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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2003
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OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _______________ to _______________
Commission File Number 2-30905
HMI INDUSTRIES INC.
-------------------
(Exact name of Registrant as Specified in Its Charter)
DELAWARE 36-1202810
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
Genesis Building, 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
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- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act). Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 1, 2003
- ------------------------ --------------------------------
Common stock, $1 par value per share 6,745,609
================================================================================
INDEX
PART I. FINANCIAL INFORMATION....................................................................................3
ITEM 1. FINANCIAL STATEMENTS...................................................................................3
Consolidated Condensed Balance Sheets.......................................................................3
Consolidated Condensed Statements of Operations.............................................................4
Consolidated Condensed Statements of Cash Flow..............................................................5
Notes to Consolidated Condensed Financial Statements (unaudited)............................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................11
Critical Accounting Policies...............................................................................11
Results of Operations......................................................................................12
Liquidity and Capital Resources............................................................................15
Cautionary Statement for "Safe Harbor" Purposes Under the Private Securities Litigation Reform Act of 1995.16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................16
ITEM 4. CONTROLS AND PROCEDURES..............................................................................17
(A) Evaluation of Disclosure Controls and Procedures.......................................................17
(B) Changes in Internal Controls...........................................................................17
PART II. OTHER INFORMATION......................................................................................17
ITEM 1. LEGAL PROCEEDINGS....................................................................................17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................17
ITEM 5. OTHER INFORMATION....................................................................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................18
(a) Index to Exhibits......................................................................................18
(b) Reports on Form 8-K....................................................................................18
SIGNATURES....................................................................................................18
Certifications.............................................................................................19
Certifications.............................................................................................20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
MARCH 31, September 30,
2003 2002
- -------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 787,480 $ 481,395
Trade accounts receivable (net of allowance of $302,093
and $482,118) 2,197,601 2,006,667
Inventories:
Finished goods 2,172,515 2,076,052
Work-in-progress, raw material and supplies 2,349,929 2,112,656
Deferred income taxes 1,456,734 1,476,182
Prepaid expenses 139,775 291,690
Other current assets 71,363 53,657
- -------------------------------------------------------------------------------------------------
Total current assets 9,175,397 8,498,299
- -------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 4,078,466 4,310,070
- -------------------------------------------------------------------------------------------------
OTHER ASSETS:
Cost in excess of net assets of acquired businesses
(net of amortization of $-0- and $3,738,649) - 5,450,860
Deferred income taxes 2,554,427 2,550,427
Trademarks (net of amortization of $182,740 and $161,556) 384,479 375,272
Other 155,266 270,833
- -------------------------------------------------------------------------------------------------
Total other assets 3,094,172 8,647,392
- -------------------------------------------------------------------------------------------------
Total assets $ 16,348,035 $ 21,455,761
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ - $ 1,392,000
Trade accounts payable 2,940,835 1,956,677
Income taxes payable 493,468 505,532
Accrued expenses and other liabilities 3,257,707 2,394,881
Long-term debt due within one year 111,538 301,894
- -------------------------------------------------------------------------------------------------
Total current liabilities 6,803,548 6,550,984
- -------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 21,956 32,726
- -------------------------------------------------------------------------------------------------
Total long-term liabilities 21,956 32,726
- -------------------------------------------------------------------------------------------------
CONTINGENCIES: - -
STOCKHOLDERS' EQUITY:
Preferred stock, $5 par value; authorized, 300,000
shares; issued, none - -
Common stock, $1 par value; authorized, 10,000,000 shares;
issued and outstanding, 6,745,609 and 6,745,609 shares 6,745,609 6,745,609
Capital in excess of par value 8,231,311 8,231,311
Unearned compensation, net - (2,728)
Retained earnings (5,454,389) 801,459
Accumulated other comprehensive loss - (903,600)
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 9,522,531 14,872,051
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 16,348,035 $ 21,455,761
=================================================================================================
See notes to consolidated condensed financial statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months For the six months
