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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 1998
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 Avenue, 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 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 months, and (2) has been subject to such filing requirements
for the past ninety (90) days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 1, 1998 was approximately $2,872,370.
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 1, 1998
- ------------------------------------------- --------------------------------
Common stock, $1 par value per share 5,179,368
Documents Incorporated by Reference
The following documents are incorporated by reference in this Form 10-K.
Portions of the Proxy Statement for the 1998 Annual Meeting, incorporated into
Part III (Items 10, 11, 12 and 13).
Index to Exhibits is found on page 45. This report consists of 45 pages.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
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<S> <C>
PART I....................................................................................................2
ITEM 1. BUSINESS......................................................................................2
(a) General Development of Business.................................................................2
(b) Financial Information About Industry Segments...................................................2
(c) Narrative Description of Business...............................................................3
(d) Financial Information About Foreign and Domestic Operations and Export Sales....................4
ITEM 2. PROPERTIES....................................................................................6
ITEM 3. LEGAL PROCEEDINGS.............................................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................6
PART II...................................................................................................6
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................6
ITEM 6. SELECTED FINANCIAL DATA.......................................................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........9
Results of Operations - 1998 compared with 1997......................................................9
Results of Operations - 1997 compared with 1996.....................................................12
Liquidity and Capital Resources.....................................................................13
Cautionary Statement for "Safe Harbor" - Purposes Under the Private Securities
Litigation Act of 1995.............................................................................15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........16
PART III.................................................................................................16
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT...............................................16
ITEM 11. EXECUTIVE COMPENSATION.......................................................................16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................16
PART IV..................................................................................................17
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................17
SIGNATURES...............................................................................................18
INDEX TO FINANCIAL STATEMENTS............................................................................19
INDEX TO EXHIBITS........................................................................................45
</TABLE>
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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 1995. The Company was reorganized in 1968 as a Delaware corporation,
succeeding an Illinois corporation originally formed in 1928. As of the end of
fiscal 1998, the business of the Company consists of the manufacture and sale of
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," and portable room air cleaners sold under the
trade name "Defender."
The operations of the Company are carried on through its plant in Cleveland,
Ohio, and its wholly-owned subsidiaries HMI Incorporated (incorporated in
Ontario, Canada), 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
financing subsidiaries; Health-Mor Acceptance Corporation, HMI Acceptance
Corporation and Health-Mor Acceptance PTY Ltd. have discontinued the financing
of contracts to end customers.
In fiscal 1997, the Company decided to sell its manufactured products businesses
and any poor performing consumer goods product lines. As a result of this
decision, Bliss Tubular Products ("Tubular"), which engaged in the bending of
aluminum, steel and copper tubing, was sold in fiscal 1997. In fiscal 1998, the
Company sold the following subsidiaries: Tube-Fab Ltd. ("Tube-Fab"), a Canadian
subsidiary which manufactured tubular products for the aircraft, military,
communications, specialty architectural industries, and manufactured precision
machined products for aircraft engines for the aerospace industry; Bliss
Manufacturing Company ("Bliss"), an Ohio subsidiary which manufactured sheet
metal stamping and sub-assemblies, and painting and welding in conjunction
therewith, for the automotive and truck manufacturing, materials handling
equipment, military and plumbing industries; Household Rental Systems ("HRS"), a
Canadian entity that sold and leased carpet cleaning systems; and Health-Mor
Personal Care Corp. ("Personal Care"), a Delaware subsidiary which sold
needleless insulin injectors.
The Company discontinued selling the "Optima" portable canister vacuum and the
"Princess 2000" upright vacuum cleaner in 1997, and discontinued the
"Elektrapure" portable canister vacuum product in 1998. Sale of the
"SuperNaturals" brand of cleaning products was ended in 1997, and most of the
Home Impressions product lines were discontinued in 1997, except for the
"Vacu-Queen" central vacuum cleaning system.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
As of September 30, 1998, the Company's continuing operations consist of a
single operating segment. See Note 11 of the Notes to the Consolidated Financial
Statements found on page 40 for further information.
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(C) NARRATIVE DESCRIPTION OF BUSINESS
The principal products of the Company are floor care and air filtration products
for surface and air cleaning and the removal of dust, dirt and pollutants and
include bagless portable vacuum cleaners, portable room air cleaners and central
vacuum cleaning systems. Portable bagless vacuum cleaners are sold under the
trade names "Filter Queen", "Princess", "Majestic", and "Empress". Portable room
air cleaners are sold under the trade name "Defender". The central vacuum
cleaning systems are sold under the trade names "Vacu-Queen" and "Majestic II".
The bagless portable canister vacuums consist of a high filtration 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 vacuum cleaners, most of which are
attached to the exhaust outlet and may be used as room deodorizers, air
circulators, and for other 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 Defender portable room air cleaner has been registered by Underwriters
Laboratories and Canadian Standards Authority as an Air Filtration Device.
The Company's products are marketed in the United States, Canada, and in over
forty other countries, with the brand names used depending on the country in
which the products are being marketed. The Company markets the Filter Queen
Majestic (worldwide), the Princess (Asia and Mexico) and the Empress (U.S.)
through independent distributors who sell to the consumer directly through their
own independent representatives and indirectly through the representatives of
smaller independent local distributors. In the U.S. the Majestic and Defender
are marketed together as the Filter Queen Indoor Air Quality System. The
Defender is also marketed in conjunction with the Filter Queen Majestic in
Canada and certain countries in Europe, the Middle East and Asia.
Central vacuum cleaning systems are marketed in Canada and certain European
countries under the trade name "Vacu-Queen" through retail distributors, under
the trade name "Majestic II" through direct distributors in the U.S., and under
the Filter Queen trade name through direct distributors in Canada.
The Company experiences strong competition in the sale of its vacuum cleaners
and central vacuum systems. In the case of sales through in-home solicitation,
this competition is primarily with vacuum cleaner equipment in use in the home
at the time of the sales presentation. There are many significant vacuum cleaner
manufacturers, plus many regional and private label manufacturers, who make
numerous brand name vacuum cleaners in the United States. Most of these are sold
through department stores, discount houses, appliance shops and by catalog,
generally at substantially lower prices than the Filter Queen. There are nine
companies in the U.S., eight companies in Canada, four companies in Europe and
two companies in Asia which compete significantly with the Company 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. The Defender room air cleaner has only one significant competitor in
the U.S. One of the Company's direct sales competitors recently introduced a
room air cleaner sold in tandem with its vacuum cleaners. It is the practice of
the Company, along with other companies in the vacuum cleaner industry, to
maintain sufficient amounts of inventory to meet the rapid delivery requirements
of customers. The Company operates with a minimal backlog (backlog at September
30, 1998 was $75,100).
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The Company has begun developing a new customer contact program that will allow
its distributors to generate new leads from existing customers. In the past, the
Company's distribution network has focused on existing customers only as a means
to sell consumables, accessories and add-on products. Preliminary tests of this
new customer contact program in Europe have produced positive results. The
Company is expanding the program with similar tests in the U.S. and Canada. The
anticipated increase in whole goods sales will continue to create an increased
demand for consumables and accessories (the traditional After the Sale ("ATS")
revenue source). This new ATS strategy, however, is designed specifically to add
to the Company's revenues through increased whole goods sales.
The Company holds trademark or trade name registrations on the principal
trademarks and trade names used in its business. These trademarks have been
registered in the United States, Canada and other countries in which the Company
has distributors which sell a significant number of units. The Company owns a
number of patents in the United States, Canada and other countries on various
features of the Filter Queen, Vacu-Queen and related products. The Company does
not believe that its business is materially dependent on any patent or group of
patents.
EMPLOYEES
The Company and its subsidiaries employed 143 persons at September 30, 1998
throughout the world.
ENVIRONMENTAL POLICIES AND CONTROLS
To the Company's knowledge, it is in compliance with all applicable Federal,
State and local laws relating to the protection of the environment. It does not
anticipate that any laws or regulations relating to the protection of the
environment will have any material effect on its earnings, capital expenditures,
or competitive position. The Company does not anticipate making any material
capital expenditures for environmental control facilities during the current and
succeeding fiscal years.
METHODS OF PRODUCTION AND RAW MATERIALS
The Company assembles finished parts purchased from various suppliers.
Manufacture of the central vacuum cleaning systems is done by another
manufacturer under contract with the Company.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Financial information relating to foreign and domestic operations for the years
ended September 30, 1998, 1997 and 1996 are set forth in Note 11 of the Notes to
Consolidated Financial Statements found on page 40.
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EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION AND TERMS OF SERVICE AS OFFICER
- ---- --- ----------------------------------------
<S> <C> <C>
James R. Malone 55 Chairman and Chief Executive Officer (1)
Carl H. Young III 57 President, Chief Operating Officer and General Counsel (2)
Robert M. Benedict 55 Vice President, Chief Financial Officer, Treasurer and Assistant
Secretary (3)
Julie A. McGraw 34 Corporate Controller, Chief Accounting Officer and Assistant
Secretary (4)
</TABLE>
(1) Mr. Malone was elected Chairman of the Board of Directors in December 1996
and Chief Executive Officer in May 1997. From 1993 to 1997, Mr. Malone was
Chairman, President, and Chief Executive Officer of Anchor Glass Container
Corporation, a manufacturer of glass containers.
(2) Mr. Young was elected President and Chief Operating Officer effective July
6, 1998. He served as Executive Vice President, General Counsel, and
Assistant Secretary from May 1997 to July 6, 1998 and served as Vice
President and General Counsel from February 1997 to May 1997. From 1993 to
1997, Mr. Young served as Senior Vice President and General Counsel of
Anchor Glass Container Corporation.
(3) Mr. Benedict was elected Chief Financial Officer effective May 18, 1998 and
Vice President and Treasurer in May 1997. From 1995 to 1997 he was
Assistant Treasurer of Sealy Inc., a mattress manufacturer. From 1992 to
1995 he was Vice President of Benedict, Kubit & Associates, a consulting
firm.
(4) Ms. McGraw was elected Corporate Controller on March 25, 1998. She served
as Assistant Corporate Controller from July 1996 until March 25, 1998. From
1994 until July 1996 she was Manager of Corporate Accounting with Moen
Inc., a faucet manufacturer. From 1991 to 1994 she was Manager of
Accounting with Isolab Inc., a manufacturer of medical test kits.
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ITEM 2. PROPERTIES
The following table sets forth the location, character and size (in square feet)
of the real estate used in the operations of the Company at September 30, 1998:
<TABLE>
<CAPTION>
Location Character Square Feet
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<S> <C> <C>
United States of America
Cleveland, Ohio Owned office, plant & warehouse 210,000
Naples, Florida Leased office space
1,690
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Receiver of the Health Mor B.V. bankruptcy estate commenced litigation
against the Company and one of Health Mor B.V.'s Managing Directors, Mr. Kevin
Dow, on or about December 3, 1997, asserting that the Company and Mr. Dow are
liable, under the law of the Netherlands, for a 616,000 NLG ($308,000) deficit
in the Health Mor B.V. estate and approximately 85,000 NLG ($42,500) in costs of
administration. This litigation was settled during the fourth quarter of fiscal
1998 for approximately $85,000.
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 cash
flows 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". On September 14, 1998, the Company received a letter
from Nasdaq stating that the Company's stock had failed to maintain a market
value of public float greater than or equal to $5,000,000 in accordance with
Marketplace Rule 4450(a)(2) under Maintenance Standard 1. The Company was given
90 days to demonstrate compliance with the minimum $5,000,000 market value of
public float required or be delisted, or to seek procedural remedies. The
Company has requested a hearing with Nasdaq Hearings Department to discuss the
demonstration of compliance. The hearing is expected to be held in January 1999.
As of September 30, 1998, there were approximately 242 stockholders of record.
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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, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998
High Low Dividend
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<S> <C> <C> <C>
1st Quarter 6 4 5/8 $ .0000
2nd Quarter 6 1/2 3 7/8 $ .0000
3rd Quarter 5 1/8 2 7/8 $ .0000
4th Quarter 3 5/8 1 1/4 $ .0000
1997
High Low Dividend
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1st Quarter 6 3/4 4 3/4 $ .0000
2nd Quarter 8 5 1/8 $ .0000
3rd Quarter 7 1/8 5 $ .0000
4th Quarter 6 1/4 3 7/8 $ .0000
</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.
