-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DoYRtpMcUnPIiYyMh/tANq/1sX9uKS1gBGKyvcmWyran0EbxbFO5CLnVgYSDXnRW bFPVBnWNBKaevYyNHXDJxg== 0000950152-01-506566.txt : 20020413 0000950152-01-506566.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950152-01-506566 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HMI INDUSTRIES INC CENTRAL INDEX KEY: 0000046445 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 361202810 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-30905 FILM NUMBER: 1820610 BUSINESS ADDRESS: STREET 1: 6000 LOMBARDO CENTER STREET 2: SUITE 500 CITY: SEVEN HILLS STATE: OH ZIP: 44131 BUSINESS PHONE: 2164321990 MAIL ADDRESS: STREET 1: 6000 LOMBARDO CENTER STREET 2: SUITE 500 CITY: SEVEN HILLS STATE: OH ZIP: 44131 FORMER COMPANY: FORMER CONFORMED NAME: HEALTH MOR INC DATE OF NAME CHANGE: 19920703 10-K 1 l91936ae10-k.txt HMI INDUSTRIES INC. 10-K/FISCAL YEAR END 9-30-01 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 2-30905 HMI INDUSTRIES INC. (Exact name of registrant as specified in its charter) DELAWARE 36-1202810 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) Incorporation or organization) 6000 Lombardo Center, Suite 500, Seven Hills, Ohio 44131 - -------------------------------------------------- ----------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 986-8008 Securities registered pursuant to Section 12(b) of the Act: None - ---------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Title of Class --------------- Common Stock, $1 par value per share Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past ninety (90) days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of registrant, computed by reference to the closing price on the OTC Bulletin Board on November 30, 2001 was approximately $3,586,014. Class November 30, 2001 - ------------------------------------- ----------------------------- Common stock, $1 par value per share 6,707,832 The following documents are incorporated by reference in this Form 10-K. Portions of the Proxy Statement for the 2002 Annual Meeting, incorporated into Part III (Items 10, 11, 12 and 13). Index to Exhibits is found on pages 45-46. This report consists of 47 pages. ===============================================================================
TABLE OF CONTENTS - ----------------- PART I............................................................................................................2 ITEM 1. BUSINESS..............................................................................................2 ITEM 2. PROPERTIES............................................................................................9 ITEM 3. LEGAL PROCEEDINGS.....................................................................................9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................9 PART II...........................................................................................................9 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................9 ITEM 6. SELECTED FINANCIAL DATA..............................................................................12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................................20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................20 PART III.........................................................................................................20 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT......................................................20 ITEM 11. EXECUTIVE COMPENSATION..............................................................................20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................20 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................20 PART IV..........................................................................................................20 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....................................20 SIGNATURES.......................................................................................................22 INDEX TO FINANCIAL STATEMENTS....................................................................................23 INDEX TO EXHIBITS................................................................................................45
1 PART I. (DOLLARS IN THOUSANDS) ITEM 1. BUSINESS GENERAL DEVELOPMENT OF THE BUSINESS Our Company, HMI Industries Inc., is a worldwide, direct selling company engaged in the manufacture and sale of high filtration portable surface cleaners, portable room air cleaners and central vacuum cleaning systems. Our high filtration portable surface cleaner and portable room air cleaner are sold under the trade names Filter Queen(R), Princess(R), Majestic(R), Empress(R) and Defender(R) (portable room air cleaner only) and our central vacuum cleaning system is sold under the trade names Vacu-Queen(R) and Majestic II(R). Although we were known as Health-Mor Inc. until 1995, when our name was changed to HMI Industries Inc., we continue to distribute our products under the Health-Mor brand name. HMI was reorganized in 1968 in Delaware, succeeding an Illinois corporation formed originally in 1928. In order to more fully automate our assembly and distribution, in January 2000 we moved all production areas to a newer and more efficient facility, in Strongsville, Ohio. Also in January 2000, our sales, marketing and executive personnel relocated to our new corporate world headquarters at 6000 Lombardo Center, Seven Hills, Ohio. