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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 period ended December 29, 1996
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number: 0-19912
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Health o meter Products, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 36-3635286
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24700 Miles Road, Bedford Heights, Ohio 44146-1399
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(Address of principal executive offices) (Zip Code)
(216) 464-4000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 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 90 days.
Yes X No
------ ----
As of January 31, 1997, the issuer had 9,080,534 shares of common stock
outstanding.
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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 period ended December 29, 1996
-----------------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number: 33-80000
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Health o meter, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 36-3330781
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24700 Miles Road, Bedford Heights, Ohio 44146-1399
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 464-4000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 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 90 days.
Yes X No
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The Registrant is a wholly-owned subsidiary of Health o meter Products,
Inc. Accordingly, none of its equity securities are owned by non-affiliates.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTH O METER PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
December 29 September 29
1996 1996
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(Unaudited)
ASSETS
Current assets
Cash $ 2,315 736
Trade accounts receivable, net 66,123 57,960
Inventories 44,036 43,626
Deferred income taxes 5,206 5,206
Other current assets 1,091 1,479
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Total current assets 118,771 109,007
Property, plant and equipment, net 17,520 18,522
Other assets
Excess of cost over fair value
of net assets acquired, net 138,846 139,830
Deferred financing costs, net 4,365 4,579
Other 1,669 1,552
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Total other assets 144,880 145,961
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Total assets $281,171 273,490
======== ========
(Continued)
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HEALTH O METER PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
December 29 September 29
1996 1996
------------ ------------
(Unaudited)
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 6,000 6,000
Accounts payable 22,711 22,851
Accrued liabilities 23,744 19,542
--------- ---------
Total current liabilities 52,455 48,393
Long-term debt
Revolving Credit Facility 45,900 41,600
Term Note 59,000 60,250
Senior Subordinated Notes 68,737 68,681
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Total long-term debt 173,637 170,531
Product liability 3,513 3,516
Other 2,068 2,043
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Total liabilities 231,673 224,483
Stockholders' equity
Common stock, par value $.01 per share;
authorized 20,000 shares; issued
and outstanding 9,080 shares 91 91
Paid-in capital 51,772 51,772
Warrants 1,773 1,773
Accumulated deficit (4,138) (4,629)
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Total stockholders' equity 49,498 49,007
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Total liabilities and stockholders' equity $ 281,171 273,490
========= =========
See accompanying notes to consolidated financial statements.
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HEALTH O METER PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THIRTEEN WEEKS ENDED
--------------------------
DECEMBER 29 DECEMBER 31
1996 1995
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Net sales $ 87,136 97,407
Operating costs and expenses
Cost of goods sold 61,077 66,863
Selling, general and
administrative expenses 19,055 18,802
Amortization of intangible assets 984 1,000
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Total operating costs and expenses 81,116 86,665
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Operating income 6,020 10,742
Interest expense 4,982 5,097
Other income (189) (70)
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Income before income taxes 1,227 5,715
Income tax expense 736 3,738
-------- --------
Net income $ 491 1,977
======== ========
Net income per share $ 0.05 0.22
======== ========
Weighted average shares outstanding 9,080 9,071
See accompanying notes to consolidated financial statements.
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HEALTH O METER PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
Thirteen weeks ended
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December 29 December 31
1996 1995
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Cash flows from operating activities
Net income $ 491 1,977
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation and amortization
of plant and equipment 1,730 1,473
Amortization of intangible assets 984 1,000
Amortization of deferred financing costs 214 215
Accretion of debt discount 56 56
Changes in
Accounts receivable (8,163) (17,083)
Inventories (410) (1,757)
Other assets 271 787
Accounts payable (140) 963
Accrued liabilities 4,202 9,197
Noncurrent liabilities 22 265
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Net cash used in operating activities (743) (2,907)
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Cash flows from investing activities
Capital expenditures (728) (853)
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Net cash used in investing activities (728) (853)
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Cash flows from financing activities
Proceeds from revolving credit facility 19,900 26,800
Repayments of revolving credit facility (15,600) (20,700)
Repayment of long-term debt (1,250) (1,250)
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Net cash provided by financing activities 3,050 4,850
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Increase in cash 1,579 1,090
Cash at beginning of the period 736 835
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Cash at end of the period $ 2,315 1,925
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 2,375 2,505
Income taxes 415 --
See accompanying notes to consolidated financial statements.
