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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
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OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _______________ to _______________
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
Incorporation or Organization) Identification No.)
Genesis Building, 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
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes [X] No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 1, 2002
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Common stock, $1 par value per share 6,745,609
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INDEX
PART I. FINANCIAL INFORMATION....................................................................................3
ITEM 1. FINANCIAL STATEMENTS...................................................................................3
CONSOLIDATED CONDENSED BALANCE SHEETS.......................................................................3
CONSOLIDATED CONDENSED STATEMENTS OF INCOME.................................................................4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW..............................................................5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)............................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................8
Critical Accounting Policies................................................................................8
Results of Operations......................................................................................10
Liquidity and Capital Resources............................................................................12
Future Accounting Requirements.............................................................................13
Cautionary Statement for "Safe Harbor" Purposes Under the Private Securities Litigation Reform
Act of 1995...............................................................................................14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................14
PART II. OTHER INFORMATION......................................................................................15
ITEM 1. LEGAL PROCEEDINGS....................................................................................15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................15
ITEM 5. OTHER INFORMATION....................................................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................15
(a) Index to Exhibits......................................................................................15
(b) Reports on Form 8-K....................................................................................15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
JUNE 30, September 30,
2002 2001
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 601 $ 6,865
Trade accounts receivable (net of allowance of $543,628 and $463,577) 2,702,828 2,130,847
Note receivable -- 35,071
Inventories:
Finished goods 2,370,059 1,902,050
Work-in-progress, raw material and supplies 2,244,449 1,845,243
Deferred income taxes 1,428,122 1,680,758
Prepaid expenses 335,933 184,137
Other current assets 55,116 362,972
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Total current assets 9,137,108 8,147,943
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PROPERTY, PLANT AND EQUIPMENT, NET 4,315,584 3,809,977
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OTHER ASSETS:
Cost in excess of net assets of acquired businesses
(net of amortization of $3,677,274 and $3,493,148) 5,530,006 5,698,247
Deferred income taxes 2,593,380 2,580,648
Trademarks (net of amortization of $150,454 and $120,083) 419,162 337,190
Other 256,034 268,865
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Total other assets 8,798,582 8,884,950
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Total assets $ 22,251,274 $ 20,842,870
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 801,000 $ 1,191,000
Trade accounts payable 3,322,205 1,902,373
Income taxes payable 517,745 531,748
Accrued expenses and other liabilities 2,286,354 2,016,303
Long-term debt due within one year 308,819 583,949
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Total current liabilities 7,236,123 6,225,373
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LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 82,931 75,112
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Total long-term liabilities 82,931 75,112
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STOCKHOLDERS' EQUITY:
Preferred stock, $5 par value; authorized, 300,000 shares; issued, none -- --
Common stock, $1 par value; authorized, 10,000,000 shares;
issued and outstanding, 6,745,609 and 6,707,832 shares 6,745,609 6,707,832
Capital in excess of par value 8,279,310 8,279,309
Unearned compensation, net (4,082) (8,145)
Retained earnings 794,919 463,403
Accumulated other comprehensive loss (883,536) (900,014)
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Total stockholders' equity 14,932,220 14,542,385
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Total liabilities and stockholders' equity $ 22,251,274 $ 20,842,870
===================================================================================================================
See notes to consolidated condensed financial statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
For the three months For the nine months
ended June 30, ended June 30,
2002 2001 2002 2001
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REVENUES:
Net product sales $9,306,956 $8,979,782 $29,275,300 $ 25,326,448
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OPERATING COSTS AND EXPENSES:
Cost of products sold 5,444,621 5,424,051 16,415,191 14,894,683
Selling, general and administrative expenses 3,512,708 3,391,540 11,996,221 10,389,340
Interest expense 22,023 21,910 64,474 71,794
Other expense, net 61,542 51,899 189,737 104,148
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Total operating costs and expenses 9,040,894 8,889,400 28,665,623 25,459,965
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Income (loss) before income taxes 266,062 90,382 609,677 (133,517)
