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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 2-30905
HMI INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-1202810
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
6000 Lombardo Center, Suite 500,
Seven Hills, Ohio 44131
- ---------------------------------------- -----------------------------------
(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
- ----------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
---------------
Common Stock, $1 par value per share
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past ninety (90) days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of registrant,
computed by reference to the closing price on the OTC Bulletin Board on October
24, 2002 was approximately $1,654,126.
Class October 24, 2002
------------------------------------ ---------------------
Common stock, $1 par value per share 6,745,609
The following documents are incorporated by reference in this Form 10-K.
Portions of the Proxy Statement for the 2003 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 51 pages.
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TABLE OF CONTENTS
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PART I............................................................................................................2
Item 1. Business..............................................................................................2
Item 2. Properties...........................................................................................10
Item 3. Legal Proceedings....................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders..................................................11
PART II..........................................................................................................11
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................11
Item 6. Selected Financial Data..............................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................14
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
Item 14. Controls and Procedures.............................................................................23
PART IV..........................................................................................................23
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................................23
SIGNATURES.......................................................................................................24
INDEX TO FINANCIAL STATEMENTS....................................................................................27
INDEX TO EXHIBITS................................................................................................50
1
PART I.
(DOLLARS IN THOUSANDS)
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
Our company, HMI Industries Inc. ("HMI"), 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.
Over the last five years HMI has positioned itself to invest in new
infrastructure and pursue additional core growth opportunities by:
a) directing the financial turnaround of the company while increasing
product awareness and brand recognition to strengthen and grow the top
line,
b) divesting all non-core businesses,
c) streamlining processes and lowering costs,
d) successfully completing a $2,000 private offering of our common
stock,
e) creating a program to aid in the retention of Distributors and help
with the development of their professional careers and independent
businesses (see U.S. MARKET below for additional information),
f) creating and developing Health-Mor at Home(TM), a direct to consumer
outbound sales force designed to assist consumers in locations where
Distributors are no longer located,
g) more fully automating our assembly and distribution by moving all
production areas to a new and more efficient facility in Strongsville,
Ohio, as well as relocating our sales, marketing and executive
personnel to our new corporate world headquarters at 6000 Lombardo
Center, Seven Hills, Ohio, and
h) obtaining approval for our manufacturing facility as both a Medical
Class II facility by the Food and Drug Administration ("FDA") and as a
Foreign Trade Zone. The FDA Medical Class II recognition is the
medical equivalent to the ISO 9001 standards. The Foreign Trade Zone
status provides dollar saving benefits on such things as duty
exemption on re-exports, duty elimination on waste and scrap, no duty
on rejected or defective parts, duty deferral, no duty on domestic
content or value added and relief from local taxes.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Our continuing operations consist of a single operating segment. See Note 1 of
the Notes to the Consolidated Financial Statements for further information.
2
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 ("EPA"), 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. In addition, studies by the EPA consistently rank indoor air pollution
among the top five environmental risks to public health. According to the June
2002 issue of Health Magazine... "Every breath you take carries tiny particles
into your lungs...and new evidence suggests that as many as 50,000 Americans may
die each year from inhaling these microscopic specks. Worldwide, that number
could be as high as 2.8 million deaths annually..." Health Magazine suggests two
methods to help clear potentially harmful particles from our air are to "Get a
good filter" and "Upgrade your vacuum". In September 2002, Woman's World
Magazine warns that "It's never been more important to avoid pollution and make
sure you're breathing the cleanest air possible." Furthermore a May 2002 report
on CNN states that "About half of all Americans...are breathing bad air." In
February of 2002, "the National Academy of Sciences Institute of Medicine found
that allergens produced by cats, cockroaches, and dust mites can aggravate
asthma." The February 2002 Consumer Reports states that "...choosing the right
vacuum, air cleaner...can improve the air you breathe and protect your home."
PRODUCTS AND DISTRIBUTION
Our principal 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(R) uses a patented multi-filtration 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 reduce
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, which is better than HEPA (high efficiency
particulate arrestance technologies), the industry standard.
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 two-year period from
the date of purchase and offer a lifetime service benefit for the replacement of
the surface cleaner's motor at a price not to exceed $99 USD. We also offer a
five-year optional warranty on the portable surface cleaner. Outside the U.S.,
we offer a two-year warranty for our high filtration portable surface cleaner.
The portable room air
3
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 400 Distributors and Importers
who sell our products. Our independent authorized Distributors and Importers
sell our products in more than 35 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 through in-home sales and direct response advertising, as both
methods allow for 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 parts and
supplies to the end-consumers in their territories, which provides them with
another source of revenue and potential referral network.
U.S. MARKET. In the United States, we primarily sell our high filtration
portable surface cleaner and portable room air cleaner through Distributors who
sell our products to end consumers through sales associates.
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 multi-step program that provides business
training from the earliest level of a new recruit to the most senior level of a
Premier Master Distributor. The program provides incentives at each level to
promote the development and retention of quality Distributors and sales
associates. Personal and professional training includes: sales, and recruiting
seminars, a business management correspondence course, and a week-long
educational and training course called the Business Management Institute ("BMI")
designed in conjunction with Baldwin-Wallace College in Cleveland, Ohio. BMI
addresses everything from sales techniques, lead generation, personal finances,
moral, legal and ethical standards, human resource compliance issues, to
business ownership and more. Every Distributor that opens a Filter Queen(R)
office must attend BMI. The results prove that offices operated by BMI graduates
are more successful in terms of unit sales and associate retention than those
operated before the inception of the program. The reward for working your way
through The Edge and selling 30,000 Filter Queen(R) units is $1 million. In May
of 2003, we expect to reward our first millionaire at our national convention.
In May of 2001, we received the distinguished Education for Life Award for our
unique and outstanding education program, The Edge Success Program. The Direct
Selling Association recognizes companies in the direct selling industry that go
beyond just sales training. Other companies who received this honor in the past
include Tupperware, Avon and Mary Kay.
In an effort to improve our service to the end-consumers, in fiscal 2001 we
created Health-Mor at Home(TM) ("HMAH"). HMAH is a revenue generating inside
sales organization selling replacement parts and services to Filter Queen(R)
owners, throughout the United States, who no longer have an authorized
Distributor in their area.
4
MARKETS OUTSIDE THE U.S. Success in exporting has occurred for us mostly in the
last twenty 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.
This year a reorganization of the management for our international market has
resulted in the planned introduction of the most successful U.S. programs. For
example, in early calendar 2003, the Edge Success Program, BMI, the "System"
selling strategy, and the new power nozzle (formally sold only as an option)
will all be introduced, with great anticipation, to some of our largest foreign
markets in parts of Asia, Europe and the Middle East.
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. Regulatory efforts in Europe and
the U.S. have focused on imposing more restrictions on telemarketing. There can
be no assurance that such 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, using customer referral programs, and a
National Advertising Campaign ("NAC").
Though we have not marketed our products directly to the consumer in the past,
we have been testing a NAC as a method to develop sales leads, increase market
penetration and improve brand awareness. In July 2001 we introduced our first
ever thirty-minute television commercial. Running on national cable channels
like the Sci-Fi Network, HGTV, Hallmark and Bravo, as well as local broadcast
channels, we were able to reach millions of homes. Although it did not generate
the financial results we anticipated, the commercial, which we stopped
broadcasting in August 2002, did triple the hits on our website during the
period it was on the air, hence, we were able to distribute numerous new leads
to our network.
In addition to television advertising we developed an alliance with a medical
doctor to write a book on the dangers of indoor air pollution. In his book,
EVERY BREATH YOU TAKE, Dr. Bill Loughridge explains how to reduce the negative
affects of indoor air pollution. In the "solutions" section of the book, Dr.
Loughridge recommends Filter Queen(R) as the best cleaning system to help
maintain a healthy environment. The book was published in May 2002 and is
available through Ingram Books, or HM@H. Filter Queen(R) Distributors have
purchased the book to educate their sales associates and consumers. Many
Distributors give the book away free just for seeing a demonstration. To date
nearly four-thousand books have been distributed.
5
We also are continuing our relationship with the National Trust for Historic
Preservation ("National Trust"), originally begun in 1998, by exclusively
supplying our Filter Queen Indoor Air Quality System(TM) to 19 sites 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 help preserve 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, Cliveden in Philadelphia,
Lyndhurst in Tarrytown, New York and Woodrow Wilson's home in Washington, D.C.