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HEALTH O METER PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(1) Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany
accounts and transactions are eliminated in consolidation.
In the opinion of management, the information furnished herein includes
all adjustments of a normal recurring nature that are necessary for a
fair presentation of results for the interim periods shown in
accordance with generally accepted accounting principles. The unaudited
interim consolidated financial statements have been prepared using the
same accounting principles that were used in preparation of the
Company's annual report on Form 10-K for the year ended September 29,
1996, and should be read in conjunction with the consolidated financial
statements and notes thereto. Because of the seasonal nature of the
small appliance and consumer scale industries, the results of
operations for the interim period are not necessarily indicative of
results for the full fiscal year.
(2) Inventories
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The components of inventories are as follows:
December 29 September 29
1996 1996
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Inventories at FIFO cost
Raw materials and purchased parts $14,906 13,446
Finished goods 28,541 29,591
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43,447 43,037
Excess of LIFO cost over FIFO 589 589
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Inventories $44,036 43,626
======= =======
Work-in-process inventories are not significant and are included with
raw materials. Inventories accounted for under the last-in, first-out (LIFO)
method represent 58 percent and 62 percent of inventories at December 29, 1996
and September 29, 1996, respectively.
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HEALTH O METER PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(3) Condensed Consolidated Financial Information
--------------------------------------------
Condensed consolidated financial information for Health o meter, Inc.
at December 29, 1996 and September 29, 1996, and for the thirteen-week
period ended December 29, 1996 and December 31, 1995 is as follows:
December 29 September 29
1996 1996
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Current assets $ 118,771 109,007
Noncurrent assets 162,400 164,483
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Total assets $ 281,171 273,490
========= =========
Current liabilities $ 52,455 48,393
Noncurrent liabilities 179,218 176,090
Intercompany payables 47,658 47,658
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Total liabilities 279,331 272,141
Stockholder's equity
Common stock - $.01 par value;
1,000 shares authorized and outstanding 10 10
Paid-in capital 2,811 2,811
Accumulated deficit (981) (1,472)
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Total stockholder's equity 1,840 1,349
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Total liabilities and stockholder's equity $ 281,171 273,490
========= =========
Thirteen-week period ended
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December 29 December 31
1996 1995
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Net sales $ 87,136 97,407
Gross profit 26,059 30,544
Net income 491 1,977
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY OVERVIEW
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Health o meter Products, Inc. (the "Company") is a holding company
which, through its wholly owned subsidiary, Health o meter, Inc. ("Health o
meter"), designs, manufactures, markets, and distributes a comprehensive line of
consumer and professional products. The Company's consumer products, marketed
under the Mr. Coffee(R) and Health o meter(R) brand names include automatic drip
coffeemakers, iced teamakers, hot teamakers, filters, water filtration products,
accessories, and other kitchen counter top appliances as well as bath, kitchen,
and diet scales and therapeutic devices. Professional products include the
Pelouze(R) and Health o meter(R) brands of office, food service, and medical
scales and timers.
RESULTS OF OPERATIONS
- ---------------------
Thirteen Weeks ended December 29, 1996 and December 31, 1995
Overview. Net sales in the first quarter of fiscal 1997 decreased
approximately 10.5 percent to $87.1 million, compared with $97.4 million for the
same period in fiscal 1996. The Company's gross profit in the first quarter of
fiscal 1997 was $26.1 million, or approximately 29.9 percent of net sales,
compared with $30.5 million, or approximately 31.4 percent of net sales in the
same period in fiscal 1996.
Net Sales and Gross Profit
Consumer Products Division. In the first quarter of 1997, the Consumer
Products Division's net sales were $77.1 million compared with $88.3 million in
1996, a decrease of 12.6 percent. The decrease in net sales was primarily
attributable to reduced sales of iced teamakers, hot teamakers and consumer
scales somewhat offset by increased sales of water and therapeutic products. The
Consumer Products Division's gross profit in the first quarter of 1997 decreased
16.2 percent to $23.0 million from $27.4 million in 1996. As a percent of net
sales gross profit margin was 29.8 percent in 1997, compared with 31.0 percent
in 1996, a decline of 3.9 percent. Lower margins in the Company's iced teamaker
and hot teamaker product lines, somewhat offset by improved margins in the
espresso/cappuccino, water filter pitcher and consumer scale product lines, were
the primary factors driving these results. The Company's automatic hot teamaker,
Mrs. Tea(TM), was a recently introduced product in 1996 while the Company's
water and therapeutic products are recently introduced products in 1997.
