<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21692
ZARING HOMES, INC
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1071348
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 Cornell Park Drive, Suite 300, Cincinnati, Ohio 45242-1825
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
513-489-8849
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
- -------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
----- -----
Number of common shares outstanding as of June 30, 1996: 4,780,150
Total Pages: 18
PAGE 1
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ZARING HOMES, INC.
<TABLE>
<Caption
INDEX
Page
----
PART I FINANCIAL INFORMATION
<S> <C>
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets,
June 30, 1996 and 1995 (unaudited),
and December 31, 1995 (audited)..........................................................................3
Consolidated Statements of Income (unaudited),
Three Months Ended June 30, 1996 and 1995
Six Months Ended June 30, 1996 and 1995..................................................................5
Consolidated Statement of Shareholders' Equity,
Six Months Ended June 30, 1996 (unaudited)...............................................................6
Consolidated Statements of Cash Flows,
Six Months Ended June 30, 1996 and 1995 (unaudited) .....................................................7
Notes to Consolidated Financial Statements (unaudited) ......................................................8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................................10
PART II OTHER INFORMATION.................................................................................16
SIGNATURES........................................................................................18
</TABLE>
PAGE 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ZARING HOMES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unaudited
June 30, December 31,
-------------- ------------
1996 1995 1995
<S> <C> <C> <C>
Cash and cash equivalents ........................ $ 2,877 $ 2,103 $ 4,513
Receivables:
Related parties .............................. 19 89 0
Other ........................................ 329 38 108
Inventories:
Residential housing completed or
under construction ........................ 45,614 49,336 35,628
Land, development costs and finished lots .... 33,108 30,432 38,532
Property and equipment, net ...................... 1,864 1,845 1,798
Investments in and advances to unconsolidated
joint ventures ............................... 886 1,594 1,578
Future tax benefits .............................. 801 801 801
Cash surrender value of life insurance and
other assets ................................. 3,406 2,137 2,480
------- ------- -------
$88,904 $88,375 $85,438
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 3
<PAGE> 4
ZARING HOMES, INC.
CONSOLIDATED BALANCE SHEETS - (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unaudited
June 30, December 31,
---------------- ------------
1996 1995 1995
LIABILITIES:
<S> <C> <C> <C>
Term notes payable ....................... $ 20,245 $ 5,245 $ 5,245
Revolving promissory notes ............... 8,095 22,600 12,500
Subordinated notes payable ............... -- 11,816 11,816
Accounts payable and unbilled amounts due
contractors ............................ 6,131 2,863 6,046
Accrued expenses ......................... 3,296 2,952 2,963
Customer deposits ........................ 4,452 1,716 1,703
Income tax payable ....................... 941 235 854
-------- -------- --------
Total liabilities .................... 43,160 47,427 41,127
SHAREHOLDERS' EQUITY:
Common shares, no par value, 18,000,000
shares authorized, 5,035,520 issued, and
4,850,159 outstanding at June 30, 1995
and December 31, 1995, and 4,780,150
outstanding at June 30, 1996 ........... 25,136 25,136 25,136
Additional paid-in capital ............... 7,687 7,533 7,533
Retained earnings ........................ 14,928 9,664 13,027
-------- -------- --------
47,751 42,333 45,696
Less Treasury shares, at cost, 185,361 shares
at June 30, 1995 and December 31, 1995,
and 255,370 shares at June 30, 1996 .... (2,007) (1,385) (1,385)
-------- -------- --------
Total shareholders' equity .......... 45,744 40,948 44,311
-------- -------- --------
$ 88,904 $ 88,375 $ 85,438
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 4
<PAGE> 5
ZARING HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES ................................... $ 43,415 $ 29,975 $ 70,670 $ 50,205
COST OF SALES .............................. 35,739 24,830 58,203 41,373
---------- ---------- ---------- ----------
Gross profit ...................... 7,676 5,145 12,467 8,832
OPERATING EXPENSES:
Selling ................................ 2,962 2,005 5,382 3,679
General and administrative ............. 2,314 1,775 4,117 3,789
---------- ---------- ---------- ----------
Income from operations ............ 2,400 1,365 2,968 1,364
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Investment income ...................... 13 19 18 30
Income from unconsolidated