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Our continuing operations consist of a single operating segment. See Note 1 of the Notes to the Consolidated Financial Statements for further information. NARRATIVE DESCRIPTION OF BUSINESS Consumers have become increasingly aware of the potential health concerns posed by indoor air quality. We regard ourself as a leader in the management of indoor air quality by offering a complete solution that keeps indoor air cleaner and safer to breathe. We believe that people with and without respiratory problems will notice the benefits of cleaner indoor air that can be derived from using our products. According to the U.S. Environmental Protection Agency, most people spend as much as 90% of their time indoors and over half of that time in their own homes. The EPA has suggested that air levels of many pollutants inside one's own home may be two to five times, and sometimes 100 times, higher than outdoor levels. In addition, studies by the EPA consistently rank indoor air pollution among the top five environmental risks to public health. According to the April 2000 issue of Town and Country Magazine... "Fifty million Americans, about one in five, now suffer from allergies..." In 2000, The American College of Allergy, Asthma & Immunology (ACAAI) reported that "Between 14 and 15 million Americans have asthma; 4.8 million are under the age of 18." Furthermore, the Asthma and Allergy Foundation of America states that: "The environmental triggers most likely to cause asthma attacks in children have become increasingly well defined. House dust mites, cockroaches, mold and animal dander have been identified as the principal allergens that trigger asthma symptoms." The American Lung Association has also stated that controlling the home environment is a very important part of asthma and allergy care. 2 PRODUCTS AND DISTRIBUTION Our principle products include a high filtration portable surface cleaner that is marketed as a healthier alternative to the typical vacuum cleaner, and a portable room air cleaner that helps to remove particles, gases and odors from the air. The two products are sold together as a complete Filter Queen Indoor Air Quality System(TM) in some parts of the world. In other areas, primarily Asia and Europe, the two products are sold separately. Filter Queen uses a patented multifiltration system consisting of Cellupure(R), MEDIPure(R), and Enviropure(R) filter cones and cartridges. The Filter Queen Indoor Air Quality System(TM) is designed and proven to remove airborne particles and allergens such as dust, smoke, pollen, mold spores, animal dander, dust mites and harmful fibers that may lead to allergic reactions. Independent tests confirm that the Filter Queen Indoor Air Quality System(TM), when used with the above named filters and cartridges, removes 99.98% of particles at .01 micron, which is better than HEPA (high efficiency particulate arrestance technologies), the industry standard. We also sell a residential built-in vacuum system. Our central vacuum system is quieter than competing models because the power unit is installed in a location separated from the living area and is made of ABS plastic to further insulate the noise it produces. Built-in vacuum systems are typically installed in either the garage, basement, or a closet. Plastic piping runs through the walls of the home from the unit to various inlets, which have been strategically placed throughout the home. When a vacuum hose end is placed into an inlet, the built-in vacuum system's power unit is activated. A built-in system offers the convenience of carrying only a power nozzle and hose. Built-in vacuum systems are extremely popular in Canada and in some parts of Europe. Our built-in vacuum system is sold in homes through direct sales and in retail outlets. In Canada, the system is marketed side-by-side with our high filtration portable surface cleaner. We sell two models of our built-in vacuum system. In Canada, one model is sold through the existing direct sales channel under the brand name Filter Queen(R). Our other model, the Vacu-Queen(R), is sold in Canada and the United States through retail vacuum specialty stores. We sell our central vacuum system in Europe under the Vacu-Queen(R) brand name and under private label through direct sales channels. We believe that we offer a superior warranty in the U.S. for our high filtration portable surface cleaner compared with all other U.S. manufacturers and sellers of vacuum cleaners. We warrant our surface cleaner for a two-year period from the date of purchase and offer a lifetime service benefit for the replacement of the surface cleaner's motor at a price not to exceed $99 USD. Outside the U.S., we offer a two-year warranty for our high filtration portable surface cleaner. In fiscal 2002, we anticipate that we will offer a five-year optional warranty on the 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 distribution system consists of approximately 400 distributors and importers who sell our products. Our independent authorized distributors and importers sell our products in more than 50 countries worldwide. 3 Each distributor and importer has a defined territory in which he or she maintains the exclusive right to sell our company's products. Each distributor and importer sells the products to consumers through an in-home presentation given by a sales associate who, in some parts of the world, has been trained and certified by independent HMI trainers as an "Indoor Air Quality Specialist." Our products are sold through direct, in-home sales and direct response advertising, as both methods allow for a more complete presentation of the product's benefits. Distributors are granted the right to market our products using the demonstration method and utilizing our trademarks. These same distributors and importers are responsible for providing service and replacement parts and supplies to the end-consumers in their territories, which provides them with another source of revenue and potential referral network. In addition, in August 2001, we began testing the effectiveness of direct response television advertising. This method allows us to provide sales leads to our existing distribution channel and market our products to a broader audience. U.S. MARKET. In the United States, we primarily sell our high filtration portable surface cleaner and portable room air cleaner through distributors who sell our products to end consumers through sales associates. To aid in the retention of distributors and help with the development of their professional careers and independent businesses, we developed a unique training and development program called "The Edge Success Program" (the "Edge"). The Edge is an innovative, highly structured 12-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 distributors and sales associates. Business and management training includes a business management correspondence course and a training seminar, the Business Management Institute, designed in conjunction with Baldwin Wallace College, in Ohio and addresses everything from in-home demonstration techniques to generation of sales leads, personnel training, compliance matters, ownership and operation of a distributorship, and more. In addition, in 2001, Health-Mor at Home(TM) was created as a direct to consumer outbound sales force designed to assist