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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1996 Commission File Number 1-6220
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
incorportated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Yes X No
--- ---
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 18, 1996 was approximately $10,300,000.
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 18, 1996
- ------------------------------------ --------------------------------
Common stock, $1 par value per share 4,924,370
DOCUMENTS INCORPORATED BY REFERENCE
The follow documents are incorporated by reference in this Form 10-K.
1. Portions of the Proxy Statement for the 1997 Annual Meeting, incorporated
into Part III (items 10,11,12,13).
Index to Exhibits is found on page 42. This report consists of 45 pages.
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TABLE OF CONTENTS
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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 . . . . . . . . . . . . 7
Metal Stamping and Metal Formed Tubing . . . . . 7
Tools, Dies and Specialty Machinery . . . . . . 8
Employees . . . . . . . . . . . . . . . 8
Environmental Policies and Controls . . . . . . 9
Methods of Production and Raw Materials . . . . . 9
(d) Financial Information About foreign and Domestic
Operations and Export Sales . . . . . . . . . 9
Executive Officers of the Registrant . . . . . . . 10
Item 2. Properties . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . 12
PART II.
- --------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matter . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 14
Item 8. Financial Statements and Supplementary Data . . . . . 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . 17
PART III.
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Item 10. Directors and Executive Officers of Registrant . . . . . 18
Item 11. Executive Compensation . . . . . . . . . . . . . 18
Item 12. Security ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . 18
Item 13. Certain Relationships and Related Transactions . . . . . 18
PART IV.
- --------
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . 19
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . 21
INDEX TO EXHIBITS . . . . . . . . . . . . . 42
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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. The
business of the Company is 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
canister vacuums sold under the trade names "Optima" and "ElektraPure", and an
upright vacuum sold under the trade name "Princess 2000". 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 and certain
tubular consumer products, both of which are manufactured by subsidiaries in the
Manufactured Products Division. The "SuperNaturals" product line of
environmentally superior cleaning products was developed by the Company to
replace the products formerly sold under the "Down-to-Earth" trade 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 Personal Care Corp.
(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).
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 1996 the Company introduced its portable room air cleaner sold under the
trade name "Defender". This air cleaner, which surpasses HEPA filtration
standards (High Efficiency Particulate Air), is being sold by the Home
Impressions group through independent retail vacuum stores and through the
Filter Queen direct distribution system.
In 1996 the Company added the Medi-Filter to its filtering package for the
Filter Queen in North America. This cone-shaped electrostatic filter, when used
with the standard cellulose filter cone, filters at an efficiency of 99.98% for
particles larger than .1 micron. This level of filtration surpasses HEPA
standards.
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The Company-developed "SuperNaturals" brand of environmentally-superior but
powerful cleaning products were introduced in fiscal 1996. These products are
distributed through the Filter Queen direct distribution system and through
independent sales representatives.
The Company recently closed its distribution system in Mexico, the only country
in which it owned its own distribution system. The Mexican subsidiary had
significant fixed overhead costs, and the continuing serious economic problems
in Mexico resulted in significant operating losses which the Company did not
believe would be reversed for some time. The Company decided to close this
subsidiary and cease operations in order to prevent further losses. The Company
is exploring ways to distribute its products in Mexico in the same manner as
they are distributed elsewhere in the world.
(b) Financial Information About Industry Segments
---------------------------------------------
The net sales and operating income of each industry segment and the identifiable
assets attributable to each industry segment for the years ended September 30,
1996, 1995 and 1994 are set forth in Note 12 (Business Segments) of the Notes to
the Consolidated Financial Statements found on page 37.
(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". Portable
canister vacuums are sold under the trade names "Optima" and "ElektraPure". The
product line also includes an upright vacuum cleaner sold under the trade name
"Princess 2000". 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, which
support filtration claims and potentially expand the market of customers.
The Company manufactures a commercial model of its Princess vacuum cleaner which
it sells to business and industrial users. The Company also manufacturers vacuum
cleaner power nozzle heads for other vacuum cleaner companies on a private label
basis.
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The floor care products of the Consumer Goods Division are marketed throughout
the United States, Canada, and forty-five 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. In certain foreign markets, the Princess and the ElektraPure are
also marketed in a similar manner. Optima is marketed through retail stores,
while the Princess 2000 is marketed on a direct basis.
Home Impressions Inc. is dedicated to marketing products related to home
convenience and comfort. The product offerings are manufactured by the Company's
existing divisions as well as being sourced from other manufacturers. New
marketing techniques and distribution channels are utilized on a national and
international basis. Catalog distribution and telemarketing are some of the
venues being tested by the Company as a means to exploit this significant
business potential.
The Home Impressions product line also includes a retail product grouping of
floor care products, including the "Optima", "Princess 2000", "ElektraPure" and
"Vacu-Queen". Except for the "Princess 2000", these products are sold primarily
through specialty retail vacuum stores in North America. The "Princess 2000" is
sold through a direct sales network. Home Impressions is selling the
"ElektraPure" and "Vacu-Queen" internationally at the retail level, and will
begin selling the "Optima" internationally during the next year.
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.
In 1996, the Company introduced a line of environmentally superior household
cleaning products under the name "SuperNaturals". These cleaning products, which
include laundry detergent, fabric softener, non-chlorine powdered bleach,
dishwashing liquid, all purpose cleaner, tile cleaner, toilet bowl cleaner and
glass cleaner, were developed exclusively for the Company and replaced the
"Down-to-Earth" product line. SuperNaturals are sold by the direct Filter Queen
distribution system and by independent sales representatives.
Household Rental Systems ("HRS") provides carpet cleaning systems for rent to
consumers through the Filter Queen direct distribution network and through
independent retail vacuum cleaner stores under the names "Easy Off" in Canada
and "Easy Way" in the United States. HRS also rents carpet cleaning systems to
consumers through leading grocery chains, drug stores and hardware stores in
Canada. The Company estimates that HRS controls approximately 80% of this market
in Canada. Independent direct distributors also rent machines to consumers
through in-home delivery and pick up. The Easy-Way and Easy Off product lines
are full lines of cleaning solutions for use with HRS products, with other
similar products or individually. These products are sold by existing retail and
Distributor organizations. HRS products meet strong competition for the carpet
cleaning systems from seven major competitors, most of which are larger than HRS
or are part of larger companies with greater resources than HRS. The Canadian
HRS business has been reported as discontinued operations.
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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. Local advertising, telemarketing and direct mail are used to reach
those consumers who can benefit from the AdvantaJet. Health-Mor Personal Care
Corp. works with medical professionals and consumer groups to target the
customer base. There are two other devices which compete with the AdvantaJet.
The Company owns a number of patents in the United States, Canada, United
Kingdom, Japan, and various European countries covering the needle-free insulin
injectors. Active distributor agreements are in effect to distribute this
product in the Japan, Korea, Spain, Italy, France and certain countries in
Africa and the Middle East.
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. In the case of sales through retail vacuum
cleaner stores, this competition is with the vacuum cleaner equipment in use in
the home at the time of the customer's inquiry and with other brands of vacuum
cleaners and central vacuum systems sold by the particular store. There are over
twenty significant vacuum cleaner manufacturers, plus many regional and private
label manufacturers, who make over forty 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, and often at lower prices than the Empress, Optima and
ElektraPure. There are approximately twenty manufacturers in the United States
and Canada of central vacuum systems. There are nine companies which compete
significantly with the Company in the United States and eight companies which
compete significantly with the Company in 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
significant amounts of inventory to meet the rapid delivery requirements of
customers. The Consumer Goods Division of the Company operates without a
backlog.
The Company's Product Development Department, established to create, engineer
and oversee the market launch of new and innovative products, introduced the
"Defender" portable room air cleaner in 1996, and also added the Medi-Filter to
the filtration package of the Filter Queen Majestic. Management believes these
products will create unparalleled air filtration in the vacuum cleaner,
filtration and other industries. This department also developed the
newly-designed "Easy-Way" carpet cleaner in 1996.
The Company is expanding its parts and service business by utilizing its
extensive customer data base to market accessories and new products and services
designed as part of the Company's "Friend for Life" philosophy. The Direct
Support Plus program is designed to maintain contact with customers, encourage
add-on sales and generate referrals by utilizing these same data bases and the
Distributor network. The parts and service business is expanding overseas.
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The Company's financing program, through its subsidiaries, Health-Mor Acceptance
Corporation and HMI Acceptance Corporation continues to expand. Health-Mor
Acceptance PTY Ltd. was incorporated in Sydney Australia, to offer consumer
financing of the Company's products in that country. Filter Queen distributors
cite the program's original objective of increasing dealer retention for its
continued value to the distribution network. Risk is limited through agreements
between the companies and the distribution network which provide for the
disbursement of funds to the distribution network after funds are received
by the Company from the customer.
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 has entered into oral or written distributorship agreements with various
companies and individuals throughout the world. 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.
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.
