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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 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 Ave, Cleveland, Ohio 44114
- ------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 432-1990
--------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
- ---------------------------------- ----------------------------------
Common stock, $1 par value per share 5,300,254
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HMI INDUSTRIES INC.
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 1998 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
(Unaudited)
June 30, September 30,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,957 $ 239,797
Trade accounts receivable (net of allowance of $6,254,845 and $5,512,063) 4,135,653 10,357,999
Finance contracts receivable 404,766 496,044
Notes receivable 372,240 228,414
Inventories 4,956,491 4,152,858
Income tax receivable -- 3,373,898
Deferred income taxes 4,709,881 8,239,080
Prepaid expenses 178,761 123,099
Other current assets 1,848,000 83,307
Net assets held for sale at realizable value -- 12,900,184
------------ ------------
Total current assets 16,639,749 40,194,680
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 5,191,351 6,194,868
------------ ------------
OTHER ASSETS:
Cost in excess of net assets of acquired businesses
(net of amortization of $2,695,267 and $2,511,140) 6,525,402 6,735,578
Unamortized trademarks 340,777 339,823
Finance contracts receivable (less amounts due within one year) 759,982 992,090
Other 41,134 133,094
------------ ------------
Total other assets 7,667,295 8,200,585
------------ ------------
Total assets $ 29,498,395 $ 54,590,133
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ -- $ 480,822
Trade accounts payable 5,247,513 6,939,040
Income taxes payable 1,393,011 1,349,163
Accrued expenses and other liabilities 3,560,938 8,125,620
Long-term debt due within one year 123,004 20,464,632
------------ ------------
Total current liabilities 10,324,466 37,359,277
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 1,457,067 762,777
Deferred income taxes 264,052 573,613
Other 1,041,369 1,342,961
------------ ------------
Total long-term liabilities 2,762,488 2,679,351
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $5 par value; authorized, 300,000 shares; issued, none -- --
Common stock, $1 par value; authorized, 10,000,000 shares;
issued, 5,368,556 shares 5,368,556 5,295,556
Capital in excess of par value 8,238,994 8,050,212
Unearned compensation (918,883) (191,500)
Retained earnings 4,796,675 4,077,771
Cumulative translation adjustment (1,021,939) (1,418,762)
------------ ------------
16,463,403 15,813,277
Less treasury stock 10,861 shares, at cost 51,962 1,261,772
------------ ------------
Total stockholders' equity 16,411,441 14,551,505
------------ ------------
Total liabilities and stockholders' equity $ 29,498,395 $ 54,590,133
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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HMI INDUSTRIES INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net product sales $ 10,091,253 $ 10,965,436 $ 29,198,032 $ 38,973,964
Financing revenue 61,090 155,167 247,730 492,847
------------ ------------ ------------ ------------
10,152,343 11,120,603 29,445,762 39,466,811
OPERATING COSTS AND EXPENSES:
Cost of products sold 7,806,473 8,532,011 20,774,699 28,010,804
Selling, general and administrative expenses 5,810,984 7,978,475 17,039,805 21,731,521
Interest expense 50,342 603,913 1,338,026 1,647,945
Other expenses 47,722 113,302 166,910 332,236
------------ ------------ ------------ ------------
Total expenses 13,715,521 17,227,701 39,319,440 51,722,506
------------ ------------ ------------ ------------
Loss before income taxes (3,563,178) (6,107,098) (9,873,678) (12,255,695)
Benefit for income taxes (1,153,334) (1,161,117) (2,991,947) (3,493,439)
------------ ------------ ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS (2,409,844) (4,945,981) (6,881,731) (8,762,256)
------------ ------------ ------------ ------------
Income (loss) from discontinued operations -
Household Rental Systems (net of taxes of $-0-, $-0-, $-0- and $-0-) -- 191,072 10,196 56,369
Bliss Manufacturing (net of taxes of $-0-, $622,021, $137,348
and $1,266,098) -- 1,014,877 224,094 2,065,740
Bliss Tubular (net of taxes of $-0-, $5,073, $-0- and $72,801) -- (8,278) -- (118,781)
Tube-Fab Ltd. (net of taxes of $-0-, $-0-, $128,733 and $-0-) -- 143,811 207,341 326,903
Health-Mor Personal Care Corp. (net of taxes of $-0-, $141,219,
$-0- and $235,831) -- (230,409) -- (542,876)
------------ ------------ ------------ ------------
-- 1,111,073 441,631 1,787,355
------------ ------------ ------------ ------------
Gain (loss) on disposals-
Household Rental Systems (net of taxes of $-0-, $-0-, $-0- and $-0-) -- (813,413) 436,889 (813,413)
Bliss Manufacturing (net of taxes of $578,712, $-0-, $6,595,911
and $-0-) 1,123,376 -- 7,216,434 --