consumers in locations where distributors are no longer located and the National Advertising Campaign began which centers around the continued testing of a thirty-minute infomercial designed to increase brand awareness, generate sales leads, and open new territories. MARKETS OUTSIDE THE U.S. Success in exporting is relatively new to us, occurring mostly in the last twenty years. To sell our products in a foreign market, we usually engage the services of a single importer to represent our products in each country. We have less contact with the direct sales networks employed by importers because we have fewer field staff outside the U.S. to support such sales networks. Since each country poses its own unique set of challenges (among others, currency fluctuations, differing political and economic systems, unique business and legal environments, inconsistent duty and tax requirements, and even civil unrest and war), it can be very difficult to penetrate a new market without the help of an individual from that market. As a consequence, we are dependent on our importers to address those challenges. MARKETING AND ADVERTISING 4 Traditionally, we have relied on our distributors to market and sell our products to consumers. A portion of the sales of our products by our distributors and their sales associates is dependent on telemarketing as a tool for developing sales leads and arranging in-home demonstrations of our products with end-consumers who purchase these products. Regulatory efforts in Europe and the U.S. have focused on imposing more restrictions on telemarketing. There can be no assurance that such regulations will not further restrict telemarketing, and thereby make it increasingly difficult to sell our products with the aid of telemarketing. Because of these increased regulations and the high relative cost of telemarketing, many of the distributors have been developing alternative methods to generate leads for in-home demonstrations. Such alternative methods include, but are not limited to, setting up displays at trade shows and fairs, distributing flyers and door hangers, and using customer referral programs. Though we have not marketed our products directly to the consumer in the past, we have been testing a National Advertising Campaign as a method to develop sales leads, increase market penetration and improve brand awareness. This method of television advertising, more commonly referred to as an infomercial, may benefit us in numerous ways. First, it greatly improves our brand awareness and increases our credibility; second, it allows us to provide validated leads to our existing distribution channel; and third, we are now able to sell products directly to consumers in areas where we do not have representation by a distributor. Early returns are proving direct response television to be a complementary solution to our existing marketing channels. In addition, we have teamed up with the National Trust for Historic Preservation ("National Trust") by exclusively supplying our high filtration portable surface cleaner to 19 homes of national historic significance under the National Trust's care. Under the agreement with the National Trust, we are permitted to advertise and promote the National Trust's choice of the Filter Queen(R) to take care of damaging dust and dirt in some of America's most nationally significant homes, including James Madison's Montpelier in Virginia, Frank Lloyd Wright's home and studio in Oak Park and the Robie House, Cliveden in Philadelphia, Lyndhurst in Tarrytown, New York and Woodrow Wilson's home in Washington, D.C. RAW MATERIAL We assemble finished parts purchased from various suppliers. The raw materials used by our manufacturing operations are purchased from a number of suppliers, and substantially all such materials are readily available. PATENTS AND TRADEMARKS We have numerous United States and foreign patents, patent and trademark applications, registered trademarks and trade names that are used in our business. We generally own the trademarks under which our products are marketed and have registered our trademarks and will continue to register and protect them as they are developed or acquired. We also believe that certain of the trademarks and trade names are of material importance to the businesses/products to which they relate and may be of material importance to our company as a whole. Although protection of our patents and related technologies are important components of our business 5 strategy, none of the individual patents is believed to be material to our company. The remaining duration of the patents and trademarks varies. SEASONALITY Our business is typically not seasonal. MAJOR CUSTOMERS AND DEPENDENCE ON INDEPENDENT DISTRIBUTORS We are subject to risks specific to the individual countries in which we do business. Sales of our products to three of our international importers accounted for 13.1%, 11.2% and 10.2% of total product sales in fiscal 200l, 13.1%, 12.9% and 11.3% of total product sales in fiscal year 2000, and 20.5%, 11.6% and 11.0% of total product sales in fiscal year 1999. The loss of any significant portion of our sales from these importers would have a material adverse impact on our sales and earnings. Our revenues, and the stability of such revenues, are dependent on our relationships with third-party distributors and their sales persons and their level of satisfaction with our products and us. The distributors are independent third parties who are not our employees and are not directly under our control. There can be no assurance that the current relationships with distributors will continue on acceptable terms and conditions to us, nor can there be any assurance that additional distributorship arrangements with third parties will be obtained on acceptable terms. Moreover, there can be no assurance that the distributors will devote sufficient time and resources to our products to enable the products to be successfully marketed. Failure of some or all of our products to be successfully and efficiently distributed could have a material adverse effect on our financial condition and results of operations. In addition, our business could be adversely affected by a variety of uncontrollable and changing factors, including but not limited to: difficulty in protecting our intellectual property rights in a particular foreign jurisdiction; recessions in economies outside the United States; longer payment cycles for and