No dividends were declared in 1998 or 1997 due to continued losses. The credit
agreement with the Company's lender presently prohibits the Company from
declaring or paying any dividends.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Revenue From Continuing Operations $ 39,075,995 $ 50,490,250 $ 59,548,908 $ 62,785,302 $ 52,759,037
Operating Costs and Expenses $ 48,202,974 $ 68,603,306 $ 63,882,184 $ 60,509,044 $ 50,539,058
Other Income (Expense), net $ (1,663,328) $ (2,650,313) $ (4,272,428) $ (1,282,491) $ (1,080,894)
Income (loss) Before Discontinued
Operations Before Taxes $ (10,790,307) $ (20,763,369) $ (8,605,704) $ 993,767 $ 1,139,085
Income (loss) Margin Before
Discontinued (27.6%) (41.1%) (14.5%) 1.6% 2.2%
Operations Before Taxes
Income Taxes (benefits) $ (2,216,786) $ (7,285,949) $ (2,838,259) $ (614,791) $ (69,510)
Income Tax Rate 20.5% 35.1% 33.0% 69.1% 6.1%
Income (loss) before Discontinued
Operations $ (8,573,521) $ (13,477,420) $ (5,767,445) $ 1,608,558 $ 1,208,595
Income (loss) Margin Before
Discontinued Operations (21.9%) (26.7%) (9.7%) 2.6% 2.3%
Income (loss) From Discontinued
Operations $ 441,631 $ 2,347,039 $ (1,965,815) $ 3,833,317 $ 3,422,894
Gain (loss) on Disposal $ 7,157,171 $ (5,519,684) $ (2,280,844) $ --- $ ---
Cumulative Effect-
Change of Accounting for Income $ --- $ --- $ --- $ --- $ 719,016
Taxes
Net Income (loss) $ (974,719) $ (16,650,065) $ (10,014,104) $ 5,441,875 $ 5,350,505
Net Income (loss) Margin (2.5%) (33.0%) (16.8%) 8.7% 10.1%
Per Share Data - Basic:
Income (loss) Before Discontinued
Operations $ (1.66) $ (2.72) $ (1.18) $ .33 $ .25
Income (loss) From Discontinued
Operations $ .09 $ .47 $ (.40) $ .79 $ .70
Net Income (loss) $ (0.19) $ (3.36) $ (2.04) $ 1.12 $ 1.09
Cash Dividends $ .000 $ .000 $ .263 $ .346 $ .324
Weighted Average Number of Common
Shares Outstanding 5,169,830 4,956,276 4,912,135 4,876,599 4,888,395
Per Share Data - Diluted:
Income (loss) Before Discontinued
Operations $ (1.66) $ (2.72) $ (1.18) $ .31 $ .23
Income (loss) From Discontinued
Operations $ .09 $ .47 $ (.40) $ .73 $ .67
Net Income (loss) $ (0.19) $ (3.36) $ (2.04) $ 1.04 $ 1.04
Cash Dividends $ .000 $ .000 $ .263 $ .323 $ .308
Weighted Average Number of Common
Shares Outstanding 5,169,830 4,956,276 4,912,135 5,226,399 5,146,445
Total Assets $ 24,408,783 $ 54,590,133 $ 92,511,124 $ 85,191,635 $ 78,642,212
Long-Term Debt $ 549,819 $ 762,777 $ 22,334,613 $ 14,050,715 $ 13,176,973
Stockholders' Equity $ 14,099,005 $ 14,551,505 $ 30,882,960 $ 40,350,913 $ 37,901,982
Book Value Per Share $ 2.73 $ 2.94 $ 6.29 $ 8.27 $ 7.75
Working Capital $ 490,339 $ 2,679,961 $ 24,981,647 $ 23,771,993 $ 22,941,184
Ratio of Current Assets to Current 1.05 1.07 1.77 1.91 1.99
Liabilities
Percent of Earnings on Average
Stockholders' Equity (6.80%) (73.3%) (28.1%) 13.9% 14.8%
Percent of All Dividends to Net Income --- --- (12.9%) 31.0% 29.7%
Stock High 6 1/2 8 1/8 15 17 19 1/8
Stock Low 1 1/4 3 7/8 4 3/4 13 1/4 11 1/4
Average Annual Price to Earnings Ratio (20.6) (1.8) (4.8) 13.5 13.9
Average Annual Dividend Yield --- --- 2.7% 2.3% 2.1%
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis contained in this section relates only to the
continuing operations of the Company.
RESULTS OF OPERATIONS - 1998 COMPARED WITH 1997
NET PRODUCT SALES- Net product sales for the fiscal year ended September 30,
1998 decreased by $11,131,000 or 22.3% as compared to fiscal 1997. The decrease
in sales is due primarily to the distressed economic conditions in the Asian
markets and lower sales in North America. Sales in Asia have continued to be
adversely affected by the unstable economic conditions and devaluation of
certain currencies, primarily in Korea. North American sales were adversely
affected due to a lower distributor base and stricter credit policies
implemented by the Company. Effective January 1, 1998, the Company implemented a
North American cash basis sales policy which resulted in both lower sales and
reduction in the number of distributors in the distribution network. Although
this policy has lowered the current sales level in North America, the Company
believes that the overall long-term financial health of the network and quality
of its distributors will be strengthened in this market, however, there can be
no assurance of such results.
The Company's net product sales and income from continuing operations are not
materially impacted by inflation or any changing prices.
FINANCING REVENUE AND OTHER INCOME- Financing revenue represents the interest
and fees generated on the contracts financed by the Company's Australian,
Canadian, and United States Subsidiaries. Financing revenues declined to
$328,000 in fiscal 1998 from $612,000 in fiscal 1997, a 46% decrease. The
decline in financing revenue is primarily attributable to the Company's decision
in January 1998 to discontinue the financing of contracts to end customers.
Prior to January 1998, the Company had tightened the finance contract credit
requirements thus decreasing the volume of contracts.
GROSS PROFIT- Gross Profit, exclusive of financing revenues, for fiscal 1998 was
$10,885,000, or 28.1% as compared to 1997 gross profit of $13,869,000 or 27.8%.
As a result of the discontinuance of the Elektrapure product line in December
1997 and after efforts to sell the line in the first two quarters of fiscal 1998
proved unsuccessful, the Company recorded a charge in the quarter ended June 30,
1998 of $520,000 to reduce the Elektrapure line inventories to their estimated
net realizable value. Quarterly, the Company performs a study of slow moving
and/or obsolete parts. In the fourth quarter of fiscal 1998, based upon the
quarterly study, the Company recorded an additional charge of $300,000 relating
to slow moving "After the Sale" ("ATS") inventory. Exclusive of these special
charges the gross margin percentage for fiscal 1998 would have been 30.2%. This
improvement in the gross margin percentage, exclusive of the special charges, is
reflective of improved efficiencies resulting from initiatives begun in the
fourth quarter of fiscal 1997 to strengthen business processes, reduce costs,
and improve quality. These initiatives continue today as management conducts its
review of component costs and continues to strengthen operational processes.
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SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general and administrative
("SG&A") expenses decreased by $12,253,000 from fiscal 1997 to fiscal 1998.
Included in these 1998 costs is bad debt expense of $2,242,000, offset by a
reduction in employee incentive expenses of $672,000. The expense for bad debts
resulted primarily from the continuing deterioration of the receivables
associated with the Company's elimination of credit in North America and changes
in the way the Company went to market in the retail and Canadian channels.
Decreased variable selling expenses of $2,178,000, which are directly related to
the decline in product revenue, and continuous cost cutting measures are the
major contributing factors to the decrease in SG&A expenses from fiscal 1997 to
fiscal 1998. The Company anticipates that the cost reduction measures, initiated
in 1997 and continued into fiscal 1998, should continue to further reduce SG&A
costs in the foreseeable quarters. These initiatives included implementation of
a cash basis policy for North American distributors effective January 1, 1998
and targeted reduction of non-sales growth expenses. While the cash basis sales
policy has currently lowered sales, the Company believes that over time this
policy should improve the Company's liquidity, strengthen the financial health
of its distribution network and reduce future bad debt expense. There can be no
assurance, however, that such measures will have such effects.
INTEREST EXPENSE - Interest expense for fiscal year 1998 was $1,389,000, or
$828,000 lower than fiscal 1997 due primarily to the retirement of outstanding
balances on the Company's credit facility with Star Bank. The credit facility
was retired from the proceeds of the Bliss sale (See Note 6 to the Consolidated
Financial Statements).
INCOME TAXES - The effective income tax rate for the year ended September 30,
1998 was 20.5%, compared to 35.1% in 1997. The decrease in the effective tax
rate (income tax benefit) from fiscal 1997 to fiscal 1998 is primarily
attributable to a $1,329,000 charge recorded in fiscal 1998 for assessed and
anticipated tax exposures as a result of ongoing Internal Revenue Service
audits.
DISCONTINUED OPERATIONS - The Company recorded combined income, net of taxes,
from Tube-Fab and Personal Care of $207,000 for fiscal year 1998. The Company
recorded income, net of taxes, from Bliss of $224,000 in fiscal 1998. The
Company's steam cleaning business, HRS, recorded income, net of taxes, of
$10,000 for the year ended September 30, 1998. All entities were sold during
fiscal year 1998 (See "General Development of Business" above and Note 2 to the
Consolidated Financial Statements).
Sales applicable to discontinued operations for fiscal year 1998 and 1997 were
$34,175,000 and $75,152,000, respectively.
YEAR 2000 - Older computer software programs that use two digits rather than
four digits to identify the year in a date field are a concern with year 2000
approaching. If not corrected, many computer applications may fail to treat
dates intended to represent years in the twenty-first century as such but
instead treat them as still in the twentieth century, potentially resulting in
system failures or miscalculations disruptive of business operations, including,
among other things, an inability to initiate, receive, process, invoice or
otherwise complete normal business activities. These Year 2000 issues affect
virtually all companies and organizations.
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Through the use of internal personnel and outside consultants, the Company has
performed a detailed review to assess the impact of the Year 2000 issue on its
continuing operations. In connection with this review, the Company conducted an
inventory of IT and non-IT hardware and software; material vendors and
customers, and business processes. Each inventoried item was addressed to
evaluate its risk, to decide whether to remediate or replace, to identify its
priority to the business and to develop a plan for the system.
Plans developed in the assessment phase are being executed in the implementation
phase. Non-compliant IT and non-IT hardware and software are being remediated or
replaced. As of December 1, 1998, the majority of the Company's IT and non-IT
hardware and software utilize Year 2000 software. Remaining non-compliant
hardware and software will be remediated or replaced with Year 2000 software and
hardware by spring 1999. Testing, which is expected to be completed by June 30,
1999, is currently being performed to ensure compliance. Testing attempts to
verify that all systems function correctly and it extends to all interfaces with
key business partners.
During the assessment and testing phase, no significant information technology
projects have been deferred as a result of our efforts on Year 2000.
The Company relies on third party suppliers for raw materials, water, utilities,
transportation and other key services. Interruption of supplier operations due
to Year 2000 issues could affect Company operations, financial conditions or
cash flows. We are now in the process of surveying our vendors in order to
ascertain their ability to continue supplying us with necessary services and
materials. As of December 4, 1998, with 50.5% (100 out of 198) of the surveys
returned, we have not received any negative responses. All state that they are,
or will be, compliant by mid-1999. In addition to the survey, contingency plans
are being developed. While approaches to reducing risks of interruption due to
supplier failures will vary, options include identification of alternate
suppliers, and utility providers, accumulation of inventory to assure production
capability where feasible or warranted, and establishment of crisis teams to
address unexpected problems. These activities are intended to provide a means of
managing risk, but cannot eliminate the potential for disruption due to third
party failure.
The Company is also dependent upon our customers for sales and cash flow. Year
2000 issues in our customers' operations could result in decreased sales,
decreased cash flows, and increased inventory and receivables. While these
events are possible, we believe our customer base is broad enough to minimize
the effects of a single occurrence. In addition, the majority of the customer
base is not dependent upon equipment that could be affected by the Year 2000
issues. However, steps are currently being taken to monitor the status of our
customers as a means of determining risks and alternatives.
The Company estimates that the total cost to identify and fix Year 2000 problems
is approximately $350,000 of which $326,000 has been incurred to date. The
Company's policy is to expense as incurred information system maintenance and
modification costs and to capitalize the cost of any new hardware and amortize
it over the assets' useful lives. All expenses related to Year 2000 problems are
being funded through operating cash flows or the existing credit facility.
11
<PAGE> 13
NEW EUROPEAN CURRENCY- A new European currency ("Euro") is planned for
introduction in January 1999 to replace the separate currency of eleven
individual countries. The Euro is not expected to have any material impact on
the business or financial operations of the Company. The Company conducts all
European business, both pricing and marketing, in the U.S. currency. In
addition, the Company has no significant foreign operations in Europe that would
result in material foreign currency translation or exchange gain or loss issues.
RESULTS OF OPERATIONS - 1997 COMPARED WITH 1996
NET PRODUCT SALES- Net product sales for the year ended September 30, 1997
decreased by $8,942,000 or 15.2% as compared to fiscal 1996. The decrease in
sales was 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. Discussions with the Company's North American distributors
revealed that inventories were high, at their level, due to over ordering
spurred by generous credit terms from the Company. This had eroded liquidity in
the Distribution Network and created a need for an inventory correction. Sales
in Asia were adversely affected by economic conditions in that region and the
devaluation of certain currencies. Sales gains in a strong European market
continued their favorable trend.
