<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 2-30905
HMI INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-1202810
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
3631 Perkins Ave, Cleveland, Ohio 44114
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 432-1990
--------------
- -------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 16, 1998
- ----------------------------------- ----------------------------------
Common stock, $1 par value per share 5,033,996
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HMI INDUSTRIES INC.
CONSOLIDATED CONDENSED BALANCE SHEET
DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 819,321 $ 239,797
Trade accounts receivable (net of allowance of $5,281,495 and $5,512,063) 7,989,924 10,357,999
Finance contracts receivable 458,867 496,044
Notes receivable 250,525 228,414
Inventories 4,261,655 4,152,858
Income tax receivable 3,372,644 3,373,898
Deferred income taxes 8,349,167 8,239,080
Prepaid expenses 64,986 123,099
Other current assets 130,268 83,307
Net assets held for sale at realizable value 15,317,503 12,900,184
------------ ------------
Total current assets 41,014,860 40,194,680
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 5,734,508 6,194,868
------------ ------------
OTHER ASSETS:
Cost in excess of net assets of acquired businesses
(net of amortization of $2,572,516 and $2,576,373) 6,659,047 6,735,578
Unamortized trademarks 359,456 339,823
Finance contracts receivable (less amounts due within one year) 917,733 992,090
Other 262,439 133,094
------------ ------------
Total other assets 8,198,675 8,200,585
------------ ------------
Total assets $ 54,948,043 $ 54,590,133
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 465,870 $ 480,822
Trade accounts payable 7,585,880 6,939,040
Income taxes payable 674,870 1,349,163
Accrued expenses and other liabilities 7,186,265 8,125,620
Long-term debt due within one year 23,369,038 20,464,632
------------ ------------
Total current liabilities 39,281,923 37,359,277
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 552,860 762,777
Deferred income taxes 668,445 573,613
Other 1,248,378 1,342,961
------------ ------------
Total long-term liabilities 2,469,683 2,679,351
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $5 par value; authorized, 300,000 shares; issued, none -- --
Common stock, $1 par value; authorized, 10,000,000 shares;
issued, 5,295,556 shares 5,295,556 5,295,556
Capital in excess of par value 8,094,719 8,050,212
Unearned compensation, net -- (191,500)
Retained earnings 2,917,367 4,077,771
Cumulative translation adjustment (1,885,676) (1,418,762)
------------ ------------
14,421,966 15,813,277
Less treasury stock 261,560 shares, at cost 1,225,529 1,261,772
------------ ------------
Total stockholders' equity 13,196,437 14,551,505
------------ ------------
Total liabilities and stockholders' equity $ 54,948,043 $ 54,590,133
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
<PAGE> 3
HMI INDUSTRIES INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Net product sales $ 8,911,190 $ 14,450,743
Financing revenue and other 100,325 170,145
------------ ------------
9,011,515 14,620,888
OPERATING COSTS AND EXPENSES:
Cost of products sold 6,130,494 9,377,345
Selling, general and administrative expenses 5,352,758 5,552,346
Interest expense 532,675 545,085
Other expenses 15,857 114,659
------------ ------------
Total expenses 12,031,784 15,589,435
------------ ------------
Loss before income taxes (3,020,269) (968,547)
Benefit for income taxes (915,442) (311,068)
------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS (2,104,827) (657,479)
------------ ------------
Income (loss) from discontinued operations -
Household Rental Systems (net of taxes of $-0-, and $-0-) 262,218 119,844
Bliss Manufacturing (net of taxes of $289,393, and $335,301) 472,167 547,071
Bliss Tubular (net of taxes of $-0-, and $2,371) -- (3,869)
Tube Fab Ltd (net of taxes of $128,733, and $-0-) 210,038 47,102
Health-Mor Personal Care Corp. (net of taxes of $-0-, and $107,663) -- (175,661)
------------ ------------
944,423 534,487
NET LOSS $ (1,160,404) $ (122,992)
============ ============
Weighted average number of shares outstanding 5,032,105 4,919,408
============ ============
BASIC AND DILUTED PER SHARE OF COMMON STOCK:
Loss before discontinued operations $ (0.42) $ (0.13)
Income from discontinued operations $ 0.19 $ 0.11
------------ ------------
Net loss $ (0.23) $ (0.02)
============ ============
Cash dividends per common share $ -- $ --
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 4