joint ventures .................... 100 22 143 121
Other, net ............................. 0 3 2 5
---------- ---------- ---------- ----------
Total other income (expense) ...... 113 44 163 156
---------- ---------- ---------- ----------
Income before provision for income taxes 2,513 1,409 3,131 1,520
Provision for income taxes ............. 990 556 1,230 603
---------- ---------- ---------- ----------
Net income ........................ $ 1,523 $ 853 $ 1,901 $ 917
========== ========== ========== ==========
Earnings per share ..................... $ 0.32 $ 0.18 $ 0.40 $ 0.19
========== ========== ========== ==========
Weighted average shares outstanding .... 4,777,360 4,850,159 4,777,360 4,850,159
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 5
<PAGE> 6
ZARING HOMES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Treasury Shares
Additional ---------------
Shares Common Paid-In # of Retained
Issued Shares Capital Shares Amount Earnings Total
------ ------ ------- ------ ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 5,035,520 $25,136 $7,533 185,361 ($1,385) $13,027 $ 44,311
Purchase of Treasury Shares -- -- -- 135,009 (1,199) -- (1,199)
Sale of Treasury Shares -- -- 154 (65,000) 577 -- 731
Net Income -- -- -- -- -- 1,901 1,901
--------- ------- ------ -------- ------- ------- --------
Balance, June 30, 1996 5,035,520 $25,136 $7,687 255,370 ($2,007) $14,928 $ 45,744
========= ======= ====== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 6
<PAGE> 7
ZARING HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES: ------- -------
<S> <C> <C>
Net income .......................................................... $ 1,901 $ 917
Adjustments to reconcile net income to cash
provided by operating activities --
Depreciation ..................................................... 500 409
Income from unconsolidated joint ventures ........................ (143) (121)
Change in assets and liabilities:
Receivables ...................................................... (240) 435
Inventories ...................................................... (4,562) (5,997)
Cash surrender value of life insurance and other assets .......... (926) (216)
Accounts payable ................................................. 85 (2,462)
Accrued expenses ................................................. 333 528
Income taxes payable ............................................. 87 (413)
Customer deposits ................................................ 2,749 817
------- -------
Net cash used by operating activities ....................... (216) (6,103)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ................................. (566) (504)
Disposal of property and equipment .................................. 0 4
Distributions from and (investments in) unconsolidated joint ventures 835 627
------- -------
Net cash provided (used) by investing activities ................. 269 127
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) on notes payable ............................ (1,221) 4,296
Purchase (sale) of treasury shares .................................. (468) --
------- -------
Net cash provided (used) by financing activities ................. (1,689) 4,296
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................ (1,636) (1,680)
CASH AND CASH EQUIVALENTS, beginning of year ............................ 4,513 3,783
------- -------
CASH AND CASH EQUIVALENTS, end of period ................................ $ 2,877 $ 2,103
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest ......................................................... $ 825 $ 1,455
------- -------
Income taxes ..................................................... $ 1,143 $ 1,014
------- -------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
PAGE 7
<PAGE> 8
ZARING HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of
Zaring Homes, Inc. (the Company), an Ohio corporation, whose principal business
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 Cincinnati, Ohio including Northern Kentucky, Nashville, Tennessee,
Indianapolis, Indiana, and Raleigh/Durham, North Carolina. In May 1996, the
Company announced its entry into the Louisville, Kentucky market, and in June
1996, announced its entry into the Charlotte, North Carolina market.
In December 1995, the Company formed Zaring Holdings, Inc. (Holdings), an Ohio
corporation, and a wholly-owned subsidiary, for the purpose of acquiring land
and residential lots in the southeastern United States market. The accounts of
Holdings have been consolidated in the accompanying consolidated financial
statements.
The Company is the majority shareholder in Zaring Homes of Indiana, L.L.C.
(ZHILLC), an Indiana corporation, and exercises control over all decisions as
set forth in the operating agreement. ZHILLC was formed in 1994 for the purpose
of designing, constructing, marketing and selling single-family homes and the
acquisition and development of land for sale as residential building lots in
Indianapolis, Indiana. The accounts of ZHILLC have been consolidated in the
accompanying financial statements.