Historically, gross margins on individual product lines have been greatest near
the point of introduction and gradually decreasing as the product matures and
becomes subject to pricing pressure. There continues to be intense pressure on
retail prices and there can be no assurance as to the Company's ability to
achieve price increases or maintain current price levels in the future. For
these reasons, the
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Company continues its efforts to introduce new products and to reduce the cost
of existing products as a means of protecting margins.
Professional Products Division. In the first quarter of 1997, the
Professional Products Division's net sales increased 9.5 percent to $10.0
million compared with $9.1 million in 1996. The Company experienced increased
sales in the first quarter of 1997 of its commercial products and in its
international sales channel, while its medical, office and food product lines
sales levels were comparable with the same period in 1996. The Professional
Products Division's gross profit was $3.1 million, or 31.1 percent of net sales,
in the first quarter of 1997, compared with $3.1 million, or 34.5 percent of net
sales, in 1996. Reduced gross profit as a percent of net sales in the medical
and commercial product lines and lower margins in the international sales
channel due to an unfavorable sales mix shift from higher margin medical
products were the primary causes of the reduced gross profit margin.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses ("SG&A") for the first quarter of fiscal 1997 totalled
$19.1 million, or approximately 21.9 percent of net sales, compared with $18.8
million, or approximately 19.3 percent of net sales, for the first quarter of
fiscal 1996. The increase in SG&A as a percentage of net sales is primarily
attributable to higher national advertising expenditures to support the
marketing of products such as the Mrs. Tea(TM) automatic hot teamaker line and
the Health o meter(R) Water by Culligan(R) water filter pitchers.
Amortization of Intangible Assets. The amortization of intangible
assets relates primarily to intangible assets associated with the acquisition of
Mr. Coffee, inc. in August 1994.
Interest Expense. Net interest expense for the first quarter of fiscal
1997 was approximately $5.0 million, compared with $5.1 million for the same
period in the prior year.
Income Taxes. The effective tax rate was 60.0 percent for the first
quarter of fiscal 1997, compared with 65.4 percent in 1996. Expenses not
deductible for tax purposes, primarily the amortization of intangible assets
associated with the acquisition, resulted in an effective tax rate significantly
higher than the statutory tax rate in both periods.
Net Income. Based on the foregoing, the Company achieved net income of
approximately $0.5 million in the first quarter of fiscal 1997, compared with
approximately $2.0 million in the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of liquidity are internally generated
cash and borrowings under a Credit Agreement among Health o meter and a group of
Banks represented by Banque Nationale de Paris, New York Branch ("BNP") as agent
and as issuer of letters of credit, ("the Bank Credit Agreement") entered into
in connection with the acquisition by the Company of Mr. Coffee, inc. on August
17, 1994 ("the Acquisition").
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Cash flow activity for the first quarters of fiscal 1997 and 1996 is
presented in the Consolidated Statements of Cash Flows. During the first quarter
of fiscal 1997, the Company required approximately $0.7 million in cash flow to
sustain its operating activities. Net income plus non-cash charges generated
approximately $3.5 million, while changes in working capital components required
approximately $4.2 million. The increase in accounts receivable, which required
approximately $8.2 million, is attributable to seasonally higher sales activity.
The increase in inventories required $0.4 million. The increases in accounts
receivable and inventories were partially offset by an increase in accrued
liabilities which generated $4.1 million. Accrued liabilities increased due to
increases in accrued interest and certain volume related direct selling expense
accruals.
The Company's business is somewhat seasonal, with a large portion of
its sales and earnings generated in the fourth calendar quarter of the year.
During fiscal 1996, the Company generated approximately 34 percent of its annual
net sales in this quarter.
The Company's aggregate capital expenditures during the first quarter
of fiscal 1997 were approximately $0.7 million. The Company anticipates making
$7.2 million of capital expenditures for the remainder of fiscal 1997. These
capital expenditures relate primarily to new product tooling, information
systems and production equipment. Management plans to fund these capital
expenditures with available cash, cash flow from operations and, if necessary,
borrowings under the revolving credit facility provided under the Bank Credit
Agreement.
