====== ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-4
<PAGE> 46
ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ (15,740) $ (6,366) $ 2,052
Adjustments to reconcile net income (loss) to cash
provided by (used in) continuing operations --
Loss (income) from discontinued operations.......... 4,530 219 (33)
Depreciation and amortization....................... 4,516 4,536 2,199
Asset impairment.................................... 753 5,674 --
Income from unconsolidated joint ventures........... (51) (242) (33)
Minority interest in consolidated entities.......... (2,655) 141 (76)
Changes in assets and liabilities, excluding effects
of acquisitions --
Future tax benefit and estimated tax refunds..... (4,803) (4,995) (383)
Receivables...................................... (5,890) (1,298) (118)
Inventories...................................... (49,086) 2,185 (17,770)
Cash surrender value of life insurance and other
assets......................................... 127 (1,279) (1,473)
Accounts payable, accrued liabilities and
deferred gains................................. 24,839 6,143 1,667
Customer deposits................................ 4,754 1,138 (673)
Income taxes payable............................. -- -- (107)
--------- -------- --------
Net cash provided by (used in) operating
activities.................................. (38,706) 5,856 (14,748)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment and sales
villages, net....................................... (2,880) (18,668) (8,898)
Proceeds from the sale of property and equipment...... 2,168 1,224 --
Distributions from unconsolidated joint ventures...... 252 663 497
Acquisitions of manufactured housing retailers........ -- -- (2,438)
--------- -------- --------
Net cash used in investing activities of
continuing operations....................... (460) (16,781) (10,839)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable........................... 107,858 123,363 53,925
Repayments on notes payable........................... (73,440) (93,883) (26,000)
Purchase and retirement of treasury shares............ -- (1,581) (3)
Proceeds from (purchase of) minority interest, net.... -- (500) 500
Capital contributions from affiliates, net (Note 1)... 321 1,089 --
--------- -------- --------
Net cash provided by financing activities of
continuing operations....................... 34,739 28,488 28,422
--------- -------- --------
</TABLE>
F-5
<PAGE> 47
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (4,427) 17,563 2,835
Net cash used in discontinued operations.............. (2,423) (6,918) (1,115)
CASH AND CASH EQUIVALENTS, beginning of year.......... 14,805 4,160 2,440
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of year................ $ 7,955 $ 14,805 $ 4,160
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest, net of amounts capitalized................ $ 8,036 $ 5,818 $ 3,202
Income taxes........................................ $ 1,171 $ 915 $ 1,844
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
</TABLE>
During 1999, the Company received a Note receivable in exchange for the
sale of an investment in the HomeMax, Inc. subsidiary (Note 4):
<TABLE>
<S> <C>
Note receivable............................................. $ 4,400
Deferred gain............................................... (1,775)
Minority interest........................................... (2,521)
Accrued expenses............................................ (104)
</TABLE>
During 1997, the Company acquired the following assets as further discussed
in Note 1:
<TABLE>
<S> <C>
Fair value of assets acquired............................... $ 6,306
Liabilities assumed....................................... (3,868)
-------
Cash paid for acquisitions................................ $ 2,438
=======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-6
<PAGE> 48
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
(1) BASIS OF PRESENTATION
(a) Operations -- 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, 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 in conjunction with the acquisition of a retailer in the Raleigh
market. During 1997, HomeMax acquired the assets of three manufactured housing
retailers for approximately $2,440. The acquisitions were recorded using the
purchase method of accounting. Accordingly, the Company made allocations of the
purchase price based on fair values as of the dates of purchase. The excess of
the cost of the acquired assets over their estimated fair value was recorded as
goodwill (See Notes 2(g) and Note 4).
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 for approximately $1,860. The Company also acquired
the stock of Legacy Mortgage Corporation for approximately $138. Legacy Mortgage
Corporation, doing business as Hearthside Home Mortgage, originated, processed
and sold mortgages to third-party investors. The acquisitions were recorded
using the purchase method of accounting (See Note 13).
In June 1998, the Company's principal shareholder formed First Cincinnati
Leasing LLC (Leasing LLC) and First Cincinnati Land LLC (Land LLC) to purchase
and leaseback certain model homes and purchase certain undeveloped land, as
applicable. In March, 1999, the Company's principal shareholder formed First
Cincinnati Leasing 99, LLC (Leasing 99 LLC) to purchase and leaseback certain
additional model homes. As a result of, among others, the principal
shareholder's control of Leasing LLC, Leasing 99 LLC and Land LLC, the results
of each of these entities have been consolidated with the Company's activities
subsequent to their formation. The LLC's initial capitalization and related
share of income is included as a component of minority interest in the
accompanying consolidated financial statements.
F-7
<PAGE> 49
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (Zaring Financial Services). Zaring Financial Services processes and sells
mortgages to third party lenders.
All significant intercompany transactions and balances have been eliminated
in consolidation.
(b) Operating Initiatives -- In 1999, 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 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 (Note 13), reduce certain costs in each of its
segments and modify the terms and conditions of its existing credit facilities
(Note 5). In conjunction with the Company's asset reduction plans, the Company
announced subsequent to yearend, that it had hired an investment banker to
review various strategic alternatives including the sale of certain or all of
its operations. In the event certain of the Company's operations are sold, net
proceeds will be utilized to reduce outstanding debt and fund continuing
operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents -- The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. The carrying value of all cash equivalents approximates fair market
value as of December 31, 1999 and 1998.
(b) Mortgage, Insurance and Other Receivables -- Mortgage, insurance and
other receivables consist of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Mortgage loan receivables................................... $3,721 $ 71
Receivables from title companies............................ 1,904 894
Insurance (Note 2(j))....................................... 1,000 --
Other....................................................... 405 634
------ ------
$7,030 $1,599
====== ======
</TABLE>
(c) Inventories -- Inventories are stated at the lower of cost or market.
Costs include acquisition, land development, direct and indirect production
costs, land deposits, interest, taxes and certain other carrying costs related
to development and construction activities. Market represents estimates based on
management's present plans and intentions of sale prices less development and
disposition costs, assuming that disposition occurs in the normal course of
business.
F-8
<PAGE> 50
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize the components of inventories as of December
31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Luxury site-built homes
Under a contract of sale.................................. $47,113 $21,257
Under construction........................................ 19,187 11,108
------- -------
$66,300 $32,365
======= =======
Retail distribution manufactured homes
Under a contract of sale.................................. $ 3,967 $ 2,224
Held for sale............................................. 2,180 522
------- -------
$ 6,147 $ 2,746
======= =======
</TABLE>
(d) Capitalized Interest -- Interest is capitalized on land in the process
of development and residential housing construction costs during the development
and construction period. The following table summarizes the activity with
respect to capitalized interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Capitalized interest, beginning of year............. $2,139 $1,678 $1,074
Interest incurred................................... 7,481 6,002 3,613
Interest expensed................................... (7,187) (5,541) (3,009)
------ ------ ------
Capitalized interest, end of year................... $2,433 $2,139 $1,678
====== ====== ======
</TABLE>
(e) Property and Equipment -- Property and equipment are recorded at cost.
Depreciation and amortization is computed using both straight-line and
accelerated methods over the estimated useful lives of the assets.
The estimated useful lives of the various classes of assets are as follows:
<TABLE>
<S> <C>
Office furniture and equipment.............................. 5-7 years
Model home furniture and accessories........................ 2-5 years
Leasehold improvements...................................... 5-15 years
HomeMax sales villages...................................... 10-15 years
</TABLE>
F-9
<PAGE> 51
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Office furniture and equipment.............................. $ 6,450 $ 5,664
Model home furniture and accessories........................ 5,855 4,971
Leasehold improvements...................................... 2,113 2,066
------- -------
14,418 12,701
Less -- accumulated depreciation and amortization........... (7,153) (5,167)
------- -------
$ 7,265 $ 7,534
======= =======
HomeMax sales villages...................................... $10,876 $13,447
Less -- accumulated depreciation and amortization........... (1,524) (760)
------- -------
$ 9,352 $12,687
======= =======
</TABLE>
(f) Accrued Liabilities -- Accrued liabilities consists of the following as
of December 31:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Estimate to complete closed homes (Note 2(m))............... $ 5,192 $1,191
Incremental warranty provision (Note 2(j)).................. 3,806 --
Other....................................................... 7,320 5,211
------- ------
$16,318 $6,402
======= ======
</TABLE>
(g) Asset Impairment -- In 1997 and through the third quarter of 1998, the
losses of HomeMax negatively impacted the consolidated results of the Company.
