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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, 2004
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 Incorporation or Organization) (IRS Employer Identification No.)
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
- --------------------------------------------------------------------
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 [ ] No [X]
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 September 30,2004
------------------------------------ --------------------------------
Common stock, $1 par value per share 6,745,609
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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 (DOLLARS IN
THOUSANDS)....................................................................................................... 16
Critical Accounting Policies............................................................................... 16
Results of Operations...................................................................................... 16
Liquidity and Capital Resources............................................................................ 18
Cautionary Statement for "Safe Harbor" Purposes Under the Private Securities Litigation Reform Act of
1995....................................................................................................... 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................... 21
ITEM 4. CONTROLS AND PROCEDURES.............................................................................. 21
(A) Evaluation of Disclosure Controls and Procedures....................................................... 21
(B) Changes in Internal Controls........................................................................... 21
PART II. OTHER INFORMATION...................................................................................... 21
ITEM 1. LEGAL PROCEEDINGS.................................................................................... 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................ 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 22
ITEM 5. OTHER INFORMATION.................................................................................... 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................................... 22
(a) Index to Exhibits...................................................................................... 22
(b) Reports on Form 8-K.................................................................................... 23
SIGNATURES.................................................................................................... 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
Dollars and shares in thousands, except par values
(UNAUDITED) SEPTEMBER 30,
MARCH 31, 2003
2004 RESTATED
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,433 $ 948
Trade accounts receivable (net of allowance of $162 and
$194) 2,553 1,892
Inventories:
Finished goods 2,731 2,555
Work-in-progress, raw material and supplies 2,122 2,153
Prepaid expenses 171 397
Other current assets 136 152
--------- --------
Total current assets 9,146 8,097
--------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 1,897 2,178
--------- --------
OTHER ASSETS:
Trademarks (net of amortization of $214 and $202) 232 272
Other - 121
--------- --------
Total other assets 232 393
--------- --------
Total assets $ 11,275 $ 10,668
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 466 $ 1,383
Trade accounts payable 2,771 2,143
Income taxes payable 504 506
Accrued expenses and other liabilities 2,529 2,399
Distributor Development Liability due within one year 200 200
Long-term debt due within one year 22 22
--------- --------
Total current liabilities 6,492 6,653
--------- --------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) - 11
Distributor Development Liability (less amounts due
within one year) 14,495 12,758
--------- --------
Total long-term liabilities 14,495 12,769
--------- --------
CONTINGENCIES: - -
STOCKHOLDERS' DEFICIT:
Preferred stock, $5 par value; authorized, 300 shares;
issued, none - -
Common stock, $1 par value; authorized, 10,000 shares;
issued and outstanding, 6,746 shares 6,746 6,746
Capital in excess of par value 8,231 8,231
Accumulated deficit (24,689) (23,731)
--------- --------
Total stockholders' deficit (9,712) (8,754)
--------- --------
Total liabilities and stockholders' deficit $ 11,275 $ 10,668
========= ========
See notes to consolidated condensed financial statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Dollars and shares in thousands, except per share data
For the three months ended March 31, For the six months ended March 31,
Restated Restated
2004 2003 2004 2003
-------- -------- -------- --------
REVENUES:
Product sales, less returns and allowances $ 10,775 $ 9,295 $ 19,158 $ 18,121
Distributor development program (653) (1,409) (1,697) (2,228)
-------- -------- -------- --------
Net product sales 10,122 7,886 17,461 15,893
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of products sold 6,273 5,592 11,359 10,834
Selling, general and administrative expenses 3,781 3,537 7,051 6,871
Loss on liquidation of foreign subsidiary - 905 - 905
Interest expense 17 6 34 20
Other (income) expense, net (17) (34) (32) (61)
-------- -------- -------- --------
Total operating costs and expenses 10,054 10,006 18,412 18,569
-------- -------- -------- --------
Income (loss) before income taxes and cumulative
effect of accounting change 68 (2,120) (951) (2,676)
Provision (benefit) for income taxes - 2 7 (5)
-------- -------- -------- --------
Income (loss) before cumulative effect of
accounting change 68 (2,122) (958) (2,671)
Cumulative effect of accounting change - - - 5,451
-------- -------- -------- --------
NET INCOME (LOSS) $ 68 $ (2,122) (958) (8,122)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted 6,746 6,742 6,746 6,742
======== ======== ======== ========
BASIC AND DILUTED PER SHARE OF COMMON
STOCK:
Income (loss) before cumulative effect of
accounting change $ 0.01 $ (0.31) $ (0.14) $ (0.39)
Cumulative effect of accounting change $ - $ - $ - $ (0.81)
-------- -------- -------- --------
NET INCOME (LOSS) $ 0.01 $ (0.31) $ (0.14) $ (1.20)
======== ======== ======== ========
See notes to consolidated condensed financial statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
For the six months ended March 31,
Restated
Dollars in thousands 2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (958) $ (8,122)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Cumulative effect of accounting change - 5,451
Distributor development program 1,737 2,229
Depreciation and amortization 360 379
Loss on liquidation of foreign subsidiary - 905
Unearned compensation - 2
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Increase in receivables (661) (190)
Increase in inventories (145) (334)
Decrease in prepaid expenses 226 152
Decrease (increase) in other current assets 16 (18)
Increase in accounts payable 628 984
Increase in accrued expenses and other
liabilities 130 529
Decrease in income taxes payable (2) (24)
Other, net 138 83
------------- -------------
Net cash provided by operating activities 1,469 2,026
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (56) (127)
------------- -------------
Net cash used in investing activities (56) (127)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under credit facility (917) (1,392)
Payment of long term debt (11) (201)
------------- -------------
Net cash used in financing activities (928) (1,593)
------------- -------------
Net increase in cash and cash equivalents 485 306
Cash and cash equivalents, beginning of period 948 481
------------- -------------
Cash and cash equivalents, end of period $ 1,433 $ 787
============= =============
See notes to consolidated condensed financial statements.
