<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-22679
ZARING NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-1506058
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 Cornell Park Drive, Suite 500, Cincinnati, Ohio 45242-1825
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
513-489-8849
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
----------- ----------
Number of common shares outstanding as of June 30, 2000: 4,591,389
Total Pages: 25
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ZARING NATIONAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
---------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets,
June 30, 2000, June 30, 1999 (unaudited), and
December 31, 1999 3
Consolidated Statements of Operations (unaudited),
Three Months Ended June 30, 2000 and 1999 and Six Months
Ended June 30, 2000 and 1999 5
Consolidated Statement of Shareholders' Equity,
Six Months Ended June 30, 2000 (unaudited) 6
Consolidated Statements of Cash Flows,
Six Months Ended June 30, 2000 and 1999 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Qualitative and Quantitative Disclosures about Market Risk 23
PART II OTHER INFORMATION 24
SIGNATURES 25
</TABLE>
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\
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ZARING NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30,
--------------------- DECEMBER 31,
2000 1999 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash and cash equivalents $ 6,328 $ 14,362 $ 7,955
Receivables:
Related parties 261 65 779
Note from American Homestar Corporation 2,941 4,400 4,400
Manufactured housing rebates 424 387 217
Mortgage, insurance and other 6,230 1,574 7,030
Inventories:
Luxury site-built homes 57,429 52,759 66,300
Retail distribution manufactured homes 7,655 3,427 6,147
Model homes 19,988 21,088 22,722
Land, development costs and finished lots 51,603 61,053 56,943
Property and equipment, net 6,795 7,669 7,265
HomeMax Sales Villages, net 9,062 11,747 9,352
Investments in and advances to unconsolidated
joint ventures -- 201 --
Future tax benefit and estimated refunds 11,829 7,454 10,856
Cash surrender value of life insurance and other assets 4,380 5,211 4,525
Net assets of discontinued operations (547) 11,053 5,739
--------- --------- ---------
$ 184,378 $ 202,450 $ 210,230
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
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ZARING NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30,
---------------------- DECEMBER 31,
2000 1999 1999
--------- --------- ---------
<S> <C> <C> <C>
Liabilities:
Revolving credit facility $ 54,000 $ 60,750 $ 61,250
Manufactured housing floor plan facility 10,513 8,035 9,855
Revolving credit note 3,594 -- 3,181
Term notes payable 35,422 45,238 42,782
Accounts payable 20,406 22,623 29,076
Accrued liabilities 11,278 7,758 16,318
Customer deposits 8,608 7,842 8,024
Deferred gains 1,885 2,476 1,860
--------- --------- ---------
Total liabilities before
minority interest
and subordinated debt 145,706 154,722 172,346
--------- --------- ---------
Minority interest in consolidated entities 7,644 3,375 1,841
--------- --------- ---------
Subordinated debt 9,000 4,000 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, 4,591,389 issued and outstanding at June
30, 2000, 4,591,488 issued and outstanding at June
30, 1999 and December 31, 1999 24,957 24,957 24,957
Additional paid-in capital 4,286 4,286 4,286
Retained earnings (deficit) (7,215) 11,110 (2,200)
--------- --------- ---------
Total shareholders' equity 22,028 40,353 27,043
--------- --------- ---------
$ 184,378 $ 202,450 $ 210,230
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
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ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues:
Luxury site-built homes $ 88,769 $ 67,359 $ 162,514 $ 106,667
Retail distribution manufactured homes 9,888 5,641 20,221 10,214
Financial services 446 353 820 668
----------- ----------- ----------- -----------
Total net revenues 99,103 73,353 183,555 117,549
----------- ----------- ----------- -----------
Expenses:
Cost of sales luxury site-built homes 74,170 53,517 139,086 85,538
Cost of sales retail distribution
manufactured homes 8,444 5,035 17,213 8,929
Financial services 428 382 919 682
Interest 3,042 1,521 5,401 2,944
Selling 6,996 5,683 13,648 9,667
General and administrative 7,317 6,579 15,102 12,797
----------- ----------- ----------- -----------
Total expenses 100,397 72,717 191,369 120,557
----------- ----------- ----------- -----------
Operating income (loss) (1,294) 636 (7,814) (3,008)
Other income (expense), net 594 (32) 656 19
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
minority interest and benefit for income taxes (700) 604 (7,158) (2,989)
Minority interest in consolidated entities (236) 609 52 769
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
benefit for income taxes (936) 1,213 (7,106) (2,220)
Provision (benefit) for income taxes (150) 884 (2,091) (479)
----------- ----------- ----------- -----------
Net income (loss) from continuing operations (786) 329 (5,015) (1,741)
Discontinued operations:
Loss of entry level home segment, net of tax -- (428) -- (689)
----------- ----------- ----------- -----------
Net loss $ (786) $ (99) $ (5,015) $ (2,430)
=========== =========== =========== ===========
Basic and diluted income (loss) per common share from
continuing operations $ (0.17) $ 0.07 $ (1.09) $ (0.38)
=========== =========== =========== ===========
Basic and diluted loss per common share from discontinued
operations $ -- $ (0.09) $ -- $ (0.15)
=========== =========== =========== ===========
Basic and diluted loss per common share $ (0.17) $ (0.02) $ (1.09) $ (0.53)
=========== =========== =========== ===========
Weighted average shares outstanding 4,591,446 4,591,488 4,591,446 4,591,488
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
SHARES COMMON PAID-IN RETAINED
ISSUED SHARES CAPITAL (DEFICIT) TOTAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 4,591,488 $ 24,957 $ 4,286 $ (2,200) $ 27,043
Purchase and retirement of common shares (99) -- -- -- --
Net loss -- -- -- (5,015) (5,015)
---------- ---------- ---------- ---------- ----------
BALANCE, June 30, 2000 4,591,389 $ 24,957 $ 4,286 $ (7,215) $ 22,028
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of this consolidated financial statement.