HMI INDUSTRIES INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,160,404) $ (122,992)
Adjustments to reconcile net income (loss) to net cash provided by (used)
by operating activities:
Depreciation and amortization 695,536 614,330
Amortization of stock awards, net 272,250 --
Provision for losses on receivables -- 213,534
Deferred income taxes (124,563) 104,092
Changes in operating assets and liabilities:
Decrease in receivables 2,380,455 533,460
Decrease (increase) in inventories (1,151,381) 695,057
Decrease in prepaid expenses 101,592 297,134
Decrease in other current assets 28,844 --
Decrease in accounts payable (1,001,531) (1,492,422)
Increase (decrease) in accrued expenses and other liabilities (1,117,985) 666,899
Decrease in income taxes payable (393,708) (190,062)
Other, net (411,835) (72,312)
----------- -----------
Net cash provided by (used in) operating activities (1,882,730) 1,246,718
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets -- 1,120,916
Capital expenditures (90,881) (324,703)
----------- -----------
Net cash provided by (used in) investing activities (90,881) 796,213
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility 12,454,000 206,084
Payment of credit facility (9,246,455) --
Payment of long term debt (654,410) (2,245,213)
----------- -----------
Net cash (used in) provided by financing activities 2,553,135 (2,039,129)
----------- -----------
Effect on exchange rate changes on cash -- --
----------- -----------
Net increase in cash and cash equivalents 579,524 3,802
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 239,797 472,408
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 819,321 $ 476,210
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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PART I - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
In the opinion of HMI Industries Inc. ("the Company"), these consolidated
condensed financial statements contain all of the adjustments necessary to
present fairly the financial position as of December 31, 1997, and the results
of operations for the three months ended December 31, 1997 and 1996, and cash
flows for the three months then ended.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis for Preparation of the Consolidated Condensed Financial Statements
------------------------------------------------------------------------
The consolidated condensed financial statements included in this report have
been prepared, without audit, by the Company from the consolidated statements of
the Company and its subsidiaries, pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including significant accounting
policies, normally included in annual financial statements have been condensed
or omitted pursuant to such rules and regulations.
It is suggested that these consolidated condensed financial statements, which
are subject to year-end audit adjustments, be read in conjunction with the
Company's latest Annual Report on Form 10-K, as amended.
Reclassification
----------------
Certain prior year amounts have been reclassified to conform to the fiscal 1998
presentation.
2. EARNINGS PER SHARE
Earnings per share have been computed according to Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS 128 replaced the
previously reported "primary earnings per share" with "basic earnings per share"
and replaced "fully diluted earnings per share" with "diluted earnings per
share". This statement had no effect on the resulting earnings per share for the
Company. In addition, because all the common stock equivalents are anti-dilutive
as of December 31, 1997 and 1996, the denominators for calculating the Company's
basic and diluted earnings per share are identical.
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<PAGE> 6
3. DISCONTINUED OPERATIONS
Sales applicable to the discontinued operations were $17,509,500 and $17,492,300
for the three months ended December 31, 1997 and 1996, respectively.
4. INVENTORIES
Inventories at December 31, 1997 and September 30, 1997 consist of the
following:
<TABLE>
<CAPTION>
December 31, September 30,
---------- ----------
<S> <C> <C>
Finished goods $3,170,372 $2,438,282
Work-in-progress, raw materials
and supplies 1,091,283 1,714,576
========== ==========
$4,261,655 $4,152,858
========== ==========
</TABLE>
5. DEBT
The Company received additional financing, from its lender, of $1,200,000 upon
the filing of its fiscal 1997 federal tax return, which was filed in January
1998. The proceeds of the anticipated tax refund will be first used to repay the
$1,200,000 to the bank and any excess will be used for working capital.
