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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1997 Commission File Number 2-30905
HMI INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-1202810
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
3631 Perkins, Cleveland, Ohio 44114
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 432-1990
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $1 par value per share
Indicate by check mark whether 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 12 and (2) has been subject to such filing requirements for the
past ninety (90) days.
Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes ____ No X
The aggregate market value of voting stock held by non-affiliates of Registrant,
computed by reference to the closing price on the NASDAQ Stock Exchange on
December 22, 1997 was approximately $10,623,000.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 22, 1997
----- --------------------------------
Common stock, $1 par value per share 5,033,996
Documents Incorporated by Reference
The following documents are incorporated by reference in this Form 10-K.
Portions of the Proxy Statement for the 1998 Annual Meeting, incorporated into
Part III (Items 10, 11, 12 and 13).
Index to Exhibits is found on page 47. This report consists of 48 pages.
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TABLE OF CONTENTS
PART I. Page
----
Item 1. Business
(a) General Development of Business..................................................................3
(b) Financial Information About Industry Segments....................................................4
(c) Narrative Description of Business................................................................4
Consumer Goods.................................................................................4
Manufactured Products..........................................................................6
Metal Stamping and Metal Formed Tubing.......................................................6
Tools, Dies and Specialty Machinery..........................................................6
Employees......................................................................................7
Environmental Policies and Controls............................................................7
Methods of Production and Raw Materials........................................................7
(d) Financial Information About Foreign and Domestic
Operations and Export Sales....................................................................7
Executive Officers of the Registrant.............................................................7
Item 2. Properties.........................................................................................9
Item 3. Legal Proceedings..................................................................................9
Item 4. Submission of Matters to a Vote of Security Holders................................................9
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matter............................. 10
Item 6. Selected Financial Data...........................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............12
Item 8. Financial Statements and Supplementary Data.......................................................16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............16
PART III.
Item 10. Directors and Executive Officers of Registrant....................................................16
Item 11. Executive Compensation............................................................................16
Item 12. Security ownership of Certain Beneficial Owners and Management....................................17
Item 13. Certain Relationships and Related Transactions....................................................17
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................17
SIGNATURES........................................................................................18
INDEX TO FINANCIAL STATEMENTS.....................................................................19
INDEX TO EXHIBITS.................................................................................47
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PART I.
Item 1. Business
(a) General Development of Business
HMI Industries Inc. (the "Company" or "registrant") was known as Health-Mor Inc.
until January 1995. The Company was reorganized in 1968 as a Delaware
corporation, succeeding an Illinois corporation originally formed in 1928. In
1997, the business of the Company was carried out through two primary divisions.
The Consumer Goods Division manufactures and sells floor care and air filtration
products, primarily portable bagless vacuum cleaners sold under the trade names
"Filter Queen", "Princess", "Majestic" and "Empress", central vacuum cleaning
systems sold under the trade names "Vacu-Queen" and "Majestic II". Portable room
air cleaners are sold under the trade name "Defender" and carpet cleaning
systems under the trade name "Easy Way" are both sold and leased. This division
also sells needle-free insulin injectors under the "AdvantaJet" name. The
operations of the Consumer Goods Division are carried on through the operations
at the Perkins Avenue facility in Cleveland, Ohio, and the following
wholly-owned subsidiaries: HMI Incorporated (incorporated in Ontario, Canada);
Home Impressions Inc. (incorporated in Delaware); Health-Mor International,
Inc., which meets the qualifications under the Internal Revenue Code as a
foreign sales corporation (incorporated in the U.S. Virgin Islands); Health-Mor
Acceptance Corporation (incorporated in Delaware); HMI Acceptance Corporation
(incorporated in Ontario, Canada); and Health-Mor Acceptance PTY Ltd.
(incorporated in Sydney, Australia). Health-Mor Personal Care Corp.
(incorporated in Delaware) is 85% owned by the registrant.
The Manufactured Products Division engages in the fabrication and sale of
commercial and industrial stamped components, metal formed tubular products and
machined components, and the manufacture of needle-free insulin injectors. The
operations of this division are carried out by Bliss Manufacturing Company
(incorporated in Ohio) and Tube-Fab Ltd. (incorporated in Ontario, Canada), both
wholly-owned subsidiaries of the Company.
In 1997, the Company made a decision to sell its Manufactured Products Division
businesses and any poor performing product lines in the Consumer Goods Division.
As a result of this decision, Bliss Tubular Products, which engaged in the
bending of aluminum, steel and copper tubing, was sold in fiscal 1997 and the
Company is negotiating the sale of Tube-Fab Ltd.
In September 1997, the Company decided to sell Bliss Manufacturing Company and
this subsidiary was offered for sale. On December 18, 1997, the Company signed a
definitive agreement to sell the stock of its Bliss Manufacturing Company to an
investor group led by Mervin Dunn and Rhone Capital, LLC. The purchase price is
$31,500,000, subject to certain adjustments, including a $1,500,000 distribution
for certain payments to vendors and employee obligations. The sale is expected
to close in March 1998, subject to regulatory and shareholder approval.
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In the Consumer Goods Division, the Company has offered for sale two businesses,
Health-Mor Personal Care Corporation and Household Rental Systems ("HRS"). A
letter of intent to sell HRS was signed in December, 1997. In addition, the
Company discontinued selling the "Optima" portable canister vacuum and the
"Princess 2000" upright vacuum cleaner in 1997. In December 1997, the Company
announced it was discontinuing the "Electrapure" portable canister vacuum
product. Sale of the "SuperNaturals" brand of cleaning products was suspended in
1997. Most of the Home Impressions product lines were discontinued in 1997,
except for the "Vacu-Queen" central vacuum cleaning system. The Company also
discontinued rental of the "Easy Way" carpet cleaning systems to Filter Queen
direct distributors in 1997.
(b) Financial Information About Industry Segments
As of September 30, 1997, the Company's continuing operations consist of a
single operating segment: the Consumer Goods Division. See Note 12 (Business
Segments) of the Notes to the Consolidated Financial Statements found on page 42
for further information.
(c) Narrative Description of Business
Consumer Goods
The principal products of the Consumer Goods Division of the Company are floor
care and air filtration products, primarily portable vacuum cleaners and central
vacuum cleaning systems. Portable bagless vacuum cleaners are sold under the
trade names "Filter Queen", "Princess", "Majestic" and "Empress". The central
vacuum cleaning systems are sold under the trade names "Vacu-Queen" and
"Majestic II". The bagless portable and portable canister vacuums consist of a
canister type suction cleaner, motorized vacuum cleaning head with a revolving
brush ("Pow-R-Nozzle"), hose, wand, brushes and other cleaning tools. The
Company also offers accessories for use with its bagless and canister vacuum
cleaners, most of which are attached to the exhaust outlet and may be used as
room deodorizers, air circulators, and for other blowing operations such as the
spraying of liquids. The central vacuum cleaning systems use the motorized
vacuum cleaning head with a revolving brush, as well as the hose, wand, brushes
and other cleaning tools. The Company also manufactures straight suction
attachments, which do not have a motorized vacuum cleaning head.
The Filter Queen cleaning system has been registered by Underwriters
Laboratories and Canadian Standards Authority as an Air Filtration Device.
The floor care products of the Consumer Goods Division are marketed in the
United States, Canada, and over forty other countries. The Company markets the
Filter Queen Majestic and the Empress through independent distributors who sell
in the home directly through their own independent representatives and who also
sell indirectly through the representatives of smaller independent local
distributors.
Central vacuum cleaning systems are marketed worldwide under the trade name
"Vacu-Queen" through retail distributors and under the trade name "Majestic II"
through direct distributors. The Company also markets the Vacu-Queen to building
contractors and developers for installation in newly constructed homes and
apartments.
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Household Rental Systems ("HRS") provides carpet cleaning systems for rent to
consumers through independent retail vacuum cleaner stores under the name "Easy
Way" in the United States and Canada. The Canadian HRS business has been
reported as discontinued operations and a letter of intent to sell HRS was
signed in December 1997.
Health-Mor Personal Care Corp. markets the AdvantaJet needle-free insulin
injector and other health care products. Customer service is crucial to this
product line. This business has been classified as a discontinued operation and
the Company is seeking a buyer for this business.
The Company meets strong competition in the sale of its vacuum cleaners and
central vacuum systems. In the case of sales through in-home solicitation, this
competition is primarily with vacuum cleaner equipment in use in the home at the
time of the sales presentation. There are many significant vacuum cleaner
manufacturers, plus many regional and private label manufacturers, who make
numerous brand name vacuum cleaners in the United States. Most of these are sold
through department stores, discount houses, appliance shops and by catalog,
generally at substantially lower prices than the Filter Queen. There are more
than five companies which compete significantly with the Company in the United
States and Canada in distribution of vacuum cleaners by in-home solicitation.
Many of its competitors in the sale of vacuum cleaners are substantially larger
and have greater resources than the Company. The Company believes that its
vacuum cleaners are competitive with other vacuum cleaners because of their
performance and warranty. It is the practice of the Company, along with other
companies in the vacuum cleaner industry, to maintain sufficient amounts of
inventory to meet the rapid delivery requirements of customers. The Consumer
Goods Division of the Company operates with a minimal backlog.
The Company is expanding its parts and service business by utilizing its
extensive customer data base to market accessories and new products and
services. The purpose is to enhance the annuity value of each customer to the
Company and to distributors by encouraging add-on sales and generating referrals
by utilizing these same data bases and the Distributor network. The parts and
service business continues to expand in markets outside of North America.
The Company's financing program, through its subsidiaries Health-Mor Acceptance
Corporation and HMI Acceptance Corporation continues to serve its distributors
and consumers by offering financing to marginally credit worthy consumers. The
Company has sold a portion of its U.S. portfolio to a first line finance
company, and continues to explore ways to serve its distributors and consumers
while at the same time reducing its overhead through alliances with first line
finance companies. Health-Mor Acceptance PTY Ltd. was incorporated in Sydney,
Australia, to offer consumer financing of the Company's products in that
country. This portfolio is currently being liquidated.
The Company holds trademark or trade name registration on the principal
trademarks and trade names used by the Consumer Goods Division. These trademarks
have been registered in the United States, Canada and other countries in which
the Company has distributors which sell a significant number of units. The
Company owns a number of patents in the United States, Canada and other
countries on various features of the Filter Queen, Vacu-Queen and related
products. The Company does not believe that its business is materially dependent
on any patent or group of patents.
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Manufactured Products
The Manufactured Products Division of the Company consists of commercial and
industrial stamped components, metal formed tubular products, machined
components, tools, dies and specialty products and production of needle-free
insulin injection systems. All businesses related to the Manufactured Products
Division have been reclassified to discontinued operations and are held for sale
at September 30, 1997.
Metal Stamping and Metal Formed Tubing
Bliss Manufacturing Company ("Bliss"), a wholly-owned subsidiary of the Company,
engages in the manufacture of various types of sheet metal stamping and
sub-assemblies, and painting and welding in conjunction therewith, for customers
in the automotive and truck manufacturing, materials handling equipment,
military, and plumbing industries. The products manufactured by Bliss are sold
primarily to original equipment manufacturers, mostly in the Midwest.
The customers of Bliss issue releases for parts depending upon their own
requirements. Therefore, Bliss operates with a minimal backlog.
The business of Bliss is significantly dependent upon several automotive and
truck manufacturers. In the event that a significant portion of the automotive
and truck business were to cease immediately, and the revenues were not replaced
with sales to other customers, whether existing or new, the loss could have a
material adverse effect on the registrant and its subsidiaries, taken as a
whole. However, the registrant believes that its relationship with these
customers is good and, although it anticipates the loss of business for
particular parts from time to time as the products in which those parts are
incorporated are discontinued or substantially changed, the registrant believes
that it can, at least in part, make up for such losses through existing or new
customers. The Company has signed a definitive agreement to sell Bliss
Manufacturing (See Item 1a).
Tube-Fab Ltd. ("Tube-Fab"), a wholly-owned subsidiary of the Company, is engaged
in the manufacture of high quality tubular products for the aircraft, military,
communications and specialty architectural industries. The Company intends to
sell Tube-Fab in 1998 (See Note 14 "Related Party Transactions" of the Notes to
the Consolidated Financial Statements).