In response to the actual and anticipated prospective losses, management and the
Board of Directors initiated efforts to consider alternatives to the segment's
pre-existing growth strategies, including the pursuit of joint venture
opportunities with other retailers, alternative operating strategies or an
outright sale of the entity (Note 4). In conjunction with these reviews 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 associated long-lived
assets. Accordingly, in the fourth quarter of 1998, the Company adjusted the
carrying values of the long-lived assets of HomeMax, including goodwill, other
intangibles and sales villages, to their estimated fair market value through the
recognition of a provision for asset impairment of $5,674. The estimated fair
market value of the assets was based on anticipated future cash flows discounted
at a rate commensurate with the risks, as well as reviews of comparable residual
asset values. In 1999, given the continued losses of HomeMax, the Company again
evaluated the carrying values associated with the long-lived assets of HomeMax
and, accordingly, adjusted the carrying value of a sales village to the net
value realized in conjunction with the sale of the village subsequent to
December 31, 1999.
F-10
<PAGE> 52
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(h) Revenue and Cost Recognition -- Revenues and costs of sales related to
homes are recognized upon closing the sale, at which time title is transferred
to the purchaser. Revenue from the sale of loans and loan servicing rights is
recognized when the closed loans are sold and delivered to an investor.
(i) Service and Warranty Liabilities -- Service and warranty costs are
estimated and provided for at the time of closing on a home. Warranty expense,
exclusive of incremental warranty, approximated $3,505, $1,558 and $1,941 in
1999, 1998 and 1997, respectively.
(j) Incremental Warranty Provision -- During 1999, the Company became aware
of certain moisture and mold related issues in certain of its luxury site-built
homes 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, the Company estimates the cost of remediation could
approximate $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. Accordingly, as of December 31, 1999, the Company has
recorded the estimated accrued warranty of $3.8 million, the estimated recovery
of $1.0 million and the resulting incremental warranty expense of $2.8 million.
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 March 27, 2000, the Company had contractual remediation costs of
approximately $2.8 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 $25,000, 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. Accordingly, 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.
(k) Advertising -- The Company expenses the costs of advertising as
incurred. Advertising expense for the years ended December 31, 1999, 1998 and
1997 approximated $4,036, $2,622 and $1,193, respectively.
(l) SFAS 123 "Accounting for Stock-Based Compensation" -- The Company has
elected to account for the cost of its stock options utilizing the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25)
as allowed by Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation" (SFAS 123). Accordingly, no compensation cost has
been recognized for stock options as substantially all stock options were
granted at prices that approximated fair market value, as defined by the plans,
at the measurement date. The pro forma disclosures required by SFAS 123 are
presented in Note 11.
(m) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial
F-11
<PAGE> 53
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
significant estimates include warranty, incremental warranty, insurance
coverage, estimated costs to complete closed homes, estimate to wind up the
affairs of discontinued operations, asset impairment and tax valuation reserves.
(n) New Pronouncements -- In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-5, "Reporting on
the Costs of Startup Activities" (SOP 98-5), which requires costs of startup
activities, including preopening expenses, to be expensed as incurred. The
Company's practice was to defer these expenses until a manufactured housing
village commenced operations, at which time the costs, other than the
advertising costs which are expensed upon opening, were amortized over a
one-year period. As of December 31, 1997, preopening expenses of approximately
$507 were deferred and amortized during 1998. Commencing in 1998, preopening
costs were expensed as incurred. Preopening costs incurred and expensed in 1999
and 1998 were nominal.
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, as amended 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.
(o) Reclassifications -- Certain reclassifications have been made to the
prior years' financial statements to conform with the 1999 presentation.
(3) INVESTMENTS IN JOINT VENTURES
Prior to 1998, the Company participated in two joint ventures to develop
and sell residential property to third parties or to venture partners who
construct residential housing on the property. In addition, the Company
participated in a partnership which provides mortgage brokering services.
For each joint venture, the Company owned a 50% ownership interest. All key
decisions regarding venture activities were made jointly. Accordingly, the
Company used the equity method of accounting for the investments in these joint
ventures.
During 1998, the Company sold its ownership position in one joint venture
and acquired the 50% interest not previously owned in another joint venture.
During 1999 the assets of the remaining joint venture were sold and the venture
was terminated.
Fees received by the Company for services provided to the joint ventures
are offset against costs to the extent incurred in providing these services. Any
excess is deferred by the Company to the extent of its ownership interest in the
venture and recognized as income as the venture closes on sales of properties to
third parties.
F-12
<PAGE> 54
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize unaudited financial information related to
the Company's joint venture activities during the period of time a 50% ownership
was maintained:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
STATEMENTS OF INCOME 1999 1998 1997
-------------------- ---- ------ ------
<S> <C> <C> <C>
Revenues.............................................. $550 $1,635 $1,264
Costs and expenses.................................... 448 1,209 1,199
---- ------ ------
Pretax income......................................... $102 $ 426 $ 65
==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
BALANCE SHEETS 1999 1998
-------------- ---- ----
<S> <C> <C>
Assets, primarily land and land improvements................ $-- $478
Liabilities................................................. $-- $ --
Equity...................................................... $-- $478
</TABLE>
(4) 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 at prime, payable quarterly. 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 September 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 year ended December 31, 1999, $1,058
was expensed under this commitment. Future commitments associated with
these leases in 2000 and 2001 approximate $1,404 and $538, respectively.
- 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 in amounts of $1,000 and $500,
respectively.
- Subsequent to the sale, the Company and American Homestar each agreed to
provide up to $50 per quarter to support advertising and promotional
initiatives. As of December 31, 1999, $150 of funding was provided by
each the Company and American Homestar.
F-13
<PAGE> 55
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- American Homestar agreed to provide certain management and consulting
services for up to three years for compensation of at least $500 plus an
additional fee of up to $750 based upon quarterly losses during the first
four quarters following closing. During the year ended December 31, 1999,
$942 was expensed under this arrangement.
- American Homestar and the Company each agreed to provide working capital
loans of up to $500 to HomeMax which will accrue interest at prime. No
working capital loans were provided as of December 31, 1999, however,
additional financing of $250 was provided by each of the companies
subsequent to yearend.
- The Company has the option to sell and American Homestar has the option
to buy 50% of HomeMax within three years at a defined price.
- The Company received an option, which expires on March 15, 2004, to
purchase up to 150,000 shares of common stock of American Homestar with
an exercise price of $18.00 per share.
The accompanying financial statements include the results of HomeMax for
all applicable periods. Losses for the period subsequent to the transaction
allocable to American Homestar are included as a component of minority interest
in loss of consolidated entities in the accompanying consolidated statements of
operations. Similarly, American Homestar's investment, net of allocable losses,
is included as a component of minority interest (approximately $766 as of
December 31, 1999) in the accompanying consolidated balance sheets. The gain
resulting from the Company's sale of a 25% interest in HomeMax to American
Homestar ($1,775) has been deferred until, among other factors, American
Homestar converts its subordinated note into an additional 25% equity interest
in HomeMax.