RAW MATERIAL
We assemble finished units from 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. In the case of trademarks used which are
owned by others, we have entered into long-term license agreements to use the
trademarks. 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
Historically we experience lower product sales in our fiscal fourth quarter, as
compared to the first three fiscal quarters, resulting from fluctuations in our
European product sales as the European importers adjust their inventory volumes
in July/August for the standard European holiday month of August. European net
product sales approximated 14.6%, 19.8% and 24.9% for the fiscal fourth quarters
in 2002, 2001 and 2000, respectively, as compared to the average of the first
three fiscal quarters in 2002, 2001 and 2000 of 19%, 23% and 30%, respectively.
MAJOR CUSTOMERS AND DEPENDENCE ON INDEPENDENT DISTRIBUTORS
We are subject to risks specific to the individual countries in which we do
business. In fiscal 2002 one international customer accounted for more than 10%
of our product sales. This international customers product sales were 11.9% of
our total product sales. In fiscal 2001 and 2000, three international customers
accounted for more than 10% each of our product sales with individual sales of
13.1%, 11.2% and 10.2% of total product sales in fiscal year 2001, and 13.1%,
12.9% and 11.3% of total product sales in fiscal year 2000. The loss of any
significant portion of our sales from these Importers could 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 our products and us. The Distributors 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 will
continue on acceptable terms and conditions to us, nor can there be any
assurance that additional
6
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
financial condition and results of operations.
In addition, our business could be adversely affected by a variety of
uncontrollable and changing factors, including but not limited to: difficulty in
protecting our intellectual property rights in a particular foreign
jurisdiction; recessions in economies outside the United States; longer payment
cycles for and greater difficulties collecting accounts receivable; export
controls, tariffs and other trade protection measures; social, economic and
political instability; and changes in United States and foreign countries laws
and policies affecting trade.
BACKLOG
We operate monthly with a minimal backlog (backlog at September 30, 2002, 2001
and 2000 was $6, $-0- and $19, respectively).
COMPETITION
We experience strong competition in the sale of our high filtration portable
surface cleaners, central vacuum systems and portable room air cleaners. Not
only do we compete for consumer sales but also for Distributors to sell our
products. 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. Economy or disposable 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 last survey from the Vacuum
Dealers Trade Association, 75% of vacuum sales in 2000 were through retail store
outlets while direct-selling companies like HMI sold 25%. We believe that our
high filtration portable surface cleaner is superior to other vacuum cleaners
because of its outstanding 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,
Tristar, Kirby, Miracle Mate, Electrolux and Water-Matic, and companies that
sell through retail outlets such as Eureka, Hoover, Kenmore and Royal. HMI is
also manufactures and distributes a portable room air cleaner recognized as a
Class II Medical Device by the FDA. The portable room air cleaner market is
primarily a retail and catalog business. HMI's Defender(R) competes directly
with air cleaners like; Alpine, Honeywell, Bionaire, Hunter, Holmes and Sharper
Image. 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.
According to The U.S. Air Cleaner Market Report 2000, published by Riedel
Marketing, nearly 70% of air cleaner owners purchased through traditional retail
establishments while just 5% of those who own an air cleaner purchased from a
salesperson that came to their home.
7
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. In fiscal year 2002, 2001 and 2000, we
invested $273, $351 and $643, respectively, in new product development. We
anticipate expending less money on the development of new products in fiscal
year 2003.
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 14 part-time employees at September 30, 2002. None
of our employees are parties to a collective bargaining agreement, and we
believe our relationships with all our employees to be good.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Sales to international customers represent 48.7%, 57.8% and 64.4% of net product
sales for the years ending September 30, 2002, 2001 and 2000, respectively.
8
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION AND TERMS OF SERVICE AS OFFICER
- ---------------------------- -------- ----------------------------------------------------------------------------
James R. Malone 59 Chairman and Chief Executive Officer
John A. Pryor 60 President and Chief Operating Officer (1)
Julie A. McGraw 38 Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (2)
Joseph Najm 42 Vice President-Operations (3)
Daniel J. Duggan 42 Vice President (4)
Darrell Weeter 46 Vice President (5)
John S. Meany, Jr. 57 Vice President, and Secretary (6)
(1) Mr. Pryor was elected President and Chief Operating Officer in 2001. From
1992 to 2001 he was President of Pryor & Associates, which provided
consulting services to the food service industry. From 1996 to 2000 he was
President and Chief Executive Officer of Valley Innovative Services, a food
services management company.
(2) Ms. McGraw was elected Chief Financial Officer and Treasurer in 2000 and
Vice President in 1999. She served as Corporate Controller from 1998 to
2001, and as Assistant Corporate Controller from 1996 until 1998.
(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) Mr. Duggan has served in various capacities with the Company since 1990. He
was elected Vice President in 2001 and has served as President of the
International Sales Division since 2002. From 1997 to 2002 he was President
of the Asia-Pacific Sales Division.
(5) Mr. Weeter was elected Vice President in 2001. He has also served as
President of the Americas Sales Division since 2000, and was Vice President
of the Americas Sales Division from 1998 to 2000. He has also served as
President of FVS Inc., a Distributor of products manufactured by the
Company, since 1985.
(6) Mr. Meany was elected Vice President in March 2002, and also has served as
Corporate Secretary since 1995. He was an attorney in private practice from
1991 to 2002.
9
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, 2002:
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 2,180
ITEM 3. LEGAL PROCEEDINGS
Bliss Technologies, Inc. ("Bliss"), the company formed from the 1998 sale of the
subsidiary of HMI, filed for bankruptcy in January 2000 in the United States
Bankruptcy Court, Eastern District of Michigan. In this action filed in 2002,
the Official Committee of Unsecured Creditors of Bliss Technologies alleges a
fraudulent conveyance claim against us asserting that the sale of Bliss in 1998
was a fraudulent transfer insofar as we received more for Bliss than it was
worth and that Bliss was insolvent from its inception. Former directors of
Bliss, Mark Kirk and Carl Young, are also named as defendants in the action.
Claims pending against them allege that in their capacity as Bliss directors
they breached fiduciary duties to Bliss creditors. The complaint seeks damages
in an unspecified sum. The claims against us and the claims against Mr. Kirk and
Mr. Young are being vigorously defended. We believe that we will resolve this
matter in a manner that will not have a material adverse effect on HMI.
CONET Industries, Inc., Royal Queen Club International Limited, Chang-whan Chang
and Young-so Song ("Plaintiffs") filed a complaint against HMI on or about
February 18, 2001 in the Seoul, Korea District Court. It was served by
Registered Mail upon HMI at our corporate offices in Seven Hills, Ohio on or
around April 10, 2002. The complaint was filed as a result of lawsuits by us
against Mr. Song, a former HMI Distributor in Korea, and Royal Queen Club
concerning Mr. Song's CYVAC product. In our lawsuits, we sought and were granted
preliminary injunctions against Plaintiffs that prohibited Plaintiffs from
manufacturing and selling the old model CYVAC for 311 days and the new model
CYVAC for 209 days, until the Seoul High Court issued a declaration of
suspension of the injunctions. Despite the fact that Plaintiffs had been
enjoined by the Courts, Plaintiffs allege that we should compensate them for
actual damages for sale discontinuance, supplemental managerial costs and new
mold fabrication costs due to the interruption in the manufacturing and
marketing of each product during that period. Plaintiffs also claim that we
tortuously interfered with Plaintiffs' business advantages, caused irreparable
harm to Plaintiffs' normal business activities and damaged Plaintiffs'
reputation and standing. Chang-whan Chang and Young-so Song allege that they
have been critically damaged personally due to the accusations, improper
provisional seizure and criminal allegations alleged by us, which they assert
resulted in disturbance to business, reputation and credit. All matters are
pending. The Plaintiffs allege damages in excess of U.S. $21,894. We believe
that since we proceeded in conformity with the authority of the Courts, the
claims against us are meritless and
10
that this matter will not have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
Claims arising in the ordinary course of business are also 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, 2002 and 2001 were
accruals of $15 and $15, respectively, relating to various claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded in the over-the-counter market on the OTC Bulletin
Board under the symbol "HMII.OB". As of September 30, 2002, there were 226
stockholders of record.