greater difficulties collecting accounts receivable; export controls, tariffs and other trade protection measures; social, economic and political instability; and changes in United States and foreign countries laws and policies affecting trade. BACKLOG We operate monthly with a minimal backlog (backlog at September 30, 2001, 2000 and 1999 was $-0-, $19 and $40, respectively). COMPETITION We experience strong competition in the sale of our high filtration portable surface cleaners, central vacuum systems and portable room air cleaners. Participants in the vacuum and indoor air cleaner industries compete primarily on price, quality, brand name recognition, product availability and product performance, including the perceived amount of particles removed by a vacuum cleaner or air filter. Vacuums and indoor air filters are sold through a variety of channels, including department stores, discount houses, appliance stores, and catalogs, generally at substantially lower prices than our products. According to the last survey from the Vacuum Dealers Trade Association, 75% of vacuum sales in 1998 were through retail store outlets while 6 direct-selling companies like HMI sold 25%. We believe that our high filtration portable surface cleaner is competitive with other vacuum cleaners because of its superior performance and warranty, as described in greater detail above under "Products and Distribution." Our high filtration portable surface cleaner and central vacuum system compete with many significant vacuum cleaner manufacturers and with regional and private label manufacturers, including other direct selling companies, such as Rainbow, Tri-Star, Kirby, Miracle Mate, Electrolux and Water-Matic, and companies that sell through retail outlets such as Eureka, Hoover, Kenmore and Royal. Our portable room air cleaner competes with other indoor air cleaners sold by direct-selling companies such as Alpine, and others that sell through retail outlets such as Honeywell and Bionaire. Many of our competitors have greater financial, marketing and manufacturing resources and better brand name recognition than us, and sell their products through broader and more extensive distribution channels. RESEARCH AND DEVELOPMENT Our ongoing research and development program involves creating new products and redesigning existing products to reduce manufacturing costs and to increase product quality and efficiencies. In fiscal year 2001, 2000 and 1999, we invested $351, $643 and $290, respectively, in new product development. We anticipate expending less money on the development of new products in fiscal year 2002. ENVIRONMENTAL To our knowledge, we are in compliance with all applicable Federal, State and local laws relating to the protection of the environment. While we anticipate no current expenses for environmental issues, there can be no assurance that we will not receive claims for environmental conditions in the future, nor any assurance that any such claims, if received, would not have a material adverse impact on our financial condition and results of operations. EMPLOYEES We employed 113 full-time and 10 part-time employees at September 30, 2001. None of our employees are parties to a collective bargaining agreement, and we believe our relationships with our employees to be good. FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS Sales to international customers represent 57.8%, 64.4%, and 67.0% of net product sales for the years ending September 30, 2001, 2000, and 1999, respectively. 7 EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION AND TERMS OF SERVICE AS OFFICER - ---------------------------- -------- ---------------------------------------------------------------------------- James R. Malone 58 Chairman and Chief Executive Officer (1) John A. Pryor 58 President and Chief Operating Officer(2) Carl H. Young III 60 Vice President and General Counsel (3) Julie A. McGraw 37 Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (4) Joseph Najm 41 Vice President-Operations (5)
(1) Mr. Malone was elected Chairman of the Board of Directors in December 1996 and Chief Executive Officer in May 1997. From 1993 to 1997, Mr. Malone was Chairman, President, and Chief Executive Officer of Anchor Glass Container Corporation, a manufacturer of glass containers. (2) Mr. Pryor was elected President and Chief Operating Officer in September 2001. From 1992 to 2001 he was President of Pryor & Associates, which provided consulting services to the food service industry. From 1996 to 2000 he was President and Chief Executive Officer of Valley Innovative Services, a food services management company. (3) Mr. Young was elected Vice President in September 2001. He previously served as President and Chief Operating Officer from July 1998 to September 2001, as Executive Vice President and Assistant Secretary from May 1997 to July 1998 and as Vice President from February 1997 to May 1997. He has served as General Counsel since 1997. From 1993 to 1997, Mr. Young served as Senior Vice President and General Counsel of Anchor Glass Container Corporation. (4) Ms. McGraw was elected Chief Financial Officer and Treasurer in March 2000, Vice President in February 1999 and Corporate Controller in March 1998. She served as Assistant Corporate Controller from July 1996 until March 1998. (5) Mr. Najm was elected Vice President-Operations in March 1999. He previously was employed by the Kirby Company as Vice President-Manufacturing from 1995 to 1999. The Kirby Company is a manufacturer of vacuum cleaners. 8 ITEM 2. PROPERTIES The following table sets forth the location, character and size (in square feet) of the real estate we used in our operations at September 30, 2001:
Location Character Square Feet - ------------------------------------- ---------------------------------------------- -------------------- United States of America Strongsville, Ohio Leased office, manufacturing and warehouse space 72,991 Seven Hills, Ohio Leased office space 15,706 Naples, Florida Leased office space 2,180