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 manufacturing, materials handling equipment, military, and
plumbing industries. The products manufactured by Bliss are sold primarily to
original equipment manufacturers, mostly in the Midwest.
In 1996 Bliss continued to increase its capacity with state-of-the-art
technology by adding three additional large presses in its Newton Falls plant.
This will enhance Bliss' capabilities in the area of large size products.
The ISO 9002 approval granted to Bliss by Freightliner and Volvo has provided
additional opportunities as well for special truck order requests.
The customers of Bliss issue releases for parts depending upon their own
requirements. Therefore, Bliss operates without a backlog.
The business of Bliss is significantly dependent upon several automotive
manufacturers. In the event that a significant portion of the automotive
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
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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.
Bliss Tubular (formerly Tube Form Inc. ), a division of Bliss, engages in the
bending and sale of steel, aluminum and copper tubing. Bliss Tubular markets its
products principally throughout the United States primarily to industrial
consumers in the appliance, vacuum cleaner, machine tool, marine, pneumatic,
hydraulic and trucking industries.
Bliss Tubular experiences strong competition from thousands of competitors, none
of whom has any sizable share of the market for such products.
Aggregate sales backlog on September 30, 1996 and 1995 were approximately
$430,000 and $3,614,000, respectively. It is expected that this operation will
fill its entire backlog in the current fiscal year.
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.
Tube-Fab experiences strong competition from numerous competitors, none of whom
has any sizable share of the market for such products.
Sales backlog on September 30, 1996 and 1995 was approximately $525,000 and
$570,000, respectively. It is expected that this backlog will be filled during
the current fiscal year.
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 Canadarm Joint Motor Modules for the Space
Station Freedom. MPD has numerous competitors in the machining field, none of
whom has any sizable market share.
MPD also manufactures the needle-free insulin injection system sold by HMI
Personal Care Corp.
Sales backlog for MPD as of September 30, 1996 and 1995 was approximately
$420,000 and $439,000, respectively. It is expected that this backlog will be
filled during the current fiscal year.
Employees
- ---------
The Company and its subsidiaries employed 935 persons at September 30, 1996
throughout the world.
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Environmental Policies and Controls
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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
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The Consumer Goods Division of the Company assembles finished parts purchased
from various suppliers. Bliss Tubular and Tube-Fab purchase metal tubing from
various suppliers and engage 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
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Financial information relating to foreign and domestic operations for the years
ended September 30, 1996, 1995 and 1994 are set forth in Note 12 (Business
Segments) of the Notes to Consolidated Financial Statements found on page 37.
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<TABLE>
<CAPTION>
Executive Officers of the Registrant
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NAME AGE POSITION AND TERMS OF SERVICE AS OFFICER
- ---- --- ----------------------------------------
<S> <C> <C>
Kirk W. Foley 54 President (1) and Chief Executive Officer (2)
William M. Duvall 66 Chairman and Chief Executive Officer, Bliss Mfg. Co. (3)
William A. Adams 50 President and Chief Operating Officer, Bliss Mfg. Co. (4)
Kevin Dow 40 Vice President - Treasury and Administration and
Treasurer (5)
Sherwin Ellens 59 Vice President - Direct Sales (6)
Michael Harper 40 Corporate Controller (7)
<FN>
(1) On December 5, 1996, the Board of Directors named James R. Malone as
Chairman of the Board of Directors. Former Chairman, Kirk W. Foley will remain
President and Chief Executive Officer. Mr. Malone is currently Chairman and
Acting President of Anchor Glass Container Corporation. Mr. Malone's election
as Director and Chairman of the Board will be placed before the shareholders at
the next Annual Shareholders meeting.
(2) Mr. Foley has served as President or Chairman of the Board and as Chief
Executive Officer of the Company since 1989. Mr. Foley has served as Chairman of
Tube-Fab Ltd., a subsidiary of the Company, since 1987 and has served as
President of HMI Incorporated, a subsidiary of the Company, since 1988.
(3) Mr. Duvall is Chairman of the Board of Bliss Manufacturing Co. and its Chief
Executive Officer. Mr. Duvall served as President of Bliss from 1990 until 1993.
(4) Mr. Adams has been the President and Chief Operating Officer of Bliss
Manufacturing Co. since 1993. Mr. Adams was the Vice President and General
Manager of Tridon, Inc. from 1992 to 1993, and was Vice President -
Manufacturing and Technology for Tridon Ltd. from 1988 to 1992.
(5) Mr. Dow has served as Vice President - Treasury and Administration of the
Company since March, 1996. He served as Vice President - Finance and
Administration from 1989 to 1996. He has served as Treasurer from August, 1995
to January, 1996, and since December, 1996.
(6) Mr. Ellens has served as Vice President - Direct Sales since January, 1996.
From 1995 to 1996, he served as Director of Direct Sales worldwide. From 1992 to
1995, he served as Director of Direct Sales for North America. From 1990 to
1992, he served as Manager of Direct Sales for the United States.
(7) Mr. Harper was elected Corporate Controller in December, 1996. He has served
as Vice President, Finance for Bliss Manufacturing Company since January, 1996.
For over sixteen years prior to that time he served in various financial
management capacities with The Sherwin-Williams Company, most recently as the
Controller of the Transportation Services Division.
Kevin Dow, Vice President-Treasury and Administration and Treasurer, is the
first cousin of Barry L. Needler, a director.
</TABLE>
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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, 1996:
<TABLE>
<CAPTION>
SQUARE FEET
---------------------------
LOCATION CHARACTER OWNED LEASED
- --------------------------------------------------- ------------------------ ------------ ----------
<S> <C> <C> <C>
CONSUMER GOODS DIVISION
United States of America
------------------------
Cleveland, Ohio Office, Plant & 210,000
Warehouse
Bradley, Illinois Office & Warehouse 7,516
Canada
-------
Mississauga, Ontario Office & Warehouses 48,302
Dorval, Quebec Office & Warehouse 4,762
Calgary, Alberta Office & Warehouse 4,490
Surrey, British Columbia Office & Warehouse 4,100
Edmonton, Alberta Office & Warehouse 3,513
Moncton, New Brunswick Office & Warehouse 3,000
Winnipeg, Manitoba Office & Warehouse 2,473
Vancouver, British Columbia Office & Store 1,700
Burlington, Ontario Office & Store 1,100
MANUFACTURED PRODUCTS DIVISION
Tools, Dies & Specialty Machinery
---------------------------------
Charlottetown, Prince Edward Island Office, Plant & 20,000
Warehouse
Metal Stamping and Metal Formed Tubing
--------------------------------------
Newton Falls, Ohio Office, Plant & 400,000
Warehouse
Youngstown, Ohio Office, Plant & 150,000
Warehouse
Bedford Heights, Ohio Office, Plant & 76,238 [1]
Warehouse
Mississauga, Ontario Office & Plant 26,000
<FN>
[1] During the fourth quarter, the Company entered into a Purchase Agreement to
sell this facility. The sale closed in December 1996. All production has been
moved to the Metal Stamping Plant in Newton Falls, Ohio.
</TABLE>
The Company owns a 25,000 square foot building in Lombard, Illinois which was
leased during 1994 with an option to purchase at any time under the ten year
lease term. Under the terms of the agreement, the lessee is responsible for all
operating expenses related to the property and the lease payments equal the debt
service for the outstanding indebtedness incurred for the original purchase of
the property. All other property owned or leased by registrant is fully utilized
by registrant or is leased to third parties.
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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
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, 1996, there were approximately 278
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, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996
High Low Dividend
------------------ ------------------ -------------------
<C> <C> <C> <C>
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
1995
High Low Dividend
------------------ ------------------ -------------------
<C> <C> <C> <C>
1st Quarter 16 1/2 13 1/4 $ .0830
2nd Quarter 16 3/4 15 $ .0875
3rd Quarter 17 15 1/4 $ .0875
4th Quarter 16 1/4 14 $ .0875
</TABLE>
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. It is not expected that the Company will declare
a dividend until the Company returns to profitability. The Line of Credit
Agreement with Star Bank will not permit the payment of dividends if the Company
incurs losses for two consecutive quarters. Under the terms of the Note Purchase
Agreement entered into by the Company in November 1990, dividend payments can
not exceed 50% of the cumulative net income of the Company since 1990 over a
base amount established in the agreement. The restriction remains in effect
until the notes are paid in full in 1997.