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ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (5,015) $ (2,430)
Adjustments to reconcile net loss to cash used in continuing
operations--
Loss from discontinued operations -- 689
Gain on sale of sales villages (529) --
Depreciation and amortization 2,482 2,011
Minority interest in consolidated entities (52) (769)
Change in assets and liabilities--
Future tax benefit and estimated tax refunds (973) (1,510)
Receivables 1,111 110
Inventories 15,437 (35,301)
Cash surrender value of life insurance and other assets (537) 53
Accounts payable, accrued liabilities and deferred gains (13,685) 10,442
Customer deposits 584 4,572
-------- --------
Net cash used in operating activities (1,177) (22,133)
-------- --------
Cash Flows from Investing Activities:
Additions to property and equipment and sales villages, net (1,448) (906)
Proceeds from sale of property and equipment and sales villages 937 41
Payments on note receivable 1,459 --
-------- --------
Net cash provided by (used in) investing activities of
continuing operations 948 (865)
-------- --------
Cash Flows from Financing Activities:
Borrowings on notes payable 21,110 54,430
Repayments on notes payable (34,649) (28,057)
Capital contributions from (distributions paid to) majority shareholder of
affiliate, net 5,855 (31)
-------- --------
Net cash provided by (used in) financing activities of
continuing operations (7,684) 26,342
-------- --------
Increase (decrease) in cash and cash equivalents (7,913) 3,344
Net cash provided by (used in) discontinued operations 6,286 (3,787)
Cash and cash equivalents, beginning of period 7,955 14,805
-------- --------
Cash and cash equivalents, end of period $ 6,328 $ 14,362
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for-
Interest, net of amounts capitalized $ 2,675 $ 3,473
======== ========
Income taxes, net of refunds $ (1,183) $ 521
======== ========
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
During the six months ended June 30, 1999, the Company received a note
receivable in exchange for the sale of an investment in the HomeMax, Inc.
subsidiary (Note 7):
<TABLE>
<S> <C>
Note receivable $ 4,400
Deferred gain (1,775)
Minority interest (2,521)
Accrued expenses (104)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(DOLLARS 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 and currently operates eleven sales villages
located in North Carolina and South Carolina.
Effective October 1, 1997, the Company, through its then newly formed
subsidiary Hearthside Homes, LLC (Hearthside), acquired substantially all
of the net operating assets of Legacy, Inc., an Indianapolis based
builder of entry level single family homes. The Company also acquired the
stock of Legacy Mortgage Corporation. Legacy Mortgage Corporation, doing
business as Hearthside Home Mortgage, originated, processed and sold
mortgages to third-party investors.
In June 1998, the Company's principal shareholder formed First Cincinnati
Leasing LLC (Leasing LLC) and First Cincinnati Land LLC (Land LLC) to
purchase and leaseback certain model homes and purchase certain
undeveloped land, as applicable. In March, 1999 and February, 2000, the
Company's principal shareholder formed First Cincinnati Leasing 99, LLC
(Leasing 99 LLC) and First Cincinnati Leasing 2000 LLC (Leasing 2000 LLC)
to purchase and leaseback certain additional model homes. As a result of,
among others, the principal shareholder's control of Leasing LLC, Leasing
99 LLC, Leasing 2000 LLC and Land LLC, the results of each of these
entities have been consolidated with the Company's activities subsequent
to their formation. The LLCs' initial capitalization and related share of
income is included as a component of minority interest in the
accompanying consolidated financial statements.
In October 1998, the Company increased its ownership of Blue Chip
Mortgage Company, LLC (Blue Chip) from 50% to 100%. Accordingly, the
financial results of Blue Chip subsequent to September 1998 are
consolidated with the Company's activities. Effective April 1, 1999, Blue
Chip and Legacy Mortgage Corporation were merged and renamed Zaring
Financial Services, LLC (Zaring
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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 9),
reduce certain costs in each of its segments and modify the terms and
conditions of its existing credit facilities (Note 4). In conjunction
with the Company's asset reduction plans, during the first quarter of
2000, the Company announced that it had hired an investment banker to
review various strategic alternatives including the sale of certain or
all of its operations. In the event certain of the Company's operations
are sold, net proceeds will be utilized to reduce outstanding debt and
fund continuing operations. (See also Note (13))
(c) Interim Reporting--The accompanying consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for interim financial information.
Since such financial statements do not include all the information and
footnotes required by generally accepted accounting principles for
complete financial statements, they should be read in conjunction with
the consolidated financial statements and related footnotes included in
the Form 10-K for the fiscal year ended December 31, 1999 filed with the
Securities and Exchange Commission. The financial statements are
unaudited, but in the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair
presentation of the Company's unaudited consolidated financial statements
as of June 30, 2000 have been included. Operating results for the six
months ended June 30, 2000, are not necessarily indicative of the results
for the entire year.
(2) Capitalized Interest-
--------------------
Interest is capitalized on land in the process of development,
construction of sales villages and residential housing construction costs
during the development and construction period. The following table
summarizes the activity with respect to capitalized interest:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Capitalized interest,
beginning of period $ 2,309 $ 2,116 $ 2,433 $ 2,139
Interest incurred 2,863 1,927 5,098 3,327
Interest expensed (3,042) (1,521) (5,401) (2,944)
------------ ------------ ------------ ------------
Capitalized interest,
end of period $ 2,130 $ 2,522 $ 2,130 $ 2,522
============ ============ ============ ============
</TABLE>
(3) Accrued Liabilities-
-------------------
Accrued liabilities consist of the following as of June 30:
2000 1999
------- -------
Estimate to complete closed homes $ 2,871 $ 1,825
Incremental warranty provision (Note 8) 1,417 --
Other 6,990 5,933
------- -------
$11,278 $ 7,758
======= =======
(4) Notes Payable-
-------------
The Company has a syndicated credit facility with PNC Bank acting as
agent. This facility consists of a revolving credit facility, including
amounts available for letters of credit, as defined in the agreement, and
a term loan.