FINANCING REVENUE AND OTHER INCOME- Financing revenues represent the interest
and fees generated on 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, exclusive of financing revenues, for fiscal 1997 was
$13,869,000, or 27.8%, as compared to fiscal 1996 gross profit of $20,574,000,
or 35.0%. Gross profit was adversely affected by lower volume, quality problems,
and operational inefficiencies. Additionally, non-recurring charges of
$1,084,000 were taken to write-off unused barter credits and tooling related to
a discontinued product line. Initiatives were begun in the fourth quarter of
1997 to strengthen business processes, reduce costs, and improve quality.
SELLING, GENERAL, AND ADMINISTRATIVE - SG&A costs increased by $6,958,000 from
fiscal 1996 to fiscal 1997. Bad debt expense of $4,659,000 was a major factor in
the increased SG&A costs. As previously discussed, deteriorating liquidity in
the North American distribution network and extended credit terms created a
customer base with the inability to pay outstanding debt. As a result the
Company to entered into agreements with certain distributors that will result in
collected balances of substantially less than 100%.
Severance charges related to the termination of Kirk W. Foley (See Note 13 to
the Consolidated Financial Statements) of approximately $2,000,000 also led to
the increase in SG&A in addition to expenses incurred in March 1997 for the
settlement of multiple lawsuits in Alabama for $294,000. These lawsuits were
based upon a variety of tort claims covered by a confidentiality agreement.
Excluding these charges, SG&A expenses would have decreased by approximately
$1,200,000.
INTEREST EXPENSE - Interest expense increased $532,000 in fiscal 1997 from 1996
as a result of additional borrowings by the Company and increased interest rates
in fiscal 1997.
INCOME TAXES - The effective tax rate for fiscal 1997 was 35.1 % compared to
33.0% in 1996.
12
<PAGE> 14
DISCONTINUED OPERATIONS - As of June 30, 1997, the Company reported Tubular,
Tube-Fab, and Personal Care, as discontinued operations. The Company recorded a
pretax estimated loss on disposal of the assets of Tube-Fab, and Personal Care
of $1,937,000 during fiscal 1997. In August 1997, the Company sold the assets of
Tubular to H-P Products and recorded a pretax loss on the sale of those assets
of $1,524,000. As of September 30, 1997, the Company reported Bliss as a
discontinued operation. Accordingly, the consolidated financial statements of
the Company have been reclassified to report separately the net assets and net
operating results of these discontinued operations. Income statements for
periods prior to the dates of discontinuance have been restated to reflect
continuing operations. The Company reported HRS as a discontinued operation in
fiscal 1996 and recorded an additional loss on disposal of $2,651,000 in fiscal
1997. At the time of the filing of the Fiscal Year 1996 Form 10-K, the Company
had a letter of intent to purchase HRS for $3.2 million. That deal was not
completed as the acquiring company was unable to obtain financing and
subsequently filed for bankruptcy. Thereafter, when the Company went back into
the market to sell HRS, there was a significant diminution in the market price,
despite positive results in the operations. In November 1997, the Company
received two signed letters of intent regarding the planned sale of this
business. Both offers, as described in the letters of intent, were substantially
lower. As a result, the assets were further written down to recognize this
impairment. Sales applicable to the discontinued operations as of September 30,
1997 and September 30, 1996 were $75,152,000 and $65,772,000, respectively.
Bliss had sales of $61,813,000 for the fiscal year ended September 30, 1997, an
increase of $14,654,000, or 31.1%, for the comparable period. Gross profit was
13.2% for the fiscal year 1997 compared to 16.5% for the fiscal year ended
September 30, 1996. Gross profit was lower due to a change in product mix and
incurrence of higher material and conversion costs that could not be passed
through to customers. SG&A expense was $3,959,900 for the year ended September
30, 1997, a decrease of $580,900 from the year ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's Consolidated Statements of Cash Flows contains items relating to
discontinued operations which have not been disaggregated as they have in the
Consolidated Balance Sheet.
OPERATING ACTIVITIES- Cash flows from operating activities utilized net cash of
$7,904,000 for fiscal 1998, principally due to the gain on the disposal of Bliss
of $7,485,000, provision for losses on receivables of $2,242,000, a decrease in
deferred income taxes of $4,177,000 resulting from the deferred tax assets being
utilized to offset the gain on the sale of Bliss, decreases in payables and
other accrued liabilities, an increase in inventories and a decrease in
receivables. The decrease in receivables of $1,585,000 was due primarily to
lower sales and tighter credit terms associated with the cash basis sales policy
in North America. Inventories increased by $1,212,000 due primarily to higher
inventory levels at Bliss required to support higher sales levels in the second
fiscal quarter. Accounts payable decreased by $3,074,000 primarily due to an
improved liquidity position. The decrease in accrued liabilities of $2,192,000
is a direct result of decreases in accrued group insurance, severance, employee
incentives, interest, and other operating accruals.
INVESTING ACTIVITIES- Net cash provided by investing activities was $28,805,000
at September 30, 1998, primarily reflecting proceeds from the sale of
discontinued operations and capital expenditures. Proceeds of $29,028,000 from
the sale of discontinued operations are primarily related to the sale of Bliss
and HRS.
13
<PAGE> 15
On March 27, 1998, the Company completed the sale of Bliss to an investor group
led by Mr. Mervin Dunn and Rhone Capital L.L.C. ("Buyer") pursuant to a stock
purchase agreement, dated December 17, 1997, as subsequently amended ("Purchase
Agreement") (See Note 2 to the Consolidated Financial Statements). Proceeds from
the sale were applied to the retirement of substantially all of the Company's
debt (see Note 6 to the Consolidated Financial Statements), certain vendor
obligations, transaction costs and related expenses, certain employee benefit
payments, and funding for the Bliss profit sharing plan. As of September 30,
1998 the Company has recorded net proceeds from the sale of Bliss of
$27,648,000.
In accordance with the Purchase Agreement, the Buyer and the Company agreed,
that if any inventory reflected in the final balance sheet was not useable and
saleable within time periods specified within the Purchase Agreement, then the
Buyer had the right to sell to the Company any such inventory. As of the date of
this filing the Company does not know how much, if any, inventory will be
required to be purchased from the Buyer.
Also in accordance with the Purchase Agreement, upon the first anniversary of
the closing date, the escrow agent shall pay and distribute to the Company, from
the escrow fund, all amounts that remain in the escrow fund less the outstanding
claim reserve, as defined in Exhibit A to the Purchase Agreement. The maximum
amount the Company can receive from the escrow fund is approximately $500,000.
Any monies received from the escrow fund or monies expended to purchase unusable
and unsaleable inventory, or satisfy other indemnification claims owed by the
Company pursuant to the Purchase Agreement, will be recorded as a gain or loss
during the second quarter of fiscal 1999. If any indemnification or inventory
claims against the Company would exceed the amount of funds remaining in escrow,
the Company could experience a material impact on its liquidity.
In April 1998, the Company received proceeds of $1,050,000 in connection with
the sale of HRS.
FINANCING ACTIVITIES- Net cash used in financing activities was $21,089,000, as
compared to $5,298,000 in fiscal 1997, which included $46,085,000 for payments
of credit facility and $5,244,000 for payment of long term debt offset by
$30,287,000 in proceeds from the credit facility.
Upon the completion of the sale of Bliss, the Company retired its debt to Star
Bank under the terms of an amended and restated credit agreement entered into in
June 1997 ($19,636,000, including interest and fees), paid off a special term
loan entered into in December 1997 ($2,000,000) and paid off equipment leases at
Bliss ($410,000). Additionally, the Company received additional financing of
$1,200,000 from the bank upon the filing of its fiscal 1997 tax return in
January 1998. Upon receipt of the refund from the fiscal 1997 tax return
($3,600,000), the principal amount of $1,200,000 was repaid plus fees and
interest. The remainder of the tax refund was used to fund working capital
requirements.
Upon the sale of Bliss, the Company also made a final payment of $1,749,000 on
unsecured, 9.86%, seven year private placement term notes, paid off the
Australian Unsecured Demand Authorization ($237,600), and made a repayment on
all outstanding amounts under the bank credit facility utilized by the Company's
Netherlands operation ($431,900).
14
<PAGE> 16
Effective April 1998, the Company entered into a $5,000,000 secured
discretionary credit facility with Heller Financial, Inc. The new credit
agreement expires in April 2001 and requires an unused facility fee, computed at
.375% per annum on the unused credit facility. The secured facility consists of
a $4.25 million credit line and a $.75 million term loan. Availability under the
credit facility is tied directly to the value of eligible collateral, which
consists of assets of the Company in the form of accounts receivable and
inventory. Interest rates accrue at prime plus 1.25% on the credit facility and
at prime plus 1.50% for the term loan. The outstanding portion of the credit
line is recorded in long-term debt on the Consolidated Balance Sheet for the
period ended September 30, 1998 as the facility does not mature until 2001.
The credit facility agreement includes, but is not limited to, various covenants
that limit the Company's ability to incur additional indebtedness, limit
compensation to key personnel and transactions with affiliates, restrict paying
dividends, limit book net worth and limit the ability for capital expenditures.
As of September 30, 1998, the Company was not in compliance with one of these;
however, the Company obtained a waiver on this covenant through September 30,
1998. Additionally, the credit agreement was amended in December 1998, to adjust
the restrictive covenant referred to above.
In October 1998, the Company announced the intention to investigate the possible
sale of its current facility in Cleveland and move operations to a more suitable
facility. The excess space and inefficient configuration of the current facility
prompted this management decision. Management expects to sell the current
facility in early January 1999 to a local real estate investment company. The
anticipated sale calls for a selling price of significantly less than the net
book value of the asset recorded on the Company's records and also calls for a
guarantee from the Company to leaseback the property for nine months. The
leaseback can be extended by the Company for up to 24 months.
The Company intends to move the corporate office, warehouse and manufacturing
facilities, to a leased building of approximately 75,000 square feet. This move
is expected to occur in late calendar 1999.
A non-cash loss on the disposal of the building, estimated at $2,690,000, is
expected to be recorded in late December 1998 or early January 1999, upon
consummation of the aforementioned sale, to record the difference between the
agreed upon selling price and the net book value of the property. The Company
believes that its current working capital, cash flow generated from future
operations and its existing credit facility will be sufficient to fund the
Company's capital requirements for the foreseeable future.
CAUTIONARY STATEMENT FOR "SAFE HARBOR" - PURPOSES UNDER THE PRIVATE SECURITIES
LITIGATION 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, including the statements made in "Net Product Sales" regarding the
future financial health of the distribution network, "Gross Profit" pertaining
to operational initiatives and the improvement of the gross margin percentage,
"Selling, General and Administrative" pertaining to the cost reduction measures,
liquidity, financial health of the distribution network, and future reduction of
bad debt expense, "Year 2000" concerning the impact of costs incurred on the
Company's future operating results, financial condition and cash flows and the
potential impact of suppliers and customers, "New European Currency" concerning
the immaterial impact on the business or financial operations of the Company and
"Liquidity and Capital Resources" monies received from the escrow
15
<PAGE> 17
funds or expended to purchase unusable and unsaleable inventory and such affect
on the Company's liquidity and sufficiency of funds for the Company's capital
requirements. Such forward-looking statements are subject to uncertainties
including the determination of any receipt of escrow funds or purchase of any
inventory related to the sale of Bliss, retention and rebuilding of the Consumer
Products Division distribution network and the ability of the Company to
implement cost reduction measures. Such uncertainties are difficult to predict
and could cause actual results of the Company to differ materially from those
matters expressed or implied by such forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements included on page 19 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
See Item 13.
ITEM 11. EXECUTIVE COMPENSATION
See Item 13.
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 1998
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.
16
<PAGE> 18
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report.
1. FINANCIAL STATEMENTS - Reference is made to the Index To Financial
Statements, included as page 19 of this report.
2. FINANCIAL STATEMENT SCHEDULES - Reference is made to the Index To
Financial Statements, included as page 19 of this report.
3. EXHIBITS - Reference is made to the Index To Exhibits, included as
page 45 of this report.
(b) Reports on Form 8-K.
No report on Form 8-K was filed during the last quarter of 1998.
(c) Exhibits Reference is made to the Index To Exhibits, included as page 45 of
this report.
(d) Financial Statement Schedules Reference is made to the Index To Financial
Statements, included as page 19 of this report.
17
<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 on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
HMI INDUSTRIES INC.
(Registrant)
by /s/ Robert M. Benedict
---------------------------------
Robert M. Benedict
Vice President, Treasurer and
Chief Financial Officer
December 23, 1998
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.