ended March 31, ended March 31,
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------
REVENUES:
Net product sales $ 9,295,309 $ 10,597,699 $ 18,121,761 $ 19,968,344
- -----------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 5,592,476 5,943,414 10,834,590 10,970,570
Selling, general and administrative
expenses 3,720,531 4,575,783 7,204,448 8,483,513
Loss on liquidation of foreign
subsidiary 904,169 - 904,169 -
Interest expense 6,394 22,812 20,706 42,451
Other (income) expense, net (32,810) 38,035 (60,281) 128,195
- -----------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 10,190,760 10,580,044 18,903,632 19,624,729
- -----------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and
cumulative effect of accounting change (895,451) 17,655 (781,871) 343,615
(Benefit) provision for income taxes (1,543) 27,477 23,117 169,367
- -----------------------------------------------------------------------------------------------------------------
(Loss) income before cumulative
effect of accounting change (893,908) (9,822) (804,988) 174,248
Cumulative effect of accounting change - - 5,450,860 -
- -----------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (893,908) $ (9,822) $(6,255,848) $ 174,248
=================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic and diluted 6,742,314 6,701,204 6,742,314 6,701,204
=================================================================================================================
BASIC AND DILUTED PER SHARE OF COMMON
STOCK:
(Loss) income before cumulative effect of
accounting change $ (0.13) $ - $ (0.12) $ 0.03
Cumulative effect of accounting change $ - $ - $ (0.81) $ -
- -----------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (0.13) $ - $ (0.93) 0.03
=================================================================================================================
See notes to consolidated condensed financial statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
For the six months ended March 31,
2003 2002
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(6,255,848) $ 174,248
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Cumulative effect of accounting change 5,450,860 -
Loss on liquidation of foreign subsidiary 904,169 -
Depreciation and amortization 379,593 423,838
Provision for loss on disposal of assets - 16,752
Common/treasury shares issued, net of unearned
compensation - 22,242
Provision for losses on receivables - 46,096
Unearned compensation 2,728
Deferred income taxes 15,448 152,075
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Increase in receivables (190,934) (1,960,636)
(Increase) decrease in inventories (333,736) 118,385
Decrease in prepaid expenses 151,915 15,607
(Increase) decrease in other current assets (17,706) 209,278
Increase in accounts payable 984,158 1,321,768
Increase in accrued expenses and other liabilities 862,826 299,912
Decrease in income taxes payable (12,064) (18,226)
Other, net 84,607 (55,429)
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 2,026,016 765,910
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (126,805) (485,141)
- -----------------------------------------------------------------------------------------
Net cash used in investing activities (126,805) (485,141)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under credit facility (1,392,000) 88,000
Payment of long term debt (201,126) (375,003)
- -----------------------------------------------------------------------------------------
Net cash used in financing activities (1,593,126) (287,003)
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 306,085 (6,234)
Cash and cash equivalents, beginning of period 481,395 6,865
- -----------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 787,480 $ 631
=========================================================================================
See notes to consolidated condensed financial statements.
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated condensed financial statements included in this report
have been prepared, without audit, by HMI Industries Inc. from our consolidated
statements and those of our subsidiaries, pursuant to the rules and regulations
of the Securities and Exchange Commission. Although we believe that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including significant accounting
policies, normally included in the annual financial statements have been
condensed or omitted pursuant to such rules and regulations.
In the opinion of our management, the unaudited financial information for the
interim periods presented reflects all adjustments (which include only normal,
recurring adjustments) necessary for a fair presentation. These consolidated
condensed financial statements and related notes should be read in conjunction
with the consolidated condensed financial statements and related notes included
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2002.
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year.
2. 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 March 31, 2003 and 2002, $-0- and $91,800, respectively, of prepaid
advertising were reported as other current assets.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Pursuant to SFAS 142 "Goodwill and Other Intangible Assets" we ceased amortizing
goodwill in the period beginning October 1, 2002. Prior to the adoption of SFAS
No. 142, we amortized goodwill on a straight-line basis over 40 years. Other
intangible assets are amortized on a straight-line basis over their useful
lives, ranging from ten to seventeen years. Goodwill amortization for the three
and six month periods ended March 31, 2002 was $61,400 and $122,700,
respectively.
FAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. The provisions of FAS 142 prohibit the
amortization of goodwill and indefinite-lived intangible assets, require that
goodwill and indefinite-lived intangible assets be
6
tested annually for impairment (and in interim periods if certain events occur
indicating that the carrying value of goodwill and/or indefinite-lived
intangible assets may be impaired), require that reporting units be identified
for the purpose of assessing potential impairments of goodwill, and remove the
forty-year limitation on the amortization period of intangible assets that have
finite lives.