The Company is the sole shareholder in Zaring Homes Kentucky, LLC (ZHKLLC), a
Kentucky corporation. ZHKLLC was formed in 1996 for the purpose of designing,
constructing, marketing and selling single family homes, and the acquisition and
development of land for sale as residential building lots in Kentucky. The
accounts of ZHKLLC have been consolidated in the accompanying financial
statements.
The accompanying consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission for interim financial information. Since such financial statements do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements, they should be read in
conjunction with the consolidated financial statements and related footnotes
included in the Form 10-K for the fiscal year ended December 31, 1995 filed with
the Securities and Exchange Commission. The financial statements are unaudited,
but in the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
Company's unaudited consolidated financial statements as of June 30, 1996, and
for the six months ended June 30, 1996 have been included. Operating results for
the six months ended June 30, 1996, are not necessarily indicative of the
results for the entire year.
2. Capitalized Interest
--------------------
Interest is capitalized on land in the process of development and residential
housing construction costs during the development and construction period. The
following table summarizes the activity with respect to capitalized interest:
PAGE 8
<PAGE> 9
ZARING HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
(Dollars in Thousands) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Capitalized interest, beginning of period $ 1,007 $ 893 $ 1,123 $ 751
Interest incurred ....................... 583 805 1,139 1,512
Interest expensed ....................... (667) (670) (1,339) (1,235)
------- ------- ------- -------
Capitalized interest, end of period ..... $ 923 $ 1,028 $ 923 $ 1,028
======= ======= ======= =======
</TABLE>
3. Notes Payable
-------------
On May 13, 1996, the Company entered into a new unsecured $87.5 million credit
agreement. The new credit agreement consists of a $72.5 million revolving credit
facility and a $15 million term loan. Ten million of the revolving credit
facility may be used for letters of credit. The credit agreement bears interest
at various options, including prime rate, Federal Fund rate, and/or LIBOR (as
defined), plus 125 to 175 basis points depending upon the Company's
debt-to-equity ratio. The revolving credit facility is a three-year commitment
expiring July 1, 1999, and the term loan is a five-year commitment expiring
April 1, 2001.
As of June 30, 1996, the Company had outstanding balances of $8 million under
the revolving credit facility, and $3.8 million in letters of credit.
Term notes payable, at June 30, 1996, include the $15 million term loan
(referred to above) and existing term loans of $5.2 million which bear interest
at a fixed rate of 7.95% and are payable in 12 equal quarterly installments
beginning in September 1998.
4. Shareholders' Equity
--------------------
Preferred Shares - The Company is authorized to issue up to 2,000,000 preferred
shares of which 1,000,000 are voting. No preferred shares have been issued.
5. Litigation
----------
On March 31, 1995, a verdict was delivered against the Company in an action
brought by a former employee. The former employee was awarded $250,000 plus
attorney's fees. The Company has been advised by counsel that it has substantial
defenses and it intends to pursue all avenues in the post trial and appellate
review process. The Company has reserved the damages in the accompanying
consolidated financial statements.
6. New Pronouncements
------------------
In 1995, the Financial Accounting Standards Board issued 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), effective for
fiscal years beginning after December 15, 1995. The new standard requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. The
adoption of SFAS 121 had no material impact on the financial statements.
Also in 1995, Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123) was issued. SFAS 123 encourages, but
does not require, companies to measure and record as compensation expense the
fair value of stock-based compensation granted to employees, directors and
others. SFAS 123 permits companies electing not to record compensation expense
to provide disclosure of net income and earnings per share as if the
compensation expense had been recorded. The Company adopted SFAS 123 as
required and elected the disclosure option.
