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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, 2000
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
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(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
6000 Lombardo Center, Suite 500, Seven Hills, Ohio 44131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 986-8008
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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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
October 31, 2000 was approximately $2,712,400.
Class Outstanding at October 31, 2000
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Common stock, $1 par value per share 6,666,731
The following documents are incorporated by reference in this Form 10-K.
Portions of the Proxy Statement for the 2000 Annual Meeting, incorporated into
Part III (Items 10, 11, 12 and 13).
Index to Exhibits is found on pages 50-51.
This report consists of 52 pages.
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TABLE OF CONTENTS
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PART I...................................................................................................2
ITEM 1. BUSINESS.....................................................................................2
ITEM 2. PROPERTIES...................................................................................9
ITEM 3. LEGAL PROCEEDINGS............................................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................9
PART II.................................................................................................10
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................10
ITEM 6. SELECTED FINANCIAL DATA.....................................................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........22
PART III................................................................................................22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT..............................................22
ITEM 11. EXECUTIVE COMPENSATION......................................................................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................22
PART IV.................................................................................................23
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................23
SIGNATURES..............................................................................................24
INDEX TO FINANCIAL STATEMENTS...........................................................................25
INDEX TO EXHIBITS.......................................................................................50
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PART I.
(DOLLARS IN THOUSANDS)
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Our Company, HMI Industries Inc., is a worldwide, direct selling company engaged
in the manufacture and sale of high filtration portable surface cleaners,
portable room air cleaners and central vacuum cleaning systems. Our high
filtration portable surface cleaner and portable room air cleaner are sold under
the trade names Filter Queen(R), Princess(R), Majestic(R), Empress(R) and
Defender(R) (portable room air cleaner only) and our central vacuum cleaning
system is sold under the trade names Vacu-Queen(R) and Majestic II(R).
Although we were known as Health-Mor Inc. until 1995, when our name was changed
to HMI Industries Inc., we continue to distribute our products under the
Health-Mor brand name. HMI was reorganized in 1968 in Delaware, succeeding an
Illinois corporation formed originally in 1928. In order to more fully automate
our assembly and distribution, in January 2000 we moved all production areas to
a newer and more efficient facility, in Strongsville, Ohio. Also in January
2000, our sales, marketing and executive personnel relocated to our new
corporate world headquarters at 6000 Lombardo Center, Seven Hills, Ohio.
DISCONTINUED OPERATIONS
In fiscal 1997, we decided to sell our non-core-manufactured products businesses
and any under performing consumer goods product lines. As a result of this
decision, Bliss Tubular Products, which engaged in the bending of aluminum,
steel and copper tubing, was sold in fiscal 1997. In fiscal 1998, HMI sold the
following subsidiaries:
- - Tube-Fab Ltd., a Canadian subsidiary which manufactured tubular products
for the aircraft, military, communications, and specialty architectural
industries, and manufactured precision machined products for aircraft
engines for the aerospace industry;
- - Bliss Manufacturing Company, an Ohio subsidiary which manufactured sheet
metal stamping and sub-assemblies, and painting and welding, for the
automotive and truck manufacturing, materials handling equipment, military
and plumbing industries;
- - Household Rental Systems, a Canadian entity that sold and leased carpet
cleaning systems; and
- - Health-Mor Personal Care Corp., a Delaware subsidiary which sold needleless
insulin injectors.
We discontinued selling the Optima(R) portable canister vacuum and the Princess
2000(R) upright vacuum cleaner in 1997, and discontinued the Elektrapure(R)
portable canister vacuum product in 1998. Sale of the SuperNaturals(R) brand of
cleaning products was ended in 1997, and the Home Impressions product lines were
discontinued in 1997, with the exception of the Vacu-Queen(R) central vacuum
cleaning system.
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In 1998, our financing subsidiaries, Health-Mor Acceptance Corporation
(incorporated in Delaware), HMI Acceptance Corporation (organized in Ontario,
Canada) and Health-Mor Acceptance PTY Ltd. (organized in Sydney, Australia),
discontinued the financing of contracts to end customers.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Our continuing operations consist of a single operating segment. See Note 11 of
the Notes to the Consolidated Financial Statements found on page 45 for further
information.
NARRATIVE DESCRIPTION OF BUSINESS
Consumers have become increasingly aware of the potential health concerns posed
by indoor air quality. We regard ourself as a leader in the management of indoor
air quality by offering a complete solution that keeps indoor air cleaner and
safer to breathe. We believe that people with and without respiratory problems
will notice the benefits of cleaner indoor air that can be derived from using
our products.
According to the U.S. Environmental Protection Agency, most people spend as much
as 90% of their time indoors and over half of that time in their own homes. The
EPA has suggested that air levels of many pollutants inside one's own home may
be two to five times, and sometimes 100 times, higher than outdoor levels. The
Centers for Disease Control and Prevention have reported that the estimated
number of asthma sufferers has risen from 6.7 million in 1980 to 13.8 million in
1994, and the American Lung Association has reported a 61 percent increase in
asthma prevalence between 1982 and 1994. Among chronic illnesses in children,
asthma is the most common. Approximately 33 percent of asthma patients are under
the age of 18. According to the American Lung Association, more than 5,600
people die of asthma in the U.S. annually. This represents a 45.3 percent
increase in asthma related mortality between 1985 and 1995. The American Lung
Association has also stated that controlling the home environment is a very
important part of asthma and allergy care.
PRODUCTS AND DISTRIBUTION
Our principle products include a high filtration portable surface cleaner that
is marketed as a healthier alternative to the typical vacuum cleaner, and a
portable room air cleaner that helps to remove particles, gases and odors from
the air. The two products are sold together as a complete Filter Queen Indoor
Air Quality System(TM) in some parts of the world. In other areas, primarily
Asia and Europe, the two products are sold separately.
Filter Queen uses a patented multifiltration system consisting of Cellupure(R),
MEDIPure(R), and Enviropure(R) filter cones and cartridges. The Filter Queen
Indoor Air Quality System(TM) is designed and proven to remove airborne
particles and allergens such as dust, smoke, pollen, mold spores, animal dander,
dust mites and harmful fibers that may lead to allergic reactions. Independent
tests confirm that the Filter Queen Indoor Air Quality System(TM), when used
with the above named filters and cartridges, removes 99.98% of particles at .01
micron, that is better than HEPA (high efficiency particulate arrestance
technologies), the industry standard.
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We also sell a residential built-in vacuum system. Our central vacuum system is
quieter than competing models because the power unit is installed in a location
separated from the living area and is made of ABS plastic to further insulate
the noise it produces. Built-in vacuum systems are typically installed in either
the garage, basement, or a closet. Plastic piping runs through the walls of the
home from the unit to various inlets, which have been strategically placed
throughout the home. When a vacuum hose end is placed into an inlet, the
built-in vacuum system's power unit is activated. A built-in system offers the
convenience of carrying only a power nozzle and hose. Built-in vacuum systems
are extremely popular in Canada and in some parts of Europe.
Our built-in vacuum system is sold in homes through direct sales and in retail
outlets. In Canada, the system is marketed side-by-side with our high filtration
portable surface cleaner. We sell two models of our built-in vacuum system. In
Canada, one model is sold through the existing direct sales channel under the
brand name Filter Queen(R). Our other model, the Vacu-Queen(R), is sold in
Canada and the United States through retail vacuum specialty stores. We sell our
central vacuum system in Europe under the Vacu-Queen(R) brand name and under
private label through direct sales channels.
We believe that we offer a superior warranty in the U.S. for our high filtration
portable surface cleaner compared with all other U.S. manufacturers and sellers
of vacuum cleaners. We warrant our surface cleaner for a five-year period from
the date of purchase and offer a warranty for the life of the vacuum for the
replacement of the surface cleaner's motor at a price not to exceed $99 USD.
Outside the U.S., we offer a two-year warranty for our high filtration portable
surface cleaner. The portable room air cleaner is warranted for renewable
one-year periods so long as the main air filter is replaced annually. A
five-year warranty is offered for our built-in vacuum system.
Our distribution system consists of approximately 350 distributors and importers
who sell our products. Our independent authorized distributors and importers
sell our products in more than 40 countries worldwide.
Each distributor and importer has a defined territory in which he or she
maintains the exclusive right to sell our company's products. Each distributor
and importer sells the products to consumers through an in-home presentation
given by a sales associate who, in some parts of the world, has been trained and
certified by independent HMI trainers as an "Indoor Air Quality Specialist." Our
products are sold exclusively through direct, in-home sales as it allows for
greater customer contact and a more complete presentation of the product's
benefits. Distributors are granted the right to market our products using the
demonstration method and utilizing our trademarks. These same distributors and
importers are responsible for providing service and replacement consumables and
supplies to the end-consumers in their territories, which provides them with
another source of revenue and potential referral network.
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U.S. MARKET. In the United States, we sell our high filtration portable surface
cleaner and portable room air cleaner through distributors who sell our products
through sales associates. Those sales associates in turn sell our company's
products directly to end customers.
To aid in the retention of distributors and help with the development of their
professional careers and independent businesses, we developed a unique training
and development program called "The Edge Success Program" (the "Edge"). The Edge
is an innovative, highly structured 12-step program that provides business
training from the earliest level of a new recruit to the most senior level of a
premier master distributor and provides incentives at each level to promote the
development and retention of quality distributors and sales associates. Business
and management training includes a business management correspondence course and
a training seminar, the Business Management Institute, designed in conjunction
with Eckerd College in Florida, and addresses everything from in-home
demonstration technique to generation of sales leads, personnel training,
compliance matters, ownership and operation of a distributorship, and more.
MARKETS OUTSIDE THE U.S. Success in exporting is relatively new to us, occurring
mostly in the last ten years. To sell our products in a foreign market, we
usually engage the services of a single importer to represent our products in
each country. We have less contact with the direct sales networks employed by
importers because we have fewer field staff outside the U.S. to support such
sales networks. Since each country poses its own unique set of challenges (among
others, currency fluctuations, differing political and economic systems, unique
business and legal environments, inconsistent duty and tax requirements, and
even civil unrest and war), it can be very difficult to penetrate a new market
without the help of an individual from that market. As a consequence, we are
dependent on our importers to address those challenges.
MARKETING AND ADVERTISING
Traditionally, we have relied on our distributors to market and sell our
products to consumers. A portion of the sales of our products by our
distributors and their sales associates is dependent on telemarketing as a tool
for developing sales leads and arranging in-home demonstrations of our products
with end-consumers who purchase these products. Recent efforts in Europe and the
U.S. have focused on imposing more restrictions on telemarketing. There can be
no assurance that state regulations will not further restrict telemarketing and
thereby make it increasingly difficult to sell our products with the aid of
telemarketing. Because of these increased regulations and the high relative cost
of telemarketing, many of the distributors have been developing alternative
methods to generate leads for in-home demonstrations. Such alternative methods
include, but are not limited to, setting up displays at trade shows and fairs,
distributing flyers and door hangers, and using customer referral programs.
While we have not marketed or advertised our products directly to consumers, we
have recently started to promote brand awareness to consumers through print ads,
radio, television and the Internet. Although difficult to measure, we have seen
an increase in Internet inquiries, and telephone calls due in large part to our
brand awareness campaign. All inquiries are sorted by zip code and forwarded to
the appropriate Distributor for action.
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In addition to direct advertising, we are able to market our products by radio
endorsements we earned from Olympic Gold Medal swimmer and world record holder
Tom Dolan. Mr. Dolan, who repeated his gold medal performance at the 2000
Olympic Games held in Sydney, Australia, suffers from severe allergies and
asthma and uses the Filter Queen Indoor Air Quality System(TM) as part of a
strategy to improve his indoor air environment and to reduce his incidents of
allergy and asthma attacks. In addition, we have teamed up with the National
Trust for Historic Preservation by exclusively supplying our high filtration
portable surface cleaner to 19 homes of national historic significance under the
National Trust's care. Under the agreement with the National Trust, we are
permitted to advertise and promote the National Trust's choice of the Filter
Queen(R) to take care of damaging dust and dirt in some of America's most
nationally significant homes, including James Madison's Montpelier in Virginia,
Frank Lloyd Wright's home and studio in Oak Park and the Robie House, Cliveden
in Philadelphia, Lyndhurst in Tarrytown, New York and Woodrow Wilson's home in
Washington, D.C.
