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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 December 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.
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(Exact name of Registrant as Specified in Its Charter)
DELAWARE 36-1202810
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(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
Genesis Building, 6000 Lombardo Center, Suite 500, Seven Hills, Ohio 44131
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (216) 986-8008
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes _X_ _No_
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 January 31, 2004
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Common stock, $1 par value per share 6,745,609
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INDEX
PART I. FINANCIAL INFORMATION....................................................................................3
ITEM 1. FINANCIAL STATEMENTS...................................................................................3
Consolidated Condensed Balance Sheets.......................................................................3
Consolidated Condensed Statements of 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.................10
Critical Accounting Policies...............................................................................10
Results of Operations......................................................................................10
Liquidity and Capital Resources............................................................................12
Future Accounting Requirements.............................................................................13
Cautionary Statement for "Safe Harbor" Purposes Under the Private Securities Litigation Reform Act of 1995.13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................14
ITEM 4. CONTROLS AND PROCEDURES..............................................................................14
(A) Evaluation of Disclosure Controls and Procedures.......................................................14
(B) Changes in Internal Controls...........................................................................14
PART II. OTHER INFORMATION......................................................................................14
ITEM 1. LEGAL PROCEEDINGS....................................................................................14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................14
ITEM 5. OTHER INFORMATION....................................................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................15
(a) Index to Exhibits......................................................................................15
(b) Reports on Form 8-K....................................................................................15
SIGNATURES....................................................................................................16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, September 30,
2003 2003
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,126,392 $ 948,422
Trade accounts receivable (net of allowance of $171,645
and $194,423) 1,812,124 1,891,549
Inventories:
Finished goods 2,577,254 2,554,663
Work-in-progress, raw material and supplies 2,369,726 2,152,563
Prepaid expenses 234,569 396,650
Other current assets 45,127 151,999
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Total current assets 8,165,192 8,095,846
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PROPERTY, PLANT AND EQUIPMENT, NET 1,953,925 2,178,510
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OTHER ASSETS:
Trademarks (net of amortization of $222,865 and $210,140) 364,769 369,965
Other 92,267 122,268
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Total other assets 457,036 492,233
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Total assets $ 10,576,153 $ 10,766,589
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 896,000 $ 1,383,000
Trade accounts payable 2,529,312 2,142,972
Income taxes payable 513,105 506,192
Accrued expenses and other liabilities 3,534,795 3,446,063
Long-term debt due within one year 22,543 22,039
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Total current liabilities 7,495,755 7,500,266
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LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 4,858 10,688
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Total long-term liabilities 4,858 10,688
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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 shares 6,745,609 6,745,609
Capital in excess of par value 8,231,311 8,231,311
Retained earnings (11,901,380) (11,721,285)
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Total stockholders' equity 3,075,540 3,255,635
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Total liabilities and stockholders' equity $ 10,576,153 $ 10,766,589
===========================================================================================================
See notes to consolidated condensed financial statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended December 31,
2003 2002
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REVENUES:
Net product sales $ 8,382,772 $ 8,826,452
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OPERATING COSTS AND EXPENSES:
Cost of products sold 5,085,641 5,242,114
Selling, general and administrative expenses 3,467,661 3,483,917
Interest expense 17,285 14,312
Other (income) expense, net (15,220) (27,471)
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Total operating costs and expenses 8,555,367 8,712,872
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(Loss) income before income taxes and cumulative
effect of accounting change (172,595) 113,580
Provision for income taxes 7,500 24,660
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(Loss) income before cumulative effect of
accounting change (180,095) 88,920
Cumulative effect of accounting change - 5,450,860