A summary of the quarterly high and low bid price of our common stock on the OTC
Bulletin Board for the years ended September 30, 2002 and 2001, are as follows:
2002
High [1] Low [1]
----------- -----------
1st Quarter $ 1.01 $ 0.70
2nd Quarter $ 0.80 $ 0.51
3rd Quarter $ 0.83 $ 0.58
4th Quarter $ 0.65 $ 0.46
2001
High [1] Low [1]
----------- -----------
1st Quarter $ 1.125 $ 0.6875
2nd Quarter $ 1.5 $ 0.84375
3rd Quarter $ 1.15 $ 0.7
4th Quarter $ 1.15 $ 1.01
[1] The bid price for our common stock was received from Nasdaq Trading & Market
Services. Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
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 2002 or 2001 as the credit agreement with our
lender presently prohibits us from declaring or paying any dividends.
11
Securities Authorized for Issuance Under Equity Compensation Plans. Information
about HMI equity compensation plans at September 30, 2002 was as follows (shares
in thousands):
Number of shares
Number of shares to remaining available
be issued upon Weighted average for future issuance
Plan Category exercise of exercise price of under equity
outstanding options outstanding options compensation plans
- --------------------------------------------- ----------------------- ---------------------- ------------------------
Equity compensation plans approved by
shareholders (a) 1,012 $1.25 -0- (b)
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved by
shareholders (c) 135 $5.91 -0-
- ---------------------------------------------------------------------------------------------------------------------
Total 1,147 $1.80 -0-
a) These options were issued under the 1992 Omnibus Long-Term Compensation
Plan. See "Notes to Consolidated Financial Statements, Note 5 - Long-Term
Compensation Plan."
b) The 1992 Omnibus Long-Term Compensation Plan (the "Plan") does not contain
any restriction on the number of shares that can be issued pursuant to an
award under the Plan except for Incentive Stock Options ("ISO"), which are
limited to 2,500,000 shares, as adjusted for stock splits. No new ISO
grants may be made under the Plan because the Plan was adopted more than
ten years ago. Regulations of the Internal Revenue Service which determine
whether or not on option is an ISO require that the Plan under which an ISO
is granted must have been adopted within the prior ten years. The number of
shares available for grant each year is equal to 5% of the Company's
outstanding Common Stock on December 31 of the prior year. To the extent
that the number of awards in any year is less than 5%, this unused amount
may be carried over to future years. Awards which have lapsed or been
forfeited may also be reissued in future years. The maximum number of
awards that can be made in any year, including carryovers and lapsed and
forfeited awards, is equal to 10% of the Company's outstanding Common Stock
on December 31 of the prior year.
c) Awards of non-qualified stock options were made to two outside consultants
in connection with their services to HMI. The option price was the fair
market value on the date of grant. One option for 100 shares expires ten
years from the date of grant (2006), while the other option for 35 shares
expires five years from the date of grant (2005).
12
ITEM 6. SELECTED FINANCIAL DATA
In thousands except per share amounts and ratios
2002 2001 2000 1999 1998
--------- ---------- --------- ---------- ---------
Net Product Sales $ 37,113 $ 32,535 $ 34,621 $ 36,927 $ 38,748
Cost of Product Sold and SG&A Expenses $ 36,080 $ 32,754 $ 33,515 $ 38,447 $ 48,203
Impairment Loss $ --- $ --- $ --- $ 2,665 $ ---
Other Expense (Income), net $ 430 $ 287 $ (6) $ (60) $ 1,335
Income (Loss) From Continuing
Operations Before Taxes $ 603 $ (506) $ 1,112 $ (4,125) $ (10,790)
Income (Loss) Margin From Continuing
Operations Before Taxes 1.6% (1.6%) 3.2% (11.2%) (27.8%)
Income Tax Expense (Benefit) $ 265 $ (593) $ (353) $ 116 $ (2,217)
Income Tax Rate 43.9% 117.2% (31.7%) (2.8%) 20.5%
Income (Loss) From Continuing
Operations $ 338 $ 87 $ 1,465 $ (4,241) $ (8,573)
Income (Loss) Margin From Continuing
Operations 0.9% 0.3% 4.2% (11.4%) (21.9%)
Income From Discontinued Operations $ --- $ --- $ --- $ --- $ 441
Gain (Loss) on Disposals $ --- $ --- $ 425 $ (375) $ 7,157
Net Income (Loss) $ 338 $ 87 $ 1,890 $ (4,616) $ (975)
Net Income (Loss) Margin 0.9% 0.3% 5.5% (12.4%) (2.5%)
Per Share Data - Basic and Diluted:
Income (Loss) Before Discontinued
Operations $ 0.05 $ 0.01 $ 0.24 $ (0.81) $ (1.66)
Income From Discontinued Operations $ --- $ --- $ --- $ --- $ .09
Gain (Loss) on Disposals $ --- $ --- $ 0.07 $ (0.07) $ 1.38
Net Income (Loss) $ 0.05 $ 0.01 $ 0.31 $ (0.88) $ (0.19)
Weighted Average Number of Common
Shares Outstanding:
Basic 6,719 6,691 6,113 5,263 5,170
Diluted 6,719 6,724 6,140 5,263 5,170
Total Assets $ 21,456 $ 21,241 $ 20,843 $ 17,465 $ 24,409
Long-Term Debt $ 33 $ 75 $ 71 $ --- $ 42
Stockholders' Equity $ 14,871 $ 14,543 $ 14,394 $ 10,326 $ 14,099
Working Capital $ 1,947 $ 1,923 $ 3,913 $ 612 $ (18)
Ratio of Current Assets to Current
Liabilities 1.30 1.29 1.61 1.09 1.00
Percent of Earnings on Average
Stockholders' Equity 2.3% 0.6% 15.3% (37.8%) (6.80%)
Stock High(a) 1 1/5 1 11/16 1 3/4 2 1/4 6 1/2
Stock Low(a) 25/49 11/16 1/2 1 1 1/4
(a) Represents closing price of stock
13
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.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon the consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these consolidated 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.
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 year
ended September 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).
14
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 and warranty settlements do not
reflect the historical data we use to calculate these estimates, additional
allowances may be required.
RESULTS OF OPERATIONS - 2002 COMPARED WITH 2001
NET PRODUCT SALES- Net product sales of $37,113 for the year ended September 30,
2002, were $4,578 or 14.1% higher when compared to the prior year sales of
$32,535. The increase in sales was primarily attributable to increased revenues
in the Americas and Asia offset by decreased sales in Canada and Europe. The
Americas, backed by a stronger distribution network and our National Advertising
Campaign ("NAC"), was the largest contributor to this sales increase.
The opening of additional offices by several key Distributors within our
existing Americas' network, as well as the switch of Distributors from a
competitor in the second quarter of fiscal 2001, led to increased Majestic(R)
(portable floor care cleaner) and Defender(R) (portable air room cleaner) sales
in the Americas. Further contributing to the Americas revenue growth were sales
from the NAC and Health-Mor at Home(TM). The NAC, a thirty-minute infomercial
which began airing in July 2001, was designed to increase brand awareness,
generate sales leads, and open new territories. In August 2002, we stopped
broadcasting the infomercial as anticipated profits for this program were not
being met and the infomercial had exceeded the industry standard expected life
cycle of twelve months. 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 that had the intention of selling the
Majestic(R) and Defender(R) together as a system rather than as stand-alone
products, similar to how the products are marketed in the United States. Korea
has had the most success marketing the products together and we are optimistic
that the Korean trend of increased Defender(R) sales will continue.
The lack of consumer financing options and Distributor development programs led
to a decline in Canadian sales over the course of fiscal 2002. This decline
prompted HMI and the Canadian Importer to meet with the key Distributors in that
territory after which it was decided that the Canadian network would adopt the
Americas Edge Success Program effective June 2002. "The Edge Success Program"
(the "Edge"), developed to aid in the retention of Distributors and help with
the development of their professional careers and independent businesses, is an
innovative, highly structured multi-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
15
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 Baldwin Wallace College in Ohio, and addresses
everything from in-home demonstration techniques to generation of sales leads,
personnel training, compliance matters, ownership and operation of a
distributorship, and more. We are hopeful that the introduction of the Edge
Program into Canada will increase sales similar to what has been experienced in
the Americas Division. The merger of the Canadian network into the Americas Edge
Program will also allow the previous Canadian Importer to strategically focus
more of his efforts on his other territories in parts of Europe, Middle East and
Asia-Pacific.
