<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORT) DECEMBER 15, 2000
ZARING NATIONAL CORPORATION
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 333-22679 31-1506058
------ ----------- --------------
(STATE OR OTHER JURISDICTION OF (COMMISSION (I.R.S. EMPLOYER
INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
11300 CORNELL PARK DRIVE, SUITE 500, CINCINNATI, OHIO 43215
----------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (513) 489-8849
---------------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE> 2
ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
The Company previously announced its plans to discontinue the
operations of its Zaring Homes, Hearthside and Zaring Financial Services
segments. As a result, the Company will ultimately no longer be required to
consolidate the results of the LLCs controlled by its principal shareholder. The
Company is filing with this Form 8-K selected financial data for the continuing
operations of the Company as of and for the years ended December 31, 1995
through 1999, selected quarterly data for the 1998 and 1999 quarters and
restated financial statements which reflect the discontinued operations of its
Zaring Homes, Hearthside and Zaring Financial Services segments, including
consolidated balance sheets as of December 31, 1999 and 1998, consolidated
statements of operations for the years ended December 31, 1999, 1998 and 1997,
consolidated statements of shareholders' equity for the years ended December 31,
1999, 1998 and 1997, and consolidated statements of cash flows for the years
ended December 31, 1999, 1998 and 1997.
On December 1, 2000, the Company received a letter from the Associate
Director of Nasdaq Listing Qualifications indicating that the Company no longer
complied with the minimum quantitative requirements of eligibility for the
listing of its shares on The NASDAQ SamllCap Market. The Company was given until
December 15, 2000 to file a plan "to achieve and sustain compliance with all The
NASDAQ SmallCap Market listing requirements." The Company does not intend to
file such a plan as requested and anticipates that its shares will subsequently
be delisted from The NASDAQ SmallCap Market. The Company expects that its shares
will become listed and traded on the over-the-counter electronic bulletin
boards.
On November 29, 2000, Robert N. Sibcy resigned as a director of the
Company.
ITEM 7. FINANCIAL STATEMENTS EXHIBITS
(c) Exhibits.
10.28 - Exhibit 10.28 Loans and Security Agreement between First Cincinnati
Leasing 2000 LLC and the Huntington National Bank
10.29 - Exhibit 10.29 Promissory note between First Cincinnati Leasing 2000 LLC
and the Huntington National Bank
10.30 - Exhibit 10.30 First Amendment to Third Amended and Restated Credit
Agreement by and among Zaring Homes, Inc., Zaring Holdings, Inc., Hearthside
Homes, LLC, Zaring National Land Holding Corporation, Zaring National Homes
Holding Corporation and Zaring Leasing, LLC, as Borrowers and Guarantors, Zaring
National Corporation, Zaring Homes of Indiana L.L.C. and Zaring Homes Kentucky,
LLC, as Guarantors, the banks party hereto, Bank of America, N.A. and Bank One,
NA as co-agents and PNC Bank, National Association, as agent, dated as of
September 29, 2000
10.31 - Exhibit 10.31 Second Amendment to Third Amended and Restated Credit
Agreement by and among Zaring Homes, Inc., Zaring Holdings, Inc., Hearthside
Homes, LLC, Zaring National Land Holding Corporation, Zaring National Homes
Holding Corporation and Zaring Leasing, LLC, as Borrowers and Guarantors, Zaring
National Corporation, Zaring Homes of Indiana L.L.C. and Zaring Homes Kentucky,
LLC, as Guarantors, the banks party hereto, Bank of America, N.A. and Bank One,
NA as co-agents and PNC Bank, National Association, as agent, dated as of
October 10, 2000
10.32 - Exhibit 10.31 Third Amendment to Third Amended and Restated Credit
Agreement by and among Zaring Homes, Inc., Zaring Holdings, Inc., Hearthside
Homes, LLC, Zaring National Land Holding Corporation, Zaring National Homes
Holding Corporation and Zaring Leasing, LLC, as Borrowers and Guarantors, Zaring
National Corporation, Zaring Homes of Indiana L.L.C. and Zaring Homes Kentucky,
LLC, as Guarantors, the banks party hereto, Bank of America, N.A. and Bank One,
NA as co-agents and PNC Bank, National Association, as agent, dated as of
November 1, 2000
10.33 - Exhibit 10.33 Fourth Amendment to Third Amended and Restated Credit
Agreement, December 5, 2000 by and among Zaring Homes, Inc., Zaring Holdings,
Inc., Hearthside Homes, LLC, Zaring National Land Holding Corporation, Zaring
National Homes Holding Corporation and Zaring Leasing, LLC, as Borrowers and
Guarantors, Zaring National Corporation, Zaring Homes of Indiana L.L.C. and
Zaring Homes Kentucky, LLC, as Guarantors, the banks party hereto, Bank of
America, N.A. and Bank One, NA as co-agents and PNC Bank, National Association,
as agent, dated as of December 5, 2000
<PAGE> 3
SELECTED FINANCIAL DATA
The Company has announced formal plans to discontinue the operations of
its Zaring Homes, Hearthside and Zaring Financial Services segments and will
ultimately no longer be required to consolidate the results of the LLCs
controlled by its principal shareholder. Accordingly, the results of operations
include the results of the Zaring Homes, Hearthside, Zaring Financial Services
and Majority Shareholder LLC segments as discontinued operations.
The following tables set forth Selected Financial Data for the
continuing operations of the Company as well as financial data related to the
discontinued operations of Zaring Homes, Hearthside Homes, Zaring Financial
Services and the Majority Shareholder LLCs. This information should be read in
conjunction with the financial statements of the Company and Management's
Discussion and Analysis of the Financial Condition and Results of Operations,
each included elsewhere in this Form 8-K. The financial statements of the
Company have been prepared on a going-concern basis, which contemplates
realization of assets and liquidation of liabilities in the ordinary course of
business. As a result of factors noted elsewhere in this document, there are no
assurances the Company can continue as a going concern.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
BALANCE SHEET DATA
AS OF DECEMBER 31,
------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $70,201 $69,670 $53,765 $48,681 $44,311
Net Assets of Discontinued
Operations $20,598 $21,719 $30,918 $48,681 $44,311
Notes Payable $24,855 $22,082 $ -- $ -- $ --
Subordinated Debt $ 9,000 $ -- $ -- $ -- $ --
Total Liabilities $43,158 $26,887 $ 3,035 $ -- $ --
Shareholders' Equity $27,043 $42,783 $50,730 $48,681 $44,311
<CAPTION>
STATEMENT OF OPERATIONS DATA
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Revenues(1) $ 20,551 $ 12,411 $ 8,209 $ -- $ --
Cost Of Sales 19,451 10,724 6,920 -- --
Asset Impairment 753 5,674 -- -- --
Interest 3,255 2,598 312 -- --
Selling, General and
Administrative Expenses 16,274 14,830 5,183 1,269 1,392
-------- -------- -------- -------- --------
Operating Loss (19,182) (21,415) (4,206) (1,269) (1,392)
Other Income (Expense) 78 112 -- -- --
-------- -------- -------- -------- --------
Loss Before
Minority Interest and
Income Taxes (19,104) (21,303) (4,206) (1,269) (1,392)
Minority Interest 2,406 263 76 -- --
-------- -------- -------- -------- --------
Loss from Continuing
Operations Before Income Taxes (16,698) (21,040) (4,130) (1,269) (1,392)
Benefit For
Income Taxes (2,688) (8,184) (1,615) (485) (539)
-------- -------- -------- -------- --------
Loss from Continuing
Operations (14,010) (12,856) (2,515) (784) (853)
Net Income (Loss) from
Discontinued Operations (1,730) 6,490 4,567 5,611 5,133
-------- -------- -------- -------- --------
Net Income (Loss) $(15,740) $ (6,366) $ 2,052 $ 4,827 $ 4,280
======== ======== ======== ======== ========
Loss Per Share
From Continuing Operations $ (3.05) $ (2.71) $ (0.53) $ (0.16) $ (0.18)
Earnings (Loss) Per Share
From Discontinued Operations (0.38) 1.37 0.96 1.17 1.06