<TABLE>
<S> <C> <C>
/s/ James R. Malone /s/ Carl H. Young III /s/ Julie A. McGraw
- ----------------------------------------- --------------------------------------- ---------------------------------------
James R. Malone Carl H. Young III Julie A. McGraw
Chairman of the Board, Chief Executive President, Chief Operating Officer, Corporate Controller and Chief
Officer and Director and Director Accounting Officer
December 23, 1998 December 23, 1998 December 23, 1998
/s/ Robert J. Abrahams
- ----------------------------------------- --------------------------------------- ---------------------------------------
Robert J. Abrahams Murray Walker Ivan Winfield
Director Director Director
December 23, 1998 December 23, 1998 December 23, 1998
/s/ Donald L. Baker /s/ John S. Meany, Jr. /s/ Mark Kirk
- ----------------------------------------- --------------------------------------- ---------------------------------------
Donald L. Baker John S. Meany, Jr. Mark Kirk
Director Director Director
December 23, 1998 December 23, 1998 December 23, 1998
/s/ Barry L. Needler
- ----------------------------------------- ---------------------------------------
Moffat Dunlap Barry L. Needler
Director Director
December 23, 1998 December 23, 1998
</TABLE>
18
<PAGE> 20
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Management ....................................................................................... 20
REPORT OF INDEPENDENT ACCOUNTANTS
For the years ended September 30, 1998, 1997 and 1996 .................................................... 21
FINANCIAL STATEMENTS
Consolidated Balance Sheets for the years ended September 30, 1998
and 1997 ............................................................................................... 22
Consolidated Statements of Income for the years ended September 30,
1998, 1997 and 1996 .................................................................................... 23
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1998, 1997 and 1996 ...................................................................... 24
Consolidated Statements of Cash Flows for the years ended September 30,
1998, 1997 and 1996 .................................................................................... 25
Notes to Consolidated Financial Statements .............................................................. 26-42
Report of Independent Accountants on Financial Statements ............................................... 43
FINANCIAL STATEMENT SCHEDULE: II - Valuation and Qualifying Accounts
and Reserves ........................................................................................... 44
</TABLE>
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
consolidated financial statements, the notes thereto or in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
19
<PAGE> 21
REPORT OF MANAGEMENT
To the Board of Directors and Stockholders of HMI Industries Inc.
The management of HMI Industries Inc. (HMI) is responsible for the preparation,
integrity and objectivity of the financial statements and all other financial
information included in this report. Management believes that the financial
statements have been prepared in accordance with generally accepted accounting
principles and that any amounts included herein which are based on estimates of
the expected effects of events and transactions have been made with sound
judgment and approved by qualified personnel.
HMI maintains an internal control structure to provide reasonable assurance that
assets are safeguarded and that transactions and events are recorded properly.
The internal control structure is regularly reviewed, evaluated and revised as
necessary by management. Additionally, HMI requires every Company employee to
maintain the highest level of ethical standards in the conduct of all aspects of
the Company's business, and their compliance is regularly monitored.
The financial statements in this report have been audited by the independent
accounting firm PricewaterhouseCoopers LLP. Their audits were conducted in
accordance with generally accepted auditing standards and included a study and
evaluation of our internal control structure as they considered necessary to
determine the extent of tests and audit procedures required for expressing an
opinion on the Company's financial statements.
The Audit Committee of the Board of Directors, of which outside directors are
members, meets periodically with the independent auditors and management to
review accounting, auditing, internal control and financial reporting matters.
The external auditors have full and free access to the Audit Committee and its
individual members at any time.
/s/ Carl H. Young III
-------------------------------------
Carl H. Young III
President and Chief Operating Officer
/s/ Robert M. Benedict
-------------------------------------
Robert M. Benedict
Vice President, Treasurer and Chief
Financial Officer
20
<PAGE> 22
Report of Independent Accountants
---------------------------------
To the Board of Directors and Stockholders of HMI Industries Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of HMI
Industries Inc. and its subsidiaries at September 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
Cleveland, Ohio
December 23, 1998
21
<PAGE> 23
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51,365 $ 239,797
Trade accounts receivable (net of allowance of $1,084,594 and $5,512,063) 3,892,141 10,357,999
Notes receivable 90,180 72,972
Finance contracts receivable 42,305 496,044
Inventories:
Finished goods 2,292,552 2,438,282
Work-in-progress, raw material and supplies 2,071,003 1,714,576
Income tax receivable -- 3,373,898
Deferred income taxes 1,342,862 8,239,080
Prepaid expenses 226,489 123,099
Other current assets -- 83,307
Net assets held for sale at realizable value -- 12,900,184
------------ ------------
Total current assets 10,008,897 40,039,238
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 5,010,053 6,194,868
------------ ------------
OTHER ASSETS:
Long-term notes receivable (less amounts due within one year) 249,821 155,442
Cost in excess of net assets of acquired businesses
(net of amortization of $2,756,642 and $2,511,140) 6,446,682 6,735,578
Deferred income taxes 2,253,805 --
Unamortized trademarks 289,162 339,823
Finance contracts receivable (less amounts due within one year) 84,610 992,090
Other 65,753 133,094
------------ ------------
Total other assets 9,389,833 8,356,027
------------ ------------
Total assets $ 24,408,783 $ 54,590,133
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ -- $ 480,822
Trade accounts payable 5,118,002 6,939,040
Income taxes payable 1,126,049 1,349,163
Accrued expenses and other liabilities 3,152,908 8,125,620
Long-term debt due within one year 121,599 20,464,632
------------ ------------
Total current liabilities 9,518,558 37,359,277
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 549,819 762,777
Deferred income taxes -- 573,613
Other 241,401 1,342,961
------------ ------------
Total long-term liabilities 791,220 2,679,351
------------ ------------
Commitments and contingencies (Note 10) -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $5 par value; authorized, 300,000 shares; issued, none -- --
Common stock, $1 par value; authorized, 10,000,000 shares;
issued, 5,368,556 and 5,295,556 shares, respectively 5,368,556 5,295,556
Capital in excess of par value 7,817,756 8,050,212
Unearned compensation, net (166,816) (191,500)
Retained earnings 3,103,052 4,077,771
Cumulative translation adjustment (1,037,721) (1,418,762)
------------ ------------
15,084,827 15,813,277
Less treasury stock 210,191 and 269,296 shares, respectively, at cost 985,822 1,261,772
------------ ------------
Total stockholders' equity 14,099,005 14,551,505
============ ============
Total liabilities and stockholders' equity $ 24,408,783 $ 54,590,133
============ ============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 24
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30,
1998 1997 1996
-------------------------------------- -----------------
<S> <C> <C> <C>
REVENUES:
Net product sales $ 38,747,976 $ 49,878,534 $ 58,820,833
Financing revenue and other 328,019 611,716 728,075
------------------ ----------------- -----------------
39,075,995 50,490,250 59,548,908
OPERATING COSTS AND EXPENSES:
Cost of products sold 27,862,674 36,009,821 38,247,052
Selling, general and administrative expenses 20,340,300 32,593,485 25,635,132
Interest expense 1,389,473 2,217,781 1,686,254
Loss on investment in Holland-Electro - - 2,012,356
Other expenses 273,855 432,532 573,818
------------------ ----------------- -----------------
Total expenses 49,866,302 71,253,619 68,154,612
------------------ ----------------- -----------------
LOSS BEFORE INCOME TAXES (10,790,307) (20,763,369) (8,605,704)
Benefit for income taxes (2,216,786) (7,285,949) (2,838,259)
------------------ ----------------- -----------------
LOSS BEFORE DISCONTINUED OPERATIONS (8,573,521) (13,477,420) (5,767,445)
------------------ ----------------- -----------------
Income (loss) from discontinued operations -
Mexico (net of taxes of $-0-, $-0- and $-0-) - - (1,428,183)
Household Rental Systems (net of taxes of $-0-, $-0- and $-0-) 10,196 498,131 (1,082,502)
Bliss Manufacturing (net of taxes of $137,348, $1,323,395, and
$1,103,664) 224,094 2,159,224 1,655,497
Bliss Tubular (net of taxes of $-0-, $87,090, and $119,901) - (142,094) (179,851)
Tube Fab Ltd (net of taxes of $128,733, $-0- and $-0-) 207,341 386,095 32,042
Health-Mor Personal Care Corp. (net of taxes of $-0-, $339,742,
and $641,878) - (554,317) (962,818)
------------------ ----------------- -----------------
441,631 2,347,039 (1,965,815)
------------------ ----------------- -----------------
Gain (loss) on disposals-
Mexico - Currency loss previously reflected as component of
equity (net of taxes of $1,000,000) - - (1,396,509)
Mexico - - (84,335)
Household Rental Systems (net of taxes of $-0-, $-0- and $-0-) 166,679 (2,651,209) (800,000)
Bliss Manufacturing (net of taxes of $6,789,917, $-0-, and $-0-) 7,484,811 - -
Bliss Tubular (net of taxes of $-0-, $244,351, and $-0-) - (1,279,799) -
Tube Fab Ltd (net of taxes of $183,269, $-0- and $-0-) (299,019) (1,020,065) -
Health-Mor Personal Care Corp. (net of taxes of $119,700,
$348,503, and $-0-) (195,300) (568,611) -
------------------ ----------------- -----------------
7,157,171 (5,519,684) (2,280,844)
================== ================= =================
NET LOSS $ (974,719) $ (16,650,065) $ (10,014,104)
================== ================= =================
Weighted average number of shares outstanding 5,169,830 4,956,276 4,912,135
================== ================= =================
BASIC AND DILUTED PER SHARE OF COMMON STOCK:
Loss before discontinued operations $ (1.66) $ (2.72) $ (1.18)
Income (loss) from discontinued operations $ 0.09 $ 0.47 $ (0.40)
Gain (loss) on disposals 1.38 (1.11) (0.46)
================== ================= =================
Net loss $ (0.19) $ (3.36) $ (2.04)
================== ================= =================
Cash dividends per common share $ - $ - $ 0.263
================== ================= =================
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Capital in
Excess Cumulative
Common of Par Unearned Retained Translation
Stock Value Compensation Earnings Adjustment
---------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 $5,295,556 $ 7,521,851 --- $ 32,045,894 ($2,663,904)
Net loss (10,014,104)
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 7,686,944 --- 20,740,344 (1,077,325)
Net loss (16,650,065)
Treasury shares issued 363,268 (13,288)
Unearned compensation (273,500)
Employee benefit stock 82,000
Unclaimed dividends 780
Foreign currency translation
adjustment (341,437)
---------- ----------- ---------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1997 5,295,556 8,050,212 (191,500) 4,077,771 (1,418,762)
NET LOSS (974,719)
TREASURY SHARES ISSUED (232,456)
ISSUANCE OF COMMON STOCK 73,000
PURCHASE OF TREASURY SHARES
UNEARNED COMPENSATION 34,684
EMPLOYEE BENEFIT STOCK (10,000)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT 381,041
========== =========== ============= ============ ===========
BALANCE AT SEPTEMBER 30, 1998 $5,368,556 $ 7,817,756 ($ 166,816) $ 3,103,052 ($1,037,721)
========== =========== ============= ============ ===========
<CAPTION>
Treasury stock Total
---------------------- Stockholders'
Shares Amount Equity
--------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995 394,526 ($1,848,484) $ 40,350,913
Net loss (10,014,104)
Cash dividends - $.2625 per
share (1,291,446)
Treasury shares issued (18,340) 85,925 251,018
Foreign currency translation
adjustment 1,586,579
--------- ----------- --------------
Balance at September 30, 1996 376,186 (1,762,559) 30,882,960
Net loss (16,650,065)
Treasury shares issued (106,890) 500,787 850,767
Unearned compensation (273,500)
Employee benefit stock 82,000
Unclaimed dividends 780
Foreign currency translation
adjustment (341,437)
------- ---------- -------------
BALANCE AT SEPTEMBER 30, 1997 269,296 (1,261,772) 14,551,505
NET LOSS (974,719)
TREASURY SHARES ISSUED (69,105) 323,758 91,302
ISSUANCE OF COMMON STOCK 73,000
PURCHASE OF TREASURY SHARES 10,000 (47,808) (47,808)
UNEARNED COMPENSATION 34,684
EMPLOYEE BENEFIT STOCK (10,000)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT 381,041
========= =========== ==============
BALANCE AT SEPTEMBER 30, 1998 210,191 ($ 985,822) $ 14,099,005
========= =========== ==============
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 26
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
For the years ended September 30,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (974,719) $(16,650,065) $(10,014,104)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,257,411 2,744,553 3,564,595
(Gain) loss on disposal of discontinued operations (7,157,171) 5,519,684 2,280,844
Provision for loss on asset disposal 444,278 451,297 --
Provision for losses on receivables 2,242,172 6,069,937 1,069,509
Amortization of stock awards, net 188,985 385,766 --
Net increase in postretirement liability -- 488,000 435,000
Deferred income taxes 4,176,640 (4,683,948) (701,049)
Changes in operating assets and liabilities:
Decrease (increase) in receivables 1,585,023 3,241,172 (2,668,671)
(Increase) decrease in inventories (1,212,211) 4,362,110 (2,139,794)
(Increase) decrease in prepaid expenses (21,325) 1,716,065 (20,741)
Decrease (increase) in other current assets 41,963 (131,180) --
(Decrease) increase in accounts payable (3,073,699) (3,213,858) 7,016,530
(Decrease) increase in accrued expenses and other liabilities (2,192,019) 4,208,023 1,015,940
Decrease in income taxes payable (3,457,073) (774,447) (2,465,824)
Other, net 247,737 74,895 (258,612)
------------ ------------ ------------
Net cash (used in) provided by operating activities (7,904,008) 3,808,004 (2,886,377)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets, net 29,027,943 2,720,916 523,783
Capital expenditures (223,383) (1,463,320) (6,484,846)
------------ ------------ ------------
Net cash provided by (used in) investing activities 28,804,560 1,257,596 (5,961,063)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility 30,287,487 38,491,000 7,795,616
Payments of credit facility (46,084,625) (40,166,603) --
Proceeds from mortgage -- 55,077 2,214,923
Payment of long term debt (5,244,038) (3,690,397) (2,807,706)
Proceeds from long term debt -- 12,712 3,022,807
Dividends paid -- -- (1,721,162)
Acquisition of treasury stock (47,808) -- --
------------ ------------ ------------
Net cash (used in) provided by financing activities (21,088,984) (5,298,211) 8,504,478
------------ ------------ ------------
Effect of exchange rate changes on cash -- -- 244,611
------------ ------------ ------------
Net decrease in cash and cash equivalents (188,432) (232,611) (98,351)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 239,797 472,408 570,759
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51,365 $ 239,797 $ 472,408
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
Items relating to discontinued operations included in the Consolidated
Statements of Cash Flow have not been disaggregated as they have in the
Consolidated Balance Sheets under the heading net assets held for sale at
realizable value.