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<PAGE> 10
<TABLE>
<S> <C>
The Company's notes payable consist of the following at June 30, 2000:
Revolving Credit Facility, payable to PNC Bank, as agent, $9.2 million available
at June 30, 2000, interest rate options of the greater of the Prime Rate or the
Federal Funds rate plus 1.0% (borrowings outstanding at June 30, 2000 are at
10.5%), expiring in March 2001 $54,000
=======
Obligation of HomeMax: Manufactured Housing Floor Plan Facility for inventory and
display models, payable to Bombardier Capital, Inc., variable interest rates
(9.5% at June 30, 2000), subject to repayment upon the earlier of sale or fifteen
months from the date of initial borrowing, secured by the inventory, an
irrevocable letter of credit from American Homestar and a repurchase agreement
with American Homestar in the event of default $10,513
=======
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 June 30, 2000 are at 10.5%), payable in quarterly
installments of $750 through March 2001 $ 3,000
Credit Agreement, payable to the Provident Bank, $15.0 million available for
working capital needs of HomeMax and subsidiaries, interest at the Prime Rate
plus 1.0%, (10.5% at June 30, 2000), payable in three annual installments of
$1.47 million commencing March 15, 2000, entire balance payable at the earlier of
September 15, 2002 or 90 days following the sale of the remaining 50% of HomeMax,
secured by $8.4 million of promissory notes, prepayment penalty equal to a
percentage of the gain, if any, upon the sale of additional interest in HomeMax,
as defined per the Credit Agreement, $10.0 million guaranteed by Zaring Homes,
Inc 13,530
Other Term Notes, payable to banks, interest at 7.95%, payable in quarterly
installments of $437 through March 2001 1,748
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 3,069
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% (8.39% at June
30, 2000) payable monthly, secured by model homes and a personal guarantee,
payable upon sale of the models or in annual installments through June 2001 4,084
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% (8.39% at June
30, 2000), payable monthly, secured by model homes, a personal guarantee and a
guarantee by Leasing LLC, payable upon sale of the models or in annual
installments through March 2002 2,435
Notes payable by Land LLC to the Provident Bank, permitted borrowings of up to
$10.0 million, interest at LIBOR plus 2.25% (8.89% at June 30, 2000) payable
monthly, secured by land and a personal guarantee, payable in July 2001 7,556
-------
$35,422
=======
</TABLE>
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<TABLE>
<S> <C>
Obligation of Zaring Financial Services: Revolving line of credit payable to the
Provident Bank, permitted borrowings of up to $5.0 million, $1.4 million
available at June 30, 2000, interest at the Prime Rate minus 0.25% (9.25% at June
30, 2000), expiring May 2002 $3,594
======
Subordinated Debt:
Subordinated notes payable to Principal Shareholder, interest at the greater of
9 7/8% or the Prime Rate plus 1 5/8% (11 1/8% at June 30, 2000) payable monthly,
principal due September, 2002 $5,000
Subordinated note payable to American Homestar Corporation, interest at 6.00%
payable quarterly, payable June 15, 2002 unless accelerated as a result of
available cash flow of HomeMax, as defined, convertible into an additional 25%
equity interest in HomeMax at the discretion of American Homestar 4,000
------
$9,000
======
</TABLE>
During 1999 and the first quarter of 2000, the Company was unable to
comply with certain covenants included in its credit agreements. The
banks initially provided a forbearance agreement which extended to April
14, 2000. Concurrent with the expiration of the forbearance agreement,
the Company entered into 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
- Maximum available borrowings under the revolving credit facility
of $72.5 million as of March 31, 2000 were reduced by $5.0 million
on July 1, 2000 and will be reduced by an additional $5.0 million
on October 1, 2000
- Interest rates were adjusted to prime plus 1% through August 31,
2000, with an increase to prime plus 2% if borrowings under the
revolving credit facility exceed $40.0 million on September 1,
2000, an increase to prime plus 3% if revolver borrowings exceed
$25.0 million on November 1, 2000 and prime plus 4% if revolver
borrowings exceed $5.0 million on January 1, 2000. Default rates,
if applicable, will be 3% above the interest rate in effect.
- The third amendment revised preexisting provisions which required,
among others, that the Company maintain certain minimum levels of
tangible net worth and cash flows from operations to certain fixed
charges as well as limiting the Company's ratio of debt to equity,
all as defined per the terms of the agreement. The amendment also
established limitations on the number of market and model homes
maintained in inventory, land acquisition and deviations from
expected cash flows (as defined).
- Waivers for loan violations occurring prior to April 14, 2000.
Management is of the opinion that it is probable the Company will not be
in compliance with certain of the terms and conditions of certain of its
credit agreements at September 30, 2000. Management intends to discuss
the potential covenant violations with its lenders and secure waivers or
otherwise amend the agreements to enable prospective compliance. 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. As of June 30, 2000,
management is uncertain as to whether borrowings under the revolving
credit facility will exceed $40.0 million on September 1, 2000. As
further discussed in Notes (1) and (13), management has in place certain
operating initiatives, including among others, the sale of certain or all
of its operations. The reduction of the borrowings outstanding on the
revolving credit facility depend on the outcome of the various
initiatives.
The Company is contingently liable under letters of credit of
approximately $6.2 million issued as a result of lot and land acquisition
and development activities through June 30, 2000.
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(5) Earnings (Loss) Per Common Share-
--------------------------------
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed similar to basic except the
denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common
shares had been issued.
Options to purchase 538,806 and 477,482 shares of common stock at an
average exercise price of $7.39 and $9.32 per share were outstanding as
of June 30, 2000 and 1999, respectively, but were not included in the
computation of earnings per share since the options' exercise prices were
greater than the average market price of the common shares at June 30,
1999. In addition, inclusion of any options in the computation of diluted
earnings per share would be anti-dilutive in the event of a net loss from
continuing operations.
Since there are no dilutive securities, basic and diluted earnings (loss)
per share are identical; thus a reconciliation of the numerator and
denominator is not necessary.
(6) Shareholders' Equity-
--------------------
The Company is authorized to issue up to 2,000,000 preferred shares of
which 1,000,000 are voting. No preferred shares have been issued.
(7) HomeMax, Inc. Joint Venture with American Homestar Corporation
--------------------------------------------------------------
Effective March 15, 1999, after assignment of certain obligations and
other preclosing activities, the Company sold a 25% interest in HomeMax
to American Homestar Corporation (American Homestar) for a note
receivable of approximately $4.4 million. The note receivable is to be
paid in three annual installments commencing March 15, 2000 and accrues
interest payable quarterly, at prime. The amended and restated securities
purchase agreement includes the following terms:
- American Homestar issued a $4.0 million subordinated convertible
loan to HomeMax concurrent with the sale. This subordinated loan
accrues interest at 6.0%, payable quarterly, while the principal
is payable on June 15, 2002 unless accelerated as a result of
available cash flow of HomeMax, as defined. The subordinated loan
is convertible into an additional 25% of HomeMax at the discretion
of American Homestar.
- The Company retained a $4.0 million receivable due from HomeMax
which accrues interest at 6.0% and is payable quarterly. The $4.0
million of principal is payable on June 15, 2002, unless
accelerated as a result of available cash flow of HomeMax, as
defined, and the receivable and related interest are eliminated in
the accompanying consolidated financial statements.