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Item 6. Selected Financial Data
- -------------------------------
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Revenue From Continuing Operations $ 114,955,808 $ 127,664,504 $ 123,004,272 $ 99,362,939 $ 84,887,587
Operating Costs and Expenses $ 119,108,754 $ 117,065,327 $ 112,645,122 $ 89,563,158 $ 78,136,308
Other Income (Expense), net $ (2,432,567) $ (1,798,631) $ (1,422,167) $ (1,732,386) $ (1,831,594)
Income (loss) Before Discontinued
Operations Before Taxes $ (6,585,513) $ 8,800,546 $ 8,936,983 $ 8,067,395 $ 4,919,685
Income (loss) Margin Before
Discontinued (5.8%) 6.9 7.3 8.1 5.8%
Operations Before Taxes
Income Taxes (benefits) $ (2,043,000) $ 2,561,800 $ 2,971,300 $ 2,665,837 $ 1,846,600
Income Tax Rate 31.0% 29.1% 33.2% 33.0% 37.5%
Income (loss) before Discontinued
Operations $ (4,542,513) $ 6,238,746 $ 5,965,683 $ 5,401,558 $ 3,073,085
Income (loss) Margin Before Discontinued
Operations (4.0%) 4.9% 4.8% 5.4% 3.6%
Income (loss) From Discontinued
Operations $ (2,510,685) $ (624,071) $ 481,406 $ (531,794) $ ---
Loss on Disposal $ (2,280,844) $ --- $ --- $ --- $ ---
Cumulative Effect-
Change of Accounting for Income $ --- $ --- $ 719,016 $ --- $ ---
Taxes
Net Income (loss) $ (9,334,042) $ 5,614,675 $ 7,166,105 $ 4,869,764 $ 3,073,085
Net Income (loss) Margin (8.1%) 4.4% 5.8% 4.9% 3.6%
PER SHARE DATA:
Net Revenues From Continuing Operations $ 23.40 $ 26.18 $ 25.16 $ 20.48 $ 17.52
Income (loss) Before Discontinued
Operations $ (.93) $ 1.28 $ 1.22 $ 1.66 $ .63
Income (loss) From Discontinued
Operations $ (.51) $ (.13) $ .10 $ (.11) $ ---
Net Income (loss) $ (1.90) $ 1.15 $ 1.47 $ 1.01 $ .63
Cash Dividends $ .263 $ .346 $ .324 $ .301 $ .301
Weighted Average Number of Common
Shares Outstanding 4,912,135 4,876,599 4,888,395 4,851,192 4,846,011
Total Assets $ 91,709,959 $ 83,866,035 $ 77,431,812 $ 65,102,787 $ 54,909,802
Long-Term Debt $ 22,334,613 $ 14,050,715 $ 13,176,973 $ 8,800,956 $ 9,159,316
Stockholders' Equity $ 33,551,422 $ 42,339,313 $ 39,717,582 $ 34,442,194 $ 31,482,159
Book Value Per Share $ 6.83 $ 8.68 $ 8.13 $ 7.10 $ 6.50
Working Capital $ 25,400,709 $ 23,771,993 $ 22,941,184 $ 18,189,328 $ 16,499,832
Ratio of Current Assets to Current 1.78 1.91 1.99 1.90 2.30
Liabilities
Percent of Earnings on Average
Stockholders' Equity (24.6%) 13.7% 19.3% 14.8% 10.0%
Percent of All Dividends to Net Income (13.8%) 30.1% 22.1% 30.0% 47.7%
Stock High 15 17 19 1/8 13 3/4 8 1/4
Stock Low 4 3/4 13 1/4 11 1/4 5 5/8 5 1/8
Average Annual Price to Earnings Ratio (5.20) 13.2 10.3 9.6 10.5
Average Annual Dividend Yield 2.7% 2.3% 2.1% 3.1% 4.5%
</TABLE>
13
<PAGE> 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
NET SALES - Net sales for the year ending September 30, 1996 decreased by
$12,880,000 or 10.1% as compared to fiscal 1995. The decrease in sales is
primarily attributable to a decrease within the Manufactured Products Division.
Fiscal 1996 Manufactured Products sales were $55,091,000 compared to fiscal
1995 sales of $64,862,000 representing a $9,771,000 decrease. The Bliss
Manufacturing labor disruption in August 1995 by the UAW is the primary factor
causing the decrease in sales orders in the Manufactured Products Division.
The Company signed a six year labor contract with the Employee Labor
Association in December 1995. Fourth quarter revenues at Bliss exceeded 1995
revenues for the first time during the year. A $2,938,000 or 4.7% decrease in
Consumer Goods revenues also contributed to the decrease in consolidated sales.
Sales declines within the North American and Asian markets have been offset by
growth in the European market. Decreases in the North American market are
attributable to, among other things, a tightening of consumer credit.
Distribution difficulties and required product changes in Asia have hampered
sales.
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.
GROSS PROFIT - Gross profit for fiscal 1996 was $30,623,000 or 26.8% as compared
to 1995 gross profit of $36,103,000 or 28.4%. Gross profit was adversely
affected by the decrease in volume at Bliss Manufacturing during the year and
due to lower margins within the U.S. tubular operations for the first nine
months of the year. Bliss Manufacturing margins increased during the year as
volume increased; however, margins have not fully recovered to 1995 levels due
to competitive pricing in the market place. The U.S. tubular operations were
moved to the Bliss Manufacturing production facility in the third quarter.
Margins for the tubular operations for the fourth quarter improved from previous
levels and are expected to continue to improve in fiscal 1997. Margins for the
Consumer Goods division were also adversely affected in fiscal 1996 by increased
material costs, production scheduling difficulties, duplicate facility costs and
volume decreases within the North American and Asian markets. The Consumer Goods
operation moved into a new facility in March 1996, thus eliminating the cost of
two facilities during the first six months of the year. Additionally, scheduling
and process changes were made within the operations to reduce production
inefficiencies. Margins in the fourth quarter increased over previous quarter
margins as a result of these changes.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative costs
increased by $5,860,000 from fiscal 1995 to fiscal 1996. As a percent of
revenues, selling, general and administrative costs were 27.8% in 1996 as
compared to 20.4% in 1995. Included in the increase is $2,200,000 of new product
development and introduction costs for the Consumer Goods business without
corresponding increases in sales from these products. The Company also
experienced increased legal and professional fees, increased compensation costs
and increased reserves for uncollectible accounts within the Consumer Goods
Division. Many of these items are one time costs, and are not expected to
repeat in 1997.
14
<PAGE> 15
INTEREST EXPENSE - Interest expense has increased as a result of additional
borrowings during 1996.
LOSS ON INVESTMENT IN HOLLAND ELECTRO - During the fourth quarter, the Company
recorded a charge of $2,012,000 to record the write-off of advances to Holland
Electro B.V., a former supplier with which the Company no longer has any ties.
The Company had advanced these monies to Holland Electro over the past five
years to develop the ElektraPure vacuum. The Company is currently selling this
product throughout the United States and Europe. The Company determined that
recovery of these advances was not likely. Accordingly, the Company recorded a
charge for the write-off of these advances.
SPECIAL CHARGES - In connection with the move of two of the Company's production
facilities and a review and rationalization of the Company's product lines, the
Company performed a study of slow moving and obsolete inventory which resulted
in a write-off of inventory and the creation of an inventory reserve amounting
to a one-time special charge (as well as the cost associated with the moves) of
$1,571,000.
INCOME TAXES - The effective rate for fiscal 1996 was 31.0% compared to 29.1% in
1995.
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. A $800,000 charge was
recorded on the disposal of the steam cleaning business in order to record the
assets of this operation at their estimated net realizable value.
RESULTS OF OPERATIONS
1995 COMPARED WITH 1994
NET SALES - Net sales for the twelve months in 1995 were $127,108,000 as
compared to $122,734,000 in 1994 representing an increase of 3.6%. Manufactured
Products revenue decreased by $1,865,000 as a result of the labor disruption at
the Bliss Manufacturing operation during the last quarter and as a result of
decreased sales within the U.S. tubular operations. The decrease in Manufactured
Products revenue was offset by Consumer Goods revenue which increased by
$6,526,000 from fiscal 1994 to fiscal 1995. Growth in the Filter Queen business
throughout Asia, Europe and the USA resulted in the increased sales levels.
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 increase in revenue is the result
of increased utilization of the financing program by U.S. consumers.
15
<PAGE> 16
GROSS PROFIT - The Company's gross profit on its entire operations was
$36,103,000 or 28.4% as compared to $32,418,000 or 26.4% in 1994. Gross margins
were 37.7% (35.3% in 1994) and 20.0% (19.3% in 1994) in the Consumer Goods
Division and Manufactured Products Division, respectively. Generally, the
effects of inflation on costs have not been a significant factor to the
Company. For the most part, cost increases continue to follow the trend of
inflation and the Company has been able and continues to be able to pass these
increases through in the form of price increases without any significant effect
on sales volume. In the minority of cases where there is customer resistance to
raising prices due to increased costs, the Company has successfully pursued in
some cases material substitutions to accomplish comparable gross margins.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses as a percentage of revenues were 20.4% in 1995 as compared to 18.2% in
1994. Selling expenses increased over 1994 as a result of the entry into new
markets and to support the launch of new products on a global basis.
INCOME TAXES - The effective tax rate for 1995 was 29.1% as compared to 33.2%
for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The working capital balance at September 30, 1996 was $25,401,000 an increase of
6.8% from the September 30, 1995 balance of $23,772,000.