PAGE 9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
The Company's business and the homebuilding industry are subject to changes in
national and local economic conditions, as well as other factors, including
employment levels, availability of financing, interest rates, consumer
confidence, housing demand, and risks of nature. The Company's results of
operations for the periods presented reflect the cyclical nature of the
homebuilding industry.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth for the periods indicated certain information
regarding the Company's operations.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1996 1995 1996 1995
---- ---- ---- ----
Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues (1) $ 43,415 100.0 $ 29,975 100.0 $ 70,670 100.0 $ 50,205 100.0
Cost of sales 35,739 82.3 24,830 82.8 58,203 82.4 41,373 82.4
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit 7,676 17.7 5,145 17.2 12,467 17.6 8,832 17.6
Selling, general and
administrative expenses 5,276 12.2 3,780 12.6 9,499 13.4 7,468 14.9
---------- ----- ---------- ----- ---------- ----- ---------- -----
Operating Income 2,400 5.5 1,365 4.6 2,968 4.2 1,364 2.7
Other income (expense) 113 0.3 44 0.1 163 0.2 156 0.3
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income before provision
for income taxes 2,513 5.8 1,409 4.7 3,131 4.4 1,520 3.0
Provision for income taxes 990 2.3 556 1.8 1,230 1.7 603 1.2
---------- ----- ---------- ----- ---------- ----- ---------- -----
Net income $ 1,523 3.5 $ 853 2.9 $ 1,901 2.7 $ 917 1.8
========== ===== ========== ===== ========== ===== ========== =====
Net income per share $ 0.32 $ 0.18 $ 0.40 $ 0.19
========== ========== ========== ==========
Weighted average shares
outstanding 4,777,360 4,850,159 4,777,360 4,859,159
========== ========== ========== ==========
<FN>
- ------------------------
(1) Revenue from a sale is recognized upon the closing of the sale.
</TABLE>
PAGE 10
<PAGE> 11
Three Months Ended June 30, 1996 Compared to June 30,1995
- ---------------------------------------------------------
Net revenues for the three month period ended June 30, 1996 increased by 44.7%
to $43.4 million from $30.0 million for the comparable period in 1995. The
number of homes closed by the Company increased by 38.4% to 191 homes from 138
homes during the same period in 1995. The increase in units closed was primarily
a result of the closings from the Raleigh, North Carolina and Indianapolis,
Indiana divisions, closing 34 units for the period ended June 30, 1996, compared
to one unit closed for the same period in 1995. The Company's Cincinnati
operation closed 99 homes for the three month period ended June 30, 1996
compared to 87 closings for the same period in 1995, and the Nashville operation
closed 58 homes for the period ended June 30, 1996, compared to 50 closings for
the same period in 1995. The Company's revenue increase for the three months
ended June 30, 1996 was also due in part to a 4.7% increase in the average
selling prices of new homes closed of $225 from $215 for the same period in
1995. The increase in average selling prices are principally due to change in
product mix sold.
Net new sales contracts for the three month period ended June 30, 1996 decreased
by 4.7% from 193 units to 184 units for the comparable period in 1995. This
decrease in sales contracts was primarily due to the Company's Cincinnati
operation which had 87 unit sales for the three month period ended June 30, 1996
compared to 107 unit sales for the same period in 1995. The Company's Nashville
operation had 46 unit sales for the three month period ended June 30, 1996
compared to 49 units for the same period in 1995. The Company's Raleigh
operation had 30 unit sales for the three months ended June 30, 1996 compared to
31 units for the same period in 1995. The Indianapolis operation had 21 unit
sales for the three month period ended June 30, 1996 compared to six units for
the same period in 1995. The Company's backlog consists of homes for which the
Company has entered into a sales contract, but which it has not yet delivered.
The sales backlog on June 30, 1996 was 394 homes with a total sales value of
$89.7 million compared to a sales backlog of 229 homes with a total value of
$46.1 million on June 30, 1995. The higher level of backlog is expected to
positively impact revenues in the third and fourth quarters of 1996.
Gross profit for the three month period ended June 30, 1996 increased by $2.5
million from the same period in 1995. This increase was the result of increased
revenues in the 1996 period. The gross profit percentage increased to 17.7% for
the three month period ended June 30, 1996 compared to 17.2% for the same period
in 1995. The increase is attributable to an increase in gross profit for the
expansion cities of Raleigh, and Indianapolis which have now been in operation
for over a year. Also attributing to the increase were writedowns of certain
land holdings taken in the same period in 1995, none were taken in 1996.
Selling, General and Administrative ("SG&A") expenses increased 39.6% to $5.3
million for the three month period ended June 30, 1996 from $3.8 million for the
comparable period of 1995. As a percentage of revenue, selling expenses remained
constant at 6.7%. General and administrative expenses, as a percentage of
revenue, decreased by .6%, primarily due to improving economies of scale in the
Raleigh and Indianapolis operations.
Other income, which includes investment income and income from unconsolidated
joint ventures increased from $44,000 for the three month period ended June 30,
1995 to $113,000 for the same period in 1996. This increase is due to additional
income from unconsolidated joint ventures of approximately $78,000.