Provision (benefit) for income taxes 108,796 41,357 278,163 (457,641)
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NET INCOME $ 157,266 $ 49,025 $ 331,514 $ 324,124
==========================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 6,729,860 6,701,204 6,735,303 6,712,652
Diluted 6,729,957 6,715,309 6,735,335 6,739,639
==========================================================================================================================
PER SHARE OF COMMON STOCK:
Basic and diluted
$ 0.02 $ 0.01 $ 0.05 $ 0.05
==========================================================================================================================
See notes to consolidated condensed financial statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
For the nine months ended June 30,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 331,514 $ 324,124
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 663,209 665,595
Provision for loss on disposal of assets 17,000 --
Common/treasury shares issued, net of unearned
compensation 41,841 81,411
Provision for losses on receivables 27,526 5,744
Deferred income taxes 239,904 (84,565)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in receivables (564,436) 16,744
Increase in inventories (867,215) (583,527)
(Increase) decrease in prepaid expenses (151,796) 75,058
Decrease (increase) in other current assets 307,856 (62,320)
Increase in accounts payable 1,419,832 220,059
Increase (decrease) in accrued expenses and other liabilities 270,051 (710,000)
Decrease in income taxes payable (14,003) (415,117)
Other, net (83,033) (202,234)
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Net cash provided by (used in) operating activities 1,638,250 (669,028)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (732,204) (1,556,936)
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Net cash used in investing activities (732,204) (1,556,936)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under credit facility (390,000) 863,085
Payment of long term debt (522,310) (12,498)
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Net cash (used in) provided by financing activities (912,310) 850,587
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Net decrease in cash and cash equivalents (6,264) (1,375,377)
Cash and cash equivalents, beginning of period 6,865 1,535,051
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Cash and cash equivalents, end of period $ 601 $ 159,674
=============================================================================================================
See notes to consolidated condensed financial statements.
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated condensed financial statements included in this report
have been prepared, without audit, by HMI Industries Inc. from our consolidated
statements and those of our subsidiaries, pursuant to the rules and regulations
of the Securities and Exchange Commission. Although we believe that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including significant accounting
policies, normally included in the annual financial statements have been
condensed or omitted pursuant to such rules and regulations.
In the opinion of our management, the unaudited financial information for the
interim periods presented reflects all adjustments (which include only normal,
recurring adjustments) necessary for a fair presentation. These consolidated
condensed financial statements and related notes should be read in conjunction
with the consolidated condensed financial statements and related notes included
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2001.
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year.
2. RECLASSIFICATION
Certain amounts in the fiscal 2001 consolidated condensed financial statements
have been reclassified to conform to the fiscal 2002 presentation.
3. SHIPPING AND HANDLING COSTS
Costs incurred for shipping and handling are included in the cost of products
sold when incurred. Amounts billed to customers for shipping and handling are
reported as net product sales.
4. 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, in no event longer than
one year.
Direct-response advertising consisted primarily of design and development costs
incurred in connection with a Filter Queen(R) television spot, which directs
viewers to call a 1-800-number to purchase our products. The capitalized costs
of the advertisement were being amortized over a twelve-month period, which
began in July 2001, following the first introduction of the advertisement into
our Americas sales division.
At June 30, 2002 and 2001, $-0- and $396,700 of advertising, respectively, was
reported as other current assets.
6
5. 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):
Nine Months Ended June 30,
--------------------------
2002 2001
-------------------------- --------------------------
Per Per
Share Share
Shares Amount Shares Amount
-------- -------- --------- ---------
Basic EPS 6,735 $ 0.05 6,713 $ 0.05
Effect of dilutive stock options -- $ -- 27 $ --
-------- -------- -------- --------
Diluted EPS 6,735 $ 0.05 6,740 $ 0.05
======== ======== ======== ========
Three Months Ended June 30,
--------------------------
2002 2001
-------------------------- --------------------------
Per Per
Share Share
Shares Amount Shares Amount
-------- -------- -------- -----------
Basic EPS 6,730 $ 0.02 6,701 $ 0.01
Effect of dilutive stock options -- $ -- 14 $ --
-------- -------- -------- --------
Diluted EPS 6,730 $ 0.02 6,715 $ 0.01
======== ======== ======== ========
As of June 30, 2002, 1,212,700 outstanding options were not included in the
computation of diluted EPS because the options' exercise prices were greater
than the average market price of the common shares. The exercise prices of these
options range from $1.0625 to $7.50 per share and expire between the period July
2, 2002 and August 29, 2010.
As of June 30, 2001, 556,800 outstanding options, subject to purchase, were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average market price of the common shares. The exercise
prices of these options ranged from $1.25 to $7.50 per share and expired between
the period January 2, 2002 and August 29, 2010.