(5) NOTES PAYABLE
The Company has a $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 December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revolving Credit Facility, payable to PNC Bank, as agent,
$72.5 million maximum available borrowings, $8.5 million
available at December 31, 1999, interest rate options of
(a) the greater of the Prime Rate or the Federal Funds
rate plus .50% or the (b) Euro-rate plus 1.50% to 2.30%,
depending on the Company's leverage ratio (borrowings
outstanding at December 31, 1999 and 1998 are at 8.76% and
7.88%, respectively), expiring in March 2001.............. $61,250 $44,500
======= =======
</TABLE>
F-14
<PAGE> 56
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Obligations of HomeMax:
Manufactured Housing Floor Plan Facility for inventory and
display models, payable to Bombardier Capital, Inc.,
variable interest rates (9.0% at December 31, 1999),
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................................... $ 9,511 $ --
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% (8.78% at December 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....................... 344 7,082
------- -------
$ 9,855 $ 7,082
======= =======
Term Loans, payable to PNC Bank, as agent, borrowings at
interest rate options of (a) the greater of the Prime Rate
or the Federal Funds rate plus .50% or the (b) Euro-rate
plus 1.50% to 2.30%, depending on the Company's leverage
ratio (borrowings outstanding at December 31, 1999 and
1998 are at 8.77% and 7.19%, respectively), payable in
quarterly installments of $750 through March 2001......... $ 4,500 $ 6,750
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%, (9.5%
at December 31, 1999), payable in three annual
installments of $1.47 million commencing March 15, 2000,
entire balance payable at the earlier of September 15,
2002 or 90 days following the sale of the remaining 50% of
HomeMax (Note 4), secured by $8.4 million of promissory
notes, prepayment penalty 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 15,000
Other Term Notes, payable to banks, interest at 7.95%,
payable in quarterly installments of $437 through
September 2001............................................ 2,739 4,371
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..... 2,949 --
</TABLE>
F-15
<PAGE> 57
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Obligations of Leasing LLC, Land LLC and Leasing 99 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% (8.21% and 6.75% at December
31, 1999 and 1998, respectively) payable monthly, secured
by model homes and a personal guarantee, payable upon sale
of the models or in annual installments through June
2001...................................................... 6,072 8,237
Notes payable by Land LLC to the Provident Bank, permitted
borrowings of up to $10.0 million, interest at LIBOR plus
2.25% (8.71% and 7.25% at December 31, 1999 and 1998,
respectively) payable monthly, secured by land and a
personal guarantee, payable in July 2001.................. 8,663 5,710
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% (8.21% at December 31, 1999), payable
monthly, secured by model homes, a personal guarantee and
a guarantee by Leasing LLC, payable upon sale of the
models or in annual installments through March 2002....... 2,859 --
------- -------
$42,782 $40,068
======= =======
Obligation of Zaring Financial Services:
Revolving line of credit payable to the Provident Bank,
permitted borrowings of up to $5.0 million, $1.8 million
available at December 31, 1999, interest at the Prime Rate
minus 0.25% (8.25% at December 31, 1999), expiring May
2002...................................................... $ 3,181 $ --
======= =======
Subordinated Debt:
Subordinated notes payable to Principal Shareholder,
interest at the greater of 9 7/8% or the Prime Rate plus
1 5/8% (10 1/8% at December 31, 1999) payable monthly,
principal due September, 2002............................. $ 5,000 $ --
Subordinated note payable to American Homestar
Corporation, interest at 6.00% payable quarterly, payable
June 15, 2002 unless accelerated as a result of available
cash flow of HomeMax, as defined, convertible into an
additional 25% equity interest in HomeMax at the
discretion of American Homestar........................... 4,000 --
------- -------
$ 9,000 $ --
======= =======
</TABLE>
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 1999 and subsequent to yearend the Company was unable to comply with
certain covenants included in its credit agreements. The bank 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 includes the following modifications:
F-16
<PAGE> 58
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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 will be reduced by $5.0 million on July
1, 2000 and an additional $5.0 million on October 1, 2000
- Interest rates will be 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, 2000. Default rates, if applicable, will be 3% above the
interest rate in effect.
- The third amendment revises 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 establishes 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.
Management is of the opinion that, based on its operating initiatives (as
discussed in Note 1 to the financial statements) and related plans, it is
probable the Company will be in compliance with the terms and conditions of its
credit agreements through the remainder of 2000. In addition, management is of
the opinion that its present cash balances, amounts available from its credit
agreements, amounts generated from its asset reduction plans and amounts
generated from future operations will provide adequate funds for its future
operations.
The carrying value of the revolving credit facilities and term loans
approximate fair market value as these notes are priced at current market rates.
The fair market value of the Company's other fixed rate notes payable as of
December 31, 1999 and 1998 approximated $9,627 and $4,452, respectively. The
fair market values of these securities was estimated by discounting the expected
cash flows at the rates currently offered to the Company for debt of the same
remaining maturities.
Scheduled maturities of notes payable are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------
<S> <C>
2000................................................. $ 17,289
2001................................................. 80,635
2002................................................. 25,266
2003................................................. 2,186
2004................................................. --
Thereafter........................................... 692
--------
$126,068
========
</TABLE>
The Company is contingently liable under letters of credit of approximately
$7.7 million issued as a result of lot and land acquisition and development
activities through December 31, 1999.
F-17
<PAGE> 59
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109). This statement requires deferred
tax recognition for all temporary difference in accordance with the liability
method and requires adjustments of future tax benefits and deferred tax
liabilities for enacted changes in tax laws and rates.
The following summarizes the provision (benefit) for income taxes on income
(loss) from continuing operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Currently payable (receivable):
Federal.......................................... $(1,250) $(1,293) $1,232
State and local.................................. (193) (90) 362
Deferred:
Federal.......................................... 560 (2,170) (233)
State and local.................................. (175) (362) (65)
------- ------- ------
$(1,058) $(3,915) $1,296
======= ======= ======
</TABLE>
The following is a reconciliation between the statutory federal income tax
rate and the provision (benefit) for income taxes:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- -------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ----- ------- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Computed provision for federal
income taxes at the statutory
rate............................ $(4,171) (34.0)% $(3,421) (34.0)% $1,127 34.0%
State and local income taxes, net
of federal income tax benefit... (613) (5.0) (501) (5.0) 164 5.0
HomeMax losses subsequent to March
15, 1999 which are not included
in the consolidated return of
the Company..................... 2,806 22.8 -- -- -- --
Valuation allowance............... 1,106 9.0 -- -- -- --
Other............................. (186) (1.6) 7 .1 5 .1
------- ----- ------- ----- ------ ----
$(1,058) (8.8)% $(3,915) (38.9)% $1,296 39.1%
======= ===== ======= ===== ====== ====
</TABLE>
F-18
<PAGE> 60
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999 and 1998, the future tax benefit and estimated refunds
consists of the following:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Goodwill and other intangibles.............................. $ -- $ (251)
Recognition of warranty expense............................. 1,791 409
Currently nondeductible expenses............................ 1,075 424
Asset impairment and discontinued operations................ 3,536 2,213
Inventory and equipment costs not currently deductible...... 322 863
Estimated refunds........................................... 3,131 2,395
Estimated net operating loss carryforwards.................. 2,107 --
Valuation allowance......................................... (1,106) --
------- ------
$10,856 $6,053
======= ======
</TABLE>
The valuation allowance established in 1999 is primarily attributed to
deferred tax assets associated with HomeMax which may ultimately be impaired
unless prospective taxable income is realized.
(7) RETIREMENT PLAN
The Company has established a defined contribution plan for all eligible
employees. The plan provides for voluntary contributions by the Company's
employees up to a specified maximum percentage of gross pay and, effective
January 1, 1998, a Company match of 25% of employee contributions. In addition,
the Company may make discretionary contributions. Total Company contributions
expensed approximated $952, $784, and $54 in 1999, 1998, and 1997, respectively.
(8) RELATED PARTY TRANSACTIONS
During 1999, Leasing 99 LLC, a company owned by Allen G. Zaring, III,
purchased from and subsequently leased back to Zaring Homes approximately $3.2
million of model homes. During 1998, Leasing LLC, a Company owned by Allen G.
Zaring, III, purchased from and subsequently leased back to Zaring Homes
approximately $11.0 million of model homes. During the lease terms, Zaring Homes
pays Leasing LLC and Leasing 99 LLC monthly rent equal to the greater of the
prime interest rate or LIBOR plus 1.5% applied to the aggregate sales prices of
the respective models and related taxes, insurance, maintenance and homeowners
fees, as applicable.