As a result of the foregoing, income before taxes for the three month period
ended June 30, 1996 increased to $2.5 million from $1.4 million for the three
month period ended June 30, 1995.
PAGE 11
<PAGE> 12
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
- -------------------------------------------------------------------------
Net revenues for the six month period ended June 30, 1996 increased by 40.8% to
$70.7 million from $50.2 million for the comparable period in 1995. The number
of homes closed by the Company increased by 34.6% to 311 homes from 231 homes
during the same period in 1995. This increase in homes closed was due to an
increase in closings in all the Company's operations. The Company's Nashville
operation closed 97 homes for the six month period ended June 30, 1996 compared
to 87 homes during the same period in 1995. The Company's Cincinnati operation
closed 153 homes for the six month period ended June 30, 1996 compared to 142
homes for the same period in 1995. The Company's Raleigh operation had 43
closings for the six months ended June 30, 1996 compared to two closings for the
same period in 1995. The Company's Indianapolis operation had 18 closings for
the six months ended June 30, 1996, none for the same period 1995.
Net new sales contracts for the six month period ended June 30, 1996 increased
by 45.2%, to 488 units from 336 units for the comparable period in 1995. This
increase in sales contracts occurred in all of the Company's operations. The
Company's Cincinnati operation had 246 unit sales for the six month period ended
June 30, 1996 compared to 187 units for the same period in 1995. The Company's
Nashville operation had 128 unit sales for the six month period ended June 30,
1996 compared to 107 unit sales for the same period in 1995. The Company's
Raleigh operation had 74 unit sales, and the Indianapolis operation had 40 unit
sales for the six month period ended June 30, 1996 compared to 35 unit sales and
seven units sales, respectively, for the same period in 1995.
Gross profit for the six month period ended June 30, 1996 increased $3.6 million
from the same period in 1995. This increase was the result of an increase in the
number of homes closed. The gross profit percentage remained constant for the
six month period ended June 30, 1995 at 17.6%.
Selling, General and Administrative ("SG&A") expenses increased 26.7% to $9.5
million for the six month period ended June 30, 1996 from $7.5 million for the
comparable period of 1995. Selling expenses as a percent of revenue increased
from 7.3% for the six month period ended June 30, 1995 to 7.6% for the
comparable period of 1996. This increase is attributable to increased model home
expenses within all the Company's operations. General and administrative
expenses, as a percentage of net revenues, decreased for the six months ended
June 30, 1996, to 5.8% from 7.6% for the same period in 1995, primarily due to a
$350 litigation reserve recorded in the same period in 1995.
Other income, which includes investment income and income from unconsolidated
joint ventures increased from $156,000 for the six month period ended June 30,
1995 to $163,000 for the same period in 1996. This increase is due to an
increase in income from unconsolidated joint ventures.
As a result of the foregoing, income before taxes for the six month period ended
June 30, 1996 increased by $1.6 million from $1.5 million to $3.1 million.
PAGE 12
<PAGE> 13
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Inventories at June 30, 1996 increased to $78.7 million compared to $74.2
million on December 31, 1995. This increase is primarily due to the additional
work in process inventory associated with the increased sales volume in all
operations and the construction of models at the Raleigh and Indianapolis
locations. Also contributing to this increase is the acquisition of finished
lots and the development of raw land for new neighborhoods.
On May 13, 1996, the Board of Directors approved and the Company entered into a
new Loan Agreement which consists of an unsecured revolving credit facility of
$72.5 million and term debt of $15 million. The Loan Agreement bears interest at
various options, including prime rate, Federal Funds rate, and/or LIBOR (as
defined), plus 125 to 175 basis points depending upon the Company's
debt-to-equity ratio. The revolving credit facility expires July 1, 1999. The
term debt is payable in 20 quarterly installments of $750 beginning July 1, 1996
through April 1, 2001.
The Company's financing needs depend upon its sales volume and inventory levels.
Historically, the Company has financed its operations through retained earnings
and unsecured lines of credit from financial institutions. None of the Company's
inventories are pledged as collateral to secure any borrowings. As of June 30,
1996, the Company has $60.7 million of unused, unsecured lines of credit
available. The Company believes that it will be able to fund its future
activities through a combination of operating cash flows, existing cash
balances, working capital management and its available credit.