RAW MATERIAL
We assemble finished parts purchased from various suppliers. The raw materials
used by our manufacturing operations are purchased from a number of suppliers,
and substantially all such materials are readily available.
PATENTS AND TRADEMARKS
We have numerous United States and foreign patents, patent and trademark
applications, registered trademarks and trade names that are used in our
business. We generally own the trademarks under which our products are marketed
and have registered our trademarks and will continue to register and protect
them as they are developed or acquired. We also believe that certain of the
trademarks and trade names are of material importance to the businesses/products
to which they relate and may be of material importance to our company as a
whole. Although protection of our patents and related technologies are important
components of our business strategy, none of the individual patents is believed
to be material to our company. The remaining duration of the patents and
trademarks varies.
SEASONALITY
Our business is typically not seasonal.
MAJOR CUSTOMERS AND DEPENDENCE ON INDEPENDENT DISTRIBUTORS
Sales of our products to three of our international importers accounted for
13.1%, 12.9% and 11.3% of total product sales in fiscal year 2000, and 20.5%,
11.6% and 11.0% of total product sales in fiscal year 1999. In fiscal year 1998,
two international importers accounted for 20.7% and 10.3% of total HMI product
sales. The loss of any significant portion of our sales from these importers,
although believed by HMI management to be unlikely, would have a material
adverse impact on our sales and earnings.
Our revenues, and the stability of such revenues, are dependent on our
relationships with third-party distributors and their sales persons and their
level of satisfaction with us and our products. The distributors are independent
third parties who are not our employees and are not directly
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under our control. There can be no assurance that the current relationships with
distributors will continue on acceptable terms and conditions to us, nor can
there be any assurance that additional distributorship arrangements with third
parties will be obtained on acceptable terms. Moreover, there can be no
assurance that the distributors will devote sufficient time and resources to our
products to enable the products to be successfully marketed. Failure of some or
all of our products to be successfully and efficiently distributed could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
BACKLOG
We operate monthly with a minimal backlog (backlog at September 30, 2000 and
1999 was $19 and $40, respectively).
COMPETITION
We experience strong competition in the sale of our high filtration portable
surface cleaners, central vacuum systems and portable room air cleaners.
Participants in the vacuum and indoor air cleaner industries compete primarily
on price, quality, brand name recognition, product availability and product
performance, including the perceived amount of particles removed by a vacuum
cleaner or air filter. Vacuums and indoor air filters are sold through a variety
of channels, including department stores, discount houses, appliance stores, and
catalogs, generally at substantially lower prices than our products. According
to the Vacuum Dealers Trade Association, 75% of vacuum sales in 1998 were
through retail store outlets and direct-selling companies like HMI sold 25%. We
believe that our high filtration portable surface cleaner is competitive with
other vacuum cleaners because of its superior performance and warranty, as
described in greater detail above under "Products and Distribution."
Our high filtration portable surface cleaner and central vacuum system compete
with many significant vacuum cleaner manufacturers and with regional and private
label manufacturers, including other direct selling companies, such as Rainbow,
Tri-Star, Kirby, Miracle Mate, Electrolux and Water-Matic, and companies that
sell through retail outlets such as Eureka, Hoover, Kenmore and Royal. Our
portable room air cleaner competes with other indoor air cleaners sold by
direct-selling companies such as Alpine, and others that sell through retail
outlets such as Honeywell, Bionaire, Ozone Generators and Ionizer. Many of our
competitors have greater financial, marketing and manufacturing resources and
better brand name recognition than us, and sell their products through broader
and more extensive distribution channels.
RESEARCH AND DEVELOPMENT
Our ongoing research and development program involves creating new products and
redesigning existing products to reduce manufacturing costs and to increase
product quality and efficiencies. During 1998, insignificant monies were
expended on research and development activities. In fiscal year 2000 and 1999,
we invested $643 and $290, respectively, in new product development. We
anticipate expending less money on the development of new products in fiscal
year 2001, than that expended in fiscal 2000.
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ENVIRONMENTAL
To our knowledge, we are in compliance with all applicable Federal, State and
local laws relating to the protection of the environment.
While we anticipate no current expenses for environmental issues, there can be
no assurance that we will not receive claims for environmental conditions in the
future, nor any assurance that any such claims, if received, would not have a
material adverse impact on our financial condition and results of operations.
EMPLOYEES
We employed 113 full-time and 3 part-time employees at September 30, 2000. We
consider our relations with our employees to be good.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Prior to March 1998, one of our major foreign operations had been located in
Canada. As of March 1998, we began selling into Canada through one importer and
all sales previously made by our Canadian operation were ceased. Canadian sales
for the fiscal year ended September 30, 1998 were not considered export sales.
Identifiable revenues of Canadian operations for the year ended September 30,
1998 were $2,219. For the fiscal years subsequent to September 30, 1998, we
considered Canadian sales to be export sales.
Sales to international customers represent 64.4%, 67.0% and 60.9% of net product
sales for the years ending September 30, 2000, 1999 and 1998, respectively.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION AND TERMS OF SERVICE AS OFFICER
- ---------------------------- -------- ----------------------------------------------------------------------------
James R. Malone 57 Chairman and Chief Executive Officer(1)
Carl H. Young III 59 President, Chief Operating Officer and General Counsel(2)
Joseph Najm 42 Vice President-Operations(3)
Julie A. McGraw 36 Vice President, Chief Financial Officer, Treasurer, Corporate Controller,
Chief Accounting Officer and Assistant Secretary(4)
(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 in July 1998.
He served as Executive Vice President, General Counsel, and Assistant
Secretary from May 1997 to July 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.
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(3) Mr. Najm was elected Vice President-Operations in March 1999. He previously
was employed by the Kirby Company as Vice President-Manufacturing from 1995
to 1999. The Kirby Company is a manufacturer of vacuum cleaners.
(4) Ms. McGraw was elected Chief Financial Officer and Treasurer in March 2000,
Vice President in February 1999 and Corporate Controller in March 1998. She
served as Assistant Corporate Controller from July 1996 until March 1998.
From 1994 until July 1996 she was Manager of Corporate Accounting with Moen
Inc., a faucet manufacturer.
ITEM 2. PROPERTIES
The following table sets forth the location, character and size (in square feet)
of the real estate we used in our operations at September 30, 2000:
Location Character Square Feet
- --------------------------- ----------------------------- ---------------
United States of America
Strongsville, Ohio Leased office, manufacturing
and warehouse space 72,991
Seven Hills, Ohio Leased office space 15,706
Naples, Florida Leased office space 2,452
ITEM 3. LEGAL PROCEEDINGS
Claims arising in the ordinary course of business are pending against us.
Although these are in various stages of the litigation process, we believe that
none of these matters will have a material adverse effect on our consolidated
financial position, results of operations or cash flows. Included in the
accompanying Consolidated Balance Sheets at September 30, 2000 and 1999 were
accruals of $177 and $391, respectively, relating to various claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock was listed for trading on the NASDAQ National Market under the
symbol "HMII" until February 10, 1999, the date when it was delisted. The
delisting occurred as the stock no longer met Nasdaq's minimum public float
requirement due to a combination of a decline in the price of our shares of
common stock and a concentration of stock holding. Since February 11, 1999, our
shares have been traded on the OTC Bulletin Board under the symbol "HMII.OB".
As of September 30, 2000, there were approximately 241 stockholders of record.
A summary of the dividends declared and the quarterly high and low sales price
of our common stock on the OTC Bulletin Board and Stock Exchange for the years
ended September 30, 2000 and 1999, are as follows:
2000
High Low Dividend
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1st Quarter 1 3/4 1/2 $ .0000
2nd Quarter 1 5/8 15/16 $ .0000
3rd Quarter 1 9/16 1 1/16 $ .0000
4th Quarter 1 1/2 1 $ .0000
1999
High Low Dividend
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1st Quarter 1 3/4 1 $ .0000
2nd Quarter 1 3/4 1 1/4 $ .0000
3rd Quarter 2 1/4 1 11/32 $ .0000
4th Quarter 2 1 1/4 $ .0000
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 2000 or 1999 as the credit agreement with our
lender presently prohibits us from declaring or paying any dividends.
In November 1999, we announced that we expected to offer for sale up to
2,500,000 shares of our common stock in a transaction exempt from the
registration requirements under federal securities law. On March 1, 2000, we
successfully completed this private offering, at $1.625 per share of Common
Stock, generating approximately $2 million in additional capital. Individuals
affiliated with HMI acquired approximately 71% of the Shares, which were
purchased at a 35% premium over the market value. Net proceeds received from the
sale of the shares will be used for general business purposes and in the
implementation of our strategic initiatives as described below.
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As part of our continuing initiative to streamline costs and restructure our
company to its core business of manufacturing and distributing high filtration
portable surface cleaners, central vacuum systems and portable room air
cleaners, we have developed a strategic plan for growth. We intend to leverage
our position as a leading manufacturer and direct seller of high filtration
portable surface cleaners, central vacuum systems and portable room air cleaners
by undertaking key initiatives that we believe will drive revenues higher and
lower operating costs.
The key initiatives include but are not limited to the following:
- Develop a better trained and more knowledgeable distribution network;
- Increase product awareness and brand recognition;
- Expand the geographic and demographic markets in which our products are
distributed and sold;
- Continue to streamline processes and lower costs; and
- Invest in new infrastructure and pursue additional growth opportunities.
Our plan is to use the proceeds from this offering and funds from operations and
bank financing to implement our strategic plan. Even with the monies raised by
the offering, there can be no assurance that cash generated from operations or
other sources of financing will be available that will enable us to fully
implement the strategic plan. In addition, there can be no assurance that our
financial condition and results of operations will not be materially and
adversely affected if we are unable to fully implement our strategic
initiatives.