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NET LOSS $ (180,095) $ (5,361,940)
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted 6,745,647 6,742,314
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BASIC AND DILUTED PER SHARE OF COMMON STOCK:
(Loss) income before cumulative effect of
accounting change $ (0.03) $ 0.01
Cumulative effect of accounting change $ - $ (0.81)
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NET LOSS $ (0.03) $ (0.80)
===========================================================================================================
See notes to consolidated condensed financial statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
For the three months ended December 31,
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (180,095) $ (5,361,940)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Cumulative effect of accounting change - 5,450,860
Depreciation and amortization 203,308 214,806
Provision for loss on disposal of assets 47,960 -
Unearned compensation - 1,354
Deferred income taxes - 19,535
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease (increase) in receivables 79,425 (566,002)
(Increase) decrease in inventories (239,754) 65,438
Decrease in prepaid expenses 162,081 105,268
Decrease in other current assets 106,872 30,353
Increase in accounts payable 386,340 692,238
Increase in accrued expenses and other
liabilities 88,731 550,768
Increase in income taxes payable 6,913 1,059
Other, net 22,470 30,196
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Net cash provided by operating
activities 684,251 1,233,933
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,956) (33,283)
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Net cash used in investing
activities (13,956) (33,283)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under credit facility (487,000) (1,001,000)
Payment of long term debt (5,325) (124,424)
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Net cash used in financing
activities (492,325) (1,125,424)
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Net increase in cash and cash equivalents 177,970 75,226
Cash and cash equivalents, beginning of period 948,422 481,395
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Cash and cash equivalents, end of period $ 1,126,392 $ 556,621
===========================================================================================================
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, 2003.
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year.
2. Other Intangible Assets
Total amortization expense for trademarks and patents was $12,700 and $10,300
for the three months ended December 31, 2003, and 2002, respectively.
Amortization expense for trademarks and patents is estimated for the remainder
of fiscal 2004 and for the next four fiscal years ending September 30, 2005
through 2008, as $34,700, $19,800, $19,000, $16,900, and $15,500.
3. Guarantees
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 the loan is not a
binding obligation of the borrower. It is not practical for us to estimate
future cash payments on possible repurchases; however, from the commencement of
the contract in July 2002 through the date of this filing we have repurchased
only one contract approximating $2,600 under this guarantee.
Warranty
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 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.
6
Our policy is to record a provision for the expected cost of warranty-related
claims at the time of the sale and adjust the provision to reflect actual
experience quarterly. The amount of warranty liability accrued reflects
management's best estimate of the expected future cost of honoring our
obligations under the warranty plans. Historically, the cost of fulfilling our
warranty obligations has principally involved replacements parts, labor and
sometimes travel. Our estimates are based on historical experience, the number
of units involved, and the extent of features/components included in product
models.
Changes in our warranty liability were as follows:
Three Months Ended
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December 31, December 31,
2003 2002
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Balance at beginning of period $ 193,300 $ 190,500
Charges to expense 46,700 55,900
Usage (45,000) (69,100)
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Balance at end of period $ 195,000 $ 177,300
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4. Earnings Per Share
The denominators for calculating our basic and diluted earnings per share were
identical for the quarter ended December 31, 2003, as the 1,158,666 outstanding
options were not included in the calculation of diluted shares outstanding as
the result would have been anti-dilutive. The exercise prices of these options
range from $1.00 to $7.50 per share and expire between January 4, 2004, and
August 29, 2010.
All 1,146,700 stock options outstanding for the quarter ended December 31, 2002,
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.
5. Long-term Compensation Plan
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:
7
For the three months ended
December 31,
2003 2002
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Net loss, as reported $ (180,095) $ (5,361,940)
Add: Stock-based employee compensation
expense included in reported net (loss)
income, net of related tax effects - -
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Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 23,196 23,555
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PRO FORMA NET LOSS $ (203,290) $ (5,385,495)
============= ================
BASIC AND DILUTED PER SHARE OF COMMON STOCK:
As reported $ (0.03) $ (0.80)
Proforma $ (0.03) $ (0.80)
6. Executive Compensation
On February 2, 2004, the Board of Directors accepted the resignation and
retirement of James R. Malone, Chief Executive Officer, triggering certain
benefit payments. Consequently, compensation expense approximating $200,000 will
be recorded in the second quarter of fiscal 2004 in accordance with Mr. Malone's
provisions of resignation.