PROVISIONS FOR WRITEDOWN TO NET REALIZABLE VALUE
- ------------------------------------------------
The Company periodically reviews the value of land and inventories and
determines whether any writedowns need to be recorded to reflect declines in
value. For the six month period ended June 30, 1995, the Company wrote down
$510,000 of land to reflect net realizable value. No significant writedowns have
been made in 1996. The estimated net realizable value of real estate inventories
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 is dependent upon future events and conditions that may cause
actual results to differ from amounts presently estimated.
INFLATION
- ---------
Housing demand, in general, is affected adversely by increases in interest
rates. If mortgage interest rates, material and labor costs increase
significantly, the Company's revenues, gross profit, and net income could be
adversely affected.
PAGE 13
<PAGE> 14
CAUTIONARY STATEMENTS
- ---------------------
The Company wishes to take advantage of the new safe harbor provisions
included in the Private Securities Litigation Reform Act of 1995. Accordingly,
in addition to historical information, this Management's Discussion and Analysis
of Financial Condition and Results of Operations contains certain
forward-looking statements. 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 including, but not limited to, those referred to
below.
GENERAL REAL ESTATE, ECONOMIC AND OTHER CONDITIONS. The homebuilding
industry is significantly affected by changes in national and local economic and
other conditions, including employment levels, changing demographic
considerations, availability of financing, interest rates, consumer confidence
and housing demand. In addition, homebuilders are subject to various risks, many
of them outside the control of the homebuilder, including competitive
overbuilding, availability and cost of building lots, availability of materials
and labor and adverse weather conditions which can cause delays in construction
schedules, cost overruns, changes in government regulation and increases in real
estate taxes and other local government fees.
PRESENT AND FUTURE COMMUNITIES. The Company intends for its
communities to be built out over time. Therefore, the medium- and long-term
financial success of the Company will be dependent on the Company's ability to
develop and market its communities successfully. Acquiring land and committing
the financial and managerial resources to develop a community on that land
involve significant risks. Before these communities generate any revenue, they
require material expenditures for, among other things, acquiring land, obtaining
development approvals and constructing project infrastructure (such as roads
and utilities), recreation centers, model homes and sales facilities. It
generally takes several years for communities to achieve cumulative positive
cash flow. The Company's risk may increase by its entries into the Raleigh,
Indianapolis, Louisville, and Charlotte markets where it does not have
substantial prior experience.
LONG-TERM NATURE OF PROJECTS; PERIOD-TO-PERIOD FLUCTUATIONS. The
Company's communities are long-term projects. Sales activity at the Company's
communities varies from period to period, and the ultimate success of any
community cannot necessarily be judged by results in any particular period or
periods. A community may generate significantly higher sales levels at inception
(whether because of local pent-up demand in the area or other reasons) than it
does during later periods over the life of the community. Revenues and earnings
of the Company will also be affected by period-to-period fluctuations in the mix
of product and home closings among the Company's communities.
THE COMPANY'S MARKETS. The Company's operations are concentrated in the
Cincinnati, Ohio, including Northern Kentucky; Nashville, Tennessee; Raleigh,
North Carolina; and Indianapolis, Indiana metropolitan areas. The Company
recently entered the Charlotte, North Carolina and Louisville, Kentucky
metropolitan areas. Although these are stable, established markets in which
the Company has or intends to operate successfully, there can be no assurance
that the stability of these markets or the Company's favorable results there
will continue. Adverse general economic conditions in these markets could have
a material adverse impact on the operations of the Company. The Company may
also expand into new geographic markets which could reduce the Company's
dependence upon the health of itsexisting markets. However, any new markets
may prove to be less stable and may involve delays, problems and expenses not
typically found by the Company in the existing markets with which it is
familiar. Such delays, problems and expenses would be likely to occur in any
new market
PAGE 14
<PAGE> 15
CAUTIONARY STATEMENTS (continued)
- ---------------------
and may include, without limitation, the development of relationships with local
contractors and suppliers, land acquisition and development, construction of new
model homes, acquiring local office facilities and hiring additional personnel.