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include all significant controlled
subsidiaries. Operations include the accounts of HMI Industries Inc (the
"Company") and the following wholly-owned subsidiaries: Health-Mor B.V.,
Health-Mor International Inc., HMI Incorporated, Health-Mor Acceptance
Corporation, HMI Acceptance Corporation, and Health-Mor Acceptance Pty. Ltd.
All significant intercompany accounts and transactions have been eliminated.
The principal products of the Company are floor care and air filtration products
for surface and air cleaning and the removal of dust, dirt and pollutants and
include bagless portable vacuum cleaners, portable room air cleaners and central
vacuum cleaning systems. The Company's products are marketed in the United
States, Canada, and over forty other countries.
RECLASSIFICATION
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 presentation.
FOREIGN CURRENCY TRANSLATION
All consolidated foreign operations use the local currency of the country of
operation as the functional currency and translate the local currency asset and
liability accounts at year-end exchange rates while income and expense accounts
are translated at weighted average exchange rates. The resulting translation
adjustments are accumulated as a separate component of Shareholders' Equity
titled "Cumulative foreign currency translation adjustment". Such adjustments
will affect net income only upon sale or liquidation of the underlying foreign
investments. During the fourth quarter of 1997, the Company recorded $719,900 to
loss on disposal for cumulative translation adjustments associated with
discontinued foreign operations. Upon the sale of the discontinued foreign
operations in the second quarter of 1998 an additional $35,000 was recorded to
loss on disposal.
Exchange gains and losses from transactions in a currency other than the local
currency of the entity involved are included in income. Net transaction and
translation adjustments are not significant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of any
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a maturity of
less than three months to be cash equivalents.
26
<PAGE> 28
ALLOWANCE FOR DOUBTFUL ACCOUNTS
On a periodic basis, the Company's management performs a review of potentially
uncollectable trade accounts receivable to provide its best estimate of the net
realizable value of the receivables. This review consists of a detailed specific
customer analysis and a focus on aging categorization, days sales outstanding
and other related analytical procedures.
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES
Intangibles resulting from business acquisitions, comprising cost in excess of
net assets of businesses acquired, are being amortized on a straight-line basis
over 40 years.
The Company periodically evaluates the recoverability of intangibles resulting
from business acquisitions and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and market and economic conditions. If there is
an impairment in value, recorded balances will be adjusted.
INVENTORIES
At September 30, 1998, inventories are stated at the lower of cost or market and
are valued using the last-in, first-out (LIFO) cost method. Inventories on the
LIFO method were 100% and 90.9% of inventories in 1998 and 1997, respectively.
If the FIFO method had been used for these inventories, their value would have
been approximately $5,179,600 and $4,768,400 at September 30, 1998 and 1997,
respectively.
At September 30, 1997, inventories related to discontinued operations were
recorded in net assets held for sale and were on the FIFO cost method. The value
of these inventories approximated $7,859,200.
ASSETS HELD FOR SALE
In 1997, assets held for sale included the assets of Health-Mor Personal Care
Corporation, Tube-Fab Ltd., Bliss Manufacturing and Household Rental Systems.
The assets and liabilities of these businesses at September 30, 1997 were
reclassified to net assets held for sale and were stated at their estimated net
realizable value. Subsequently, these businesses were sold during fiscal 1998
(See Note 2).
Assets held for sale at September 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------------- -----------
<S> <C> <C>
Accounts receivable, net $ -- $ 9,524,069
Inventories -- 7,859,180
Property, plant and equipment, net -- 9,240,582
Other assets -- 8,260,924
-------------- -----------
Total assets $ -- $34,884,755
-------------- -----------
Accounts payable -- 7,801,520
Accrued expenses -- 7,079,624
Other liabilities -- 5,345,289
-------------- -----------
Total liabilities $ -- $20,226,433
-------------- -----------
Net assets held for sale at realizable value $ -- $14,658,322
============== ===========
</TABLE>
27
<PAGE> 29
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is provided on
the straight-line and declining balance methods over estimated useful lives of
10 to 40 years for buildings and improvements and 3 to 10 years for machinery
and equipment. Improvements which extend the useful life of property, plant and
equipment are capitalized, and maintenance and repairs are expensed. When
property, plant and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the appropriate accounts and any gain
or loss is included in current income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
It is not practical to determine the fair value of finance contract receivables
due to the unavailability of quoted market prices and the volume of outstanding
contracts with varying maturity dates. The Company's finance contract
receivables generally mature three years after issuance and generate interest at
rates ranging from 18% to 23%.
The Company's remaining financial instruments consist principally of cash and
cash equivalents, accounts and notes receivable, accounts payable, accrued
expenses and other liabilities, line of credit, and short and long-term debt in
which the fair value of these financial instruments approximates the carrying
value.
INCOME TAXES
The Company accounts for income taxes pursuant to the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, the tax consequences in the future years for differences
between the financial and tax basis of assets and liabilities at year end are
reflected as deferred income taxes.
REVENUE RECOGNITION
Product revenues are recognized upon the shipment of product. Prior to January
1, 1998, the Company provided extended credit terms to its distribution network.
On January 1, 1998, the Company revised this policy to cash only sales terms for
its North American distributors. In fiscal 1998, the Company also began offering
discounts to international customers upon prepayment of shipments.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest was $1,382,931, $2,171,658 and $1,509,627 for the years
ended September 30, 1998, 1997 and 1996, respectively.
Each of the following transactions have been treated as non-cash items for
purposes of the Consolidated Statements of Cash Flows. In January 1998, accrued
severance in the amount of $1,523,500, relating to the settlement agreement
between the Company and Mr. Kirk W. Foley, the Company's former Chief Executive
Officer, was applied to the loss on disposal reserve for Tube-Fab, which was
transferred to Mr. Foley as part of such settlement agreement. During the second
quarter of fiscal 1998, the Company relinquished land and a building valued at
$523,400 and the related mortgage in the amount of $316,500 in exchange for an
increase in a note receivable due from a former officer of the Company
(See Note 13). In July 1998, $1,534,100 of financing receivables, deemed
uncollectable, were netted against related liabilities. Such liabilities, which
are recorded when a financing sale occurs, are paid to a distributor office only
upon the collection of the financing receivable.
28
<PAGE> 30
During fiscal 1997, the tenant of the Company's Lombard, Illinois building,
exercised his right to purchase the property at a price equal to the remaining
principal debt service of approximately $800,000. The amount of the debt service
equaled the net book value of the asset recorded on the Company's books. In
addition, $5,286,277 of gross goodwill related to the discontinued Bliss
Manufacturing operation was reclassified to net assets held for sale. During
fiscal 1996, the Company assumed a mortgage of $323,000 and relieved a note
receivable for $302,000 in exchange for $625,000 of fixed assets.
Items relating to discontinued operations included in the Consolidated
Statements of Cash Flow have not been disaggregated as they have in the
Consolidated Balance Sheets under the heading net assets held for sale at
realizable value.
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 September 30, 1998, 1997 and 1996, the denominators for calculating the
Company's basic and diluted earnings per share are identical.
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 1998,
1997 and 1996 was 5,169,830, 4,956,276 and 4,912,135, respectively.
2. DISCONTINUED OPERATIONS
In fiscal 1998, 1997 and 1996, the Company reported its subsidiaries Bliss,
Tube-Fab, HRS, Personal Care and Tubular as discontinued operations, as well as
its sales operations in Mexico.
On March 27, 1998, the Company completed the sale of Bliss to an investor group
led by Mr. Mervin Dunn and Rhone Capital L.L.C. ("Buyer") pursuant to a stock
purchase agreement, dated December 17, 1997, as subsequently amended ("Purchase
Agreement"). The proposed sale of Bliss was approved by the Company's Board of
Directors during the fourth quarter of fiscal 1997 and therefore Bliss was
reflected as a discontinued operation for the fiscal year ended September 30,
1997.
The purchase price paid to the Company on the closing date of the sale was
$31,660,000, less $1,000,000 delivered by the Buyer to an escrow account for
post-closing adjustments and indemnification obligations of the Company under
the Purchase Agreement. The purchase price was subject to post-closing
adjustments based on the net change in current assets less current liabilities
from the reference balance sheet to the final balance sheet as defined in the
Purchase Agreement.
29
<PAGE> 31
Net of transaction fees and expenses, the Company recorded a gain, prior to
post-closing adjustments, on the sale of Bliss of approximately $12,110,000
($6,093,000 net of taxes) for the fiscal quarter ended March 31, 1998. The
difference between the federal statutory income tax rate of 34% and the
effective tax rate recognized on the gain on the sale was primarily attributable
to a permanent tax basis difference associated with the Company's stock purchase
of Bliss in 1990. Proceeds delivered at the closing from the sale of Bliss were
applied to retire substantially all of the Company's debt, certain vendor
obligations, transaction costs and related expenses, certain employee benefit
programs, and funding for the Bliss profit sharing plan.
In July 1998, the Buyer notified the Company that it accepted $1,348,000 of the
final post-closing adjustment, but disputed other issues that had the potential
to increase this adjustment. Thus, in the fiscal quarter ended June 30, 1998,
the Company recorded an additional gain of $1,702,000 ($1,123,000 net of taxes)
related to the final undisputed portion of the purchase price adjustment,
including $500,000 in funds related to the escrow account, which in accordance
with the Purchase Agreement were to be released to the Company upon resolution
of any disputed items.
In August 1998, the Company recorded an additional gain of $462,000 ($268,000
net of taxes), net of transaction fees, relating to the final resolution of
disputed items.
In accordance with the Purchase Agreement, the Buyer and the Company agreed,
that if any inventory reflected in the final balance sheet was not useable and
saleable within time periods specified within the Purchase Agreement, then the
Buyer had the right to sell to the Company any such inventory. As of the date of
this filing the Company does not know how much, if any, inventory will be
required to be purchased from the Buyer.
Also in accordance with the Purchase Agreement, upon the first anniversary of
the closing date, the escrow agent shall pay and distribute to the Company, from
the escrow fund, all amounts that remain in the escrow fund less the outstanding
claim reserve, as defined in Exhibit A to the Purchase Agreement. The maximum
amount the Company can receive from the escrow fund is approximately $500,000.
Any monies received from the escrow fund or monies expended to purchase unusable
and unsaleable inventory, or to satisfy other indemnification claims owed by the
Company pursuant to the Purchase Agreement, will be recorded as a gain or loss
during the second quarter of fiscal 1999.
In fiscal 1997, the Company recorded its Tube-Fab operation as a discontinued
operation and recorded a pre-tax estimated loss on disposal of $1,020,000. On
January 8, 1998, the Company completed the sale of Tube-Fab to Mr. Foley (see
Note 13 "Related Party Transactions"). An additional loss on disposal of
$482,000 ($299,000 net of taxes) was recorded in the second quarter of fiscal
1998.
In March 1996, the Company adopted a plan to sell HRS. The Company recorded an
estimated loss of the disposal of this operation of $800,000 during 1996. An
additional charge of $2,651,000 on this disposal was recorded in the third and
fourth quarters of fiscal 1997 to reflect the then estimated realizable value.
This charge included a write-off of the entity's estimated currency translation
adjustment previously reported as a component of equity. On March 31, 1997, the
Company completed the sale of HRS to Integrated Capital Management Group for
$1,050,000. Assets sold consisted primarily of inventory, fixed assets, and
other intangible assets relating to the carpet and upholstery cleaning business.
Net of transaction expenses and fees, the Company recorded a gain on the sale of
$167,000 in fiscal 1998.
30
<PAGE> 32
In the third quarter of fiscal 1997, the Company recorded Personal Care as a
discontinued operation and recorded an estimated loss of $917,000 ($569,000 net
of taxes). These assets were sold to Eidolon Corporation, a Canadian company,
for $89,000. As a result of the sale, the Company recorded an additional loss on
disposal of $315,000 ($195,000 net of taxes) in the quarter ended March 31,
1998.