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ITEM 6. SELECTED FINANCIAL DATA
In thousands except per share amounts and ratios
2000 1999 1998 1997 1996
-------- -------- -------- --------- ----------
Net Revenue From Continuing Operations $ 34,621 $ 36,927 $ 38,748 $ 49,878 $ 58,821
Cost of Product Sold and SG&A Expenses $ 33,515 $ 38,447 $ 48,203 $ 68,603 $ 63,882
Impairment loss $ --- $ 2,665 $ --- $ --- $ ---
Other Income (Expense), net $ 6 $ 60 $ (1,335) $ (2,038) $ (3,544)
Income (loss) Before Discontinued
Operations and Taxes $ 1,112 $ (4,125) $(10,790) $ (20,763) $ (8,606)
Income (loss) Margin Before
Discontinued Operations and Taxes 3.2% (11.0%) (27.6%) (41.1%) (14.5%)
Income Tax (Benefit) Expense $ (353) $ 116 $ (2,217) $ (7,286) $ (2,838)
Income Tax Rate (31.7%) (2.8%) 20.5% 35.1% 33.0%
Income (loss) Before Discontinued
Operations $ 1,465 $ (4,241) $ (8,573) $ (13,477) $ (5,767)
Income (loss) Margin Before
Discontinued Operations 4.2% (11.4%) (21.9%) (26.7%) (9.7%)
Income (loss) From Discontinued
Operations $ --- $ --- $ 441 $ 2,347 $ (1,966)
Gain (loss) on Disposal $ 425 $ (375) $ 7,157 $ (5,520) $ (2,281)
Net Income (loss) $ 1,890 $ (4,616) $ (975) $ (16,650) $ (10,014)
Net Income (loss) Margin 5.5% (12.4%) (2.5%) (33.0%) (16.8%)
Per Share Data - Basic:
Income (loss) Before Discontinued
Operations $ 0.24 $ (0.81) $ (1.66) $ (2.72) $ (1.18)
Income (loss) From Discontinued
Operations $ --- $ --- $ .09 $ .47 $ (.40)
Gain (loss) on Disposals $ 0.07 $ (0.07) $ 1.38 $ (1.11) $ (0.46)
Net Income (loss) $ 0.31 $ (0.88) $ (0.19) $ (3.36) $ (2.04)
Cash Dividends $ --- $ --- $ --- $ --- $ .263
Weighted Average Number of Common
Shares Outstanding 6,113 5,263 5,170 4,956 4,912
Per Share Data - Diluted:
Income (loss) Before Discontinued
Operations $ 0.24 $ (0.81) $ (1.66) $ (2.72) $ (1.18)
Income (loss) From Discontinued
Operations $ --- $ --- $ .09 $ .47 $ (.40)
Gain (loss) on Disposals $ 0.07 $ (0.07) $ 1.38 $ (1.11) $ (0.46)
Net Income (loss) $ 0.31 $ (0.88) $ (0.19) $ (3.36) $ (2.04)
Cash Dividends $ --- $ --- $ --- $ --- $ .263
Weighted Average Number of Common
Shares Outstanding 6,140 5,263 5,170 4,956 4,912
Total Assets $ 20,843 $ 17,465 $ 24,409 $ 54,590 $ 92,511
Long-Term Debt $ 71 $ --- $ 42 $ 763 $ 22,335
Stockholders' Equity $ 14,394 $ 10,326 $ 14,099 $ 14,552 $ 30,883
Working Capital $ 3,913 $ 612 $ (18) $ 2,680 $ 24,982
Ratio of Current Assets to Current
Liabilities 1.61 1.09 1.00 1.07 1.77
Percent of Earnings on Average
Stockholders' Equity 15.3% (37.8%) (6.80%) (73.3%) (28.1%)
Percent of All Dividends to Net Income --- --- --- --- (12.9%)
Stock High 1 3/4 2 1/4 6 1/2 8 1/8 15
Stock Low 1/2 1 1 1/4 3 7/8 4 3/4
Average Annual Price to Earnings Ratio 3.6 (1.9) (20.6) (1.8) (4.8)
Average Annual Dividend Yield --- --- --- --- 2.7%
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS)
The discussion and analysis contained in this section relates only to our
continuing operations.
RESULTS OF OPERATIONS - 2000 COMPARED WITH 1999
NET PRODUCT SALES- Net product sales of $34,621 for the year ended September 30,
2000, were $2,306 or 6.2% lower when compared to the prior year sales of
$36,927. The decrease in sales is primarily related to the decline of sales in
Asia and Western Europe of $1,831 and $1,571, respectively, offset by increased
sales to Eastern Europe/Middle East of $1,136.
The decrease in Asia is largely the result of decreased Majestic(R) volume,
which was driven primarily by a sales decline in Japan. This situation was being
addressed through a reorganization of the territories within the Japanese
importer's network of distributors. However, in September 2000, the importer, in
the best interest of his network and HMI, made the decision to sell his business
to a group led by the two largest volume distributors in his network and the
former President of his business. The sale was effective October 1, 2000, and
given that this new group has made a substantial investment in their business
which deals with our Filter Queen products, management of HMI anticipates that
this new group of importers will meet or exceed the sales targets for fiscal
2001.
Sales in Western Europe have been adversely effected by decreased sales to our
Holland importer and a major U.K. importer. These decreases were offset by
increased sales to Portugal and Spain, as these two countries continue to grow
their businesses. Holland sales were negatively impacted by the fact that some
of our Eastern European and Middle Eastern distributors have increased their
volume sufficiently enough to be able to order container-sized shipments
directly from us. Accordingly, they no longer need to buy product from our
Holland importer. Decreased sales within his own territory has also added to the
Holland importer's overall sales decline, as telemarketing regulations in this
area have hindered the growth and stability of the direct sales market. Our
major U.K. importer's business suffered when, in the first quarter of fiscal
2000, he lost two master distributors to a competitor. He spent the rest of the
year working to rebuild his network and open new offices. Recently, an English
television news expose on disreputable sales associates (not affiliated with
this importer) demonstrating the Filter Queen(R) product in the U.K., as well as
a truck drivers strike which caused an oil/gas shortage in the U.K., have had an
adverse effect on the importer's attitude toward the business which has
prevented him from making any appreciable recovery during the year. This has
caused him to resign his position as an importer of our product. No details have
been finalized at this time; however, we have opened negotiations with his top
two distributors and it is anticipated that one or both of them will become
importers.
The favorable sales comparison in the Eastern European/Middle Eastern region is
primarily related to increased sales in Norway and Turkey. As previously
discussed these importers have grown their businesses and increased their sales
volume to the point where they are now able to place container-sized orders
directly from us. As such, they are no longer purchasing product from our
Holland importer, as was done in fiscal 1999.
Net product sales are not materially impacted by any changing prices.
GROSS PROFIT- The gross margin for the year ended September 30, 2000, was
$14,173 or 40.9% of sales as compared to $12,829 or 34.7% of sales in 1999. This
increase in the gross margin of
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$1,344 is principally attributed to favorable material and overhead spending
variances of $2,275 and $198, respectively; offset by lower year-to-date sales
volume which negatively impacted the gross margin by $1,129.
Material costs have been reduced due to management's on-going focus to improve
quality and reduce costs. The key areas in which material cost reductions have
been obtained are filtration products, motors and molded plastic parts, as well
as other improvements in the procurement process. Material costs have also been
favorably impacted by reduced obsolescence expense, which was $691 lower than
the prior year due to adjustments recorded in fiscal 1999 for certain motors and
product changes.
Improved purchasing and inventory controls further contributed to the current
year improvement. In addition, our parts specifications have been conveyed
clearly to our suppliers who must meet our specifications. Vendor charge backs
have become the norm when parts fail our quality inspection. Process
improvements and operational efficiencies brought about by Total Quality Control
procedures have reduced direct labor costs in our manufacturing plant. These are
examples of where attention to cost and quality has directly resulted in
improved gross margins.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative
("SG&A") expenses for the year ended September 30, 2000, of $13,067 were
favorable to fiscal 1999 expenses of $14,349 by $1,282. The decrease in SG&A is
primarily attributable to decreases associated with the decreased sales volume,
such as commissions and certain career development expenses, which decreased
$987. Other significant favorable variances were for rental equipment, a
distributor development program and legal and professional fees. Rental
equipment expense is favorable $369 as a result of the cancellation and
subsequent settlement of a computer equipment lease which was accrued for in
fiscal 1999. The distributor development program adjustment was based on the
results of an actuarial study and resulted in a non-cash credit to income of
$332, during the third quarter of fiscal 2000. The actuarial study was
commissioned to refine the existing calculation and to provide the credibility
of a third party verification. Legal and professional expenses were down $327 as
a result of reduced legal activity in this year. Offsetting these favorable
variances were $657 in benefits expense associated with the fiscal year 2000
incentive program.
IMPAIRMENT LOSS - On January 12, 1999, we sold our Cleveland, Ohio facility and
related land to Rose Management Company, a local real estate investment company,
for $840. The net book value of the related land and building at the time of
sale was $3,505. In December 1998, we recorded a non-cash impairment loss of
$2,665 on the building to reflect the difference between the sales price and the
net book value of the property.
INTEREST EXPENSE - Interest expense for fiscal year 2000 was $47, or $24 lower
than fiscal 1999 due primarily to lower outstanding balances on the current
credit facility as compared to that in fiscal 1999.
OTHER (INCOME) EXPENSE - The decrease in other income from $131 in fiscal 1999
to $53 for the year ended September 30, 2000 is primarily associated with the
reclass of financing revenue to this line of our Consolidated Statement of
Operations. Financing revenue represents the interest
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and fees generated on the contracts financed by our Australian, Canadian, and
United States subsidiaries. It was decided in January 1998 to discontinue the
financing of contracts to the end customers. In fiscal 2000, any remaining
monies received relating to this business were recorded to the other
income/expense line of our Consolidated Statements of Operations. Therefore,
finance revenue of $436 and $328 for the years ended September 30, 1999 and
1998, respectively, has been reclassified to conform to the 2000 presentation.
The financing revenue has decreased due to the January 1998 cessation of the
financing of end user purchase contracts by HMI
INCOME TAXES - The effective income tax rate for the year ended September 30,
2000 was (31.7%) compared to (2.8%) in fiscal 1999. The effective tax rate for
fiscal 1999 was attributable to the establishment of a valuation allowance
against 1999 net operating losses offset by a provision for state taxes. The
valuation allowance was established in September of 1999, because although we
had just reported our first profitable quarter in sixteen quarters, management
felt that this was still not enough positive evidence at that time to warrant an
adjustment to the valuation allowance that had been previously established to
reserve a portion of the deferred tax asset. During the first three quarters of
fiscal 2000, we recognized operating profits but utilized the `rolling' method
of accounting for income taxes which resulted in the reduction of the valuation
allowance associated with U.S. deferred tax assets to the extent those assets
were utilized in a given quarter. This method created an effective tax rate of
0% for each quarter. However, as of September 30, 2000, it is management's
belief that enough positive evidence now exists so as to warrant the reversal of
the valuation allowance associated with domestic deferred tax assets. Therefore
the income tax benefit and the effective tax rate for fiscal 2000 primarily
represent the reversal of this portion of the valuation allowance. (See Note 8
to the Consolidated Financial Statements).
GAIN ON DISPOSAL - On March 27, 1998, we completed the sale of, our then
wholly-owned subsidiary, Bliss Manufacturing to an investor group led by Mr.
Mervin Dunn and Rhone Capital L.L.C. pursuant to a Stock Purchase Agreement,
dated December 17, 1997, as subsequently amended. In March 1999, we recorded a
reserve of $425,000 for future environmental damage expenditures pursuant to
section 8.5 of this Purchase Agreement. This amount was recorded as a
conservative estimate of potential liability under the Stock Purchase Agreement
as studies conducted by independent third parties noted no obligations under
existing regulatory guidelines.
On January 21, 2000, Bliss, under the ownership of Rhone Capital L.L.C., filed
Chapter 11 bankruptcy with the Michigan Eastern Bankruptcy Court, in Detroit,
Michigan. Subsequently, all Bliss facilities were auctioned through the
Bankruptcy Court. The indemnification obligation noted in the Stock Purchase
Agreement did not survive the sale through the bankruptcy court, and as a
result, in June 2000 the $425,000 reserve, recorded in accordance with the Stock
Purchase Agreement, was reversed to income and recorded as a gain on disposal of
discontinued operations in the Consolidated Statements of Operations. (See Note
2 to the Consolidated Financial Statements).
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INFLATION - While inflation has not had, and we do not expect it to have, a
material impact upon operating results, there can be no assurances that our
business will not be affected by inflation in the future.
RESULTS OF OPERATIONS - 1999 COMPARED WITH 1998
NET PRODUCT SALES- Product sales for the year ended September 30, 1999 were
$36,927 a $1,821 decrease over fiscal year 1998 product sales of $38,748. This
sales decrease was primarily a result of decreased worldwide After Market Sales
("AMS") offset by increased Majestic(R) sales (our floor care product) in Asia
and increased Defender(R) sales (our portable room air cleaner) in the Americas.
The Americas Majestic(R) sales as well as an increase in trade discounts also
contributed to the decline in sales.
The decrease in worldwide AMS, as compared to fiscal 1998, was attributed
principally to declines in the Canadian and European markets of $871 and $447,
respectively. AMS are sales of additional accessories, consumables (filters and
fragrances), and replacement parts. In March 1998, we changed our Canadian
operations by engaging an importer to manage our distribution network. Because
the Canadian importer has focused principally on maintaining a strong
distributor network and stabilizing sales of the Majestic(R), the AMS program
deteriorated slightly. However, HMI management and the Canadian importer
implemented a new strategy, in the third quarter of fiscal 1999, that they felt
would improve the growth of AMS in Canada. The new strategy added additional
experienced AMS sales support to the Canadian territory and refocused AMS as a
tool for generating sales.