The Company's cash decreased $98,000 during the year ended September 30, 1996.
Receivables increased by $2,669,000 primarily as a result of increases in trade
receivables of $2,143,000 and finance contracts receivables of $526,000. Trade
receivables increased as a result of increased sales in September. Inventories
increased by $2,140,000 as a result of increased inventory levels within the
Manufactured Products division to support the start-up of new significant
contracts awarded to Bliss Manufacturing. The aforementioned variances relate
to information in the Consolidated Statement of Cash Flow and do not directly
tie to the Consolidated Balance Sheet because of the assets of the Canadian
Household Rental Systems business and the Mexican operation which are classified
as net assets held for sale at realizable value. Prepaid expenses increased as
a result of costs incurred during fiscal 1996 which were deferred and will be
amortized over the period in which benefit is to be received. Certain of these
costs relate to the introduction of new products. Accounts payable increased by
$6,845,000 due to the increased inventory levels and a restricted cash
position. Included in the September 30, 1996 working capital was $4,228,059 of
net assets held for sale relating to the assets of Household Rental Systems and
the former Bedford Heights, Ohio facility for the Tubular operation. The
Tubular facility was sold in December 1996. These assets were classified as
long term in the September 30, 1995 consolidated balance sheet.
At September 30, 1996, $3,333,000 of the unsecured, 9.86%, seven year private
placement term notes were outstanding. This debt, obtained in November 1990 to
finance the acquisition of Bliss Manufacturing Company, requires annual
principal payments in November of each year of $1,666,667 through 1997.
16
<PAGE> 17
Capital expenditures during 1996 were $6,485,000, compared to $3,805,000 in
1995. In 1996, capital expenditures in the Consumer Goods operation were
$5,244,000 and $1,241,000 in the Manufactured Products Division. The largest
addition during the year was a $2,829,000 renovation of a 210,000 square foot
facility in Cleveland to relocate the production and assembly operations of the
Consumer Goods Division and the Company's corporate activities. Other
significant Consumer Goods capital expenditures include $463,000 for production
machinery, primarily the machinery which produces the paper filters for the
Filter Queen, $713,000 for tooling and $507,000 for customized computer
software. Additions in the Manufactured Products Division include $561,000 for
three new presses at Bliss, building improvements and machinery of $223,000 for
Bliss Tubular, and $220,000 in other production equipment at Bliss.
The Company has a $15,000,000 line of credit with a bank at prime less 1/2%
(7.75% at September 30, 1996). In August 1996, the Company negotiated an
increase in the line to $17,500,000. Under the Company's line of credit
agreement, the principal amount of $2,500,000 is due no later than January 2,
1997. That payment is expected to be made with proceeds from the sale of the
Bedford Heights tubular facility, cash generated from operations, and an
anticipated federal tax refund. If these sources are not sufficient, because
the Company does not receive the tax refund prior to the payment date, the
Company expects the bank to agree to accept payment at the time the anticipated
tax refund is received by the Company, which is believed to be in early
January. In November 1996, the commitment was increased to $19,500,000. The
additional commitment of $2,000,000 is available through February 1997.
The agreements relating to the company's outstanding debt include various
covenants that limit its ability to incur additional indebtedness, and
restricts paying dividends, as well as require it to meet various financial
covenants. At September 30, 1996, 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, 1996.
Interest expense for 1996 was primarily related to borrowing on the line of
credit 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.
Losses in 1996 were funded by increases in debt, however, availability of cash
had diminished, which, from time to time, created deficiencies in working
capital. The Company's principal sources of liquidity in the future are
expected to be funded with cash generated from operations, the 1996 tax refund,
and the sale of certain non-core assets, and additional borrowings under the
Company's line of credit facility.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Reference is made to the Index to Financial Statements included on page 21 of
this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
Not applicable.
17
<PAGE> 18
PART III.
- ---------
Item 10. Directors and Executive Officers of Registrant
- --------------------------------------------------------
See Item 13.
Item 11. Executive Compensation
- --------------------------------
See Item 13.
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 21 of this report.
2. FINANCIAL STATEMENT SCHEDULES - Not applicable.
3. EXHIBITS - Reference is made to the Index To Exhibits, included
as page 42 of this report.
(b) Reports on Form 8-K. No report on Form 8-K was filed during the last
quarter of 1996.
(c) Exhibits Reference is made to the Index To Exhibits, included as page 42 of
this report.
(d) Financial Statement Schedules - Not Applicable.
18
<PAGE> 19
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)
December 20, 1996 by /s/ Michael Harper
-------------------
MICHAEL HARPER
Corporate Controller and
Principal Accounting Officer
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/ Kirk W. Foley
- ------------------
KIRK W. FOLEY
President, Chief Executive
Officer and Director
12/23/96
- --------
Date
/s/ Robert J. Abrahams /s/ Donald L. Baker
- ---------------------- -------------------
ROBERT J. ABRAHAMS DONALD L. BAKER
Director Director
12/23/96 12/23/96
- -------- --------
Date Date
/s/ Moffat Dunlap
- ------------------ -------------------
MOFFAT DUNLAP JAMES R. MALONE
Director Director
12/24/96
- -------- --------
Date Date
19
<PAGE> 20
/s/ John S. Meany, Jr.
- ------------------ ----------------------
GRACE MCCARTHY JOHN S. MEANY, JR.
Director Director
12/19/96
- -------- --------
Date Date
/s/ Barry L. Needler
- -------------------- -------------------
BARRY L. NEEDLER FRANK RASMUSSEN
Director Director
12/24/96
- -------- --------
Date Date
/s/ Ivan Winfield
- -----------------
IVAN WINFIELD
Director
12/23/96
- --------
Date
20
<PAGE> 21
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE
----
Report of Independent Accountants
- ---------------------------------
For the years ended September 30, 1996, 1995 and 1994..................... 22
Financial Statements
- --------------------
Consolidated Balance Sheets for the years ended September 30, 1996
and 1995................................................................ 23
Consolidated Statements of Income for the years ended September 30,
1996, 1995 and 1994..................................................... 24
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1996, 1995 and 1994....................................... 25
Consolidated Statements of Cash Flows for the years ended September
30, 1996, 1995 and 1994................................................. 26
Notes to Consolidated Financial Statements .............................27-41
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.
21
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders, HMI Industries Inc.
We have audited the accompanying consolidated balance sheets of HMI Industries
Inc. and its subsidiaries as of September 30, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1996 in conformity with generally
accepted accounting principles.
As described in Notes 1 and 9 to the Consolidated Financial Statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," in 1994.
/s/ Coopers & Lybrand, L.L.P.