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
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/A 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. Restatement
The accompanying balance sheet as of September 30, 2003, and the accompanying
statements of operations and of cash flows for the three and six months ended
March 31, 2003 have been restated. The adjustments associated with the
restatement related to the following:
Accrued Distributor Development Liabilities
Pursuant to EITF 01-9, "Accounting for Consideration Given by a Vendor to a
Customer", which was issued in 2001, we changed the way we account for the
potential one million dollar award associated with our Distributor Development
Program, otherwise known as our Edge Success Program ("Program"). Prior to the
adoption of EITF 01-9, we utilized the services of an independent actuary who
developed a model based on our historical sales and other factors that
identified, in aggregate, the probability of distributors reaching the goal
(earning 30,000 credits for sales of our product units) thereby triggering our
cash payment obligation. We recognized expense and recorded a liability based on
that model. The original intentions of the Program were to aid Master
Distributors in their retirement/succession plan and promote growth and
retention within the new distributor network. Because of these original
intentions and the long-term nature of this Program (fifteen years), management
did not consider the implications of this pronouncement to the award associated
with the Program and therefore EITF 01-9 was not adopted in 2001 as required.
Accordingly, we have restated our revenues to properly reflect the accrual for
this award as a reduction of revenues, not as a selling and administrative
expense. We have determined that for purposes of EITF 01-9 it is not possible to
reasonably estimate such a liability. We have therefore accrued such awards
assuming a maximum accrual rate whereby we assume each eligible distributor will
earn the award. In other words, for each qualifying sale, we have recorded a
liability by reducing revenue. Such a liability will only be derecognized (i.e.
the accrual eliminated) when (i) the award is paid out or (ii) when a
distributor is no longer eligible for the award. For the quarter and six months
ended March 31, 2003, this adjustment (i) decreased sales by $1,409 and $2,228,
respectively, and (ii) decreased selling, general and administrative expenses by
$184 and $334, respectively.
6
Tooling Assets
In 2003, we performed an analysis on the potential impairment of certain tooling
assets. We concluded from our analysis, which was based upon the held and used
model, that the tooling assets were fully impaired and accordingly we recorded
an impairment charge of $1,613 as of September 30, 2003. We inadvertently
omitted impairment charges of $98 for patents and trademarks relating to these
tooling assets and have reflected such additional impairment in the restated
2003 Consolidated Condensed Balance Sheet for the year ended September 30, 2003.
Deferred Tax Asset
In 2003, we provided a full valuation allowance on our deferred tax assets. As a
result of the restatement related to the Distributor Development Program, our
recorded income in 2001 changed to a loss and caused a significant cumulative
loss for financial statement purposes. Accordingly, we determined that the
impairment of our deferred tax assets should be reflected in the second quarter
of fiscal 2001, when we first reflected the adoption of EITF 01-9. As a result
we reversed the original impairment recorded in fiscal 2003. For the quarter and
six months ended March 31, 2003, the adjustments increased the provision for
income taxes by $4 and decreased the provision $28, respectively.
Summary of Restatement Adjustments
The following table summarizes the effects of the restatement adjustments on
certain of our previously issued financial statements by type of adjustment and
by the affected captions in our Statement of Operations. The various adjustments
recorded to prior years as part of the restatement have no effect on our cash
flows.
Three Months Ended Six Months Ended
Summary of Restatement Adjustments by Type March 31, 2003 March 31, 2003
------------------ ----------------
(Increase) decrease to net loss-
DISTRIBUTOR DEVELOPMENT LIABILITIES:
Revenues $ (1,409) $ (2,228)
Selling, general and administrative expenses 184 334
DEFERRED TAX ADJUSTMENT
Provision for income taxes (4) 28
--------- ---------
Total effect of restatement on net loss $ (1,229) $ (1,866)
========= =========
7
Summary of Restated Financial Data
The following tables present a summary of our balance sheet, statements of
operations and of cash flows as previously reported, and as restated as a result
of the restatement adjustments summarized above.