In January 1998, the Company negotiated, with its lender, an extension on the
credit facility, utilized by the Netherlands operations, until the earlier of
March 31, 1998 or upon receipt of proceeds from the sale of Bliss Manufacturing.
6. RELATED PARTY TRANSACTIONS
In May 1997, the Company advised Kirk W. Foley, then its CEO, that it was
terminating his employment which triggered certain obligations as per Mr.
Foley's employment contract, including an $800,000 severance payment, an
assumption of a $518,000 personal bank loan made to Mr. Foley, other
compensation obligations of approximately $79,000 and an obligation to purchase
Mr. Foley's Company stock at current market value (approximately $325,000).
Because of the Company's tight cash position, noncash ways to satisfy its
obligations to Mr. Foley were sought. The resolution was a decision to transfer
to Mr. Foley the Company's 100% stock interest in Tube-Fab Ltd, a Canadian
subsidiary headquartered on Prince Edward Island, Canada, which an independent
appraiser valued at $1,512,000. The Tube-Fab Ltd. stock had been carried on the
Company's books at a value of $2,157,500 and was accordingly written down to its
appraised value.
The settlement transaction with Mr. Foley closed in January 1998. It entailed a
transfer of the Tube-Fab Ltd. shares to Mr. Foley; Mr. Foley's payment of
$303,000 to the Company; cancellation of the Company's $800,000 severance
obligation; an assumption of the $486,750
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<PAGE> 7
($518,000 less a $31,250 principal payment made in June 1997) bank loan;
cancellation of Mr. Foley's put right with respect to his Company stock; and
assumption by Mr. Foley of an operating lease of Canadian facilities currently
leased by the Company, which has a remaining lease obligation of approximately
$1,050,000 over 8 1/2 years.
Mr. Foley's employment contract also required the Company to pay to him a
$300,000 cash award relating to phantom shares he had previously earned but had
deferred in 1996. This award was reduced to a $150,000 payment in the settlement
transaction. The settlement also required the Company to continue Mr. Foley's
salary and benefits from the time of termination advice through December 15,
1997 (approximately $320,000).
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis contained in this section relates only to the
continuing operations of the Company.
RESULTS OF OPERATIONS
NET PRODUCT SALES- Net product sales for the quarter ended December 31, 1997
decreased by $5,539,600 or 38.3% in the comparable quarter. The decrease in
sales is due primarily to declines in North America and Asia. Weak sales in
North America were attributable to a correction of high inventory levels in the
distribution network, lower sales to end consumers and a reduction in the
distributor base. Additionally, excess credit granted in prior years to the
Company's distributors resulted in an overall deterioration of liquidity in the
distribution network. Sales in Asia were adversely affected by economic
conditions in that region and the devaluation of certain currencies, especially
in Korea.
FINANCING REVENUE AND OTHER INCOME- Financing revenues represent the interest
and fees generated on the contracts financed by the Company's Australian,
Canadian, and United States Subsidiaries. The decline in these revenues is
consistent with the sales decrease experienced mainly in North America.
GROSS PROFIT- Gross profit for the quarter ended December 31, 1997 was
$2,780,700 or 31.2 % as compared to $5,073,400 or 35.1% in the quarter ended
December 31, 1996. Gross profit was adversely affected by the decline in volume
and continued operational inefficiencies from the prior year. However,
initiatives begun in the fourth quarter of 1997 to strengthen business
processes, reduce costs, and improve quality yielded positive results in first
quarter 1998 as gross profit increased as a percent of sales from 26.6% in the
fourth quarter of fiscal 1997.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general and administrative costs
decreased by $199,600 for the quarter ended December 31, 1997 versus the
comparable quarter. Included in these costs is a severance charge of $200,000
related to the termination of the Company's branch
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<PAGE> 8
in Holland. SG&A was higher as a percent of sales due to depressed volume in
the first quarter of 1998. The Company's cost reduction measures initiated in
1997 should continue to reduce selling, general and administrative costs in
1998. These include implementation of a cash basis policy for North American
distributors effective January 1, 1998. While this policy may depress sales
temporarily, over time it should improve the Company's liquidity and strengthen
the fiscal health of its distribution network. The subsequent reduction in
credit resulting from this policy should significantly reduce bad debt expense
in 1998.