Tools, Dies and Specialty Machinery
Machined Products Division ("MPD"), a division of Tube-Fab, engages in the
manufacture and sale of precision machined components for aircraft engines for
the aerospace industry. The work performed is primarily subcontract work for
engine manufacturers. In addition, MPD continues its work with Spar Aerospace,
manufacturing components for the Special Purpose Dextrous Manipulator for the
International Space Station. MPD has numerous competitors in the machining
field, none of whom has any sizable market share.
Sales backlog for MPD as of September 30, 1997 and 1996 was approximately
$540,903 and $420,000, respectively. It is expected that this backlog will be
filled during the current fiscal year.
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Employees
The Company and its subsidiaries employed 836 persons at September 30, 1997
throughout the world. Approximately 70% are part of businesses that have been
classified as discontinued.
Environmental Policies and Controls
To the best of the Company's knowledge, it is in compliance with all applicable
Federal, State and local laws relating to the protection of the environment. It
does not anticipate that any laws or regulations relating to the protection of
the environment will have any material effect on its earnings, capital
expenditures, or competitive position. The Company does not anticipate making
any material capital expenditures for environmental control facilities during
the current and succeeding fiscal years.
Methods of Production and Raw Materials
The Consumer Goods Division of the Company assembles finished parts purchased
from various suppliers. Tube-Fab purchases metal tubing from various suppliers
and engages in finishing operations, such as bending, beading and flaring. MPD
manufactures needle-free insulin injectors and precision machined parts for the
aerospace industry. Bliss purchases steel (both coil and blank) from various
suppliers and stamps metal parts for its customers. Bliss also engages in
welding and painting of certain parts, including the painting of parts for other
companies.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
Financial information relating to foreign and domestic operations for the years
ended September 30, 1997, 1996 and 1995 are set forth in Note 12 (Business
Segments) of the Notes to Consolidated Financial Statements found on page 42.
Executive Officers of the Registrant
NAME AGE POSITION AND TERMS OF SERVICE AS OFFICER
- ---- --- ----------------------------------------
James R. Malone 55 Chairman and Chief Executive Officer (1)
Mark A. Kirk 40 President, Chief Operating Officer and Chief Financial
Officer (2)
Carl H.Young III 56 Executive Vice President, General Counsel and Assistant
Secretary (3)
Sherwin Ellens 60 Vice President - Sales and Marketing (4)
Robert M. Benedict 54 Vice President and Treasurer (5)
Kevin Dow 41 Vice President - Corporate Services and Assistant Treasurer (6)
Michael Harper 41 Vice President, Corporate Controller and Chief Accounting
Officer and Assistant Secretary (7)
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(1) Mr. Malone was elected Chairman of the Board of Directors on December 5,
1996 and Chief Executive Officer on May 14, 1997. From 1993 to 1997, Mr.
Malone was Chairman, President, and Chief Executive Officer of Anchor Glass
Container Corporation, a manufacturer of glass containers. From 1990 to
1993 he was Chairman and Chief Executive Officer of Grimes Aerospace
Company, an aircraft component manufacturer.
(2) On May 14,1997, Mr. Kirk was elected President and Chief Operating Officer.
He is also Chief Financial Officer, and was elected to that position in
February 1997. From 1993 to 1997 he served as Senior Vice President and
Chief Financial Officer of Anchor Glass Container Corporation. From 1990 to
1993 he was Senior Vice President and Chief Financial Officer at Grimes
Aerospace Company.
(3) Carl Young was elected Executive Vice President, General Counsel, and
Assistant Secretary on May 28, 1997. He had previously served as Vice
President and General Counsel from February 14, 1997 to May 28, 1997. From
1993 to 1997 Mr. Young served as Senior Vice President and General Counsel
of Anchor Glass Container Corporation. From 1990 to 1993, Mr. Young was
Senior Vice President and General Counsel for Grimes Aerospace Company.
(4) Mr. Ellens has served as Vice President - Sales and Marketing since May 28,
1997. From 1996 to May 14,1997 he was Vice President of Direct Sales. From
1992 to 1995, he served as Director of Direct Sales for North America.
(5) Mr. Benedict was elected Vice President and Treasurer on May 28, 1997. From
1995 to 1997 he was Assistant Treasurer of Sealy Inc., a mattress
manufacturer. From 1992 to 1995 he was Vice President of Benedict, Kuhit &
Associates, a consulting firm.
(6) Mr. Dow was named Vice President - Corporate Services and Assistant
Treasurer on May 28, 1997. From March 1996 to May 1997 he served as Vice
President-Administration and Treasury. He has also served as Treasurer or
Assistant Treasurer at various times since 1995. He served as Vice
President Finance and Administration from 1989 to 1996.
(7) Mr. Harper was elected Vice President, Chief Accounting Officer and
Assistant Secretary on May 28, 1997. He has also served as Corporate
Controller since December 1996. He served as Vice President, Finance for
Bliss Manufacturing Company from January 1996 to December 1996. For over
sixteen years prior to that time he served in various financial management
positions with The Sherwin-Williams Company, most recently as the
Controller of the Transportation Services Division. Sherwin-Williams
Company is a paint manufacturer.
Kevin Dow, Vice President-Corporate Services and Assistant Treasurer, is the
first cousin of Barry L. Needler, Vice Chairman and a director.
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Item 2. Properties
The following table sets forth by industry segment, the location, character and
size (in square feet) of the real estate used in the operations of the Company
and its subsidiaries at September 30, 1997:
SQUARE FEET
-----------------------
LOCATION CHARACTER OWNED LEASED
- -------- --------- ----- ------
CONSUMER GOODS DIVISION
United States of America
------------------------
Cleveland, Ohio Office, Plant & Warehouse 210,000
Bradley, Illinois (1) Office & Warehouse 7,516
Canada
------
Mississauga, Ontario Office & Warehouses 46,772
Dorval, Quebec Office & Warehouse 4,762
Calgary, Alberta Office & Warehouse 4,500
Surrey, British Columbia Office & Warehouse 4,100
Edmonton, Alberta Office & Warehouse 2,049
Vancouver, British Columbia Office & Store 2,292
Burlington, Ontario Office & Store 1,100
MANUFACTURED PRODUCTS DIVISION
Tools, Dies & Specialty Machinery (1)
Charlottetown, Prince Edward Island Office, Plant & Warehouse 19,000
Metal Stamping and Metal Formed Tubing (1)
Newton Falls, Ohio Office, Plant & Warehouse 400,000
Youngstown, Ohio Office, Plant & Warehouse 150,000
(1) Included in Assets Held for Sale
Item 3. Legal Proceedings
Claims arising in the ordinary course of business are pending against the
Company. Although these are in various stages of the litigation process,
management believes that none of these matters will have a material adverse
effect on the consolidated financial position, results of operations or
liquidity of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The common stock of the Company is listed and traded on the NASDAQ Stock Market
under the symbol HMII. As of September 30, 1997, there were approximately 253
stockholders of record.
A summary of the dividends declared and the quarterly high and low sales price
of the Company's common stock on the Nasdaq Stock Exchange for the years ended
September 30, 1997 and 1996, are as follows:
1997
High Low Dividend
---- --- --------
1st Quarter 6 3/4 4 3/4 $ .0000
2nd Quarter 8 1/8 5 1/8 $ .0000
3rd Quarter 7 5/8 4 7/8 $ .0000
4th Quarter 6 1/4 3 7/8 $ .0000
1996
High Low Dividend
---- --- --------
1st Quarter 15 11 1/4 $ .0875
2nd Quarter 12 1/4 7 3/4 $ .0875
3rd Quarter 8 3/4 7 $ .0875
4th Quarter 8 1/4 4 3/4 $ .0000
The declaration and payment of quarterly dividends is at the discretion of the
Board of Directors, which may raise, lower or omit the dividend in any quarter.
Due to losses in the first three quarters of 1996, the Company did not declare a
dividend in the fourth quarter of fiscal 1996. No dividends were declared in
1997 due to continued losses. The Credit Agreement with the Company's lender
will not permit the payment of dividends and this restriction remains in effect
until the credit facility is paid in full in 1998. It is not expected that the
Company will declare a dividend until the Company returns to profitability.
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Item 6. Selected Financial Data
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net Revenue From Continuing Operations $ 50,490,250 $ 59,548,908 $ 62,785,302 $ 52,759,037 $ 44,224,939
Operating Costs and Expenses $ 68,603,306 $ 63,882,184 $ 60,509,044 $ 50,539,058 $ 41,416,946
Other Income (Expense), net $ (2,650,313) $ (4,272,428) $(1,282,491) $(1,080,894) $(1,080,413)
Income (loss) Before Discontinued
Operations Before Taxes $(20,763,369) $ (8,605,704) $ 993,767 $ 1,139,085 $ 1,727,580
Income (loss) Margin Before Discontinued
Operations Before Taxes (41.1%) (14.5%) 1.6% 2.2% 3.9%
Income Taxes (benefits) $ (7,285,949) $ (2,838,259) $ (614,791) $ (69,510) $ 145,512
Income Tax Rate 35.1% 33.0% 69.1% 6.1% 8.4%
Income (loss) before Discontinued Operations $(13,477,420) $ (5,767,445) $ 1,608,558 $ 1,208,595 $ 1,582,068
Income (loss) Margin Before Discontinued Operations (26.7%) (9.7%) 2.6% 2.3% 3.6%
Income (loss) From Discontinued Operations $ 2,347,039 $ (1,965,815) $ 3,833,317 $ 3,422,894 $ 3,287,695
Loss on Disposal $ (5,519,684) $ (2,280,844) $ --- $ --- $ ---
Cumulative Effect-
Change of Accounting for Income Taxes $ --- $ --- $ --- $ 719,016 $ ---
Net Income (loss) $(16,650,065) $(10,014,104) $ 5,441,875 $ 5,350,505 $ 4,869,763
Net Income (loss) Margin (33.0%) (16.8%) 8.7% 10.1% 11.0%
Per Share Data:
Net Revenues From Continuing Operations $ 10.19 $ 12.12 $ 12.87 $ 10.79 $ 9.12
Income (loss) Before Discontinued
Operations $ (2.72) $ (1.18) $ .33 $ .25 $ .33
Income (loss) From Discontinued
Operations $ .47 $ (.40) $ .79 $ .70 $ .68
Net Income (loss) $ (3.36) $ (2.04) $ 1.12 $ 1.09 $ 1.01
Cash Dividends $ .000 $ .263 $ .346 $ .324 $ .301
Weighted Average Number of Common
Shares Outstanding 4,956,276 4,912,135 4,876,599 4,888,395 4,851,192
Total Assets $ 55,390,133 $ 92,511,124 $ 85,191,635 $ 78,642,212 $ 65,102,797
Long-Term Debt $ 762,777 $ 22,334,613 $ 14,050,715 $ 13,176,973 $ 8,800,956
Stockholders' Equity $ 14,551,505 $ 30,882,960 $ 40,350,913 $ 37,901,982 $ 34,442,194
Book Value Per Share $ 2.94 $ 6.29 $ 8.27 $ 7.75 $ 7.10
Working Capital $ 3,793,541 $ 24,981,647 $ 23,771,993 $ 22,941,184 $ 18,189,328
Ratio of Current Assets to Current Liabilities 1.10 1.77 1.91 1.99 1.90
Percent of Earnings on Average Stockholders' Equity (73.3%) (28.1%) 13.9% 14.8% 14.8%
Percent of All Dividends to Net Income --- (12.9%) 31.0% 29.7% 30.0%
Stock High 8 1/8 15 17 19 1/8 13 3/4
Stock Low 3 7/8 4 3/4 13 1/4 11 1/4 5 5/8
Average Annual Price to Earnings Ratio (1.8) (4.8) 13.5 13.9 9.6
Average Annual Dividend Yield --- 2.7% 2.3% 2.1% 3.1%
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion and analysis contained in this section relates only to the
continuing operations of the Company.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
NET PRODUCT SALES - Net product sales for the year ended September 30, 1997
decreased by $8,942,000 or 15.2% as compared to fiscal 1996. The decrease in
sales is due primarily to declines in North America and Asia. Weak sales in
North America were attributable to a correction of high inventory levels in the
distribution network, lower sales to end consumers and a reduction in the
distributor base. Additionally, excess credit granted in prior years to the
Company's distributors resulted in an overall deterioration of liquidity in the
distribution network. Sales in Asia were adversely affected by economic
conditions in that region and the devaluation of certain currencies. Sales gains
in a strong European market continued their favorable trend.