The decrease in European AMS was the direct result of a loss of business in
Russia and its neighboring countries from the economic crisis in that region, an
adjustment in the inventory levels in the Netherlands warehouse, and distributor
cash constraints in the U.K. caused by difficulties in obtaining consumer
financing to complete sale transactions. Consumer financing companies used in
England decreased from four primary lenders to one during the second quarter of
fiscal 1999. To rectify this situation, we negotiated with a consumer finance
professional who identified and established new financial services, while
revitalizing existing relationships for the U.K. network. This relationship
helped to stabilize, in the fourth quarter of fiscal 1999, the difficulties
being experienced in the U.K.
Asian Majestic(R) sales increased $453 from their fiscal 1998 levels largely due
to a return to growth in the Korean market following last year's fallout of the
Asian currency devaluation. This resurgence in the Korean market was slightly
offset by a decline in Japanese Majestic(R) sales as the Japanese market had not
recovered as quickly from the adverse economic conditions in that area.
The Americas Defender(R) sales for fiscal 1999 increased 12% or $325 as compared
to fiscal 1998. The increase in Defender(R) sales was directly attributable to
the repackaging of our products (the Majestic(R) and Defender(R)) as a
side-by-side system rather than as stand-alone products.
While Defender(R) sales rose in the Americas, Majestic(R) sales decreased over
fiscal 1998 by $609 primarily as a result of consumer financing constraints and
lead generation and recruiting
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issues. The availability of consumer financing had diminished following the
merger of Beneficial and Household Finance and Avco Financial Services, the two
largest U.S. consumer credit companies. To assist the distribution network in
obtaining financing, we completed, in the fourth quarter of fiscal 1999, a
national financing deal that we hoped would greatly improve the closing rate of
financed sales transactions in the Americas distribution network. As state
regulations on consumer protection laws impose more restrictions on
telemarketing, many of our distributors had to begin to develop alternative
methods to generate leads for in-home demonstrations. In addition, as the
unemployment rate continues to remain at an all time low, the Americas
distributors had to create new recruiting programs to offset the adverse effect
unemployment has on their ability to recruit new candidates to demonstrate our
products in homes.
To assist the distributors in creating new lead generation and recruiting
programs, as well as aid in the retention of distributors and help with the
development of their professional careers and independent businesses, we
developed a unique training and development program called "The Edge Success
Program" (the "Edge"). The Edge is an innovative, highly structured 12-step
program that provides business training from the earliest level of a new recruit
to the most senior level of a premier master distributor and provides incentives
at each level to promote the development and retention of quality distributors
and sales associates. Business and management training includes a business
management correspondence course and a training seminar, the Business Management
Institute, designed in conjunction with Eckerd College in Florida, and addresses
everything from in-home demonstration techniques to generation of sales leads,
personnel recruiting and training, compliance matters, and other aspects of
owning and operating a distributorship.
Effective January 1, 1998, we implemented in North America a cash-basis sales
policy, which required distributors to purchase inventory from us in cash. This
policy was implemented to negate the deterioration of liquidity, primarily in
the North American distribution network, caused by excess credit granted in
prior years and to improve internal working capital. To encourage distributors
outside of North America to utilize cash-basis sales terms, in late fiscal 1998,
we began offering trade discounts to those distributors that prepaid their sales
orders. Several distributors, primarily in Canada, Japan and Portugal, fully
utilized the availability of these prepayment discounts for all twelve months
ending September 30, 1999. This greater utilization of the discounts in fiscal
1999 versus fiscal 1998 represents the remaining variance between fiscal 1999
and 1998 net product sales.
Net product sales were not materially impacted by any changing prices.
GROSS PROFIT- Gross Profit for fiscal 1999 was $12,829, or 34.7% as compared to
1998 gross profit of $10,885 or 28.1%. The increase in the margin was largely a
result of a reduction in obsolescence, as well as reduced material and overhead
costs coupled with a favorable LIFO adjustment of $485. Offsetting the increase
in the margin were unfavorable variances of approximately $1,395 related to
sales volume and trade discounts.
Obsolescence expense decreased $554 from fiscal 1998 levels primarily as a
result of a special charge recorded in December 1997 for the discontinuance of
the Elektrapure product line. After efforts to sell the line in the first two
quarters of fiscal 1998 proved unsuccessful, we recorded a
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charge in the quarter ended June 30, 1998, of $520 to reduce the Elektrapure
line inventories to their estimated net realizable value.
Reduced material costs, which directly impacted the favorable LIFO adjustment,
were the direct results of the resurgence of the initiatives begun in the fourth
quarter of fiscal year 1997 to strengthen operational processes, reduce cost,
and improve quality. Our focus on quality, reduction of plant spending, and
improved labor efficiencies, netted an additional reduction of $2,149 in
manufacturing overhead expenses. These initiatives became an important part of
our culture as we continuously review our manufacturing cost structure and
operational processes.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general and administrative
("SG&A") expenses for the year ended September 30, 1999 of $14,349 were
favorable to fiscal 1998 expenses of $20,340 by $5,991. The decrease in SG&A
expenses was primarily attributable to decreases in employee related costs of
$1,370, bad debt expense of $2,522, distributor development expenses of $604,
professional and consulting fees of $409 and miscellaneous supplies and utility
expenses of $280. The decrease in bad debt primarily related to $2,358 recorded
in fiscal 1998 for bad debt expense resulting from the continuing deterioration
of the receivables associated with our elimination of credit in North America
and changes in the way we went to market in the retail and Canadian channels. No
such adjustment was necessary in fiscal 1999. The other savings, mentioned
above, were generated by our cost reduction measures undertaken in fiscal 1998
and continuing into fiscal 1999. In fiscal 1998, we downsized our businesses to
one core business segment, downsized our staff to an appropriate level, and
reduced non-sales growth expenses and fixed costs. Further contributing to the
decrease in SG&A expenses was $881 relating to the Canadian and Holland
entities. These operations were downsized in fiscal 1998 as part of our cost
reduction plan.
IMPAIRMENT LOSS - On January 12, 1999, we sold our then current facility and
related land in Cleveland, Ohio, to Rose Management Company, a local real estate
investment company, for $840. The net book value of the related land and
building at the time of sale was $3,505. In December 1998, we recorded a
non-cash impairment loss of $2,665 on the building to reflect the difference
between the sales price and the net book value of the property.
INTEREST EXPENSE - Interest expense for fiscal year 1999 was $71, or $1,318
lower than fiscal 1998 due primarily to lower outstanding balances on the
current credit facility as compared to the Star Bank credit facility in fiscal
1998. The Star Bank credit facility was retired in March 1998 from the proceeds
generated from the sale of our Bliss Manufacturing operation.
INCOME TAXES - The effective income tax rate for the year ended September 30,
1999 was (2.8%), compared to 20.5% in 1998. The effective rate for fiscal 1999
was attributable to the establishment of a valuation allowance against current
fiscal net operating losses offset by a provision for state taxes.
DISCONTINUED OPERATIONS - All previously recorded discontinued operations were
disposed of in fiscal 1998 (See "General Development of Business" above and Note
2 to the Consolidated Financial Statements). Sales applicable to discontinued
operations for fiscal year 1999 and 1998 were $-0- and $34,174, respectively.
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On March 19, 1999, we reached an agreement with Rhone Capital LLC to resolve a
dispute concerning unusable and unsaleable inventory, and related
representations and warranties stemming from the sale of our Bliss Manufacturing
operation to Rhone in March 1998. All issues in dispute related to a Stock
Purchase Agreement, dated December 17, 1997, as subsequently amended.
Certain conditions of the resolution were as follows:
(1) approximately $500 in funds escrowed in connection with the Stock Purchase
Agreement were released to Rhone;
(2) we agreed, as did Rhone, not to assert claims for indemnification under
specified sections of the Stock Purchase Agreement;
(3) Rhone agreed not to require us to purchase any unusable or unsaleable
inventory pursuant to the Stock Purchase Agreement; and
(4) Rhone also agreed not to seek reimbursement for any monies actually paid in
respect of environmental damages from March 27, 1998, to and including
March 31, 1999.
Also in March 1999 we recorded a reserve of $425 for future environmental damage
expenditures pursuant to the Stock Purchase Agreement. This reserve was offset
by the reversal of $50 of professional fees established in the original loss on
disposal reserve recorded in fiscal year 1998 for the sale of Bliss. These
professional fees were not paid due to the release of the entire escrow to Rhone
(See Note 2 to the Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES- Cash flows from operating activities utilized net cash of
$135 for the year ended September 30, 2000, principally due to increases of
$868, $380, $234, $244 and $205 in receivables, inventories, prepaid expenses,
other current assets and other operating activities, respectively, and decreases
in accounts payable of $329. These uses of cash were offset by cash inflows
resulting from non-cash adjustments of $217 and net income of $1,890.
The increase in accounts receivable is primarily the result of a few large
international customers having decided to forego their prepaid discounts in
favor of "net 30" terms due to the status of the Euro and other cash related
issues. The increase in inventory is largely a direct result of lower than
anticipated product revenue. The increase in prepaid expenses was a direct
result of monies expended in advance for rent, video services and our European
convention, while the increase in other current assets relates primarily to
direct-response advertising costs incurred in connection with a Filter Queen
television spot, which will be amortized in fiscal 2001. The increase in other
operating activities is largely attributed to an increase in deposits on our
furniture lease and our world headquarters facility lease.
Cash disbursements for the year ended September 30, 2000 were approximately $300
greater than purchases recorded for fiscal 1999, resulting in a decreased
accounts payable balance. This decrease was partially a result of a $104
decrease in raw material purchases due to the decreased sales volume over prior
year and lower overall SG&A expenses.
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Non-cash adjustments consist primarily of depreciation and amortization,
treasury/common shares issued, deferred income taxes (see Income Taxes Above)
and gain on the disposal of assets related to the Bliss Manufacturing sale.
INVESTING ACTIVITIES- Capital expenditures of $970 represent the entire net cash
used in investing activities for the year ended September 30, 2000, of which the
largest portion relates to leasehold improvements for our new manufacturing
facility, factory and testing equipment, computer software and office furniture.
FINANCING ACTIVITIES- Net cash provided by financing activities consists of
$1,926 related to the net proceeds from the sale of common stock, offset by
payments of long-term debt in the amount of $51.
In November 1999, we announced that we expected to offer for sale up to
2,500,000 shares of our common stock in a transaction exempt from the
registration requirements under federal securities law. On March 1, 2000, we
successfully completed this private offering, at $1.625 per share of Common
Stock, generating approximately $2 million in additional capital. Individuals
affiliated with HMI acquired approximately 71% of the Shares, which were
purchased at a 35% premium over the market value. Net proceeds received from the
sale of the shares will be used for general purposes and in the implementation
of our strategic initiatives as described below.
As part of our continuing initiative to streamline costs and restructure our
company to its core business of manufacturing and distributing high filtration
portable surface cleaners, central vacuum systems and portable room air
cleaners, we have developed a strategic plan for growth. We intend to leverage
our position as a leading manufacturer and direct seller of high filtration
portable surface cleaners, central vacuum systems and portable room air cleaners
by undertaking key initiatives that we believe will drive revenues higher and
lower operating costs.
The key initiatives include but are not limited to the following:
- Develop a better trained and more knowledgeable distribution network;
- Increase product awareness and brand recognition;
- Expand the geographic and demographic markets in which our products
are distributed and sold;
- Continue to streamline processes and lower costs; and
- Invest in new infrastructure and pursue additional growth
opportunities.
Our plan is to use the proceeds from this offering and funds from operations and
bank financing to implement our strategic plan. Even with the monies raised by
the offering, there can be no assurance that cash generated from operations or
other sources of financing will be available that will enable us to fully
implement the strategic plan. In addition, there can be no assurance that our
financial condition and results of operations will not be materially and
adversely affected if we are unable to fully implement our strategic
initiatives.