The sales decline in Europe was primarily due to lower sales to Portugal 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.
Net product sales were not materially impacted by changing prices.
GROSS PROFIT- The gross margin for the year ended September 30, 2002, was
$15,815 or 42.6% of sales as compared to $13,166 or 40.5% of sales in 2001. This
increase in the gross margin of $2,649 was principally attributable to the
higher sales volume and improved product mix, in part driven by a higher
proportion of Defender(R) versus Majestic(R) sales, over the prior year,
partially offset by unfavorable plant spending largely associated with increased
salaries and depreciation.
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A")- SG&A expenses for the year ended
September 30, 2002, of $14,782 were unfavorable to the fiscal 2001 expenses of
$13,385 by $1,397. The increase in SG&A expenses was largely attributable to the
$1,382 of expenses associated with our aforementioned NAC initiative and
non-recurring expenses of $435 relating to the Schedule 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 Schedule 13D filing). It was also impacted by
increased sales commissions and certain accrued benefit expenses, which followed
the increased level of sales and earnings. Offsetting these increases were
reduced professional fees of $346 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 and reduced outside consulting.
INTEREST EXPENSE- Interest expense for fiscal year 2002 was $86, or $15 lower
than the fiscal 2001 balance of $101 primarily due to lower interest rates
associated with our current credit facility as compared with those in 2001.
OTHER EXPENSE (INCOME)- The increase in other expense (income), net, from $186
in fiscal 2001 to $344 for the year ended September 30, 2002 primarily resulted
from a franchise tax refund received in 2001 from a former legally dissolved
subsidiary as well as a decrease of other income associated with the cessation
of the financing of end user purchase contracts by HMI.
INCOME TAXES- The effective income tax rate for the year ended September 30,
2002 was 43.9% compared to 117.2% in fiscal 2001. This difference was driven by
the increase in pre-tax earnings and the absence of significant permanent
differences in fiscal 2002. In addition, prior year provisions were impacted by
IRS settlements and valuation allowance adjustments that were not required in
this fiscal tax provision.
16
The effective rate for fiscal 2001 was primarily attributable to the reversal of
income tax reserves and the prior year utilization of net operating loss
carryforwards not previously recognized. 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 the examinations resulted in
minimal impact to the financial statements, we recorded a benefit of $445 for
the reversal of income tax reserves associated with these fiscal tax years. The
effective rate absent these reserves would have been (29.2%).
INFLATION AND PRICING- While inflation or changing prices have not had, and we
do not expect them to have, a material impact upon operating results, there can
be no assurances that our business will not be affected by inflation or changing
prices in the future.
RESULTS OF OPERATIONS - 2001 COMPARED WITH 2000
NET PRODUCT SALES- Net product sales of $32,535 for the year ended September 30,
2001, were $2,086 or 6.0% lower when compared to the prior year sales of
$34,621. The decrease in sales was primarily attributable to lower international
sales in Western Europe and Asia offset by increased sales in the Americas.
Decreased sales in Western Europe had the largest unfavorable international
impact and were primarily attributable to reduced sales to Portugal, the U.K.
and Belgium.
The reduced sales to Portugal reflected realignments made by this Importer to
his inventory levels throughout fiscal 2001. The realignment was done in part to
lower warehouse safety stock in order to improve his cash flow position to
assist in the development of a distribution network in Brazil and in part due to
a lower sell through rate to the end consumer in the fourth quarter.
The reduced sales to the U.K. were the result of the loss of our largest
Importer who resigned as an HMI Importer in the first quarter of fiscal 2001.
While a former Distributor has since become the Importer for that territory, it
will be some time before the new Distributor can recover the volume loss from
the largest Importer. The decline in the Belgium (formerly Holland) Importer's
sales was largely associated with the reduced level of warehouse sales to
Distributors in the U.K. who typically purchase smaller quantities from this
"European warehouse" rather than container-sized shipments purchased directly
from HMI.
Sales in the Americas to our existing Distributor base increased $1,321 from
fiscal 2000 and were driven primarily by growth in Defender(R) sales, which had
been favorably impacted by the introduction of the new model as well as its
approval in the second quarter as a Class II Medical Device by the Food and Drug
Administration. Defender(R) sales also increased as Distributors continued the
trend of marketing the Majestic(R) and Defender(R) together as a system rather
than as standalone products, by the opening of additional offices within the
existing network, as well as the switch of Distributors from a competitor.
Majestic(R) sales were favorably impacted by these additional offices as well.
Further contributing to the Americas revenue growth were sales from our
Health-Mor at Home(TM) and infomercial initiatives. Health-Mor at Home(TM) is a
direct to consumer outbound sales force formed by us in early fiscal year 2001
that is designed to assist consumers in locations where Distributors were no
longer located. Our infomercial, which was rolled out in the fourth quarter of
fiscal 2001, was intended to increase sales and brand awareness in areas where
we did not have Distributors.
Net product sales were not materially impacted by changing prices.
17
GROSS PROFIT- The gross margin for the year ended September 30, 2001, was
$13,166 or 40.8% of sales as compared to $14,173 or 40.9% of sales in 2000. This
decrease in the gross margin of $1,007 was principally attributable to lower
year-to-date sales volume, which negatively impacted the gross margin by $1,290.
The negative sales volume was offset by a favorable material variance of $271,
which was associated with lower costs for commodities such as cardboard
packaging, filters, motors, and electrical cords that continue to be reduced by
improving vendor quality, internal processes, and identifying and pursuing cost
savings opportunities.
SELLING, GENERAL, AND ADMINISTRATIVE- SG&A expenses for the year ended September
30, 2001, of $13,385 were unfavorable to fiscal 2000 expenses of $13,067 by
$318. The increase in SG&A was largely attributable to increases associated with
the training, support and development of our Distributors, advertising costs
associated with the development and airtime of our television infomercial, and
non-recurring professional fees incurred in the second quarter of fiscal 2001 in
connection with the evaluation of potential growth opportunities. This overall
increase in expense was offset by certain reduced expenses, which were primarily
driven by the absence of a bonus expense in 2001. Lower product development
expense and a refund of Canadian Goods and Services Taxes also helped to reduce
the overall increase.
INTEREST EXPENSE- Interest expense for fiscal year 2001 was $101, or $54 higher
than fiscal 2000 due primarily to higher outstanding balances on the credit
facility as compared to that in fiscal 2000.
OTHER (INCOME) EXPENSE- The increase in other (income) expense from ($53) in
fiscal 2000 to $186 for the year ended September 30, 2001 resulted in part from
an assessment, in fiscal 2001, associated with a state sales and use tax audit,
as well as a decrease of other income associated with the cessation of the
financing of end user purchase contracts by HMI.
INCOME TAXES- The effective income tax rate for the year ended September 30,
2001 was 117.2% compared to (31.7%) in fiscal 2000. This difference was driven
by the reversal of income tax reserves and the prior year utilization of net
operating loss carryforwards not previously recognized. 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 the
examinations resulted in minimal impact to the financial statements, we recorded
a benefit of $445 for the reversal of income tax reserves associated with these
fiscal tax years. The effective rate absent these reserves would have been
(29.2%).
The effective rate for fiscal 2000 was 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.
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 for future environmental damage expenditures pursuant to section
8.5 of this Purchase Agreement. This amount was recorded as an 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
18
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
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 Income.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES- Cash flows from operating activities provided net cash of
$1,356 for the year ended September 30, 2002, principally due to cash inflows
resulting from net income of $338, net non-cash expenses of $1,234 primarily
relating to depreciation and amortization of $928 and deferred income taxes of
$235, as well as an increase in accrued expenses and other liabilities of $379,
and a decrease in other current assets of $309, offset by a $441 increase in
inventory and a $343 decrease in accounts payable.
The increase in accrued expenses and other liabilities primarily relates to
Distributor programs which increased as a result of the revenue growth in fiscal
2002 as compared to fiscal 2001, as well as an increase in accrued compensation
and benefits which is reflective of the revenue and income growth during fiscal
2002.
Other current assets decreased largely as a result of prepaid direct response
advertisement costs being fully amortized by September 30, 2002 versus a balance
of $275 at September 30, 2001.
An improvement in our labor and overhead absorption attributable to increased
sales in September 2002 versus the same period last year, as well as the
purchase during mid-2002 of raw materials for the new product models scheduled
for release in calendar 2003, led to increased inventories at September 30,
2002.