- The Company agreed to pay up to $3.0 million in connection with
certain annual lease obligations. During the six months ended June
30, 2000, $801 was expensed under this commitment.
- Subsequent to the sale, model home inventory was replaced with the
inventory of American Homestar. Costs of replacement was provided
by the Company and American Homestar.
- Subsequent to the sale, the Company and American Homestar each
agreed to provide up to $50 per quarter for the four quarters
subsequent to March 15, 1999 to support advertising and
promotional initiatives.
- American Homestar agreed to provide certain management and
consulting services for up to three years for compensation of at
least $0.5 million plus an additional fee of up to $0.75 million
based upon quarterly losses during the first four quarters
following closing. During the six months ended June 30, 2000, $285
was expensed under this agreement. Beginning April 1, 2000, the
Company is committed to pay $1,000 per month to American Homestar
for such services through March 15, 2002.
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<PAGE> 13
- American Homestar and the Company each agreed to provide working
capital loans of up to $0.5 million to HomeMax which will accrue
interest at prime. During the six months ended June 30, 2000, the
Company and American Homestar each provided additional financing
of $250.
- 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 consolidated
statements of operations. Similarly, American Homestar's investment net
of allocable losses is included as a component of minority interest
(approximately $322 as of June 30, 2000) in the accompanying 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.
(8) Litigation-
----------
During 1999, the Company became aware of certain moisture and mold
related issues in certain of its luxury site-built home communities in
Mason, Ohio. The Company has vigorously pursued various remediation
initiatives in an effort to address the various homeowner concerns. As of
December 31, 1999 and through June 30, 2000, the Company estimated 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. 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 June 30, 2000, the Company incurred
approximately $2.4 million related to the remediation efforts.
As of June 30, 2000, the Company had contractual remediation costs of
approximately $3.0 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.
(9) Discontinued Operations-
-----------------------
On December 13, 1999, the Board of Directors approved plans to
discontinue the affairs of Hearthside. Accordingly, in 1999 the Company
recorded a provision of $1.75 million as the estimate of the cost of
discontinuing the Hearthside operations. As of June 30, 2000, $467,000 of
this amount is unused. The net losses associated with the operations of
Hearthside for the three months and six months ended June 30, 1999 are
included in the accompanying consolidated statements of operations as
discontinued
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<PAGE> 14
operations. In addition, net assets of Hearthside are separately stated
in the accompanying balance sheets. The results of the discontinued
Hearthside segment reflect an allocation of interest expense based on
assets deployed. Summary financial information of Hearthside is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 2,562 $ 6,210 $ 11,601 $ 11,125
Interest allocation $ 10 $ 240 $ 179 $ 459
Pretax operating loss $ -- $ (677) $ -- $ (1,090)
Benefit for income taxes -- 249 -- 401
-------- -------- -------- --------
Net loss $ -- $ (428) $ -- $ (689)
======== ======== ======== ========
</TABLE>
AS OF JUNE 30,
-----------------------
2000 1999
-------- --------
Land and home inventories $ 292 $ 13,152
Other assets 1,002 514
Liabilities (1,841) (2,613)
-------- --------
Net assets of discontinued operations $ (547) $ 11,053
======== ========
The disposal of Hearthside assets through an orderly sales process is
expected to be completed no later than December 13, 2000.
(10) New Pronouncements-
------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). This statement established accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments imbedded in other contracts) be recorded on the balance sheet
as either an asset or liability measured at its fair value. This
statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS 133 is effective for fiscal years beginning after
June 15, 2000. Upon adoption of this statement, the Company anticipates
no impact on its reported consolidated financial position, results of
operations, cash flows or related disclosures.
(11) Reclassifications-
-----------------
Certain amounts in the consolidated interim financial statements for 1999
have been reclassified to conform to the 2000 presentation.
(12) Segment Information-
---------------------
The following tables set forth, for the periods indicated, certain
segment information regarding the Company's operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED,
JUNE 30, JUNE 30,
-------------------------- -----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Zaring Homes, Inc.
Luxury Site-Built Homes
Revenues $ 86,305 $ 66,240 $ 159,213 $ 105,252
Cost of sales 72,194 52,506 136,396 84,259
Interest 2,901 1,885 5,344 3,946
Selling, general and administrative 10,726 8,650 21,035 15,430
--------- --------- --------- ---------
Operating income (loss) 484 3,199 (3,562) 1,617
Other income (expense) 81 (74) 195 (83)
--------- --------- --------- ---------
Pretax Luxury Site-Built Income (Loss) 565 3,125 (3,367) 1,534
Financial Services
Revenues 446 353 820 668
Expenses 428 382 919 682
Interest 75 -- 123 --
Other income (expense) (12) 4 (12) 45
--------- --------- --------- ---------
</TABLE>
Page 14
<PAGE> 15
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED,
JUNE 30, JUNE 30,
-------------------------- -----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Pretax Financial Services Income (Loss) (69) (25) (234) 31
HomeMax, Inc.
Retail Distribution Manufactured Homes
Revenues 9,888 5,641 20,221 10,214
Cost of sales 8,444 5,035 17,213 8,929
Interest 424 368 819 913
Selling, general and administrative 2,697 2,458 5,680 4,858
-------- -------- -------- --------
Operating loss (1,677) (2,220) (3,491) (4,486)
Other income 523 26 472 44
Minority interest 185 542 493 599
-------- -------- -------- --------
Pretax Retail Distribution Loss (969) (1,652) (2,526) (3,843)
Majority Shareholder LLCs
Revenues 2,464 1,119 3,301 1,415
Cost of sales 1,976 1,012 2,690 1,279
Interest 329 272 664 537
Selling, general and administrative 19 71 49 95
-------- -------- -------- --------
Operating income (loss) 140 (236) (102) (496)
Other income 281 169 543 326
Minority interest (421) 67 (441) 170
-------- -------- -------- --------
Corporate -- -- -- --
Interest income from subsidiaries, net 687 1,004 1,549 2,452
General and administrative (1,150) (1,239) (2,528) (2,394)
-------- -------- -------- --------
Income (loss) before taxes and
discontinued operations (936) 1,213 (7,106) (2,220)
Provision (credit) for income taxes (150) 884 (2,091) (479)
-------- -------- -------- --------
Net income (loss) before discontinued
operations (786) 329 (5,015) (1,741)
Loss from discontinued operations,
net of tax -- (428) -- (689)
-------- -------- -------- --------
Net loss $ (786) $ (99) $ (5,015) $ (2,430)
======== ======== ======== ========
</TABLE>
Other pertinent information regarding the Company's segment operations are as
follows:
<TABLE>
<CAPTION>
ZARING HOMEMAX, INC.