7. Related Party Transactions
James R. Malone, our former Chairman and Chief Executive Officer, Darrell
Weeter, President of the Company's Americas division, and John Glomb, a Regional
Vice President of the Company, each own 31.67% of the membership interests in a
Company called Vision Capital Logistics, LLC ("VCL"). VCL, a brokerage service
provider for sourcing consumer credit, assists its clients in securing third
party financing for its clients' customers to purchase products, including
products manufactured by us and sold by our Distributors. VCL charges additional
fees to our Distributors for these financing services. VCL's client list also
includes a number of other "direct sales" companies, including other floor care
companies. In securing such financing, VCL may guarantee the legal compliance
obligations (but not any payment obligations) of our Distributors to a third
party lender. The third party lender pays VCL a participation fee for such
financing services, a part of which (twelve percent (12%)) VCL pays to us.
During the quarters ended December 31, 2003, and 2002, VCL paid HMI $4,600 and
$5,900, respectively in connection with such financing services. Additionally,
in certain cases a Distributor may not be able to complete a sale because of the
substandard credit status of the retail customer. In such cases VCL may provide
the Distributor with financing for this sale. We entered into an arrangement
with VCL known as a Swap Program under which VCL will purchase the contract of
the retail customer from the Distributor and arrange for the financing of the
contract at a significant discount. To replace the product sold by our
Distributor and for which the Distributor received only a portion of the
consumer sale price, VCL will purchase a replacement product from us at the same
price paid by our Master Distributors and we will ship it to the Distributor to
replace the product the Distributor just sold. During the quarters ended
December 31, 2003, and 2002, VCL purchased an aggregate of $11,700 and $11,000,
respectively of our products under the Swap Program. Under the terms of our
credit facility in place from time to time, we were prohibited from engaging in
certain of the financing activities provided by VCL.
8
Beginning in June 2000 until January 2003 we sublet to VCL a portion of our
office space in Naples, Florida. During the quarter ended December 31, 2002, VCL
paid HMI $6,000 in rent for such space, which amount was based upon an
allocation of our total monthly lease payments to the amount of space utilized
by VCL. In February 2003 a new lease was entered into for office space with VCL
as the tenant. We began subleasing space from VCL for $2,700 per month, which
amount is based upon an allocation of VCL's total monthly lease payments to the
amount of space that we utilize. For the quarter ended December 31, 2003 we paid
VCL a total of $8,000 in lease payments. The sublease was terminated in
February, 2004.
Darrell Weeter, an executive officer of the Company, has served for many years
as President of FVS, Inc., a distributor of products manufactured by HMI, and
which is owned by Mr. Weeter and his wife. For the quarters ended December 31,
2003, and 2002, FVS, Inc. purchased, at Master Distributor pricing, a total of
$11,400 and $21,900, respectively, in products from us. Mr. Weeter also received
amounts due to him under our Career Development Program of $3,200 and $11,800
for the three months ended December 31, 2003, and 2002, respectively. The
amounts paid were distributor paid overrides collected by us from distributors
that were brought into the Filter Queen business by Mr. Weeter.
Derek Hookom, an employee of HMI, is President of Summit Air, a distributor of
products manufactured by HMI. For the quarters ended December 31, 2003, and
2002, Summit Air purchased, at Master Distributor pricing, a total of $8,800,
and $63,200, respectively, in products from us. Mr. Hookom also received amounts
due to him under our Career Development Program of $12,800 and $25,100 for the
three months ended December 31, 2003, and 2002, respectively. The amounts paid
were distributor paid overrides collected by us from distributors that were
brought into the Filter Queen business by Mr. Hookom.
8. Subsequent Events
On February 2, 2004, the Board of Directors accepted the resignation and
retirement of James R. Malone, the Chairman and Chief Executive Officer.
Consequently, compensation expense of approximately $200,000 will be recorded in
the second quarter of fiscal 2004 in accordance with Mr. Malone's provisions of
his resignation.