CONSOLIDATED CONDENSED BALANCE SHEETS
Dollars and shares in thousands, except par values
Previously
RESTATED Reported
SEPTEMBER 30, September 30,
2003 2003
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 948 $ 948
Trade accounts receivable (net of allowance of $172) 1,892 1,892
Inventories:
Finished goods 2,555 2,555
Work-in-progress, raw material and supplies 2,153 2,153
Prepaid expenses 397 397
Other current assets 152 152
------------- -------------
Total current assets 8,097 8,097
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET 2,178 2,178
------------- -------------
OTHER ASSETS:
Trademarks (net of amortization of $202) 272 370
Other 121 121
------------- -------------
Total other assets 393 491
------------- -------------
Total assets $ 10,668 $ 10,766
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,383 $ 1,383
Trade accounts payable 2,143 2,143
Income taxes payable 506 506
Accrued expenses and other liabilities 2,399 3,445
Distributor Development Liability due within one year 200 -
Long-term debt due within one year 22 22
------------- -------------
Total current liabilities 6,653 7,499
------------- -------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 11 11
Distributor Development Liability (less amounts due
within one year) 12,758 -
------------- -------------
Total long-term liabilities 12,769 11
------------- -------------
CONTINGENCIES: - -
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock, $5 par value; authorized, 300 shares;
issued, none - -
Common stock, $1 par value; authorized, 10,000 shares;
issued and outstanding, 6,746 shares 6,746 6,746
Capital in excess of par value 8,231 8,231
Accumulated deficit (23,731) (11,721)
------------- -------------
Total stockholders' (deficit) equity (8,754) 3,256
------------- -------------
Total liabilities and stockholders' (deficit) equity $ 10,668 $ 10,766
============= =============
8
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended December
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2003
---------------------------- ----------------------------
Dollars and shares in thousands, except per share data RESTATED Previously RESTATED Previously
Reported Reported
------------ ------------ ------------ ------------
REVENUES:
Product sales, less returns and allowances 9,295 9,295 18,121 18,121
Distributor development program (1,409) - (2,228) -
------------ ------------ ------------ ------------
Net product sales $ 7,886 $ 9,295 $ 15,893 $ 18,121
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 5,592 5,592 10,834 10,834
Selling, general and administrative expenses 3,537 3,721 6,871 7,205
Loss on impairment of asset - - - -
Loss on liquidation of subsidiary 905 905 905 905
Interest expense 6 6 20 20
Other (income) expense, net (34) (34) (61) (61)
------------ ------------ ------------ ------------
Total operating costs and expenses 10,006 10,090 18,569 18,903
------------ ------------ ------------ ------------
(Loss) income before income taxes and cumulative
effect of accounting change (2,120) (895) (2,676) (782)
Provision (benefit) for income taxes 2 (2) (5) 23
------------ ------------ ------------ ------------
(Loss) income before cumulative effect of accounting
change (2,122) (893) (2,671) (805)
Cumulative effect of accounting change - 5,451 5,451
------------ ------------ ------------ ------------
NET (LOSS ) INCOME $ (2,122) $ (893) $ (8,122) $ (6,256)
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic and diluted 6,742 6,742 6,742 6,742
============ ============ ============ ============
BASIC AND DILUTED PER SHARE OF COMMON STOCK
(NOTE 1):
(Loss) income before cumulative effect of accounting
change $ (0.31) $ (0.13) $ (0.39) $ (0.12)
Cumulative effect of accounting change $ - $ - $ (0.81) $ (0.81)
------------ ------------ ------------ ------------
NET (LOSS ) INCOME $ (0.31) $ (0.13) $ (1.20) $ (0.93)
============ ============ ============ ============
9
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
For the six months ended March 31,
2003
2003 Previously
Dollars in thousands RESTATED Reported
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,122) $ (6,256)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH
PROVIDED BY OPERATING ACTIVITIES:
Cumulative effect of accounting
change 5,451 5,451
Distributor development program 2,229 -
Depreciation and amortization 379 379
Loss on liquidation of foreign
subsidiary 905 905
Provision for loss on disposal of
assets - -
Unearned compensation 2 2
Deferred income taxes - 15
CHANGES IN OPERATING ASSETS AND
LIABILITIES:
Increase in receivables (190) (190)
Increase in inventories (334) (334)
Decrease in prepaid expenses 152 152
Increase in other current assets (18) (18)
Increase in accounts payable 984 984
Increase in accrued expenses and other
liabilities 529 864
Decrease in income taxes payable (24) (11)
Other, net 83 83
--------------- ---------------
Net cash provided by operating
activities 2,026 2,026
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (127) (127)
--------------- ---------------
Net cash used in investing
activities (127) (127)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under credit facility (1,392) (1,392)
Payment of long term debt (201) (201)
--------------- ---------------
Net cash used in financing
activities (1,593) (1,593)
--------------- ---------------
Net increase in cash and cash equivalents 306 306
Cash and cash equivalents, beginning of
period 481 481
--------------- ---------------
Cash and cash equivalents, end of period $ 787 $ 787
=============== ===============
3. Other Intangible Assets
Total amortization expense for trademarks and patents was $24 and $21, for the
six months ended March 31, 2004, and 2003, 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 $15, $15,
$14, $11, and $10.