Cleveland, Ohio
December 18, 1996
22
<PAGE> 23
<TABLE>
<CAPTION>
HMI INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
SEPTEMBER 30, September 30,
1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 472,408 $ 570,759
Trade accounts receivable (net of allowance of $2,439,406 and $1,549,897) 26,252,884 26,025,887
Finance contracts receivable 2,224,480 2,587,085
Notes receivable 560,884 1,049,389
Inventories:
Finished goods 6,943,970 6,274,061
Work-in-progress, raw material and supplies 11,420,627 10,407,830
Income tax receivable 1,463,000 --
Deferred income taxes 1,772,129 721,666
Prepaid expenses 2,683,711 2,148,088
Net assets held for sale at realizable value 4,228,059 --
------------ ------------
Total current assets 58,022,152 49,784,765
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 15,717,653 15,012,400
------------ ------------
OTHER ASSETS:
Long-term notes receivable (less amounts due within one year) 334,123 334,123
Cost in excess of net assets of acquired businesses
(net of amortization of $3,092,432 and $2,740,965) 12,636,147 12,985,128
Deferred income taxes -- 496,537
Unamortized trademarks 312,775 1,557,078
Finance contracts receivable (less amounts due within one year) 4,449,628 3,561,278
Other 237,481 134,726
------------ ------------
Total other assets 17,970,154 19,068,870
------------ ------------
Total assets $ 91,709,959 $ 83,866,035
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 3,132,975 $ 2,204,384
Trade accounts payable 17,785,859 10,940,597
Dividends payable -- 429,716
Income taxes payable 1,013,979 2,737,429
Accrued expenses and other liabilities 7,202,989 7,673,887
Long-term debt due within one year 3,485,641 2,026,759
------------ ------------
Total current liabilities 32,621,443 26,012,772
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 22,334,613 14,050,715
Deferred income taxes 192,372 165,495
Other 3,010,109 1,297,740
------------ ------------
Total long-term liabilities 25,537,094 15,513,950
------------ ------------
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 7,686,944 7,521,851
Retained earnings 23,408,806 34,034,294
Cumulative translation adjustment (1,077,325) (2,663,904)
------------ ------------
35,313,981 44,187,797
Less treasury stock 376,186 shares, at cost 1,762,559 1,848,484
------------ ------------
Total stockholders' equity 33,551,422 42,339,313
------------ ------------
Total liabilities and stockholders' equity $ 91,709,959 $ 83,866,035
============ ============
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 24
<TABLE>
<CAPTION>
HMI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended September 30,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Net product sales $ 114,227,733 $ 127,107,900 $ 122,733,701
Financing revenue and other 728,075 556,604 270,571
------------- ------------- -------------
114,955,808 127,664,504 123,004,272
OPERATING COSTS AND EXPENSES:
Cost of products sold 83,604,293 91,004,487 90,315,401
Selling, general and administrative expenses 31,921,078 26,060,840 22,329,721
Interest expense 1,769,285 1,452,427 1,336,482
Loss on investment in Holland-Electro 2,012,356 -- --
Other expenses 663,282 346,204 85,685
Special charges 1,571,027 -- --
------------- ------------- -------------
Total expenses 121,541,321 118,863,958 114,067,289
------------- ------------- -------------
Income (loss) before income taxes (6,585,513) 8,800,546 8,936,983
Provision (benefit) for income taxes (2,043,000) 2,561,800 2,971,300
-------------- ------------- -------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS (4,542,513) 6,238,746 5,965,683
------------- ------------- -------------
Income (loss) from discontinued operations - Mexico
(net of taxes of $-0-, $496,000 and $144,000) (1,428,183) (235,838) 279,855
Loss on disposal of Mexican Operations-
Currency loss previously reflected as component of equity (2,396,509) -- --
Loss on disposal (84,335) -- --
Tax benefit 1,000,000 -- --
------------- ------------- -------------
Loss on disposal - Mexico (1,480,844) -- --
Income (loss) from discontinued operations - HRS (1,082,502) (388,233) 201,551
Loss on disposal - HRS (800,000) -- --
Cumulative effect of change in accounting for
income taxes (Note 1 ) 719,016
------------- ------------- -------------
NET INCOME (LOSS) $ (9,334,042) $ 5,614,675 $ 7,166,105
============= ============= =============
Weighted average number of shares outstanding 4,912,135 4,876,599 4,888,395
============= ============= =============
PER SHARE OF COMMON STOCK:
Income (loss) before discontinued operations $ (0.93) $ 1.28 $ 1.22
Income (loss) from discontinued operations $ (0.51) $ (0.13) $ 0.10
Loss from disposal $ (0.46) $ -- $ --
Cumulative effect of accounting change $ -- $ -- $ 0.15
------------- ------------- -------------
Net income (loss) $ (1.90) $ 1.15 $ 1.47
============= ============= =============
Cash dividends per common share $ 0.263 $ 0.346 $ 0.346
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 25
HMI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended September
30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common stock Cumulative
---------------------------- Capital in Excess Retained Translation
Issued Shares Amount of Par Value Earnings Adjustment
-------------- ------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1993 3,530,396 $3,530,396 $7,195,587 $26,292,013 ($480,315)
Net income 7,166,105
Cash dividends-
$.324 per share (1,581,857)
Treasury shares issued 27,780
Stock split 1,765,160 1,765,160 (1,765,160)
Foreign currency
translation adjustment (388,701)
----------- ------------- ------------- ------------- --------------
September 30, 1994 5,295,556 5,295,556 7,223,367 30,111,101 (869,016)
Net income 5,614,675
Cash dividends-
$.345 per share (1,691,482)
Treasury shares issued 298,484
Foreign currency
translation adjustment (1,794,888)
----------- ------------- ------------- ------------- --------------
SEPTEMBER 30, 1995 5,295,556 5,295,556 7,521,851 34,034,294 (2,663,904)
NET LOSS (9,334,042)
CASH DIVIDENDS-
$.2625 PER SHARE (1,291,446)
TREASURY SHARES ISSUED 165,093
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT 1,586,579
----------- ------------- ------------- ------------- --------------
BALANCE AT SEPTEMBER 30, 1996 5,295,556 $ 5,295,556 $ 7,686,944 $ 23,408,806 $ (1,077,325)
=========== ============= ============= ============= ==============
<CAPTION>
Treasury stock Total
--------------------------------- Stockholders'
Shares Amount Equity
------------- -------------- -----------
<S> <C> <C> <C>
Balance at September 30, 1993 298,222 ($2,095,487) $34,442,194
Net income 7,166,105
Cash dividends-
$.324 per share (1,581,857)
Treasury shares issued (11,200) 52,061 79,841
Stock split 149,111 -
Foreign currency
translation adjustment (388,701)
----------- ------------ -----------
September 30, 1994 436,133 (2,043,426) 39,717,582
Net income 5,614,675
Cash dividends-
$.345 per share (1,691,482)
Treasury shares issued (41,607) 194,942 493,426
Foreign currency
translation adjustment (1,794,888)
----------- ------------ -----------
SEPTEMBER 30, 1995 394,526 (1,848,484) 42,339,313
NET LOSS (9,334,042)
CASH DIVIDENDS-
$.2625 PER SHARE (1,291,446)
TREASURY SHARES ISSUED (18,340) 85,925 251,018
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT 1,586,579
----------- ------------ ------------
BALANCE AT SEPTEMBER 30, 1996 376,186 $(1,762,559) $ 33,551,422
=========== ============ ============
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 26
<TABLE>
<CAPTION>
HMI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the years ended September 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(9,334,042) $ 5,614,675 $ 7,166,105
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 3,564,595 3,768,822 3,380,062
Loss on disposal of discontinued operations 2,280,844 -- --
Provision for losses on receivables 1,069,509 641,562 998,846
Amortization of deferred non-compete agreement -- 380,576 --
Deferred income taxes (527,049) (53,923) (1,350,425)
Changes in operating assets and liabilities:
Decrease (increase) in receivables (2,668,671) (5,916,069) (6,054,209)
Decrease (increase) in inventories (2,139,794) (2,191,579) (1,503,059)
Decrease (increase) in prepaid expenses (719,176) (429,965) 63,588
Increase (decrease) in accounts payable 7,016,530 3,301,638 2,454,217
Increase (decrease) in accrued expenses and other liabilities 1,015,940 (1,545,968) (651,422)
Increase (decrease) in income taxes payable (2,186,450) (245,319) 721,657
Other, net (258,613) (186,780) 295,924
----------- ----------- -----------
Net cash provided (used) in operating activities (2,886,377) 3,137,670 5,521,284
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business -- -- (4,875,000)
Proceeds from sale of fixed assets 523,783 -- 8,000
Capital expenditures (6,484,846) (3,805,326) (3,509,116)
Collection of notes receivable -- -- 300,000
----------- ----------- -----------
Net cash used in investing activities (5,961,063) (3,805,326) (8,076,116)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 7,795,616 4,117,324 6,328,482
Proceeds from mortgage 2,214,923 -- --
Payment of long term debt (2,807,706) (2,012,371) (1,832,605)
Proceeds from financing 3,022,807 -- --
Dividends paid (1,721,162) (1,669,565) (1,541,970)
Proceeds from exercise of stock options -- 112,850 79,841
----------- ----------- -----------
Net cash provided by financing activities 8,504,478 548,238 3,033,748
----------- ----------- -----------
Effect on exchange rate changes on cash 244,611 -- --
----------- ----------- -----------
Net decrease in cash and cash equivalents (98,351) (119,418) 478,916
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 570,759 690,177 211,261
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 472,408 $ 570,759 $ 690,177
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of HMI
Industries Inc. ("the Company") and the following wholly-owned subsidiaries:
Tube Form, Inc. (Tube Form), Tube-Fab Ltd. (Tube-Fab), Bliss Manufacturing
Company (Bliss), Health-Mor B.V., Health-Mor International, Inc., HMI
Incorporated (HMI Inc.), Health-Mor Acceptance Corporation, HMI Acceptance
Corporation, Health-Mor Acceptance Pty. Ltd., Health-Mor Mexicana S.A. de C.V.,
HMI Personal Care Corporation and Home Impression Inc. All significant
intercompany transactions have been eliminated in the consolidated financial
statements.
CASH EQUIVALENTS
Cash equivalents consist of short-term highly liquid negotiable instruments with
a maturity within 90 days from the date of purchase.
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES
Cost in excess of net assets of acquired businesses are being amortized on a
straight-line basis over a 40-year period. Cost in excess of net assets acquired
of $881,121 which related to the acquisition of Tube Form in 1970 will not be
amortized unless there is a decrease in its value.
The Company regularly assesses the aggregate carrying value of such excess based
upon the profitability and performance of the acquired businesses. If there is a
diminution in value, recorded balances will be adjusted.
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 on the LIFO method were 35.1% and 45.7% of inventories in 1996 and
1995, respectively. If the FIFO method had been used for all inventories, their
value would have been approximately $19,071,000 and $17,434,000 at September 30,
1996 and 1995, respectively.
ASSETS HELD FOR SALE
Assets held for sale include the assets of Household Rental Systems recorded at
their estimated net realizable value and the former Bedford Heights, Ohio
facility for the tubular operation. The tubular facility was sold in
December 1996.