In August 1997, the Company sold the assets of Tubular to H-P Products and
recorded a loss on the sale of those assets of $1,524,000 ($1,280,000 net of
taxes).
During the fourth quarter of fiscal 1996, the Company adopted a plan to exit its
direct sales operation in Mexico. Revenue and expenses related to this business
were classified as discontinued operations for the fiscal year ended September
30, 1996. The Company recorded a loss on disposal of $1,481,000 in fiscal 1996
primarily comprised of the currency devaluation which was previously reported as
a component of equity, net of the U.S. tax benefit of the loss on the Company's
investment in this operation.
Sales applicable to the discontinued operations were $34,174,552, $75,151,642
and $65,771,729 for the years ended September 30, 1998, 1997 and 1996,
respectively.
3. NOTES RECEIVABLE
Long-term notes receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Notes receivable - See Note 13 $ 340,001 $ 228,414
Less amounts due within one year 90,180 72,972
=========== ===========
$ 249,821 $ 155,442
=========== ===========
4. PROPERTY, PLANT AND EQUIPMENT
1998 1997
----------- -----------
Land $ 7,083 $ 7,083
Buildings and improvements 3,765,726 3,867,012
Machinery and equipment 5,177,786 7,552,322
----------- -----------
8,950,595 11,426,417
Accumulated depreciation 3,940,542 5,231,549
=========== ===========
Net property, plant and equipment $ 5,010,053 $ 6,194,868
=========== ===========
</TABLE>
In October 1998, the Company announced the intention to investigate the possible
sale of its current facility in Cleveland and move operations to a more suitable
facility. The excess space and inefficient configuration of the current facility
prompted this management decision. Management expects to sell the current
facility in early January 1999 to a local real estate investment company. The
anticipated sale calls for a selling price of significantly less than
the net book value of the asset recorded on the Company's records and
also calls for a guarantee from the Company to leaseback the property for nine
months. The leaseback can be extended by the Company for up to 24 months.
31
<PAGE> 33
The Company intends to move the corporate office, warehouse and manufacturing
facilities, to a leased building of approximately 75,000 square feet. This move
is expected to occur in late calendar 1999.
A non-cash loss on the disposal of the building, estimated at $2,690,000, is
expected to be recorded in late December 1998 or early January 1999, upon
consummation of the aforementioned sale, to record the difference
between the agreed upon selling price and the net book value of the property.
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Accrued compensation $1,083,350 $4,049,464
Distributor funds payable 480,506 1,171,998
Pension and profit sharing -- 362,560
Accrued interest 6,542 332,364
Other 1,582,510 2,209,234
========== ==========
$3,152,908 $8,125,620
========== ==========
</TABLE>
6. CREDIT FACILITY AND LONG-TERM DEBT
Upon the completion of the sale of Bliss, the Company retired its debt to Star
Bank under the terms of an amended and restated credit agreement entered into in
June 1997 ($19,636,100, including interest and fees), paid off a special term
loan entered into in December 1997 ($2,000,000) and paid off equipment leases at
Bliss ($410,000). Additionally, the Company received additional financing of
$1,200,000 from the bank upon the filing of its fiscal 1997 tax return in
January 1998. Upon receipt of the refund from the fiscal 1997 tax return
($3,600,000), the principal amount of $1,200,000 was repaid plus fees and
interest. The remainder of the tax refund was used to fund working capital
requirements.
Upon the sale of Bliss, the Company also made a final payment of $1,748,800 on
unsecured, 9.86%, seven year private placement term notes, paid off the
Australian Unsecured Demand Authorization ($237,600), and made a repayment on
all outstanding amounts under the bank credit facility utilized by the Company's
Netherlands operation ($431,900).
Effective April 1998, the Company entered into a $5,000,000 secured
discretionary credit facility with Heller Financial, Inc. The new credit
agreement expires in April 2001 and requires an unused facility fee, computed at
.375% per annum on the unused credit facility. The secured facility consists of
a $4.25 million credit line and a $.75 million term loan. Availability under the
credit facility is tied directly to the value of eligible collateral, which
consists of assets of the Company in the form of accounts receivable and
inventory. Interest rates accrue at prime plus 1.25% on the credit facility and
at prime plus 1.50% for the term loan (9.50% and 9.75%, respectively at
September 30, 1998). The outstanding portion of the credit line is recorded in
long-term debt on the Consolidated Balance Sheet for the period ended September
30, 1998 as the facility does not mature until 2001.
32
<PAGE> 34
<TABLE>
<CAPTION>
Long-term debt consists of the following:
1998 1997
--------- -----------
<S> <C> <C>
BANK LINES OF CREDIT - see above $508,080 $10,579,822
SPECIAL TERM LOAN, bearing interest at Prime -- 1,580,052
plus 2 1/4% (10.75% at September 30, 1997), due
in monthly installments of $50,000 through
October 1, 1998
EQUIPMENT TERM LOAN, bearing interest at Prime -- 1,951,595
plus 1/2% (9.00% at September 30, 1997), due in
monthly installments of $29,751 through October
1, 1998
REAL ESTATE TERM LOAN, bearing interest at Prime -- 2,193,750
plus 1/2% (9.00% at September 30, 1997), due in
monthly installments of $18,750 through October
1, 1998
SEVEN YEAR, 9.86% PROMISSORY -- 1,666,667
NOTES, interest payable semi-annually and
principal payments of $1,666,666,
commencing November, 1992 through March 31, 1998
CONSTRUCTION LOAN/MORTGAGE bearing -- 2,252,156
interest at 9.00% at September 30,
1997, collateralized by buildings,
contents and inventory, principal and
interest payments due in monthly
installments of $23,193 commencing
June 1997 through October 1, 1998
CAPITALIZED LEASE OBLIGATIONS 163,338 478,760
bearing interest at 6.48% to 8.04% due in
monthly installments of $11,919 (including
interest) through January 2000
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
DISTRIBUTOR DEPOSITS bearing interest up to 6% $ -- $ 599,429
at September 30, 1997 payable 180 days after
termination of distributor agreement
UNSECURED DEMAND AUTHORIZATION -- 406,000
bearing interest at Australian prime less
1/2% (5.4% at September 30, 1997), due in
monthly installments of $25,375 payable on March
31, 1998
----------- -----------
671,418 21,708,231
Less amounts due within one year 121,599 20,945,454
=========== ===========
$ 549,819 $ 762,777
=========== ===========
</TABLE>
The principal amount of long-term debt payable in the five years ending
September 30, 1999 through 2003 is $121,599, $41,739, $508,080, $-0- and $-0-.
The weighted average interest rate on short term borrowings at September 30,
1998 and 1997 was 8.01% and 8.75%, respectively.
The credit facility agreement includes, but is not limited to, various covenants
that limit the Company's ability to incur additional indebtedness, limit
compensation to key personnel and transactions with affiliates, restrict paying
dividends, limit book net worth and limit the ability for capital expenditures.
As of September 30, 1998, the Company was not in compliance with one of these;
however, the Company obtained a waiver on this covenant through September 30,
1998. Additionally, the credit agreement was amended in December 1998, to adjust
the restrictive covenant referred to above.
7. LONG-TERM COMPENSATION PLAN
The Company adopted the Health-Mor Inc. 1992 Omnibus Long-Term Compensation Plan
("Plan") in 1992. The Plan provides for the granting of stock options, stock
appreciation rights, restricted stock awards, phantom stock and/or performance
shares ("Awards") to key employees of the Company and its Subsidiaries and stock
options for the non employee directors of the Company. Options granted under the
Plan expire up to ten years after the date of grant if not exercised and may be
exercisable in whole or in part at the discretion of the Committee established
by the Board of Directors. Shares available for issuance under the Plan may be
authorized and unissued shares or treasury shares. The maximum number of shares
of Common Stock available for grant of Awards under the Plan are limited on an
annual and cumulative basis as further defined in the Plan.
Stock options under the Plan generally have exercise prices equal to the fair
market values at dates of grant, otherwise, if the option price is less than the
fair market value at the date of the grant, compensation expense is recorded for
the difference. For restricted or phantom stock, the Company records
compensation expense as the excess of the quoted market price of a similar but
unrestricted share of stock at the award date over the purchase price, if any.
In May 1997, the Board of Directors approved a restricted stock grant to two
executives of 20,000 shares each of common stock subject to certain
restrictions. Subsequently, the executives forfeited these shares.
34
<PAGE> 36
The shares vested over a maximum period of eight months and were subject to each
executive's continued employment and other various restrictions.
In July 1997, the Board of Directors granted restricted stock and stock options
under the Plan to three of its executives. Each executive was awarded 25,000
shares of restricted common stock, with 12,500 vesting on October 1, 1997 and
the balance on January 2, 1998. Subsequently, the executives forfeited all
25,000 shares. An additional 75,000 shares of restricted common stock were
issued in fiscal 1998 contingent upon certain conditions and continued
employment. Each of these executives also received options to purchase 75,000
shares of common stock at $5.68 per share, of which 35,210 options are incentive
stock options, half exercisable on July 2, 1997 and the remaining on January 2,
1998. The remaining 39,790 options are non-qualified stock options that became
exercisable on July 2, 1997. All options expire July 2, 2002, to the extent not
exercised.
On March 25, 1998, restricted stock agreements were finalized with three of the
Company's executives in lieu of a deferred bonus agreement previously outlined
in fiscal 1997. Under the terms of such agreements, each executive shall receive
85,200 shares of Common Stock subject to certain conditions and continued
employment. The shares vest ratably over eight quarters beginning with the
quarter ended March 31, 1998. The non-vested portion of the restricted stock
awards is recorded as unearned compensation in the Consolidated Balance Sheet.
In July 1998, 60,200 unvested shares were forfeited by Mark A. Kirk upon his
resignation as President and Chief Operating Officer of the Company. Shares
which vested on March 31 and June 30, 1998 were subsequently forfeited by the
executives.
There were 69,105 treasury shares and 73,000 common shares issued pursuant to
fiscal 1998 stock grants. Unamortized deferred compensation amounted to $238,800
at September 30, 1998. Total compensation expense, in conjunction with the Plan
was $188,986, $659,266 and $251,000 in 1998, 1997 and 1996, respectively.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock plans as
allowed under FAS Statement No. 123, "Accounting for Stock-Based Compensation"
(FAS 123). Had compensation cost for the stock granted in 1998, 1997 and 1996
been determined consistent with FAS 123, pro forma net income and earnings per
share would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net loss, as reported $ 974,719 $ 16,650,065 $ 10,014,104
Net loss, pro forma $ 1,107,493 $ 17,482,065 $ 10,515,359
Loss per Common share (basic and diluted):
As reported $ 0.19 $ 3.36 $ 2.04
Pro forma $ 0.21 $ 3.53 $ 2.14
</TABLE>
Because the FAS No. 123 method of accounting has not been applied to options
granted prior to 1996, the above pro forma disclosures are not necessarily
indicative of future amounts.
35
<PAGE> 37
The fair value for all options granted in 1998, 1997 and 1996 were estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 JUNE 1996 JANUARY 1996
OPTIONS OPTIONS OPTIONS OPTIONS
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Risk free interest rate 5.6% 6.2% 6.5% 5.3%
Expected life of option 3 yrs. 3 yrs. 3 yrs. 3 yrs.
Expected dividend yield of stock 0.0% 0.0% 0.0% 0.0%
Expected volatility of stock 71.1% 51.5% 41.8% 41.8%
</TABLE>
A summary of the Company's stock option activity, and related information for
the years ended September 30, 1998, 1997, and 1996, is shown in the following
table.
<TABLE>
<CAPTION>
Shares subject Average option
to option price per share
--------------- ---------------
<S> <C> <C>
September 30, 1995, Outstanding 381,675 $ 10.46
Granted 162,000 9.08
Canceled (12,750) 7.55
----------------
September 30, 1996 530,925 10.18
Granted 356,000 5.52
Canceled (163,300) 7.49
----------------
September 30, 1997 723,625 8.47
Granted 42,000 6.25
Canceled (311,625) 9.07
---------------
September 30, 1998, Outstanding 454,000 $ 7.83
===============
</TABLE>
Options exercisable and shares available for future grant on September 30:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- --------
<S> <C> <C> <C>
Options exercisable 299,500 487,810 403,893
Weighted- average option price per share of options exercisable
$ 8.13 $ 8.90 $ 8.58
Weighted-average fair value of options granted during the year
$ 3.16 $ 2.34 $ 3.09
</TABLE>
36
<PAGE> 38
The ranges of exercise prices and the remaining contractual life of options as
of September 30, 1998 were:
<TABLE>
<S> <C> <C>
Range of exercise prices $4-$10 $11-$18
Options outstanding:
Outstanding as of September 30, 1998 352,000 102,000
Weighted-average remaining contractual life 5.22 1.94
Weighted-average exercise price $6.14 $13.68
Options exercisable:
Outstanding as of September 30, 1998 232,000 67,500
Weighted-average remaining contractual life 6.40 2.00
Weighted-average exercise price $6.31 $13.81
</TABLE>
8. INCOME TAXES
The (benefit) provision for income taxes relating to continuing operations
consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Current:
Federal $(4,734,764) $(6,205,078) $(2,678,363)
Foreign -- 25,000 25,000
----------- ----------- -----------
(4,734,764) (6,180,078) (2,653,363)
Deferred (benefit) expense 2,517,978 (1,105,871) (184,896)
=========== =========== ===========
$(2,216,786) $(7,285,949) $(2,838,259)
=========== =========== ===========
</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>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Tax at Federal statutory rate of 34% $(3,668,704) $(7,059,545) $(2,925,939)
Increases (reductions) in taxes
resulting from:
Tax expense relating to Internal Revenue
Service audits and assessments 1,328,717 -- --
Foreign Sales Corporation earnings (25,997) (231,455) (269,595)
Amortization of cost in excess of
net assets of acquired businesses 105,937 79,152 79,152
Foreign income taxes, net -- 25,000 25,000
Other - net 43,261 (99,101) 253,123
=========== =========== ===========
$(2,216,786) $(7,285,949) $(2,838,259)
=========== =========== ===========
</TABLE>
The decrease in the effective tax rate (income tax benefit) from fiscal 1997 to
fiscal 1998 is primarily attributable to a $1,329,000 charge recorded in fiscal
1998 for assessed and anticipated tax exposures as a result of ongoing Internal
Revenue Service audits.