4. Guarantees
We have guaranteed repayment to a finance company for certain events of default
by some of our Canadian distributors. The finance company purchases the
installment sales contracts that the distributors entered into with their
customers for the sale of products manufactured by HMI. 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. For example, we would be required to
purchase
10
from the finance company a contract entered into by an end consumer to finance
the purchase of our product if the finance company believes that the contract
has been improperly obtained.
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. We had $86 and $46 of cash reserves we had received from Canadian
Distributors as of March 31, 2004 and 2003, respectively. These amounts were
included in the accrued expenses and other liabilities line item of our
Consolidated Condensed Balance Sheets. We expect to hold them for at least a
period approximating the term of the finance contracts with the end consumers,
which typically have a 36 month term.
Although it is not practical for us to estimate future cash payments on possible
repurchases; the maximum potential of future payments that we could be required
to make under the guarantee is the total contracts outstanding of $628 and $993
at March 31, 2004 and 2003, respectively. However, from the commencement of the
contract in July 2002 we have repurchased only one contract approximating $3
under this guarantee. Moreover, we are permitted pursuant to agreements with our
Canadian distributors to be reimbursed from the cash reserves referred to above
for the costs and expenses incurred in fulfilling our guarantee to the finance
company.
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 (Dollar's not in thousands). On
occasion, we also support a five-year optional extended warranty on the portable
surface cleaner offered by our U.S. Distributors to the end user as a sales
promotion during an in home product demonstration. As an enticement to the end
user to buy our product during that demonstration, the five year optional
extended warranty is offered to them at no cost; accordingly no revenue for this
optional warranty is recognized by HMI. Outside the U.S. we offer a two-year
warranty for our high filtration portable surface cleaner. The portable room air
cleaner is warranted for renewable one-year periods so long as the main air
filter is replaced annually. A five-year warranty is offered for our built-in
vacuum system.
Our 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 Six Months Ended
------------------------ ------------------------
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Balance at beginning of period $ 195 $ 177 $ 193 $ 191
Charges to expense 96 93 143 148
Usage (88) (89) (133) (158)
---------- ---------- ---------- ----------
Balance at end of period $ 203 $ 181 $ 203 $ 181
========== ========== ========== ==========
11
5. Earnings Per Share
The denominators for calculating our basic and diluted earnings per share were
identical for the quarter ended March 31, 2004, as the 1,276 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 they expire between January 4, 2005, and August 29,
2010.
All 1,165 stock options outstanding for the quarter ended March 31, 2003, 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.
6. 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 greater of fair market or
par 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,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net (loss) income, as reported $ 68 $ (2,122) $ (958) $ (8,122)
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 68 23 92 47
---------- ---------- ---------- ----------
PRO FORMA NET (LOSS) INCOME $ - $ (2,145) $ (1,050) $ (8,169)
========== ========== ========== ==========
BASIC AND DILUTED PER SHARE OF COMMON
STOCK:
As reported $ 0.01 $ (0.31) $ (0.14) $ (1.20)
Proforma $ - $ (0.32) $ (0.16) $ (1.21)
7. 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 was
recorded in the second quarter of fiscal 2004 in accordance with Mr. Malone's
provisions of resignation.
8. Commitments and Contingencies
Bliss Technologies, Inc. ("Bliss"), the company formed from the 1998 sale of the
subsidiary of HMI, filed for bankruptcy in January 2000 in the United States
Bankruptcy Court, Eastern District of Michigan. In a separate action filed in
2002, the Official Committee of Unsecured Creditors of Bliss alleges a
fraudulent conveyance claim against us asserting that the sale of Bliss in 1998
was a fraudulent transfer insofar as we
12
received more for Bliss than it was worth and that Bliss was insolvent from its
inception. Former directors of Bliss, Mark Kirk and Carl Young, are also named
as defendants in the action. Claims pending against them allege that in their
capacity as Bliss directors they breached fiduciary duties to Bliss creditors.
The complaint seeks damages in an unspecified sum. In September 2004 the parties
conducted a mediation session with an agreed-upon mediator which did not result
in a settlement. Although we may continue to pursue the settlement discussions
that began at the mediation we are also continuing to move forward in court with
the vigorous defense of the claims against us and the claims against Mr. Kirk
and Mr. Young.