ITEM 3. LEGAL PROCEEDINGS Claims arising in the ordinary course of business are pending against us. Although these are in various stages of the litigation process, we believe that none of these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows. Included in the accompanying Consolidated Balance Sheets at September 30, 2001 and 2000 were accruals of $15 and $177, respectively, relating to various claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since February 11, 1999, our common stock has been traded in the over-the-counter market on the OTC Bulletin Board under the symbol "HMII.OB". Our common stock was listed for trading on the NASDAQ National Market under the symbol "HMII" until February 10, 1999, the date when it was delisted. The delisting occurred as the stock no longer met Nasdaq's minimum public float requirement due to a combination of a decline in the price of our shares of common stock and a concentration of stock holding. As of September 30, 2001, there were approximately 231 stockholders of record. 9 A summary of the quarterly high and low bid price of our common stock on the OTC Bulletin Board for the years ended September 30, 2001 and 2000, are as follows: 2001 High [1] Low [1] -------------- -------------- 1st Quarter $ 1.125 $ 0.6875 2nd Quarter $ 1.5 $ 0.84375 3rd Quarter $ 1.15 $ 0.7 4th Quarter $ 1.15 $ 1.01 2000 High [1] Low [1] --------------- ------------- 1st Quarter $ 1.4375 $ 0.5 2nd Quarter $ 1.375 $ 0.9375 3rd Quarter $ 1.5 $ 1.03125 4th Quarter $ 1.5 $ 1.0 [1] The bid price for our common stock was received from Nasdaq Trading & Market Services. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. The declaration and payment of quarterly dividends is at the discretion of the Board of Directors, which may raise, lower or omit the dividend in any quarter. No dividends were declared in 2001 or 2000 as the credit agreement with our lender presently prohibits us from declaring or paying any dividends. On March 1, 2000, we successfully completed a private offering of our common stock in a transaction exempt from the registration requirements under federal securities law pursuant to section 4(2) of the Securities Act of 1933. A total of 1,231 shares of our common stock were sold at $1.625 per share. Individuals affiliated with HMI acquired approximately 71% of the Shares, which were purchased at a 35% premium over the market value. Net proceeds received from the sale of the shares were used for general business purposes and in the beginning implementation stage of our strategic initiatives as described below. As part of our continuing initiative to streamline costs and restructure our company to its core business of manufacturing and distributing high filtration portable surface cleaners, central vacuum systems and portable room air cleaners, we have developed a strategic plan for growth. We intend to leverage our position as a leading manufacturer and direct seller of high filtration portable surface cleaners, central vacuum systems and portable room air cleaners by undertaking key initiatives that we believe will drive revenues higher and lower operating costs. 10 The key initiatives include but are not limited to the following: - Develop a better trained and more knowledgeable distribution network; - Increase product awareness and brand recognition; - Expand the geographic and demographic markets in which our products are distributed and sold; - Continue to streamline processes and lower costs; and - Invest in new infrastructure and pursue additional growth opportunities. Our plan was to use the proceeds from this offering and funds from operations and bank financing to implement our strategic plan. Even with the monies raised by the offering, there can be no assurance that cash generated from operations or other sources of financing will be available that will enable us to fully implement the strategic plan. In addition, there can be no assurance that our financial condition and results of operations will not be materially and adversely affected if we are unable to fully implement our strategic initiatives. 11 ITEM 6. SELECTED FINANCIAL DATA In thousands except per share amounts and ratios
2001 2000 1999 1998 1997 --------- ---------- --------- ---------- --------- Net Product Sales $ 32,299 $ 34,621 $ 36,927 $ 38,748 $ 49,878 Cost of Product Sold and SG&A Expenses $ 32,518 $ 33,515 $ 38,447 $ 48,203 $ 68,603 Impairment Loss $ -- $ -- $ 2,665 $ -- $ -- Other Income (Expense), net $ 287 $ 6 $ 60 $ (1,335) $ (2,038) (Loss) Income From Continuing Operations Before Taxes $ (506) $ 1,112 $ (4,125) $(10,790) $(20,763) (Loss) Income Margin From Continuing Operations Before Taxes (1.6%) 3.2% (11.2%) (27.8%) (41.6%) Income Tax (Benefit) Expense $ (593) $ (353) $ 116 $ (2,217) $ (7,286) Income Tax Rate 117.2% (31.7%) (2.8%) 20.5% 35.1% Income (Loss) From Continuing Operations $ 87 $ 1,465 $ (4,241) $ (8,573) $(13,477) Income (Loss) Margin From Continuing Operations 0.3% 4.2% (11.4%) (21.9%) (26.7%) Income From Discontinued Operations $ -- $ -- $ -- $ 441 $ 2,347 Gain (Loss) on Disposals $ -- $ 425 $ (375) $ 7,157 $ (5,520) Net Income (Loss) $ 87 $ 1,890 $ (4,616) $ (975) $(16,650) Net Income (Loss) Margin 0.3% 5.5% (12.4%) (2.5%) (33.0%) Per Share Data - Basic and Diluted: Income (Loss) Before Discontinued Operations $ 0.01 $ 0.24 $ (0.81) $ (1.66) $ (2.72) Income From Discontinued Operations $ -- $ -- $ -- $ .09 $ .47 Gain (Loss) on Disposals $ -- $ 0.07 $ (0.07) $ 1.38 $ (1.11) Net Income (Loss) $ 0.01 $ 0.31 $ (0.88) $ (0.19) $ (3.36) Weighted Average Number of Common Shares Outstanding: Basic 6,691 6,113 5,263 5,170 4,956 Diluted 6,724 6,140 5,263 5,170 4,956 Total Assets $ 20,843 $ 20,843 $ 17,465 $ 24,409 $ 54,590 Long-Term Debt $ 75 $ 71 $ -- $ 42 $ 763 Stockholders' Equity $ 14,543 $ 14,394 $ 10,326 $ 14,099 $ 14,552 Working Capital $ 1,923 $ 3,913 $ 612 $ (18) $ 2,680 Ratio of Current Assets to Current Liabilities 1.31 1.61 1.09 1.00 1.07 Percent of Earnings on Average Stockholders' Equity 0.6% 15.3% (37.8%) (6.80%) (73.3%) Stock High 1 11/16 1 3/4 2 1/4 6 1/2 8 1/8 Stock Low 11/16 1/2 1 1 1/4 3 7/8