Our credit facility agreement includes, but is not limited to, various covenants
that limit our ability to incur additional indebtedness, restrict paying
dividends, maintain a minimum net worth, and limit the ability for capital
expenditures. As of December 31, 2003, we were not in compliance with our
interest coverage ratio and net worth covenants; however, we obtained a waiver
on this covenant which was effective until the February 20, 2004 amendment of
the credit facility.
On February 20, 2004 an amendment of our $3,000,000 credit facility agreement
was executed with our lender. The credit facility has an expiration date of
October 15, 2004. The amended agreement carries the same interest rate and
similar covenants as the previous amended loan agreement, with the exception of
the interest coverage ratio which was amended to exclude non-cash expenses,
including but not limited to, the impairment of tooling assets and associated
inventory, and the tangible net worth covenant in which the minimum amount was
reset to $2,400,000.
9
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, 2003.
RESULTS OF OPERATIONS
Net Product Sales
FIRST QUARTER OF FISCAL 2004 COMPARED TO FIRST QUARTER OF FISCAL 2003
Net product sales of $8,382,800 for the quarter ended December 31, 2003, were
$443,700 or 5.0% lower when compared to the prior year sales of $8,826,500. The
decrease was attributable to lower sales in Europe and the Americas offset by
increased sales in Asia.
The largest sales decline was in Europe and was driven by reduced sales to
Spain, Portugal, and Denmark. The decrease in these regions' sales was
principally associated with the ongoing challenges of lead generation, the
recruiting of new sales associates, and the retention of existing associates
within these importer's territories. It is hoped that the Edge Success Program
("the Edge") which was introduced in these countries in the second and third
quarter of fiscal 2003 will increase both the recruiting and retention of sales
associates and distributors, similar to what has been experienced with the
program in our Americas direct sales network. 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
and provides incentives at each level to promote the development and retention
of quality sales associates and distributors.
Asian sales increased primarily as the result of product being shipped to a new
customer in Malaysia during the first quarter of fiscal 2004.
Gross Margin
FIRST QUARTER OF FISCAL 2004 COMPARED TO FIRST QUARTER OF FISCAL 2003
The gross margin for the quarter ended December 31, 2003, was $3,297,100 or
39.3% of sales as compared to $3,584,300 or 40.6% of sales in the prior year.
The decrease in gross margin of $287,200 was driven by the aforementioned
decreased sales volume.
10
Selling, General, and Administrative ("SG&A")
FIRST QUARTER OF FISCAL 2004 COMPARED TO FIRST QUARTER OF FISCAL 2003
The SG&A expenses for the quarter ended December 31, 2003, of $3,467,700 or
41.4% of sales were $16,200 or 0.5% lower when compared to the same period in
the prior year of $3,483,900 or 39.5% of sales. While this variance is not
considered significant, it should be noted that increased costs associated with
distributor development, including developing new lead generation programs to
assist our distribution network with the challenges created by the recently
enacted telemarketing laws, were largely offset by lower compensation costs
which followed the lower level of sales and earnings as well as expenses
incurred in the prior year associated with certain growth initiatives in the
Americas division.
Interest Expense
FIRST QUARTER OF FISCAL 2004 COMPARED TO FIRST QUARTER OF FISCAL 2003
Interest expense for the quarter ended December 31, 2003, was $17,300 or $3,000
higher when compared to the same period in fiscal 2003 of $14,300 and primarily
reflects the increased borrowings on our line of credit when compared to the
first quarter of the prior year.
Other (income) expense, net
FIRST QUARTER OF FISCAL 2004 COMPARED TO FIRST QUARTER OF FISCAL 2003
The decrease in other income from $27,500 in the prior year to $15,200 for the
quarter ended December 31, 2003, was attributable to a variety of individually
insignificant items.