Indebtedness incurred in connection with the Acquisition has
significantly increased the Company's cash requirements and imposes various
restrictions on its operations. The Acquisition and related transactions were
financed with approximately $98 million in borrowings under the Bank Credit
Agreement, approximately $70 million in proceeds from a unit offering of 13%
senior subordinated notes due 2002, (the "Notes") and warrants to purchase
shares of Common Stock at a price of $6.25 per share, and approximately $17.2
million in net proceeds received from the exercise of certain transferable
rights to purchase 3,543,433 shares of Common Stock issued to the stockholders
of the Company. The Notes are generally not redeemable at the option of the
Company until August 15, 1999. Subject to certain conditions, at any time
through August 17, 1997, up to 35 percent of the initial principal amount of the
Notes originally issued may be redeemed with the net proceeds of one or more
public offerings of equity securities of the Company or Health o meter at a
redemption price of 110% of the principal amount thereof, together with accrued
and unpaid interest. For more detailed information, see the Company's Annual
Report on Form 10-K for the year ended September 29, 1996.
The Bank Credit Agreement includes a $75.0 million term loan facility,
which is subject to amortization on a quarterly basis in aggregate annual
amounts of $6.0 million, $8.75 million, $17.5 million, $15.0 million and $19.0
million during fiscal 1997 through fiscal 2001, respectively, and a $60.0
million revolving credit facility. Health o meter is required to make
prepayments on the Term Loan and Revolving Credit Facility with a percentage of
Excess Cash Flow (as defined) and 100% of the proceeds from certain asset sales,
issuances of debt and equity securities and extraordinary items outside the
ordinary course of business. The required term loan repayment for fiscal 1997,
which was paid in the second quarter of 1997, is
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$1.0 million. Health o meter may also make optional prepayments, in full or in
part, on the Term Loan.
The Bank Credit Agreement and the indenture governing the Notes
contain various customary covenants which the Company was in compliance with at
December 29, 1996. Borrowing availability under the revolving credit facility at
December 29, 1996 was $15.8 million after considering outstanding letters of
credit of $1.3 million, actual borrowings of $45.9 million, and sufficiency of
collateral. Health o meter's obligations under the Bank Credit Agreement are
secured by substantially all of Health o meter's assets and a pledge of all of
its issued and outstanding common stock. Health o meter's obligations under the
Bank Credit Agreement and the Notes are guaranteed by the Company.
Based upon current levels of operations, anticipated sales growth and
plans for expansion, management believes that the Company's cash flow from
operations (including favorable cost savings estimated to be achieved in the
future), combined with borrowings available under the Bank Credit Agreement,
will be sufficient to enable the Company to meet all of its cash operating
requirements over both the short term and the longer term, including scheduled
interest and principal payments, capital expenditures and working capital needs.
This expectation is predicated upon continued growth in revenues in the
Company's core businesses consistent with historical experience, achievement of
operating cash flow margins consistent with historical experience, and the
absence of significant increases in interest rates.
INFLATION
- ---------
Increases in interest rates, the costs of materials and labor, and
Federal, state and local tax rates can significantly affect the Company's
operations. Management believes that the current practices of maintaining
adequate operating margins through a combination of new product introductions,
product differentiation, cost reduction, outsourcing, manufacturing and overhead
expense control and careful management of working capital are its most effective
tools for coping with inflation.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
During 1995, the Financial Accounting Standards Board issued two
pronouncements which are effective for financial statements for years beginning
after December 15, 1995. The Company has considered the requirements of
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and has determined that it will not require
recognition of any impairment losses. The Company has also determined to remain
within the accounting prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees, and accordingly the implementation of Statement No. 123,
Accounting for Stock-Based Compensation will result in additional disclosures
without any impact on the statements of operations or financial condition.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) See the Exhibit Index at page 13 of this Form 10-Q.
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
SIGNATURE
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.
HEALTH O METER PRODUCTS, INC.
HEALTH O METER, INC.
Date: February 11, 1997 /s/ Steven M. Billick
--------------------------------
Steven M. Billick
Senior Vice President, Treasurer
and Chief Financial Officer
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Exhibit Index
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Exhibit Number Description of Document
- -------------- -----------------------
10.20 Employment Agreement between the Company and
C. Wayne Morris dated October 7, 1996*
27 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
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