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) The discussion and analysis contained in this section relates only to our continuing operations. RESULTS OF OPERATIONS - 2001 COMPARED WITH 2000 NET PRODUCT SALES- Net product sales of $32,299 for the year ended September 30, 2001, were $2,322 or 6.7% lower when compared to the prior year sales of $34,621. The decrease in sales was primarily attributable to lower international sales in Western Europe and Asia offset by increased sales in the Americas. Decreased sales in Western Europe had the largest unfavorable international impact and were primarily attributable to reduced sales to Portugal, the U.K. and Belgium. The reduced sales to Portugal reflect realignments made by this importer to his inventory levels throughout fiscal 2001. The realignment was done in part to lower warehouse safety stock in order to improve his cash flow position to assist in the development of a distribution network in Brazil and in part due to a lower sell through rate to the end consumer in the fourth quarter. The reduced sales to the U.K. were the result of the loss of our largest importer who resigned as an HMI importer in the first quarter of fiscal 2001. While a former distributor has since become the importer for that territory, it will be some time before the new distributor can recover the volume loss from the largest importer. The decline in the Belgium (formerly Holland) importer's sales was largely associated with the reduced level of warehouse sales to distributors in the U.K. who typically purchase smaller quantities from this "European warehouse" rather than container-sized shipments purchased directly from HMI. Sales in the Americas to our existing distributor base increased $1,321 from fiscal 2000 and were driven primarily by growth in Defender(R) sales, which have been favorably impacted by the recent introduction of the new model as well as its approval in the second quarter as a Class II Medical Device by the Food and Drug Administration. Defender(R) sales have also increased as distributors continued the trend of marketing the Majestic(R) and Defender(R) together as a system rather than as standalone products, by the opening of additional offices within the existing network, as well as the switch of distributors from a competitor. Majestic(R) sales were favorably impacted by these additional offices as well. Further contributing to the Americas revenue growth were sales from our Health-Mor at Home(TM) and infomercial initiatives. Health-Mor at Home(TM) is a direct to consumer outbound sales force formed by us in early fiscal year 2001 that is designed to assist consumers in locations where distributors were no longer located. Our infomercial, which was rolled out in the fourth quarter, is intended to increase sales and brand awareness in areas where we do not have distributors. Net product sales were not materially impacted by changing prices. GROSS PROFIT- The gross margin for the year ended September 30, 2001, was $13,166 or 40.8% of sales as compared to $14,173 or 40.9% of sales in 2000. This decrease in the gross margin of $1,007 was principally attributable to lower year-to-date sales volume, which negatively impacted the gross margin by $1,290. The negative sales volume was offset by a favorable material variance of $271, which was associated with lower costs for commodities such as 13 cardboard packaging, filters, motors, and electrical cords that continue to be reduced by improving vendor quality, internal processes, and identifying and pursuing cost savings opportunities. SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative ("SG&A") expenses for the year ended September 30, 2001, of $13,385 were unfavorable to fiscal 2000 expenses of $13,067 by $318. The increase in SG&A was largely attributable to increases associated with the training, support and development of our distributors, advertising costs associated with the development and airtime of our television infomercial, and non-recurring professional fees incurred in the second quarter in connection with the evaluation of potential growth opportunities. This overall increase in expense was offset by certain reduced expenses, which were primarily driven by the absence of a bonus expense in 2001. Lower product development expense and a refund of Canadian Goods and Services Taxes also helped to reduce the overall increase. INTEREST EXPENSE - Interest expense for fiscal year 2001 was $101, or $54 higher than fiscal 2000 due primarily to higher outstanding balances on the credit facility as compared to that in fiscal 2000. OTHER (INCOME) EXPENSE - The increase in other (income) expense from ($53) in fiscal 2000 to $186 for the year ended September 30, 2001 resulted in part from an assessment, in fiscal 2001, associated with a state sales and use tax audit, as well as a decrease of other income associated with the cessation of the financing of end user purchase contracts by HMI. INCOME TAXES - The effective income tax rate for the year ended September 30, 2001 was 117.2% compared to (31.7%) in fiscal 2000. This difference was driven by the reversal of income tax reserves and the prior year utilization of net operating loss carryforwards not previously recognized. During the second quarter of fiscal 2001, we were informed by the Internal Revenue Service that examinations for fiscal years 1994 through 1997 were completed. As the examinations resulted in minimal impact to the financial statements, we recorded a benefit of $445,000 for the reversal of income tax reserves associated with these fiscal tax years. The effective rate absent these reserves would have been (29.2%). The effective rate for fiscal 2000 was primarily attributable to the utilization and reversal of the $1,008 valuation allowance associated with the U.S. net operating loss carryforwards recorded in prior years (See Note 7 to the Consolidated Financial Statements). GAIN ON DISPOSAL - On March 27, 1998, we completed the sale of, our then wholly-owned subsidiary, Bliss Manufacturing to an investor group led by Mr. Mervin Dunn and Rhone Capital L.L.C. pursuant to a Stock Purchase Agreement, dated December 17, 1997, as subsequently amended. In March 1999, we recorded a reserve of $425,000 for future environmental damage expenditures pursuant to section 8.5 of this Purchase Agreement. This amount was recorded as an estimate of potential liability under the Stock Purchase Agreement as studies conducted by independent third parties noted no obligations under existing regulatory guidelines. On January 21, 2000, Bliss, under the ownership of Rhone Capital L.L.C., filed Chapter 11 bankruptcy with the Michigan Eastern Bankruptcy Court, in Detroit, Michigan. Subsequently, all Bliss facilities were auctioned through the Bankruptcy Court. The indemnification obligation noted in the Stock Purchase Agreement did not survive the sale through the bankruptcy court, and as a result, in June 2000 the $425,000 reserve, recorded in accordance with the Stock Purchase Agreement, was reversed to income and recorded as a gain on disposal of discontinued 14 operations in the Consolidated Statements of Operations (See Note 2 to the Consolidated Financial Statements). INFLATION AND PRICING - While