-------- -------- -------- -------- --------
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
======== ======== ======== ======== ========
<CAPTION>
SELECTED OPERATING DATA
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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>
3
<PAGE> 4
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
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) $ 5,479 $ 4,858 $ 5,641 $ 4,573
Cost Of Sales 6,027 4,495 5,039 3,890
Asset Impairment 753 -- -- --
Interest 886 672 721 976
Selling, General and Administrative
Expenses 4,791 4,220 3,708 3,555
-------- -------- -------- --------
Operating Loss (6,978) (4,529) (3,827) (3,848)
Other Income (Expense) (4) 27 36 19
-------- -------- -------- --------
Loss Before Minority
Interest and Income Taxes (6,982) (4,502) (3,791) (3,829)
Minority Interest 1,191 616 542 57
-------- -------- -------- --------
Loss From Continuing Operations
Before Income Taxes (5,791) (3,886) (3,249) (3,772)
Provision (Benefit) For Income Taxes 445 (838) (856) (1,439)
-------- -------- -------- --------
Loss from Continuing
Operations (6,236) (3,048) (2,393) (2,333)
Income (Loss) from Discontinued Operations:
Loss of entry level home segment,
net of tax (3,537) (304) (428) (261)
Income (loss) of luxury site built
home segment, net of tax (3,465) 3,348 2,738 228
Income (loss) of financial
services segment, net of tax (98) 30 (16) 35
-------- -------- -------- --------
Net Income (Loss) $(13,336) $ 26 $ (99) $ (2,331)
======== ======== ======== ========
Loss Per Share
From Continuing Operations $ (1.36) $ (0.66) $ (0.52) $ (0.51)
Earnings (Loss) Per Share
From Discontinued Operations (1.54) 0.67 0.50 --
-------- -------- -------- --------
Earnings (Loss) Per Share $ (2.90) $ 0.01 $ (0.02) $ (0.51)
======== ======== ======== ========
Weighted Average Shares Outstanding 4,591 4,591 4,591 4,591
======== ======== ======== ========
<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) $ 4,892 $ 4,542 $ 2,047 $ 930
Cost Of Sales 4,255 3,837 1,845 787
Asset Impairment 5,674 -- -- --
Interest 811 1,074 469 244
Selling, General and Administrative
Expenses 4,993 3,654 3,493 2,690
-------- -------- -------- --------
Operating Loss (10,841) (4,023) (3,760) (2,791)
Other Income (Expense) (135) 70 116 61
-------- -------- -------- --------
Loss Before Minority Interest
and Income Taxes (10,976) (3,953) (3,644) (2,730)
Minority Interest 20 60 102 81
-------- -------- -------- --------
Loss From Continuing
Operations Before Income Taxes (10,956) (3,893) (3,542) (2,649)
Benefit For Income Taxes (4,137) (1,550) (1,415) (1,082)
-------- -------- -------- --------
Loss from Continuing
Operations (6,819) (2,343) (2,127) (1,567)
Income (Loss) from Discontinued
Operations:
Income (loss) of entry level home
segment, net of tax (66) (7) (166) 20
Income (loss) of luxury site built
home segment, net of tax 1,112 2,913 2,252 435
Income (loss) of financial services
segment, net of tax (3) -- -- --
-------- -------- -------- --------
Net Income (Loss) $ (5,776) $ 563 $ (41) $ (1,112)
======== ======== ======== ========
Loss Per Share
From Continuing Operations $ (1.46) $ (0.49) $ (0.45) $ (0.33)
Earnings Per Share
From Discontinued Operations 0.22 0.61 0.44 0.10
-------- -------- -------- --------
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>
4
<PAGE> 5
<TABLE>
<CAPTION>
SELECTED OPERATING DATA (UNITS)
THREE MONTHS ENDED
------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1999 1999 1999 1999
---- ---- ---- ----
RETAIL DISTRIBUTION MANUFACTURED HOMES
<S> <C> <C> <C> <C>
New Orders(2) 96 106 64 124
Closings(1) 94 83 102 77
Backlog(3) 201 199 176 214
<CAPTION>
THREE MONTHS ENDED
------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1998 1998 1998 1998
---- ---- ---- ----
RETAIL DISTRIBUTION MANUFACTURED HOMES
<S> <C> <C> <C> <C>
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
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 8-K.
OVERVIEW
The Company has plans to discontinue the operations of its Zaring
Homes, Hearthside and Zaring Financial Services segments and will ultimately no
longer be required to consolidate the results of the LLCs controlled by its
principal shareholder. Accordingly, the continuing operations will consist of
HomeMax, Inc. (retail distribution manufactured homes) and its parent Zaring
National Corporation (corporate). The results of operations also include the
results of the Zaring Homes, Hearthside, Zaring Financial Services and Majority
Shareholder LLC segments as discontinued operations.
The Company's business and the manufactured housing industry are
subject to changes in national and local economic conditions, as well as other
factors, including employment levels, availability of financing, interest rates,
consumer confidence and housing demand. The Company's results of continuing
operations for the periods presented include retail distribution manufactured
homes and reflect, among others, the cyclical nature of that industry.
The Company reported consolidated net revenues from continuing
operations of $20.5 million for the year ending December 31, 1999 compared to
$12.4 million in 1998, an increase of $8.1 million or 65.6%. The net loss from
continuing operations for 1999 was $(14.0) million or $(3.05) per share,
compared to a net loss of $(12.9) million or $(2.71) per share in 1998.
The Company reported consolidated net revenues from continuing
operations of $12.4 million for the year ending December 31, 1998 compared to
$8.2 million in 1997, an increase of $4.2 million or 51.2%. The net loss from
continuing operations for 1998 was $(12.9) million or $(2.71) per share,
compared to a net loss of $(2.5) million or $(0.53) 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 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 backlog 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 71.2% and 58.2% 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.
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:
5
<PAGE> 6
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
HOMEMAX
Retail Distribution Manufactured Homes
<S> <C> <C> <C>
Revenues $ 20,551 $ 12,411 $ 8,209
Cost of sales 19,451 10,724 6,920
Asset impairment 753 5,674 --
Interest 1,568 1,807 312
Selling, general and administrative 11,688 11,704 3,370
-------- -------- --------
Operating loss (12,909) (17,498) (2,393)
Other income (expense) 43 (5) (28)
Minority interest 2,406 263 76
-------- -------- --------
Pretax Retail Distribution Loss (10,460) (17,240) (2,345)
CORPORATE
Interest 1,687 790 --
General and administrative 4,551 3,010 1,785
-------- -------- --------
Loss before income taxes and
discontinued operations (16,698) (21,040) (4,130)
Benefit for income taxes (2,688) (8,184) (1,615)
-------- -------- --------
Net loss before discontinued
operations (14,010) (12,856) (2,515)
Income (loss) from discontinued
operations, net of tax (1,730) 6,490 4,567
-------- -------- --------
Net income (loss) $(15,740) $ (6,366) $ 2,052
======== ======== ========
Other pertinent information regarding the Company's segment operations
are as follows:
<CAPTION>
HOMEMAX
RETAIL
DISTRIBUTION CORPORATE TOTAL
------------ --------- -----
Segment assets:
<S> <C> <C> <C>
1999 $24,004 $18,432 $42,436
1998 23,152 10,671 33,823
1997 12,044 6,643 18,687
Depreciation and
amortization expense:
1999 $ 946 $ 183 $ 1,129
1998 2,024 -- 2,024
1997 134 -- 134
Expenditures for long-lived
assets (excluding acquisitions):
1999 $ 675 $ -- $ 675
1998 14,064 -- 14,064
1997 5,252 -- 5,252
Reconciliation of segment assets to total assets:
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total segment assets $ 42,436 $ 33,823 $ 18,687
Elimination of inter-entity investments 65 (5) --
Cash* 7,102 14,133 4,160
Net assets of discontinued operations 20,598 21,719 30,918
-------- -------- --------
Total assets $ 70,201 $ 69,670 $ 53,765
======== ======== ========
</TABLE>
* Management excludes cash from assessing a segment's operating performance.