INTEREST EXPENSE - Interest expense for the quarter ended December 31, 1997 did
not change significantly versus the quarter ended December 31, 1996.
DISCONTINUED OPERATIONS - As of June 30, 1997, the Company reported Bliss
Tubular and Tube-Fab Ltd., its tubular and aerospace businesses, as well as
Health-Mor Personal Care Corp., its personal care business, as discontinued
operations. The Company recorded pre-tax combined income from Tube-Fab Ltd., and
Health-Mor Personal Care Corp. of $338,000 for the quarter ended December 31,
1997. As of September 30, 1997, the Company reported Bliss Manufacturing, its
metal fabrication and stamping business, as a discontinued operation. For the
quarter ended December 31, 1997, the Company recorded pre-tax income from Bliss
Manufacturing of $761,600. The Company's steam cleaning business, Household
Rental Systems, reported as a discontinued operation in fiscal 1996, recorded
pre-tax income of $262,200 in the first quarter ended December 31, 1997. In
November, 1997, the Company received two signed letters of intent regarding the
planned sale of this business. Management anticipates that the sale of this
business will be completed in the first half of 1998. Sales applicable to the
discontinued operations for the quarters ended December 31, 1997 and December
31, 1996 were $17,509,500 and $17,492,300, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The working capital balance at December 31, 1997 was $1,732,900, a decrease of
$1,102,500 from the September 30, 1997 balance of $2,835,400. The Company's cash
increased $579,500 during the quarter ended December 31, 1997 from September 30,
1997. The decrease in receivables of $2,380,500 was due primarily to lower sales
and tighter credit terms. Inventories increased by $1,151,400 due to higher
inventory at Bliss Manufacturing as a result of higher conversion costs.
Accounts payable decreased by $1,001,500 primarily at Bliss Manufacturing.
Accrued liabilities decreased $1,118,000 due primarily to deferred compensation
and profit sharing payments made at Bliss. The aforementioned variances relate
to information in the Consolidated Statement of Cash Flow in which items
relating to discontinued operations have not been disaggregated as they have in
the Consolidated Balance Sheet.
On December 18, 1997, the Company entered into a definitive agreement to sell
100% of the stock of Bliss Manufacturing, a wholly owned subsidiary for
$31,250,000, subject to certain adjustments. The Company expects the entire
proceeds from the sale of Bliss Manufacturing to be applied to the retirement of
substantially all of its debt, certain vendor obligations, transaction costs and
related expenses, certain employee benefit payments, and amounts necessary to
fund future tax obligations arising from the gain on the sale of Bliss
Manufacturing. It is anticipated
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<PAGE> 9
that this transaction will close by the end of the second fiscal quarter of
1998. Accordingly, debt to be retired from the proceeds of the sale has been
classified as current.
At September 30, 1997, the Company was in violation of the financial covenants
under its credit agreement and was experiencing increasing liquidity problems.
The Company's deteriorating cash position was a significant factor that led to
the decision to sell Bliss Manufacturing. In December 1997, the Company obtained
waivers from its lenders with respect to the covenant violations and received
$2,000,000 in a special term loan that accrues interest at a rate of prime plus
2.0%, to be paid monthly. The maturity date of this agreement is the earlier of
the receipt of the Bliss Manufacturing sale proceeds or March 31, 1998.