Bliss Tubular (net of taxes of $-0-, $325,256, $-0- and $325,256) -- (1,411,802) -- (1,411,802)
Tube-Fab Ltd. (net of taxes of $-0-, $-0-, $183,269 and $-0-) -- (645,472) (299,019) (645,472)
Health-Mor Personal Care Corp. (net of taxes of $-0-,
$348,503, $119,700 and $348,503) -- (568,611) (195,300) (568,611)
------------ ------------ ------------ ------------
1,123,376 (3,439,298) 7,159,004 (3,439,298)
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (1,286,468) $ (7,274,206) $ 718,904 $(10,414,199)
============ ============ ============ ============
Weighted average number of shares outstanding, basic and diluted 5,356,820 4,961,985 5,140,979 4,936,938
============ ============ ============ ============
BASIC AND DILUTED PER SHARE OF COMMON STOCK:
Loss before discontinued operations $ (0.45) $ (1.00) $ (1.34) $ (1.77)
Income from discontinued operations $ -- $ 0.22 $ 0.09 $ 0.37
Gain (loss) on disposals $ 0.21 $ (0.69) $ 1.39 $ (0.70)
------------ ------------ ------------ ------------
Net (loss) income $ (0.24) $ (1.47) $ 0.14 $ (2.10)
============ ============ ============ ============
Cash dividends per common share $ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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HMI INDUSTRIES INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 718,904 $ (10,414,199)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization 1,386,036 2,149,830
(Gain) Loss on disposal of discontinued operations, net (7,159,004) 3,439,298
Amortization of stock awards, net 792,019 407,015
Provision for loss on asset write-down - 160,000
Provision for losses on receivables 1,963,498 2,760,031
Deferred income taxes 3,327,478 (1,375,959)
Changes in operating assets and liabilities:
Decrease in receivables 2,084,180 5,043,343
(Increase) decrease in inventories (1,805,147) 2,444,765
Decrease in prepaid expenses 26,403 1,337,897
Decrease (increase) in other current assets 41,963 (412,509)
Decrease in accounts payable (2,944,188) (2,039,108)
(Decrease) increase in accrued expenses and other liabilities (2,393,787) 243,774
Decrease in income taxes payable (2,996,104) (227,098)
Other, net 268,010 (376,186)
------------------------------------
Net cash (used in) provided by operating activities (6,689,739) 3,140,894
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses, net of transaction expenses of $5,229,344 26,863,472 1,120,916
Capital expenditures (199,242) (775,585)
------------------------------------
Net cash provided by investing activities 26,664,230 345,331
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility 25,150,353 28,894,000
Proceeds from mortgage - 55,077
Payment of credit facility (40,290,815) (28,929,000)
Payment of long term debt (4,992,061) (3,410,322)
Acquisition of treasury stock (47,808) -
------------------------------------
Net cash used in financing activities (20,180,331) (3,390,245)
------------------------------------
Net (decrease) increase in cash and cash equivalents (205,840) 95,980
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 239,797 472,408
------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,957 $ 568,388
====================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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PART I - ITEM 1
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
In the opinion of the management of HMI Industries Inc. (the "Company"), these
consolidated condensed financial statements contain all of the adjustments
necessary to present fairly the financial position as of June 30, 1998 and
September 30, 1997, the results of operations for the three and nine months
ended June 30, 1998 and 1997, and cash flows for the nine months ended June 30,
1998 and 1997.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis for Preparation of the Consolidated Condensed Financial Statements
------------------------------------------------------------------------
The consolidated condensed financial statements included in this report have
been prepared, without audit, by the Company from the consolidated statements of
the Company and its subsidiaries, pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including significant accounting
policies, normally included in annual financial statements have been condensed
or omitted pursuant to such rules and regulations.
It is suggested that these consolidated condensed financial statements, which
are subject to year-end audit adjustments, be read in conjunction with the
Company's latest Annual Report on Form 10-K, as amended.
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
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 Ltd., formerly a wholly owned Canadian subsidiary of the Company
("Tube-Fab"), which was transferred to Mr. Foley as part of such settlement
agreement. In addition, 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
an officer of the Company (see Note 7 "Related Party Transactions").
Reclassification
----------------
Certain prior year amounts have been reclassified to conform to the fiscal 1998
presentation.