The decrease in accounts payable is reflective of the re-adjustment of our raw
material stock levels which led to a significant reduction in inventory
purchases during the last two months of fiscal 2002.
INVESTING ACTIVITIES- Capital expenditures of $866 represent the entire net cash
used in investing activities for the year ended September 30, 2002, of which the
largest portion relates to tooling associated with new products anticipated for
release during calendar 2003.
FINANCING ACTIVITIES- Net cash used in financing activities was $414, which
included $201 for net borrowings under the credit facility and $615 for payment
of long-term debt.
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
September 30, 2002, there was $1,392 borrowed on our $2,000 credit facility.
19
CASH OBLIGATIONS- Set forth below, in tabular form, is information as of
September 30, 2002 for the periods indicated concerning our obligations and
commitments to make future payments under long-term obligations:
2007 and
Total 2003 2004 2005 2006 thereafter
----------- ----------- --------- ----------- --------- -------------
Line of Credit $ 1,392 $ 1,392 - - - -
Long-term Debt $ 305 $ 302 $ 22 $ 11 - -
Operating Leases $ 2,048 $ 903 $ 847 $ 260 $ 38 -
----------- ----------- --------- ----------- --------- -------------
Total $ 3,745 $ 2,597 $ 869 $ 271 $ 38 -
=========== =========== ========= =========== ========= =============
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 elected Mr. Foley to fill the sixth director
seat. The six directors will serve until the 2003 stockholders' meeting.
FUTURE ACCOUNTING REQUIREMENTS
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities. This statement
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred as opposed to recognizing
the liability at the date of an entity's commitment to an exit plan. This
Statement is effective for exit or disposal activities that are initiated after
December 31, 2002. We are currently in the process of evaluating this Statement
but do not expect its adoption to have a material impact on our financial
statements or results of operations.
20
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 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
for comparison to the carrying value, 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 and such
impairment could be material to our balance sheet.
21
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 7A. 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 September 30, 2002, we had $1,392
outstanding under our credit facility bearing interest at the prime rate. If
interest rates were to increase 50 basis points (0.5%) from the September 30,
2002 rates and assuming no changes in outstanding debt levels from the September
30, 2002 levels, we would realize an increase in our annual interest expense of
approximately $7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements included on page 27 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 2003 Annual Meeting of Shareholders
is incorporated herein by
22
reference. See "Executive Officers of the Registrant" following Item 1 in this
Report for information concerning executive officers.
ITEM 14. CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
We evaluated the design and operation of our disclosure controls and procedures
to determine whether they are effective in ensuring that the disclosure of
required information is timely and made in accordance with the Exchange Act and
the rules and forms of the Securities and Exchange Commission. This evaluation
was made under the supervision and with the participation of management,
including our chief executive officer and chief financial officer within the
90-day period prior to the filing of this Form 10-K. The chief executive officer
and chief financial officer have concluded, based on their review, that our
disclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c)
and 15d-14(c), are effective to ensure that information required to be disclosed
by us in reports that we file under the Exchange Act is recorded, processed,
summarized and reported accurately and within the time periods specified in
Securities and Exchange Commission rules and forms.
(B) CHANGES IN INTERNAL CONTROLS
No significant changes were made to our internal controls or other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
PART IV.
ITEM 15. 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 27 of this report.
2. FINANCIAL STATEMENT SCHEDULES - Reference is made to the Index to
Financial Statements, included as page 27 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 2002.
(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
27 of this report.
23
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 10, 2002
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/ John A. Pryor /s/ Thomas N. Davidson
- -------------------------------------- ------------------------------------- -------------------------
James R. Malone John A. Pryor Thomas N. Davidson
Chairman of the Board, Chief Executive President and Chief Operating Officer Director
Officer and Director and Director December 12, 2002
December 11, 2002 December 10, 2002
/s/ Kirk W. Foley /s/ Murray Walker /s/ Ivan J. Winfield
- -------------------------------------- ------------------------------------- -------------------------
Kirk W. Foley Murray Walker Ivan J. Winfield
Director Director Director
December 12, 2002 December 10, 2002 December 12, 2002
/s/ Earl J. Watson
- -------------------------------------- ------------------------------------- -------------------------
Earl J. Watson
Corporate Controller
December 10, 2002
24
CERTIFICATIONS
I, James R. Malone, certify that:
1. I have reviewed this annual report on Form 10-K of HMI Industries
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's Board of Directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ James R. Malone
-------------------------------------
James R. Malone
Chief Executive Officer and Chairman
December 11, 2002
25
CERTIFICATIONS
I, Julie A. McGraw, certify that:
1. I have reviewed this annual report on Form 10-K of HMI Industries
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's Board of Directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Julie A. McGraw
--------------------------
Julie A. McGraw
Chief Financial Officer and Treasurer
December 10, 2002
26
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Management 28
Report of Independent Accountants ......................................................... 29
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2002 and 2001 ........................... 30
Consolidated Statements of Income for the years ended September 30,
2002, 2001 and 2000 ................................................................... 31
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 2002, 2001 and 2000 ..................................................... 32
Consolidated Statements of Cash Flow for the years ended September 30,
2002, 2001 and 2000 ................................................................... 33
Notes to Consolidated Financial Statements .............................................. 34-47
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.
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 of 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/ James R. Malone
-------------------------------------
James R. Malone
Chairman and Chief Executive
Officer
/s/ John A. Pryor
-------------------------------------
John Pryor
President, Chief Operating Officer
/s/ Julie A. McGraw
-------------------------------------
Julie A. McGraw
Vice President, Chief Financial
Officer and Treasurer
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 income, stockholders' equity and cash flow present
fairly, in all material respects, the financial position of HMI Industries Inc.
and its subsidiaries at September 30, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2002, 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
November 8, 2002
29
HMI Industries Inc.
CONSOLIDATED BALANCE SHEETS
Dollars and shares in thousands, except par values SEPTEMBER 30, September 30,
2002 2001
- --------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 481 $ 405
Trade accounts receivable (net of allowance of $482 and $464) 2,007 2,131
Note receivable -- 35
Inventories:
Finished goods 2,076 1,902
Work-in-progress, raw material and supplies 2,113 1,845
Deferred income taxes 1,476 1,681
Prepaid expenses 292 184
Other current assets 54 363
- --------------------------------------------------------------------------------------------------------------------
Total current assets 8,499 8,546
- --------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 4,310 3,810
- --------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Cost in excess of net assets of acquired businesses
(net of accumulated amortization of $3,739 and $3,493) 5,451 5,698
Deferred income taxes 2,550 2,581
Trademarks (net of accumulated amortization of $162 and $120) 375 337
Other 271 269
Total other assets 8,647 8,885
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 21,456 $ 21,241
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,392 $ 1,191
Trade accounts payable 1,957 2,300
Income taxes payable 506 532
Accrued expenses and other liabilities 2,395 2,016
Long-term debt due within one year 302 584
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,552 6,623
- --------------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 33 75
- --------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 33 75
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $5 par value; authorized, 300 shares; issued, none -- --
Common stock, $1 par value; authorized, 10,000 shares;
issued and outstanding, 6,746 and 6,708 shares 6,746 6,708
Capital in excess of par value 8,231 8,279
Unearned compensation, net (3) (8)
Retained earnings 802 464
Accumulated other comprehensive loss (Note 1) (905) (900)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,871 14,543
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 21,456 $ 21,241
- --------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
30
HMI Industries Inc.
CONSOLIDATED STATEMENTS OF INCOME
Dollars and shares in thousands, except per share data FOR THE YEARS ENDED SEPTEMBER 30,
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Net product sales $ 37,113 $ 32,536 $ 34,621
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 21,298 19,370 20,448
Selling, general and administrative expenses 14,782 13,385 13,067
Interest expense 86 101 47
Other expense (income), net 344 186 (53)
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 36,510 33,042 33,509
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 603 (506) 1,112
Provision (benefit) for income taxes 265 (593) (353)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 338 87 1,465
- ----------------------------------------------------------------------------------------------------------------------------------
Gain on disposals-
Bliss Manufacturing (net of taxes of $-0-, $-0-, and $-0-) -- -- 425
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 338 $ 87 $ 1,890
==================================================================================================================================
Weighted average number of shares outstanding:
Basic 6,719 6,691 6,113
Diluted 6,719 6,724 6,140
==================================================================================================================================
BASIC AND DILUTED PER SHARE OF COMMON STOCK (NOTE 1):
Income from continuing operations $ 0.05 $ 0.01 $ 0.24
Gain on disposals $ -- $ -- $ 0.07
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.05 $ 0.01 $ 0.31
==================================================================================================================================
See notes to consolidated financial statements.