HOMES, INC. RETAIL
LUXURY DISTRIBUTION MAJORITY
SITE-BUILT FINANCIAL MANUFACTURED SHAREHOLDER
HOMES SERVICES HOMES LLCS CORPORATE TOTAL
----------- ----------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Segment assets:
As of June 30, 2000 $113,400 $4,537 $25,673 $20,912 $85,132 $249,654
RECONCILIATION OF SEGMENT
ASSETS TO TOTAL ASSETS
AS OF JUNE 30, 2000:
Total segment assets $249,654
Elimination of inter-entity
investments (71,057)
Net assets of discontinued
operations (547)
Cash and cash equivalents* 6,328
--------
$184,378
========
</TABLE>
* Management excludes cash and cash equivalents from assessing a segment's
operating performance.
(13) Subsequent Event-
----------------
On August 17, 2000 the Company announced it will negotiate exclusively
with The Drees Company (Drees) through September 30, 2000 and its
intention to merge with Drees. Per the terms of the proposed transaction
Drees will acquire the Raleigh operations from Zaring for approximately
$12.0 million on or before September 30, 2000 and, thereafter Drees will
acquire the Company in a merger transaction in which the Company's public
shareholders will receive cash in an
Page 15
<PAGE> 16
amount approximating 1.2 x the September 30, 2000 adjusted book value of
the Company, as defined. Certain of the Company's shareholders will
become shareholders of the combined enterprise upon consummation of the
merger transaction.
Page 16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO JUNE 30, 1999
RESULTS OF OPERATIONS
The Company's business and the homebuilding industry are subject to changes in
national and local economic conditions, as well as other factors, including
employment levels, availability of financing, interest rates, consumer
confidence and housing demand. The Company's results of continuing operations
for the periods presented include luxury site-built homes, retail distribution
manufactured homes and financial services and reflect the cyclical nature of the
housing industry.
The Company reported consolidated net revenues from continuing operations of
$99.1 million for the quarter ended June 30, 2000, compared to $73.4 million for
the same quarter in 1999, an increase of 35.1%. The net loss from continuing
operations for the quarter was $(786,000) or $(0.17) per share, compared to net
income of $329,000 or $0.07 per share for the same quarter of 1999.
For the six months ended June 30, 2000, consolidated revenues from continuing
operations were $183.6 million, compared to $117.6 million for the same period
in 1999, an increase of 56.2%. The net loss from continuing operations for the
six months ended June 30, 2000 was $(5.0) million or $(1.09) per share, compared
to a net loss of $(1.7 million) or $(0.38) per share for the six months ended
June 30, 1999.
The following tables set forth, for the periods indicated, certain segment
information regarding the Company's operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Zaring Homes, Inc.
Luxury Site-Built Homes
Revenues (1) $ 86,305 $ 66,240 $ 159,213 $ 105,252
Cost of sales 72,194 52,506 136,396 84,259
Interest 2,901 1,885 5,344 3,946
Selling, general and administrative 10,726 8,650 21,035 15,430
--------- --------- --------- ---------
Operating income (loss) 484 3,199 (3,562) 1,617
Other income (expense) 81 (74) 195 (83)
--------- --------- --------- ---------
Pretax Luxury Site-Built Income (Loss) 565 3,125 (3,367) 1,534
Financial Services
Revenues 446 353 820 668
Expenses 428 382 919 682
Interest 75 -- 123 --
Other income (expense) (12) 4 (12) 45
--------- --------- --------- ---------
Pretax Financial Services Income (Loss) (69) (25) (234) 31
HomeMax, Inc.
Retail Distribution Manufactured Homes
Revenues (1) 9,888 5,641 20,221 10,214
Cost of sales 8,444 5,035 17,213 8,929
Interest 424 368 819 913
Selling, general and administrative 2,697 2,458 5,680 4,858
--------- --------- --------- ---------
Operating loss (1,677) (2,220) (3,491) (4,486)
Other income 523 26 472 44
Minority interest 185 542 493 599
--------- --------- --------- ---------
Pretax Retail Distribution Loss (969) (1,652) (2,526) (3,843)
</TABLE>
Page 17
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Majority Shareholder LLCs
Revenues (1) $ 2,464 $ 1,119 $ 3,301 $ 1,415
Cost of sales 1,976 1,012 2,690 1,279
Interest 329 272 664 537
Selling, general and administrative 19 71 49 95
--------- --------- --------- ---------
Operating income (loss) 140 (236) (102) (496)
Other 281 169 543 326
Minority interest (421) 67 (441) 170
--------- --------- --------- ---------
-- -- -- --
Corporate
Interest income from subsidiaries, net 687 1,004 1,549 2,452
General and administrative (1,150) (1,239) (2,528) (2,394)
--------- --------- --------- ---------
Income (loss) before taxes and discontinued
operations (936) 1,213 (7,106) (2,220)
Provision (credit) for income taxes (150) 884 (2,091) (479)
--------- --------- --------- ---------
Net income (loss) before discontinued
operations (786) 329 (5,015) (1,741)
Loss from discontinued operations, net of
tax -- (428) -- (689)
--------- --------- --------- ---------
Net Loss $ (786) $ (99) $ (5,015) $ (2,430)
========= ========= ========= =========
</TABLE>
(1) Revenue from sale is recognized upon the closing of the sale.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------
2000 1999 2000 1999
----------- ------------ ----------- -----------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Luxury Site-Built Homes
Operating data:
Units
New Orders (1) 229 351 500 656
Closings (2) 290 231 534 372
Backlog (3) 399 540 399 540
Average revenue per closing $ 297 $ 284 $ 298 $ 278
Average value of new order sales $ 319 $ 277 $ 320 $ 280
Sales value of backlog $ 127,631 $ 152,105 $ 127,631 $ 152,105
Retail Distribution Manufactured Homes
Operating data:
Units
New Orders (1) 119 64 309 188
Closings (2) 148 102 314 179
Backlog (3) 196 176 196 176
Average revenue per closing $ 70 $ 53 $ 65 $ 56
Average value of new order sales $ 60 $ 40 $ 63 $ 99
Sales value of backlog $ 16,060 $ 11,931 $ 16,060 $ 11,931
</TABLE>
(1) New orders represent total new home orders received during the period,
net of cancellations.