Also in 1998, Land LLC, a company owned by Allen G. Zaring, III and his
sons, purchased approximately $4.3 million of undeveloped land from Zaring
Homes. In 1999 and 1998 Land LLC purchased approximately $4.1 million and $1.5
million, respectively of undeveloped land from unrelated parties. Zaring Homes
has options for up to three years to purchase the land for Land LLC's original
cost plus 15%. Interim monthly option payments to Land LLC approximate its
carrying costs (interest, real estate taxes, sewer and water). To secure its
performance of the option contract, Zaring Homes provided a $1.3 million
irrevocable letter of credit. In 1999, Zaring Homes purchased $1.2 million of
undeveloped land from Land LLC.
F-19
<PAGE> 61
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other related party activities are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ----
<S> <C> <C> <C>
Sale of residential lots............................. $ -- $ -- $165
====== ====== ====
Sales of residential homes to management and other
related parties, including $554 and $1,680 related
to employees who were relocated during 1999 and
1998, respectively................................. $2,722 $3,393 $732
====== ====== ====
Purchase of residential lots......................... $ -- $ -- $480
====== ====== ====
American Homestar:
Rebates receivable................................. $ 489 $ -- N/A
Interest receivable................................ 272 -- N/A
Interest payable on subordinated loan.............. 121 -- N/A
Management fee payable............................. 942 -- N/A
Interest income.................................... 272 -- --
Interest expense................................... 191 -- --
Management fee expense............................. 942 -- --
Allen G. Zaring, III:
Interest payable on subordinated loan.............. $ 43 $ -- N/A
Interest expense................................... 127 -- --
Temporary financing provided to the Company and
repaid during the year.......................... 2,000 -- --
Receivable......................................... 16 16 N/A
Blue Chip:
Receivable......................................... $ -- $ 66 N/A
Employees:
Receivables........................................ $ 15 $ -- N/A
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
(a) Lot Purchases -- In addition to land under development, the Company has
commitments to purchase residential lots from various outside parties as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NUMBER OF LOTS AMOUNT
- ------------------------ -------------- -------
<S> <C> <C>
2000............................................ 237 $11,560
2001............................................ 287 12,652
2002............................................ 144 6,003
2003............................................ 116 4,840
2004............................................ 111 4,615
Thereafter...................................... 76 3,040
--- -------
971 $42,710
=== =======
</TABLE>
(b) Litigation -- 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
F-20
<PAGE> 62
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
matters, which seek remedies or damages. The Company believes that any liability
that may finally be determined, exclusive of certain litigation discussed in
Note 2(j), will not have a material effect on its financial position or results
of operations.
(c) Operating Leases -- The Company is obligated under noncancelable
operating lease agreements for certain furniture and equipment, office space and
land related to the HomeMax sales villages. Rental expense under these
agreements approximates $2,930, $2,674, and $973 for the years ended December
31, 1999, 1998 and 1997, respectively. Future minimum lease payments under these
operating lease agreements are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------
<S> <C>
2000................................................. $ 3,268
2001................................................. 2,625
2002................................................. 1,536
2003................................................. 1,029
2004................................................. 731
Thereafter........................................... 2,931
-------
$12,120
=======
</TABLE>
(10) SHAREHOLDERS' EQUITY
(a) Preferred Shares -- The Company is authorized to issue up to 2,000,000
preferred shares of which 1,000,000 are voting and 1,000,000 are nonvoting. No
preferred shares have been issued.
(b) Common Shares -- In 1998, the Company purchased and retired 189,300
shares for approximately $1,581. During 1997, the Company retired 255,400
treasury shares.
(c) In each 1999, 1998 and 1997, the Company issued as an incentive three
shares to each employee (2,001, 1,428 and 1,218 common shares with a total
market value of $12, $13 and $12 in 1999, 1998 and 1997 respectively).
(11) STOCK OPTION PLANS
The Company adopted stock option plans (the Plans) for employees and non
employee directors in 1999, 1997, 1996 and 1993. Had compensation cost for these
plans been determined consistent with SFAS
F-21
<PAGE> 63
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
123, the Company's net income (loss) and earnings (loss) per share would have
been the following pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Net Income (Loss)
As reported..................................... $(15,740) $(6,366) $2,052
Pro forma....................................... $(15,916) $(7,692) $1,865
Earnings (Loss) Per Share
As reported..................................... $ (3.43) $ (1.34) $ 0.43
Pro forma....................................... $ (3.47) $ (1.62) $ 0.39
</TABLE>
Because the method of accounting as prescribed by SFAS 123 has not been
applied to options granted prior to January 1, 1995, the pro forma net income
(loss) and earnings (loss) per share information may not be representative of
that to be expected in future years.
The Company may grant options for up to 893,000 shares under the Plans. The
Company has granted options on 629,567 shares through December 31, 1999. The
option exercise prices approximated the stock's market price on the date of
grant. Of the options granted, 91,700 will vest subject to the Company's annual
performance and conformity with certain performance criteria. These options
expire ten years from grant date. Another 60,000 of the options vest in three
annual installments beginning in 1998 and expire in ten years and 72,243 vest in
2000 and expire in ten years. The remaining options vest at their grant date and
expire ten years from date of grant.
A summary of the status of the Company's stock option plans at December 31,
1999, 1998 and 1997 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year............. 321,946 $10.15 208,728 $10.35 66,383 $12.05
Granted............... 223,808 8.39 223,956 10.25 200,250 10.00
Exercised............. -- -- -- -- -- --
Forfeited/Expired..... (100,270) 9.86 (110,738) 10.72 (57,905) 11.03
--------- ------ --------- ------ -------- ------
Outstanding, end of
year................ 445,484 $ 9.33 321,946 $10.15 208,728 $10.35
========= ====== ========= ====== ======== ======
Exercisable, end of
year................ 226,541 $10.14 89,577 $10.18 41,225 $11.91
========= ====== ========= ====== ======== ======
Weighted average fair
value of option
shares granted...... $ 5.86 $ 6.27 $ 5.85
========= ========= ========
</TABLE>
F-22
<PAGE> 64
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information related to options outstanding
and options exercisable as of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE EXERCISE CONTRACTUAL OPTIONS EXERCISE
OUTSTANDING PRICE PRICE LIFE EXERCISABLE PRICE
- ----------- ------------ -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
2,000 $ 7.25 $ 7.25 6.3 2,000 $ 7.25
198,943 8.00-9.45 8.39 9.3 -- --
229,061 9.50-10.25 9.99 8.0 209,061 10.03
9,260 11.15 11.15 6.2 9,260 11.15
6,220 12.50-13.50 13.10 4.6 6,220 13.10
------- ------ --- ------- ------
445,484 $ 9.33 8.5 226,541 $10.14
======= ====== === ======= ======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Dividend yield.................................. 0% 0% 0%
Expected volatility............................. 36% 36% 36%
Risk-free interest rate......................... 6.5% 6.5% 6.5%
Expected lives.................................. 10 years 10 years 10 years
</TABLE>
(12) EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per common 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 445,484, 321,946 and 208,728 shares of common stock at
average prices of $9.33, $10.15 and $10.35 per share were outstanding during
1999, 1998 and 1997, respectively, but were not included in the computation of
diluted earnings per share since the options' exercise prices were greater than
the average market price of the common shares. In addition, during 1999 and
1998, 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 per
share are identical thus a reconciliation of the numerator and denominator is
not necessary.
(13) DISCONTINUED OPERATIONS
On December 13, 1999, the Board of Directors approved plans to discontinue
the affairs of Hearthside. The net losses associated with the operations of
Hearthside are included in the accompanying consolidated statements of
operations as discontinued operations for each of the periods presented. In
addition, net assets of Hearthside are separately stated in the accompanying
balance sheets. The results of the discontinued
F-23
<PAGE> 65
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hearthside segment reflect an allocation of interest expense based on assets
deployed. Summary financial information of Hearthside is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Net revenues.............................................. $30,231 $11,354 $1,706
Interest allocation....................................... $ 952 $ 264 $ 12
Pretax operating income (loss)............................ $(7,168) $ (362) $ 54
Provision (benefit) for income taxes...................... (2,638) (143) 21
------- ------- ------
Net income (loss)......................................... $(4,530) $ (219) $ 33
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Land and home inventories................................... $9,814 $9,816
Other assets................................................ 812 493
Liabilities................................................. (4,887) (2,463)
------ ------
Net assets of discontinued operations....................... $5,739 $7,846
====== ======
</TABLE>
The disposal of Hearthside assets through an orderly sales process is
expected to be completed no later than December 13, 2000. For the period ended
December 31, 1999, the loss on discontinued operations include the write down of
assets to estimated realizable value and the estimated costs of disposing those
operations (which aggregate approximately $1.75 million), net of applicable tax
benefits.