6
<PAGE> 7
FISCAL 1999 COMPARED TO FISCAL 1998
CONTINUING OPERATIONS
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 in 1998 to $58 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 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, they
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.
CORPORATE
Corporate interest expense was $1.7 million in 1999 as compared to $0.8
million in 1998. The increase is due to the addition of the subordinated debt
and a full year of the Provident Bank debt.
Corporate general and administrative expenses were $4.6 million in 1999
as compared to $3.0 million in 1998. The increase in general and administrative
expenses is primarily attributable to additional personnel, costs associated
with new systems initiatives and Year 2000 compliance programs as well as other
professional expenses. Corporate general and administrative expenses are not
allocated to the Company's segments.
PROVISION (CREDIT) FOR INCOME TAXES
The income tax benefit associated with losses reported in 1999 and 1998
decreased from $8.2 million to $2.7 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.
7
<PAGE> 8
DISCONTINUED OPERATIONS
ZARING HOMES (LUXURY SITE - BUILT HOMES)
On November 13, 2000, the Board of Directors approved plans to
discontinue the operations of the Zaring Homes segment. On December 1, 2000, the
Company reached an agreement with The Drees Company (Drees), a privately-owned
homebuilder located in northern Kentucky, to sell certain of the assets of the
Zaring Homes Cincinnati, Nashville and Indianapolis divisions to Drees. On
September 29, 2000, the Company sold certain of the assets of the Louisville
division to Olympia Homes, LLC, a privately-owned homebuilder located in
Louisville, Kentucky. On October 13, 2000, the Company sold certain of the
assets of the Raleigh division to Drees and on November 13, 2000, the Company
sold certain of the assets of the Charlotte division to St. Lawrence Homes, a
privately-owned single family homebuilder headquartered in Raleigh, North
Carolina. The Company expects to close on the sale of the net assets of the
Cincinnati, Nashville and Indianapolis divisions by November 13, 2001. In the
event the sale to Drees does not materialize, the Company will aggressively
pursue other purchasers for these three divisions.
Summary financial information of the Zaring Homes segment is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $284,602 $241,599 $214,042
Cost of sales 237,792 199,867 179,568
Incremental warranty provision 2,806 -- --
Interest allocation 2,698 2,479 2,698
Selling, general and administrative 36,880 28,256 24,346
-------- -------- --------
Operating income 4,426 10,997 7,430
Other income (expense) 82 (14) 15
-------- -------- --------
Pretax income 4,508 10,983 7,445
Provision for income taxes 1,659 4,271 2,911
-------- -------- --------
Net income $ 2,849 $ 6,712 $ 4,534
======== ======== ========
</TABLE>
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 in 1999 from $259 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.
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 $0.2 million in 1999 as compared to 1998. As
a percentage of net revenues, interest expense remained essentially constant at
1.0%. The increase in interest expense is 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 pretax income of
$4.5 million for the year ended December 31, 1999, a decrease of $6.5 million
from the $11.0 million of income reported in the same period in 1998.
HEARTHSIDE HOMES (ENTRY LEVEL HOMES)
On December 13, 1999, the Board of Directors approved plans to wind up
the affairs of Hearthside. The disposal of Hearthside's assets through an
orderly sales process was substantially complete as of December 13, 2000.
8
<PAGE> 9
Summary financial information of Hearthside is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $ 30,231 $ 11,354 $ 1,706
Cost of sales 31,399 9,697 1,424
Interest allocation 952 264 12
Selling, general and administrative 3,296 1,755 216
-------- -------- --------
Operating income (loss) (5,416) (362) 54
Provision for discontinued operations (1,752) -- --
-------- -------- --------
Pretax income (loss) (7,168) (362) 54
Provision (benefit) for income taxes (2,638) (143) 21
-------- -------- --------
Net income (loss) $ (4,530) $ (219) $ 33
======== ======== ========
</TABLE>
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 $0.2 million represents the net loss of
the segment as previously reported.
FINANCIAL SERVICES
Upon closing the sale of the last remaining division of the Zaring
Homes segment, the operations of the Zaring Financial Services segment will be
discontinued.
Summary financial information of the Zaring Financial Services segment
is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $ 1,677 $ 526 $ --
Expenses 1,707 531 --
Interest 48 -- --
------- ------- ------
Pretax loss (78) (5) --
Benefit for income taxes (29) (2) --
------- ------- ------
Net loss $ (49) $ (3) $ --
======= ======= ======
</TABLE>
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 1998 are consolidated with the Company's activities. The Zaring
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
$0.05 million in 1999 and essentially break even in 1998, respectively.
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. Upon
closing the sale of the Zaring Homes divisions, the agreements between Zaring
Homes and the Majority Shareholder LLCs will be terminated and the Majority
Shareholder LLCs will enter into new agreements with the third party purchasers.
Summary financial information of the Majority Shareholder LLCs is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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>
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.
9
<PAGE> 10
FISCAL 1998 COMPARED TO FISCAL 1997
CONTINUING OPERATIONS
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.
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.
CORPORATE
Corporate interest expense relates to nine months of interest on the
Provident Bank debt. Corporate had no debt outstanding in 1997.
Corporate general and administrative expenses were $3.0 million in 1998 as
compared to $1.8 million in 1997. This increase in general and administrative
expenses is attributed to additional personnel to support expansion activities
as well other professional expenses. Corporate general and administrative
expenses are not allocated to the Company's segments.
DISCONTINUED OPERATIONS
ZARING HOMES, INC. (LUXURY SITE-BUILT HOMES)
On November 13, 2000, the Board of Directors approved plans to discontinue
the operations of the Zaring Homes segment.
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 7.5% to $259 in 1998 from $241 in
1997.
10
<PAGE> 11
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 decreased $0.2 million for the year ended December 31,
1998, compared to the same period in 1997. As a percentage of revenues interest
expense decreased from 1.3% in 1997 to 1.0% in 1998. This decrease is mainly
attributable to overall lower levels of borrowings by 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.
As a result of the foregoing, Zaring Homes reported pretax income of
$11.0 million or 4.5% of net revenues for the year ended December 31, 1998, an
increase of $3.5 million or 47.5% from the same period in 1997.
HEARTHSIDE HOMES (ENTRY LEVEL HOMES)
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.
FINANCIAL SERVICES
Upon closing the sale of the last remaining division of the Zaring
Homes segment, the operations of the Zaring Financial Services segment will be
discontinued.
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.
MAJORITY SHAREHOLDER LLCS
Upon closing the sale of the Zaring Homes divisions, the agreements
between Zaring Homes and the majority Shareholder LLCs will be terminated and
the ongoing Shareholder LLCs will enter into new agreements with the third party
purchasers.
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.
LOAN AGREEMENTS
The Company's loan agreements and other financing arrangements related
to continuing operations include:
- 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 $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).
- 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.
11
<PAGE> 12
The Company's loan agreements and other financing arrangements related to
discontinued operations 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. The interest rate on the revolving credit facility was 8.76% 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.
- 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).
- 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.
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).
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
- 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 2, 2000,
$5.0 million on October 1, 2000 and an additional $10.0 million on October
13, 2000.