FINANCING REVENUE AND OTHER INCOME - Financing revenues represent the interest
and fees generated on the contracts financed by the Company's Australian,
Canadian, and United States Subsidiaries. The decline in these revenues is
consistent with the sales decrease experienced mainly in North America.
GROSS PROFIT - Gross Profit for fiscal 1997 was $13,869,000 or 27.8% as compared
to 1996 gross profit of $20,574,000 or 35.0%. Gross profit was adversely
affected by lower volume, quality problems, and operational inefficiencies.
Additionally, non-recurring charges of $1,084,000 were taken to write-off unused
barter credits and tooling related to a discontinued product line. Initiatives
were begun in the fourth quarter of 1997 to strengthen business processes,
reduce costs, and improve quality.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general and administrative costs
increased by $6,958,000 from fiscal 1996 to fiscal 1997. The increase was due
primarily to additional bad debt expense taken of $4,659,000, severance charges
related to the termination of Kirk W. Foley of approximately $2,000,000,
expenses incurred for the settlement of a lawsuit and other expenses. Adjusted
for these charges, selling, general and administrative would have decreased by
approximately $1,200,000. The Company has initiated cost reduction measures in
1997 that should continue to reduce selling, general and administrative costs in
1998. These include implementation of a cash basis policy for North American
distributors effective January 1, 1998. While this policy may depress sales
temporarily, over time it should improve the Company's liquidity and strengthen
the fiscal health of its distribution network. The subsequent reduction in
credit resulting from this policy should significantly reduce bad debt expense
in 1998.
INTEREST EXPENSE - Interest expense increased $532,000 in fiscal 1997 from 1996
as a result of additional borrowings and increases in interest rates in 1997.
INCOME TAXES - The effective tax rate for fiscal 1997 is 35.1% compared to
33.0% in 1996.
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DISCONTINUED OPERATIONS - As of June 30, 1997, the Company reported Bliss
Tubular and Tube-Fab Ltd., its tubular and aerospace businesses, as well as
Health-Mor Personal Care Corp., its personal care business, as discontinued
operations. The Company recorded a pretax estimated loss on disposal of the
assets of Tube-Fab Ltd., and Health-Mor Personal Care Corp. of $1,937,200 during
fiscal 1997. In August 1997, the Company sold the assets of Bliss Tubular to H-P
Products and recorded a pretax loss on the sale of those assets of $1,524,000.
As of September 30, 1997, the Company reported Bliss Manufacturing, its metal
fabrication and stamping business, as a discontinued operation. Accordingly, the
consolidated financial statements of the Company have been reclassified to
report separately the net assets and net operating results of these discontinued
operations. Income Statements for periods prior to the dates of discontinuance
have been restated to reflect continuing operations. The Company's steam
cleaning business, Household Rental Systems, reported as a discontinued
operation in fiscal 1996, recorded an additional loss on disposal of $2,651,000
in fiscal 1997. In November, 1997, the Company received two signed letters of
intent regarding the planned sale of this business. Management anticipates that
the sale of this business will be completed in early 1998. Sales applicable to
the discontinued operations as of September 30, 1997 and September 30, 1996 were
$75,151,642 and $65,771,728 respectively.
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
NET PRODUCT SALES - Net product sales for the year ending September 30, 1996
decreased by $3,408,000 or 5.5% as compared to fiscal 1995. Sales declines in
the North American and Asian markets were offset by growth in the European
market. Decreases in the North American market were attributable to, among other
things, a tightening of consumer credit. Distribution difficulties and required
product changes in Asia hampered sales in fiscal 1996.
FINANCING REVENUES - Financing revenues represent the interest and fees
generated on the contracts financed by the Company's Australian, Canadian, and
United States Subsidiaries.
GROSS PROFIT - Gross profit for fiscal 1996 was $20,574,000 or 35.0% as compared
to 1995 gross profit of $23,119,000 also 37.1%. Total gross profit was lower due
to the decline in sales volume. The Consumer Goods operations moved into a new
facility in March 1996, thus eliminating the cost of duplicate facilities
incurred during the first six months of the year. Additionally, scheduling and
process changes were made, within the operations, in an effort to reduce
production inefficiencies.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative costs
increased by $4,236,000 from fiscal 1995 to fiscal 1996. Included in the
increase is $2,200,000 of product development and introduction costs for the
Consumer Goods business with corresponding increases in sales from these
products. The Company also experienced increased legal and professional fees,
increased compensation costs and increased reserves for uncollectable accounts.
INCOME TAXES - The effective rate for fiscal 1996 was 33.0% compared to 69.1% in
1995.
13
14
DISCONTINUED OPERATIONS - The Company adopted a plan to exit its direct sales
business in Mexico and to sell the Canadian Household Rental Systems operation.
Accordingly, the results of these operations are reported as discontinued
operations. The Company has recorded a loss on the disposal of Mexico of
$1,481,000 primarily comprised of the currency devaluation which was previously
reflected as a component of equity offset by a U.S. tax benefit of the loss on
the Company's investment in the Mexican operation. An $800,000 charge was
recorded in fiscal 1996 on the disposal of the steam cleaning business in order
to record the assets of this operation at their estimated net realizable value.
LIQUIDITY AND CAPITAL RESOURCES
The working capital balance at September 30, 1997 was ($439,000) compared to the
September 30, 1996 balance of $24,982,000, principally as a result of the
Company's long-term debt being classified as current on the September 30, 1997
consolidated balance sheet. On December 18, 1997, the Company entered into a
definitive agreement to sell 100% of the stock of Bliss Manufacturing, a wholly
owned subsidiary for $31,500,000, subject to certain adjustments. The Company
expects the entire proceeds from the sale of Bliss Manufacturing to be applied
to the retirement of substantially all of its debt, certain vendor obligations,
transaction costs and related expenses, certain employee benefit payments, and
amounts necessary to fund future tax obligations arising from the gain on the
sale of Bliss Manufacturing. It is anticipated that this transaction will close
by the end of the second fiscal quarter of 1998. Accordingly, debt to be retired
from the proceeds of the sale has been classified as current.
The Company's cash decreased $233,000 during the year ended September 30, 1997.
The decrease in receivables of $3,241,000 was due primarily to lower sales,
tighter credit terms, and an increase in the allowance for doubtful accounts.
Inventories decreased by $4,362,000 due to tighter inventory controls in the
Consumer Goods Division and at Bliss Manufacturing. Accounts payable decreased
by $3,214,000 as a result of lower inventory levels. Accrued liabilities
increased $4,208,000 due primarily to severance charges taken as a result of the
termination of Kirk W. Foley.(See Note 14 to the Consolidated Financial
Statements). The aforementioned variances relate to information in the
Consolidated Statement of Cash Flow in which items relating to discontinued
operations have not been disaggregated as they have in the Consolidated Balance
Sheet.
In November 1996, the Company increased the line of credit facility from
$17,500,000 to $19,500,000 with a principal payment of $2,000,000 due by
February 28, 1997. Under this line of credit agreement, a principal amount of
$2,500,000 was due no later than January 2, 1997. In December 1996, the proceeds
from the sale of the Bedford Heights, Ohio tubular facility were utilized to pay
down the $2,500,000 principal amount to $1,379,100. In January 1997, proceeds
from a federal income tax refund were used to pay the remaining principal amount
due. Effective February 28, 1997, the Credit Facility Agreement was amended to
increase the line of credit from $17,000,000 to $20,000,000 with $5,000,000 of
the commitment due March 31, 1997. Subsequently, the availability of the
$20,000,000 facility was extended through May 31, 1997.
14
15
Effective June 1997, the Company entered into a $20 million credit facility with
its lender which replaced the February 1997 amended and restated credit facility
agreement. The new credit agreement expires on October 1, 1998 and requires an
unused facility fee, computed at 0.25% per annum on the Unused Revolving
Facility amount, payable monthly. The secured facility consists of a $13 million
revolving credit facility and $7 million in term loans. The term loans require
monthly principal payments of $98,501. Interest rates accrue at prime on the
revolving credit facility and up to prime plus 2.25% on the term loans. As of
September 30, 1997, the outstanding balance on the Company's credit facility was
$15,824,397.
At September 30, 1997, the Company was in violation of the financial covenants
under its credit agreement and was experiencing increasing liquidity problems.
The Company's deteriorating cash position was a significant factor that led to
the decision to sell Bliss Manufacturing. In December 1997, the Company obtained
waivers from its lenders with respect to the covenant violations and received
$2,000,000 in a special term loan that accrues interest at a rate of prime plus
2.0%, to be paid monthly. The maturity date of this agreement is the earlier of
the receipt of the Bliss Manufacturing sale proceeds or March 31, 1998.
Additionally, a fee with respect to the special term loan of $80,000 will be
paid on such date that the special term loan is paid in full. Additionally, the
Company expects to receive additional financing of $1,200,000 upon the filing of
its fiscal 1997 tax return, which is expected to be filed in early January 1998.
The proceeds of the anticipated tax refund will be first used to repay the
$1,200,000 to the bank and any excess will be used for working capital.
In November 1996, the Company made an annual principal payment of $1,666,666 on
the unsecured, 9.86%, seven year private placement term notes, leaving a balance
of $1,666,667 as of September 30, 1997, with the final payment due date extended
until the earlier of March 31, 1998 or upon receipt of proceeds from the sale of
Bliss Manufacturing.
The Australian Unsecured Demand Authorization, payable on demand or February 28,
1997, was extended until the earlier of March 31, 1998 or upon the receipt of
proceeds from the sale of Bliss Manufacturing. An extension was also obtained in
April 1997 for the bank credit facility utilized by the Netherlands operation.
The facility ($480,822), originally payable in March 1997, is now available
through December 1997. The Company is presently negotiating, with its lender, an
extension on this debt until the earlier of March 31, 1998 or upon receipt of
proceeds from the sale of Bliss Manufacturing.
Interest expense for 1997 was primarily related to borrowing on the line of
credit, term loans, and the Private Placement unsecured term notes. Other
interest relates to the Industrial Revenue Bonds on the Lombard property,
interest on capital leases and interest paid on Distributors' deposits.
The Company's principal sources of liquidity, until the sale of Bliss
Manufacturing, are expected to be funded with cash generated from operations,
additional borrowings under the Company's credit facility referred to above and
the 1997 tax refund. After the sale of Bliss Manufacturing the Company's
principal sources of liquidity are expected to be from the proceeds from the
sale, a new credit facility to be put in place in the second fiscal quarter of
1998 and from cash generated from operations.
15
16
The sale of Bliss Manufacturing is contingent upon shareholder approval,
regulatory approval and a variety of other customary closing conditions. The
Company expects all these conditions to be met and the sale of Bliss
Manufacturing to be consummated by March 31, 1998. However, if the sale of Bliss
Manufacturing is not achieved by such date, the Company would have liquidity
needs that could only be satisfied by further amendment to the credit facility
to allow for additional time to close the sale transaction or obtaining
additional financing sources.
The agreements relating to the Company's outstanding debt include various
covenants that limit its ability to incur additional indebtedness, restricts
paying dividends, and limits the ability for capital expenditures. As of
September 30, 1997, the Company was not in compliance with certain of these
covenants contained in its credit agreements; however, the company obtained a
waiver on these covenants through September 30, 1997. Additionally, the credit
agreements were amended so as to eliminate the restrictive covenants referred to
above until March 31, 1998.
CAUTIONARY STATEMENT FOR "SAFE HARBOR"
PURPOSES UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of the federal securities laws. As a general matter, forward-looking
statements are those focused upon future plans, objectives or performance as
opposed to historical items and include statements of anticipated events or
trends and expectations and beliefs relating to matters not historical in
nature. Such forward-looking statements are subject to certain uncertainties
including the successful completion of the sale of Bliss Manufacturing, and
retention and rebuilding of the Consumer Products Division distribution network.