Our credit facility agreement includes, but is not limited to, various covenants
that limit our 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
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expenditures. As of September 30, 2000, we were not in compliance with one of
these covenants; however, we obtained a waiver on this covenant.
On December 17, 1999, we entered into an agreement with our lender to reset
certain of these covenants, primarily capital expenditures and indebtedness, in
anticipation of exceeding the previous established levels during our fiscal year
ending September 30, 2000. On October 10, 2000, our lender again agreed to reset
certain of these covenants for the year ending September 30, 2001, in order to
allow for us to execute several strategic initiatives within our fiscal 2001
budget, that could not otherwise be implemented due to the previously
established levels.
No monies were outstanding under this credit facility at September 30, 2000, or
are anticipated to be outstanding at December 31, 2000.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." In May 1999, the FASB delayed the effective
date of FAS 133 by one year. We will be required to adopt FAS 133 for fiscal
year 2001. This statement establishes a new model for accounting for derivatives
and hedging activities. Under FAS 133, certain derivatives must be recognized as
assets and liabilities and measured at fair value. We anticipate that, due to
the fact that we are currently not engaged in hedging activities and that there
is limited to no use of derivative instruments within our company, the adoption
of FAS 133 will not have a significant effect on our results of operations or
financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. We will be required to adopt SAB 101
by the fourth quarter of fiscal 2001. We do not expect the adoption of SAB 101
to have a material effect on our consolidated financial position or results of
operation.
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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, but not limited to, the
statements made in "Net Product Sales" regarding the new Asian importer meeting
or exceeding the 2001 sales targets. Such forward-looking statements are subject
to uncertainties such as anticipated sales trends, improved lead generation and
recruiting and the ability to obtain financing for the end through consumer
financing companies. Such uncertainties are difficult to predict and could cause
our actual results of operation 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 25 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 "Election of Directors," "Committees and
Compensation of the Board of Directors", "Security Ownership", and "Executive
Compensation" in the Proxy Statement for the 2000 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.
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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 25 of this report.
2. FINANCIAL STATEMENT SCHEDULES - Reference is made to the Index to
Financial Statements, included as page 25 of this report.
3. EXHIBITS - Reference is made to the Index to Exhibits, included as
pages 50-51 of this report.
(b) Reports on Form 8-K.
No report on Form 8-K was filed during the last quarter of fiscal 2000.
(c) Exhibits.
Reference is made to the Index to Exhibits, included as pages 50-51 of this
report.
(d) Financial Statement Schedules.
Reference is made to the Index to Financial Statements, included as page
25 of this report.
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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/ Julie A. McGraw
---------------------------------------
Julie A. McGraw
Vice President, Chief Financial Officer
and Treasurer
December 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ James R. Malone /s/ Carl H. Young III /s/ Robert J. Abrahams
- ------------------------------------------ ---------------------------------------- ----------------------------------------
James R. Malone Carl H. Young III Robert J. Abrahams
Chairman of the Board, Chief Executive President, Chief Operating Officer, Director
Officer and Director and Director December 22, 2000
December 22, 2000 December 22, 2000
/s/ Thomas N. Davidson /s/ John S. Meany, Jr. /s/ Barry L. Needler
- ------------------------------------------ ---------------------------------------- ----------------------------------------
Thomas N. Davidson John S. Meany, Jr. Barry L. Needler
Director Director Director
December 22, 2000 December 22, 2000 December 22, 2000
/s/ Murray Walker
- ------------------------------------------ ----------------------------------------
Murray Walker Ivan J. Winfield
Director Director
December 22, 2000 December 22, 2000
24
26
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Management........................................................................................ 26
Report of Independent Accountants........................................................................... 27
Financial Statements
- --------------------
Consolidated Balance Sheets as of September 30, 2000 and 1999............................................... 28
Consolidated Statements of Operations for the years ended September 30,
2000, 1999 and 1998..................................................................................... 29
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 2000, 1999 and 1998....................................................................... 30
Consolidated Statements of Cash Flow for the years ended September 30,
2000, 1999 and 1998..................................................................................... 31
Notes to Consolidated Financial Statements................................................................ 32-47
Report of Independent Accountants on Financial Statement Schedule......................................... 48
Financial Statement Schedule: II - Valuation and Qualifying Accounts and Reserves.......................... 49
- ----------------------------
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.
25
27
REPORT OF MANAGEMENT
To the Board of Directors and Stockholders of HMI Industries Inc.
The management of HMI Industries Inc. 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 employees to maintain the
highest level of ethical standards in the conduct of all aspects of HMI'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 auditing standards generally accepted in the United States of
America 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 HMI's financial statements.
The Audit Committee of the Board of Directors, of which outside directors are
members, meets periodically with the independent accountants and management to
review accounting, auditing, internal control and financial reporting matters.
The independent accountants 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/ Julie A. McGraw
-------------------------------
Julie A. McGraw
Vice President, Chief Financial
Officer and Treasurer
26
28
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 operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of HMI
Industries Inc. and its subsidiaries at September 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
Cleveland, Ohio
December 8, 2000
27
29
CONSOLIDATED BALANCE SHEETS
Dollars and shares in thousands except par values SEPTEMBER 30, September 30,
2000 1999
- ------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,535 $ 765
Trade accounts receivable (net of allowance of $507 and $691) 3,207 2,234
Note receivable 105 105
Inventories:
Finished goods 1,778 1,698
Work-in-progress, raw material and supplies 1,437 1,137
Deferred income taxes 1,528 1,458
Prepaid expenses 411 177
Other current assets 290 46
- ------------------------------------------------------------------------------------------------------
Total current assets 10,291 7,620
- ------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 1,551 1,006
- ------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Long-term note receivable (less amounts due within one year) 35 140
Cost in excess of net assets of acquired businesses
(net of accumulated amortization of $3,248 and $3,002) 5,963 6,219
Deferred income taxes 2,504 2,139
Trademarks (net of accumulated amortization of $80 and $43) 309 261
Other 190 80
- ------------------------------------------------------------------------------------------------------
Total other assets 9,001 8,839
- ------------------------------------------------------------------------------------------------------
Total assets $20,843 $17,465
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 2,558 $ 2,887
Income taxes payable 963 1,016
Accrued expenses and other liabilities 2,840 3,063
Long-term debt due within one year 17 42
- ------------------------------------------------------------------------------------------------------
Total current liabilities 6,378 7,008
- ------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 71 --
Other -- 131
- ------------------------------------------------------------------------------------------------------
Total long-term liabilities 71 131
- ------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 10) -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $5 par value; authorized, 300 shares; issued, none -- --
Common stock, $1 par value; authorized, 10,000 shares;
issued and outstanding, 6,658 and 5,369 shares 6,658 5,369
Capital in excess of par value 8,279 7,609
Unearned compensation, net (41) (145)
Retained earnings (deficit) 377 (1,513)
Accumulated other comprehensive loss (Note 1) (879) (868)
- ------------------------------------------------------------------------------------------------------
14,394 10,452
Less treasury stock -0- and 32 shares, respectively, at cost -- 126
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,394 10,326
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $20,843 $17,465
======================================================================================================
See notes to consolidated financial statements.
28
30
CONSOLIDATED STATEMENTS OF OPERATIONS
Dollars and shares in thousands except per share data FOR THE YEARS ENDED SEPTEMBER 30,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
REVENUES:
Net product sales $34,621 $36,927 $ 38,748
- -----------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 20,448 24,098 27,863
Selling, general and administrative expenses 13,067 14,349 20,340
Impairment loss (Note 4) -- 2,665 --
Interest expense 47 71 1,389
Other (income) expenses, net (53) (131) (54)
- -----------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 33,509 41,052 49,538
- -----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 1,112 (4,125) (10,790)
(Benefit) provision for income taxes (353) 116 (2,217)
- -----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS 1,465 (4,241) (8,573)
- -----------------------------------------------------------------------------------------------------------------------
Income from discontinued operations -
Household Rental Systems (net of taxes of $-0-, $-0- and $-0-) -- -- 10
Bliss Manufacturing (net of taxes of $-0-, $-0-, and $137) -- -- 224
Tube Fab Ltd (net of taxes of $-0-, $-0- and $129) -- -- 207
- -----------------------------------------------------------------------------------------------------------------------
-- -- 441
- -----------------------------------------------------------------------------------------------------------------------
Gain (loss) on disposals-
Household Rental Systems (net of taxes of $-0-, $-0- and $-0-) -- -- 167
Bliss Manufacturing (net of taxes of $-0-, $-0-, and $6,790) 425 (375) 7,484
Tube Fab Ltd (net of taxes of $-0-, $-0- and $183) -- -- (299)
Health-Mor Personal Care Corp. (net of taxes of $-0-, $-0-, and $120) -- -- (195)
- -----------------------------------------------------------------------------------------------------------------------
425 (375) 7,157
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,890 $(4,616) $ (975)
=======================================================================================================================
Weighted average number of shares outstanding:
Basic 6,113 5,263 5,170
Diluted 6,140 5,263 5,170
=======================================================================================================================
BASIC PER SHARE OF COMMON STOCK (NOTE 1):
Income (loss) before discontinued operations $ 0.240 $(0.806) $ (1.658)
Income from discontinued operations $ -- $ -- $ 0.085
Gain (loss) on disposals $ 0.069 $(0.071) $ 1.384
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.309 $(0.877) $ (0.189)
=======================================================================================================================
DILUTED PER SHARE OF COMMON STOCK (NOTE 1):
Income (loss) before discontinued operations $ 0.239 $(0.806) $ (1.658)
Income from discontinued operations $ -- $ -- $ 0.085
Gain (loss) on disposals $ 0.069 $(0.071) $ 1.384
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.308 $(0.877) $ (0.189)
=======================================================================================================================
Cash dividends per common share $ -- $ -- $ --
=======================================================================================================================
See notes to consolidated financial statements.
29
31
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
Dollars in thousands Capital
in
Excess Accumulated
of Retained Other Treasury Total
Common Par Unearned Earnings Comprehensive Treasury Stock Shareholders'
Stock Value Compensation (Deficit) Income Shares Amount Equity
------ ------- ------------ --------- ------------- -------- -------- -------------
Balance at September 30, 1997 $5,296 $8,132 $(273) $4,078 $(1,419) 269 $(1,262) $14,552
Comprehensive loss:
Net loss (975) (975)
Translation adjustment (374) (374)
-------
Total comprehensive loss (1,349)
Write off of sold
subsidiaries
cumulative translation
adjustment 755 755
Treasury shares issued 124 (69) 324 448
Issuance of common stock 73 73
Purchase of treasury shares 10 (48) (48)
Unearned compensation (322) (322)
Employee benefit stock (10) (10)
------ ------ ----- ------ ------- ---- ------- -------
Balance at September 30, 1998 5,369 8,246 (595) 3,103 (1,038) 210 (986) 14,099
Comprehensive loss:
Net loss (4,616) (4,616)
Translation adjustment 31 31
-------
Total comprehensive loss (4,585)
Write off of sold
subsidiaries
cumulative translation
adjustment 139 139
Treasury shares issued (613) (178) 860 247
Unearned compensation 450 450
Employee benefit stock (24) (24)
------ ------ ----- ------ ------- ---- ------- -------
Balance at September 30, 1999 5,369 7,609 (145) (1,513) (868) 32 (126) 10,326
COMPREHENSIVE INCOME:
NET INCOME 1,890 1,890
TRANSLATION ADJUSTMENT (11) (11)
-------
TOTAL COMPREHENSIVE INCOME 1,879
TREASURY SHARES ISSUED (92) (32) 126 34
ISSUANCE OF COMMON STOCK 1,289 714 2,003
UNEARNED COMPENSATION 104 104
EMPLOYEE BENEFIT STOCK 48 48
------ ------ ----- ------ ------- ---- ------- -------
BALANCE AT SEPTEMBER 30, 2000 $6,658 $8,279 $ (41) $ 377 $ (879) -- -- $14,394
====== ====== ===== ====== ======= ==== ======= =======
See notes to consolidated financial statements.