6. COMPREHENSIVE INCOME/LOSS
Comprehensive income/loss combines net income/loss and "other comprehensive
items," which represents foreign currency translation adjustments, reported as a
component of stockholders' equity in the accompanying Consolidated Condensed
Balance Sheets. We present such information in our Statement of Stockholders'
Equity on an annual basis and in a footnote in our quarterly reports. We had
comprehensive income of $178,500 and $348,000 for the three and nine months
ended June 30, 2002, respectively and comprehensive income of $65,500 and
$319,300 for the corresponding periods ending June 30, 2001.
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following transaction has been treated as a non-cash item for purposes of
the Consolidated Condensed Statements of Cash Flow. During the third quarter of
fiscal 2002, we recorded $255,000 in debt in exchange for an asset. This asset
has been vendor-financed and consists of production equipment associated with
our filter cone product.
7
8. DEBT
On March 1, 2002, we entered into an additional $1 million revolving line of
credit with our current lender consisting of loans against our eligible
receivables and inventory. This additional line, which expired on May 31, 2002,
carried the same interest rate and covenants as our existing $2 million
revolving line of credit and was obtained to assist, if necessary, with the
build-up of inventory associated with the launch of our new product and other
strategic initiatives. As of the date of this report, our lender has approved
the reinstatement of the additional $1 million line at the same terms as when
originally obtained, with an expiration of January 31, 2003.
In addition, under the same agreement mentioned above, we reset the capital
expenditure covenant in anticipation of exceeding the previously established
levels during our fiscal year ending September 30, 2002.
There were no covenant violations under the credit facility agreement as of or
for the period ended June 30, 2002.
9. INCOME TAXES
During the second quarter of fiscal 2001, we were informed by the Internal
Revenue Service that examinations for fiscal years 1994 through 1997 were
completed. As these examinations resulted in minimal impact to the financial
statements, we recorded a benefit of $445,000 for the reversal of income tax
reserves associated with these fiscal tax years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon the consolidated condensed financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated condensed
financial statements required us to make estimates and judgments that affect the
reported amount of assets and liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities at the date of the consolidated
condensed financial statements. Actual results may differ from these estimated
under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgment and uncertainties, and potentially may result in materially
different outcomes under different assumptions and conditions. We believe that
the critical accounting policies are limited to those that are described below.
8
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. Quarterly, we
perform a review of all customer accounts with respect to aging of receivables,
historical payment patterns, customers' financial condition, and from this
review determine if an allowance is needed. If the financial condition of the
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
SALES RETURN AND ALLOWANCE
We record a provision for estimated sales returns and allowances on product
sales in the same period as the related revenues are recorded. These estimates
are based on historical sales returns and other known factors. If future returns
do not reflect the historical data we use to calculate these estimates,
additional allowances may be required.
EXCESS AND OBSOLESCENCE RESERVES
We evaluate our inventory to determine excess or slow moving items based on
current order activity and projections of future demand. For those items
identified, we estimate their market value or net sales value based on current
trends. An allowance is created for those items having a net sales value less
than cost. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be necessary.
GOODWILL AND OTHER INTANGIBLE ASSETS
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 these estimates or their
related assumptions change in the future, we may be required to record
impairment charges for these assets not previously recorded. During the nine
months ended June 30, 2002, we did not record any impairment losses related to
goodwill and other intangible assets (Refer also to our comments under the
Future Accounting Requirements section below concerning the adoption of FAS
142).
INCOME TAXES
Carrying value of our domestic net deferred tax assets assumes that we will be
able to generate sufficient future taxable income in certain tax jurisdictions,
based on estimates and assumptions. If these estimates and related assumptions
change in the future, we may be required to record additional valuation
allowances against our deferred tax assets resulting in additional income tax
expense in our Consolidated Condensed Statement of Income. Management evaluates
the realizability of the deferred tax assets quarterly and assesses the need for
additional valuation allowances quarterly.
WARRANTY RESERVES
Estimated future warranty obligations, based on historical trends, related to
our products are provided by charges to operations in the period in which the
related revenue is recognized. If future returns do not reflect the historical
data we use to calculate these estimates, additional allowances may be required.
9
RESULTS OF OPERATIONS
NET PRODUCT SALES
THIRD QUARTER OF FISCAL 2002 COMPARED TO THIRD QUARTER OF FISCAL 2001
Net product sales of $9,307,000 for the quarter ended June 30, 2002, were
$327,200 or 3.6% higher when compared to sales for the same quarter in fiscal
2001 of $8,979,800. The increase was entirely attributable to the Americas,
offset by decreased European sales.
Revenue growth in the Americas was largely attributable to the opening of
additional offices by several key master distributors within our existing
network, as well as the promotion of certain regional distributors to master
distributor status.