(14) SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 131 establishes new standards for segment
reporting which are based on the way management organizes segments within a
company for making operating decisions and assessing performance. The Company's
segments are aligned with its respective product offerings: luxury site-built
homes, financial services, retail distribution manufactured housing, majority
shareholder LLC activities and corporate. Corporate primarily includes the
operations of the Company's corporate office whose main purpose is to provide
financing, cash management, risk management, capital allocations, management
reporting and general administration of the other segments.
F-24
<PAGE> 66
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth for the years indicated information
regarding the Company's segments:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
ZARING HOMES
Luxury Site-Built Homes
Revenues............................................ $284,602 $241,599 $214,042
Cost of sales....................................... 237,792 199,867 179,568
Incremental warranty provision...................... 2,806 -- --
Interest............................................ 8,356 6,943 5,563
Selling, general and administrative................. 36,880 28,256 24,346
-------- -------- --------
Operating income (loss)............................. (1,232) 6,533 4,565
Other income........................................ 82 198 15
-------- -------- --------
Pretax Luxury Site-Built Income (Loss).............. (1,150) 6,731 4,580
FINANCIAL SERVICES
Revenues............................................ 1,677 526 --
Expenses............................................ 1,707 531 --
Interest............................................ 48 -- --
-------- -------- --------
Pretax Financial Services Loss...................... (78) (5) --
HOMEMAX
Retail Distribution Manufactured Homes
Revenues............................................ 20,551 12,411 8,209
Cost of sales....................................... 19,451 10,724 6,920
Interest............................................ 1,568 1,807 312
Asset impairment.................................... 753 5,674 --
Selling, general and administrative................. 11,688 11,704 3,370
-------- -------- --------
Operating loss...................................... (12,909) (17,498) (2,393)
Other income (expense).............................. 43 (5) 48
Minority interest................................... 2,406 263 --
-------- -------- --------
Pretax Retail Distribution Loss..................... (10,460) (17,240) (2,345)
MAJORITY SHAREHOLDER LLCS
Revenues............................................ 2,836 2,308 --
Cost of sales....................................... 2,436 1,887 --
Interest............................................ 1,221 465 --
Selling, general and administrative................. 178 112 --
-------- -------- --------
Operating loss...................................... (999) (156) --
Other income........................................ 750 560 --
Minority interest................................... 249 (404) --
-------- -------- --------
</TABLE>
F-25
<PAGE> 67
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CORPORATE
Interest income from subsidiaries, net.............. 4,006 3,674 2,866
General and administrative.......................... (4,586) (3,222) (1,786)
-------- -------- --------
Income (loss) before taxes and discontinued
operations..................................... (12,268) (10,062) 3,315
Provision (credit) for income taxes................. (1,058) (3,915) 1,296
-------- -------- --------
Net income (loss) before discontinued
operations.................................. (11,210) (6,147) 2,019
Income (loss) from discontinued operations, net of
tax.............................................. (4,530) (219) 33
-------- -------- --------
Net income (loss).............................. $(15,740) $ (6,366) $ 2,052
======== ======== ========
</TABLE>
Other pertinent information regarding the Company's segment operations are
as follows:
<TABLE>
<CAPTION>
ZARING HOMEMAX
HOMES RETAIL
LUXURY DISTRIBUTION MAJORITY
SITE-BUILT FINANCIAL MANUFACTURED SHAREHOLDER
HOMES SERVICES HOMES LLCS CORPORATE TOTAL
---------- --------- ------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Segment assets:
1999...................... $134,521 $3,983 $22,898 $18,723 $84,873 $264,998
1998...................... 91,110 181 23,152 14,998 58,303 187,744
1997...................... 107,132 -- 12,044 -- 56,014 175,190
Depreciation and
amortization expense:
1999...................... 3,512 31 916 -- 57 4,516
1998...................... 2,480 32 2,024 -- -- 4,536
1997...................... 2,065 -- 134 -- -- 2,199
Expenditures for long-lived
assets (excluding
acquisitions):
1999...................... 2,136 69 675 -- -- 2,880
1998...................... 4,604 -- 14,064 -- -- 18,668
1997...................... 3,646 -- 5,252 -- -- 8,898
</TABLE>
Reconciliation of segment assets to total assets:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total segment assets.......................... $264,998 $187,744 $175,190
Elimination of inter-entity investments....... (68,462) (50,502) (50,625)
Cash and cash equivalents*.................... 7,955 14,805 4,160
Net assets of discontinued operations......... 5,739 7,846 1,148
-------- -------- --------
Total assets.................................. $210,230 $159,893 $129,873
======== ======== ========
</TABLE>
- ---------------
* Management excludes cash and cash equivalents from assessing a segment's
operating performance.
F-26
<PAGE> 1
Exhibit 10.25
[BOMBARDIER LOGO]
GUARANTY BY BOMBARDIER
CORPORATION CAPITAL
(MASTER GUARANTY)
In consideration of, and in order to induce Bombardier Capital Inc.
("BCI") to extend credit to the dealers owned by, or affiliated with HOMEMAX,
INC. as listed on Schedule A hereto, as amended from time to time by BCI upon
notice to the undersigned (each a "Dealer" and collectively, "Dealers") the
undersigned (each a "Guarantor" and collectively, jointly and severally, the
"Guarantors") guarantee, jointly and severally, full and prompt payment to BCI
of all obligations of each Dealer to BCI whether direct or indirect, absolute or
contingent, due or to become due, now existing or hereafter arising, which with
respect to any Guarantor are incurred prior to the receipt by BCI of written
notice of revocation of this Guaranty by such Guarantor, which notice of
revocation shall not affect rights acquired by BCI against the notifying
Guarantor prior to its receipt or any rights of BCI against any other Guarantor
whenever arising, and each Guarantor agrees to indemnify BCI against and save it
harmless from and against all loss, cost, liability and expense which BCI may
incur or suffer by reason of any action so taken by it. This Guaranty is one of
payment and not collectability. The liability of Guarantors hereunder shall be
unlimited and shall continue, regardless of the payment, reduction, creation, or
any change in the amount of obligations, and this Guaranty shall not be
terminated by the absence, from time to time, of indebtedness to be guaranteed
hereby, but shall apply equally to new indebtedness thereafter created.
Prior to entering into agreements, at BCI's option, to extend credit
to additional Dealers, BCI will send Guarantors a revised and amended Schedule
A, from time to time. If a Guarantor does not agree with the amended
Schedule(s), it must immediately notify BCI in writing of any objections and any
objections shall only relate to the obligation of the objecting Guarantor and
shall not effect the obligations of any other Guarantor. Failure by a Guarantor
to notify BCI of its objections within seven (7) days shall constitute its
acceptance of Schedule A, as amended.
Each and every Guarantor waives presentment, protest, notice of
acceptance of this Guaranty, notice of any loans made, extensions granted, or
other action taken in reliance hereon and all demands and notices of every kind
in connection with this guaranty or the obligations hereby guaranteed; assents
to any renewal, extension or postponement of the time of payment or any other
indulgence, to any substitution, exchange or release of collateral, and/or to
the addition or release of any other person primarily or secondarily liable for
the obligations guaranteed hereby; and it agrees to the provisions of the notes
and/or other paper evidencing the obligations hereby guaranteed. Each and every
Guarantor waives any claim or other right now existing or hereafter acquired
against each Dealer, any other Guarantor or any other party, that arises from
the performance of Guarantor's obligations under this Guaranty, including,
without limitation, any right of reimbursement, recourse, subrogation,
indemnity, exoneration, as well as any rights or remedies relating to any
collateral security which BCI now has or hereafter may acquire. Each and every
Guarantor further agrees that all liability under this Guaranty shall be
primary, and that in any right of action which shall accrue to BCI under its
agreements with any Dealer, BCI may, at BCI's option, notwithstanding any prior
waiver or indulgences, proceed against one or more of the Guarantors and a
Dealer or any Dealers, jointly and severally, and may proceed against one or
more of the Guarantors without having commenced any action against or having
obtained any judgment against any Dealer or any other Guarantor.