CONET Industries, Inc., Royal Queen Club International Limited, Chang-whan Chang
and Young-so Song ("Plaintiffs") filed a complaint against HMI on or about
February 18, 2001, in the Seoul, Korea District Court. It was served by
Registered Mail upon HMI at our corporate offices in Seven Hills, Ohio, on or
around April 10, 2002. The complaint was filed as a result of lawsuits by us
against Mr. Song, a former HMI Distributor in Korea, and Royal Queen Club
concerning Mr. Song's CYVAC product. In our lawsuits, we sought and were granted
preliminary injunctions against Plaintiffs that prohibited Plaintiffs from
manufacturing and selling the old model CYVAC for 311 days and the new model
CYVAC for 209 days until the Seoul High Court issued a declaration of suspension
of the injunctions. Despite the fact that Plaintiffs had been enjoined by the
Courts, Plaintiffs allege that we should compensate them for actual damages for
sale discontinuance, supplemental managerial costs, and new mold fabrication
costs due to the interruption in the manufacturing and marketing of each product
during that period. Plaintiffs also claim that we tortuously interfered with
Plaintiffs' business advantages, caused irreparable harm to Plaintiffs' normal
business activities, and damaged Plaintiffs' reputation and standing. Chang-whan
Chang and Young-so Song allege that they have been critically damaged personally
due to the accusations, improper provisional seizure and criminal allegations
alleged by us, which they assert resulted in disturbance to business,
reputation, and credit. All matters are pending. The Plaintiffs originally
alleged damages in excess of U.S. $21,894. After several hearings the court
ruled in our favor and against the Plaintiffs on all counts. We were then
notified that the Plaintiffs appealed this decision in accordance with Korean
law. On August 16, 2004 we were notified by our Korean counsel that the appeal
filed by the Plaintiff before the Supreme Court had been dismissed in favor of
HMI, effectively terminating the litigation.
Claims arising in the ordinary course of business are pending against us. In the
third quarter of fiscal 2004 we increased reserves by $500 to provide for any
contingent liabilities associated with various litigation and contingent claims.
There can be no assurance that an unfavorable outcome in these various
litigation and contingent claims would not have a material adverse effect on our
consolidated financial position, results of operations, or cash flow. Included
in the accompanying Consolidated Condensed Balance Sheets at March 31, 2004, and
2003, were accruals of $15 and $15, respectively, relating to various claims.
9. Debt
On February 20, 2004, an amendment of our $3,000 credit facility agreement was
executed with our lender. The credit facility expired 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 from the 5.0 to 1.0 ratio,
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 from $7,400 to $2,400.
13
The cumulative effect of the adjustments on our statement of operations
associated with the restatement of our financial statements was a $12,856
reduction in our net earnings over the period from January 1, 2001 through
December 31, 2003. Such an earnings reduction caused us to be in default of our
$2,400 tangible net worth covenant. In addition we have violated our financial
reporting requirements to the bank as the restatement process has delayed any
subsequent filings of our public statements with the Securities and Exchange
Commission since our first fiscal quarter of 2003. Our credit agreement
covenants require that our statements be filed quarterly with the bank within 45
days of the end of each quarter.
On October 15, 2004, an amendment of our $3,000 credit facility agreement was
executed with our lender. The bank has agreed to extend the maturity date of the
loan until December 31, 2004. In addition the bank provided a waiver for the
aforementioned covenant and financial reporting violations. The amended
agreement carries an interest rate of prime plus one percent and covenants
similar to the previous amended loan agreement, with the exception of the
tangible net worth covenant which was eliminated through the maturity date of
the loan.
As of September 30, 2004, there was $962 borrowed on the $3,000 credit facility.
10. 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 owned 31.67% of the membership interests in
a Company called Vision Capital Logistics, LLC ("VCL"). VCL, was a brokerage
service provider for sourcing consumer credit, assisting 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 charged additional
fees to our Distributors for these financing services. VCL's client list also
included a number of other "direct sales" companies, including other floor care
companies. In securing such financing, VCL guaranteed the legal compliance
obligations (but not any payment obligations) of our Distributors to a third
party lender. The third party lender paid VCL a participation fee for such
financing services, a part of which (twelve percent (12%)) VCL paid to us.
During the quarters ended March 31, 2004, and 2003, VCL paid HMI $-0- and $6,
respectively in connection with such financing services. Additionally, in
certain cases when a Distributor was not able to complete a sale because of the
substandard credit status of the retail customer VCL may have provided the
Distributor with financing for this sale. In those cases we entered into an
arrangement with VCL known as a Swap Program under which VCL purchased the
contract of the retail customer from the Distributor and arranged 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 purchased a replacement product from us at the same
price paid by our Master Distributors and we shipped it to the Distributor to
replace the product the Distributor just sold. During the quarters ended March
31, 2004, and 2003, VCL purchased an aggregate of $11 and $6, 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. In the third quarter of fiscal 2004 we
ended our arrangement with VCL. At such time Mr. Weeter and Mr. Glomb sold their
membership interests to Mr. Malone.