30
32
CONSOLIDATED STATEMENTS OF CASH FLOW
Dollars in thousands FOR THE YEARS ENDED SEPTEMBER 30,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,890 $(4,616) $ (975)
Adjustments to reconcile net income (loss) to net cash
(used in ) provided by operating activities:
Depreciation and amortization 802 823 1,257
Impairment of asset -- 2,665 --
(Gain) loss on disposal of discontinued operations (425) 375 (7,157)
Provision for loss on sale/disposal of assets 12 48 444
Provision for losses on receivables -- -- 2,242
Treasury/common shares issued, net of unearned compensation 263 674 189
Deferred income taxes (435) -- 4,177
Changes in operating assets and liabilities:
(Increase) decrease in receivables (868) 1,881 1,585
(Increase) decrease in inventories (380) 1,529 (1,212)
(Increase) decrease in prepaid expenses (234) 49 (21)
(Increase) decrease in other current assets (244) (46) 42
Decrease in accounts payable (329) (2,231) (3,074)
Increase (decrease) in accrued expenses and other liabilities 71 (575) (2,192)
Decrease in income taxes payable (53) (110) (3,457)
Other, net (205) 161 248
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (135) 627 (7,904)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets, net -- 793 29,028
Capital expenditures (970) (76) (223)
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (970) 717 28,805
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under credit facility -- (508) (15,798)
Payment of long term debt (51) (122) (5,244)
Net proceeds from issuance of common stock 1,926 -- --
Acquisition of treasury stock -- -- (48)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,875 (630) (21,090)
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 770 714 (189)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 765 51 240
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,535 $ 765 $ 51
=======================================================================================================================
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 for fiscal year 1998.
31
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS EXCEPT
SHARES AND PER SHARE DATA)
BASIS OF CONSOLIDATION
The consolidated financial statements include all significant controlled
subsidiaries. Operations include the accounts of HMI Industries Inc and the
following wholly-owned subsidiaries: 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.
Our principle products include a high filtration portable surface cleaner that
is marketed as a healthier alternative to the typical vacuum cleaner, and a
portable room air cleaner that helps to remove particles, gases and odors from
the air. The two products are sold together as a complete Filter Queen Indoor
Air Quality System(TM) in some parts of the world. In other areas, primarily
Asia and Europe, the two products are sold separately.
RECLASSIFICATION
Certain amounts in the 1999 and 1998 consolidated financial statements have been
reclassified to conform to the 2000 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 Stockholders' Equity
titled "Accumulated Other Comprehensive Loss". Such adjustments will affect net
income only upon sale or liquidation of the underlying foreign investments.
During the fourth quarter of 1997, we recorded a loss on disposal reserve of
$720 for cumulative translation adjustments associated with discontinued foreign
operations. Upon the sale of the discontinued foreign operations in the second
quarter of 1998, the cumulative translation adjustments of $755, associated with
these operations, were reclassed to the loss on disposal reserve. An additional
$35 was recorded to loss on disposal for the difference between the actual
cumulative translation adjustments at the sale dates and the original reserve
recorded in fiscal 1997.
In February 1999, we finalized the closing of our Holland sales office. This
action resulted in an expense of $139 associated with the write off of the
Holland cumulative translation adjustment previously included within the
accumulated other comprehensive loss caption of the Consolidated Balance Sheets.
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.
32
34
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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
We consider all highly liquid instruments purchased with a maturity of less than
three months to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
On a quarterly basis, we perform a review of potentially uncollectible trade
accounts receivable to provide our 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; day's sales outstanding and other related
analytical procedures. Any adjustments noted in this review are recorded at that
time.
PREPAID ADVERTISING
We expense the production costs of advertising the first time the advertising
takes place, except for direct-response advertising, which is capitalized and
amortized over its expected period of future benefits.
Direct-response advertising consists primarily of design and development costs
incurred in connection with a Filter Queen television spot, which directs
viewers to call a 1-800-number to purchase our products. The capitalized costs
of the advertisement will be amortized over a twelve-month period following the
first introduction of the advertisement into our Americas sales division, which
is anticipated in the first calendar quarter of 2001.
At September 30, 2000 and 1999, $254 and $-0-, respectively, of advertising was
reported as prepaid assets. Advertising expense was $193, $49 and $306, in
fiscal 2000, 1999 and 1998, respectively.
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.
Quarterly, we evaluate the recoverability of intangibles resulting from business
acquisitions and measure 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
Inventories are stated at the lower of cost or market. Cost is determined
principally on the last-in, first-out (LIFO) method, which provides a better
matching of current costs and revenues. The following presents the effect on
inventories and income before taxes had the Company used the first-in, first-out
(FIFO) method of inventory valuation.
33
35
2000 1999
------ ------
Percentage of total inventories on LIFO 100% 100%
Inventory amount had FIFO method been utilized
to value inventory $3,709 $3,366
Increase in net income before taxes due to LIFO $ 38 $ 285
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is provided on
the straight-line method over estimated useful lives of 5 years for leasehold
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 are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the appropriate accounts and any gain or loss is included in
income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our 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
We account 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 bases of assets and liabilities at year-end are reflected as
deferred income taxes.
REVENUE RECOGNITION AND PRODUCT WARRANTY
Product revenues are recognized upon the shipment of product.
We warrant our surface cleaner for a five-year period from the date of purchase
and offer a warranty for the life of the vacuum for the replacement of the
surface cleaner's motor at the same price as was paid for the motor in the
original sale. Outside the U.S., we offer a two-year warranty for our high
filtration portable surface cleaner. The portable room air cleaner is warranted
for renewable one-year periods so long as the main air filter is replaced
annually. A five-year warranty is offered for our built-in vacuum system. A
provision for estimated future costs relating to warranty expense is recorded
when products are shipped.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest was $44, $68 and $1,383 for the years ended September 30,
2000, 1999 and 1998, respectively.
Each of the following transactions have been treated as non-cash items for
purposes of the Consolidated Statements of Cash Flows. During the second quarter
of fiscal 2000, by entering into three capital leases totaling $96,800, we
incurred debt in exchange for assets. The assets consist of racking and
compactors for our Strongsville, Ohio manufacturing facility.
In January 1998, accrued severance in the amount of $1,523, relating to our
settlement agreement with Mr. Kirk W. Foley, our 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, we relinquished land and a building valued at $523 and
34
36
the related mortgage in the amount of $316 in exchange for an increase in a note
receivable due from one of our former officers (See Note 13). In July 1998,
$1,534 of financing receivables, deemed uncollectable, were netted against
related liabilities. Such liabilities, which were recorded when a financing sale
occurred, were paid to a distributor office only upon the collection of the
financing receivable.
EARNINGS PER SHARE
Earnings per share have been computed according to Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share". The following is a
reconciliation of the number of shares (denominator) used in the basic and
diluted earnings per share computations (shares in thousands) for the year ended
September 30, 2000:
Per
Share
Shares Amount
------ -------
Basic EPS 6,113 $ 0.309
Effect of dilutive stock options 27 $(0.001)
----- -------
Diluted EPS 6,140 $ 0.308
===== =======
The denominators for calculating our basic and diluted earnings per share were
identical as of September 30, 1999 and 1998 as the outstanding options were not
assumed as the result would have been anti-dilutive since a loss from continuing
operations existed for these periods.
As of September 30, 2000, 615,800 outstanding options, subject to purchase, were
not included in the computation of diluted EPS because the options' exercise
price was greater than the average market price of the common shares. The
exercise prices of these options range from $1.375 to $11.625 per share and
expire between the period January 2, 2001 and August 28, 2005.
COMPREHENSIVE INCOME/LOSS
Comprehensive income/loss combines net income/loss and "other comprehensive
items," which represents foreign currency translation adjustments, which are
reported as a separate component of stockholders' equity in the accompanying
Consolidated Balance Sheets. We present such information in our Statements of
Stockholders' Equity on an annual basis and in a footnote in our quarterly
reports.
2. DISCONTINUED OPERATIONS
In fiscal 1998 and 1997, we reported our subsidiaries Bliss, Tube-Fab, HRS, and
Personal Care as discontinued operations.
On March 27, 1998, we completed the sale of Bliss to an investor group led by
Mr. Mervin Dunn and Rhone Capital L.L.C. pursuant to a stock purchase agreement,
dated December 17, 1997, as subsequently amended. The purchase price paid to us
on the closing date of the sale was $31,660, less $1,000 delivered by Rhone to
an escrow account for post-closing adjustments and indemnification obligations
by us under the Stock 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 Stock Purchase Agreement.
35
37
Net of transaction fees and expenses, we recorded a gain, prior to post-closing
adjustments, on the sale of Bliss of approximately $12,110 $(6,093 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 our stock purchase of Bliss in 1990. Proceeds delivered at the
closing from the sale of Bliss were applied to retire substantially all of our
debt, certain vendor obligations, transaction costs and related expenses,
certain employee benefit programs, and funding for the Bliss profit sharing
plan.
In July 1998, Rhone notified us that they accepted $1,348 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, we
recorded an additional gain of $1,702 $(1,123 net of taxes) related to the final
undisputed portion of the purchase price adjustment, including $500 in funds
related to the escrow account, which in accordance with the Stock Purchase
Agreement were to be released to us upon resolution of any disputed items.
In August 1998, we recorded an additional gain of $462 $(268 net of taxes), net
of transaction fees, relating to the final resolution of disputed items.
In accordance with the Stock Purchase Agreement, Rhone and HMI agreed, that if
any inventory reflected in the final balance sheet was not useable and saleable
within time periods specified within the Stock Purchase Agreement, then Rhone
had the right to sell to us any such inventory. On March 19, 1999, we reached an
agreement with Rhone to resolve this dispute concerning this inventory, and the
related representations and warranties stemming from the sale of our Bliss
operation to Rhone.
Certain conditions of the resolution were as follows:
(1) approximately $500 in funds escrowed in connection with the Stock Purchase
Agreement were released to Rhone;
(2) we agreed, as did Rhone, not to assert claims for indemnification under
specified sections of the Stock Purchase Agreement;
(3) Rhone agreed not to require us to purchase any unusable or unsaleable
inventory pursuant to the Stock Purchase Agreement; and
(4) Rhone also agreed not to seek reimbursement for any monies actually paid in
respect of environmental damages from March 27, 1998, up to and including
March 31, 1999.
Also in March 1999, we recorded a reserve of $425 for future environmental
damage expenditures pursuant to the Stock Purchase Agreement. This amount was
recorded as a conservative estimate of potential liability under the Stock
Purchase Agreement as studies conducted by independent third parties noted no
obligation under existing regulatory guidelines. Under the Stock Purchase
Agreement, the amount of our indemnification obligations for environmental
damages will decline annually from the closing date of that transaction, from
90% in the first two years, to 80% in the third year, 70% in the fourth year,
60% in the fifth year and 50% thereafter until the end of the seventh year. We
agreed to indemnify the investor group for environmental matters until March
2005. This reserve was offset by the reversal of $50 of professional fees
established in the original loss on disposal reserve recorded in fiscal year
1998
36
38
for the sale of Bliss. These professional fees were not paid due to the release
of the entire escrow to Rhone.
On January 21, 2000, Bliss, under the ownership of Rhone Capital L.L.C., filed
Chapter 11 bankruptcy with the Michigan Eastern Bankruptcy Court, in Detroit,
Michigan. Subsequently, all Bliss facilities were auctioned through the
Bankruptcy Court. The indemnification obligation noted in the Stock Purchase
Agreement did not survive the sale through the bankruptcy court, and as a
result, in June 2000, the $425,000 reserve recorded in accordance with the Stock
Purchase Agreement, was reversed to income and recorded as a gain on disposal of
discontinued operations in the Consolidated Statements of Operations.