(2) Revenue from a sale is recognized upon the closing of the sale.
(3) Backlog includes new orders which have not yet closed.
Page 18
<PAGE> 19
ZARING HOMES, INC., LUXURY SITE-BUILT HOMES- Net revenues for the three months
ended June 30, 2000 were $86.3 million, an increase of 30.3% over the $66.2
million reported in the same period 1999. Zaring Homes delivered 290 homes in
the second quarter of 2000, compared to 231 homes in 1999, a 25.5% increase. Net
revenues for the six months ended June 30, 2000 were $159.2 million as compared
to $105.3 million for the six months ended June 30, 1999, a 51.3% increase. This
increase in revenues and homes delivered was primarily due to the continued
strength of the luxury housing market in substantially all of the Company's
markets. The average selling price of a home was $298,000 and $278,000 for the
six months ended June 30, 2000 and 1999 respectively, representing a 7.2%
increase from the corresponding period in 1999. The total sales value of backlog
was $127.6 million as of June 30, 2000 as compared to $152.1 million as of June
30, 1999, a 16.1% decrease.
Gross profit dollars and percentages were $14.1 million and 16.4% in the second
quarter of 2000 as compared to $13.7 million and 20.7% in the second quarter of
1999. Gross profit dollars increased in the second quarter of 2000 as compared
to the second quarter of 1999 primarily due to the number of homes delivered.
Gross profit percentages, however, decreased primarily due to increased
subcontractor and other production related costs. Gross profit dollars and
percentages were $22.8 million and 14.3% during the first six months of 2000 as
compared to $21.0 million and 19.9% during the first six months of 1999.
Interest expense increased $1.0 million in the second quarter of 2000 as
compared to the second quarter of 1999. As a percentage of net revenues,
interest expense increased to 3.4% from 2.8%. This increase in interest expense
is due to the increase in interest rates related to the third amendment to the
syndicated credit facility which became effective April 14, 2000. Interest
expense for the six months ended June 30, 2000 increased $1.4 million from $3.9
million in 1999 to $5.3 million in 2000. As a percentage of net revenues
interest expense decreased to 3.4% for the six months ended June 30, 2000 from
3.7% for the same period in 1999.
As a percentage of revenues, selling expenses remained flat at 7.4% for the
three months ended June 30, 2000 as compared to the same period in 1999. Selling
expenses for the quarter ended June 30, 2000 increased $1.5 million as compared
to the corresponding period in 1999. This increase is primarily due to increase
in the number of homes delivered. Selling expenses for the six months ended June
30, 2000 increased $4.3 million to $12.5 million from $8.2 million. As a
percentage of revenues, selling expenses remained at 7.8% for the six months
ended June 30, 2000 as compared to the same period of 1999. As a percentage of
revenues, general and administrative expenses decreased to 5.0% in the second
quarter of 2000 from 5.7% in the second quarter of 1999. General and
administrative expenses increased $560,000 or 14.8% in the second quarter of
2000 compared to the second quarter of 1999, due primarily to increases in
payroll and office related costs. General and administrative expenses increased
$1.2 million or 15.9% in the first six months of 2000 compared to the same
period of 1999. As a percentage of revenues, general and administration expenses
decreased to 5.3% in the first six months of 2000 compared to 6.9% in 1999. As a
percentage of revenues, selling, general and administrative expenses were 12.4%
and 13.1% for the three month period ended June 30, 2000 and 1999, respectively,
and 13.2% and 14.7% for the six month period ended June 30, 2000 and 1999,
respectively. The decrease in this percentage is mainly due to the increase in
revenues.
As a result of the foregoing, Zaring Homes reported pretax income of $565,000 or
0.7% of net revenues in the second quarter of 2000, a decrease of $2.6 million
from pre-tax income of $3.1 million in the same period in 1999. For the six
months ended June 30, 2000, Zaring Homes reported a pre-tax loss of $(3.4)
million or (2.1)% of net revenues as compared to pre-tax income of $1.5 million
or 1.5% of net revenues in the same period of 1999.
FINANCIAL SERVICES - The financial services segment reported revenues of
$446,000 and $820,000 for the three months and six months ended June 30, 2000,
respectively. After deducting $428,000 and $919,000 in expenses associated with
the mortgage company operations, the financial services segment reported a
pretax loss of $(69,000) and $(234,000) for the three months and six months
ended June 30, 2000. In the second quarter of 1999, the financial services
segment reported pretax loss of $(25,000) on revenues of $353,000. In the six
months ended June 30,
Page 19
<PAGE> 20
1999, the financial services segment reported pretax income of $31,000 on
revenues of $668,000.
HOMEMAX, INC., RETAIL DISTRIBUTION MANUFACTURED HOMES- Net revenues for the
three months ended June 30, 2000 increased $4.3 million from $5.6 million in the
second quarter of 1999 to $9.9 million. HomeMax closed 148 units in the second
quarter of 2000, an increase of 45.1% from the 102 units closed in the same
period of 1999. Net revenues for the six months ended June 30, 2000 increased
$10.0 million or 98.0% from $10.2 million for the first six months of 1999 to
$20.2 million for the first six months of 2000. HomeMax closed 314 units during
the first six months of 2000, an increase of 75.4% from the 179 units closed in
the same period of 1999. The increase is due to the maturity of the sales
villages and new management at a majority of the villages.
Gross profit was $1.4 million or 14.6% for the three months ended June 30, 2000
as compared to $606,000 or 10.7% for the same period in 1999. Gross profit
dollars and percentages were $3.0 million and 14.9% during the first six months
of 2000 as compared to $1.3 million and 12.6% during the first six months of
1999. The increase in gross profit dollars is due mainly to the increase in
average net revenues per unit.
Interest expense was $424,000 or 4.3% of revenues in the second quarter of 2000
compared to $368,000 or 6.5% of revenues in the corresponding quarter of 1999.
Interest expense was $819,000 for the first six months of 2000 as compared to
$913,000 for the first six months of 1999, a decrease of $94,000 or 10.3%. The
decrease in interest expense is primarily attributable to the recapitalization
of the operations in conjunction with the joint venture agreement with American
Homestar, signed March 15, 1999. The recapitalization resulted in a net
reduction in the interest bearing debt of HomeMax. The decrease as a percentage
of revenues is due primarily to the increase in revenues and decrease in
interest expense.