31
HMI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Dollars in thousands Capital
in
Excess Accumulated
of Retained Other Treasury Total
Common Par Unearned Earnings Comprehensive Treasury Stock Stockholders'
Stock Value Compensation (Deficit) Loss Shares Amount Equity
--------- ------- ------------- --------- -------------- -------- --------- -------------
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
Comprehensive income:
Net income 87 87
Translation adjustment (21) (21)
----------
Total comprehensive income 66
Issuance of common stock 50 50
Unearned compensation 33 33
--------- ------- ---------- --------- ----------- ------- --------- ----------
Balance at September 30, 2001 6,708 8,279 (8) 464 (900) - - 14,543
COMPREHENSIVE INCOME:
NET INCOME 338 338
TRANSLATION ADJUSTMENT (5) (5)
----------
TOTAL COMPREHENSIVE INCOME 333
ISSUANCE OF COMMON STOCK 38 38
UNEARNED COMPENSATION 5 5
EMPLOYEE BENEFIT STOCK (48) (48)
--------- ------- ---------- --------- ----------- ------- --------- ----------
BALANCE AT SEPTEMBER 30, 2002 $ 6,746 $ 8,231 ($ 3) $ 802 ($ 905) - - $ 14,871
========= ======= ========== ========= =========== ======= ========= ==========
See notes to consolidated financial statements.
32
HMI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Dollars in thousands FOR THE YEARS ENDED SEPTEMBER 30,
2002 2001 2000
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 338 $ 87 $ 1,890
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 928 913 802
(Gain) on disposal of discontinued operations -- -- (425)
Provision for loss on sale/disposal of assets 17 -- 12
Provision for loss on receivables 59 -- --
Treasury/common shares issued, net of unearned
compensation and employee benefit stock (5) 83 263
Deferred income taxes 235 (230) (435)
Changes in operating assets and liabilities:
Decrease (increase) in receivables 100 1,181 (868)
Increase in inventories (441) (532) (380)
(Increase) decrease in prepaid expenses (108) 227 (234)
Decrease (increase) in other current assets 309 (73) (244)
Decrease in accounts payable (343) (258) (329)
Increase (decrease) in accrued expenses and other
liabilities 379 (824) 71
Decrease in income taxes payable (26) (431) (53)
Other, net (86) (169) (205)
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,356 (26) (135)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (866) (2,278) (970)
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (866) (2,278) (970)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under credit facility 201 1,191 --
Payment of long term debt (615) (17) (51)
Net proceeds from issuance of common stock -- -- 1,926
- --------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (414) 1,174 1,875
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 76 (1,130) 770
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 405 1,535 765
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 481 $ 405 $ 1,535
- --------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
33
HMI INDUSTRIES INC.
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 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 principal 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), primarily in the United States. In other areas,
primarily Asia and Europe, the two products are sold separately.
RECLASSIFICATION
Certain amounts in the fiscal 2001 consolidated financial statements have been
reclassified to conform to the fiscal 2002 presentation.
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.
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.
CASH EQUIVALENTS
We consider all highly liquid instruments purchased with a maturity of less than
three months to be cash equivalents. Cash equivalents are comprised primarily of
commercial paper. We believe the carrying amounts approximate fair value due to
the short maturities of these instruments.
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.
34
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.
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 directed
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 September 30, 2002 and 2001, $-0-, and $275, respectively, of advertising was
reported as other current assets. Advertising expense was $1,808, $591, and
$193, in fiscal 2002, 2001 and 2000, respectively.
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.
2002 2001
--------- ---------
Percentage of total inventories on LIFO 100% 100%
Inventory amount had FIFO method been utilized to value inventory $ 4,599 $ 4,147
(Decrease) increase in net income before taxes due to LIFO $ (11) $ 94
EXCESS AND OBSOLESCENCE RESERVES
We evaluate our inventory quarterly 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.
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.
GOODWILL AND OTHER INTANGIBLE ASSETS
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.
35
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 year
ended September 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).
Other intangible assets are amortized on a straight-line basis over their useful
lives, ranging from ten to seventeen years.
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.
Exchange gains and losses from transactions in a currency other than the local
currency of the entity involved are included in income as they occur.
Significantly all of our product sales to our customer base are conducted in
U.S. dollars and therefore net transaction and translation adjustments are not
significant.
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.
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.
SEGMENT REPORTING
We conduct our business as a single reportable segment.
CONCENTRATIONS
In fiscal 2002 one international customer accounted for more than 10% of our
product sales. This international customers product sales were 11.9% of our
total product sales. In fiscal 2001 and 2000, three international customers
accounted for more than 10% each of our product sales with individual sales of
13.1%, 11.2% and 10.2% of total product sales in fiscal year 2001, and 13.1%,
12.9% and 11.3% of total product sales in fiscal year 2000. The loss of any
significant portion of our sales from these Importers could 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 our products and us.
36
The Distributors 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 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.
Sales to international customers represent 48.7%, 57.8% and 64.4% of net product
sales for the years ending September 30, 2002, 2001 and 2000, respectively.
REVENUE RECOGNITION
Our revenue recognition policy is to recognize revenues when products are
shipped, or for certain customers when the products are received by the
customer's shipping agent, at which time title transfers to the customer.
WARRANTY
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.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in research and development are expensed as incurred and included
in SG&A expenses. In fiscal year 2002, 2001 and 2000, we invested $273, $351 and
$643, respectively, in new product development.
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.
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. Management evaluates the realizability of
the deferred tax assets quarterly and assesses the need for additional valuation
allowances quarterly.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest was $86, $96 and $44 for the years ended September 30,
2002, 2001 and 2000, respectively. Cash paid for income taxes was $56, $70 and
$135 for the years ended September 30, 2002, 2001 and 2000.
Each of the following transactions has been treated as non-cash items for
purposes of the Consolidated Statements of Cash Flows. During the third and
fourth quarter of fiscal 2002 we recorded $290 in debt in exchange for assets.
These vendor-financed assets consisted primarily of tools, molds and equipment
associated with new product development. During the fourth quarter of fiscal
2001, we recorded $588 in debt in exchange for assets. These assets were
vendor-financed and consisted primarily of tools, molds and production equipment
also related to new product development.
37
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,
2002 2001
------------------------ ------------------------
Per Per
Share Share
Shares Amount Shares Amount
--------- --------- -------- ------------
Basic EPS 6,719 $ 0.05 6,691 $ 0.01
Effect of dilutive stock options - - 33 -
---------- ---------- -------- -----------
Diluted EPS 6,719 $ 0.05 6,724 $ 0.01
========== ========== ======== ===========
Options outstanding during the years ended September 30, 2002 and 2001 to
purchase approximately 1,147 and 1,322 shares of common stock, respectively,
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market prices of the common stock
during the period and, therefore, the effect would be anti-dilutive.
FUTURE ACCOUNTING REQUIREMENTS
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities. This statement
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred as opposed to recognizing
the liability at the date of an entity's commitment to an exit plan. This
Statement is effective for exit or disposal activities that are initiated after
December 31, 2002. We are currently in the process of evaluating this Statement
but do not expect its adoption to have a material impact on our financial
statements or results of operations.
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
38
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 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
for comparison to the carrying value, 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 and such
impairment could be material to our balance sheet.
2. PROPERTY, PLANT AND EQUIPMENT
2002 2001
---------- ----------
Leasehold improvements $ 288 $ 288
Machinery and equipment 7,564 6,168
Construction in progress 1,620 2,074
---------- ----------
9,472 8,530
Accumulated depreciation 5,162 4,720
---------- ----------
Net property, plant and equipment $ 4,310 $ 3,810
========== ==========
Depreciation expense relating to continuing operations for the years ended
September 30, 2002, 2001, and 2000 was $639, $608, and $523, respectively.