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Earnings Per Share
------------------
Earnings per share have been computed according to Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Because all common stock
equivalents are anti-dilutive as of June 30, 1998 and 1997, the denominators for
calculating the Company's basic and diluted earnings per share are identical.
Derivatives
-----------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 requires all derivatives to be recognized at
fair value as either assets or liabilities on the balance sheet. Any gain or
loss resulting from changes in such fair value is required to be recognized in
earnings to the extent the derivatives are not effective as hedges. SFAS 133 is
effective for fiscal years beginning after June 15, 1999, and is effective for
interim periods in the initial year of adoption. The Company has not yet
determined the effect, if any, of the adoption of SFAS 133 on the Company's
results of operations, financial position or liquidity.
2. DISCONTINUED OPERATIONS
On January 8, 1998, the Company completed the sale of Tube-Fab to Mr. Foley (see
Note 7 "Related Party Transactions"). An additional loss on disposal of $482,300
($299,000 net of taxes) was recorded in the second quarter.
On March 27, 1998, the Company completed the sale of Bliss Manufacturing
Company, formerly a wholly owned Ohio subsidiary of the Company, ("Bliss") to an
investor group led by Mr. Mervin Dunn and Rhone Capital L.L.C. (the "Buyer")
pursuant to a Stock Purchase Agreement, dated as of December 17, 1997 (as
subsequently amended, the "Purchase Agreement"). 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, and is
subject to post-closing adjustments based on the net change in current assets
less current liabilities. The final purchase price adjustment will be based on
the audited closing balance sheet that the Company delivered to the Buyer on May
29, 1998.
On July 13, 1998 the Buyer notified the Company that it did not object with
respect to $1,348,000 of the final purchase price adjustment but disputed other
issues that had the potential to increase this adjustment. The adjustments in
dispute are presently being negotiated with the Buyer. Under the terms of the
Purchase Agreement, if the parties are unable to reach an agreement, any
unresolved disputed items will be promptly referred to an unrelated accounting
firm that shall render as promptly as practicable a final and binding resolution
on both parties. The $1,348,000, in addition to $500,000 from the escrow account
to be released to the Company within two business days following the settlement
of the disputed issues, have been recorded in Other Current Assets on the June
30, 1998 Consolidated Condensed Balance Sheet. Net of
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transaction fees and expenses, the Company recorded a gain on the sale of
Bliss of approximately $12,110,300 ($6,093,100 net of taxes) for the 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 of
Bliss is 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 Bliss were applied to retire substantially all of the
Company's debt, certain vendor obligations, transaction costs and related
expenses, certain employee benefit payments, and funding for the Bliss profit
sharing plan.
In the quarter ended June 30, 1998, the Company recorded an additional gain of
$1,702,100 ($1,123,376 net of taxes) related to the final undisputed portion of
the purchase price adjustment, as well as the funds related to escrow. Any
unresolved disputed items resolved in the Company's favor will be recorded as a
gain on disposal upon resolution.
On March 31, 1998, the Company completed the sale of certain assets of Household
Rental Systems to Integrated Capital Management Group for $1,050,000. The
proceeds from this transaction were received in April 1998. 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 from the sale of $436,900.
On April 29, 1998, the Company sold substantially all the assets of Health-Mor
Personal Care Corporation, its marketer of the AdvantaJet needle-free insulin
injector and other health care products. These assets were sold to Eidolon
Corporation, a Canadian company, for $89,100. As a result of the sale, the
Company recorded an additional loss on disposal of $315,000 ($195,300 net of
taxes) in the quarter ended March 31, 1998.
Sales applicable to the discontinued operations for the three months ended June
30, 1998 and 1997 were $-0- and $20,701,500, respectively, and $34,174,600 and
$56,647,200 for the nine months ended June 30, 1998 and 1997, respectively.
3. INVENTORIES
Inventories at June 30, 1998 and September 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
June 30, September 30,
---------- -------------
<S> <C> <C>
Finished goods $2,849,119 $2,438,282
Work-in-progress, raw
materials
and supplies 2,107,372 1,714,576
========== ==========
$4,956,491 $4,152,858
========== ==========
</TABLE>
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4. 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. 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 facility is recorded in long-term
debt on the Consolidated Condensed Balance Sheet for the period ended June 30,
1998.
5. LONG-TERM COMPENSATION PLAN
On March 25, 1998, restricted stock agreements were finalized with three of the
Company's executives in lieu of a deferred bonus agreement outlined in fiscal
year 1997. Under the terms of such agreements, each employee 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 Condensed
Balance Sheet. In July 1998, 60,200 unvested shares were forfeited by Mark A.