Selling, general and administrative expenses for HomeMax were $2.7 million or
27.3% of revenues for the three months ended June 30, 2000 compared to $2.5
million or 43.6% of revenues for the same period in 1999. Selling expenses were
$718,000 or 7.3% of revenues in the second quarter of 2000 compared to $810,000
or 14.4% of revenues in the second quarter of 1999. General and administrative
expenses were $2.0 million or 20.0% of revenues in the second quarter of 2000
compared to $1.6 million or 28.4% of revenues in the second quarter of 1999.
Selling, general and administrative expenses for the six months ended June 30,
2000 were $5.7 million or 28.1% of revenues as compared to $4.9 million or 47.6%
of revenues for the same period of 1999. Selling expenses were $1.4 million or
6.9% of revenues for the six months ended June 30, 2000 versus $1.6 million or
15.7% of revenues for the same period of 1999. General and administrative
expenses were $4.3 million or 21.2% of revenues for the six months ended June
30, 2000 as compared to $3.3 million or 32.3% of revenues for the first six
months of 1999. The increase in selling expenses is primarily due to the
increase in closing revenues in 2000 versus 1999. The increase in general and
administrative expenses is due to payroll and related costs. The decrease in
selling, general and administrative expenses as a percentage of revenue is due
mainly to the increase in net revenues.
Other income for the three months ended June 30, 2000 includes a gain of
$529,000 related to the sale of two unopened sales villages.
As a result of the foregoing, HomeMax reported a pretax loss of $(969,000) or
(9.8)% of revenues in the second quarter of 2000 compared to a pretax loss of
$(1.6) million, (29.3)% of revenues, in the second quarter of 1999. In the six
months ended June 30, 2000, HomeMax reported a pretax loss of $(2.5) or (12.5)%
of net revenues versus a pretax loss of $(3.8) million or (37.6)% of net
revenues for the six months ended June 30, 1999.
MAJORITY SHAREHOLDER LLCS - First Cincinnati Leasing LLC, First Cincinnati
Leasing 99 LLC, First Cincinnati Leasing 2000 LLC and First Cincinnati Land LLC
are reported as "Majority Shareholder LLCs". Leasing LLC and Leasing 99 LLC
closed 8 homes during the three months ended June 30, 2000 for $2.5 million
versus four home closings for $1.1 million during the three months ended June
30, 1999. Leasing LLC and Leasing 99 LLC closed 11 homes during the six months
ended June 30, 2000 for $3.3 million in revenues as compared to five homes
closed for $1.4
Page 20
<PAGE> 21
million in revenues during the same period of 1999. Interest expense was
$329,000 and $664,000 during the three months and six months ended June 30, 2000
as compared to $272,000 and $537,000 during the same periods in 1999. Interest
expense represents interest incurred for model home and undeveloped land
holdings. Other income, net represents rental income for model homes and land
option payments from the Company net of income deferred until land parcels are
sold to unrelated third parties. Deferred income of the LLCs approximated $1.6
million at June 30, 2000 as compared to $500,000 at June 30, 1999.
CORPORATE- Interest income from subsidiaries represents the allocation of
interest cost to the subsidiaries. Corporate general and administrative expenses
were $1.1 million for the three month period ended June 30, 2000, as compared to
$1.3 million for the three month period ended June 30, 1999. Corporate, general
and administrative expenses were $2.5 million and $2.4 million for the six
months ended June 30, 2000 and 1999, respectively. The increase in Corporate
general and administrative expenses is attributed mainly to increases in payroll
and legal and professional costs.
INCOME TAXES- The income tax benefit associated with losses reported in the
first six months of 2000 and 1999 as a percentage of the loss before taxes and
discontinued operations (29.4% and 21.5%, respectively) is 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.
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. At December 13, 1999 the Company
recorded a provision of $1.75 million as the estimate of the cost of
discontinuing the Hearthside operations. At June 30, 2000, approximately
$467,000 of the estimate remains.
Page 21
<PAGE> 22
CAPITAL RESOURCES AND LIQUIDITY
The Company had cash and equivalents and available borrowings on its revolving
credit facility of approximately $6.3 million and $9.2 million, respectively, as
of June 30, 2000 as compared to $14.4 million and $7.6 million available as of
June 30, 1999. These amounts are available to fund the ongoing operations of the
Company.
Net cash used in operations during the six months ended June 30, 2000
approximated $1.2 million as compared to $22.1 million during the six months
ended June 30, 1999. Net cash used in the first six months of 2000 is primarily
attributable to the net loss ($5.0 million), decreases in trade payables,
accruals and deposits ($13.1 million), changes in certain assets ($1.5 million)
offset by decreases in inventories and receivables ($16.5 million).
Net cash provided by investing activities was $948,000 in the first six months
of 2000 compared to a use of cash of $865,000 in the same period of 1999. This
change is primarily attributable to payment received on the note from American
Homestar ($1.5 million) and proceeds of $937,000 from the sale of sales villages
and property and equipment offset by property and equipment additions of $1.4
million.
Net cash used in financing activities for the six months ended June 30, 2000 was
$7.7 million, as compared to net cash provided by financing activities of $26.3
million in the same period in 1999. This use of cash in 2000 was primarily due
to net payments on debt of $13.5 million offset by capital contributions of $6.0
million to Leasing 2000 LLC by the Company's Chairman. In the same period in
1999, the Company had net borrowings from debt of $26.4 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 and leaseback 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
- Sell certain or all of its operations
During 1999 and the first quarter of 2000, the Company was unable to comply with
certain covenants included in its credit agreements. The banks initially
provided a forbearance agreement which extended to April 14, 2000. Concurrent
with the expiration of the forbearance agreement, the Company negotiated a third
amendment to the loan agreements with its banks. The amendment to the syndicated
credit facility 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 were reduced by $5.0 million on July 1, 2000
and will be reduced by an additional $5.0 million on October 1, 2000
- Interest rates were adjusted to prime plus 1% through August 31, 2000, with
an increase to prime plus 2% if borrowings under the revolving credit
facility exceed $40.0 million on September 1, 2000, an increase to prime
plus 3% if revolver borrowings exceed $25.0 million on November 1, 2000 and
prime plus 4% if revolver borrowings exceed $5.0 million on January 1, 2000.
Default rates, if applicable, will be 3% above the interest rate in effect.