Such uncertainties are difficult to predict and could cause actual results of
the company to differ materially from those matters expressed or implied by such
forward-looking statements.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Index to Financial Statements included on page 19 of
this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III.
Item 10. Directors and Executive Officers of Registrant
See Item 13.
Item 11. Executive Compensation
See Item 13.
16
17
Item 12. Security Ownership of Certain Beneficial Owners and Management
See Item 13.
Item 13. Certain Relationships and Related Transactions
Information provided under the captions "Principal Holders of Voting
Securities," "Election of Directors," "Committees and Compensation of the Board
of Directors", "Security Ownership of Directors and Management", "Executive
Compensation", and "Related Transactions" in the Proxy Statement for the 1997
Annual Meeting of Shareholders is incorporated herein by reference. See
"Executive Officers of the Registrant" following Item 1 in this Report for
information concerning executive officers.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report.
1. Financial Statements - Reference is made to the Index To
Financial Statements, included as page 19 of this report.
2. Financial Statement Schedules - Reference is made to the Index
To Financial Statements, included as page 19 of this report.
3. Exhibits - Reference is made to the Index To Exhibits,
included as page 47 of this report.
(b) Reports on Form 8-K. No report on Form 8-K was filed during the last quarter
of 1997.
(c) Exhibits Reference is made to the Index To Exhibits, included as page 47 of
this report.
(d) Financial Statement Schedules - Reference is made to the Index To Financial
Statements, included as page 19 of this report.
17
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HMI INDUSTRIES INC.
(Registrant)
by /s/ Michael Harper
--------------------------------------
Michael Harper
Vice President, Corporate Controller
and Chief Accounting Officer
December 29, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ James R. Malone /s/ Mark A. Kirk
- ---------------------------------- ----------------------------------- -----------------------
James R. Malone Mark A. Kirk Frank Rasmussen
Chairman of the Board, Chief President, Chief Operating Director
Executive Officer and Director Officer, Chief Financial Officer December 29, 1997
December 29, 1997 and Director
December 29, 1997
/s/ Robert J. Abrahams
- ---------------------------------- ----------------------------------- -----------------------
Robert J. Abrahams Grace McCarthy Ivan Winfield
Director Director Director
December 29, 1997 December 29, 1997 December 29, 1997
/s/ Donald L. Baker /s/ John S. Meany, Jr.
- ---------------------------------- -----------------------------------
Donald L. Baker John S. Meany, Jr.
Director Director
December 29, 1997 December 29, 1997
/s/ Moffat Dunlap /s/ Barry L. Needler
- ---------------------------------- -----------------------------------
Moffat Dunlap Barry L. Needler
Director Director
December 29, 1997 December 29, 1997
18
19
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Management ........................................................... 20
Report of Independent Accountants
For the years ended September 30, 1997, 1996 and 1995 ........................ 21
Financial Statements
Consolidated Balance Sheets for the years ended September 30, 1997
and 1996 ................................................................... 22
Consolidated Statements of Income for the years ended September 30,
1997, 1996 and 1995 ........................................................ 23
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997, 1996 and 1995 .......................................... 24
Consolidated Statements of Cash Flows for the years ended September
30, 1997, 1996 and 1995 .................................................... 25
Notes to Consolidated Financial Statements ................................... 26-45
Financial Statement Schedule: II - Valuation and Qualifying Accounts and
Reserves ....................................................................... 46
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
consolidated financial statements, the notes thereto or in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
19
20
REPORT OF MANAGEMENT
To the Board of Directors and Stockholders of HMI Industries Inc.
The management of HMI Industries Inc. (HMI) is responsible for the preparation,
integrity and objectivity of the financial statements and all other financial
information included in this report. Management believes that the financial
statements have been prepared in accordance with generally accepted accounting
principles and that any amounts included herein which are based on estimates of
the expected effects of events and transactions have been made with sound
judgment and approved by qualified personnel.
HMI maintains an internal control structure to provide reasonable assurance that
assets are safeguarded and that transactions and events are recorded properly.
The internal control structure is regularly reviewed, evaluated and revised as
necessary by management. Additionally, HMI requires every Company employee to
maintain the highest level of ethical standards in the conduct of all aspects of
the Company's business, and their compliance is regularly monitored.
The financial statements in this report have been audited by the independent
accounting firm of Coopers & Lybrand L.L.P. Their audits were conducted in
accordance with generally accepted auditing standards and included a study and
evaluation of our internal control structure as they considered necessary to
determine the extend of tests and audit procedures required for expressing an
opinion on the company's financial statements.
The Audit Committee of the Board of Directors, of which outside directors are
members, meets periodically with the independent auditors and management to
review accounting, auditing, internal control and financial reporting matters.
The external auditors have full and free access to the Audit committee and its
individual members at any time.
/s/ Mark A. Kirk
---------------------------------------------
President, Chief Operating Officer and Chief
Financial Officer
/s/ Michael Harper
---------------------------------------------
Vice President, Corporate Controller and
Chief Accounting Officer
20
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders, HMI Industries Inc.
We have audited the consolidated financial statements and the financial
statement schedule of HMI Industries Inc. and its subsidiaries listed in the
index on page 19 of this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position of HMI Industries
Inc. and its subsidiaries as of September 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
As discussed in Note 1 to the consolidated financial statements, the Company has
restated its prior years consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, the Company
intends to retire substantially all of its outstanding debt with the expected
proceeds from the sale of its subsidiary Bliss Manufacturing Company.
/s/ Coopers & Lybrand, L.L.P.
Cleveland, Ohio
December 29, 1997
21
22
HMI INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
SEPTEMBER 30, September 30,
1997 1996
- --------------------------------------------------------------------------------------------------------------------
ASSETS (Restated)
CURRENT ASSETS:
Cash and cash equivalents $ 239,797 $ 472,408
Trade accounts receivable (net of allowance of $5,512,063 and $2,439,406) 10,357,999 26,252,884
Finance contracts receivable 496,044 2,224,480
Notes receivable 228,414 560,884
Inventories:
Finished goods 2,438,282 6,943,970
Work-in-progress, raw material and supplies 1,714,576 11,420,627
Income tax receivable 3,373,898 1,463,000
Deferred income taxes 8,239,080 1,772,129
Prepaid expenses 123,099 1,985,276
Other current assets 83,307 --
Net assets held for sale at realizable value 14,658,322 4,228,059
------------ ------------
Total current assets 41,952,818 57,323,717
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 6,194,868 15,717,653
------------ ------------
OTHER ASSETS:
Long-term notes receivable (less amounts due within one year) -- 334,123
Cost in excess of net assets of acquired businesses
(net of amortization of $3,534,511 and $3,092,432) 5,777,440 12,636,147
Deferred income taxes -- 1,499,600
Unamortized trademarks 339,823 312,775
Finance contracts receivable (less amounts due within one year) 992,090 4,449,628
Other 133,094 237,481
------------ ------------
Total other assets 7,242,447 19,469,754
------------ ------------
Total assets $ 55,390,133 $ 92,511,124
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 480,822 $ 3,132,975
Trade accounts payable 6,939,040 17,785,859
Income taxes payable 2,149,163 734,605
Accrued expenses and other liabilities 8,125,620 7,202,990
Long-term debt due within one year 20,464,632 3,485,641
------------ ------------
Total current liabilities 38,159,277 32,342,070
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 762,777 22,334,613
Postretirement benefits other than pensions -- 3,749,000
Deferred income taxes 573,613 192,372
Other 1,342,961 3,010,109
------------ ------------
Total long-term liabilities 2,679,351 29,286,094
------------ ------------
Commitments and contingencies (Note 11) -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $5 par value; authorized, 300,000 shares; issued, none -- --
Common stock, $1 par value; authorized, 10,000,000 shares;
issued, 5,295,556 shares 5,295,556 5,295,556
Capital in excess of par value 8,050,212 7,686,944
Unearned compensation, net (191,500) --
Retained earnings 4,077,771 20,740,344
Cumulative translation adjustment (1,418,762) (1,077,325)
------------ ------------
15,813,277 32,645,519
Less treasury stock 269,296 shares, at cost 1,261,772 1,762,559
------------ ------------
Total stockholders' equity 14,551,505 30,882,960
------------ ------------
Total liabilities and stockholders' equity $ 55,390,133 $ 92,511,124
============ ============
See notes to consolidated financial statements.
22
23
HMI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
REVENUES: Restated) (Restated)
Net product sales $ 49,878,534 $ 58,820,833 $62,228,698
Financing revenue and other 611,716 728,075 556,604
------------- --------------- ------------
50,490,250 59,548,908 62,785,302
OPERATING COSTS AND EXPENSES:
Cost of products sold 36,009,821 38,247,052 39,110,004
Selling, general and administrative expenses 32,593,485 25,635,132 21,399,040
Interest expense 2,217,781 1,686,254 1,409,291
Loss on investment in Holland-Electro - 2,012,356 -
Other expenses 432,532 573,818 (126,800)
------------- --------------- ------------
Total expenses 71,253,619 68,154,612 61,791,535
------------- --------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (20,763,369) (8,605,704) 993,767
BENEFIT FOR INCOME TAXES (7,285,949) (2,838,259) (614,791)
------------- --------------- ------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS (13,477,420) (5,767,445) 1,608,558
------------- --------------- ------------
Income (loss) from discontinued operations -
Mexico (net of taxes of $-0-, $-0- and $496,000) - (1,428,183) (235,838)
Household Rental Systems (net of taxes of $-0-, $-0- and $-0-) 498,131 (1,082,502) (388,233)
Bliss Manufacturing (net of taxes of $1,323,395, $1,103,664 and
$3,075,442) 2,159,224 1,655,497 4,613,163
Bliss Tubular (net of taxes of $87,090, $119,901, and $20,746) (142,094) (179,851) 31,120
Tube Fab Ltd (net of taxes of $-0-, $-0- and $-0-) 386,095 32,042 (132,796)
Health-Mor Personal Care Corp. (net of taxes of $339,742, $641,878
and $36,066) (554,317) (962,818) (54,099)
------------- --------------- ------------
2,347,039 (1,965,815) 3,833,317
------------- --------------- ------------
Loss on disposals-
Mexico - Currency loss previously reflected as component of equity
(net of taxes of $1,000,000) - (1,396,509)
Mexico - (84,335) -
Household Rental Systems (net of taxes of $-0-, $-0- and $-0-) (2,651,209) (800,000) -
Bliss Tubular (net of taxes of $244,351, $-0-, and $-0-) (1,279,799) - -
Tube Fab Ltd (net of taxes of $-0-, $-0- and $-0-) (1,020,065) - -
Health-Mor Personal Care Corp. provision for operating losses
during phase-out period (net of taxes of $348,503, $-0- and $-0-) (568,611) - -
------------- --------------- ------------
(5,519,684) (2,280,844) -
------------- --------------- ------------
NET INCOME (LOSS) $(16,650,065) $ (10,014,104) $ 5,441,875
============= =============== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,956,276 4,912,135 4,876,599
============= =============== ============
PER SHARE OF COMMON STOCK:
Income (loss) before discontinued operations $ (2.72) $ (1.18) $ 0.33
Income (loss) from discontinued operations $ 0.47 $ (0.40) $ 0.79
Loss on disposals $ (1.11) $ (0.46) $ -
------------- --------------- ------------
Net income (loss) $ (3.36) $ (2.04) $ 1.12
============= =============== ============
Cash dividends per common share $ - $ 0.263 $ 0.346
============= =============== ============
See notes to consolidated financial statements.