- Interest rates were adjusted to prime plus 1% through August 31, 2000, with
an increase to prime plus 2% if borrowings under the revolving credit
facility exceed $40.0 million on September 1, 2000, an increase to prime
plus 3% if revolver borrowings exceed $25.0 million on November 1, 2000 and
prime plus 4% if revolver borrowings exceed $5.0 million on January 1,
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 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.
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.
These commitments relate primarily to the discontinued Zaring Homes and
Hearthside segments. Subsequent to December 31, 1999, the Company is negotiating
the transfer and/or termination of these commitments with the owners of the lots
and the purchasers of certain of the assets of the Zaring Homes segment. As of
December 15, 2000, these commitments approximate $8.1 million.
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.
CAPITAL RESOURCES AND LIQUIDITY
The Company had cash of $7.1 million as of December 31, 1999 as
compared to $14.1 million available as of December 31, 1998. These amounts are
available to fund ongoing operations of the Company.
Net cash used in continuing operations in 1999 approximated $20.7
million as compared to approximately $14.0 million in 1998. Net cash used in
1999 is primarily attributable to the net loss ($15.7 million) and increases in
inventories ($4.0 million) and other net changes in certain assets and
liabilities ($5.1 million) offset by increases in trade payables, accruals and
deposits ($1.9 million).
12
<PAGE> 13
Net cash provided by (used in) investing activities of continuing
operations increased from a net use of $12.0 million in 1998 to $1.8 million
provided by investing activities in 1999. This is primarily attributable to
additions to property, equipment and sales villages of $0.5 million in 1999
versus $13.8 million in 1998, an increase of $1.0 million in proceeds from sales
of property and equipment and a decrease of $0.4 million in distributions from
the joint venture.
Net cash provided by financing activities of continuing operations
decreased to $12.4 million in 1999 from $20.3 million in 1998. Net sources of
financing in 1999 consisted primarily of additional net borrowings from the
manufactured housing floor plan ($2.3 million) and subordinated debt provided by
the Company's Chairman and American Homestar ($9.0 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:
- Selling the remaining assets of Hearthside and winding up the related
operations; substantially complete as of December 15, 2000
- Selling certain model homes to the Company's Chairman; substantially
complete as of December 15, 2000
- Reducing the number of market homes per community
- Selling certain idle HomeMax sales villages; completed during the
second quarter of 2000
- Deferring certain land development initiatives
- Selling certain other homebuilding operations; As previously discussed,
on December 1, 2000, the Company signed an agreement with Drees whereby
a Drees subsidiary will acquire substantially all of the site-built
homebuilding assets of Zaring Homes in its Cincinnati, Nashville and
Indianapolis markets at book value, as defined. Under the terms of the
agreement, Drees will obtain Zaring Homes' tradenames, trademarks and
home plans in these markets. Zaring Homes will retain warranty
responsibility for all homes closed prior to the sale to Drees. The
sale is expected to close during the first quarter of 2001. On
September 29, 2000, the Company sold certain of the net assets of its
Louisville division to Olympia Homes for approximately $6.3 million. On
October 13, 2000, the Company sold certain of the net assets of its
Raleigh division to Drees for approximately $11.0 million. In addition,
on November 13, 2000, the Company sold certain of the net assets of its
Charlotte division to St. Lawrence Homes for approximately $3.3
million.
The Company was not in compliance with certain of the terms and
conditions of certain of its credit agreements at September 30, 2000. Management
intends to discuss the potential covenant violations with its lenders and secure
waivers or otherwise amend the agreements to enable compliance through at least
the date of the expected sale to Drees. In addition, management is of the
opinion that its present cash balances, amounts available from its credit
agreements and amounts generated from its asset reduction plans will provide
adequate funds for its future operations through the date of the sale to Drees
provided such sale occurs no later than the first quarter of 2001. However,
there can be no assurances that the banks will provide waivers or otherwise
amend the credit agreements or continue to provide financing to the Company. In
the event the banks do not agree to provide waivers or otherwise amend the
credit agreements and accelerate payments due per the agreement, the Company
will encounter great difficulty in meeting the demands of the banks and will
need to evaluate various forms of financial reorganizations, the most severe of
which could include bankruptcy. In addition, losses from continuing operations
are anticipated and there are no assurances the Company would be able to secure
capital or other financing to fund these losses. Although management is pursuing
various initiatives to sell certain or all of its operations there are no
assurances the net proceeds would be sufficient to pay all creditors or provide
any distributions to the Company's shareholders.
As of November 1, 2000 borrowings under the revolving credit facility
were approximately $39.3 million, accordingly interest rates were adjusted to
prime plus 3.0%. Further, as of December 15, 2000, management believes
borrowings under the revolving credit facility will exceed $5.0 million on
January 1, 2001. If borrowings exceed $5.0 million on January 1, 2000, interest
rates will be adjusted to prime plus 4.0% through the maturity of the facility.
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.
13
<PAGE> 14
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 $0.8 million. The village was sold in
January, 2000.
Through the third quarter of 2000, the losses of HomeMax continued to
adversely impact the consolidated results of the Company. In response to the
actual and anticipated prospective losses, the Company again determined the
undiscounted estimated future cash flows of HomeMax were less than the carrying
value of the long-lived assets of HomeMax. Accordingly, in the third quarter of
2000, the Company adjusted the carrying values of the long-lived assets of
HomeMax to their estimated fair market value through the recognition of an
additional provision for asset impairment of approximately $6.3 million. The
estimated fair value of the assets was based on reviews of comparable residual
asset values.
In 1999, the Company established a valuation allowance primarily
related to deferred tax assets associated with HomeMax which may ultimately be
impaired unless prospective taxable income is realized. During the quarter ended
September 30, 2000, the Company recorded an additional valuation allowance of
$10.6 million. The 2000 valuation allowance was allocated among continuing and
discontinued operations based on the origin of the timing items in amounts
approximating $6.2 million and $4.4 million, respectively. The recognition of
the valuation allowance is primarily attributable to the fact that previously
recorded deferred tax assets will only be realized through prospective taxable
income and there are substantial uncertainties relative to the prospects of
realizing such taxable income.
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 and through September 30, 2000, 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. Through September 30, 2000, the
Company received insurance proceeds of approximately $432. Adjustments to the
estimated costs of remediation as well as the related minimum insurance
recoveries will be recorded in the periods in which the facts and circumstances
which warrant such adjustments become known.
As of September 30, 2000, of the total estimated remediation costs of
$3.8 million, the Company had contractual remediation costs of approximately
$2.9 million with certain homeowners in the communities. In March 2000, a class
action suit was filed by a homeowner in one of the communities which claimed
damages of more than $25, along with other 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.
14
<PAGE> 15
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.
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.
15
<PAGE> 16
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 (as restated) F-2
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997 (as restated) F-3
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 (as restated) F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997 (as restated) F-5
Notes to Consolidated Financial Statements (as restated) F-6
</TABLE>
16
<PAGE> 17
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.
As discussed further in Note 1, subsequent to March 27, 2000, the date
of our original report, the Company has incurred losses of approximately $20.4
million during the nine months ended September 30, 2000 based on unaudited
interim financial statements, announced plans to discontinue the operations of
Zaring Homes, Inc. and Zaring Financial Services, is in violation of certain
loan covenants that give the lenders the right to accelerate the due date of
their loans and continues to experience losses from its continuing operations.