During the first quarter of fiscal 2003, we completed the first step of the
two-step implementation process by obtaining a valuation of HMI for comparison
to the carrying value and began the process of measuring the amount of the
impairment (step two). Although management does not believe that the market
value of common stock fairly reflects the value of HMI, because of liquidity,
control premium and small float issues, etc., the valuation experts employed by
us utilized the market value of the common stock as of October 1, 2002 but also
weighted the valuation for comparable values of peer companies, recent sales of
similar types of companies and a discounted cash flow methodology. Based on the
assumptions used in any of the last three valuations and depending on the
weighting used for each valuation, results of the valuation could be
significantly changed. However, we believe that the weighting methodology used
is reasonable and results in an accurate and fair value of HMI.
During the second quarter of fiscal 2003, we completed our initial impairment
test, based upon the above valuation, for October 1, 2002 resulting in a full
impairment of the goodwill recorded on HMI's books through a non-cash charge of
$5,450,900. Such charge is non-operational in nature and is reflected as a
Cumulative Effect of Accounting Change in the accompanying Consolidated
Condensed Statements of Operations for the six months ended March 31, 2003.
A reconciliation of the reported net (loss) income and net (loss) income per
share to the amounts adjusted for the exclusion of amortization of goodwill and
the cumulative effect of a change in accounting principle for the three and six
months ended March 31, 2003 and 2002, respectively, had the provisions of SFAS
142 been applied on October 1, 2001, is as follows:
For the three months For the six months
ended March 31, ended March 31,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
(Loss) income before cumulative
effect of accounting change $ (893,908) $ (9,822) $ (804,988) $ 174,248
Cumulative effect of accounting change - - 5,450,860 -
- ----------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME (893,908) (9,822) (6,255,848) 174,248
Goodwill amortization add back, net of tax - 61,374 - 122,751
- ----------------------------------------------------------------------------------------------------------------------
ADJUSTED NET (LOSS) INCOME $ (893,908) $ 51,552 $(6,255,848) $ 296,999
======================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic and diluted 6,742,314 6,701,204 6,742,314 6,701,204
======================================================================================================================
BASIC AND DILUTED PER SHARE OF COMMON
STOCK:
(Loss) income before cumulative
effect of accounting change $ (0.13) $ - $ (0.12) $ 0.03
Cumulative effect of accounting change $ - $ - $ (0.81) $ -
Goodwill amortization add back, net of tax $ - $ 0.01 $ - $ 0.01
======================================================================================================================
ADJUSTED NET (LOSS) INCOME $ (0.13) $ 0.01 $ (0.93) $ 0.04
======================================================================================================================
7
The following proforma financial information compares our (loss) income before
cumulative effect of accounting change, net (loss) income and net (loss) income
per share for the three and six month periods ended December 31, 2002 and March
31, 2003, respectively, had the transitional goodwill impairment charge of
$5,450,900 been recorded on October 1, 2002:
Three Months Ended Six Months Ended
December 31, 2002 March 31, 2003
- --------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change $ 88,920 $ (804,988)
Cumulative effect of accounting change 5,450,860 5,450,860
- --------------------------------------------------------------------------------------------------
ADJUSTED NET LOSS $(5,361,940) $(6,255,848)
==================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted 6,742,314 6,742,314
==================================================================================================
BASIC AND DILUTED PER SHARE OF COMMON STOCK:
Income (loss) before cumulative effect of accounting change $ 0.01 $ (0.12)
Cumulative effect of accounting change $ (0.81) $ (0.81)
- --------------------------------------------------------------------------------------------------
ADJUSTED NET LOSS $ (0.80) $ (0.93)
==================================================================================================
Total amortization expense for trademarks and patents was $21,200 and $20,200
for the six months ended March 31, 2003 and 2002, respectively. Amortization
expense for trademarks and patents is estimated for the remainder of fiscal 2003
and for the next four fiscal years ending September 30, 2004 through 2007 as
$20,800, $19,800, $12,100, $11,100 and $8,900.