23
24
HMI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended September 30, 1997, 1996 and 1995
COMMON CAPITAL IN EXCESS UNEARNED RETAINED
STOCK OF PAR VALUE COMPENSATION EARNINGS
----- ------------ ------------ --------
Balance at September 30, 1994, as reported $5,295,556 $7,223,367 - $ 30,111,101
Adjustment for postretirement benefits (See Note 1) (1,815,600)
----------- ------------ ---------- --------------
Balance at September 30, 1994, as restated 5,295,556 7,223,367 - 28,295,501
Net income, as reported 5,614,675
Adjustment for postretirement benefits (See Note 1) (172,800)
Cash dividends - $.345 per share (1,691,482)
Treasury shares issued 298,484
Foreign currency translation adjustment
----------- ------------ ---------- --------------
September 30, 1995, as restated 5,295,556 7,521,851 - 32,045,894
Net loss, as reported (9,334,042)
Adjustment for postretirement benefits (See Note 1) (261,000)
Adjustment for certain deferred costs (See Note 1) (419,062)
Cash dividends - $.2625 per share (1,291,446)
Treasury shares issued 165,093
Foreign currency translation adjustment
----------- ------------ ---------- --------------
September 30, 1996, as restated 5,295,556 7,686,944 - 20,740,344
Net loss (16,650,065)
Treasury shares issued 363,268 (13,288)
Unearned compensation (273,500)
Employee benefit stock 82,000
Unclaimed dividends 780
Foreign currency translation adjustment
----------- ------------ ---------- --------------
Balance at September 30, 1997 $5,295,556 $8,050,212 $(191,500) 4,077,771
=========== ============ ========== ==============
CUMULATIVE TOTAL
TRANSLATION TREASURY STOCK STOCKHOLDERS'
ADJUSTMENT SHARES AMOUNT EQUITY
---------- ------ ------ ------
Balance at September 30, 1994, as reported $(869,016) 436,133 $(2,043,426) $ 39,717,582
Adjustment for postretirement benefits (See Note 1) (1,815,600)
------------- ---------- ------------- -------------
Balance at September 30, 1994, as restated (869,016) 436,133 (2,043,426) 37,901,982
Net income, as reported 5,614,675
Adjustment for postretirement benefits (See Note 1) (172,800)
Cash dividends - $.345 per share (1,691,482)
Treasury shares issued (41,607) 194,942 493,426
Foreign currency translation adjustment (1,794,888) (1,794,888)
------------- ---------- ------------- -------------
September 30, 1995, as restated (2,663,904) 394,526 (1,848,484) 40,350,913
Net loss, as reported (9,334,042)
Adjustment for postretirement benefits (See Note 1) (261,000)
Adjustment for certain deferred costs (See Note 1) (419,062)
Cash dividends - $.2625 per share (1,291,446)
Treasury shares issued (18,340) 85,925 251,018
Foreign currency translation adjustment 1,586,579 1,586,579
------------- ---------- ------------- -------------
September 30, 1996, as restated (1,077,325) 376,186 (1,762,559) 30,882,960
Net loss (16,650,065)
Treasury shares issued (106,890) 500,787 850,767
Unearned compensation (273,500)
Employee benefit stock 82,000
Unclaimed dividends 780
Foreign currency translation adjustment (341,437) (341,437)
------------- ---------- ------------- -------------
Balance at September 30, 1997 $(1,418,762) 269,296 $(1,261,772) $ 14,551,505
============= ========== ============= =============
See notes to consolidated financial statements.
24
25
HMI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED SEPTEMBER 30,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated) Restated)
Net income (loss) $(16,650,065) $(10,014,104) $ 5,441,875
Adjustments to reconcile net income (loss) to net cash provided by (used) in
operating activities:
Depreciation and amortization 2,744,553 3,564,595 3,768,822
Loss on disposal of discontinued operations 5,519,684 2,280,844 -
Provision for loss on asset write down 451,297 -
Provision for losses on receivables 6,069,937 1,069,509 641,562
Amortization of stock awards, net 385,766 - -
Amortization of deferred non-compete agreement - - 380,576
Net increase in postretirement liability 488,000 435,000 288,000
Deferred income taxes (4,683,948) (701,049) (169,123)
Changes in operating assets and liabilities:
Decrease (increase) in receivables 3,241,172 (2,668,671) (5,916,069)
Decrease (increase) in inventories 4,362,110 (2,139,794) (2,191,579)
Decrease (increase) in prepaid expenses 1,716,065 (20,741) (429,965)
Increase in other current assets (131,180) - -
Increase (decrease) in accounts payable (3,213,858) 7,016,530 3,301,638
Increase (decrease) in accrued expenses and other liabilities 4,208,023 1,015,940 (1,545,968)
Decrease in income taxes payable (774,447) (2,465,824) (245,319)
Other, net 74,895 (258,612) (186,780)
------------- ------------- ------------
Net cash provided by (used) in operating activities 3,808,004 (2,886,377) 3,137,670
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 2,720,916 523,783 -
Capital expenditures (1,463,320) (6,484,846) (3,805,326)
Collection of notes receivable - - -
------------- ------------- ------------
Net cash provided by (used) in investing activities 1,257,596 (5,961,063) (3,805,326)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility 38,491,000 7,795,616 4,117,324
Payments of credit facility (40,166,603) - -
Proceeds from mortgage 55,077 2,214,923 -
Payment of long term debt (3,690,397) (2,807,706) (2,012,371)
Proceeds from long term debt 12,712 3,022,807 -
Dividends paid - (1,721,162) (1,669,565)
Proceeds from exercise of stock options - - 112,850
------------- ------------- ------------
Net cash provided by (used) in financing activities (5,298,211) 8,504,478 548,238
------------- ------------- ------------
Effect of exchange rate changes on cash - 244,611 -
------------- ------------- ------------
Net decrease in cash and cash equivalents (232,611) (98,351) (119,418)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 472,408 570,759 690,177
------------- ------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 239,797 $ 472,408 $ 570,759
============= ============= ============
See notes to consolidated financial statements.
25
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include all significant controlled
subsidiaries both continuing and discontinued operations. Continuing operations
include the accounts of HMI Industries Inc (the "Company") and the following
wholly-owned subsidiaries: Health-Mor B.V., Health-Mor International Inc., HMI
Incorporated, Health-Mor Acceptance Corporation, HMI Acceptance Corporation,
Health-Mor Acceptance Pty. Ltd., and Home Impressions Inc. Operations reported
as discontinued are Household Rental Systems, Tube-Fab Ltd., Health-Mor Personal
Care Corp., Bliss Tubular, and Bliss Manufacturing Company. All significant
inter-company accounts and transactions have been eliminated.
Reclassification
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform to the 1997 presentation.
Restatement
During the fourth quarter of fiscal 1997, new management personnel discovered
the fact that the basic labor agreement between Bliss Manufacturing and its
employees provides hospitalization and life insurance benefits for eligible
employees upon retirement. Upon discovery, an actuarial valuation was
immediately performed which reflected an APBO of $4.1 million at September 30,
1997. Under the immediate recognition rules of FASB No. 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions" (FAS 106),
management has recorded the actuarially determined liability of $4.2 million at
September 30, 1997 and has restated its opening fiscal year 1995 retained
earnings ($3.0 million accrued cost less $1.2 million tax impact) and its 1995
and 1996 results of operations for the respective years' FAS 106 expense of
$385,000 and $541,000, respectively (net of "pay as you go" amounts previously
included in the respective year's income statements of $97,000 and $106,000,
respectively and net of taxes of $115,200 and $174,000, respectively).
In addition, certain other costs associated with the Company's Health-Mor
Personal Care Corporation totaling approximately $698,000 ($419,000 net of
taxes), which were capitalized and deferred in fiscal 1996, to match such
expenses with associated revenues to be generated in connection with the sale of
the AdvantaJet needle-fee insulin injector, will be restated in the Company's
financial statements to reflect the expensing of these costs in fiscal year 1996
rather than in fiscal year 1997 as previously reported.
26
27
Foreign Currency Translation
All consolidated foreign operations use the local currency of the country of
operation as the functional currency and translate the local currency asset and
liability accounts at year-end exchange rates while income and expense accounts
are translated at weighted average exchange rates. The resulting translation
adjustments are accumulated as a separate component of Shareholders' Equity
titled "Cumulative foreign currency translation adjustment". Such adjustments
will affect net income only upon sale or liquidation of the underlying foreign
investments. During the fourth quarter of 1997, the Company recorded $719,900 to
loss on disposal for cumulative translation adjustments associated with
discontinued foreign operations.
Exchange gains and losses from transactions in a currency other than the local
currency of the entity involved are included in income. Net transaction and
translation adjustments are not significant.
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 any
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of
less than three months to be cash equivalents.
Cost in Excess of Net Assets of Acquired Businesses
Intangibles resulting from business acquisitions, comprising cost in excess of
net assets of businesses acquired, are being amortized on a straight-line basis
over 40 years. Cost in excess of net assets acquired of $881,121 which related
to the acquisition of Tube Form in 1970 are included in the loss on disposal for
the Tubular business, which was recorded in June 1997.
The Company periodically evaluates the recoverability of intangibles resulting
from business acquisitions and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and market and economic conditions. If there is
an impairment in value, recorded balances will be adjusted.
27
28
Inventories
Inventories are stated at the lower of cost or market and are valued using the
last-in, first-out (LIFO) and the first-in, first-out (FIFO) cost methods.
Inventories from continuing operations on the LIFO method were 90.9% and 86.3%
of inventories in 1997 and 1996, respectively. If the FIFO method had been used
for these inventories, their value would have been approximately $4,768,400 and
$8,174,100 at September 30, 1997 and 1996, respectively.
All discontinued operations are on the FIFO cost method. The value of these
inventories approximate $7,859,200 and $11,229,200 at September 30, 1997 and
1996.
Assets Held for Sale
Assets held for sale include the assets of Health-Mor Personal Care Corporation,
Tube-Fab Ltd., Bliss Manufacturing and Household Rental Systems. The assets and
liabilities of these businesses at September 30, 1997, primarily working capital
accounts and property, plant and equipment, have been reclassified to net assets
held for sale and are stated at their estimated net realizable value.
In December 1997, the Company signed a letter of intent with respect to the sale
of Household Rental Systems. Management anticipates that the sale of this
business will be completed in early 1998.
On December 18, 1997, the Company signed a definitive agreement to sell the
stock of its Bliss Manufacturing Company to an investor group led by Mervin Dunn
and Rhone Capital, LLC. The purchase price is $31,500,000, subject to certain
adjustments, including a $1,500,000 distribution for certain payments to vendors
and employee obligations. The sale is expected to close in March 1998, subject
to regulatory and HMI shareholder approval. Holders of over 50% of the
outstanding shares of HMI common stock have granted to representatives of the
buyer group irrevocable proxies to vote their HMI shares in favor of the
transaction. The Company expects the entire proceeds from the sale of Bliss
Manufacturing to be applied to the retirement of substantially all of its debt,
certain vendor obligations, transaction costs and related expenses, certain
employee benefit payments, and amounts necessary to fund future tax obligations
arising from the gain on the sale of Bliss Manufacturing.
In January 1998, the Company expects to sell Tube-Fab Ltd. to its former CEO,
Mr. Kirk Foley, as part of the Company's negotiated settlement of obligations
under Mr. Foley's employment contract (See Note 14). The assets of Health-Mor
Personal Care Corp. are expected to be sold in early 1998.
The former Bedford Heights, Ohio facility for the Tubular operation, which was
recorded as an asset held for sale at September 30, 1996, was sold in December
1996 resulting in an insignificant gain on disposal.
28
29
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided on
the straight-line and declining balance methods over estimated useful lives of
10 to 40 years for buildings and improvements and 3 to 10 years for machinery
and equipment. Improvements which extend the useful life of property, plant and
equipment are capitalized, and maintenance and repairs are expensed. When
property, plant and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the appropriate accounts and any gain
or loss is included in current income.
Fair Value of Financial Instruments
It is not practical to determine the fair value of finance contract receivables
due to the unavailability of quoted market prices and the significant volume of
outstanding contracts with varying maturity dates. The Company's finance
contracts receivables generally mature three years after issuance and generate
interest at rates ranging from 18% to 23%.
The Company's remaining financial instruments consist principally of cash and
cash equivalents, accounts and notes receivable, accounts payable, accrued
expenses and other liabilities, line of credit, and short and long-term debt in
which the fair value of these financial instruments approximates the carrying
value.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, the tax consequences in the future years for differences
between the financial and tax basis of assets and liabilities at year end are
reflected as deferred income taxes.