These factors, among others, create a substantial doubt about the Company's
ability to continue as a going concern and an uncertainty as to the
recoverability of recorded asset amounts and the amounts of liabilities. The
accompanying financial statements do not include any adjustments relating to the
recoverability of asset carrying amounts or the amount of liabilities that might
result should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
December 15, 2000
F-1
<PAGE> 18
ZARING NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS (AS RESTATED, NOTE 1)
AS OF DECEMBER 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1999 1998
------ ------
ASSETS
<S> <C> <C>
CASH $ 7,102 $ 14,133
RECEIVABLES:
Related parties 828 67
Note from American Homestar Corporation 4,400 --
Manufactured housing rebates and other 124 531
INVENTORIES:
Retail distribution manufactured homes 6,147 2,457
Model homes 6,556 5,911
Finished lots -- 379
PROPERTY AND EQUIPMENT, net 954 832
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 3,284 4,700
NET ASSETS OF DISCONTINUED OPERATIONS (Note 13) 20,598 21,719
-------- --------
$ 70,201 $ 69,670
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Manufactured housing floor plan facility $ 9,855 $ 7,082
Term notes payable 15,000 15,000
Accounts payable 2,083 1,995
Accrued liabilities 3,539 2,218
Customer deposits 1,150 592
Deferred gain 1,765 --
-------- --------
Total liabilities before subordinated debt
and minority interest 33,392 26,887
-------- --------
SUBORDINATED DEBT 9,000 --
-------- --------
MINORITY INTEREST IN CONSOLIDATED ENTITIES 766 --
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares, no par value, 2,000,000 shares
authorized, none issued or outstanding -- --
Common shares, no par value, 18,000,000 shares
authorized, 4,591,488 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
-------- --------
$ 70,201 $ 69,670
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-2
<PAGE> 19
ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (AS RESTATED, NOTE 1)
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:
Retail distribution manufactured homes $ 20,551 $ 12,411 $ 8,209
-----------------------------------------------
Total net revenues 20,551 12,411 8,209
-----------------------------------------------
EXPENSES:
Cost of sales retail distribution
manufactured homes 19,451 10,724 6,920
Asset impairment (Note 2 (d)) 753 5,674 --
Interest 3,255 2,598 312
Selling 3,544 3,080 881
General and administrative 12,730 11,750 4,302
----------- ----------- -----------
Total expenses 39,733 33,826 12,415
----------- ----------- -----------
Operating loss (19,182) (21,415) (4,206)
OTHER INCOME (EXPENSE):
Income from unconsolidated joint ventures 51 242 33
Other, net 27 (130) (33)
----------- ----------- -----------
78 112 --
----------- ----------- -----------
Loss from continuing operations
before minority interest and
benefit for income taxes (19,104) (21,303) (4,206)
MINORITY INTEREST IN CONSOLIDATED ENTITIES 2,406 263 76
----------- ----------- -----------
Loss from continuing operations
before benefit for income
taxes (16,698) (21,040) (4,130)
BENEFIT FOR INCOME TAXES (2,688) (8,184) (1,615)
----------- ----------- -----------
Net loss from continuing
operations (14,010) (12,856) (2,515)
DISCONTINUED OPERATIONS (Note 13):
Income (loss) of entry
level home segment, net of tax (4,530) (219) 33
Income of luxury site built
home segment, net of tax 2,849 6,712 4,534
Income (loss) of financial services
segment, net of tax (49) (3) --
----------- ----------- -----------
Net income (loss) $ (15,740) $ (6,366) $ 2,052
=========== =========== ===========
BASIC AND DILUTED LOSS PER
COMMON SHARE FROM CONTINUING OPERATIONS $ (3.05) $ (2.71) $ (0.53)
=========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER
COMMON SHARE FROM DISCONTINUED OPERATIONS $ (0.38) $ 1.37 $ 0.96
=========== =========== ===========
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> 20
ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (AS RESTATED, NOTE 1)
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> 21
ZARING NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED, NOTE 1)
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 used in continuing operations --
Loss (income) from discontinued operations 1,730 (6,490) (4,567)
Depreciation and amortization 1,129 2,024 134
Asset impairment 753 5,674 --
Tax valuation allowance 1,106 -- --
Income from unconsolidated joint ventures (51) (242) (33)
Minority interest in consolidated entities (2,406) (263) (76)
Changes in assets and liabilities,
excluding effects of acquisitions--
Future tax benefit and estimated tax refunds (5,909) (4,995) (383)
Receivables (354) 1,087 (1,517)
Inventories (3,956) (5,232) 273
Cash surrender value of life insurance
and other assets 1,166 (1,414) (1,547)
Accounts payable and accrued liabilities 1,295 1,747 (1,145)
Customer deposits 558 447 (112)
Income taxes payable -- -- (107)
-------- -------- --------
Net cash used in operating activities
of continuing operations (20,679) (14,023) (7,028)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment and
sales villages, net (565) (13,835) (5,252)
Proceeds from the sale of property and
equipment 2,146 1,139 --
Distributions from unconsolidated joint
ventures 252 663 497
Acquisitions of manufactured housing retailers -- -- (2,438)
-------- -------- --------
Net cash provided by (used in)
investing activities of continuing
operations 1,833 (12,033) (7,193)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable 27,574 27,429 --
Repayments on notes payable (15,801) (5,347) --
Purchase and retirement of treasury shares -- (1,581) (3)
Proceeds from (purchase of) minority
interest, net 651 (161) 500
-------- -------- --------
Net cash provided by financing
activities of continuing operations 12,424 20,340 497
-------- -------- --------
DECREASE IN CASH (6,422) (5,716) (13,724)
Net cash provided by (used in) discontinued
operations (609) 15,689 17,884
CASH, beginning of year 14,133 4,160 --
-------- -------- --------
CASH, end of year $ 7,102 $ 14,133 $ 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
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
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 (1,765)
Minority interest (2,521)
Accrued expenses (114)
</TABLE>
During 1997, in connection with the reorganization of the Company, approximately
$4,446 of net assets were distributed to the continuing operations and the
Company acquired the following assets:
<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-5
<PAGE> 22
ZARING NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
(1) BASIS OF PRESENTATION
(a) Organizational Considerations before Discontinued
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 $2,438. 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(d) and 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.
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.
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) Discontinued Operations--The Company has plans to discontinue the
operations of Zaring Homes, Hearthside and Zaring Financial Services and will
ultimately no longer be required to consolidate the results of the LLCs
controlled by its principal shareholder. The net assets and results of
operations of these segments are treated as discontinued operations for all
periods presented and, accordingly, prior financial information has been
restated to conform with the current treatment accorded. (see Notes 13 and 15)
(c) Operating Initiatives--In 1999, the Company experienced losses in
each of its operating segments. Through September 30, 2000, the Company incurred
additional losses in each of its operating segments aggregating to approximately
$20.4 million, based on its unaudited interim financial statements. In addition,
the Company has been unable to comply with certain terms and conditions of its
loan covenants despite its revenue growth. Management's plans to improve
operating results and cashflow available to fund ongoing operations include
initiatives to reduce certain assets,
F-6
<PAGE> 23
including the discontinuance of the operations of Zaring Homes, Hearthside and
Zaring Financial Services (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, 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. Through December 15, 2000, the following have occurred
relative to these initiatives:
- On September 29, 2000, the Company sold certain of the net assets of its
Louisville division to Olympia Homes LLC for approximately $6.3 million. On
October 13, 2000, the Company sold certain of the net assets of its Raleigh
division to The Drees Company (Drees) for approximately $11.0 million. In
addition, on November 13, 2000, the Company sold certain of the net assets
of its Charlotte division to St. Lawrence Homes for approximately $3.3
million. Aggregate losses realized as a result of the sale of certain net
assets associated with these three divisions approximated $0.8 million.
- On December 1, 2000, the Company entered into an agreement with Drees
whereby a Drees subsidiary will purchase substantially all of the
site-built homebuilding assets of Zaring Homes in its Cincinnati, Nashville
and Indianapolis markets at book value, as defined. Under the terms of the
agreement, Drees will obtain Zaring Homes' tradenames, trademarks and home
plans in these markets. Zaring Homes will retain warranty responsibility
for all homes closed prior to the sale to Drees. This transaction is
expected to close during the first quarter of 2001
- During the first quarter of 2000, Zaring Homes sold certain model homes to
First Cincinnati Leasing 2000 LLC for approximately $6.0 million. These
models were then leased back by Zaring Homes.