4. VALUATION OF LONG-LIVED ASSETS
As of the beginning of fiscal 2003, we adopted Statement of Financial Accounting
Standards ("FAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". The adoption of this accounting standard did not have a
material impact on our operating results and financial position. We assess
potential impairments to our long-lived and intangible assets when there is
evidence that events or changes in circumstances indicate that the carrying
amount of an asset may not be recovered. An impairment loss is recognized when
the carrying amount of the long-lived and intangible asset is not recoverable
and exceeds its fair value. The carrying amount of a long-lived and intangible
asset is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset. Any
required impairment loss is measured as the amount by which the carrying amount
of a long-lived and intangible asset exceeds its fair value and is recorded as a
reduction in the carrying value of the related asset and a charge to operating
results.
5. FOREIGN CURRENCY TRANSLATION
During the second quarter of fiscal 2003, we recorded a write-off of $904,200 to
loss on disposal for cumulative translation adjustments associated with the
liquidation of our Canadian subsidiary.
6. COMPREHENSIVE INCOME/LOSS
Comprehensive income/loss combines net income/loss and "other comprehensive
items," which represents foreign currency translation adjustments, reported as a
component of stockholders' equity in the accompanying Consolidated Condensed
Balance Sheets. We present such information in our Statement of Stockholders'
Equity on an annual basis and in a footnote in our quarterly reports. We had
comprehensive losses of $898,000 and $6,256,400, for the three and
8
six months ended March 31, 2003, respectively and comprehensive losses of
$11,400 and $169,500 for the corresponding periods ending March 31, 2002.
7. GUARANTEES
During the second quarter of fiscal 2003 we adopted Financial Accounting
Standards Board Interpretation No. 45 ("FIN 45") "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN 45 requires that a liability be recorded in the
guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued, including a
reconciliation of changes in the entity's product warranty liabilities. The
disclosure requirements are effective for financial statements for interim or
annual periods ended after December 15, 2002, while the recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002.
We have guaranteed repayment to a finance company for certain events of default
by some of our Canadian distributors. The finance company purchased the
installment sales contracts that the distributors entered into with their
customers for the sale of products manufactured by HMI. We require the
participating Canadian distributors to provide us with cash reserves, which are
held as liabilities on our records, in order to provide a fund for the payments
of any defaults by the participating Canadian distributors. Our obligation to
repurchase any contracts is limited to situations in which the borrower has any
valid defense, right of set-off or counterclaim regarding the loan; the loan
does not comply with all applicable laws and regulations; or if the loan is not
a binding obligation of the borrower. From the commencement of the contract in
July 2002 through March 31, 2003 we have not had to repurchase any contract
under this guarantee.
WARRANTY
Changes in our warranty liability were as follows:
Three Months Ended Six Months Ended
------------------------- -------------------------
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Balance at beginning of period $ 177,400 $ 234,500 $ 190,500 $ 299,400
Charges to expense 92,500 - 148,400 -
Usage (88,700) (36,000) (157,700) (100,900)
--------- --------- --------- ---------
Balance at end of period $ 181,200 $ 198,500 $ 181,200 $ 198,500
========= ========= ========= =========
8. EARNINGS PER SHARE
As of March 31, 2003, 1,164,700 outstanding options were not included in the
computation of diluted EPS because the options' exercise prices were greater
than the average market price of the common shares. The exercise prices of these
options range from $1.00 to $7.50 per share and expire between the period
January 4, 2004 and August 29, 2010.
The denominators for calculating our basic and diluted earnings per share were
identical for the quarter ended March 31, 2002 as the 1,660,300 outstanding
options were not included in the calculation of diluted shares outstanding as
the result would have been anti-dilutive.
9
For the first three months of fiscal 2002, or the quarter ended December 31,
2001, all 1,648,300 stock options outstanding 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.