Supplemental Disclosure of Cash Flow Information
Cash paid for interest was $2,171,658, $1,509,627 and $1,477,552 for the years
ended September 30, 1997, 1996 and 1995, respectively. During the year, the
tenant of the Company's Lombard, Illinois building, exercised his right to
purchase the property at a price equal to the remaining principal debt service
of approximately $800,000. The amount of the debt service equaled the net book
value of the asset recorded on the Company's books. In addition, $5,286,277 of
goodwill related to the discontinued Bliss Manufacturing operation was
reclassified to net assets held for sale. During fiscal 1996, the Company
assumed a mortgage of $323,000 and relieved a note receivable for $302,000 in
exchange for $625,000 of fixed assets. During 1995, the Company acquired
approximately $470,000 of fixed assets which were not paid for as of September
30, 1995.
Income Per Share
Income per share of common stock is based upon the weighted-average number of
common shares and common share equivalents outstanding. The weighted-average
number of common shares and common share equivalents outstanding during 1997,
1996 and 1995 was 4,956,276, 4,912,135 and 4,876,599, respectively.
29
30
2. DISCONTINUED OPERATIONS
In the third quarter of fiscal 1997, the Company reported its Health-Mor
Personal Care Corporation, Bliss Tubular and Tube-Fab Ltd. as discontinued
operations. Bliss Tubular, Tube-Fab Ltd and Bliss Manufacturing comprise the
Company's reported Manufactured Products segment. The Bliss Tubular and Tube-Fab
Ltd. operations represent the Company's only tube fabrication and tube forming
businesses (primarily for the consumer goods marketplace) and have been
accounted for and operated separately from the Bliss Manufacturing business. The
Company recorded a pre-tax estimated loss on disposal of the assets of Tube-Fab
Ltd., and Health-Mor Personal Care Corp. of $1,937,179 during fiscal 1997. In
August 1997, the Company sold the assets of Bliss Tubular to H-P Products and
recorded a pre-tax loss on the sale of those assets of $1,524,150.
In the fourth quarter of fiscal 1997, the Company received Board approval for
the proposed sale of the Bliss Manufacturing Company, a business which
represents a heavy-duty metal stamping operation and supplier to the automobile
and heavy-duty truck industry. As a result, the entire Manufactured Products
Division, which was previously reported as a separate segment in the Company's
financial statements, will be reflected as discontinued operations for the year
ended September 30, 1997.
Sales applicable to the discontinued operations were $69,902,015, $58,358,230
and $68,964,988 for the years ended September 30, 1997, 1996 and 1995,
respectively.
During the fourth quarter of fiscal 1996, the Company adopted a plan to exit its
direct sales operation in Mexico. Revenues and expenses related to this business
have been classified as discontinued operations for the years ended September
30, 1996 and 1995. The Company recorded a loss on disposal of $1,480,844 in
fiscal 1996 primarily comprised of the currency devaluation which was previously
reported as a component of equity, net of the U.S. tax benefit of the loss on
the Company's investment in the Mexican operation. Revenues of the Mexican
operations were $1,876,516, and $2,873,044 for the years ended September 30,
1996, and 1995, respectively.
In March 1996, the Company adopted a plan to sell its steam cleaning rental
leasing operations distributed through grocery chains and supermarkets in
Canada. Revenues and expenses related to this business have been classified as
discontinued operations for the years ended September 30, 1997, 1996 and 1995.
Revenues of this operation for the years ended September 30, 1997, 1996 and 1995
were $5,249,627, $5,536,983 and $6,592,853, respectively. The Company recorded
an estimated loss on the disposal of the operation of $800,000 during 1996. An
additional charge of $2,651,209 on the disposal of this asset was recorded in
the third and fourth quarters of fiscal 1997 to reflect its current realizable
value. This charge also includes an estimated write-off of the entity's currency
translation adjustment (reported as a component of equity) which will occur upon
the sale of the operation. Net assets of Household Rental Systems are included
in assets held for sale.
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31
3. NOTES RECEIVABLE
Long-term notes receivable consist of the following:
1997 1996
-------- --------
Notes receivable - See Note 14 $228,414 $895,007
Less amounts due within one year 228,414 560,884
-------- --------
$ -- $334,123
======== ========
4. PROPERTY, PLANT AND EQUIPMENT
1997 1996
----------- -----------
Land $ 7,083 $ 576,109
Buildings and improvements 3,867,012 9,712,417
Machinery and equipment 7,552,322 20,553,692
----------- -----------
11,426,417 30,842,218
Accumulated depreciation 5,231,549 15,124,565
----------- -----------
Net property, plant and equipment $ 6,194,868 $15,717,653
=========== ===========
Gross property, plant and equipment related to discontinued operations amounted
to $23,485,754, with associated accumulated depreciation of $14,245,172, at
September 30, 1997.
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
1997 1996
---------- ----------
Accrued compensation $4,049,464 $3,127,615
Distributor funds payable 1,171,998 292,198
Pension and profit sharing 362,560 852,413
Accrued interest 332,364 259,657
Accrued taxes -- 110,810
Other 2,209,234 2,560,297
---------- ----------
$8,125,620 $7,202,990
========== ==========
Accrued expenses and other liabilities related to discontinued operations
approximated $2,298,900 at September 30, 1997. These liabilities primarily
consist of accrued compensation and pension and profit sharing expenses.
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32
6. CREDIT FACILITY AND LONG-TERM DEBT
In November 1996, the Company increased the line of credit facility from
$17,500,000 to $19,500,000 with a principal payment of $2,000,000 due by
February 28, 1997. Under this line of credit agreement, a principal amount of
$2,500,000 was due no later than January 2, 1997. In December 1996, the proceeds
from the sale of the Bedford Heights, Ohio tubular facility were utilized to pay
down the $2,500,000 principal amount to $1,379,100. In January 1997, proceeds
from a federal income tax refund were used to pay the remaining principal amount
due. Effective February 28, 1997, the Credit Facility Agreement was amended to
increase the line of credit from $17,000,000 to $20,000,000 with $5,000,000 of
the commitment due March 31, 1997. Subsequently, the availability of the
$20,000,000 facility was extended through May 31, 1997.
Effective June 1997, the Company entered into a $20 million credit facility with
its lender which replaced the February 1997 amended and restated credit facility
agreement. The new credit agreement expires on October 1, 1998 and requires an
unused facility fee, computed at 0.25% per annum on the Unused Revolving
Facility amount, payable monthly. The secured facility consists of a $13 million
revolving credit facility and $7 million in term loans. The term loans require
monthly principal payments of $98,501. Interest rates accrue at prime on the
revolving credit facility and up to prime plus 2.25% on the term loans. As of
September 30, 1997, the outstanding balance on the Company's credit facility was
$15,824,397 (including $10.1 million of the line of credit, the special term
loan, the equipment term loan and the real estate term loan disclosed below).
At September 30, 1997, the Company was in violation of the financial covenants
under its credit agreement and was experiencing increasing liquidity problems.
The Company's deteriorating cash position was a significant factor that led to
the decision to sell Bliss Manufacturing. In December 1997, the Company obtained
waivers from its lenders with respect to the covenant violations and received
$2,000,000 in a special term loan that accrues interest at a rate of prime plus
2.0%, to be paid monthly. The maturity date of this agreement is the earlier of
the receipt of the Bliss Manufacturing sale proceeds or March 31, 1998.
Additionally, a fee with respect to the special term loan of $80,000 will be
paid on such date that the special term loan is paid in full. Additionally, the
Company expects to receive additional financing of $1,200,000 upon the filing of
its fiscal 1997 tax return, which is expected to be filed in early January 1998.
The proceeds of the anticipated tax refund will be first used to repay the
$1,200,000 to the bank and any excess will be used for working capital.
In November 1996, the Company made an annual principal payment of $1,666,666 on
the unsecured, 9.86%, seven year private placement term notes, leaving a balance
of $1,666,667 as of September 30, 1997, with the final payment due date extended
until the earlier of March 31, 1998 or upon receipt of proceeds from the sale of
Bliss Manufacturing.
In March 1996, the Company entered into a bank credit facility, utilized by the
Netherlands operations, for a maximum amount of NLG 1,000,000 or approximately
$600,000. Interest is incurred at the promissory note discount rate as
determined by the Dutch central bank. At September 30, 1997 the promissory note
discount rate was 6.00%. This commitment is available through December 31, 1997
and the $481,000 outstanding balance at September 30, 1997 is classified as
short term debt in the
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33
consolidated balance sheet. The Company is presently negotiating, with its
lender, an extension on this debt until the earlier of March 31, 1998 or upon
receipt of proceeds from the sale of Bliss Manufacturing. The Australian
Unsecured Demand Authorization, payable on demand or February 28, 1997, was
extended until the earlier of March 31, 1998 or upon the receipt of proceeds
from the sale of Bliss Manufacturing.
Long-term debt consists of the following:
1997 1996
----------- -----------
Bank lines of credit - see above $10,579,822 $18,132,975
Special Term Loan, bearing 1,580,052 --
interest at Prime plus 2 1/4%
(10.75% at September 30, 1997),
due in monthly installments of
$50,000 through October 1, 1998
Equipment Term Loan, bearing 1,951,595 --
interest at Prime plus 1/2%
(9.00% at September 30, 1997),
due in monthly installments of
$29,751 through October 1, 1998
Real Estate Term Loan, bearing 2,193,750 --
interest at Prime plus 1/2%
(9.00% at September 30, 1997),
due in monthly installments of
$18,750 through October 1, 1998
Seven year, 9.86% promissory 1,666,667 3,333,333
notes, interest payable semi-
annually and principal
payments of $1,666,666,
commencing November, 1992
through March 31, 1998
Construction Loan/Mortgage 2,252,156 2,214,923
bearing interest at 9.00% at
September 30, 1997, collateralized
by buildings, contents and inventory,
principal and interest payments
due in monthly installments of
$23,193 commencing June 1997
through October 1, 1998
33
34
1997 1996
----------- -----------
Capitalized lease obligations $ 478,760 $ 1,745,303
bearing interest at 6.48% to
8.04% due in monthly
installments of $21,496
(including interest)
through January 2000
Distributor deposits bearing 599,429 1,144,492
interest up to 6% at September
30, 1997 payable 180 days after
termination of
distributor agreement
Unsecured Demand Authorization 406,000 1,007,745
bearing interest at Australian
prime less 1/2% (5.4%), due in
monthly installments of $25,375
payable on March 31, 1998
Industrial Revenue Development -- 956,849
Bonds- See Note 11
Mortgage loan, variable interest -- 316,537
(9.25% at September 30, 1996) payable
monthly with principal payments
of $1,226, through May 2008
Interest free grant with varied -- 101,072
principal installments due annually
through June 1999
----------- -----------
21,708,231 28,953,229
Less amounts due within one year 20,945,454 6,618,616
----------- -----------
$ 762,777 $22,334,613
=========== ===========
Long-term debt relating to discontinued operations has be reclassified to net
assets held for sale. Total debt ($481,897 long-term and $508,046 short-term for
the year ended September 30, 1997) associated with these operations amounted to
$989,940 at September 30, 1997. Interest rates relating to debt for discontinued
operations range from 3.74% to 9.5%.
34
35
The principal amount of long-term debt payable in the five years ending
September 30, 1998 through 2002, relating to continuing operations, is
$20,945,454, $121,418, $41,929, $599,430 and $-0-, and for discontinued
operations is $508,046, $194,757, $14,700, $14,700 and $257,737. The weighted
average interest rate on short term borrowings at September 30, 1997 and 1996
was 8.75% and 8.10%, respectively.
The agreements relating to the Company's outstanding debt include various
covenants that limit its ability to incur additional indebtedness, restricts
paying dividends, and limits the ability for capital expenditures. As of
September 30, 1997, the Company was not in compliance with certain of these
covenants contained in its credit agreements; however, the company obtained a
waiver on these covenants through September 30, 1997. Additionally, the credit
agreements were amended so as to eliminate the restrictive covenants referred to
above until March 31, 1998.