- During the second quarter of 2000, the HomeMax subsidiary sold two unopened
sales villages for approximately $0.8 million, resulting in a gain of
approximately $0.5 million.
As the Company's assets are sold, net proceeds have been or will be
utilized to reduce outstanding debt and fund operations (see also Note 5).
The continuing operations of the Company will consist of HomeMax, Inc.
and its parent Zaring National Corporation. The Company will continue to review
various operating initiatives with respect to its continuing operations and, to
date, has not announced any formal plans for liquidation, Accordingly, the
accompanying financial statements have been prepared on a going-concern basis,
which contemplates realization of assets and liquidation of liabilities in the
ordinary course of business. As a result of, among others, the factors noted,
there are no assurances the Company can continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Inventories--Inventories are stated at the lower of cost or market.
Costs include primarily acquisition costs and certain other related costs.
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.
The following tables summarize the components of inventories as of
December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Retail distribution manufactured homes
Under a contract of sale $ 3,967 $ 1,935
Held for sale 2,180 522
-------- --------
$ 6,147 $ 2,457
======== ========
</TABLE>
(b) Capitalized Interest--Interest was 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 included with the results of discontinued
operations (Note 13):
<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 2,992 2,940 3,302
Interest expensed (2,698) (2,479) (2,698)
-------- -------- -------
Capitalized interest, end of year $ 2,433 $ 2,139 $ 1,678
======== ======== =======
</TABLE>
(c) 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:
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
F-7
<PAGE> 24
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Office furniture and equipment $ 730 $ 523
Leasehold improvements 387 386
------- -------
1,117 909
Less - accumulated depreciation and amortization (163) ( 77)
-------- --------
$ 954 $ 832
======= =======
HomeMax sales villages $10,876 $13,447
Less - accumulated depreciation and amortization (1,524) (760)
-------- --------
$ 9,352 $12,687
======== =======
</TABLE>
(d) 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.
Through the third quarter of 2000, the losses of HomeMax continued to
adversely impact the consolidated results of the Company. In response to the
actual and anticipated prospective losses, the Company again determined the
undiscounted estimated future cash flows of HomeMax were less than the carrying
value of the long-lived assets of HomeMax. Accordingly, in the third quarter of
2000, the Company adjusted the carrying values of the long-lived assets of
HomeMax to their estimated fair market value through the recognition of an
additional provision for asset impairment of $6,300. The estimated fair value of
the assets was based on reviews of comparable residual asset values.
(e) 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 loan servicing rights is
recognized when the closed loans are sold and delivered to an investor.
(f) Advertising--The Company expenses the costs of advertising as
incurred. Advertising expense of the Company's continuing operations for the
years ended December 31, 1999, 1998 and 1997 approximated $710, $984 and $234,
respectively. Advertising expense of the Company's discontinued operations
approximated $3,326, $1,638 and $959 for the years ended December 31, 1999, 1998
and 1997, respectively.
(g) 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.
(h) 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 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, estimates to wind up the
affairs of discontinued operations, asset impairment and tax valuation reserves.
(i) 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
F-8
<PAGE> 25
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 interprets and expands upon existing guidance regarding revenue
recognition. The implementation of SAB 101 is required no later than the fourth
quarter of 2000. The Company does not expect SAB 101 to have a material impact
on revenue recognition.
(j) 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.
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
======= ======= =======
<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
F-9
<PAGE> 26
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.
- 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 $500 and $750 was provided by the Company and
American Homestar, respectively, through September 30, 2000.
- 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 ($1,765) has been deferred until, among other factors, American
Homestar converts its subordinated note into an additional 25% equity interest
in HomeMax.
(5) NOTES PAYABLE
CONTINUING OPERATIONS:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
------ ------
<S> <C> <C>
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
======== ========
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
======== ========
</TABLE>
F-10
<PAGE> 27
<TABLE>
<S> <C> <C>
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 6.0%
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 $ --
======= =======
<CAPTION>
DISCONTINUED OPERATIONS
DECEMBER 31,
------------
1999 1998
------ ------
<S> <C> <C>
Obligations of Zaring Homes:
Revolving Credit Facility, payable to PNC Bank, as agent, $72.5 million
available at December 31, 1999, borrowings outstanding at December 31,
1999 and December 31, 1998 are at 8.77% and 7.19%, respectively, expiring
in March 2001 $61,250 $44,500
Term Loans, payable to PNC Bank, as agent, borrowings outstanding at December
31, 1999 and December 31, 1998 are at 8.76% and 7.88, respectively,
payable in quarterly installments of $750 through March 2001 4,500 6,750
Other Term Notes, payable to banks, interest at 7.95%, payable in quarterly
installments of $437 through March 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 --
------- -------
$71,438 $55,621
======= =======
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 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 --
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 December 31, 1998, respectively) payable monthly,
secured by land and a personal guarantee, payable in July 2001 8,663 5,710
------- -------
$17,594 $13,947
======= =======
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 $ --
======= =======
</TABLE>
F-11
<PAGE> 28
The Company's discontinued Zaring Homes segment has a syndicated credit
facility with PNC Bank acting as agent. This facility consists of a revolving
credit facility, including amounts available for letters of credit, as defined
in the agreement, and a term loan.
During 1999 and 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
- 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 2, 2000,
$5.0 million on October 1, 2000 and an additional $10.0 million on October
13, 2000.
- Interest rates were adjusted to prime plus 1% through August 31, 2000, with
an increase to prime plus 2% if borrowings under the revolving credit
facility exceed $40.0 million on September 1, 2000, an increase to prime
plus 3% if revolver borrowings exceed $25.0 million on November 1, 2000 and
prime plus 4% if revolver borrowings exceed $5.0 million on January 1,
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 established limitations on the
number of market and model homes maintained in inventory, land acquisition
and deviations from expected cash flows (as defined).
- Waivers for loan violations occurring prior to April 14, 2000.
The Company was not in compliance with certain of the terms and
conditions of certain of its credit agreements at September 30, 2000. Management
intends to discuss the potential covenant violations with its lenders and secure
waivers or otherwise amend the agreements to enable compliance through at least
the date of the expected sale to Drees (see Notes 1, 13 and 15). In addition,
management is of the opinion that its present cash balances, amounts available
from its credit agreements and amounts generated from its asset reduction plans
will provide adequate funds for its future operations through the date of the
sale to Drees provided such sale occurs no later than the first quarter of 2001.
However, there can be no assurances that the banks will provide waivers or
otherwise amend the credit agreements or continue to provide financing to the
Company. In the event the banks do not agree to provide waivers or otherwise
amend the credit agreements and accelerate payments due per the agreements, the
Company will encounter great difficulty in meeting the demands of the banks and
will need to evaluate various forms of financial reorganization, the most severe
of which could include bankruptcy. In addition, losses from continuing
operations are anticipated and there are no assurances the Company would be able
to secure capital or other financing to fund these losses. Although management
is pursuing various initiatives to sell certain or all of its operations there
are no assurances the net proceeds would be sufficient to pay all creditors or
provide any distributions to the Company's shareholders.
As of November 1, 2000 borrowings under the revolving credit facility
were approximately $39.3 million, accordingly interest rates were adjusted to
prime plus 3.0%. Further, as of December 15, 2000, management believes
borrowings under the revolving credit facility will exceed $5.0 million on
January 1, 2001. If borrowings exceed $5.0 million on January 1, 2000, interest
rates will be adjusted to prime plus 4.0% through the maturity of the facility.