27
<PAGE> 28
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 long-term debt in which the
fair value of these financial instruments approximates the carrying value.
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.
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." SFAS 109 was adopted on October 1, 1993 and applied prospectively from
that date. 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. The impact of adopting SFAS 109
was an increase in net income of $719,016 or $.15 per share in fiscal 1994.
SPECIAL CHARGES
In connection with the move of two of the Company's production facilities and a
review and rationalization of the Company's product lines, the Company performed
a study of slow moving and obsolete inventory which resulted in the write-off
and reserve of inventory amounting to a
28
<PAGE> 29
one-time special charge of $1,571,027. The balance in the reserve at September
30, 1996 was $321,900.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest was $1,509,627, $1,477,552 and $1,417,816 for the years
ended September 30, 1996, 1995 and 1994, respectively. During the year, 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. Additionally, approximately $754,000 of accounts receivable
were converted to notes receivable. During 1994, the Company acquired
approximately $941,000 of fixed assets which were financed through capitalized
lease obligations.
INCOME PER SHARE
On January 13, 1994, the Board of Directors declared a 3 for 2 common stock
split in the form of dividends payable on February 22, 1994. All share and per
share information has been restated to reflect the effect of such split.
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 1996,
1995 and 1994 was 4,912,135, 4,876,599 and 4,888,395, respectively.
RECLASSIFICATION
Certain amounts in the 1995 and 1994 financial statements have been reclassified
to conform to the 1996 presentation.
2. DISCONTINUED OPERATIONS
During the fourth quarter of 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, 1995 and 1994. The Company recorded a loss on disposal of $1,480,844
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, $2,873,044 and $5,180,849 for the years ended September 30, 1996,
1995 and 1994, 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
29
<PAGE> 30
September 30, 1996, 1995 and 1994. Revenues for the operation for the years
ended September 30, 1996, 1995 and 1994 were $5,536,983, $6,592,853 and
$5,688,440, respectively. The Company recorded an estimated loss on the disposal
of the operation of $800,000 during 1996. Net assets of Household Rental Systems
are included in assets held for sale.
<TABLE>
<CAPTION>
3. NOTES RECEIVABLE
Long-term notes receivable consist of the following:
1996 1995
------------------------ ------------------------
<S> <C> <C>
Notes receivable - Related parties
See Note 14 $ 895,007 $ 1,383,512
Less amounts due within one year 560,884 1,049,389
======================== ========================
$ 334,123 $ 334,123
======================== ========================
<CAPTION>
4. PROPERTY, PLANT AND EQUIPMENT
1996 1995
------------------------ ------------------------
Land $ 576,109 $ 800,640
Buildings and improvements 9,712,417 10,427,581
Machinery and equipment 20,553,692 19,483,281
------------------------ ------------------------
30,842,218 30,711,502
Accumulated depreciation 15,124,565 15,699,102
------------------------ ------------------------
Net property, plant and equipment $ 15,717,653 $ 15,012,400
======================== ========================
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<CAPTION>
1996 1995
------------------------ ------------------------
Accrued compensation $ 3,127,615 $ 2,499,538
Pension and profit sharing 852,413 826,775
Accrued interest 259,657 212,197
Accrued taxes 110,810 780,098
Other 2,852,494 3,355,279
======================== ========================
$ 7,202,989 $ 7,673,887
======================== ========================
</TABLE>
30
<PAGE> 31
6. LINES OF CREDIT
The Company has a $15,000,000 line of credit with a bank at prime less 1/2%
(7.75% at September 30, 1996). In August 1996, the Company negotiated an
increase in the line to $17,500,000. The incremental $2,500,000 is to be paid
with the proceeds from the sale of the Bedford Heights, Ohio tubular facility,
cash generated from operations, and an anticipated federal tax refund, in no
event later than January 2, 1997. In November 1996, the commitment was
increased to $19,500,000. The additional commitment of $2,000,000 is available
through February 1997.
As of September 30, 1996, $15,000,000 of the outstanding amount has been
classified as long-term debt. Commitment fees for unused amounts on the line of
credit are insignificant.
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, 1996 the promissory note
discount rate was 6.0%. The commitment is available through March 1997 and is
classified as short term debt as of September 30, 1996.
<TABLE>
<CAPTION>
7. LONG-TERM DEBT
Long-term debt consists of the following:
1996 1995
----------------- ------------------------
<S> <C> <C>
Bank lines of credit-Note 6 $ 18,132,975 $ 9,704,384
Seven year, 9.86% promissory 3,333,333 5,000,000
notes, interest payable semi-
annually and principal
payments of $1,666,666,
commencing November, 1992
through 1997
Promissory Note bearing interest
at prime (8.25% at September 2,214,923 ---
30, 1996) collateralized by buildings,
contents and inventory.
Principal payments commencing June 1997
Capitalized lease obligations 1,745,303 976,600
bearing interest at 3.74% to
8.04% due in monthly
installments of $63,630
(including interest)
through January, 2000
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
<S> <C> <C>
Distributor deposits bearing 1,144,492 1,530,126
interest of (2.5% to 5.0%) at
September 30, 1996 payable
180 days after termination of
distributor agreement
Unsecured Demand Authorization
bearing interest at Australian 1,007,745 --
prime less 1/2% (8.4%) payable
on demand or February 28, 1997
Industrial Revenue Development 956,849 1,070,748
Bonds bearing interest of 5.4%,
due in monthly installments of
$12,800, through May, 2004
Mortgage loan, variable interest
(9.25% at September 30, 1996) 316,537 --
payable monthly with principal
payments of $1,226, through May
2008
Interest free grant with varied
principal installments due 101,072 --
annually through June 1999
----------- -----------
28,953,229 18,281,858
Less amounts due within one year 6,618,616 4,231,143
=========== ===========
$22,334,613 $14,050,715
=========== ===========
</TABLE>
The principal amount of long-term debt payable in the five years ending
September 30, 1997 through 2001 is $6,618,616, $17,738,173, $736,701, $406,697
and $351,250. The weighted average interest rate on short term borrowings at
September 30, 1996 and 1995 was 8.10% and 8.41%, respectively. The Company
believes the Bank line of credit will be renewed upon its expiration on January
1, 1998.
The agreements relating to the company's outstanding debt include various
covenants that restrict its ability to incur additional indebtedness, and
restricts paying dividends, as well as require it to meet various financial
covenants. At September 30, 1996, 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, 1996.
32
<PAGE> 33
8. 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 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. The option price may not be less than the fair market
value at the date of the grant. Additional information regarding shares subject
to option is as follows:
<TABLE>
<CAPTION>
SHARES SUBJECT AVERAGE OPTION
TO OPTION PRICE PER SHARE
----------------- ---------------
<S> <C> <C>
Outstanding-
September 30, 1993 271,500 $ 7.53
Granted 54,000 13.08
Exercised (11,200) 7.44
----------------
September 30, 1994 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
================
</TABLE>
At September 30, 1996, 225,000 shares were reserved for the plan. The Company
does not expect to adopt the recognition provisions of the recently issued SFAS
No. 123 "Accounting for Stock-Based Compensation". Disclosures required by new
accounting standard will be included in the fiscal 1997 financial statements
pursuant to the effective date criteria.
33
<PAGE> 34
<TABLE>
<CAPTION>
9. INCOME TAXES
The provision (benefit) for income taxes relating to continuing operations consists of the following:
1996 1995 1994
----------------- ----------------- ------------------
<S> <C> <C> <C>
Current:
Federal $ (1,199,407) $ 1,844,078 $ 2,873,615
State and local 155,000 154,730 357,119
Foreign 25,000 25,000 50,000
----------------- ----------------- ------------------
(1,019,407) 2,023,808 3,280,734
Deferred expense (benefit) (1,023,593) 537,992 (309,434)
----------------- ----------------- ------------------
$ (2,043,000) $ 2,561,800 $ 2,971,300
================= ================= ==================
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- ------------------
<S> <C> <C> <C>
Tax at Federal statutory rate of 34% $ (2,239,075) $ 2,992,185 $ 3,038,574
Increases (reductions) in taxes
resulting from:
State income taxes, net of related
Federal income tax benefit 155,000 102,122 235,699
Foreign Sales Corporation earnings (269,595) (548,500) (208,000)
Amortization of cost in excess of
net assets of acquired businesses 128,680 128,404 128,404
Foreign income taxes, net 25,000 25,000 (33,906)
Other - net 156,990 (137,411) (189,471)
----------------- ----------------- ------------------
$ (2,043,000) $ 2,561,800 $ 2,971,300
================= ================= ==================
</TABLE>
Effective October, 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The new
requirements resulted in a "cumulative adjustment from a change in accounting
principle" of $719,016, representing reversal of amounts previously expensed.
The statement was applied prospectively, and prior year financial statements
have not been restated.