Income Taxes
FIRST QUARTER OF FISCAL 2004 COMPARED TO FIRST QUARTER OF FISCAL 2003
The effective income tax rate for the quarter ended December 31, 2003, was
(4.3%) compared to an effective rate of 21.7% for the same period in the prior
year. The change in the effective rate was primarily attributable to the
recording of a full valuation allowance against our deferred tax assets in the
fourth quarter of fiscal 2003. This valuation allowance is decreased when income
is generated (increased by losses), thereby completely offsetting our federal
income tax expense (benefit). The valuation allowance, which is periodically
reviewed, can be partially reversed as discussed above or completely reversed
when sufficient positive evidence emerges that the deferred tax assets will be
utilized (positive evidence is deemed to be a sustained trend of U.S. income for
financial accounting purposes). The effective tax rate of (4.3%) is associated
with state franchise taxes.
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. There was no
tax effect related to this item as this charge is a permanent difference for
income tax purposes. This amount is reflected, in this Form 10-Q, as a deduction
from results of operations for the quarter ended December 31, 2002.
Inflation and Pricing
Net product sales and income from continuing operations were not materially
impacted by inflation or changing prices.
11
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash flows from operating activities provided net cash of $684,300 for the three
months ended December 31, 2003, principally due to cash inflows resulting from
an increase in accounts payable of $386,300, decreases in prepaid expenses and
other current assets of $162,100 and $106,900, respectively, as well as net
non-cash expenses of $251,300 primarily relating to depreciation and
amortization of $203,300, offset by an increase in inventories of $239,800 and a
net loss of $180,100.
During the last two months of our fiscal year 2003 we re-adjusted our raw
material stock levels which led to a reduction in purchases as compared to the
previous ten months raw material purchase average. In the first quarter of
fiscal 2004 we returned to more characteristic purchasing levels thus increasing
our overall payable balance for the three months ended December 31, 2003. Also
impacting the payable balance were the check payments for the last week of
December that were postponed until January 2004 because of the holidays.
Amortization of prepaid risk insurance was the contributing factor to the
decrease in prepaid expenses, while the decrease in other current assets largely
related to the receipt of a miscellaneous non-trade receivable.
Increased raw materials, primarily motors and electrical components, of $217,200
accounted for the majority of the inventories increase at December 31, 2003.
Less than anticipated sales and lower then expected manufacturing through-put,
as well as materials relating to new product lines, led to this increase.
Investing Activities
Capital expenditures of $14,000 represent the entire net cash used in investing
activities for the three months ended December 31, 2003, of which the largest
portion relates to tooling associated with our current product line.
Financing Activities
Net cash used in financing activities was $492,300, which included $487,000 for
net repayments under the credit facility and $5,300 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, debt
service, capital expenditures and expenses associated with our research and
development and sales projects, through September 30, 2004. At such time we
anticipate the extension of our existing line of credit or the obtainment of a
new credit facility; however, there can be no assurance that such credit will be
available to us or if available grant as favorable terms as our current credit
facility. As of January 31, 2004, there was $1,738,000 borrowed on the
$3,000,000 credit facility.
Our credit facility agreement includes, but is not limited to, various covenants
that limit our ability to incur additional indebtedness, restrict paying
dividends, maintain a minimum net worth and limit the ability for capital
expenditures. As of December 31, 2003, we were not in compliance with our
interest coverage ratio and net worth covenants, however, we obtained a waiver
on these covenants which was effective until the February 20, 2004 amendment of
the credit facility.
On February 20, 2004, an amendment of our $3,000,000 credit facility agreement
was executed with our lender. The credit facility has an expiration date of
October 15, 2004. The amended agreement carries the same interest rate and
similar covenants as the previous amended loan agreement, with the exception of
the interest coverage ratio which was amended to exclude non-cash expenses,
including but not limited to, the impairment of tooling assets and associated
inventory, and the tangible net worth covenant in which the minimum amount was
reset to $2,400,000.
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 2003 Annual Report on Form 10-K.
12
SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS
During the second quarter of fiscal 2004, we engaged certain independent
professionals to review relationships we had with certain affiliates. These
professionals completed their review and issued a report to the special
committee in February 2004. The committee is currently reviewing their
recommendations. In addition, on February 2, 2004, the Board of Directors
accepted the resignation and retirement of James R. Malone, the Chairman and
Chief Executive Officer. Consequently, compensation expense of approximately
$200,000 will be recorded in the second quarter of fiscal 2004 in accordance
with Mr. Malone's provisions of his resignation.