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 from continuing operations are as
follows:
YEARS ENDED DECEMBER 31,
------------------------
2000 $11,325
2001 1,470
2002 21,060
2003 -
2004 -
Thereafter -
--------
$ 33,855
--------
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-12
<PAGE> 29
(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 benefit for income taxes on the loss from
continuing operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Currently payable (receivable) $(1,250) $ -- $ --
Deferred (1,438) (8,184) (1,615)
------- ------- -------
$(2,688) $(8,184) $(1,615)
======= ======= =======
</TABLE>
The following is a reconciliation between the statutory federal income
tax rate and the benefit for income taxes:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Computed benefit for federal
income taxes at the statutory rate $(5,677) (34.0)% $(7,154) (34.0)% $(1,404) (34.0)%
State and local income taxes, net of
federal income tax benefit (835) (5.0) (1,052) (5.0) (207) (5.0)
HomeMax losses subsequent to March 15, 1999
which are not included in the consolidated
return of the Company 2,806 16.8 -- -- -- --
Valuation allowance 1,106 6.6 -- -- -- --
Other (88) (.5) 22 .1 (4) (.1)
------- ------ ------- ------ ------- ------
$(2,688) (16.1)% $(8,184) (38.9)% $(1,615) (39.1)%
======= ====== ======= ====== ======= ======
</TABLE>
At December 31, 1999 and 1998, the future tax benefit and estimated
refunds consist 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. During the quarter ended
September 30, 2000, the Company recorded an additional valuation allowance of
$10.6 million. The 2000 valuation allowance was allocated among continuing and
discontinued operations based on the origin of the timing items in amounts
approximating $6.2 million and $4.4 million, respectively. The recognition of
the valuation allowance is primarily attributable to the fact that previously
recorded deferred tax assets will only be realized through prospective taxable
income and there are substantial uncertainties relative to the prospects of
realizing such taxable income.
(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 attributed to continuing operations approximated $158,
$179, and $3 in 1999, 1998, and 1997, respectively. Company contributions
expensed related to the discontinued operations approximated $794, $605 and $51
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
F-13
<PAGE> 30
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.
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) 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 matters, which seek
remedies or damages. The Company believes that any liability that may finally be
determined, exclusive of certain litigation discussed below, will not have a
material effect on its financial position or results of operations.
During 1999, the Company became aware of certain moisture and mold
related issues in certain of its luxury site-built home communities in Mason,
Ohio. The Company has vigorously pursued various remediation initiatives in an
effort to address the various homeowner concerns. As of December 31, 1999 and
through September 30, 2000, the Company estimated the cost of remediation
approximates $3.8 million. Certain of the costs associated with the remediation
efforts are subject to recovery through the Company's insurance. To date, the
Company's primary carrier has accepted certain coverage, however, the excess
insurance carrier has to date denied coverage. The Company continues to
vigorously pursue its rights under its insurance polices. In the opinion of
management and legal counsel it is remote that insurance recoveries will be less
than $1.0 million. Through September 30, 2000 the Company received insurance
proceeds of approximately $432. Adjustments to the estimated costs of
remediation well as the related minimum insurance recoveries will be recorded in
the periods in which the facts and circumstances which warrant such adjustments
become known. Through September 30, 2000, the Company incurred costs of
approximately $3.3 million related to the remediation efforts.
As of September 30, 2000, of the total estimated remediation costs of
$3.8 million, the Company has contractually agreed to remediation costs of
approximately $2.9 million with certain homeowners in the communities. In March
2000, a purported class action suit was filed by a homeowner which claimed
compensatory damages of more than $25, treble and punitive damages and other
costs. The Company intends to vigorously defend this matter. However, given the
preliminary nature of this 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.
F-14
<PAGE> 31
(b) 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 for the Company's continuing operations approximated $2,240, $1,266,
and $269 for the years ended December 31, 1999, 1998 and 1997, respectively.
Rental expense under these agreements for the Company's discontinued operations
approximated $1,635, $1,408 and $704, respectively. Future minimum lease
payments under these operating lease agreements are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
Continuing Operations Discontinued Operations
--------------------- -----------------------
<S> <C> <C>
2000 $2,090 $ 1,178
2001 1,500 1,125
2002 680 856
2003 250 779
2004 109 622
Thereafter 339 2,592
----- -------
$4,968 $ 7,152
====== =======
</TABLE>
As further discussed in Note 15, under the terms of the purchase
agreements with Drees, Olympia Homes and St. Lawrence Homes, the facility and
equipment leases of the Zaring Homes segment will be assumed by Drees, Olympia
Homes and St. Lawrence Homes, as appropriate.
(c) 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>
These commitments relate primarily to the discontinued Zaring Homes and
Hearthside segments. Subsequent to December 31, 1999, the Company is negotiating
the transfer and/or termination of these commitments with the owners of the lots
and the purchases of certain of the assets of the Zaring Home segment. As of
December 15, 2000, these commitments approximate $8.1 million.
(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 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
F-15
<PAGE> 32
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>
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
(a) Entry Level Home Segment--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
included in the net assets of discontinued operations in the accompanying
balance sheets. The results of the discontinued Hearthside segment reflect an
allocation of interest expense based on assets deployed. Summary financial
information of Hearthside is as follows:
<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>
F-16
<PAGE> 33
<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 includes 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.
(b) Luxury Site-Built Homes Segment--On November 13, 2000, the Board of
Directors approved plans to discontinue the operations of the Zaring Homes
segment. As indicated previously, the Company has reached a tentative agreement
with Drees to sell certain of the assets of the Zaring Homes Cincinnati,
Nashville and Indianapolis divisions to Drees. In addition, on September 29,
2000, the Company sold certain of the net assets of the Louisville division to
Olympia Home LLC, on October 13, 2000, the Company sold certain of the assets of
the Raleigh division to Drees and on November 13, 2000, the Company sold certain
of the assets of the Charlotte division to St. Lawrence Homes.
The Company expects to close on the sale of the net assets of the
Cincinnati, Nashville and Indianapolis divisions within the next twelve months.
In the event the sale to Drees does not materialize, the Company will
aggressively pursue other purchasers for these three divisions. Accordingly, the
net income associated with the operations of Zaring Homes is included in the
accompanying statements of operations as discontinued operations for each of the
periods presented. In addition, the net assets of Zaring Homes are included in
net assets of discontinued operations in the accompanying consolidated balance
sheets.
As of the period ended September 30, 2000, the Company recorded a loss on
discontinued operations including a write down of assets to estimated realizable
value and a provision for anticipated closing costs and operating losses until
disposal aggregating approximately $3.0 million. The results of the Zaring Homes
segment reflect an allocation of interest expense based on assets deployed.
Summary financial information of the Zaring Homes segment is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Revenues $284,602 $241,599 $214,042
Cost of sales 237,792 199,867 179,568
Incremental warranty provision 2,806 -- --
Interest allocation 2,698 2,479 2,698
Selling, general and administrative 36,880 28,256 24,346
-------- -------- -------
Operating income 4,426 10,997 7,430
Other income (expense) 82 (14) 15
-------- -------- -------
Pretax operating income 4,508 10,983 7,445
Provision for taxes 1,659 4,271 2,911
-------- -------- -------
Net income $ 2,849 $ 6,712 $ 4,534
======== ======== =======
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Land $49,090 $ 41,737
Luxury site-built home inventory 66,300 32,365
Model homes 6,243 5,240
Property and equipment, net 6,199 6,634
Other assets 4,445 2,285
Accounts payable (26,971) (12,080)
Accrued expenses (12,691) (4,037)
Customer deposits (6,851) (2,667)
Notes payable (71,438) (55,621)
-------- --------
Net assets of discontinued operations $ 14,326 $ 13,856
======== ========
</TABLE>
F-17
<PAGE> 34
(c) Financial Services Segment--Upon closing the sale of the last
remaining division of the Zaring Homes segment, the operations of the Zaring
Financial Services segment will be discontinued. As a result, the net losses
associated with the operations of Zaring Financial Services are included in the
accompanying consolidated statements of operations as discontinued operations
for all periods presented. In addition, the net assets of Zaring Financial
Services are included in net assets of discontinued operations in the
accompanying consolidated balance sheets. Summary financial information of
Zaring Financial Services is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $ 1,677 $ 526 $ --
Pretax operating income (loss) $ (78) $ (5) $ --
Benefit for income taxes (29) (2) --
------- ----- ------
Net loss $ (49) $ (3) $ --
======= ===== ======
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Mortgage receivables $ 3,721 $ 71
Other assets 263 88
Revolving credit note (3,181) --
Other liabilities (270) (142)
------- -----
Net assets of discontinued operations $ 533 $ 17
======= =====
</TABLE>
(d) Majority Shareholder LLCs--Upon closing the sale of the Zaring Homes
divisions, the agreements between Zaring Homes and the Majority Shareholder LLCs
will be terminated and the Majority Shareholder LLCs will enter into new
agreements with the third party purchasers. As a result, the activities of these
entities will no longer be required to be consolidated with the results of the
Company. The Majority Shareholder LLCs are included as a component of
discontinued operations in the accompanying financial statements of the Company.