9. LONG-TERM COMPENSATION PLAN
During the second quarter of fiscal 2003 we adopted the Financial Accounting
Standards Board Statement of Financial Accounting Standard ("SFAS") No. 148
"Accounting for Stock-Based Compensation-Transition and Disclosure," which
provides alternative methods of accounting for stock-based compensation and
amends SFAS No. 123 "Accounting for Stock-Based Compensation." We record
stock-based compensation expense using the intrinsic value method on the date of
grant in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related interpretations. Because we
establish the exercise price based on the fair market value of our stock at the
date of grant, the options have no intrinsic value upon grant, and therefore no
expense is recorded. Each quarter, we report the potential dilutive impact of
stock options in our diluted earnings per share. As allowed by SFAS 148, we have
elected to continue to apply the intrinsic value-based method of accounting and
have adopted the disclosure requirements of SFAS 123. If we had measured
compensation cost for stock options granted under the fair value based method
prescribed by SFAS 123, net income would have changed to the pro forma amounts
set forth below:
For the three months For the six months
ended March 31, ended March 31,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Net (loss) income, as reported $ (893,908) $ (9,822) $(6,255,848) $ 174,248
Add: Stock-based employee
compensation expense included in
reported net income, net of related tax effects - - - -
- ----------------------------------------------------------------------------------------------------------------------
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects 23,309 22,857 46,165 45,911
- ----------------------------------------------------------------------------------------------------------------------
PRO FORMA NET (LOSS) INCOME $ (917,217) $ (32,679) $(6,302,013) $ 128,337
======================================================================================================================
BASIC AND DILUTED PER SHARE OF COMMON
STOCK:
As reported $ (0.13) $ - $ (0.93) $ 0.03
Proforma $ (0.14) $ - $ (0.93) $ 0.02
10. DEBT
In January 2003 we entered into an amendment to our credit facility agreement
with our current lender. This amendment, which expires January 31, 2004,
permanently increased our revolving line of credit from $2 million to $3
million, and carries the same interest rate and similar covenants as the
original loan agreement.
There were no covenant violations under the credit facility agreement as of or
for the three and six month periods ended March 31, 2003.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon the consolidated condensed financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated condensed
financial statements required us to make estimates and judgments that affect the
reported amount of assets and liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities at the date of the consolidated
condensed financial statements. Actual results may differ from those 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. For a more
complete description of our critical accounting policies please refer to our
Annual Report on Form 10-K for the fiscal year ended September 30, 2002. The
following policies reflect changes and/or updates to the detailed descriptions
included in the aforementioned Form 10-K.
GOODWILL AND OTHER INTANGIBLE ASSETS
Pursuant to FAS 142 "Goodwill and Other Intangible Assets" we ceased amortizing
goodwill in the period beginning October 1, 2002. Prior to the adoption of SFAS
No. 142, we amortized goodwill on a straight-line basis over 40 years. Other
intangible assets are amortized on a straight-line basis over their useful
lives, ranging from ten to seventeen years.
FAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. The provisions of FAS 142 prohibit the
amortization of goodwill and indefinite-lived intangible assets, require that
goodwill and indefinite-lived intangible assets be tested annually for
impairment (and in interim periods if certain events occur indicating that the
carrying value of goodwill and/or indefinite-lived intangible assets may be
impaired), require that reporting units be identified for the purpose of
assessing potential impairments of goodwill, and remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
During the first quarter of fiscal 2003, we completed the first step of the
two-step implementation process by obtaining a valuation of HMI for comparison
to the carrying value and began the process of measuring the amount of the
impairment (step two). Although management does not believe that the market
value of common stock fairly reflects the value of HMI, because of liquidity,
control premium and small float issues, etc., the valuation experts employed by
us utilized the market value of the common stock as of October 1, 2002 but also
weighted the valuation for comparable values of peer companies, recent sales of
similar types of companies and a discounted cash flow methodology. Based on the
assumptions used in any of the last three valuations referred to above and
depending on the weighting used for each valuation, results of
11
the valuation could be significantly changed. However, we believe that the
weighting methodology used is reasonable and results in an accurate and fair
value of HMI.
During the second quarter of fiscal 2003, we completed our initial impairment
test, based upon the above valuation, for October 1, 2002 resulting in a full
impairment of the goodwill recorded on HMI's books through a non-cash charge of
$5,450,900. Such charge is non-operational in nature and is reflected as a
Cumulative Effect of Accounting Change in the accompanying Consolidated
Condensed Statements of Operations.