39
3. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
2002 2001
--------- ---------
Accrued distributor development $ 633 $ 530
Distributor fund payable 630 483
Accrued compensation 579 407
Other 553 596
--------- ---------
$ 2,395 $ 2,016
========= =========
4. DEBT AND CREDIT FACILITY
In June 2001, we terminated our credit facility of $3,500 with Finova Capital
and entered into a $2,000 revolving line of credit with US Bank consisting of
loans against our eligible receivables and inventory. The new credit agreement
expires in 2003 and calls for interest to accrue at the prime rate (4.75% at
September 30, 2002). The new facility provides us with an improved interest
rate, increased availability and more favorable eligibility requirements, lower
annual fees and less restrictive covenants. The credit facility agreement
includes various covenants that include, but are not limited to, restrictions on
paying dividends, limitations on our ability to incur additional indebtedness,
and minimal requirements on tangible net worth, interest coverage ratio and
capital expenditures. There were no covenant violations under the credit
facility agreement as of September 30, 2002.
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. In July 2002 our lender approved the extension of the
expiration date of this additional line to 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.
During the fourth quarter of fiscal 2001, we recorded $588 in obligations
relating to vendor-financed assets. These assets consist primarily of tools,
molds and production equipment associated with new product development. These
obligations require monthly payments, including principal and interest, of $67,
with the nominal annual interest rates on these leases ranging from 0.0% to
11.5%, compounding monthly. The remaining terms of the obligations range from 6
to 13 months.
During the third and fourth quarters of fiscal 2002, we recorded $290 in
obligations relating to vendor-financed assets. These assets consisted primarily
of tools, molds and equipment associated with new product development. These
obligations require monthly payments, including interest, of $21, with the
nominal annual interest rates on this debt ranging from 0.0%
40
to 2.0%, compounding monthly. The remaining terms of the obligations range from
6 to 12 months.
Long-term debt consists of the following:
2002 2001
------ ------
Bank line of credit - see above $1,392 $1,191
- -------------------------------
Vendor-finance obligations 282 588
- --------------------------
bearing interest at 0.00% to 11.50% through
October 2002 adjusting to 2.00% thereafter, due
in monthly installments of $43 (including
interest) through September 2003
Capitalized lease obligations 53 71
- -----------------------------
bearing interest at 2.62% to 12.00% due in
monthly installments of $2 (including interest)
through March 2005
------ ------
1,727 1,850
Less amounts due within one year 1,694 1,775
------ ------
$ 33 $ 75
====== ======
The principal amount of long-term debt payable in the five years ending
September 30, 2003 through 2007 is $1,694, $22, $11, $-0- and $-0-. The weighted
average interest rate on short-term borrowings at September 30, 2002 and 2001
was 4.50% and 6.05%, respectively.
5. 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 the unrestricted share of stock at
the award date over the purchase price, if any.
41
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 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.
During fiscal 2001, the Board of Directors granted 560,000 incentive stock
options (410,000 at $1.15 per share and 150,000 at $1.30 per share) to certain
of our key employees in accordance with the Plan. All 560,000 options vest over
a three-year period. No compensation expense was recorded related to the stock
options, as the exercise price was equal to the fair market value at the grant
date.
No options or awards were granted during fiscal 2002 to key employees.
There were -0-, -0- and 10,000 shares issued and -0-, -0- and 16,700 non-vested
shares forfeited pursuant to the Plan in fiscal 2002, 2001 and 2000,
respectively. Unamortized deferred compensation amounted to $3, $8, and $41 at
September 30, 2002, 2001, and 2000, respectively. Total compensation expense, in
conjunction with the Plan was $5, $33, and $95 in fiscal 2002, 2001, and 2000,
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 2002, 2001 and 2000 been determined
consistent with SFAS 123, pro forma net income (loss) and earnings per common
share would have been as follows (dollars in thousands, except per share data):
2002 2001 2000
--------- --------- ---------
Net income, as reported $ 338 $ 87 $1,890
Net income (loss), pro forma $ 188 $ (153) $1,685
Income (loss) per common share (basic and
diluted):
As reported $0.05 $ 0.01 $ 0.31
Pro forma $0.03 ($ 0.02) $ 0.27
The fair value for all options granted in 2002, 2001 and 2000 were estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
2002 2001 2000
OPTIONS OPTIONS OPTIONS
------------------ ------------------------ ----------------------
Risk free interest rate 4.5% 3.9% to 4.9% 6.1% to 6.5%
Expected life of option 4 yrs. 3 yrs. to 4 yrs. 3 yrs. to 4 yrs.
Expected dividend yield of stock 0.0% 0.0% 0.0%
Expected volatility of stock 102.2% 95.3% to 102.5% 79.4% to 85.5%
42
A summary of our stock option activity, and related information for the years
ended September 30, 2002, 2001, and 2000, is shown in the following table.
Shares subject Weighted
to option average option
(in thousands) price per share
------------------- ---------------------
September 30, 1999, Outstanding 741 $ 4.72
Granted 457 1.14
Canceled (137) 7.01
-------------------
September 30, 2000 1,061 2.89
Granted 596 1.18
Canceled (54) 5.14
-------------------
September 30, 2001 1,603 2.18
Granted 46 1.08
Canceled (537) 2.84
-------------------
September 30, 2002, Outstanding 1,112 $ 1.81
===================
Options exercisable and shares available for future grant on September 30 (in
thousands except per share data):
2002 2001 2000
-------- -------- --------
Options exercisable 704 784 667
Weighted-average option price per share
of options exercisable $ 2.16 $ 3.16 $ 3.74
Weighted-average fair value of options
granted during the year $ 1.08 $ 0.77 $ 0.67
The ranges of exercise prices and the remaining contractual life of options as
of September 30, 2002 were:
Range of exercise prices $1-$2 $2-$8
Options outstanding:
Outstanding as of September 30, 2002 (in thousands) 1,006 106
Weighted-average remaining contractual life 3.62 3.55
Weighted-average exercise price $1.21 $7.43
Options exercisable:
Outstanding as of September 30, 2002 (in thousands) 598 106
Weighted-average remaining contractual life 3.08 3.55
Weighted-average exercise price $1.23 $7.43
43
6. INCOME TAXES
The provision (benefit) for income taxes relating to continuing operations
consists of the following:
2002 2001 2000
----- ----- -----
Current:
Federal and State $ 30 $(363) $ 82
Foreign -- -- --
----- ----- -----
30 (363) 82
Deferred (benefit) expense 235 (230) (435)
----- ----- -----
$ 265 $(593) $(353)
===== ===== =====
A reconciliation of the provision for income taxes at the Federal statutory rate
to that included in the Consolidated Statements of Income related to earnings
from continuing operations is as follows:
2002 2001 2000
------- ------- -------
Tax at Federal statutory rate of 34% $ 205 $ (172) $ 378
(Reductions) increases in taxes resulting
from:
Tax expense relating to Internal Revenue
Service audits and settlements -- (445) --
Amortization of cost in excess of net
assets of acquired businesses 84 84 84
Valuation allowances against deferred
tax assets -- -- (1,008)
Other - net (24) (60) 193
------- ------- -------
$ 265 $ (593) $ (353)
======= ======= =======
The decrease in the effective tax rate from fiscal 2001 to fiscal 2002 is
primarily attributable to the increase in pre-tax earnings and the absence of
significant permanent differences in fiscal 2002. In addition, the 2001 fiscal
effective tax rate was significantly impacted by the settlement of an Internal
Revenue Examination and the related reversal of FAS 5 tax reserves.
44
The components of deferred tax assets and liabilities are comprised of the
following at September 30,
2002 2001
------ ------
Gross deferred tax assets:
Operating loss carryforwards $4,174 $4,741
Receivable and inventory reserves 230 233
Accrued compensation 85 48
Other 127 158
------ ------
4,616 5,180
------ ------
Gross deferred tax liabilities:
Depreciation 91 69
Valuation allowances on foreign net
deferred tax assets 499 849
------ ------
Net Deferred Tax Asset $4,026 $4,262
====== ======
We have determined that we should fully reserve against this net potential tax
asset to the extent it represents excess available net deferred tax assets for
certain foreign subsidiaries and divisions as it is more likely than not that
these tax assets will not be realized. Accordingly, such benefits will be
realized only as, and if, they are used to reduce future tax expense, subject to
evaluation of the continuing need for such valuation allowance, or until fully
realized. Income taxes paid during the years ended September 30, 2002, 2001, and
2000 were $65, $70, and $136, respectively.
Net operating loss carryforwards of approximately $12,121 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.
7. EMPLOYEE BENEFIT 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 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, 2002, 2001
and 2000.