Kirk upon his resignation as President and Chief Executive Officer of the
Company.
6. LITIGATION
The Receiver of the Health Mor B.V. bankruptcy estate commenced litigation
against HMI Industries Inc and one of Health Mor B.V.'s Managing Directors, Mr.
Kevin Dow, on or about December 3, 1997, in bankruptcy case asserting that HMI
Industries Inc 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. The Company believes that this
litigation will be settled during the fourth quarter 1998 for less than
$100,000. Accordingly, the Company has recorded an accrual in the quarter ended
June 30, 1998.
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7. RELATED PARTY TRANSACTIONS
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.
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. The note receivable of $228,414 is reflected in current
assets as a note receivable at September 30, 1997. 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.
PART I - ITEM 2
- ---------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis contained in this section relates only to the
continuing operations of the Company.
RESULTS OF OPERATIONS
NET PRODUCT SALES- Net product sales for the quarter ended June 30, 1998
decreased by $874,200 or 8.0% in the comparable quarter of fiscal 1997. Net
product sales of $29,198,000 for the nine months ended June 30, 1998 represent a
decline of $9,776,000 or 25.1% compared to $38,974,000 for the nine months ended
June 30, 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 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.
8
<PAGE> 10
FINANCING REVENUE- Financing revenue represents the interest and fees generated
on the contracts financed by the Company's Australian, Canadian, and United
States Subsidiaries. The decline in financing revenue is primarily attributable
to the Company's decision in January 1998 to discontinue the financing of
contracts to the 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 revenue, for the quarter
ended June 30, 1998 was $2,284,800, or 22.6 %, as compared to $2,433,400, or
22.2%, in the quarter ended June 30, 1997. Gross profit, exclusive of financing
revenue, for the nine months ended June 30, 1998 was $8,423,300, or 28.8%,
compared to $10,963,200, or 28.1%, for the comparable period. As a result of the
discontinuance, in December 1997, of the Elektrapure product line 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, related primarily to the Elektrapure line. Exclusive of this
special charge the gross margin percentage for the quarter and nine months ended
June 30, 1998 would have been 28.0% and 30.6%, respectively. This improvement in
the gross margin percentage, exclusive of the special charge, 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.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general and administrative
("SG&A") costs decreased by $2,167,500 for the quarter ended June 30, 1998
versus the comparable quarter of fiscal 1997. SG&A expenses for the nine months
ended June 30, 1998 were $4,691,700 lower than the comparable period in fiscal
1997. Included in these 1998 year-to-date costs are severance charges of
$239,000 related to the reduction of the Company's salaried personnel in January
1998, bad debt expense of $1,873,000, offset by a reduction in employee
incentive expenses of $599,300. The expense for bad debt 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. SG&A was higher as a percent of
sales due to depressed sales volume in the first nine months of 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 include implementation of a cash basis
policy for North American distributors effective January 1, 1998 and targeting
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.
INTEREST EXPENSE - Interest expense for the quarter ended June 30, 1998 was
$553,600 lower than the comparable quarter due primarily to lower outstanding
balances on the credit facility as the Star Bank credit facility was retired
from the proceeds of the Bliss sale (See Note 4 to Consolidated Condensed
Financial Statements). Interest expense for the nine months ended June 30, 1998
was $1,338,000 compared to $1,647,900 for the nine months ended June 30, 1997.
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<PAGE> 11
DISCONTINUED OPERATIONS. No income or loss from discontinued operations was
recorded in the quarter ended June 30, 1998. The Company recorded pre-tax
combined income from Tube-Fab, and Health-Mor Personal Care Corp. of $336,100
for the nine months ended June 30, 1998. The Company recorded pre-tax income
from Bliss of $361,400 for the nine months ended June 30, 1998. The Company's
steam cleaning business, Household Rental Systems, recorded pre-tax income of
$10,200 for the nine months ended June 30, 1998.
Sales applicable to the discontinued operations for the quarters ended June 30,
1998 and 1997 were $-0- and $20,701,500, respectively. For the nine months ended
June 30, 1998 and 1997 sales were $34,174,600 and $56,647,200, respectively.
YEAR 2000 - Customary computer programming changes, developed prior to the
upcoming change in the century becoming a concern, have used two digits rather
than four to identify the year in a date field. If not corrected, many computer
applications may fail to treat year 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 failure 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.