The sales decline in Europe was primarily due to lower sales to Portugal, Spain
and Belgium of which Portugal was the largest. Due to the relocation of some of
Portugal's best distributors to Brazil and the closing of non-performing
offices, the distribution network in Portugal is going through a period of
reorganization.
FIRST NINE MONTHS OF FISCAL 2002 COMPARED TO FIRST NINE MONTHS OF FISCAL
2001
Net product sales of $29,275,300 for the nine months ended June 30, 2002, were
$3,948,900 or 15.6% higher when compared to sales for the same period in fiscal
2001 of $25,326,400. The increase in sales was primarily attributable to
increased sales in the Americas and Asia offset by decreased sales in Europe,
primarily due to the aforementioned lower sales to Portugal.
The increased sales in the Americas were largely due to the increased network
sales as discussed above. Also contributing to the Americas revenue growth were
sales from the National Advertising Campaign (NAC), and Health-Mor at Home(TM)
offset by unfavorable Canadian sales. The NAC centers around the continued
testing and refinement of a thirty-minute infomercial. The NAC was designed to
increase brand awareness, generate sales-leads, and open new territories.
Health-Mor at Home(TM) created in October 2001, is a direct to consumer outbound
sales force designed to assist consumers in locations where distributors are no
longer located.
Defender(R) sales to Japan and Korea drove the year-to-date Asian revenue
increase. They were sold to distributors there that purchased them with the
intention of selling the Majestic(R) and Defender(R) together as a system rather
than as stand-alone products. Korea has had the most success marketing the
products together and we are hopeful that this trend of increased Defender(R)
sales will continue.
GROSS PROFIT
THIRD QUARTER OF FISCAL 2002 COMPARED TO THIRD QUARTER OF FISCAL 2001
The gross margin for the quarter ended June 30, 2002, was $3,862,300 or 41.5% of
sales as compared to $3,555,700 or 39.6% of sales in 2001. This represents an
increase in gross margin of $306,600 and was largely driven by a favorable sales
volume variance and improved product mix from the prior year.
10
FIRST NINE MONTHS OF FISCAL 2002 COMPARED TO FIRST NINE MONTHS OF FISCAL
2001
The gross margin for the nine months ended June 30, 2002, was $12,860,100 or
43.9% of sales as compared to $10,431,800 or 41.2% of sales for the same period
in 2001. Favorable sales volume variances represent the largest portion of the
$2,428,300 gross margin increase.
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A")
THIRD QUARTER OF FISCAL 2002 COMPARED TO THIRD QUARTER OF FISCAL 2001
SG&A expenses of $3,512,700 or 37.7% of sales for the quarter ended June 30,
2002, were $121,200 higher when compared to the same period in fiscal 2001 of
$3,391,500 or 37.8% of sales. These higher costs were attributable to increased
sales commissions and certain accrued benefit expenses, which followed the
increased level of sales and earnings. They were also impacted by expenses
associated with our NAC initiative and expenses relating to the launch of our
75th Anniversary units. Offsetting these increases were reduced video, career
development program and consulting expenses, incurred during the same period in
fiscal 2001.
FIRST NINE MONTHS OF FISCAL 2002 COMPARED TO FIRST NINE MONTHS OF FISCAL
2001
SG&A expenses for the nine months ended June 30, 2002, were $11,996,200 or 41.0%
of sales as compared to $10,389,300 or 41.0% of sales for the same period in
fiscal 2001; an increase of $1,606,900. The increase in SG&A expenses was
largely attributable to the aforementioned expenses associated with our NAC
initiative and non-recurring expenses of $425,400 relating to the Form 13D that
was filed with the Securities Exchange Commission on October 19, 2001, and later
amended on December 24, 2001 (See the Liquidity and Capital Resources section
below for additional information on the Form 13D filing). It was also impacted
by the aforementioned increased sales commissions and accrued benefit expenses.
Offsetting these increases were reduced professional fees of $345,500 relating
to non-recurring expenses, incurred during fiscal 2001, associated with the
evaluation of potential growth opportunities, as well as the costs associated
with certain career development programs and activities.
INCOME (LOSS) BEFORE INCOME TAXES
The year-to-date income before taxes of $609,700 was $743,200 higher when
compared to the prior year, which reflected a loss of ($133,500). Exclusive of
the above-mentioned non-recurring fees and expenses, our year-to-date income
before taxes would have been $1,035,100 and $212,000 for fiscal 2002 and 2001,
respectively.