VALUATION OF LONG-LIVED ASSETS
As of the beginning of fiscal 2003, we adopted Statement of Financial Accounting
Standards ("FAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". The adoption of this accounting standard did not have a
material impact on our operating results and financial position. We assess
potential impairments to our long-lived and intangible assets when there is
evidence that events or changes in circumstances indicate that the carrying
amount of an asset may not be recovered. An impairment loss is recognized when
the carrying amount of the long-lived or intangible asset is not recoverable and
exceeds its fair value. The carrying amount of a long-lived or intangible asset
is not recoverable if it exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset. Any required
impairment loss is measured as the amount by which the carrying amount of a
long-lived and intangible asset exceeds its fair value and is recorded as a
reduction in the carrying value of the related asset and a charge to operating
results.
RESULTS OF OPERATIONS
NET PRODUCT SALES
SECOND QUARTER OF FISCAL 2003 COMPARED TO SECOND QUARTER OF FISCAL 2002
Net product sales of $9,295,300 for the quarter ended March 31, 2003, were
$1,302,400 or 12.2% lower when compared to the prior year sales of $10,654,700.
The decrease in sales was largely attributable to reduced Distributor sales in
Asia, Europe and the cessation of the Americas National Advertising Campaign
("NAC"), offset by increased revenues in the Americas distributor network of
$1,250,300.
The NAC, a thirty-minute television 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 achieved and the infomercial
had exceeded the industry standard expected life cycle of twelve months.
Exclusive of the second quarter 2002 NAC sales of $628,800, revenues would have
decreased $673,600.
Decreased European sales are largely associated with reduced sales to Portugal
and Spain, both of which were impacted by these importers selling through their
old model units in anticipation of the introduction of the 75th Anniversary
models in these countries. The introduction of the 75th Anniversary model
occurred in these and several other European countries during the second quarter
of fiscal 2003. We are hopeful that the introduction of the 75th Anniversary
models as well as the launch of the Edge Success Program ("the Edge") will lead
to improved sales in these countries. The Edge, first created for the Americas
direct sales distribution network, is a multi-
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step program that provides business training from the earliest level of a new
recruit to the most senior level of premier master distributor and provides
incentives at each level to promote the development and retention of quality
distributors and sales associates.
The sales decline in Asia was primarily due to lower sales to Japan and Korea of
which Japan was the largest. The reduced sales to Japan reflect continued
realignments this importer has made to his inventory levels in anticipation of
the upcoming launch of our 75th Anniversary Majestic(R), which is planned to
occur in Japan later in our fiscal year. The reduced sales to Japan also reflect
Defender(R) sales that were made in the prior year with the intent of selling
them with the Majestic(R) as a system similar to how our products are marketed
in the U.S.; however, this program was not as successful as anticipated and as a
result Defender(R) sales will be less than the prior year while the importer
sells through his inventory. We are currently reviewing different alternatives
to promote the Defender(R) in Japan such as re-introducing the system approach
in connection with the new product launch or selling it through a completely
different sales channel. In addition, we are considering alternatives that would
encourage the Japanese network to place greater emphasis on our products versus
the other non-competing products they represent (Japanese direct sales network
routinely carry multiple product lines).
The increased sales in the Americas exclusive of NAC sales was due to the growth
of the direct sales network primarily resulting from several of our key master
distributors who have grown their business through effective recruiting,
retention and the opening of new offices under the aforementioned Edge Success
Program.
FIRST SIX MONTHS OF FISCAL 2003 COMPARED TO FIRST SIX MONTHS OF FISCAL 2002
Net product sales of $18,121,800 for the six months ended March 31, 2003, were
$1,846,600 or 9.2% lower when compared to the prior year sales of $19,968,300.
The decrease in sales was largely attributable to reduced sales in Asia, Europe
and the NAC offset by increased revenues in the Americas distributor network of
$2,115,000; the rationale for these fluctuations is consistent with the above
discussion.
GROSS PROFIT
SECOND QUARTER OF FISCAL 2003 COMPARED TO SECOND QUARTER OF FISCAL 2002
The gross margin for the quarter ended March 31, 2003, was $3,702,800 or 39.8%
of sales as compared to $4,654,300 or 43.9% of sales in 2002, a decrease in
gross margin of $951,500. The cessation of the aforementioned NAC resulted in
approximately $534,300 of the decrease. The remaining $417,200 was largely
attributable to decreased international sales; it was also impacted by increased
warranty and depreciation costs. Increased warranty costs were primarily driven
by Defender(R) issues specific to certain international markets and depreciation
expense increased due to tools and molds associated with new product models.