34
<PAGE> 35
<TABLE>
<CAPTION>
The components of deferred tax assets and liabilities are comprised of the
following at September 30,
1996 1995
---------------- ----------------
<S> <C> <C>
Gross deferred tax assets:
Operating loss carryforwards $ 871,000 $ 1,013,537
Receivable and inventory reserves 853,556 408,830
Accrued compensation 684,871 107,236
Benefits insurance reserves 117,425 115,290
Lombard property reserves 308,000 302,400
Warranty reserves 90,475 60,480
Other 171,674 131,209
---------------- ----------------
3,097,001 2,138,982
---------------- ----------------
Gross deferred tax liabilities:
Deferred DISC income 62,438 91,954
Depreciation 583,806 477,320
---------------- ----------------
646,244 569,274
Valuation allowances on foreign operating loss
carryforwards 871,000 517,000
---------------- ----------------
Net deferred tax asset $ 1,579,757 $ 1,052,708
================ ================
</TABLE>
The Company has determined that it should fully reserve against this net
potential tax asset to the extent it represents excess available tax net
operating loss carryforwards 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, 1996, 1995 and 1994 were $1,082,229, $1,622,986 and $3,543,281,
respectively.
Foreign net operating loss carryforwards of approximately $2,149,000 for tax are
available to offset future taxable income. The carryforwards will expire in 2002
through 2011. 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.
10. PROFIT SHARING AND PENSION PLANS
Bliss has a defined contribution plan which cover 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
35
<PAGE> 36
plan was terminated in April, 1996. All funds relating to the plan are to be
distributed in December 1996. 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, 1996, 1995 and 1994 was $1,978,647,
$1,042,741 and $1,547,125, respectively.
11. COMMITMENTS AND CONTINGENCIES GUARANTEES AND LEASES
The Company has guaranteed certain surety bonds totaling $928,510 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 under these agreements including renewal options, if exercised, are
$503,453, $420,180, $327,822, $245,466 and $220,065 for the years ending
September 30, 1997, 1998, 1999, 2000 and 2001, respectively. Rental expense for
all leases and other short-term needs was $917,600, $756,000 and $919,000 for
the years ended September 30, 1996, 1995 and 1994, respectively.
During the fiscal year 1994 and continuing throughout 1996, the property owned
by the Company in Lombard, Illinois that was the office facilities for the
discontinued operations of HMI Credit Inc. was leased to a third party. The
lease includes an option to purchase the property at any time during the ten
year lease term. The tenant is 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.
The minimum lease payments under the terms of the agreement approximate $144,000
per year for the next five years. The related bonds are payable in equal monthly
installments of $12,000, including interest at 5.4% with the final installment
due May 1, 2004.
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 liquidity 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
36
<PAGE> 37
Stock to employ Mr. Foley and emphasize the Company's objectives of maintaining
a stable, long-term organization, increasing shareholder liquidity, expanding
the Company's equity base and focusing efforts on increasing the return on
capital employed.
<TABLE>
<CAPTION>
12. BUSINESS SEGMENTS
For the years ended September 30,
------------------------------------------------------
1996 1995 1994
------------- -------------- -------------
<S> <C> <C> <C>
Net Revenues
Consumer Goods Division $ 59,548,908 $ 62,785,302 $ 56,276,973
Health-Mor Personal Care 316,168 17,376 --
Manufactured Products Division 55,090,732 64,861,826 66,727,299
------------- ------------- -------------
$ 114,955,808 $ 127,664,504 $ 123,004,272
============= ============= =============
Operating Income
Consumer Goods Division $ (2,443,547) $ 4,822,589 $ 3,739,463
Health-Mor Personal Care (928,084) (90,165) --
Manufactured Products Division (781,315) 5,866,753 6,619,687
------------- ------------- -------------
$ (4,152,946) $ 10,599,177 $ 10,359,150
============= ============= =============
Depreciation
Consumer Goods Division $ 1,151,427 $ 1,166,171 $ 937,874
Health-Mor Personal Care 30,998 -- --
Manufactured Products Division 1,176,529 1,187,510 1,105,887
------------- ------------- -------------
$ 2,358,954 $ 2,353,681 $ 2,043,761
============= ============= =============
Assets
Consumer Goods Division $ 50,945,707 $ 53,144,047 $ 46,591,028
Health-Mor Personal Care 1,710,449 395,375 --
Manufactured Products Division 34,825,744 30,326,613 30,840,784
Assets Held for Sale 4,228,059 -- --
------------- ------------- -------------
$ 91,709,959 $ 83,866,035 $ 77,431,812
============= ============= =============
Capital Expenditures
Consumer Goods Division $ 5,240,411 $ 1,981,677 $ 2,180,386
Health-Mor Personal Care 3,620 -- --
Manufactured Products Division 1,240,815 1,823,649 1,328,730
------------- ------------- -------------
$ 6,484,846 $ 3,805,326 $ 3,509,116
============= ============= =============
Export Sales and Royalties
All Foreign Countries $ 29,700,864 $ 30,014,691 $ 21,886,491
============= ============= =============
Operating Income
North American $ (3,478,569) $ 9,038,690 $ 9,034,840
Foreign (674,377) 1,560,487 1,324,310
------------- ------------- -------------
$ (4,152,946) $ 10,599,177 $ 10,359,150
============= ============= =============
</TABLE>
Assets and liabilities are translated at current exchange rates, and income and
expenses are translated using weighted average exchange rates. The effects of
these translation adjustments, as well as gains and losses from certain
intercompany transactions, are reported
37
<PAGE> 38
in a separate component of shareholders' equity. Such adjustments will affect
net income only upon sale or liquidation of the underlying foreign investments.
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.
Canadian sales are not considered export sales. The Company's major foreign
operations are located in Canada. Business activities are conducted principally
in local currency. Identifiable assets of the Canadian operations, excluding the
assets of Household Rental Systems which are classified as Assets held for sale,
were $6,389,000 and $6,600,000 at September 30, 1996 and 1995, respectively.
Identifiable revenues of Canadian operations for the years ended September 30,
1996, 1995 and 1994 were $7,085,000, $8,757,525 and $9,636,257, respectively.
Sales by the Manufactured Products segment to two customers were approximately
19% of the Company's total sales in 1996 and 1995. Sales to one customer in the
Consumer Goods segment represent 9% and 12% of the Company's total sales in 1996
and 1995, respectively.
At September 30, 1996 and 1995, the Company's receivables from companies in the
automotive industry were approximately 26% and 9%, respectively, of the
consolidated receivables.
<TABLE>
<CAPTION>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
1996
-------------------------------------------------------------------------------------------
December 31, March 31, June 30, September 30,
----------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net revenues $ 26,121,386 $ 30,515,584 $ 26,430,096 $ 31,888,742
Gross profit $ 7,164,141 $ 8,227,036 $ 6,479,248 $ 8,753,015
Loss before
discontinued
operations $ (66,966) $ (1,037,717) $ (1,303,241) $ (2,134,589)
Loss on Disposal $ ---- $ ---- $ (800,000) $ (1,480,844)
Loss from discontinued
operations $ (362,895) $ (1,332,499) $ (796,133) $ (19,158)
Net income (loss) $ (429,861) $ (2,370,216) $ (2,899,374) $ (3,634,591)
Per share of common
stock:
Income (loss) before
discontinued
operations $ (0.01) $ (0.21) $ (0.27) $ (0.44)
Loss from discontinued
operations $ (0.08) $ (0.27) $ (0.16) $ ---
Loss from disposal $ --- $ --- $ (0.16) $ (0.30)
Net income (loss) $ (0.09) $ (0.48) $ (0.59) $ (0.74)
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------------------------------
December 31, March 31, June 30, September 30,
----------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Net revenues $ 28,776,306 $ 35,128,346 $ 32,111,483 $ 31,648,369
Gross profit $ 7,579,986 $ 10,418,956 $ 8,511,498 $ 9,592,973
Income before discontinued
operations $ 1,505,076 $ 2,287,288 $ 950,733 $ 1,495,649
Loss on Disposal $ --- $ --- $ --- $ ---
Income (loss) from
discontinued $ 205,865 $ (665,867) $ (158,003) $ (6,066)
operations
Net income (loss) $ $1,710,942 $ 1,621,418 $ 792,730 $ 1,489,585
Per share of common stock:
Income before
discontinued $ 0.30 $ 0.47 $ 0.19 $ 0.31
operations
Income (loss) from
discontinued $ 0.04 $ (0.14) $ (0.03) $ (0.00)
operations
Loss from disposal $ ---- $ --- $ ---- $ ----
Net income $ 0.34 $ 0.33 $ 0.16 $ 0.31
</TABLE>
14. RELATED PARTY TRANSACTIONS
On October 15, 1991, the Company purchased for $139,000 certain computer
equipment, computer software, and other assets from JCL Medical Systems Ltd.