COMPETITION. The homebuilding business is highly competitive. The
Company competes in each of its local market areas with numerous national,
regional and local homebuilders, some of which have greater financial,
marketing, land acquisition, and sales resources than the Company. Builders of
new homes compete not only for home buyers, but also for desirable properties,
financing, raw materials and skilled laborers. The Company also competes with
the resale market for existing homes which provides certain attraction for home
buyers over building a new home. The Company attempts to meet this competition
from the home resale market by offering benefits which the resale market for
existing homes cannot provide, the flexibility to select interior and exterior
finishes and new home warranties.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL CONSIDERATIONS. The housing
industry and the Company are subject to increasing local, state and Federal
statutes, ordinances, rules and regulations concerning zoning, resource
protection (preservation of woodlands and hillside areas), building design,
construction and similar matters, including local regulations which impose
restrictive zoning and density requirements in order to limit the number of
residences that can eventually be built within the boundaries of a particular
location. Such regulation affects construction activities, including
construction materials which must be used in certain aspects of building design,
as well as sales activities and other dealings with consumers. The Company must
also obtain licenses, permits and approvals from various governmental agencies
for its development activities, the granting of which are beyond the Company's
control. Furthermore, increasingly stringent requirements may be imposed on
homebuilders and developers in the future. Although the Company cannot predict
the impact on the Company of compliance with any such requirements, such
requirements could result in time consuming and expensive compliance programs.
The Company is also subject to a variety of local, state and Federal
statutes, ordinances, rules and regulations concerning the protection of health
and the environment. The particular environmental laws which apply to any given
project vary greatly according to the project site and the present and former
uses of the property. These environmental laws may result in delays, cause the
Company to incur substantial compliance costs, including substantial
expenditures for pollution and water quality control, and prohibit or severely
restrict development in certain environmentally sensitive regions or areas. The
Company endeavors in its land acquisition program to resolve, or at least
significantly reduce, environmental issues before it becomes obligated to
purchase the land. Although there can be no assurance that it will be successful
in all cases, the Company has a general practice of requiring an environmental
audit and resolution of environmental issues prior to purchasing land in an
effort to avoid major environmental issues in the Company's developments.
In addition, the Company has been and may in the future be subject to
periodic delays or may be precluded from developing certain projects due to
building moratoriums. These moratoriums generally relate to insufficient water
supplies, sewage facilities, delays in utility hook-ups, or inadequate road
capacity within the specific market area or subdivision. These moratoriums can
occur prior to, or subsequent to, commencement of operations by the Company
without notice to, or recourse by, the Company. Although the Company's
practice of resolving such issues before committing to purchase property tends
to reduce the Company's exposure to financial risk as a result of such
moratoriums, the Company must utilize its resources in dealing with them.
PAGE 15
<PAGE> 16
CAUTIONARY STATEMENTS (continued)
- ---------------------
FINANCING; LEVERAGE; INTEREST RATES. The homebuilding industry in
general is highly leveraged and usually subject to significant up-front
expenditures for land development costs. Although the Company generally limits
the extent of its borrowings, in periods of significant growth, the Company will
require significant additional capital resources, whether from issuances of
equity or by incurring additional indebtedness. If the Company is at any time
not successful in obtaining sufficient capital to fund its development and
expansion expenditures, some or all of its projects may be significantly
delayed, resulting in cost increases and adverse effects on the Company's
results of operations. No assurance can be given as to the availability or cost
of any future financing. In addition, the Company's degree of leverage from time
to time will affect its interest incurred and may limit funds available for
operations. As a result, the Company may be more vulnerable to economic
downturns, which could limit its ability to withstand adverse changes or to
capitalize on business opportunities. If the Company is at any time unable to
generate sufficient cash flow from operations to service its debt, refinancing
of all or a portion of that debt or obtaining additional financing may be
required to avoid defaults (including cross defaults). There can be no assurance
that such refinancing would be possible or that any additional financing could
be obtained, or obtained on terms that are favorable or acceptable to the
Company.
The Company's real estate operations are also dependent upon the
availability and cost of mortgage financing. The Company does not finance the
purchase of homes in its communities and does not contemplate doing so. However,
the Company does arrange mortgage financing with third-party lenders for the
purchase of its homes through a Cincinnati mortgage broker in which the Company
owns a 50% partnership interest. (Blue Chip Mortgage Company, LLC.) An increase
in interest rates, which may result from governmental policies and other
factors outside the control of the Company, may adversely affect the buying
decisions of potential home buyers and their ability to sell their existing
homes.