14
Beginning in June 2000 until January 2003 we sublet to VCL a portion of our
office space in Naples, Florida. In February 2003 a new lease was entered into
for office space with VCL as the tenant. We began subleasing space from VCL for
$3 per month, which amount was based upon an allocation of VCL's total monthly
lease payments to the amount of space that we utilized. For the quarters ended
March 31, 2004 and 2003 we paid VCL a total of $3 and $8 in lease payments,
respectively. 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 March 31,
2004, and 2003, FVS, Inc. purchased, at Master Distributor pricing, a total of
$20 and $21, respectively, in products from us. Mr. Weeter also received amounts
due to him under our Career Development Program of $32 and $58 for the three
months ended March 31, 2004, and 2003, respectively. The amounts paid were
distributor paid overrides ("DPO's") collected by us from distributors that were
brought into the Filter Queen business by Mr. Weeter. DPO's are a unit price
override charged on top of our standard unit sales price for which we, HMI, act
as a pass through, meaning that we collect the DPO from the promoted distributor
and disburse it to the promoting distributor upon their request; accordingly
these DPO's are not reflected in our income statement as revenue. The total
DPO's still owed to Mr. Weeter were $5 and $20 as of March 31, 2004, and
September 30, 2003, respectively. This payable to Mr. Weeter was recorded on the
other accrued expense and liabilities line item of our Consolidated Condensed
Balance Sheets as of March 31, 2004 and September 30, 2003.
Derek Hookom, an employee of HMI, is President of Summit Air, a distributor of
products manufactured by HMI. For the quarters ended March 31, 2004, and 2003,
Summit Air purchased, at Master Distributor pricing, a total of $10, and $86,
respectively, in products from us. Mr. Hookom became an employee of HMI on
January 1, 2003 and under the terms of his employment agreement; Mr. Hookom
remains eligible to receive the Millionaires Club Award associated with the Edge
Success Program through sales generated by his personally developed sales
network. The Company incurred $52 and $45, respectively, of distributor
development program revenue reduction associated with Mr. Hookom's participation
in the Program for the quarters ended March 31, 2004 and 2003. Mr. Hookom also
received DPO's due to him under our Career Development Program of $36 and $24
for the three months ended March 31, 2004, and 2003, respectively. The amounts
paid were distributor paid overrides collected by us from distributors that were
brought into the Filter Queen business by Mr. Hookom. The total DPO's still owed
to Mr. Hookom were $35 and $34 as of March 31, 2004, and September 30, 2003,
respectively. This payable to Mr. Hookom was recorded on the other accrued
expense and liabilities line item of our Consolidated Condensed Balance Sheets
as of March 31, 2004 and September 30, 2003.
The above amounts are not considered to be significant to the financial
statements as a whole and therefore have not separately identified in the
Consolidated Condensed Balance Sheets, Statements of Operations or Statements of
Cash Flow.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS)
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/A for the fiscal year ended September 30, 2003.
RESULTS OF OPERATIONS
Product Sales
SECOND QUARTER OF FISCAL 2004 COMPARED TO SECOND QUARTER OF FISCAL 2003
Product sales, net of returns and allowances and before distributor development
program revenue reduction ("Product Sales") for the quarter ended March 31,
2004, were $10,775. This represents an increase of $1,480 or 15.9% when compared
to the prior year product sales of $9,295. The increase in sales was largely
attributable to gains in Asia and Europe of $1,414 and $682, respectively,
offset by decreased revenues in the Americas of $618.
Asian sales increased primarily as a result of shipments to a new customer in
Malaysia and improved sales to Japan, Hong Kong and Korea. Increased European
sales were largely associated with improved Defender sales to Portugal and
Spain, both of which were impacted by these importers marketing our Majestic and
Defender product together as a system, similar to how they are marketed in the
U.S.
The sales decline in the Americas was largely associated with office closings in
one sales division. A new divisional director has been assigned to this
territory to provide the additional support that has been requested and we are
hopeful that we can begin to rebuild this territory.
FIRST SIX MONTHS OF FISCAL 2004 COMPARED TO FIRST SIX MONTHS OF FISCAL 2003
Product sales of $19,158 for the six months ended March 31, 2004, were $1,037 or
5.7% higher when compared to the prior year sales of $18,121. The increased
sales were largely attributable to increased sales in Asia of $1,956 mostly to a
new customer in Malaysia, offset by decreased revenues in the Americas of $757.
Distributor Development Program
SECOND QUARTER OF FISCAL 2004 COMPARED TO SECOND QUARTER OF FISCAL 2003
The sales reduction associated with the distributor development program for the
quarter ended March 31, 2004 was $653 compared to $1,409 for the same quarter of
the prior year. The decrease of $756 was driven by termination gains which were
largely attributable to one established U.S. distributor who left the business
during the quarter. The overall decrease was offset by increased international
sales volume. See Note 2 to our Consolidated Condensed Financial Statements for
further information on the accounting for this Program.