37
<PAGE> 39
The components of deferred tax assets and liabilities are comprised of the
following at September 30,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
Gross deferred tax assets:
<S> <C> <C>
Postretirement benefits $ -- $ 1,631,245
Operating loss carryforwards 5,484,171 3,222,314
Receivable and inventory reserves 612,970 857,822
Accrued compensation 130,214 1,816,797
Impairment reserves 17,154 1,999,901
Other 327,311 481,964
----------- -----------
6,494,094 10,010,043
----------- -----------
Gross deferred tax liabilities:
Accounts receivable fair market value
adjustment for tax purposes 1,524,012 --
Depreciation 214,326 668,445
----------- -----------
1,738,338 668,445
Valuation allowances on foreign
net deferred tax assets 1,159,089 1,676,131
----------- -----------
Net deferred tax asset $ 3,596,667 $ 7,665,467
=========== ===========
</TABLE>
The Company has determined that it should fully reserve against this net
potential tax asset to the extent it represents excess available net deferred
tax assets for certain foreign subsidiaries and divisions as it is more likely
than not that these tax assets will not be realized. 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. Income taxes paid during the years ended September 30,
1998, 1997 and 1996 were $730,383, $277,559 and $1,082,229, respectively.
Net operating loss carryforwards of approximately $14,090,000 for tax are
available to offset future taxable income. The carryforwards will expire in 2005
through 2018. Undistributed earnings of foreign subsidiaries are reinvested in
their operations and therefore, no provision is made for additional income taxes
that might be payable on such earnings.
9. PROFIT SHARING AND PENSION PLANS
The Company has a qualified profit sharing plan which covers 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. Profit sharing expense for the plan for the years ended September 30,
1998, 1997 and 1996 was $-0-, $112,560 and $-0-, respectively.
38
<PAGE> 40
10. COMMITMENTS AND CONTINGENCIES, GUARANTEES AND LEASES
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 $494,208,
$100,329, $62,911, $51,923 and $2,235 for the years ending September 30, 1999,
2000, 2001, 2002 and 2003, respectively. Rent expense was $700,022, $858,589 and
$917,600 for the years ended September 30, 1998, 1997 and 1996, respectively.
LITIGATION
The Receiver of the Health Mor B.V. bankruptcy estate commenced litigation
against the Company and one of Health Mor B.V.'s Managing Directors, Mr. Kevin
Dow, on or about December 3, 1997, asserting that the Company and Mr. Dow are
liable, under the law of the Netherlands, for a 616,000 NLG ($308,000) deficit
in the Health Mor B.V. estate and approximately 85,000 NLG ($42,500) in costs of
administration. This litigation was settled during the fourth quarter of fiscal
1998 for approximately $85,000.
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 cash
flows of the Company.
EXECUTIVE COMPENSATION AGREEMENT
During 1994, the Company negotiated a five year Compensation Agreement with the
Chief Executive Officer, Kirk W. Foley, which was ratified at the 1995 Annual
Shareholders' Meeting. The Agreement combined salary, incentive compensation,
loans, stock options and Phantom Stock to employ Mr. Foley. On May 14, 1997 Mr.
Foley's employment with the Company was terminated triggering certain
obligations under this employment agreement (See Note 13).
Also in May 1997, the Company announced and completed a reduction of personnel
which affected approximately forty people (hourly and salaried) at its
Cleveland, Ohio facility. The Canadian corporate office was also scaled down,
with all accounting functions being brought into the Cleveland, Ohio office,
reducing staff by approximately eleven people in the Canadian office.
Total charges of $3,049,754 relating to the layoffs announced in May and Mr.
Foley's termination benefit package were recorded in the third and fourth
quarter of fiscal 1997. The balance in the related reserve at September 30, 1997
was $2,058,492, of which $300,000 was previously recorded as compensation
expense in fiscal year 1996 in accordance with Mr. Foley's employment agreement.
As of September 30, 1998 all amounts relating to this reserve have been
disbursed.
39
<PAGE> 41
11. BUSINESS SEGMENTS, MAJOR CUSTOMERS, AND FOREIGN OPERATIONS
The Company's continuing operations consist of a single operating segment.
Prior to March 1998, one of the Company's major foreign operations had been
located in Canada. As of March 1998, the Company began selling into Canada
through one importer and all sales previously made by the Company's Canadian
operation were ceased. Canadian sales are not considered export sales.
Identifiable assets of the Canadian operations were $584,394 and $2,318,521 at
September 30, 1998 and 1997, respectively. Identifiable revenues of Canadian
operations for the years ended September 30, 1998, 1997 and 1996 were
$2,219,540, $4,981,069 and $4,387,750, respectively.
One international customer represented 20.7% and another international customer
represented 10.3% of total product sales in fiscal 1998. In fiscal 1997, one
international customer represented 15.9% of total product sales and another
international customer represented 10.0% of total product sales.
Sales to international customers represents 60.9%, 62.6% and 56.0% of net
product sales for the years ending September 30, 1998, 1997 and 1996,
respectively.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------
December 31, March 31, June 30, September 30,
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 9,011,515 $ 10,281,904 $ 10,152,343 $ 9,630,233
Gross profit (exclusive of
financing revenues) $ 2,780,696 $ 3,357,858 $ 2,284,780 $ 2,461,968
Loss before discontinued
operations $(2,104,827) $ (2,367,060) $ (2,409,844) $(1,691,790)
Gain (loss) on disposals $ -- $ 6,035,628 $ 1,123,376 $ (1,833)
Income (loss) from discontinued
operations $ 944,423 $ (502,792) $ -- $ --
Net (loss) income $(1,160,404) $ 3,165,776 $ (1,286,468) $(1,693,623)
Per share of common
Stock (basic and diluted):
Loss before discontinued
operations $ (0.42) $ (0.47) $ (0.45) $ (0.32)
Income (loss) on disposals $ -- $ 1.20 $ 0.21 $ (0.03)
Income (loss) from
discontinued operations $ 0.19 $ (0.10) $ -- $ --
Net (loss) income $ (0.23) $ 0.63 $ (0.24) $ (0.35)
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------
December 31, March 31, June 30, September 30,
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 14,620,888 $ 13,725,320 $ 11,120,603 $ 11,023,439
Gross profit (exclusive of
financing revenues) $ 5,073,398 $ 3,456,337 $ 2,433,425 $ 2,905,553
Loss before discontinued
operations $ (657,479) $ (3,158,796) $ (4,945,981) $ (4,715,164)
Loss on disposals $ -- $ -- $ (3,439,298) $ (2,080,386)
Income from discontinued
operations $ 534,487 $ 141,795 $ 1,111,073 $ 559,684
Net loss $ (122,992) $ (3,017,001) $ (7,274,206) $ (6,235,866)
Per share of common
Stock (basic and diluted):
Loss before discontinued
operations $ (0.13) $ (0.64) $ (1.00) $ (0.95)
Loss on disposals $ -- $ -- $ (0.69) $ (0.42)
Income from discontinued
operations $ 0.11 $ 0.03 $ 0.22 $ 0.11
Net loss $ (0.02) $ (0.61) $ (1.47) $ (1.26)
</TABLE>
In the fourth quarter of fiscal 1998, the Company recorded a charge of
$1,329,000 relating assessed and anticipated tax exposures as a result of
ongoing Internal Revenue Service audits.
13. 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.
41
<PAGE> 43
In January 1998, the Company completed the transfer of Tube-Fab to Mr. Foley in
settlement of its obligations to him. As a result of this transaction, the
Company recorded an additional loss on disposal of $299,000, net of $183,300 of
taxes in the second fiscal quarter of 1998. The settlement 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 ($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 had 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).
Mr. Foley's departure caused the Company to examine the collectability of
certain other related party receivables aggregating $743,000 which were forgiven
and accordingly written off in the third and fourth quarters of fiscal 1997.
In 1995, the Company converted $750,000 of accounts receivable from a former
Filter Queen distributor to a note receivable. This distributor was 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. During the quarter ended March 31, 1998, the Company
relinquished land and a building valued at $523,400 and the related mortgage in
the amount of $316,500 in exchange for an increase in the note receivable noted
above. The note receivable of $340,001 is reflected in current and long-term
assets at September 30, 1998.
14. MAJOR VENDOR
In 1991, the Company entered into an agreement that provided for the potential
acquisition of Holland Electro B.V. of Rotterdam, the Netherlands, contingent
upon attaining certain earnings targets in the two year period ended September
30, 1992. When Holland Electro B.V. failed to achieve the agreed targets, HMI
walked away from the proposed purchase but continued to buy products and other
services from Holland-Electro.
In January 1996, Holland Electro B.V. filed for bankruptcy, triggering a
Conditional Purchase Agreement the Company had with Kredietbank N.V. in the
amount of $1,104,000. As a result, the Company was required to take possession
of finished goods and work in progress inventories. Upon acquisition of these
inventories, the Company began production of the ElektraPure and other floorcare
products for distribution in North America and Europe. The Company had paid in
advance for certain services and inventory to be acquired from Holland Electro
B.V. The advances, royalties and other receivables totaled $2,012,000. During
fiscal 1996, as a result of the bankruptcy and subsequent resolution of pending
claims, the Company determined that recovery of these advances was not likely.
Accordingly, the Company recorded a charge for the write-off of these advances.
42
<PAGE> 44
Report of Independent Accountants on
Financial Statement Schedule
------------------------------------
To the Board of Directors and Stockholders of
HMI Industries Inc.
Our report on the consolidated financial statements of HMI Industries Inc. is
included on page 21 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related Financial Statement
Schedule listed in the index on page 19 of this Form 10-K. In our opinion, the
financial statement schedule referred to above when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
Cleveland, Ohio
December 23, 1998
43
<PAGE> 45
HMI INDUSTRIES INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning of Charged to End of
Description Period Costs and Expense Deductions Period
------------------------------------------------------------
<S> <C> <C> <C> <C>
Valuation account for accounts receivable:
Year ended September 30, 1998 $5,512,000 $2,107,000 $6,534,000 $1,085,000
Year ended September 30, 1997 $2,439,000 $4,820,000 $1,747,000 $5,512,000
Year ended September 30, 1996 $1,550,000 $ 889,000 -- $2,439,000
Valuation account for inventory:
Year ended September 30, 1998 $1,631,000 $1,318,000 $2,465,000 $ 484,000
Year ended September 30, 1997 $1,234,000 $ 754,000 $ 357,000 $1,631,000
Year ended September 30, 1996 $ 305,000 $ 929,000 -- $1,234,000
Reserve for loss on disposal:
Year ended September 30, 1998 $5,388,000 $ 631,000 $5,786,000 $ 233,000
Year ended September 30, 1997 $ 800,000 $6,112,000 $1,524,000 $5,388,000
Year ended September 30, 1996 -- $ 800,000 -- $ 800,000
Valuation for deferred tax asset:
Year ended September 30, 1998 $1,676,000 $ -- $ 517,000 $1,159,000
Year ended September 30, 1997 $ 871,000 $1,151,000 $ 346,000 $1,676,000
Year ended September 30, 1996 $ 517,000 $ 354,000 -- $ 871,000
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
<S> <C> <C>
3.1 Certificate of Incorporation Incorporated by reference from, Annual Report on form
10-K for the year ended September 30, 1995
3.2 Bylaws Incorporated by reference from, Annual Report on form
10-K for the year ended September 30, 1995
10.00 Material Contracts Heller Credit Facility Agreement, incorporated by
reference from Form 10-Q for the quarter ended March
31, 1998
10.01 Material Contracts Amendment to Loan and Security Agreement, attached
10.02 Material Contracts Change of Control Agreements, incorporated by reference
from Form 10-K/A3 for the year ended September 30, 1997
10.03 Material Contracts Non-statutory Stock Option Agreements, incorporated by
reference from Form 10-K/A3 for the year ended
September 30, 1997
10.04 Material Contracts Incentive Stock Option Agreements, incorporated by
reference from Form 10-K/A3 for the year ended
September 30, 1997
10.05 Material Contracts Restricted Stock Agreements, incorporated by
reference from Form 10-Q for the quarter
ended March 31, 1998
10.06 Material Contracts Employment Agreement - Malone, incorporated by
reference from Form 10-K/A3 for the year ended
September 30, 1997
10.07 Material Contracts Employment Agreement - Young, incorporated
by reference from Form 10-K/A3 for the year
ended September 30, 1997
10.08 Material Contracts Restricted Stock Agreements, incorporated by
reference from Form 10-K/A3 for the year ended
September 30, 1997
10.09 Material Contracts Restricted Stock Agreements, attached
10.10 Material Contracts Bliss Stock Purchase Agreement, incorporated by
reference from Form 10-K/A3 for the year ended
September 30, 1997
11 Statement re: Computation of per Note 1 on Page 26 of the Financial Statements
share earnings
21 Subsidiaries of Registrant Page 2 of this report
23 Consent of Experts Attached
27 Financial Data Schedule Attached
</TABLE>
45
<PAGE> 1
Exhibit 10.01
AMENDMENT TO LOAN AND SECURITY AGREEMENT
This First Amendment to that certain Loan and Security Agreement
("Amendment") is made and entered into as of December 11, 1998 by and between
HMI Industries, Inc. ("Borrower") and Heller Financial, Inc. ("Lender").