INCOME TAXES
The effective tax rate for the quarter ended June 30, 2002 was 40.9% compared to
an effective tax rate of 45.8% for the same period in fiscal 2001. The change in
the effective tax rate is primarily attributable to additional tax benefits
associated with export sales.
The effective income tax rate for the nine months ended June 30, 2002 was 45.6%
compared to 342.8% in fiscal 2001. This difference was primarily attributable to
the reversal of income tax reserves in the prior year. During the second quarter
of fiscal 2001, the Internal Revenue Service informed us that examinations for
fiscal years 1994 through 1997 were completed. As these examinations resulted in
minimal impact to the financial statements, we recorded a benefit of $445,000
for the reversal of income tax reserves associated with these fiscal tax years.
The effective tax rate absent the reversal of these reserves would have been
9.5%.
11
INFLATION AND PRICING
Net product sales and income from continuing operations were not materially
impacted by inflation or changing prices.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash flows from operating activities provided net cash of $1,638,200 for the
nine months ended June 30, 2002, principally due to cash inflows resulting from
an increase in accounts payable of $1,419,800, net income of $331,500, as well
as net non-cash expenses of $989,500 primarily relating to depreciation and
amortization of $663,200 and deferred income taxes of $239,900, offset by
increases in inventory and accounts receivables of $867,200 and $ 564,400,
respectively.
The increase in accounts payable reflects higher purchasing activity associated
with the increased sales volume and new product models as well as a more
conscientious effort to monitor and improve working capital balances.
The inventory increase was largely a result of safety stock that was built to
prevent any shipping interruptions to the distribution network for a planned
one-week plant shutdown in July 2002, the purchase of raw material for the new
product models released in May and another scheduled for release in fiscal 2003,
as well as increased finished good stock levels associated with the buildup of
expected June 2002 orders that will not occur until July/August 2002.
The increase in our receivables balance is largely attributable to sales volume
increases related to several international customers who all receive credit
terms to assist in the growth and revitalization of these areas, and to growth
in our NAC program which provides for extended payment terms.
INVESTING ACTIVITIES
Capital expenditures of $732,200 represent the entire net cash used in investing
activities for the nine months ended June 30, 2002, of which the largest portion
relates to tooling associated with new products anticipated for release during
2003.
FINANCING ACTIVITIES
Net cash used in financing activities was $912,300, which included $522,300 for
payment of long-term debt and $390,000 for net repayments under the credit
facility.
Current working capital, together with anticipated cash flows generated from
future operations and our existing credit facility are believed to be adequate
to cover our anticipated cash requirements, including but not limited to capital
expenditures and expenses associated with the launch of our new products. As of
June 30, 2002, there was $801,000 borrowed on our $2,000,000 credit facility.
12
SCHEDULE 13D
On October 19, 2001, and as amended on December 24, 2001, Kirk W. Foley and
certain other reporting persons filed a Statement on Schedule 13D reporting the
acquisition of additional shares of our common stock by such persons. According
to the Schedule 13D, the reporting persons intended to seek, among other things,
(i) control of our board of directors and (ii) to have our board of directors
engage an investment banking firm to explore strategic alternatives.
We entered into an agreement with Kirk W. Foley, dated February 14, 2002, in
settlement of certain proposals made by Mr. Foley in the 13D. Under the terms of
the settlement, we have restructured our Board of Directors by reducing the size
of the Board from nine to six directors and providing for annual elections of
all directors. The six directors consist of the five continuing directors: James
R. Malone, Chairman, Thomas Davidson, John Pryor, Murray Walker and Ivan
Winfield. Our Board of Directors has elected Mr. Foley to fill the sixth
director seat. The six directors will serve until the 2003 stockholders'
meeting. In conjunction with the reduction in Board size, four of our original
nine directors resigned from the Board. The resigning directors are Carl H.
Young, III, Robert J. Abrahams, John S. Meany, Jr. and Barry L. Needler.
FUTURE ACCOUNTING REQUIREMENTS
In May 2002, the FASB issued SFAS No. 145, Rescission of FAS Nos. 4, 44, and 64,
Amendment of FAS 13, and Technical Corrections as of April 2002. The provisions
of this Statement related to the rescission of SFAS No. 4 are effective for
fiscal years beginning after May 15, 2002, while provisions related to SFAS No.
13 are effective for transactions occurring after May 15, 2002, and all
remaining provisions of this Statement shall be effective for financial
statements issued on or after May 15, 2002. This Statement eliminates SFAS No.