In fiscal 1997, we recorded our Tube-Fab operation as a discontinued operation
and recorded a pre-tax estimated loss on disposal of $1,020. On January 8, 1998,
we completed the sale of Tube-Fab to Mr. Foley (see Note 13). An additional loss
on disposal of $482 $(299 net of taxes) was recorded in the second quarter of
fiscal 1998.
In March 1996, we adopted a plan to sell HRS. We recorded an estimated loss on
the disposal of this operation of $800 during 1996. An additional charge of
$2,651 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, 1998, we completed the sale of
HRS to Integrated Capital Management Group for $1,050. 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, we recorded a gain on the sale of $167 in fiscal 1998.
In the third quarter of fiscal 1997, we recorded Personal Care as a discontinued
operation and recorded an estimated loss of $917 $(569 net of taxes). These
assets were sold to Eidolon Corporation, a Canadian company, for $89. As a
result of the sale, we recorded an additional loss on disposal of $315 $(195 net
of taxes) in the quarter ended March 31, 1998.
Sales applicable to discontinued operations were $-0- and $34,174 for the years
ended September 30, 1999 and 1998, respectively.
3. NOTES RECEIVABLE
Long-term notes receivable consist of the following:
2000 1999
---- ----
Notes receivable - See Note 13 $140 $245
Less amounts due within one year 105 105
---- ----
$ 35 $140
==== ====
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4. PROPERTY, PLANT AND EQUIPMENT
2000 1999
------ ------
Leasehold improvements $ 288 $ 10
Machinery and equipment 5,178 5,098
Construction in progress 197 --
------ ------
5,663 5,108
Accumulated depreciation 4,112 4,102
------ ------
Net property, plant and equipment $1,551 $1,006
====== ======
On January 12, 1999, we sold our Perkins Avenue facility and related land in
Cleveland, Ohio, to Rose Management Company, a local real estate investment
company, for $840. The net book value of the related land and building at the
time of sale was $3,505. In December 1998, we recorded a non-cash impairment
loss of $2,665 on the building to reflect the difference between the sales price
and the net book value of the property. The impairment loss was recorded as a
separate line item under operating expenses in the Consolidated Statements of
Operations.
Depreciation expense relating to continuing operations for the years ended
September 30, 2000, 1999 and 1998 was $523, $560 and $880
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
2000 1999
------ ------
Accrued compensation $ 987 $ 524
Accrued distributor development 459 490
Accrued warranty 431 420
Distributor funds payable 347 287
Accrued litigation 177 391
Accrued environmental -- 439
Other 439 512
------ ------
$2,840 $3,063
====== ======
In June 2000, an adjustment was made to a certain distributor development
program accrual. This adjustment was based on the results of an actuarial study
and resulted in a credit to income of $331. The actuarial study was commissioned
to refine the existing calculation and to provide the credibility of a third
party verification.
6. CREDIT FACILITY AND LONG-TERM DEBT
Effective April 1998, we entered into a $5,000 secured discretionary credit
facility with Heller Financial, Inc. The new credit agreement expired in April
2001 and required an unused facility fee, computed at .375% per annum on the
unused credit facility. The secured facility consisted of a $4.25 million credit
line and a $.75 million term loan. Availability under the credit facility was
tied directly to the value of our eligible collateral, which consisted of
accounts receivable and inventory. Interest rates accrued at prime plus 1.25% on
the credit facility and at prime plus
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1.50% for the term loan.
In May 1999, we terminated this credit facility with Heller Financial and
entered into a $3,500 revolving line of credit with Finova Capital consisting of
loans against our eligible receivables and inventory. A pre-payment penalty
waiver for early termination of the old credit facility was obtained from Heller
Financial in February 1999. The new credit agreement expires in 2002 and calls
for interest to accrue at a rate of prime plus 2%, or 11.50% as of September 30,
2000. No monies were outstanding under this credit facility at September 30,
2000, or are anticipated to be outstanding at December 31, 2000.
During the quarter ended March 31, 2000, we entered into capital leases totaling
$97. These leases, with a term of 60 months, require monthly payments, principal
and interest, of $2. The nominal annual interest rates on these leases range
from 2.62% to 12.0%, compounding monthly.
Long-term debt consists of the following:
2000 1999
---- ----
BANK LINES OF CREDIT - see above $-- $--
CAPITALIZED LEASE OBLIGATIONS 88 42
bearing interest at 2.62% to 12.00% due in
monthly installments of $2 (including interest)
through March 2005
--- ---
88 42
Less amounts due within one year 17 42
--- ---
$71 $--
=== ===
The weighted average interest rate on short-term borrowings at September 30,
2000 and 1999 was 8.87% and 8.04%, respectively.
Our credit facility agreement includes, but is not limited to, various covenants
that limit our 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, 2000, we were not in compliance with one of these covenants; however, we
obtained a waiver on this covenant.
On December 17, 1999, we entered into an agreement with our lender to reset
certain of these covenants, primarily capital expenditures and indebtedness, in
anticipation of exceeding the previous established levels during our fiscal year
ending September 30, 2000. On October 10, 2000, our lender again agreed to reset
certain of these covenants for the year ending September 30, 2001, in order to
allow for us to execute several strategic initiatives within our fiscal 2001
budget, that could not otherwise be implemented due to the previously
established levels.
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7. LONG-TERM COMPENSATION PLAN
We adopted the Health-Mor Inc. 1992 Omnibus Long-Term Compensation 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
our key employees and stock options for our non-employee directors. 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, we record 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 July 1997, the Board of Directors granted restricted stock and stock options
under the Plan to three of our executives. Each executive was awarded 25,000
shares of restricted common stock, with 12,500 vesting on October 1, 1997 and
the balance vesting 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 35,000 options are incentive
stock options, half were exercisable on July 2, 1997 and the remaining on
January 2, 1998. The remaining 40,000 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 our
executives in lieu of a deferred bonus agreement previously outlined in fiscal
1997. Under the terms of such agreements, each executive received 85,000 shares
of Common Stock subject to certain conditions and continued employment. The
shares vested ratably over eight quarters beginning with the quarter ended March
31, 1998. The executives subsequently forfeited the shares which had vested on
March 31 and June 30, 1998. In July 1998, 60,000 unvested shares were forfeited
by one of the executives upon his resignation.
During the second fiscal quarter of 1999, the Board of Directors granted 308,000
incentive stock options (298,000 at $1.50 per share and 10,000 at $1.375 per
share) and 77,000 restricted shares to certain of our key employees in
accordance with the Plan. The majority of the options and restricted shares vest
over a 36-month period with the exception of 133,000 options and 26,000
restricted shares that vested immediately. No compensation expense was recorded
related to the stock options during fiscal 1999, as the exercise price was equal
to the fair market value at the grant date.
During fiscal 2000, the Board of Directors granted 415,000 incentive stock
options (215,000 at $1.0625 per share and 200,000 at $1.25 per share) and 10,000
restricted shares to certain of our
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key employees in accordance with the Plan. Vesting immediately were 215,000
options. The remaining options or, 200,000 options, vest over a 48-month period
with the vesting subject to acceleration clauses based upon our company's stock
price. No compensation expense was recorded related to the stock options during
fiscal 2000, as the exercise price was equal to the fair market value at the
grant date.
There were 10,000 and 77,000 shares issued and 16,700 and 7,000 non-vested
shares forfeited pursuant to the Plan in fiscal 2000 and 1999, respectively.
Unamortized deferred compensation amounted to $41, $144 and $595 at September
30, 2000, 1999 and 1998, respectively. Total compensation expense, in
conjunction with the Plan was $95, $511 and $189 in 2000, 1999 and 1998,
respectively.
We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for our stock plans as allowed under SFAS
Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Had
compensation cost for the stock granted in 2000, 1999 and 1998 been determined
consistent with SFAS 123, pro forma net income and earnings per share would have
been as follows (dollars in thousands except per share data):
2000 1999 1998
------ ------- -------
Net income (loss), as reported $1,890 $(4,616) $ (975)
Net income (loss), pro forma $1,685 $(4,781) $(1,107)
Income (loss) per Common share
(basic and diluted):
As reported $ 0.31 $ (0.88) $ (0.19)
Pro forma $ 0.27 $ (0.91) $ (0.21)
The fair value for all options granted in 2000, 1999 and 1998 were estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
2000 1999 1998
OPTIONS OPTIONS OPTIONS
-------- ----------------- -------------- -------
Risk free interest rate 6.1% to 6.5% 4.7% to 5.1% 5.6%
Expected life of option 3 yrs. to 4 yrs. 3 yrs. 3 yrs.
Expected dividend yield
of stock 0.0% 0.0% 0.0%
Expected volatility
of stock 79.4% to 85.5% 75.3% to 80.4% 71.1%
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A summary of our stock option activity, and related information for the years
ended September 30, 2000, 1999, and 1998, is shown in the following table.
Shares subject Weighted
to option average option
(in thousands) price per share
-------------- ---------------
September 30, 1997, Outstanding 724 $8.47
Granted 42 6.25
Canceled (312) 9.07
----- -----
September 30, 1998 454 7.83
Granted 350 1.47
Canceled (63) 9.14
----- -----
September 30, 1999 741 4.72
Granted 457 1.14
Canceled (137) 7.01
----- -----
September 30, 2000, Outstanding 1,061 $2.89
===== =====
Options exercisable and shares available for future grant on September 30 (in
thousands except per share data):
2000 1999 1998
---- ---- ----
Options exercisable 667 438 299
Weighted-average option price
per share of options exercisable $3.74 $6.01 $8.13
Weighted-average fair value of
options granted during the year $0.67 $0.81 $3.16
The ranges of exercise prices and the remaining contractual life of options as
of September 30, 2000 were:
Range of exercise prices $1-$2 $2-$16
Options outstanding:
Outstanding as of September 30, 2000 (in thousands) 736 325
Weighted-average remaining contractual life 5.96 3.23
Weighted-average exercise price $1.27 $6.55
Options exercisable:
Outstanding as of September 30, 2000 (in thousands) 357 310
Weighted-average remaining contractual life 4.46 3.26
Weighted-average exercise price $1.28 $6.58
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8. INCOME TAXES
The provision (benefit) for income taxes relating to continuing operations
consists of the following:
2000 1999 1998
----- ---- -------
Current:
Federal and state $ 82 $116 $(4,735)
Foreign -- -- --
----- ---- -------
82 116 (4,735)
Deferred (benefit) expense (435) -- 2,518
----- ---- -------
$(353) $116 $(2,217)
===== ==== =======
A reconciliation of the provision for income taxes at the Federal statutory rate
to that included in the Consolidated Statements of Operations related to
earnings from continuing operations is as follows:
2000 1999 1998
------- ------- -------
Tax at Federal statutory rate of 34% $ 378 $(1,402) $(3,669)
Increases (reductions) in taxes
resulting from:
Tax expense relating to Internal Revenue
Service audits and assessments -- -- 1,329
Foreign Sales Corporation earnings -- (104) (26)
Amortization of cost in excess of
net assets of acquired businesses 84 86 106
Valuation allowances against deferred
tax assets (1,008) 1,466 --
Other - net 193 70 43
------- ------- -------
$ (353) $ 116 $(2,217)
======= ======= =======
The increase in the effective tax rate (income tax benefit) from fiscal 1999 to
fiscal 2000 is primarily attributable to the utilization and reversal of the
$1,008 valuation allowance associated with the U.S. net operating loss
carryforwards recorded in prior years.
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The components of deferred tax assets and liabilities are comprised of the
following at September 30,
2000 1999
------ ------
Gross deferred tax assets:
Operating loss carryforwards $4,921 $5,612
Receivable and inventory reserves 267 608
Accrued compensation 126 234
Impairment reserves -- 17
Other 174 140
------ ------
5,488 6,611
------ ------
Gross deferred tax liabilities:
Accounts receivable fair market value
adjustment for tax purposes 508 1,016
Depreciation 99 141
------ ------
607 1,157
Valuation allowances on foreign net
deferred tax assets 849 1,857
------ ------
Net deferred tax asset $4,032 $3,597
====== ======
We have determined that we should fully reserve against the net 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, 2000, 1999 and 1998 were
$136, $226, and $730, respectively.