In the event a Dealer or Dealers shall become involved in financial
difficulty of any kind, of which contingency BCI shall be the sole judge, all of
said indebtedness, liability, and obligations shall, at the option of BCI,
become immediately due from and be forthwith paid by the Guarantors to BCI the
same as though said debts, liabilities and obligations had matured by lapse of
time.
This Guaranty shall inure to the benefit of BCI and its successors and
assigns and shall be binding upon each and every Guarantor and its successors
and assigns.
Guarantors agree to indemnify BCI and hold BCI harmless from and
against all losses and expense, including legal fees, suffered or incurred by
BCI as a result of claims to compel the return of any payment received by
BCI from a Dealer or Dealers, or transfers for BCI's account of collateral,
with respect to the obligations of a
<PAGE> 2
Dealer or Dealers guaranteed herein. The obligations of a Dealer or Dealers
guaranteed herein shall be automatically reinstated if and to the extent BCI is
compelled to return any payment by or on behalf of such Dealer or Dealers, and
Guarantors agree to remain liable for such obligations even though the Guaranty
may have been terminated and/or the agreements evidencing the debt canceled,
together with all costs, expenses and reasonable attorneys' fees incurred in
connection with the enforcement of this Guaranty.
Guarantors agree to pay all of BCI's costs and expenses, including
attorneys' fees and legal expenses incurred in connection with the enforcement
of this Guaranty. This Guaranty can be altered only by a document or letter
signed by a duly authorized representative of BCI and each and every Guarantor
waives all rights to invoke any condition, promise or representation made by
anyone which might have the effect of invalidating this Guaranty or of limiting
its interests.
Each and every Guarantor represents and warrants that it is a duly
organized and validly existing corporation under the laws of the jurisdiction of
its incorporation and that this Guaranty has been duly authorized, executed and
delivered by such Guarantor and is enforceable against such Guarantor in
accordance with its terms.
Each and every Guarantor represents and warrants that it shares an
identity of interest with Dealers as members of an affiliated and interdependent
group of companies engaged in substantially similar businesses, and such
Guarantor directly and indirectly benefits from credit extended by BCI to
Dealers, which such Guarantor agrees constitutes adequate consideration for this
Guaranty.
IN WITNESS WHEREOF, the Guarantors have caused this Guaranty to be
executed as of this 29th day of October, 1999.
WITNESS:
L. Curtis McCaskill, Jr.
- -------------------------- HOMEMAX, INC.
WITNESS: By: /s/ Matthew S. Massarelli
-----------------------------
- -------------------------- Name Matthew S. Massarelli
Title: President
STATE OF North Carolina
----------------------
COUNTY OF Wake
----------------------
On this 29th day of October, 1999, before me personally appeared
Matthew S. Massarelli of HomeMax, Inc., known by me to be the person who
executed the foregoing instrument, and he/she duly acknowledged to me that
he/she executed the same of his/her own free act and deed and the free act and
deed, of HomeMax, Inc.
/s/ Patricia Murphy
--------------------------------
Notary Public
My commission expires: 10/9/2002
<PAGE> 3
Date: ______________
Schedule A to
GUARANTY BY CORPORATION
-----------------------
Dealers:
--------
HomeMax, Inc.
HomeMax North Carolina, Inc.
HomeMax South Carolina, Inc.
HomeMax Tennessee, Inc.
HomeMax Kentucky, LLC
<PAGE> 4
WITNESS: HOMEMAX NORTH CAROLINA, INC.
/s/ L. Curtis McCaskill, Jr.
- ------------------------------ By: /s/ Matthew S. Massarelli
--------------------------------
Name: Matthew S. Massarelli
Title: President
WITNESS
- ------------------------------
STATE OF North Carolina
---------------------
COUNTY OF Wake
--------------------
On this 29th day of October, 1999, before me personally appeared
Matthew S. Massarelli of HomeMax North Carolina, Inc., known by me to be the
person who executed the foregoing instrument, and he/she duly acknowledged to me
that he/she executed the same of his/her own free act and deed and the free act
and deed, of HomeMax North Carolina, Inc.
/s/ Patricia Murphy
---------------------------------
Notary Public
My commission expires: 10/9/2002
---------
<PAGE> 5
WITNESS: HOMEMAX SOUTH CAROLINA, INC.
/s/ L. Curtis McCaskill, Jr.
- ------------------------------ By: /s/ Matthew S. Massarelli
--------------------------------
Name: Matthew S. Massarelli
Title: President
WITNESS
- ------------------------------
STATE OF North Carolina
---------------------
COUNTY OF Wake
--------------------
On this 29th day of October, 1999, before me personally appeared
Matthew S. Massarelli of HomeMax South Carolina, Inc., known by me to be the
person who executed the foregoing instrument, and he/she duly acknowledged to me
that he/she executed the same of his/her own free act and deed and the free act
and deed, of HomeMax South Carolina, Inc.
/s/ Patricia Murphy
---------------------------------
Notary Public
My commission expires: 10/9/2002
-----------
<PAGE> 6
WITNESS: HOMEMAX TENNESSEE, INC.
/s/ L. Curtis McCaskill, Jr.
- ------------------------------ By: /s/ Matthew S. Massarelli
--------------------------------
Name: Matthew S. Massarelli
Title: President
WITNESS
- ------------------------------
STATE OF North Carolina
---------------------
COUNTY OF Wake
--------------------
On this 29th day of October, 1999, before me personally appeared
Matthew S. Massarelli of HomeMax Tennessee, Inc., known by me to be the
person who executed the foregoing instrument, and he/she duly acknowledged to me
that he/she executed the same of his/her own free act and deed and the free act
and deed, of HomeMax Tennessee, Inc.
/s/ Patricia Murphy
---------------------------------
Notary Public
My commission expires: 10/9/2002
-----------
<PAGE> 7
WITNESS: HOMEMAX KENTUCKY, LLC
/s/ L. Curtis McCaskill, Jr.
- ------------------------------ By: /s/ Matthew S. Massarelli
--------------------------------
Name: Matthew S. Massarelli
Title: President
WITNESS
- ------------------------------
STATE OF North Carolina
---------------------
COUNTY OF Wake
--------------------
On this 29th day of October, 1999, before me personally appeared
Matthew S. Massarelli of HomeMax Kentucky, LLC, known by me to be the
person who executed the foregoing instrument, and he/she duly acknowledged to me
that he/she executed the same of his/her own free act and deed and the free act
and deed, of HomeMax Kentucky, LLC.
/s/ Patricia Murphy
---------------------------------
Notary Public
My commission expires: 10/9/2002
----------
<PAGE> 1
Exhibit 10.26
[BOMBARDIER LOGO]
INVENTORY SECURITY AGREEMENT
AND POWER OF ATTORNEY
BOMBARDIER
CAPITAL
1. PARTIES: The parties to this Agreement are Bombardier Capital Inc. (BCI) and
the Dealer who has signed at the end of this Agreement ("Dealer").
2. ADVANCES: At Dealer's request, BCI, at its option, will advance funds for
the acquisition of Dealer's Inventory (Inventory), or for such other purpose
satisfactory to BCI, secured, in whole part, by a security interest in the
Collateral described in Paragraph 4 below. In each case, BCI will send Dealer a
schedule or schedules as described in Paragraph 3 below. If Dealer does not
agree with the schedule(s), it must immediately notify BCI in writing of any
objections. Dealer's failure to notify BCI of its objections within seven (7)
days shall constitute an acceptance of the schedule(s).