16
FIRST SIX MONTHS OF FISCAL 2004 COMPARED TO FIRST SIX MONTHS OF FISCAL 2003
The year-to-date sales reduction associated with the distributor development
program was $1,697 compared to $2,228 for the same period in the prior year.
This decrease of $531 was due to the aforementioned termination gain and
decreased sales volume in the Americas when compared to the prior year, offset
by increased international sales.
Gross Margin, exclusive of distributor development program
SECOND QUARTER OF FISCAL 2004 COMPARED TO SECOND QUARTER OF FISCAL 2003
The gross margin exclusive of the impact of the distributor development program
revenue reduction ("product gross margin") for the quarter ended March 31, 2004,
was $4,502 or 41.8% of sales. This represents an increase in gross margin of
$799 when compared to gross margin of $3,703 or 39.8% of sales in 2003 and was
largely attributable to the favorable international sales volume discussed
above.
FIRST SIX MONTHS OF FISCAL 2004 COMPARED TO FIRST SIX MONTHS OF FISCAL 2003
The product gross margin of $7,799 or 40.7% of sales for the six months ended
March 31, 2004, was $512 or 7.0% higher when compared to the prior year product
gross margin of $7,287 or 40.2% of sales. A favorable sales volume variance of
$582 was offset by a variety of individually insignificant plant spending
variances.
Selling, General, and Administrative ("SG&A")
SECOND QUARTER OF FISCAL 2004 COMPARED TO SECOND QUARTER OF FISCAL 2003
SG&A expenses of $3,781 or 37.3% of sales for the quarter ended March 31, 2004,
were $244 higher when compared to the same period in fiscal 2003 of $3,537 or
44.8% of sales. This increase was driven by $240 of expenses associated with
certain independent professionals who were engaged by a Special Committee of the
Board of Directors to review relationships we had with certain affiliates, as
well as by the February 2, 2004 resignation and retirement of James R. Malone,
the former Chairman and Chief Executive Officer. We recorded $200 of
compensation expense in association with Mr. Malone's resignation. This overall
increased level of expense was offset by commissions and compensation related
expenses associated with the lower sales in the Americas and the decreased level
of earnings.
FIRST SIX MONTHS OF FISCAL 2004 COMPARED TO FIRST SIX MONTHS OF FISCAL 2003
SG&A expenses of $7,051 or 40.4% of sales for the six months ended March 31,
2004 were $180 higher when compared to the same period in fiscal 2003 of $6,871
or 43.2% of sales. The rationale for the lower expense is consistent with the
discussion above.
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 $905 for cumulative translation
adjustments associated with this subsidiary.
Interest Expense
Interest expense was $17 and $34 for the quarter and six months ended March 31,
2004, respectively, compared to $6 and $20 for the same periods in 2003. The
increased expense primarily reflects the increased borrowings on our line of
credit when compared to the prior year.
17
Other (income) expense, net
For the quarter and six months ended March 31, 2004 other expense (income), net,
decreased $17 and $29, respectively, and was attributable to a variety of
individually insignificant items.
Income Taxes
The effective tax rate for the quarter and six months ended March 31, 2004 was
0.0% and (0.7%), respectively, compared to effective rates of (0.1%) and 0.2%
for the same period in fiscal 2003. The differences from the prior year were
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 $5,451
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 six months ended March 31, 2003.
Inflation and Pricing
Product sales and income from continuing operations were not materially impacted
by inflation or changing prices.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash flows from operating activities provided net cash of $1,469 for the six
months ended March 31, 2004, principally due to cash inflows resulting from an
increase in accounts payable of $628, decreases in prepaid expenses of $226, as
well as net non-cash expenses of $2,097 of which $1,737 is attributable to the
new accounting associated with our distributor development program and $360 is
related to depreciation and amortization, offset by an increase in receivables
of $661 and a net loss of $958.
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 six months of
fiscal 2004 we returned to more characteristic purchasing levels thus increasing
our overall payable balance for the six months ended March 31, 2004. A more
conscientious effort to monitor and improve the working capital balance also
impacted the payable balance.
Amortization of prepaid risk insurance was the contributing factor to the
decrease in prepaid expenses.
The increase in the receivables balance is largely attributable to sales volume
increases related to several international customers who all receive credit
terms to assist with the time delay in shipping products overseas.
Investing Activities
Capital expenditures of $56 represent the entire net cash used in investing
activities for the three months ended March 31, 2004, of which the largest
portion relates to engineering testing equipment, and tooling associated with
our current product line.
18
Financing Activities
Net cash used in financing activities was $928, which included $917 for net
repayments under the credit facility and $11 for payment of long-term debt.
Our $3,000 credit facility agreement includes various covenants that limit our
ability to incur additional indebtedness, restricts paying dividends and limits
capital expenditures, and requires we maintain a minimum net worth. As of
September 30, 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. We
were required to maintain an interest coverage ratio of greater than or equal to
5.0 to 1.0 interest to earnings before interest, taxes, depreciation and
amortization ("EBITDA") and a net worth of at least $7,400, calculated quarterly
and increasing by 50% of net income annually.