FUTURE ACCOUNTING REQUIREMENTS
FASB Interpretation No. 46, Consideration of Variable Interest Entities (FIN
46): This statement was issued in January 2003 and a revised interpretation of
FIN 46 (FIN 46-R) was issued in December 2003. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of FIN 46 are effective immediately
for all arrangements entered into after January 31, 2003. Since January 31,
2003, we have not invested in any entities we believe are variable interest
entities for which we are the primary beneficiary. For those arrangements
entered into after January 31, 2003, we are required to apply the provisions of
FIN No. 46 through the end of the first quarter of fiscal 2004. We are required
to adopt the provisions of FIN 46-R for those arrangements in the second quarter
of fiscal 2004. For arrangements entered into prior to February 1, 2003, we are
required to adopt the provisions of FIN 46-R in the second quarter of fiscal
2004. We are in the process of determining the effect, if any, the adoption of
FIN 46-R will have on our financial statements.
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity (SFAS No. 150): This statement, issued in May
2003, establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 has been deferred
indefinitely related to certain measurement and disclosure components of the
standard; however, certain disclosure provisions are still required if
applicable to us. The final adoption of SFAS No. 150 is not expected to have a
significant impact, if any, on our financial statements; however, a formal
assessment will be performed.
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 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 difficulty in protecting our
intellectual property rights in a particular foreign jurisdiction; dependency on
key personnel and the ability to retain them; recessions in economies where we
sell our products; longer payment cycles for and greater difficulties collecting
accounts receivable; export controls, tariffs and other trade protection
measures; social, economic and political instability; changes in United States
and foreign countries laws and policies affecting trade; anticipated sales
trends; the ability to attract and retain Distributors and Importers; improved
lead generation and recruiting; and the ability to obtain financing for the end
consumer through consumer financing companies, including VCL. 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.
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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 December 31, 2003, we had $896,000
outstanding under our credit facility bearing interest at the prime rate. If
interest rates were to increase 50 basis points (0.5%) from the December 31,
2003, rates and assuming no changes in outstanding debt levels from December 31,
2003 levels, we would realize an increase in our annual interest expense of
approximately $4,500.
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 principal executive officer and principal financial officer within
the 90-day period prior to the filing of this Form 10-Q. The principal executive
officer and principal 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 during the last fiscal quarter 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.
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ITEM 5. OTHER INFORMATION
Our Common Stock was traded in the over-the-counter market on the OTC Bulletin
Board under the symbol "HMII.OB" until February 19, 2004, the date it was
removed. The removal occurred as we were no longer current with regards to our
SEC filings, primarily our Form 10-K for the year ended September 30, 2003, and
therefore the members of the OTC Bulletin Board could no longer quote our
shares.
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 10-Q for the quarter ended June 30,
2003
10.01 Material Contracts~
U.S. Bank N.A. Waiver Letter and Amendment to Revolving Credit Note
dated February 20, 2004, incorporated by reference from Annual Report on
Form 10-K for the year ended September 30, 2003
31.1 Rule 13a-14(a)/15d-14(a) Certification~
Certification Pursuant to 15 U.S.C. Section 7241 for Kirk W. Foley,
attached
31.2 Rule 13a-14(a)/15d-14(a) Certification~
Certification Pursuant to 15 U.S.C. Section 7241 for Julie A. McGraw,
attached
32.1 Section 1350 Certification~
Certification for Kirk W. Foley Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), attached
32.2 Section 1350 Certification~
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 December 31, 2003. We
did however furnish to the SEC a report on Form 8-K dated February 3, 2004,
containing our February 3, 2004, press release to announce the resignation and
replacement of our Chairman of the Board.
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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: February 20, 2004 /s/ Julie A. McGraw
----------------- -------------------------
Julie A. McGraw
Vice President - Chief Financial
Officer
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