3. PAYMENT: Dealer shall repay BCI in accordance with either or a combination
of the following Plans, which shall be chosen at the sole discretion of BCI:
a) Pay As Sold Plan: BCI shall deliver to Dealer a schedule or schedules
listing each item of Inventory on which BCI has advanced funds and the
amount of the advance. Immediately upon the sale of each item of
Inventory, Dealer will pay to BCI the total amount due on that item.
Dealer will pay to BCI the total amount due on unsold Inventory within
the period established from time to time by BCI or upon demand by BCI
whichever first occurs and will pay such curtailments as BCI may
require.
b) Scheduled Payment Plan: BCI shall deliver to Dealer a schedule or
schedules listing the repayment terms for the Inventory on which it
has advanced funds and the amount of the advance. Dealer will
thereafter pay to BCI the payment due, when due or upon demand by BCI,
whichever comes first, as shown on the schedule(s) BCI supplies
Dealer.
Under either Plan, Dealer agrees that:
a) Dealer will pay BCI financing and service charges, insurance charges
(if any), and late charges according to and upon receipt of the
billing statements which BCI delivers to Dealer and within the time
specified by BCI.
b) BCI, at its discretion, may at any time and without notice to Dealer
apply or reapply any monies received from Dealer in payment of any
Dealer's obligations or liabilities to BCI, in such order of
application as BCI may determine.
c) The specific interest rate(s) charged to Dealer are stated on
individual financial program letters, which letters may be obtained by
the Dealer from BCI representatives. The interest rates charged at any
given time are determined by the financial programs in force for the
specific products that Dealer purchases under this Agreement, and
Dealer and BCI agree that the rates charged may fluctuate over time
and may vary depending on factors such as the type and brand of
Inventory purchased, time of year, age of the Inventory, and/or
payment habits of Dealer.
d) It is the intention of BCI to conform to all applicable laws governing
the rates of interest that may be charged. If the amount contracted
for, charged or received by BCI exceeds the maximum amount permitted
by law, it is agreed that such excess will be considered an error and
canceled immediately and, if already paid, shall be refunded to the
Dealer or, at BCI's option, applied to other outstanding liabilities
of Dealer to BCI.
4. COLLATERAL:
a) In order to secure repayment to BCI of all extensions of credit made
by BCI under this Agreement, and to secure payment of all other debts
or liabilities and performance of all obligations of Dealer to BCI,
whether now existing or hereafter existing, Dealer agrees that BCI
shall have and hereby grants to BCI a security interest in all of the
rights, titles and interests (whether now existing or hereafter
arising or acquired from time to time) of the Dealer in, to and under
all Inventory, including but not limited to, all goods manufactured
and/or sold by any manufacturer, distributor or seller, which
inventory is owned by Dealer or in which Dealer has an interest, the
purchase of which was financed or floorplanned by BCI for the Dealer
of whatever kind or nature, wherever located, and all returns,
repossessions, exchanges, substitutions, replacements, attachments,
parts, accessories and accessions thereto and thereof, and all other
goods used or intended to be used in conjunction therewith and all
proceeds and products thereof, and documents relating thereto (the
"Collateral").
b) Dealer shall execute and deliver such financing statements and
amendments thereto and all further
1 of 4
<PAGE> 2
writings as BCI shall request to accomplish the purpose of this
Agreement and Dealer shall bear all the costs of recording and
perfection.
5. DEALER'S DUTIES: Dealer agrees:
a) That upon purchase of each item of Inventory. Dealer shall deliver to
BCI upon request, the Certificate of Title or Certificate of Origin
issued for same, if any, and BCI shall have the right to have its
lien, encumbrance or security interest noted thereon and/or retain
such Certificate of Origin.
b) To sell and deliver Inventory only in the ordinary course of business
and not to use, rent or dispose of Collateral except as herein
provided, nor permit any encumbrance upon the Collateral without BCI's
prior written consent.
c) To keep all Collateral in good order, repair and operating condition
and to pay all transportation and storage charges on the Collateral.
d) To pay immediately all taxes, expenses, assessments and charges which
may now or hereafter be levied or assessed against the Collateral.
e) To hold any funds and proceeds payable to BCI, in the same form as
received, IN TRUST for BCI, separate and apart from Dealer's funds and
goods. BCI shall apply all amounts so received from Dealer toward the
payment of and liabilities of Dealer, in such order of application as
BCI may determine.
f) To reimburse BCI for BCI's expense and cost incurred in connection
with inspections of the Collateral, and its collection and
administration costs.
g) That for purposes of determining the rate of charge hereunder, any
other language herein to the contrary notwithstanding, charges shall
be deemed to have been accrued and accruing from the date of purchase
of each item of Inventory and shall be determined on an annualized
basis (without regard to any "free-flooring period").
h) Dealer agrees to keep all Collateral insured against risks covered by
standard forms of fire, theft and extended coverage insurance and such
other risks as may be required by BCI, in such amounts and under such
policies issued by such insurance company or companies as are
satisfactory to BCI. BCI shall be named either as a co-insured or
under a loss payable clause, to the extent its interest may appear.
Should Dealer fail to procure such insurance upon request, BCI may,
but is not obligated to, procure the same and collect the cost thereof
from Dealer.
i) To keep all of the Collateral only at its place(s) of business
referred to in Section 13 and to permit BCI to inspect the Collateral
during Dealer's business hours and at other reasonable times and to
inspect and make copies of Dealer's books and records.
j) Dealer shall at all times keep full and accurate records of its
business and Dealer shall upon demand, furnish BCI all such
information regarding Dealer's business and financial condition as BCI
may reasonably request.
k) That BCI may hold any sums or monies belonging to the Dealer which
come into the possession of BCI and may apply all or a portion of said
sums or monies to any outstanding indebtedness, liabilities or
obligations of the Dealer.
6. POWER OF ATTORNEY: Dealer grants to BCI:
a) A power of attorney under which BCI may a) execute on behalf of Dealer
any notes, chattel paper, UCC financing statements, amendments thereto
and continuations thereof (or similar statements of notice,
registration, amendment or continuation under the laws of any
jurisdiction), or other writing in connection with this Agreement or
the Collateral as BCI may require for the purpose of protecting,
maintaining or enforcing the Collateral or the security interest
granted to BCI in the Collateral and b) adjust, make, pursue, settle
and collect any insurance claim in connection with this Agreement, as
attorney-in-fact for Dealer.
7. DEFAULT: The following shall constitute default under this Agreement:
a) Any breach or failure of Dealer to observe or perform any of its
obligations, covenants or undertakings hereunder.
b) Misrepresentation by Dealer to BCI in connection with the business and
financial condition of Dealer or relating to Collateral.
c) Death or dissolution of Dealer, or if any action or proceedings to
dissolve Dealer be instituted.
d) Dealer becoming insolvent or making an assignment for the benefit of
creditors, or if a Petition in Bankruptcy is filed by or against
Dealer, or a complaint in equity or other proceedings for the
appointment of a receiver for Dealer is filed, or if proceedings for
reorganization or for composition with creditors under any law be
instituted by or against Dealer, or if any or all of the goods of
Dealer shall be attached.
e) BCI in good faith deems itself insecure.
REMEDIES: If Dealer defaults, BCI can, at its option and without notice,
demand immediate payment of all obligations under this Agreement and any
other indebtedness owed to BCI. BCI shall have all the rights and remedies
of a secured party under the Uniform Commercial Code in effect in the
jurisdiction where the
2 of 4
<PAGE> 3
Collateral is kept including, but not limited to, the right to enter any
of Dealer's premises with or without legal process, but without force,
and to take possession and remove the Collateral. At BCI's request and to
the extent Dealer may lawfully do so, Dealer will assemble, prepare for
removal and make available to BCI at a place to be designated by BCI
which is reasonably convenient to both parties such items of Collateral
as BCI may deem sufficient to cover all of Dealer's obligations to BCI.