In addition, we offer a 401(K) savings plan to all of our employees. We match
50% of the first 6% of the employee's contribution to the plan. Employees may
currently contribute up to 15% of compensation to the plan and up to 50%
beginning January 1, 2003. Amounts expensed for the years ended September 30,
2002, 2001 and 2000 were $91, $110 and $42, respectively, of which the company
match in fiscal 2002 was reduced in the second quarter as the match was funded
by forfeitures of prior matches from unvested former participant/employees.
45
8. COMMITMENTS AND CONTINGENCIES, GUARANTEES AND LEASES
We are obligated under certain operating leases for facilities and equipment,
which expire on various dates through 2006. The minimum annual lease payments
under these agreements, including renewal options, if exercised, are $903, $847,
$260, $38 and $-0- for the years ending September 30, 2003, 2004, 2005, 2006 and
2007, respectively. Rent expense was $1,035, $1,104 and $854 for the years ended
September 30, 2002, 2001 and 2000, respectively.
LITIGATION
Bliss Technologies, Inc. ("Bliss"), the company formed from the 1998 sale of the
subsidiary of HMI, filed for bankruptcy in January 2000 in the United States
Bankruptcy Court, Eastern District of Michigan. In this action filed in 2002,
the Official Committee of Unsecured Creditors of Bliss Technologies alleges a
fraudulent conveyance claim against us asserting that the sale of Bliss in 1998
was a fraudulent transfer insofar as we received more for Bliss than it was
worth and that Bliss was insolvent from its inception. Former directors of
Bliss, Mark Kirk and Carl Young, are also named as defendants in the action.
Claims pending against them allege that in their capacity as Bliss directors
they breached fiduciary duties to Bliss creditors. The complaint seeks damages
in an unspecified sum. The claims against us and the claims against Mr. Kirk and
Mr. Young are being vigorously defended. We believe that we will resolve this
matter in a manner that will not have a material adverse effect on HMI.
CONET Industries, Inc., Royal Queen Club International Limited, Chang-whan Chang
and Young-so Song ("Plaintiffs") filed a complaint against HMI on or about
February 18, 2001 in the Seoul, Korea District Court. It was served by
Registered Mail upon HMI at our corporate offices in Seven Hills, Ohio on or
around April 10, 2002. The complaint was filed as a result of lawsuits by us
against Mr. Song, a former HMI Distributor in Korea, and Royal Queen Club
concerning Mr. Song's CYVAC product. In our lawsuits, we sought and were granted
preliminary injunctions against Plaintiffs that prohibited Plaintiffs from
manufacturing and selling the old model CYVAC for 311 days and the new model
CYVAC for 209 days, until the Seoul High Court issued a declaration of
suspension of the injunctions. Despite the fact that Plaintiffs had been
enjoined by the Courts, Plaintiffs allege that we should compensate them for
actual damages for sale discontinuance, supplemental managerial costs and new
mold fabrication costs due to the interruption in the manufacturing and
marketing of each product during that period. Plaintiffs also claim that we
tortuously interfered with Plaintiffs' business advantages, caused irreparable
harm to Plaintiffs' normal business activities and damaged Plaintiffs'
reputation and standing. Chang-whan Chang and Young-so Song allege that they
have been critically damaged personally due to the accusations, improper
provisional seizure and criminal allegations alleged by us, which they assert
resulted in disturbance to business, reputation and credit. All matters are
pending. The Plaintiffs allege damages in excess of U.S. $21,894. We believe
that since we proceeded in conformity with the authority of the Courts, the
claims against us are meritless and that this matter will not have a material
adverse effect on our consolidated financial position, results of operations or
cash flows.
Claims arising in the ordinary course of business are also 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.
46
Included in the accompanying Consolidated Balance Sheets at September 30, 2002
and 2001 were accruals of $15 and $15, respectively, relating to various claims.
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
2002
------------------------------------------------------
December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
Net revenues $ 9,371 $ 10,598 $ 9,307 $ 7,837
Gross profit $ 4,344 $ 4,655 $ 3,862 $ 2,954
Net income (loss) $ 184 $ (9) $ 156 $ 7
Basic and diluted income (loss) per
share of common stock: $ 0.03 $ 0.00 $ 0.02 $ 0.00
2001
------------------------------------------------------
December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
Net revenues $ 7,442 $ 9,032 $ 9,033 $ 7,029
Gross profit $ 3,097 $ 3,780 $ 3,556 $ 2,733
Net (loss) income $ (117) $ 392 $ 49 $ (237)
Basic and diluted (loss) income per
share of common stock: $ (0.02) $ 0.06 $ 0.01 $ (0.04)
10. RELATED PARTY TRANSACTIONS
In 1995, we converted $750 of accounts receivable from a former Filter Queen(R)
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 $-0- and $35 is reflected in current and long-term assets at September 30,
2002 and 2001, respectively.
47
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 November 8, 2002 appearing in this Annual Report
on Form 10-K also included an audit of the financial statement schedule listed
in item 15 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 11, 2002
48
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, 2002 $ 464 $ 59 $ 41 $ 482
Year ended September 30, 2001 $ 507 $ -- $ 43 $ 464
Year ended September 30, 2000 $ 691 $ -- $ 184 $ 507
Valuation account for inventory:
Year ended September 30, 2002 $ 199 $ 56 $ 146 $ 109
Year ended September 30, 2001 $ 235 $ 90 $ 126 $ 199
Year ended September 30, 2000 $ 602 $ 71 $ 438 $ 235
Reserve for loss on disposal:
Year ended September 30, 2002 $ -- $ -- $ -- $ --
Year ended September 30, 2001 $ -- $ -- $ -- $ --
Year ended September 30, 2000 $ 451 $ -- $ 451 $ --
Valuation for deferred tax asset:
Year ended September 30, 2002 $ 849 $ -- $ 350 $ 499
Year ended September 30, 2001 $ 849 $ -- $ -- $ 849
Year ended September 30, 2000 $1,857 $ -- $1,008 $ 849
49
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
3.3 Amended Bylaws Incorporated by reference from Form 8-K filed on
February 19, 2002
9.0 Voting Trust Agreement Stockholders Voting Agreement, incorporated by
reference from Form 13-D filed on October 19, 2001
10.00 Material Contracts Firstar/US Bank Revolving Credit Agreement,
incorporated by reference from Form 10-Q for the
quarter ended June 30, 2001
10.01 Material Contracts Firstar/US Bank Revolving Credit Agreement,
incorporated by reference from Form 10-Q for the
period ended March 31, 2002
10.02 Material Contracts Firstar/US Bank Revolving Credit Agreement, attached
10.03 Material Contracts 13-D Settlement Agreement incorporated by reference
from Form 8-K filed on February 19, 2002
10.04 Material Contracts Change of Control Agreement - Duggan, attached
10.05 Material Contracts Change of Control Agreement - Pryor, incorporated by
reference from Form 10-K for the year ended September
30, 2001
10.06 Material Contracts Change of Control Agreements - McGraw and Malone,
incorporated by reference from Form 10-K/A3 for the
year ended September 30, 1997
10.07 Material Contracts Employment Agreement - Pryor, incorporated by
reference from Form 10-K for the year ended September
30, 2001
10.08 Material Contracts Employment Agreement - Malone, incorporated by
reference from Form 10-K/A3 for the year ended
September 30, 1997
10.09 Material Contacts Accelerated Incentive Stock Option Agreements,
incorporated by reference from Form 10-K for the year
ended September 30, 2001
10.10 Material Contracts Incentive Stock Option Agreement - Pryor, incorporated
by reference from Form 10-K for the year ended
September 30, 2001
10.11 Material Contracts Incentive Stock Option Agreements, incorporated by
reference from Form 10-K for the year ended September
30, 2001
50
10.12 Material Contracts Incentive Stock Option Agreements, incorporated by
reference from Form 10-K for the year ended September
30, 2000
10.13 Material Contracts Incentive Stock Option Agreements incorporated by
reference from Form 10-Q for the quarter ended March
31, 1999.
11 Statement re: Computation of per Note 1 on Page 38 of the Financial Statements
share earnings
21 Subsidiaries of Registrant Note 1 on Page 34 of this report
23 Consent of Experts Attached
99.1 Additional Exhibits Certification for James R. Malone Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 ( 18 U.S.C.
Section 1350), attached
99.2 Additional Exhibits Certification for Julie A. McGraw Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 ( 18 U.S.C.
Section 1350), attached
51