CONSTRUCTION. The Company has from time to time experienced shortages
of materials or qualified tradespeople or volatile increases in the cost of
certain materials (particularly increases in the price of lumber and framing,
which are significant components of home constructions costs), resulting in
longer than normal construction periods and increased costs not reflected in the
prices of homes for which home sales contracts had been entered into up to one
year in advance of scheduled closing. Generally, the Company's home sale
contracts do not contain, or if they do, contain only limited provisions for
price increases if the Company's costs of construction increase.
NATURE RISKS. All communities in which the Company builds are subject
to significant seasonal precipitation and temperature fluctuation that can
cause delays in construction and development and increase costs. Many of the
communities were adversely affected by adverse weather conditions in fiscal
1995 and 1996.
Additional information on factors which could affect the Company's
financial results may be included in the Company's most recently filed Annual
Report or Form 10-K, and subsequent reports, filed with the Securities and
Exchange Commission.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Litigation
----------
PAGE 16
<PAGE> 17
PART II - OTHER INFORMATION (continued)
- ---------------------------
On March 31, 1995, a verdict was delivered against the Company in an action
brought by a former employee. The former employee was awarded $250,000 plus
attorney's fees. The Company has been advised by counsel that it has substantial
defenses and it intends to pursue all avenues in the post trial and appellate
review process. The Company has reserved the damages awarded in the
accompanying consolidated financial statements.
The Company is subject to various other claims, lawsuits and administrative
proceedings arising in the ordinary course of business activities which seek
remedies or damages. The Company believes that any liability that may finally be
determined will not have a material effect on its financial position or results
of operation.
Item 2. None
Item 3. None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A) The Annual Meeting of Shareholders of Zaring Homes, Inc. was held on
April 18, 1996.
B) Not Applicable
C) 1) Seven nominees were elected to the Board of Directors at the 1995
Annual Meeting:
Allen G. Zaring III was elected by a vote of 4,448,668 for and
15,020 withheld.
John R. Brooks was elected by a vote of 4,435,608 for and 28,080
withheld.
George E. Casey, Jr. was elected by a vote of 4,448,668 for and
15,020 withheld.
Murat H. Davidson was elected by a vote of 4,448,608 for and 15,080
withheld.
Daniel W. Geeding was elected by a vote of 4,448,608 for and 15,080
withheld.
Robert N. Sibey was elected by a vote of 4,448,608 for and 15,080
withheld.
John H. Wyant was elected by a vote of 4,448,668 for and 15,020
withheld.
2) At the meeting, the following matters were voted upon with the
voting results for each matter as indicated:
a. The shareholders ratified Amendments to the Company's Key Employee
Stock Option Plan. There were 21,175 votes cast in opposition,
112,051 abstentions, 123,406 broker non-votes and 4,207,056 cast in
favor.
b. The shareholders ratified a proposal to approve the Employee Stock
Purchase Plan. There were 5,206 votes cast in opposition, 112,045
abstentions, 123,406 broker non-votes and 4,223,031 votes cast in
favor.
c. The shareholders ratified a proposal to approve the Executive
Deferred Compensation Plan. There were 14,692 votes cast in
opposition, 110,847 abstentions, 123,406 broker non-votes and
4,214,743 votes cast in favor.
d. The shareholders confirmed the selection of Arthur Andersen, L.L.P.
as independent auditors of the Company for fiscal 1996. There was
1,000 votes cast in opposition, 6,445 abstentions, no broker
non-votes and 4,456,243 votes cast in favor.
D) Not Applicable
Item 5. None
Item 6. EXHIBITS AND REPORTS ON FORM 8-k
a) Exhibits 27, Financial Data Schedule
b) The Company did not file a report on Form 8-k
during the quarter for which this report is filed.
PAGE 17
<PAGE> 18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZARING HOMES, INC.
(Registrant)
Date: By: /s/ GEORGE E. CASEY, JR.
----------------------------------------
George E. Casey, Jr.
President and Chief Executive Officer
Date: By: /s/ RONALD G. GRATZ
----------------------------------------
Ronald G. Gratz
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
PAGE 18
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,877
<SECURITIES> 0
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