FIRST SIX MONTHS OF FISCAL 2003 COMPARED TO FIRST SIX MONTHS OF FISCAL 2002
The gross margin of $7,287,200 for the six months ended March 31, 2003, was
$1,710,600 or 19.0% lower when compared to the prior year gross margin of
$8,997,800. Approximately $1,019,900 of the decrease in gross margin was
associated with the cessation of the NAC. Unfavorable volume variance associated
with lower international sales, overhead absorption, and the aforementioned
increased warranty costs comprised the remaining difference of which the
unfavorable international sales volume variance was the largest.
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SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A")
SECOND QUARTER OF FISCAL 2003 COMPARED TO SECOND QUARTER OF FISCAL 2002
SG&A expenses of $3,720,500 or 40.0% of sales for the quarter ended March 31,
2003, were $855,300 lower when compared to the same period in fiscal 2002 of
$4,575,800 or 43.2% of sales. The reduced level of expense was driven by the
absence of advertising and administrative costs associated with our
aforementioned National Advertising Campaign of approximately $872,100, costs
associated with the Form 13D that was filed with the Securities Exchange
Commission in the prior year of $420,400 and reduced outside consulting expenses
of $118,800. These decreases were partially offset by increased costs associated
with certain growth initiatives in the Americas division.
FIRST SIX MONTHS OF FISCAL 2003 COMPARED TO FIRST SIX MONTHS OF FISCAL 2002
SG&A expenses of $7,204,400 or 39.8% of sales for the six months ended March 31,
2003 were $1,279,100 lower when compared to the same period in fiscal 2002 of
$8,483,500 or 42.5% of sales. The rationale for the lower expense is consistent
with the above discussion.
LIQUIDATION OF FOREIGN SUBSIDIARY
During the second quarter of fiscal 2003, after reviewing possible future
options for our Canadian subsidiary, we chose to liquidate the entity and
therefore recorded a loss on disposal of $904,200 for cumulative translation
adjustments associated with this subsidiary.
INTEREST EXPENSE
Interest expense was $6,400 and $20,700 for the quarter and six months ended
March 31, 2003, respectively, and was $22,800 and $42,500 for the same periods
in 2002. The decreased expense was primarily due to the reduced line of credit
balance in the second quarter of fiscal 2003 as well as interest paid in the
prior year to vendors associated with the short term financing of certain tools
and molds.
OTHER (INCOME) EXPENSE, NET
For the quarter and six months ended March 31, 2003 other (income) expense, net,
decreased $70,800 and $188,500, respectively, primarily resulting from the
absence of goodwill amortization associated with the adoption of SFAS No. 142
(see Note 3 to the Consolidated Condensed Financial Statements).
INCOME TAXES
The effective tax rate for the quarter ended March 31, 2003 was 0.2% compared to
an effective rate of 155.6% for the same period in fiscal 2002. The effective
rate for the quarter ended March 31, 2003 was lower than the federal statutory
rate of 34% primarily due to a non-deductible loss from the liquidation of our
Canadian subsidiary. The change in the effective rate from the same period in
fiscal 2002 was primarily due to the effect of the accounting change for
goodwill amortization (see Note 3 to the Consolidated Condensed Financial
Statements). The impact of the non-deductible loss from the liquidation of our
Canadian subsidiary in the current year as well as the goodwill amortization in
the prior year has been magnified by the low level of pre-tax earnings.
The effective income tax rate for the six months ended March 31, 2003 was (3.0%)
compared to 49.3% in fiscal 2002. The difference from the prior year was
primarily attributable to the
14
aforementioned non-deductible loss from the liquidation of our Canadian
subsidiary and the absence of non-deductible goodwill.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On October 1, 2002, we adopted SFAS 142. Under SFAS 142, goodwill impairment is
deemed to exist if the net book value of a reporting unit exceeds its estimated
fair value. During the second quarter of fiscal 2003, we completed our initial
impairment test as of October 1, 2002 and recorded a non-cash charge of
$5,450,900 to fully eliminate the carrying value of our goodwill (See Note 3 to
the Consolidated Condensed Financial Statements). There was no tax effect
related to this item as this charge is a permanent difference for income tax
purposes.