The Company has performed a detailed review and assessment of the impact of the
Year 2000 issue on its continuing operations, addressing both information
technology ("IT") and non-IT systems. In connection with this review, the
Company believes that the remaining costs to be incurred to address the Year
2000 issue subsequent to June 30, 1998 will not have a material adverse impact
on the Company's future operating results, financial condition, or cash flows.
During fiscal 1997 and 1996, the Company implemented new information systems
throughout its continuing operations which are Year 2000 compliant. The
Company's remaining Year 2000 issue activities consist of replacing a minimal
amount of older personal computer equipment and investigating the status of Year
2000 compliance for its major suppliers and other providers. While the Company
is beginning its investigation of such other parties (principally of its
suppliers and other providers), there can be no assurance that the Year 2000
issues confronting such other parties and any failure on their part to timely
address them will not have a material adverse effect on the Company.
The Company has not yet accessed the most reasonably likely worst case Year 2000
scenarios or their effect on the Company's results of operations, liquidity, and
financial condition. The Company intends to analyze the consequences of any
possible events, trends or uncertainties regarding worst case Year 2000
scenarios in the coming months.
10
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The working capital balance at June 30, 1998 was $6,315,300, an increase of
$3,479,900 from the September 30, 1997 balance of $2,835,400. Cash flows from
operating activities utilized net cash of $6,689,700 for the nine months ended
June 30, 1998, principally due to decreases in payables and other accrued
liabilities and an increase in inventories, offset by a decrease in receivables.
The decrease in receivables of $2,084,200 was due primarily to lower sales and
tighter credit terms associated with the cash basis sales policy in North
America. Inventories increased by $1,805,100 due primarily to higher inventory
levels at Bliss required to support higher sales levels in the second fiscal
quarter and increased consumer goods inventory due to lower than anticipated
sales in the third quarter of 1998. Accounts payable decreased by $2,944,200
primarily due to an improved liquidity position. The decrease in accrued
liabilities of $2,393,800 is a direct result of decreases in accrued group
insurance, severance, employee incentives, and other operating accruals. The
aforementioned variances relate to information in the Consolidated Condensed
Statements of Cash Flow in which items relating to discontinued operations
have not been disaggregated as they have in the Consolidated Condensed Balance
Sheet.
On March 27, 1998, the Company completed the sale of Bliss to an investor group
led by Mr. Dunn and the Buyer (See Note 2 to Consolidated Condensed Financial
Statements). Proceeds from the sale were applied to the retirement of
substantially all of the Company's debt (see Note 4 to Consolidated Condensed
Financial Statements), certain vendor obligations, transaction costs and related
expenses, certain employee benefit payments, and funding for the Bliss profit
sharing plan. The Company expects to receive additional proceeds from the sale
of Bliss in the fourth quarter of fiscal 1998, pending agreement between the
Company and the Buyer on the final closing balance sheet.
In April 1998, the Company received proceeds of $1,050,000 in connection with
the sale of the Household Rental Systems.
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. 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 facility is recorded in long-term
debt on the Consolidated Condensed Balance Sheet for the period ended June 30,
1998.
The Company anticipates 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.
11
<PAGE> 13
CAUTIONARY STATEMENT FOR "SAFE HARBOR"
PURPOSES UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of the Federal securities laws. As a general matter, forward-looking
statements are those focused upon future plans, objectives or performance as
opposed to historical items and include statements of anticipated events or
trends and expectations and beliefs relating to matters not historical in
nature, 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,
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 "Liquidity and Capital Resources" concerning proceeds
that the Company expects to receive from the finalization of the Bliss closing
balance sheet and sufficiency of funds for the Company's capital requirements.
Such forward-looking statements are subject to certain uncertainties including
the determination of the final purchase price adjustment from 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.
12
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits
----------------------
10.00 Material Contracts Health-Mor Personal Care Corporation
Purchase Agreement, incorporated by
reference from Form 10-Q for the quarter
ended March 31, 1998
27.00 Financial Data Schedule
(b) Reports on Form 8-K
------------------------
On April 8, 1998, the Company filed a Form 8-K with the Commission, announcing
the March 27, 1998 sale of its subsidiary Bliss Manufacturing to Rhone Capital
L.L.C. Pro-forma financial information was incorporated by reference to Schedule
14A filed with the SEC on March 12, 1998.
13
<PAGE> 15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMI Industries Inc.
-------------------
(Registrant)
Date: August 13, 1998 /s/ Julie A. McGraw
--------------- -------------------
Corporate Controller and Chief
Accounting Officer
14
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