The Company's principal sources of liquidity, until the sale of Bliss
Manufacturing, are expected to be funded with cash generated from operations,
additional borrowings under the Company's credit facility referred to above and
the 1997 tax refund. After the sale of Bliss Manufacturing the Company's
principal sources of liquidity are expected to be from the proceeds from the
sale, a new credit facility to be put in place in the second fiscal quarter of
1998 and from cash generated from operations.
7. LONG-TERM COMPENSATION PLAN
The Company adopted the Health-Mor Inc. 1992 Omnibus Long-Term Compensation Plan
("Plan") in 1992. The Plan provides for the granting of stock options, stock
appreciation rights, restricted stock awards, phantom stock and/or performance
shares ("Awards") to key employees of the Company and its Subsidiaries and stock
options for the non employee directors of the Company. Options granted under the
plan expire up to ten years after the date of grant if not exercised and may be
exercisable in whole or in part at the discretion of the Committee established
by the Board of Directors. Share awards available for issuance under the Plan
may be authorized and unissued shares or treasury shares. The maximum number of
shares of Common Stock available for grant of Awards under the Plan are limited
on an annual and cumulative basis as further defined in the Plan.
Stock options under the Plan generally have exercise prices equal to the fair
market values at dates of grant, otherwise, if the option price is less than the
fair market value at the date of the grant, compensation expense is recorded for
the difference. For restricted or phantom stock, the Company records
compensation expense as the excess of the quoted market price of a similar but
unrestricted share of stock at the award date over the purchase price, if any.
In May 1997, the Board of Directors approved a stock option grant to two
executives of 20,000 shares each, of common stock subject to certain
restrictions. The shares will vest over a maximum period of eight months and are
subject to each executive's continued employment and other various restrictions.
35
36
In July 1997, the Board of Directors granted stock and stock options under the
Plan to three of its executives. Each executive was awarded 25,000 shares of
restricted stock, with 12,500 vesting on October 1, 1997 (subsequently, the
executives forfeited the 12,500 shares vesting on October 1, 1997) and the
balance on January 2, 1998. An additional 75,000 shares of restricted common
stock will be issued in 1998 contingent upon certain conditions and continued
employment. In addition, they each received options to purchase 75,000 shares of
common stock at $5.68 per share, of which 35,210 options are incentive stock
options, half exercisable on July 2, 1997 and the remaining on January 2, 1998.
The remaining 39,790 options are non-qualified stock options that became
exercisable on July 2, 1997. All options expire July 2, 2002, to the extent not
exercised.
There were 77,500 shares issued pursuant to 1997 executive grants during the
current fiscal year. Unamortized deferred compensation amounted to $273,500 at
September 30, 1997. Total compensation expense, in conjunction with the Plan was
$659,266, $251,000 and $380,600 in 1997, 1996 and 1995, respectively.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock plans as
allowed under FAS Statement No. 123, "Accounting for Stock-Based Compensation"
(FAS 123). Accordingly, the adoption of this statement did not affect the
Company's results of operations, financial position or liquidity. Had
compensation cost for the stock granted in 1997 and 1996 been determined
consistent with FAS 123, pro forma net income and earnings per share would have
been as follows:
1997 1996
---- ----
Net loss as Reported $16,650,065 $10,014,104
Net loss Pro Forma $17,482,065 $10,515,359
Loss per Common share:
As Reported $3.36 $2.04
Pro Forma $3.53 $2.14
Because the FAS No. 123 method of accounting has not been applied to options
granted prior to 1996, the above pro forma disclosures are not necessarily
indicative of future amounts.
The fair value for all options granted in 1997 and 1996 were estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
1997 JUNE 1996 JANUARY 1996
OPTIONS OPTIONS OPTIONS
-------------- ------------- -------------
Risk free interest rate 6.2% 6.5% 5.3%
Expected life of option 3 yrs. 3 yrs. 3 yrs.
Expected dividend yield of stock 0.0% 0.0% 0.0%
Expected volatility of stock 51.5% 41.8% 41.8%
36
37
A summary of the Company's stock option activity, and related information for
the years ended September 30, 1997, 1996, and 1995, is shown in the following
table.
Shares subject Average option
to option price per share
-------------- ---------------
September 30, 1994, Outstanding 314,300 $ 8.49
Granted 94,000 16.18
Exercised (13,594) 7.35
Canceled (13,031) 7.54
-------
September 30, 1995 381,675 10.46
Granted 162,000 9.08
Canceled (12,750) 7.55
-------
September 30, 1996 530,925 10.18
Granted 356,000 5.52
Canceled (163,300) 7.49
-------
September 30, 1997, Outstanding 723,625 $ 8.47
=======
Options exercisable and shares available for future grant on September 30:
1997 1996 1995
---- ---- ----
Options exercisable 487,810 403,893 197,737
Weighted-average option price
per share of options exercisable $ 8.90 $ 8.58 $10.28
Weighted-average fair value of options
granted during the year $ 2.34 $ 3.09 --
37
38
The ranges of exercise prices and the remaining contractual life of options as
of September 30, 1997 were:
Range of exercise prices $____ - ____ $____ - ____
Options outstanding:
Outstanding as of September 30, 1997
Weighted-average remaining contractual life
Weighted-average exercise price
Options exercisable:
Outstanding as of September 30, 1997
Weighted-average remaining contractual life
Weighted-average exercise price
8. INCOME TAXES
The (benefit) provision for income taxes relating to continuing operations
consists of the following:
1997 1996 1995
----------- ----------- -----------
Current:
Federal $(6,205,078) $(2,678,363) $(1,177,783)
Foreign 25,000 25,000 25,000
----------- ----------- -----------
(6,180,078) (2,653,363) (1,152,783)
Deferred (benefit) expense (1,105,871) (184,896) 537,992
----------- ----------- -----------
$(7,285,949) $(2,838,259) $ ( 614,791)
=========== =========== ===========
A reconciliation of the provision for income taxes at the Federal statutory rate
to that included in the Consolidated Statements of Income related to earnings
from continuing operations is as follows:
1997 1996 1995
----------- ----------- -----------
Tax at Federal statutory rate of 34% $(7,059,545) $(2,925,939) $ 337,881
Increases (reductions) in taxes
resulting from:
Valuation Allowance Reserves
on Foreign Net Operating Losses -- -- (325,085)
Foreign Sales Corporation earnings (231,455) (269,595) (548,500)
Amortization of cost in excess of net
assets of acquired businesses 79,152 79,152 79,152
Foreign income taxes, net 25,000 25,000 25,000
Other - net (99,101) 253,123 (183,239)
----------- ----------- -----------
$(7,285,949) $(2,838,259) $ (614,791)
=========== =========== ===========
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The components of deferred tax assets and liabilities are comprised of the
following at September 30,
1997 1996
----------- -----------
Gross deferred tax assets:
Postretirement benefits $ 1,631,245 $ 1,499,600
Operating loss carryforwards 3,222,314 871,000
Receivable and inventory reserves 857,822 853,556
Accrued compensation 1,816,797 684,871
Benefits insurance reserves 181,335 117,425
Impairment reserves 1,999,901 308,000
Warranty reserves 90,475 90,475
Other 241,373 171,674
----------- -----------
10,041,262 4,596,601
----------- -----------
Gross deferred tax liabilities:
Deferred DISC income 31,219 62,438
Depreciation 668,445 583,806
----------- -----------
699,664 646,244
Valuation allowances on foreign
net deferred tax assets 1,676,131 871,000
----------- -----------
Net deferred tax asset $ 7,665,467 $ 3,079,357
=========== ===========
The Company has determined that it should fully reserve against this net
potential tax asset to the extent it represents excess available tax net
deferred tax assets for all foreign subsidiaries and divisions. Accordingly,
such benefits will be realized only as, and if, they are used to reduce future
tax expense, subject to evaluation of the continuing need for such valuation
allowance, or until fully realized. The Mexican NOL which was recognized as an
asset in fiscal year 1995, amounting to $496,537, was written off in fiscal year
1996 in connection with the decision to discontinue the Company's Mexican
operations. Income taxes paid during the years ended September 30, 1997, 1996
and 1995 were $277,559, $1,082,229 and $1,622,986, respectively.
Net operating loss carryforwards of approximately $3,222,314 for tax are
available to offset future taxable income. The carryforwards will expire in 2002
through 2012. Undistributed earnings of foreign subsidiaries are reinvested in
their operations and therefore, no provision is made for additional income taxes
that might be payable on such earnings.
9. PROFIT SHARING AND PENSION PLANS
Bliss Manufacturing has a defined contribution plan which covers substantially
all employees. The Bliss plan contribution is at management's discretion and is
allocated based on a percentage of each employee's wages. In addition, Tube Form
had a defined contribution plan which covered substantially all employees. This
plan required an annual contribution of a specified percentage of each employees
wage, with a minimum contribution of $660 per employee. This plan was terminated
in April, 1996. All funds relating to the plan were distributed in fiscal year
1997.
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The Company and Tube-Fab have qualified profit sharing plans which cover
substantially all employees. The overall contribution to the Company's plan and
the allocation method is at the discretion of the Board of Directors. The
allocation to the participants is based on either a fixed amount per
participant, a percentage of eligible wages, or a combination of a fixed amount
and a percentage of eligible wages. The required annual contribution to the
Tube-Fab plan is based upon a percentage of net income after certain
adjustments. The allocation to the participants is based upon a formula
established in the Plan. Profit sharing and pension plan expense for all plans
for the years ended September 30, 1997, 1996 and 1995 was $600,804, $1,978,647
and $1,042,741, respectively. For the years ended September 30,1997, 1996 and
1995, continuing operations represented $112,560, $-0- and $112,515 of the total
expense.
Tube-Fab Ltd., and Bliss Manufacturing have been reported as discontinued
operations, and accordingly, pension and profit sharing expense for these
entities have been reflected in results of discontinued operations.
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health care and life insurance benefits to
certain employees and retirees of Bliss Manufacturing, a wholly owned
subsidiary. As the Bliss Manufacturing business qualified for discontinued
operations treatment for the fiscal year ended September 30, 1997, the
postretirement benefit costs are reflected in the "Income from discontinued
operations - Bliss manufacturing" line of the Consolidated Statement of Income
and the accrued postretirement benefit costs are grouped in the "net assets held
for sale at realizable value" line in the Consolidated Balance Sheet.
The components of the postretirement benefit costs are as follows:
1997 1996 1995
--------- --------- ---------
Service Costs $ 339,000 $ 309,000 $ 213,000
Interest Costs
265,000 232,000 192,000
Net amortization and
deferral -- -- (20,000)
--------- --------- ---------
$ 604,000 $ 541,000 $ 385,000
========= ========= =========
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The status of the plans was as follows at September 30,
1997 1996
----------- -----------
Accumulated postretirement benefit obligation (APBO):
Retirees $(1,642,000) $(1,639,000)
Actives fully eligible (195,000) (181,000)
Actives not yet fully eligible (2,242,000) (1,769,000)
----------- -----------
Total APBO (4,079,000) (3,589,000)
Fair value of plan assets -- --
----------- -----------
Funded status $(4,079,000) $(3,589,000)
Unrecognized (gain)/loss (158,000) (160,000)
----------- -----------
Accrued postretirement benefit costs $(4,237,000) $(3,749,000)
=========== ===========
Assumed weighted average discount rate 7.5% 7.5%
The assumed health care cost trend rate used in measuring the health care
portion of the postretirement benefit cost for 1997 is 10.5%, gradually
declining to 5.5% by the year 2007 and remaining at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
1 percentage point in each year would increase the APBO as of September 30, 1997
by $849,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $165,000.
11. COMMITMENTS AND CONTINGENCIES, GUARANTEES AND LEASES
The Company has guaranteed certain surety bonds totaling $90,512 executed by
distributors. The Company is obligated under certain operating leases for
facilities which expire on various dates through 2003. The minimum annual lease
payments, for continuing operations, under these agreements including renewal
options, if exercised, are $193,242, $185,062, $167,161, $152,520 and $147,518
for the years ending September 30, 1998, 1999, 2000, 2001 and 2002,
respectively. Minimum annual lease payments for discontinued operations are
$195,272, $94,248, $56,958, $40,853 and $20,058 for the years ending September
30, 1998, 1999, 2000, 2001 and 2002, respectively. Rental expense for all leases
and other short-term needs was $858,589, $917,600 and $756,000 for the years
ended September 30, 1997, 1996 and 1995, respectively. Of the total rent expense
for the year ended September 30, 1997, $359,520 related to discontinued
operations.