Additionally, a fee with respect to the special term loan of $80,000 will be
paid on such date that the special term loan is paid in full. Additionally , the
Company received additional financing of $1,200,000 upon the filing of its
fiscal 1997 tax return, which was filed in January 1998. The proceeds of the
anticipated tax refund will be first used to repay the $1,200,000 to the bank
and any excess will be used for working capital.
In November 1996, the Company made an annual principal payment of $1,666,666 on
the unsecured, 9.86%, seven year private placement term notes, leaving a balance
of $1,666,667 as of December 31, 1997, with the final payment due date extended
until the earlier of March 31, 1998 or upon receipt of proceeds from the sale of
Bliss Manufacturing.
The Australian Unsecured Demand Authorization, payable on demand or February 28,
1997, was extended until the earlier of March 31, 1998 or upon the receipt of
proceeds from the sale of Bliss Manufacturing. An extension was also obtained in
April 1997 for the bank credit facility utilized by the Netherlands operation.
The facility, originally payable in March 1997, is now available until the
earlier of March 31, 1998 or upon receipt of proceeds from the sale of Bliss
Manufacturing.
The Company's principal sources of liquidity, until the sale of Bliss
Manufacturing, are expected to be funded with cash generated from operations,
additional borrowings under the Company's credit facility referred to above and
the 1997 tax refund. After the sale of Bliss Manufacturing the Company's
principal sources of liquidity are expected to be from the proceeds from the
sale, a new credit facility to be put in place in the second fiscal quarter of
1998 and from cash generated from operations.
The sale of Bliss Manufacturing is contingent upon shareholder approval,
regulatory approval and a variety of other customary closing conditions. The
Company expects all these conditions to be met and the sale of Bliss
Manufacturing to be consummated by March 31, 1998. However, if the sale of Bliss
Manufacturing is not achieved by such date, the Company would have liquidity
needs that could only be satisfied by further amendment to the credit facility
to allow for additional time to close the sale transaction or obtaining
additional financing sources.
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<PAGE> 10
The agreements relating to the Company's outstanding debt include various
covenants that limit its ability to incur additional indebtedness, restricts
paying dividends, and limits the ability for capital expenditures. The credit
agreements were amended so as to eliminate the restrictive covenants referred to
above until March 31, 1998.
CAUTIONARY STATEMENT FOR "SAFE HARBOR"
PURPOSES UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of the federal securities laws. As a general matter, forward-looking
statements are those focused upon future plans, objectives or performance as
opposed to historical items and include statements of anticipated events or
trends and expectations and beliefs relating to matters not historical in
nature. Such forward-looking statements are subject to certain uncertainties
including the successful completion of the sale of Bliss Manufacturing, and
retention and rebuilding of the Consumer Products Division distribution network.
Such uncertainties are difficult to predict and could cause actual results of
the company to differ materially from those matters expressed or implied by such
forward-looking statements.
PART II - OTHER INFORMATION
Item 5. Other Information - None.
9
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMI Industries Inc.
----------------------
(Registrant)
Date: February 16, 1998 \s\ Mark A. Kirk
----------------- ----------------------
President and Chief
Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 819,321
<SECURITIES> 0
<RECEIVABLES> 14,898,544
<ALLOWANCES> 5,281,495
<INVENTORY> 4,261,655
<CURRENT-ASSETS> 41,014,860
<PP&E> 11,042,031
<DEPRECIATION> 5,307,523
<TOTAL-ASSETS> 54,948,043
<CURRENT-LIABILITIES> 39,281,923
<BONDS> 0
0
0
<COMMON> 5,295,556
<OTHER-SE> 7,900,881
<TOTAL-LIABILITY-AND-EQUITY> 54,948,043
<SALES> 8,911,190
<TOTAL-REVENUES> 9,011,515
<CGS> 6,130,494
<TOTAL-COSTS> 11,499,109
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 532,675
<INCOME-PRETAX> (3,020,269)
<INCOME-TAX> (915,442)
<INCOME-CONTINUING> (2,104,827)
<DISCONTINUED> 944,423
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,160,403)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