Net operating loss carryforwards of approximately $13,805 for tax are available
to offset future taxable income. The carryforwards will expire in 2005 through
2019. 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
We have a qualified profit sharing plan that covers substantially all employees.
The overall contribution to our plan and the allocation method is at the
discretion of our 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. There was
no profit sharing expense for the plan for the years ended September 30, 2000,
1999 and 1998.
10. COMMITMENTS AND CONTINGENCIES, GUARANTEES AND LEASES
We are obligated under certain operating leases for facilities, which expire on
various dates through 2005. The minimum annual lease payments under these
agreements, including renewal options, if exercised, are $903, $840, $727, $712
and $183 for the years ending September 30,
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2001, 2002, 2003, 2004 and 2005, respectively. Rent expense was $854, $705 and
$700 for the years ended September 30, 2000, 1999 and 1998, respectively.
LITIGATION
Claims arising in the ordinary course of business are pending against us.
Although these are in various stages of the litigation process, we believe that
none of these matters will have a material adverse effect on our consolidated
financial position, results of operations or cash flows. Included in the
accompanying Consolidated Balance Sheets at September 30, 2000 and 1999 were
accruals of $177 and $391, respectively, relating to various claims.
11. BUSINESS SEGMENTS, MAJOR CUSTOMERS, AND FOREIGN OPERATIONS
Our continuing operations consist of a single operating segment.
Sales of our products to three of our international importers accounted for
13.1%, 12.9% and 11.3% of total product sales in fiscal year 2000, and 20.5%,
11.6% and 11.0% of total product sales in fiscal year 1999. In fiscal year 1998,
two international importers accounted for 20.7% and 10.3% of total HMI product
sales. The loss of any significant portion of our sales from these importers,
although believed by HMI management to be unlikely, would have a material
adverse impact on our sales and earnings.
The distributors/importers are independent third parties who are not our
employees and are not directly under our control. There can be no assurance that
the current relationships with distributors/importers will continue on
acceptable terms and conditions to us, nor can there be any assurance that
additional distributorship arrangements with third parties will be obtained on
acceptable terms. Moreover, there can be no assurance that the
distributors/importers will devote sufficient time and resources to our products
to enable the products to be successfully marketed. Failure of some or all of
our products to be successfully and efficiently distributed could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Prior to March 1998, one of our major foreign operations had been located in
Canada. As of March 1998, we began selling into Canada through one importer and
all sales previously made by our Canadian operation were ceased. Canadian sales
for the fiscal year ended September 30, 1998 were not considered export sales.
Identifiable revenues of Canadian operations for the year ended September 30,
1998 were $2,219. For the fiscal years subsequent to September 30, 1998, we
considered Canadian sales to be export sales.
Sales to international customers represent 64.4%, 67.0% and 60.9% of net product
sales for the years ending September 30, 2000, 1999 and 1998, respectively.
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12. QUARTERLY FINANCIAL DATA (UNAUDITED)
2000
-----------------------------------------------------------------
December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
Net revenues $ 8,479 $ 9,655 $8,313 $8,174
Gross profit $ 3,379 $ 4,013 $3,293 $3,488
Income before discontinued
operations $ 251 $ 331 $ 354 $ 176
Gain on disposal $ -- $ -- $ 425 $ --
Net income $ 251 $ 310 $ 779 $ 550
Basic and diluted income per share of common stock:
Income before discontinued
operations $ 0.05 $ 0.05 $ 0.05 $ 0.09
Gain on disposal $ -- $ -- $ 0.07 $ --
Net income $ 0.05 $ 0.05 $ 0.12 $ 0.09
1999
-----------------------------------------------------------------
December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
Net revenues $ 9,172 $ 9,520 $8,711 $9,524
Gross profit $ 2,616 $ 3,072 $3,014 $4,127
(Loss) income before discontinued
operations $(3,284) $ (790) $ (381) $ 214
(Loss) on disposals $ -- $ (375) $ -- $ --
Net (loss) income $(3,284) $(1,165) $ (381) $ 214
Basic and diluted (loss) income per share of common stock:
(Loss) income before discontinued
operations $ (0.63) $ (0.15) $(0.07) $ 0.04
(Loss) on disposals $ -- $ (0.07) $ -- $ --
Net (loss) income $ (0.63) $ (0.22) $(0.07) $ 0.04
13. RELATED PARTY TRANSACTIONS
In May 1997, we advised Kirk W. Foley, then our CEO, that we were terminating
his employment which triggered certain obligations as per Mr. Foley's employment
contract, including an $800 severance payment, an assumption of a $518 personal
bank loan made to Mr. Foley, other compensation obligations of approximately $79
and an obligation to purchase Mr. Foley's HMI stock at current market value
(approximately $325).
Because of our tight cash position at that time, non-cash ways to satisfy our
obligations to Mr. Foley were sought. The resolution was a decision to transfer
to Mr. Foley our 100% stock interest in Tube-Fab Ltd, a Canadian subsidiary
headquartered on Prince Edward Island, Canada, which an independent appraiser
valued at $1,512. The Tube-Fab Ltd. stock had been carried on our books at a
value of $2,157 and was accordingly written down to its appraised value.
In January 1998, we completed the transfer of Tube-Fab to Mr. Foley in
settlement of our obligations to him. As a result of this transaction, we
recorded an additional loss on disposal of $299, net of $183 of taxes in the
second fiscal quarter of 1998. The settlement entailed a transfer
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of the Tube-Fab Ltd. shares to Mr. Foley; a payment from Mr. Foley of $303 to
us; cancellation of our $800 severance obligation; an assumption of the $487
$(518 less a $31 principal payment made in June 1997) bank loan; cancellation of
Mr. Foley's put right with respect to his HMI stock; and assumption by Mr. Foley
of an operating lease of Canadian facilities currently leased by us, which had a
remaining lease obligation of approximately $1,050 over 8 1/2 years.
Mr. Foley's employment contract also required us to pay to him a $300 cash award
relating to phantom shares he had previously earned but had deferred in 1996.
This award was reduced to a $150 payment in the settlement transaction. The
settlement also required us to continue Mr. Foley's salary and benefits from the
time of termination advice through December 15, 1997 (approximately $320).
Mr. Foley's departure caused us to examine the collectability of certain other
related party receivables aggregating $743 which were forgiven and accordingly
written off in the third and fourth quarters of fiscal 1997.
In 1995, we converted $750 of accounts receivable from a former Filter Queen
distributor to a note receivable. This distributor was an officer of one of our
majority owned subsidiaries. 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, we relinquished land and a
building valued at $523 and the related mortgage in the amount of $317 in
exchange for an increase in the note receivable noted above. The note receivable
of $140 and $245 is reflected in current and long-term assets at September 30,
2000 and 1999, respectively.
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Report of Independent Accountants on
Financial Statement Schedule
----------------------------
To the Board of Directors and Stockholders of
HMI Industries Inc.
Our audits of the consolidated financial statements of HMI Industries Inc.
referred to in our report dated December 8, 2000 appearing in this Annual Report
on Form 10-K also included an audit of the financial statement schedule listed
in item 14 of this Form 10-K. In our opinion, the financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Cleveland, Ohio
December 8, 2000
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HMI INDUSTRIES INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Dollars in thousands Balance at Additions Balance at
- -------------------- Beginning of Charged to End of
Description Period Costs and Expense Deductions Period
----------- -------------------------------------------------------------
Valuation account for accounts receivable:
Year ended September 30, 2000 $ 691 $ -- $ 184 $ 507
Year ended September 30, 1999 $1,085 $ -- $ 394 $ 691
Year ended September 30, 1998 $5,512 $2,107 $6,534 $1,085
Valuation account for inventory:
Year ended September 30, 2000 $ 602 $ 71 $ 438 $ 235
Year ended September 30, 1999 $ 484 $ 762 $ 644 $ 602
Year ended September 30, 1998 $1,631 $1,318 $2,465 $ 484
Reserve for loss on disposal:
Year ended September 30, 2000 $ 451 $ -- $ 451 $ --
Year ended September 30, 1999 $ 233 $ 375 $ 157 $ 451
Year ended September 30, 1998 $5,388 $ 631 $5,786 $ 233
Valuation for deferred tax asset:
Year ended September 30, 2000 $1,857 $ -- $1,008 $ 849
Year ended September 30, 1999 $1,159 $ 698 $ -- $1,857
Year ended September 30, 1998 $1,676 $ -- $ 517 $1,159
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INDEX TO EXHIBITS
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 Finova Loan and Security Agreement, incorporated by
reference from Form 10-Q for the quarter ended June
30, 1999
10.01 Material Contracts Finova Loan and Security Agreement Covenant Amendment
Letter dated December 17, 1999, incorporated by
reference from Form 10-Q for the quarter ended
December 31, 1999.
10.02 Material Contracts Amendment to Finova Loan and Security Agreement,
attached.
10.03 Material Contracts Heller Credit Facility Agreement, incorporated by
reference from Form 10-Q for the quarter ended March
31, 1998
10.04 Material Contracts Amendment to Heller Loan and Security Agreement,
incorporated by reference from Form 10-K for the year
ended September 30, 1998
10.05 Material Contracts Second Amendment to Heller Financial Loan and Security
Agreement, incorporated by reference from Form 10-Q
for the quarter ended March 31, 1999.
10.06 Material Contracts Heller Financial Pre-Payment Penalty Waiver Letter
incorporated by reference from Form 10-Q for the
quarter ended March 31, 1999.
10.07 Material Contracts Real Estate Sale Agreement and Amendment to Real
Estate Sale Agreement, incorporated by reference from
Form 10-Q for the quarter ended December 31, 1998
10.08 Material Contracts Bliss Stock Purchase Agreement, incorporated by
reference from Form 10-K/A3 for the year ended
September 30, 1997
10.09 Material Contracts Bliss Stock Purchase Agreement Settlement Letter,
incorporated by reference from Form 10-Q for the
quarter ended March 31, 1999.
10.10 Material Contracts Change of Control Agreements, incorporated by
reference from Form 10-K/A3 for the year ended
September 30, 1997
10.11 Material Contracts Employment Agreement - Malone, incorporated by
reference from Form 10-K/A3 for the year ended
September 30, 1997
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10.12 Material Contracts Employment Agreement - Young, incorporated by
reference from Form 10-K/A3 for the year ended
September 30, 1997
10.13 Material Contracts Incentive Stock Option Agreements, attached
10.14 Material Contacts Accelerated Incentive Stock Option Agreements, attached
10.15 Material Contracts Restricted Stock Agreements incorporated by reference
from Form 10-Q for the quarter ended March 31, 1999
10.16 Material Contracts Amendment to Restricted Stock Agreements incorporated
by reference from Form 10-Q for the quarter ended
March 31, 1999
10.17 Material Contracts Restricted Stock Agreements incorporated by reference
from Form 10-K for the year ended September 30, 1998
10.18 Material Contracts Restricted Stock Agreements, incorporated by reference
from Form 10-Q for the quarter ended March 31, 1998
10.19 Material Contracts Restricted Stock Agreements, incorporated by reference
from Form 10-K/A3 for the year ended September 30, 1997
10.20 Material Contracts Non-statutory Stock Option Agreements, incorporated by
reference from Form 10-K/A3 for the year ended
September 30, 1997
10.21 Material Contracts Incentive Stock Option Agreements incorporated by
reference from Form 10-Q for the quarter ended March
31, 1999.
10.22 Material Contracts Incentive Stock Option Agreements, 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 35 of the Financial Statements
share earnings
21 Subsidiaries of Registrant Note 1 on Page 32 of this report
23 Consent of Experts Attached
27 Financial Data Schedule Attached
51