Dealer agrees that private sale of any item financed by BCI at the amount
owed to BCI on that item, less a reasonable restocking charge shall be a
commercially reasonable method of disposition. Five (5) days written
notice of public sale date or the date after which a private sale may
occur shall be a reasonable notice. BCI shall not be chargeable with
responsibility for the accuracy or validity of any document or for the
existence or value of any Collateral. Dealer further agrees to pay
reasonable attorney's fees and legal expenses incurred by BCI in
enforcing this Agreement after default by Dealer. To the extent not
prohibited by law, Dealer waives all valuation and exemption laws and
releases all right of appeal after payment in full.
9. TIME AND ACKNOWLEDGEMENT: Time is of the essence in the performance of
Dealer's duties, but the failure of BCI to enforce its rights under this
Agreement shall not be deemed a waiver of BCI's rights under this
Agreement. Dealer will not assert against BCI any claim or defense Dealer
may have against any seller of goods to Dealer. Dealer acknowledges
receipt of a copy of this Agreement.
10. ASSIGNMENT: This Agreement may be assigned by BCI but Dealer may not
assign this Agreement without the prior written consent of BCI.
11. MODIFICATION: This Agreement may not be modified, altered or amended in
any manner whatsoever, except by a further agreement in writing signed by
both Dealer and BCI.
12. GOVERNING LAW: The validity, enforceability and interpretation of this
Agreement shall be governed by the laws of the State of New York.
13. DEALER BUSINESS AND WAREHOUSE ADDRESSES: (Attach a schedule if more space
required.)
See Schedule A attached hereto.
Effective as of the_________day of____________________ 19__.
WITNESS: DEALER:
(OR ATTEST)
HOMEMAX TENNESSEE, INC.
/s/ L. Curtis McCaskill, Jr. HOMEMAX
- ---------------------------- TENNESSEE, INC.
L. Curtis McCaskill, Jr. CORPORATE
- ---------------------------- SEAL
Secretary
By: /s/ Matthew S. Massarelli
----------------------------
Name: Matthew S. Massarelli
Title: President
Accepted by:
BOMBARDIER CAPITAL INC.
By: ______________________________________
Title:
3 of 4
<PAGE> 4
ACKNOWLEDGMENT BY DEALER IF INDIVIDUAL(S) OR PARTNERSHIP
STATE OF _________________
COUNTY OF _______________
On this the ____ day of ________________,19 ____ before me personally appeared
__________________________ ____________________________________________________
known to me to be the person(s) whose name(s) is (are) subscribed to the
foregoing Inventory Security Agreement and Power of Attorney and acknowledged
that he (they) voluntarily executed the same for the purposes therein contained.
In Witness Whereof I Hereunto set my hand and Official Seal.
__________________________________________
Notary Public
ACKNOWLEDGMENT BY DEALER IF A CORPORATION OR LLC
STATE OF North Carolina
----------------------
COUNTY OF Wake
----------------------
On this the 29th of October, 1999. before me personally appeared Matthew S.
Massarelli who acknowledged himself to be the President of HomeMax Tennessee,
Inc., a corporation/LLC, and that he, being authorized by the Board of
Directors/Members, voluntarily executed the foregoing Inventory Security
Agreement and Power of Attorney for the purposes therein contained, by signing
the name of the corporation/LLC by himself.
In Witness Whereof I Hereunto set my hand and Official Seal.
/s/ Patricia Murphy
--------------------------------
Notary Public
My Commission expires 10/9/2002
4 of 4
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
ZARING NATIONAL CORPORATION
ENTITY Zaring National Corporation
TYPE OF ENTITY C-Corp
EIN 31-1506058
DATE OF INCORPORATION 2/5/97
STATE OF INCORPORATION Ohio
ENTITY Zaring Holdings, Inc.
TYPE OF ENTITY C-Corp
EIN 31-1464421
DATE OF INCORPORATION 1/2/96
STATE OF INCORPORATION Ohio
ENTITY Zaring Homes, Inc.
TYPE OF ENTITY C-Corp
EIN 31-1071348
DATE OF INCORPORATION 7/29/83
STATE OF INCORPORATION Ohio
ENTITY Zaring Homes Kentucky, LLC
TYPE OF ENTITY LLC
EIN 31-1464422
DATE OF INCORPORATION 4/8/96
STATE OF INCORPORATION Kentucky
ENTITY Zaring Homes of Indiana, LLC
TYPE OF ENTITY LLC
EIN 35-1951252
DATE OF INCORPORATION 9/27/94
STATE OF INCORPORATION Indiana
ENTITY Blue Chip Mortgage Company, LLC
TYPE OF ENTITY LLC
EIN 31-1453875
DATE OF INCORPORATION 1/21/96
STATE OF INCORPORATION Ohio
ENTITY Hearthside Homes, LLC
TYPE OF ENTITY LLC
EIN 31-1564448
DATE OF INCORPORATION 9/12/97
STATE OF INCORPORATION Indiana
ENTITY Legacy Mortgage Corporation
(dba Hearthside Home Mortgage)
TYPE OF ENTITY C-Corp
EIN 35-1913797
DATE OF INCORPORATION 2/24/94
STATE OF INCORPORATION Indiana
ENTITY Centron Financial Services Corp.
TYPE OF ENTITY C-Corp
EIN 31-1580201
DATE OF INCORPORATION 12/10/97
STATE OF INCORPORATION North Carolina
<PAGE> 2
ENTITY HomeMax, Inc.
TYPE OF ENTITY C-Corp
EIN 51-1999949
DATE OF INCORPORATION 11/26/96
STATE OF INCORPORATION Delaware
ENTITY HM Services, Inc.
TYPE OF ENTITY C-Corp
EIN 31-1562416
DATE OF INCORPORATION 8/21/97
STATE OF INCORPORATION Delaware
ENTITY HM Properties, Inc.
TYPE OF ENTITY C-Corp
EIN 35-1563237
DATE OF INCORPORATION 9/15/97
STATE OF INCORPORATION Delaware
ENTITY HomeMax Tennessee, Inc.
TYPE OF ENTITY C-Corp
EIN 31-1563241
DATE OF INCORPORATION 8/25/97
STATE OF INCORPORATION Tennessee
ENTITY HomeMax South Carolina, Inc.
TYPE OF ENTITY C-Corp
EIN 31-1563240
DATE OF INCORPORATION 8/27/97
STATE OF INCORPORATION South Carolina
ENTITY HomeMax Ohio, Inc.
TYPE OF ENTITY C-Corp
EIN 31-1585059
DATE OF INCORPORATION 2/4/98
STATE OF INCORPORATION Ohio
ENTITY HomeMax Indiana, LLC
TYPE OF ENTITY LLC
EIN 31-1585066
DATE OF INCORPORATION 2/4/98
STATE OF INCORPORATION Indiana
ENTITY HomeMax Kentucky, LLC
TYPE OF ENTITY LLC
EIN 31-1585070
DATE OF INCORPORATION 2/9/98
STATE OF INCORPORATION Kentucky
ENTITY HomeMax North Carolina, Inc.
TYPE OF ENTITY C-Corp
EIN 62-1665363
DATE OF INCORPORATION 12/30/96
STATE OF INCORPORATION North Carolina
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements File No. 33-85588 and File No. 333-22679.
Arthur Andersen LLP
Cincinnati, Ohio
April 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ZARING
NATIONAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999
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> DEC-31-1999
<CASH> 7,955
<SECURITIES> 0
<RECEIVABLES> 12,426
<ALLOWANCES> 0
<INVENTORY> 152,112
<CURRENT-ASSETS> 0
<PP&E> 25,294
<DEPRECIATION> 8,677
<TOTAL-ASSETS> 210,230
<CURRENT-LIABILITIES> 0
<BONDS> 117,068
0
0
<COMMON> 24,957
<OTHER-SE> 2,086
<TOTAL-LIABILITY-AND-EQUITY> 210,230
<SALES> 309,666
<TOTAL-REVENUES> 309,666
<CGS> 262,485
<TOTAL-COSTS> 262,485
<OTHER-EXPENSES> 55,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,187
<INCOME-PRETAX> (12,268)
<INCOME-TAX> (1,058)
<INCOME-CONTINUING> (11,210)
<DISCONTINUED> (4,530)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,740)
<EPS-BASIC> (3.43)
<EPS-DILUTED> (3.43)
</TABLE>