On February 20, 2004, an amendment of our credit facility agreement was executed
with our lender. The expiration date was extended to October 15, 2004. The
amended agreement carried 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 from the 5.0 to 1.0 ratio,
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.
The cumulative effect of the adjustments on our statement of operations
associated with the restatement of our financial statements was a $12,856
reduction in our net earnings over the period from January 1, 2001 through
December 31, 2003. Such an earnings reduction caused us to be in default of our
$2,400 tangible net worth covenant. In addition we have violated our financial
reporting requirements to the bank as the restatement process has delayed any
subsequent filings of our public statements with the Securities and Exchange
Commission since our first fiscal quarter of 2003. Our credit agreement
covenants require that our statements be filed quarterly with the bank within 45
days of the end of each quarter.
On October 15, 2004, an amendment of our $3,000 credit facility agreement was
executed with our lender. The bank has agreed to extend the maturity date of the
loan until December 31, 2004. In addition the bank provided a waiver for the
aforementioned covenant and financial reporting violations. The amended
agreement carries an interest rate of prime plus one percent and covenants
similar to the previous amended loan agreement, with the exception of the
tangible net worth covenant which was eliminated through the maturity date of
the loan.
We are actively seeking finance sources to replace the credit facility prior to
its expiration. If we cannot replace the credit facility prior to December 31,
2004, we currently anticipate that we will have sufficient liquidity to repay
the credit facility and cover all our cash needs through March 31, 2005.
As of September 30, 2004, there was $962 borrowed on the $3,000 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 2003 Annual Report on Form 10-K.
19
ACCRUED DISTRIBUTOR DEVELOPMENT LIABILITIES
We account for a certain Distributor Development Program pursuant to EITF 01-9
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products). The accounting associated with this Program
requires us to record a liability related to every qualifying sale and only
derecognizing such liability (i.e. the accrual is eliminated) when (i) the award
is paid out or (ii) when a distributor is no longer eligible for the award. The
application of EITF 01-9 requires a $14,695 accrual at March 31, 2004, to
reflect the future obligation associated with the Program. This amount was
determined by multiplying the percentage of attainment of the 30,000 unit goal
for every eligible distributor by the present value of five payments of
$200,000, discounted at a risk adjusted interest rate.
We have been operating with a distributor network for over seventy years and we
implemented the Program in 1997. During those periods we have closely monitored
the distributor network and the turnover rate in the network. Based on that
accumulated knowledge, we believe that application of EITF 01-9, which requires
accruing on each sale as if every distributor involved with the sale was going
to earn the $1 million award, results in the recognition of an obligation we
believe will be significantly in excess of the payouts from the Program for the
foreseeable future. This is due to the assumption inherent in the maximum
accrual calculation that every distributor involved with a sale will qualify to
earn the award. Our history shows this not to be the case. During the twelve
quarters ended September 30, 2003, our turnover rate was, on average, more than
50%. For example, the participants in the Program from the Americas network who
left the Program during the twelve months ended September 30, 2003 represented
an accrual of over $2,000 and that period was not a period of extraordinary
turnover. Because we measure the accrual quarterly, departures may cause
quarterly results to vary greatly. In addition, the criteria for derecognizing
the accrual for any distributor requires that the distributor has lost
eligibility to participate in the Program.
We have been funding the actuarially determined present value of total award
payouts calculated on an aggregate basis under this program since September 2000
and such fund had a balance of $1,308 as of March 31, 2004. It is our intention
to continue to fund the projected stream of cash payouts subject to our cash
flow model based on our aggregate actuarial model, which will continue to be
updated annually by our independent actuaries based on our experience. These
funds are maintained in a short term investment account and recorded as cash and
cash equivalents in our Consolidated Condensed Balance Sheets.
Please refer to our Annual Report on Form 10-K/A for the fiscal year ended
September 30, 2003 for a complete discussion of our accounting associated with
this Program.
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
"Product Sales" regarding the hope to rebuild a certain sales territory in the
Americas, 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
20
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. 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, 2004, we had $466
outstanding under our credit facility bearing interest at the prime rate. If
interest rates were to increase 50 basis points (0.5%) from the March 31, 2004,
rates and assuming no changes in outstanding debt levels from March 31, 2004
levels, we would realize an increase in our annual interest expense of
approximately $2.
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
See Note 8 for applicable information.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Our Common Stock was quoted 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 because 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. It is now quoted in the Pink Sheets.
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
10.02 Material Contracts~
U.S. Bank N.A. Waiver Letter and Amendment to Revolving Credit Note, dated
October 15, 2004, incorporated by reference from Form 8-K filed on October
21, 2004
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
22
(B) REPORTS ON FORM 8-K
We filed a report with the SEC 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.
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: October 22, 2004 /s/ Julie A. McGraw
---------------------------------------
Julie A. McGraw
Vice President - Chief Financial
Officer
23