4, as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items if they meet the criteria of APB Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. This Statement also eliminates SFAS No. 44, which was
established to provide accounting requirements for effects of transition for
provisions of the Motor Carrier Act of 1980. The deregulation of intrastate
operating rights and transition to the provisions of those laws being complete
has necessitated the rescission of SFAS No. 44. This Statement also eliminates
the need to have SFAS 64, which was an amendment to SFAS 4 and has been
rescinded with this Statement. Lastly, this Statement amends SFAS 13, requiring
lease modifications that have economic effects similar to sale-leaseback
transactions to be accounted for in the same manner as sales-leaseback
transactions. We are currently in the process of evaluating this Statement and
do not expect the adoption of this Statement to have a material impact on our
financial statements and results of operations.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." FAS 144 replaces FAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The FASB issued FAS 144 to establish a single accounting model,
based on the framework established in FAS 121, as FAS 121 did not address the
accounting for a segment of a business accounted for as a discontinued
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operation under APB 30 "Reporting The Results of Operations - Reporting The
Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and
Infrequently Occurring Events and Transactions." FAS 144 also resolves
significant implementation issues related to FAS 121. Companies are required to
adopt FAS 144 for fiscal years beginning after December 15, 2001, but early
adoption is permitted. We have not yet determined the impact, if any, this
standard will have on our operating results and financial position.
In July 2001, the FASB also issued FAS 142 "Goodwill and Other Intangible
Assets". FAS 142 addresses financial accounting and reporting for intangible
assets acquired individually or with a group of other assets at acquisition. FAS
142 presumes that goodwill and certain intangible assets have indefinite useful
lives. Accordingly, goodwill and certain intangibles with indefinite lives will
not be amortized, but rather will be tested at least annually for impairment.
FAS 142 also addresses accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. FAS 142 is effective for
fiscal years beginning after December 15, 2001. As of the date of this filing,
we have initiated the process to implement FAS 142 and anticipate the completion
of the first implementation step, which is to obtain a valuation for the company
which will screen for the potential impairment of goodwill, by December 31,
2002. As FAS 142 utilizes a different accounting model than the current
accounting standard, possible impairment of our goodwill could be determined as
a result of this step.
CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of the Federal securities laws. As a general matter, forward-looking
statements are those focused upon future plans, objectives or performance as
opposed to historical items and include statements of anticipated events or
trends and expectations and beliefs relating to matters not historical in
nature, including by way of example, but not limited to, the statements made in
"Net Product Sales" regarding the continued trend of Korean system sales,
"Liquidity" regarding anticipated cash requirements and the adequacy of our
current means to be able to meet those requirements. 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 consumer 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk is related to our borrowings. Fixed rate
borrowings may have their fair market value adversely impacted from changes in
interest rates. Variable rate borrowings will lead to additional interest
expense if interest rates increase. As of June 30, 2002, we had $801,000
outstanding under our credit facility bearing interest at the prime rate. If
interest rates were to increase 50 basis points (0.5%) from the June 30, 2002
rates and assuming no changes in outstanding debt levels from the June 30, 2002
levels, we would realize an increase in our annual interest expense of
approximately $4,000.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) INDEX TO EXHIBITS
3.1 Certificate of Incorporated by reference from Annual Report
Incorporation 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
3.3 Amended Bylaws Incorporated by reference from Form 8-K
filed on February 19, 2002.
10.00 Material Contract Firstar Bank, NA Revolving Credit
Agreement, incorporated by reference from
Form 10-Q for the period ended March 31,
2002.
10.01 Material Contract 13-D Settlement Agreement incorporated by
reference from Form 8-K filed on February
19, 2002
(b) REPORTS ON FORM 8-K
No report on Form 8-K was filed during the quarter ended June 30, 2002.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMI Industries Inc.
-------------------
(Registrant)
Date: August 14, 2002 /s/ Julie A. McGraw
--------------- ------------------------------------
Julie A. McGraw
Vice President - Chief Financial
Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF HMI
INDUSTRIES INC. PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report on Form 10-Q (the "Report") for the
period ended June 30, 2002 as filed with the Securities and Exchange Commission
on the date hereof, each of the undersigned certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of HMI Industries Inc.
/s/ James R. Malone /s/ Julie A. McGraw
- ----------------------- -----------------------
James R. Malone Julie A. McGraw
Chief Executive Officer Chief Financial Officer
August 14, 2002 August 14, 2002
15