- The third amendment revised preexisting provisions which required, among
others, that the Company maintain certain minimum levels of tangible net
worth and cash flows from operations to certain fixed charges as well as
limiting the Company's ratio of debt to equity, all as defined per the terms
of the agreement. The amendment also established limitations on the number
of market and model homes maintained in inventory, land acquisition and
deviations from expected cash flows (as defined).
- Waivers for loan violations occurring prior to April 14, 2000.
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Management is of the opinion that it is probable the Company will not be in
compliance with certain of the terms and conditions of certain of its credit
agreements at September 30, 2000. Management intends to discuss the potential
covenant violations with its lenders and secure waivers or otherwise amend the
agreements to enable prospective compliance. 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
initiatives. As of June 30, 2000, management is uncertain as to whether
borrowings under the revolving credit facility will exceed $40.0 million on
September 1, 2000. As further discussed in Notes (1) and (13), management has in
place certain operating initiatives, including among others, the sale of certain
or all of its operations. The reduction of the borrowings outstanding on the
revolving credit facility depend on the outcome of the various initiatives.
On August 17, 2000 the Company announced it will negotiate exclusively with The
Drees Company (Drees) through September 30, 2000 and its intention to merge with
Drees. Per the terms of the proposed transaction Drees will acquire the Raleigh
operations from Zaring for approximately $12.0 million on or before September
30, 2000 and, thereafter Drees will acquire the Company in a merger transaction
in which the Company's public shareholders will receive cash in an amount
approximating 1.2 x the September 30, 2000 adjusted book value of the Company,
as defined. Certain of the Company's shareholders will become shareholders of
the combined enterprise upon consummation of the merger transaction.
LOT COMMITMENTS- In the aggregate, as of June 30, 2000, Zaring Homes owned, had
the ability to develop or purchase, or had under contract 3,603 lots. At June
30, 2000, Zaring Homes owned approximately 862 lots and undeveloped land,
including land owned by Land LLC, which will be developed into approximately 561
lots. Zaring also had under contract, subject to the satisfaction of Zaring's
purchase contingencies and exercising of option agreements, 1,433 lots and
undeveloped land which, if purchased, would be developed into approximately 347
lots. Of the 1,433 lots under contract, Zaring Homes is committed to 386 lots.
PROVISIONS FOR WRITEDOWN TO NET REALIZABLE VALUE- The Company periodically
reviews the value of assets held by its reporting segments, including: land,
inventories, property and equipment, and intangibles and determines whether any
write-downs need to be recorded to reflect declines in value. The estimated net
realizable value of real estate inventories and property and equipment
represents management's estimate based on present plans and intentions, selling
prices in the ordinary course of business and anticipated economic and market
conditions. Accordingly, the realization of the value of the Company's real
estate inventories, property and equipment and certain intangibles is dependent
upon future events and conditions that may cause actual results to differ from
amounts presently estimated.
INFLATION- Housing demand, in general, is affected adversely by increases in
interest rates. If mortgage interest rates, and material and labor costs
increase significantly, the Company's revenues, gross profit, and net income
could be adversely affected.
CAUTIONARY STATEMENTS - Certain statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" are "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements involve known and unknown risks, uncertainties and
other factors that may cause results to differ materially. Such risks,
uncertainties and other factors include, but are not limited to, changes in
general real estate, general economic and other conditions, fluctuations in
interest rates, increases in raw materials and labor costs, levels of
competition and other factors described in Zaring National Corporation's Form
10-Q for the quarter ended September 30, 1998.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
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There were no material changes in the qualitative and quantitative disclosures
about market risk as of June 30, 2000 from that presented in the Company's
annual report on Form 10-K for the fiscal year ended December 31, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various claims, lawsuits and administrative
proceedings arising in the ordinary course of business with respect to real
estate, environmental zoning, and other matters, which seek remedies or damages.
The Company believes that any liability that may finally be determined, without
consideration of the litigation discussed below, will not have a material effect
on its financial position, cash flows, or results of operations.
On March 14, 2000, a lawsuit was filed by Felix and Wanda Martinez in the Court
of Common Pleas, Hamilton County, Ohio against Zaring National Corporation (the
"Company") and its subsidiary, Zaring Homes, Inc., in the form of a purported
class action whose members own homes in the "White Blossom" residential
development of Zaring Homes in Mason, Ohio. The suit alleges that the home
owners have been damaged because of defects in their homes including water and
moisture in wall cavities; water damage to wood and other materials used to
build the homes; mold and mildew growth inside the homes; excessive humidity;
and poor air quality inside the homes. The suit requests compensatory damages of
more than $25,000, treble damages, punitive damages, attorney fees, litigation
expenses, court costs, interest before and after judgement, and all other
available relief. The Company intends to vigorously contest this suit.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 24, 2000, the Company held the Annual Meeting of Shareholders at which
the shareholders voted upon the election of six directors for one year terms
expiring 2001. The results on these matters were as follows:
<TABLE>
<CAPTION>
NOMINEE VOTES FOR VOTES AGAINST WITHHELD
--------------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C>
Allen G. Zaring III 4,507,508 21,512 -
John R. Brooks 4,508,534 20,486 -
Murat H. Davidson 4,508,534 20,486 -
Daniel W. Geeding 4,508,534 20,486 -
Robert N. Sibcy 4,508,634 20,386 -
John H. Wyant 4,508,531 20,489 -
</TABLE>
At the meeting, the shareholders confirmed the appointment of Arthur Andersen,
LLP as independent auditors of the Company for fiscal 2000. There were 4,527,981
votes cast in favor, 3,144 votes cast in opposition and 2,895 abstentions.
ITEM 5. OTHER INFORMATION - The Company was notified April 28, 2000 that it
failed to maintain the minimum market value of public float for continued
listing on the Nasdaq National Market and that it had until July 27, 2000 to
regain compliance. The Company submitted an application to transfer to the
Nasdaq Small Cap Market and effective August 14, 2000 the Company's shares have
been transferred to the Nasdaq Small Cap Market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - NONE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZARING NATIONAL CORPORATION
(Registrant)
Date: August 21, 2000 By: /s/Allen G. Zaring III
---------------------------
Allen G. Zaring III
Chairman of the Board, President and
Chief Executive Officer
Date: August 21, 2000 By: /s/Ronald G. Gratz
-----------------------
Ronald G. Gratz
Chief Financial Officer
Secretary and Treasurer
(Principal Financial and Accounting Officer)
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