WHEREAS, Lender and Borrower are parties to a certain Loan and Security
Agreement, dated April 23,1998 and all amendments thereto (the "Agreement"); and
WHEREAS, an Event of Default is in existence under the Agreement as a
result of Borrower's breach of the covenant contained in subsection 6.1, Book
Net Worth (the "Existing Event of Default"), and Borrower has requested Lender
waive the Existing Event of Default; and
WHEREAS, the parties desire to amend the Agreement as hereinafter set
forth;
NOW THEREFORE, in consideration of the mutual conditions and agreements
set forth in the Agreement and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. DEFINITIONS. Capitalized terms used in this Amendment,
unless otherwise defined herein, shall have the meaning ascribed to such term in
the Agreement.
2. AMENDMENT. Subject to the conditions set forth the below,
the Agreement is amended as follows:
(a) Subsection 6.1, Book Net Worth is amended by deleting SUBSECTION
6.1. BOOK NET WORTH in its entirety and inserting the following in lieu thereof:
"6.1, BOOK NET WORTH. Permit Borrower's book net worth, at any
time, to be less than 13,500,000."
3. WAIVER. Lender hereby waives the Existing Event of Default.
This is a limited waiver and shall not be deemed to constitute a waiver of any
other Event of Default or any future breach of the Agreement or any of the other
Loan Documents.
4. CONDITIONS. The effectiveness of this Amendment is subject
to the following conditions precedent (unless specifically waived in writing by
Lender):
(a) There shall have occurred no material adverse change in the
business, operations, financial condition, profits or prospects of Borrower, or
in the Collateral;
(b) Borrower shall have executed and delivered such other documents and
instruments as Lender may require;
(c) All corporate proceedings taken in connection with the transactions
contemplated by this Amendment and all documents, instruments and other legal
matters incident thereto shall be satisfactory to Lender and its legal counsel;
1
<PAGE> 2
(d) No Default or Event of Default other than the Existing Event of
Default shall have occurred and be continuing.
5. CORPORATE ACTION. The execution, delivery, and performance of this
Amendment has been duly authorized by all requisite corporate action on the part
of Borrower and this Amendment has been duly executed and delivered by Borrower.
6. REPRESENTATIONS AND WARRANTIES. To induce the Lender to enter into
this Amendment, the Borrowers hereby warrant, represent and covenant to the
Lender that each representation or warranty of the Borrowers set forth in
Section 4 of the Credit Agreement is hereby restated and reaffirmed as true and
correct on and as of the date hereof as if such representation or warranty were
made on and as of the date hereof (except to the extent that any such
representation or warranty expressly relates to a prior specific date or
period).
7. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
8. Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
9. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall constitute an original, but all of which taken
together shall be one and the same instrument.
10. RATIFICATION. The terms and provisions set forth in this Amendment
shall modify and supersede all inconsistent terms and provisions of the
Agreement and, except as expressly modified and superseded by this Amendment,
the terms and provisions of the Agreement are ratified and confirmed and shall
continue in full force and effect.
11. REFERENCES.
(a) Any reference to the Agreement contained in any Loan Document, or
any other notice, request, certificate, or other document executed concurrently
with or after the execution and delivery of this Amendment shall be deemed to
include this Amendment, unless the context shall otherwise require.
(b) Except as specifically amended above, the Agreement, the Note, and
all other Loan Documents, are and shall continue to be in full force and effect
and are hereby in all respects ratified and confirmed. The Borrowers have no
knowledge of any challenge to the Lender's claims arising under the Loan
Documents or the effectiveness of the Loan Documents;
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of the Lender under any of the Loan Documents, nor constitute a
waiver of any provision of any of the Loan Documents. This Amendment shall not
constitute a modification of the Agreement or a
2
<PAGE> 3
course of dealing with the Lender at variance with the Agreement such as to
require further notice by the Lender to require strict compliance with the terms
of the Agreement and the other Loan Documents in the future, except as expressly
set forth herein
(d) The Borrowers confirm and agree that to the extent that any such
Loan Document purports to assign or pledge to the Lender, or to grant a security
interest or lien on, any Collateral as security for the Obligations of the
Borrowers from time to time existing in respect of the Agreement and the Loan
Documents, such pledge, assignment and/or grant of the security interest is
hereby ratified and confirmed in all respects, except as expressly provided for
herein.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed under seal and delivered by their respective duly authorized
officers on the date first written above.
HELLER FINANCIAL, INC.
By: /s/ Michael L. DuBois
----------------------------
Name: Michael L. Dubois
--------------------------
Title: Vice President
-------------------------
ATTEST: HMI INDUSTRIES, INC.
By: /s/ R.M. Benedict, Jr.
- ------------------------ ----------------------------
Secretary Name: R.M. Benedict, Jr.
--------------------------
Title: Exec VP, CFO & Treasurer
-------------------------
3
<PAGE> 1
Exhibit 10.09
HMI INDUSTRIES INC.
EXHIBIT 10
MATERIAL CONTRACTS - INCENTIVE STOCK OPTION AGREEMENT
<TABLE>
<CAPTION>
AGREEMENT EFFECTIVE DATE/
PARTICIPANT DATE SHARES SHARES EXCERCISABLE
<S> <C> <C> <C>
Robert M. Benedict Jr. 4/1/98 12,000 4/1/99 - one third
4/1/00 - one third
4/1/01 - one third
Julie McGraw 4/1/98 12,000 4/1/99 - one third
4/1/00 - one third
4/1/01 - one third
</TABLE>
See Field Exhibit for Robert M. Benedict Jr.
<PAGE> 2
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT is entered into as of this 1st day of
April, 1998, by and between HMI Industries Inc., a Delaware corporation with
its principal place of business at 3631 Perkins Avenue, Cleveland, Ohio (the
"Company") and Robert M. Benedict, Jr. (the "Employee").
WHEREAS, the Employee is employed as a key member of management of the
Company; and,
WHEREAS, pursuant to the Company's 1992 Omnibus Long-Term Compensation
Plan (the "Plan") the Board of Directors of the Company has approved a grant to
the Employee of shares of Common Stock of the Company, par value $1.00 per
share, subject to certain restrictions; and,
WHEREAS, the Employee has agreed to accept the shares subject to the
restrictions placed on ownership of the shares.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the Company and the Employee agree as follows:
1. GRANT OF SHARES. The Company grants to the Employee 12,000 shares of Common
Stock of the Company subject to the restrictions in section 2 (the "Shares"),
and the Employee accepts the Shares subject to the restrictions.
2. VESTING. The Shares shall vest on the following dates in the amount
indicated:
April 1, 1999 4,000 shares
April 1, 2000 4,000 shares
April 1, 2001 4,000 shares
Prior to the vesting of the Shares, if the Employee terminates his employment
with the Company or if the Company shall terminate his employment with Cause
(as defined below), the Shares shall be forfeited as provided in Section 4. In
the event of the following occurrences, all unvested Shares shall vest
immediately and shall not be subject to forfeiture: (a) Termination of the
Employee's employment without cause; (1)) Death of the Employee; (c) Change in
Control of the Company as defined in the Plan; (d) Termination of the Company's
Common Stock from trading on a national securities exchange.
3. DEFINITION OF CAUSE. Termination of Employee's employment for any of the
following reasons will constitute cause: (a) conviction of a felony or a crime
involving dishonesty or moral turpitude; (b) material breach of, or neglect of
the Employee's duties and responsibilities that is willful and deliberate and
that is likely to result in material economic injury to the Company.
1
<PAGE> 3
4. FORFEITURE. In the event that the Shares do not vest, the Shares shall be
surrendered and canceled and returned to the Company's treasury, and the
Employee shall receive no payment in consideration of such forfeited Shares.
5. COMPLIANCE WITH SECURITIES LAWS. No Shares will be issued in the absence of
an effective registration statement under the Securities Act of 1933, unless the
Company has received evidence of exemption therefrom which is satisfactory to
counsel for the Company. Employee agrees to be bound by such provisions as the
Company may require to insure that the issuance by the Company or the sale by
the Employee of any of the Shares shall be in compliance with applicable
securities laws. These restrictions may include but shall not be not limited to
a) placing a restricted legend on the certificates evidencing the shares; b)
issuance of a stop transfer order by the transfer agent; and c) providing to the
Company an investment intent letter in which the Employee agrees that the shares
are being held for investment only and not for resale or distribution.
6. SAFEGUARDING OF SHARES. Employee agrees that the Company will retain the
Shares until they vest or are forfeited. Employee further agrees to execute an
assignment separate from certificate with a medallion signature guarantee
transferring the Shares to the Company in the event of forfeiture.
7. RECEIPT OF PLAN. Employee acknowledges receipt of a copy of the Plan, and
agrees that this grant of Shares shall be subject to all the terms and
provisions of the Plan, including any future amendments.
8. TAXES. Employee acknowledges that any federal, state or local income taxes
that may be due as a result of this grant are solely the. responsibility of the
Employee, and agrees to pay any such taxes when due. If, as a result of this
grant, the Company is required to withhold any amount from the Employee for
federal, state or city income tax, FICA or Medicare tax or other similar taxes
or fees for which withholding is required by an employer for compensation paid
to an employee, the Employee authorizes the Company to withhold from other cash
sources due to the Employee from the Company, sufficient amounts to pay any
withholding which may be required as a result of the grant of Shares.
9. NO CONTRACT OF EMPLOYMENT. This agreement does not constitute a contract of
employment, and nothing herein shall be construed as creating a contract of
employment between Employee and the Company.
10. CONSIDERATION. It is understood that the consideration for the Shares shall
be past services through the date of issuance having a value not less than the
par value of the shares.
11. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming
under the Employee.
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<PAGE> 4
IN WITNESS WHEREOF, the Company and the Employee have executed this
Restricted Stock Agreement as of the date indicated above.
HMI INDUSTRIES INC.
By /s/ Mark A. Kirk
--------------------------
Mark A. Kirk, President
/s/ Robert M. Benedict, Jr.
------------------------------
Robert M. Benedict, Jr.
3
<PAGE> 1
Exhibit 23
Consent of Independent Accountants
----------------------------------
We consent to the incorporation by reference in the Registration Statement of
HMI Industries Inc. (the "Company") on Form S-8 (File No. 333-47153) of our
report dated December 23, 1998, on our audits of the consolidated financial
statements of the Company, as of September 30, 1998 and 1997 and for each of the
three years in the period ended September 30, 1998, included on page 21 of the
Annual Report on Form 10-K. We also consent to the incorporation by reference of
our report dated December 23, 1998 on the Financial Statement Schedule, which
appears on page 43 of this Form 10-K.
PricewaterhouseCoopers LLP
Cleveland, Ohio
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 51,365
<SECURITIES> 0
<RECEIVABLES> 5,443,651
<ALLOWANCES> 1,084,594
<INVENTORY> 4,363,555
<CURRENT-ASSETS> 10,008,897
<PP&E> 8,950,595
<DEPRECIATION> 3,940,542
<TOTAL-ASSETS> 24,408,783
<CURRENT-LIABILITIES> 9,518,558
<BONDS> 0
0
0
<COMMON> 5,368,556
<OTHER-SE> 8,730,449
<TOTAL-LIABILITY-AND-EQUITY> 24,408,783
<SALES> 38,747,976
<TOTAL-REVENUES> 39,075,995
<CGS> 27,862,674
<TOTAL-COSTS> 48,476,829
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,389,473
<INCOME-PRETAX> (10,790,307)
<INCOME-TAX> (2,216,786)
<INCOME-CONTINUING> (8,573,521)
<DISCONTINUED> 7,598,802
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (974,719)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