INFLATION AND PRICING
Net product sales and income from continuing operations were not materially
impacted by inflation or changing prices.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash flows from operating activities provided net cash of $2,026,000 for the six
months ended March 31, 2003, which reflects a net loss of $6,255,800 offset by
non-cash charges of $6,752,800 and an increase in operating assets and
liabilities of $1,529,100.
Non-cash charges consist primarily of $5,450,900 related to the cumulative
effect of accounting change from our adoption of SFAS 142, $904,200 associated
with the loss on disposal for cumulative translation adjustments from the
liquidation of our Canadian Subsidiary and $379,600 in depreciation and
amortization expense.
The increase in operating assets and liabilities principally relates to an
increase in accounts payable and accrued expenses and other liabilities of
$984,200 and $862,800, respectively, offset by a $333,700 increase in
inventories. During the last two months of our fiscal year 2002 we re-adjusted
our raw material stock levels which led to a significant reduction, as of our
year-end, in both inventory purchases and accounts payable. As the sales volume
rose in the first and second quarters of fiscal 2003, primarily in the Americas
Division, we returned to more characteristic purchasing levels thus increasing
our overall payable balance for the six months ended March 31, 2003. Also
impacting the payable balance were variable selling expenses associated with the
Americas Division which increased as a direct result of the growth in their
sales volume.
The increase in accrued expenses and other liabilities primarily related to the
Americas Division Distributor programs and variable selling compensation
expenses which increased as a result of the Americas revenue growth in the
second quarter of fiscal 2003 as compared to September 30, 2002.
Both finished goods and raw material were driving factors in the increase in
inventories. Increases in safety stock, primarily demo supplies, and lower than
anticipated sales in our International market accounted for the increase in
finished goods. Lower international sales as well as the build up of raw
materials for product improvements soon to be released, and the
15
purchase of printed materials for the International promotion of our Edge
Success Program lead to increased raw materials.
INVESTING ACTIVITIES
Capital expenditures of $126,800 represent the entire net cash used in investing
activities for the six months ended March 31, 2003. These expenditures mainly
relate to tooling associated with new products, office furniture and new office
computer hardware.
FINANCING ACTIVITIES
Net cash used in financing activities was $1,593,100, which included $1,392,000
for net repayments under the credit facility and $201,100 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 our research and development projects.
As of March 31, 2003, there was no outstanding balance on our $3,000,000 amended
credit facility.
CASH OBLIGATIONS
There have been no material changes outside the ordinary course of our business
with regards to cash obligations that have not been previously disclosed in our
fiscal 2002 Annual Report on Form 10-K.
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 optimism of the 75th Anniversary model and the
Edge Success Program's impact on International sales, and "Liquidity" regarding
anticipated cash requirements and the adequacy of our current ability to meet
those requirements. Such forward-looking statements are subject to uncertainties
such as anticipated sales trends, improved lead generation and recruiting and
the ability to obtain financing for the end consumer through consumer financing
companies. Such uncertainties are difficult to predict and could cause our
actual results of operation to differ materially from those matters expressed or
implied by such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk is related to our borrowings. Fixed rate
borrowings may have their fair market value adversely impacted from changes in
interest rates. Variable rate borrowings will lead to additional interest
expense if interest rates increase. As of March 31, 2003, we had no outstanding
borrowing under our credit facility bearing interest at the prime rate.
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ITEM 4. 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-Q. 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 referenced in paragraph (A) above.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 Form 8-K filed on February
19, 2002.
10.00 Material Contract Amendment to U.S. Bank N.A. Loan Agreement and Note,
incorporated by reference from Form 10-Q for the quarter ended
December 31, 2002.
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
(b) REPORTS ON FORM 8-K
No report on Form 8-K was filed during the quarter ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMI INDUSTRIES INC.
-------------------
(Registrant)
Date: MAY 14, 2003 /s/ Julie A. McGraw
------------ ---------------------
Julie A. McGraw
Vice President - Chief Financial
Officer
18
CERTIFICATIONS
I, James R. Malone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of HMI Industries
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 officer 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 officer and I have indicated in this
quarterly 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
May 14, 2003
19
CERTIFICATIONS
I, Julie A. McGraw, certify that:
1. I have reviewed this quarterly report on Form 10-Q of HMI Industries
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 officer 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 officer and I have indicated in
this quarterly 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
May 14, 2003
20