(JCL) based on independent appraisals. These assets are used in management of
the Company's databases for Warranty Registration, Mail Order Programs and
Distributor/Dealer Performance activities. At that time JCL was owned by two
directors of the Company. At the same time, the Company entered into a four year
agreement with JCL to provide computer program and supervision services, all of
which relate to the maintenance and processing of the aforementioned databases
for $168,000. These services were previously paid for on a monthly basis as
incurred.
The Company pays Fairway Inc., a corporation controlled by a director of the
Company, an annual consulting fee of $100,000 for assisting in obtaining
professional advice on Company matters. In 1989, the Company advanced $203,401
to three companies which were controlled by two directors of the Company. In
accordance with the terms of the agreement of these advances, collectibility is
assured by these directors or corporations they control. The advance bears
interest at Canadian prime plus one and one-half percent (7.25% at September
30, 1996). The balance of $271,440 is reflected in current assets as a note
receivable at September 30, 1996.
39
<PAGE> 40
In 1988, the Company loaned Amherst Tanti U.S. Inc., a corporation owned by an
officer of the Company, $334,123, which is reflected in other assets as
long-term note receivable at September 30, 1996. This note shall be forgiven in
the future if the net income of the Company reaches certain specified levels.
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 $289,444 is reflected in current
assets as a note receivable at September 30, 1996.
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. These earnings targets were not reached and accordingly, no
consideration was paid. The Company had the ability, at its sole discretion, to
effect the acquisition of Holland Electro B.V., for no consideration. In January
1996, Holland Electro B.V. filed for bankruptcy, triggering the Conditional
Purchase Agreement the Company had with a Dutch bank 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 ($1,607,000 at
September 30, 1995). During 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.
The Company also entered into various agreements with Holland Electro B.V. to
provide for the supply of certain floor care products for the Company's
non-direct marketing channel. The agreements included the purchase of machinery
and equipment, tooling, intellectual property and patents, licensing and
distribution arrangements, warehousing and technical support.. Holland Electro
B.V. supplied ElektraPure to the Company for North American distribution, and
additional products to other world markets utilizing the tooling and
intellectual property purchased by the Company. The total consideration paid by
the Company for these assets was $503,000. The licensing and distribution
agreements required Holland Electro B.V. to pay the Company one Netherlands
Guilder for each unit manufactured and the Company was obligated to pay Holland
Electro B.V. $2.50 for each Holland Electro B.V. product sold by the Company.
Net royalty revenue accrued by the Company was $22,000 in 1995 and $25,000 in
1994. No royalty revenue was recorded in 1996. During 1995 and 1994, the Company
purchased $348,000 and $78,000 respectively, of product from Holland Electro
B.V..
40
<PAGE> 41
In addition to the ongoing supply of the aforementioned products, the Holland
Electro B.V. Rotterdam facility performed the services of a distribution center
for the Company's European market. In addition to warehousing, the center
managed the handling and documentation associated with all incoming and outbound
shipments. Other activities included assistance with European regulatory
approvals and providing office space and communication facilities for the
Company's management. For these services, the Company contracted with Holland
Electro B.V. to pay approximately $33,000 monthly. Upon the bankruptcy of
Holland Electro B.V., the Company opened a distribution center in Gorinchem,
Holland to service its European market and handle the functions previously
administered by Holland Electro B.V..
41
<PAGE> 42
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit Page in this Incorporated by References
Number Exhibit Title Report From
- -------- ------------------ ------------- -----------------------------------------
<S> <C> <C> <C>
3.1 Certificate of Annual Report on form 10-K for the year
Incorporation ended September 30, 1995
3.2 Bylaws Annual Report on form 10-K for the year
ended September 30, 1995
10 Material Contracts Pages 43-44 Proxy Statement for the Annual Meeting of
Stockholders January 19, 1995 - Exhibit B
11 Statement re: Note 1 on Page 29
Computation of per of the Financial
share earnings Statements
21 Subsidiaries of Page 3
Registrant
27 Financial Data Schedule.
</TABLE>
42
<PAGE> 1
EXHIBIT 10
AMENDMENT TO EMPLOYMENT AGREEMENT
This Agreement of Amendment is made to that certain Employment Agreement
dated as of January 1, 1994 between HMI Industries Inc., formerly known as
Health-Mor Inc. (the "Company") and Kirk W. Foley (the "Executive") (such
existing Employment Agreement to be known herein as the "Agreement").
WHEREAS, the Company and the Executive have previously entered into the
Agreement providing for the employment of the Executive by the Company as Chief
Executive Officer until December 31, 1998; and,
WHEREAS, the Agreement provided that the Executive receive certain stock
awards under the Company's Omnibus Long-Term Compensation Plan; and,
WHEREAS, among the stock awards received were shares of phantom stock,
which shares vest at various times during the term of the Agreement; and,
WHEREAS, the vesting of the phantom stock awards creates taxable income to
the Executive, requiring the inclusion of the fair market value of such shares
in the Executive's taxable income, and creating a significant income tax
liability for the Executive; and,
WHEREAS, the vesting of the phantom shares requires the Company to record a
charge to earnings in an amount equal to the taxable income deemed received by
the Executive, thereby reducing the Company's reported earnings and possibly
adversely affecting its stock price; and,
WHEREAS, the Executive and the Company previously agreed to defer one-half
of the stock award which vested on January 1, 1996, and the Executive is now
willing to surrender his right to receive the shares previously deferred and to
surrender his right to receive the shares which vest are due to vest on July 1,
1996.
NOW, THEREFORE, in consideration of the premises and the mutual promises
contained herein, the Company and the Executive hereby agree as follows:
1. SURRENDER OF PHANTOM SHARES. Paragraph 6(a) of the Agreement is amended by
deleting the second sentence of the first paragraph and replacing it with the
following:
The award has vested or will vest as follows: 21,857 phantom shares on June
30, 1995; 10,929 phantom shares on January 1, 1996; and 21,857 phantom shares
on January 1, 1997. In lieu of any phantom shares being vested on June 30, 1996,
and in lieu of the phantom shares deferred from January, 1996 vesting on January
1, 1999, the Executive shall be entitled to be paid a cash award of $150,000 on
each of June 30, 1997 and June 30, 1998. In addition, the Executive shall be
entitled to an award of shares of the Company with a fair market value equal to
the appreciation, if any, in the Company's share price from June 30, 1996 to
June 30, 1998, and
43
<PAGE> 2
measured by the number of phantom shares surrendered. Dividends on such shares
as calculated elsewhere in this paragraph will be "credited" to the Executive
until the date that such shares were originally to vest, and such "credits" will
be used to "purchase" additional shares of phantom stock as of the original date
of vesting. Any award earned shall be payable to Executive on July 1, 1998.
2. LOAN REPAYMENT. Paragraph 9(a) of the Agreement is amended by deleting the
third sentence of that paragraph and replacing it with the following:
The Executive has been deemed to have "earned" and the Company is
responsible for $100,000 of principal for the employment years of 1994 and 1995,
and furthermore it is understood and agreed that any principal outstanding as of
December 31, 1998 shall be deemed to have been earned at that time so long as
the Executive is then employed by the Company.
3. COST OF LIVING INCREASE. The cost of living allowance payable pursuant to
Paragraph 4 of the Agreement will be increased by $25,000 per year in order to
permit the Executive to purchase additional life insurance. This increase will
be subject to the actual cost of the insurance premiums and review of living
expenses on an annual basis. This increase will take effect January 1, 1996.
4. NO ADDITIONAL AMENDMENT. Except for the changes made herein, the Agreement
continues in full force and effect as originally written.
5. EFFECTIVE DATE. These amendments made herein are effective as of June 20,
1996, except for the increase in the living allowance in paragraph 3 above.
HMI INDUSTRIES INC.
BY /s/ Robert J. Abrahams
---------------------------
Robert J. Abrahams
/s/ Kirk W. Foley
---------------------------
Kirk W. Foley
44
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 472,408
<SECURITIES> 0
<RECEIVABLES> 29,253,174
<ALLOWANCES> 2,439,406
<INVENTORY> 18,364,597
<CURRENT-ASSETS> 58,022,152
<PP&E> 30,842,218
<DEPRECIATION> 15,124,565
<TOTAL-ASSETS> 91,709,959
<CURRENT-LIABILITIES> 32,621,443
<BONDS> 0
<COMMON> 5,295,556
0
0
<OTHER-SE> 28,255,866
<TOTAL-LIABILITY-AND-EQUITY> 91,709,959
<SALES> 114,227,733
<TOTAL-REVENUES> 114,955,808
<CGS> 83,604,293
<TOTAL-COSTS> 119,108,754
<OTHER-EXPENSES> 663,282
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,769,285
<INCOME-PRETAX> (6,585,513)
<INCOME-TAX> (2,043,000)
<INCOME-CONTINUING> (4,542,513)
<DISCONTINUED> (4,791,529)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,334,042)
<EPS-PRIMARY> (1.90)
<EPS-DILUTED> (1.90)
</TABLE>