During the fiscal year 1994 and continuing throughout 1996, the property owned
by the Company in Lombard, Illinois that housed the office facilities for the
discontinued operations of HMI Credit Inc. was leased to a third party. The
lease included an option to purchase the property at any time during the ten
year lease term. The tenant was responsible for all operating expenses related
to the property and the lease payments equal the debt service for the variable
rate industrial revenue development bonds originally issued to finance the
property.
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On July 7,1997, the tenant exercised his right to purchase the property at a
price equal to the remaining principal debt service for the variable rate
industrial revenue development bonds of approximately $800,000.
Litigation
Various claims arising in the ordinary course of business are pending against
the Company. In the opinion of management none of these matters will have a
material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.
Executive Compensation Agreement
During 1994, the Company negotiated a five year Compensation Agreement with the
Chief Executive Officer, Kirk W. Foley which was ratified at the 1995 Annual
shareholders' Meeting. The Agreement combines salary, incentive compensation,
loans, stock options and Phantom Stock to employ Mr. Foley. On May 14, 1997 Mr.
Foley's employment with the Company was terminated triggering certain
obligations under this employment agreement (See Note 14).
Also in May 1997, the Company announced and completed a reduction of personnel
which affected approximately forty people (hourly and salaried) at its
Cleveland, Ohio Consumer Goods facility. The Canadian corporate office was also
scaled down, with all accounting functions being brought into the Cleveland,
Ohio office, reducing staff by approximately eleven people in the Canadian
office.
Total charges of $3,049,754 relating to the layoffs announced in May and Mr.
Foley's termination benefit package were recorded in the third and fourth
quarter of 1997. The balance in the related reserve at September 30, 1997 was
$2,058,492, of which $300,000 was previously recorded as compensation expense in
fiscal year 1996 in accordance with Mr. Foley's employment agreement.
12. BUSINESS SEGMENTS
As of September 30, 1997, the Company's continuing operations consist of a
single operating segment: the Consumer Goods Division. Previously, the Company
was segmented into three operating divisions: Consumer Goods, Health-Mor
Personal Care and Manufactured Products. During 1997, the Company sharpened its
focus on its core business in the Consumer Goods Division and operations that
were outside of the core business were identified in the third and fourth
quarters and classified as discontinued operations. The identified operations
consist of all of the Manufactured Products Division entities as well as the
Health-Mor Personal Care segment.
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Canadian sales are not considered export sales. One of the Company's major
foreign operations is located in Canada. The Company primarily conducts business
in local currency. Identifiable assets of the Canadian operations, excluding the
assets of Household Rental Systems and Tube-Fab Ltd., which are classified as
net assets held for sale, were $2,318,521 and $3,790,067 at September 30, 1997
and 1996, respectively. Identifiable revenues of Canadian operations for the
years ended September 30, 1997, 1996 and 1995 were $4,981,069, $4,387,750 and
$5,841,140, respectively. Three customers in the Consumer Goods segment, each
with individual sales greater than 10% of total product sales, represented 44.9%
and 23.4% of the Company's total net sales in 1997 and 1996, respectively.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
1997
---------------------------------------------------------------------------
December 31, March 31, June 30, September 30,
------------ ------------ ------------ ------------
Net revenues $ 14,620,888 $ 13,725,320 $ 11,120,603 $ 11,023,438
Gross profit $ 5,073,398 $ 3,456,337 $ 2,433,425 $ 2,905,554
Loss before
discontinued operations $ (657,479) $ (3,158,796) $ (4,945,981) $ (4,709,901)
Loss on disposals $ -- $ -- $ (3,439,298) $ (2,080,386)
Loss from discontinued
operations $ 534,487 $ 141,795 $ 1,111,073 $ 554,421
Net loss $ (122,992) $ (3,017,001) $ (7,274,206) $ (6,235,866)
Per share of common stock:
Loss before
discontinued operations $ (0.13) $ (0.64) $ (1.00) $ (0.94)
Loss on disposals $ -- $ -- $ (0.69) $ (0.41)
Loss from
discontinued operations $ 0.11 $ 0.03 $ 0.22 $ 0.11
Net loss $ (0.02) $ (0.61) $ (1.47) $ (1.24)
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1996
---------------------------------------------------------------------------
December 31, March 31, June 30, September 30,
------------ ------------ ------------ ------------
Net revenues $ 13,432,049 $ 16,789,086 $ 13,291,222 $ 16,036,551
Gross profit $ 4,874,589 $ 5,073,776 $ 4,712,003 $ 5,913,410
Loss before
discontinued operations $ (446,993) $ (1,284,982) $ (1,411,563) $ (2,623,907)
Loss on disposals $ -- $ -- $ (800,000) $ (1,480,844)
Income (loss) from
discontinued operations $ (48,119) $ (1,577,795) $ (748,562) $ 408,661
Net loss $ (495,112) $ (2,862,777) $ (2,960,125) $ (3,696,090)
Per share of common stock:
Loss before
discontinued operations $ (0.09) $ (0.26) $ (0.29) $ (0.53)
Loss on disposals $ -- $ -- $ (0.16) $ (0.30)
Loss from
discontinued operations $ (0.01) $ (0.32) $ (0.15) $ 0.08
Net loss $ (0.10) $ (0.58) $ (0.60) $ (0.75)
The first two quarters of 1997 have been restated as shown above. Inventory
analysis performed in conjunction with the third quarter physical inventory
revealed $1.1 million of raw material procurements from a supplier which were
recognized in the third quarter that related to the two previous quarters and
additionally, inventory adjustments of $582,800 were required to reflect product
costs not properly recognized in the first two quarters.
14. RELATED PARTY TRANSACTIONS
In May 1997, the Company advised Kirk W. Foley, then its CEO, that it was
terminating his employment which triggered certain obligations as per Mr.
Foley's employment contract, including an $800,000 severance payment, an
assumption of a $518,000 personal bank loan made to Mr. Foley, other
compensation obligations of approximately $79,000 and an obligation to purchase
Mr. Foley's Company stock at current market value (approximately $325,000).
Because of the Company's tight cash position, noncash ways to satisfy its
obligations to Mr. Foley were sought. The resolution was a decision to transfer
to Mr. Foley the Company's 100% stock interest in Tube-Fab Ltd, a Canadian
subsidiary headquartered on Prince Edward Island, Canada, which an independent
appraiser valued at $1,512,000. The Tube-Fab Ltd. stock had been carried on the
Company's books at a value of $2,157,500 and was accordingly written down to its
appraised value.
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The settlement transaction with Mr. Foley is expected to be closed in January
1998. It entails a transfer of the Tube-Fab Ltd. shares to Mr. Foley; Mr.
Foley's payment of $303,000 to the Company; cancellation of the Company's
$800,000 severance obligation; an assumption of the $486,750 ($518,000 less a
$31,250 principal payment made in June 1997) bank loan; cancellation of Mr.
Foley's put right with respect to his Company stock; and assumption by Mr. Foley
of an operating lease of Canadian facilities currently leased by the Company,
which has a remaining lease obligation of approximately $1,050,000 over 8 1/2
years.
Mr. Foley's employment contract also requires the Company to pay to him a
$300,000 cash award relating to phantom shares he had previously earned but had
deferred in 1996. This award has been reduced to a $150,000 payment in the
settlement transaction. The settlement also requires the Company to continue Mr.
Foley's salary and benefits from the time of termination advice through December
15, 1997 (approximately $320,000).
Mr. Foley's departure caused the Company to examine the collectability of
certain other related party receivables aggregating $743,000 which were forgiven
and accordingly written off in the third and fourth quarters of fiscal 1997.
In 1995, the Company converted $750,000 of accounts receivable from a former
Filter Queen distributor to notes receivable. This distributor is an officer of
a majority owned subsidiary of the company. In 1996, the officer contributed
various assets and liabilities to the subsidiary in exchange for a reduction in
the note receivable. The note receivable of $228,414 is reflected in current
assets as a note receivable at September 30, 1997.
15. MAJOR VENDOR
In 1991, the Company entered into an agreement that provided for the potential
acquisition of Holland Electro B.V. of Rotterdam, the Netherlands, contingent
upon attaining certain earnings targets in the two year period ended September
30, 1992. When Holland Electro B.V. failed to achieve the agreed targets, HMI
walked away from the proposed purchase but continued to buy products and other
services from Holland-Electro.
In January 1996, Holland Electro B.V. filed for bankruptcy, triggering a
Conditional Purchase Agreement the Company had with Kredietbank N.V. in the
amount of $1,104,000. As a result, the Company was required to take possession
of finished goods and work in progress inventories. Upon acquisition of these
inventories, the Company began production of the ElektraPure and other floorcare
products for distribution in North America and Europe. The Company had paid in
advance for certain services and inventory to be acquired from Holland Electro
B.V. The advances, royalties and other receivables totaled $2,012,000. During
fiscal 1996, as a result of the bankruptcy and subsequent resolution of pending
claims, the Company determined that recovery of these advances was not likely.
Accordingly, the Company recorded a charge for the write-off of these advances.
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HMI INDUSTRIES INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance at Additions Balance at
Beginning of Charged to End of
Description Period Costs and Expense Deductions Period
----------------------------------------------------------------
Valuation account for accounts receivable:
Year ended September 30, 1997 $2,439,000 $4,820,000 $1,747,000 $5,512,000
Year ended September 30, 1996 $1,550,000 $ 889,000 -- $2,439,000
Year ended September 30, 1995 $1,121,000 $ 429,000 -- $1,550,000
Valuation account for inventory:
Year ended September 30, 1997 $1,234,000 $ 754,000 $ 357,000 $1,631,000
Year ended September 30, 1996 $ 305,000 $ 929,000 -- $1,234,000
Year ended September 30, 1995 $ 120,000 $ 185,000 -- $ 305,000
Reserve for loss on disposal:
Year ended September 30, 1997 $ 800,000 $6,112,000 $1,524,000 $5,388,000
Year ended September 30, 1996 -- $ 800,000 -- $ 800,000
Year ended September 30, 1995 -- -- -- --
Valuation for deferred tax asset:
Year ended September 30, 1997 $ 871,000 $1,151,000 $ 346,000 $1,676,000
Year ended September 30, 1996 $ 517,000 $ 354,000 -- $ 871,000
Year ended September 30, 1995 $ 193,000 $ 324,000 -- $ 517,000
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INDEX TO EXHIBITS
Exhibit Page in this
Number Exhibit Title Report Incorporated by Reference From
- -------------- ---------------------------- -------------- -------------------------------
3.1 Certificate of Incorporation Annual Report on form 10-K
for the year ended
September 30, 1995
3.2 Bylaws Annual Report on form 10-K
for the year ended
September 30, 1995
10.00 Material Contracts Proxy Statement for the
Annual Meeting of
Stockholders January 19,
1995 - Exhibit B
10.01 Material Contracts Change of Control Agreements
10.02 Material Contracts Non-statutory Stock Option
Agreements
10.03 Material Contracts Incentive Stock Option
Agreements
10.04 Material Contracts Deferred Bonus Agreements
10.05 Material Contract Employment Agreement - Malone
10.06 Material Contract Employment Agreement - Kirk
10.07 Material Contract Employment Agreement - Young
10.08 Material Contracts Restricted Stock Agreements
10.09 Material Contracts Amended and Restated Credit
Agreement
10.10a Material Contracts Amendment No. 1 to Amended
and Restated Credit
Agreement
10.10b Material Contracts Amendment No. 2 to Amended
and Restated Credit
Agreement
10.11 Material Contracts Bliss Stock Purchase
Agreement
11 Statement re: Computation Note 1 on
of per share earnings Page 29 of
the
Financial
Statements
21 Subsidiaries of Registrant Page 3
27 Financial Data Schedule
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