Summary information of the Majority Shareholder LLCs is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $ 2,836 $2,308 $ --
Cost of sales 2,436 1,887 --
Interest, net 1,221 465 --
Selling, general and administrative 178 112 --
------ ------ -------
Operating loss (999) (156) --
Other income 750 560 --
Minority interest 249 (404) --
------ ------- -------
$ -- $ -- $ --
====== ====== =======
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Model homes $ 9,923 $ 9,153
Land 7,853 5,784
Other assets 1,063 739
Notes payable (17,594) (13,947)
Other liabilities (170) (75)
Minority interest (1,075) (1,654)
-------- --------
Net assets of discontinued operations $ -- $ --
======== ========
</TABLE>
(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
continuing segments are aligned with its respective product offerings: retail
distribution of manufactured housing 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-18
<PAGE> 35
The following tables set forth for the years indicated information
regarding the Company's segments:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
HOMEMAX
<S> <C> <C> <C>
Retail Distribution Manufactured Homes
Revenues $ 20,551 $ 12,411 $ 8,209
Cost of sales 19,451 10,724 6,920
Asset impairment 753 5,674 --
Interest 1,568 1,807 312
Selling, general and administrative 11,688 11,704 3,370
--------- --------- --------
Operating loss (12,909) (17,498) (2,393)
Other income (expense) 43 (5) (28)
Minority interest 2,406 263 76
--------- --------- --------
Pretax Retail Distribution Loss (10,460) (17,240) (2,345)
CORPORATE
Interest 1,687 790 --
General and administrative 4,551 3,010 1,785
-------- -------- --------
Loss before income taxes and
discontinued operations (16,698) (21,040) (4,130)
Benefit for income taxes (2,688) (8,184) (1,615)
--------- ---------- ---------
Net loss before discontinued
operations (14,010) (12,856) (2,515)
Income (loss) from discontinued operations,
net of tax (1,730) 6,490 4,567
--------- -------- -------
Net income (loss) $(15,740) $ (6,366) $ 2,052
========= ========= =======
</TABLE>
Other pertinent information regarding the Company's segment operations
are as follows:
<TABLE>
<CAPTION>
HOMEMAX
RETAIL
DISTRIBUTION
MANUFACTURED
HOMES CORPORATE TOTAL
----- --------- -----
<S> <C> <C> <C>
Segment assets:
1999 $24,004 $18,432 $42,436
1998 23,152 10,671 33,823
1997 12,044 6,643 18,687
Depreciation and
amortization expense:
1999 946 183 1,129
1998 2,024 -- 2,024
1997 134 -- 134
Expenditures for
long-lived assets
(excluding acquisitions):
1999 675 -- 675
1998 14,064 -- 14,064
1997 5,252 -- 5,252
</TABLE>
Reconciliation of segment assets to total assets:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Total segment assets $ 42,436 $ 33,823 $ 18,687
Elimination of inter-entity investments 65 (5) --
Cash and cash equivalents* 7,102 14,133 4,160
Net assets of discontinued operations 20,598 21,719 30,918
-------- -------- -------
Total assets $ 70,201 $ 69,670 $53,765
======== ======== =======
</TABLE>
* Management excludes cash and cash equivalents from assessing a segment's
operating performance.
(15) SUBSEQUENT EVENTS
In February 2000, the Company's principal shareholder formed First
Cincinnati Leasing 2000 LLC by contributing $6.0 million to purchase certain
model homes from Zaring Homes. The model homes were subsequently leased back to
Zaring Homes. On September 1, 2000, Leasing 2000 borrowed $5.3 million from a
bank at interest of LIBOR plus 1.75%, secured by the model homes and a personal
guarantee and due August 2003.
During the second quarter of 2000, the HomeMax subsidiary sold two
unopened sales villages for approximately $800 resulting in a gain of
approximately $529.
On September 29, 2000 the Company sold certain of the net assets of the
Zaring Homes Louisville division to Olympia Homes LLC for approximately $6.3
million resulting in a loss of $824.
On October 13, 2000, the Company sold certain of the operating assets
of the Zaring Homes Raleigh division to Drees for book value, approximately
$11.0 million.
On November 13, 2000, St. Lawrence Homes acquired substantially all of
the real estate assets and assumed the lot purchase contracts of the Zaring
Homes Charlotte
F-19
<PAGE> 36
division for book value, $3.3 million. All Zaring Homes under contract of sale
in Charlotte will be completed and warranted by Zaring Homes.
On November 13, 2000, the Board of Directors of the Company approved
plans to discontinue the operations of its Zaring Homes and Zaring Financial
Services segments and will no longer be required to consolidate the results of
the LLCs controlled by its principal shareholder (see Note 13).
On December 1, 2000, the Company entered into an agreement with Drees
whereby a Drees subsidiary will purchase substantially all of the site-built
homebuilding assets of Zaring Homes in its Cincinnati, Nashville and
Indianapolis markets at book value, as defined. Under the terms of the
agreement, Drees will obtain Zaring Homes' tradenames, trademarks and home plans
in these markets. Zaring Homes will retain warranty responsibility for all homes
closed prior to the sale to Drees. The Company expects to close on the sale to
Drees in the first quarter of 2001.
At September 30, 2000 the Company was not in compliance with certain of
the terms and conditions of certain of its credit agreements. Management intends
to discuss the covenant violations with its lenders and secure waivers or
otherwise amend the agreements to enable compliance at least through the date of
the expected sale to Drees. (see Note 5)
Through the third quarter of 2000, the losses of HomeMax continued to
adversely impact the consolidated results of the Company. In response to the
actual and anticipated prospective losses, the Company again determined that the
undiscounted estimated future cash flows of HomeMax were less than the carrying
value of the long-lived assets of HomeMax. Accordingly, the Company adjusted the
carrying values of the long-lived assets of HomeMax to their estimated fair
market value through the recognition of an additional provision for asset
impairment of approximately $6.3 million.
During the third quarter of 2000, the Company recorded an additional
tax valuation allowance of $10.6 million. The valuation allowance was allocated
among continuing and discontinued operations based on the origin of the timing
items in amounts approximately $6.2 million and $4.4 million, respectively. The
recognition of the valuation allowance is primarily attributable to the fact the
previously recorded deferred tax assets will only be realized through
prospective taxable income and there are substantial uncertainties relative to
the prospects of realizing such taxable income.
F-20
<PAGE> 37
SIGNATURES
Pursuant to the requirements of the Securities Exchange of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 15, 2000
ZARING NATIONAL CORPORATION
By: /s/ Ronald G. Gratz
-------------------------
Ronald G. Gratz
Chief Financial Officer,
Secretary and Treasurer
F-21