inflation or changing prices have not had, and we do not expect them to have, a material impact upon operating results, there can be no assurances that our business will not be affected by inflation or changing prices in the future. RESULTS OF OPERATIONS - 2000 COMPARED WITH 1999 NET PRODUCT SALES- Net product sales of $34,621 for the year ended September 30, 2000, were $2,306 or 6.2% lower when compared to the prior year sales of $36,927. The decrease in sales was primarily related to the decline of sales in Asia and Western Europe of $1,831 and $1,571, respectively, offset by increased sales to Eastern Europe/Middle East of $1,136. The decrease in Asia was largely the result of decreased Majestic(R) volume, which was driven primarily by a sales decline in Japan. This situation was being addressed through a reorganization of the territories within the Japanese importer's network of distributors. However, in September 2000, the importer, in the best interest of his network and HMI, made the decision to sell his business to a group led by the two largest volume distributors in his network and the former President of his business. The sale was effective October 1, 2000, and given that this new group had made a substantial investment in their business, which deals with our Filter Queen(R) products, management of HMI anticipated that this new group of importers would meet or exceed the sales targets for fiscal 2001. Sales in Western Europe have been adversely effected by decreased sales to our Holland importer and a major U.K. importer. These decreases were offset by increased sales to Portugal and Spain, as these two countries continued to grow their businesses. Holland sales were negatively impacted by the fact that some of our Eastern European and Middle Eastern distributors had increased their volume sufficiently enough to be able to order container-sized shipments directly from us. Accordingly, they no longer needed to buy product from our Holland importer. Decreased sales within his own territory also added to the Holland importer's overall sales decline, as telemarketing regulations in this area had hindered the growth and stability of the direct sales market. Our major U.K. importer's business suffered when, in the first quarter of fiscal 2000, he lost two master distributors to a competitor. He spent the rest of the year working to rebuild his network and open new offices. In addition, an English television news expose on disreputable sales associates (not affiliated with this importer) demonstrating the Filter Queen(R) product in the U.K., as well as a truck drivers strike which caused an oil/gas shortage in the U.K., had an adverse effect on the importer's attitude toward the business which prevented him from making any appreciable recovery during the year. This caused him to resign his position as an importer of our product. The favorable sales comparison in the Eastern European/Middle Eastern region was primarily related to increased sales in Norway and Turkey. As previously discussed these importers had grown their businesses and increased their sales volume to the point where they were now able to place container-sized orders directly from us. As such, they no longer purchased product from our Holland importer, as was done in fiscal 1999. Net product sales were not materially impacted by any changing prices. GROSS PROFIT- The gross margin for the year ended September 30, 2000, was $14,173 or 40.9% of sales as compared to $12,829 or 34.7% of sales in 1999. This increase in the gross margin of $1,344 was principally attributed to favorable material and overhead spending variances of 15 $2,275 and $198, respectively; offset by lower year-to-date sales volume, which negatively impacted the gross margin by $1,129. Material costs were reduced due to management's on-going focus to improve quality and reduce costs. The key areas in which material cost reductions had been obtained were filtration products, motors and molded plastic parts, as well as other improvements in the procurement process. Material costs had also been favorably impacted by reduced obsolescence expense, which was $691 lower than the prior year due to adjustments recorded in fiscal 1999 for certain motors and product changes. Improved purchasing and inventory controls further contributed to the current year improvement. In addition, our parts specifications was conveyed clearly to our suppliers who must meet our specifications. Vendor charge backs have become the norm when parts fail our quality inspection. Process improvements and operational efficiencies brought about by Total Quality Control procedures reduced direct labor costs in our manufacturing plant. These are examples of where attention to cost and quality directly resulted in improved gross margins. SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative ("SG&A") expenses for the year ended September 30, 2000, of $13,067 were favorable to fiscal 1999 expenses of $14,349 by $1,282. The decrease in SG&A was primarily attributable to decreases associated with the decreased sales volume, such as commissions and certain career development expenses, which decreased $987. Other significant favorable variances were for rental equipment, a distributor development program and legal and professional fees. Rental equipment expense was favorable $369 as a result of the cancellation and subsequent settlement of a computer equipment lease, which was accrued for, in fiscal 1999. The distributor development program adjustment was based on the results of an actuarial study and resulted in a non-cash credit to income of $332, during the third quarter of fiscal 2000. The actuarial study was commissioned to refine the existing calculation and to provide the credibility of a third party verification. Legal and professional expenses were down $327 as a result of reduced legal activity in this year. Offsetting these favorable variances were $657 in benefits expense associated with the fiscal year 2000 incentive program. IMPAIRMENT LOSS - On January 12, 1999, we sold our Cleveland, Ohio facility and related land to Rose Management Company, a local real estate investment company, for $840. The net book value of the related land and building at the time of sale was $3,505. In December 1998, we recorded a non-cash impairment loss of $2,665 on the building to reflect the difference between the sales price and the net book value of the property. INTEREST EXPENSE - Interest expense for fiscal year 2000 was $47, or $24 lower than fiscal 1999 due primarily to lower outstanding balances on the current credit facility as compared to that in fiscal 1999. OTHER (INCOME) EXPENSE - The decrease in other income from $131 in fiscal 1999 to $53 for the year ended September 30, 2000 was primarily associated with the reclass of financing revenue to this line of our Consolidated Statement of Operations. Financing revenue represents the interest and fees generated on the contracts financed by our Australian, Canadian, and United States subsidiaries. It was decided in January 1998 to discontinue the financing of contracts to the end customers. In fiscal 2000, any remaining monies received relating to this business were recorded 16 to the other income/expense line of our Consolidated Statements of Operations. Therefore, finance revenue of $436 for the year ended September 30, 1999 was reclassified to conform to the 2000 presentation. The financing revenue decreased due to the January 1998 cessation of the financing of end user purchase contracts by HMI. INCOME TAXES - The effective income tax rate for the year ended September 30, 2000 was (31.7%) compared to (2.8%) in fiscal 1999. The effective tax rate for fiscal 1999 was attributable to the establishment of a valuation allowance against 1999 net operating losses offset by a provision for state taxes. The valuation allowance was established in September of 1999, because although we had just reported our first profitable quarter in sixteen quarters, management felt that this was still not enough positive evidence at that time to warrant an adjustment to the valuation allowance that had been previously established to reserve a portion of the deferred tax asset. During the first three quarters of fiscal 2000, we recognized operating profits but utilized the `rolling' method of accounting for income taxes which resulted in the reduction of the valuation allowance associated with U.S. deferred tax assets to the extent those assets were utilized in a given quarter. This method created an effective tax rate of 0% for each quarter. However, as of September 30, 2000, it was management's belief that enough positive evidence existed so as to warrant the reversal of the valuation allowance associated with domestic deferred tax assets. Therefore the income tax benefit and the effective tax rate for fiscal 2000 primarily represent the reversal of this portion of the valuation allowance. (See Note 7 to the Consolidated Financial Statements). GAIN ON DISPOSAL - On March 27, 1998, we completed the sale of, our then wholly-owned subsidiary, Bliss Manufacturing to an investor group led by Mr. Mervin Dunn and Rhone Capital L.L.C. pursuant to a Stock Purchase Agreement, dated December 17, 1997, as subsequently amended. In March 1999, we recorded a reserve of $425,000 for future environmental damage expenditures pursuant to section 8.5 of this Purchase Agreement. This amount was recorded as a conservative estimate of potential liability under the Stock Purchase Agreement as studies conducted by independent third parties noted no obligations under existing regulatory guidelines. On January 21, 2000, Bliss, under the ownership of Rhone Capital L.L.C., filed Chapter 11 bankruptcy with the Michigan Eastern Bankruptcy Court, in Detroit, Michigan. Subsequently, all Bliss facilities were auctioned through the Bankruptcy Court. The indemnification obligation noted in the Stock Purchase Agreement did not survive the sale through the bankruptcy court, and as a result, in June 2000 the $425,000 reserve, recorded in accordance with the Stock Purchase Agreement, was reversed to income and recorded as a gain on disposal of discontinued operations in the Consolidated Statements of Operations. (See Note 2 to the Consolidated Financial Statements). LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES- Cash flows from operating activities utilized net cash of $424 for the year ended September 30, 2001, principally due to cash outflows resulting from decreases in accrued expenses and other liabilities, account payables, and income taxes of $824, $655 and $431, respectively, and an increase in inventories of $532, offset by decreased receivables of $1,181 and net non-cash expenses of $854, primarily relating to depreciation and amortization of $913. The decrease in accrued expenses and other liabilities primarily relates to the payment of the fiscal 2000 management incentive bonus, adjustments to the warranty reserve, and litigation settlement payouts. Cash disbursements for the month of September 2001 exceeded purchasing 17 activity by nearly $300, resulting in a decreased accounts payable balance. This decrease was also a result of a $400 decrease in raw material purchases in the month of September 2001, attributable to improved management of the supply chain lead-times. The decrease in income taxes payable relates to the reversal of income tax reserves as discussed above in the "Results of Operations - 2001 compared with 2000" section. The increase in inventory is largely a direct result of lower than anticipated product revenue, as well as additional purchases relating to our new portable room air cleaner model. The decline in our receivables balance is largely attributable to lower sales in September 2001 versus September 2000. INVESTING ACTIVITIES- Capital expenditures of $2,278 represent the entire net cash used in investing activities for the year ended September 30, 2001, of which the largest portion relates to tooling associated with new units anticipated for release during fiscal 2002. FINANCING ACTIVITIES- Net cash provided by financing activities was $1,174, which included $1,191 for net borrowings under the credit facility and $17 for payment of long-term debt. Current working capital, together with anticipated cash flows generated from future operations and our existing credit facility are believed to be adequate to cover our anticipated cash requirements, including but not limited to capital expenditures, expenses associated with the execution of our brand-awareness initiatives and research and development costs. As of September 30, 2001, there was $1,191 borrowed on our $2,000 credit facility. SCHEDULE 13D- On October 19, 2001, Kirk W. Foley and certain other reporting persons filed a Statement on Schedule 13D reporting the acquisition of additional shares of our common stock by such persons. According to the Schedule 13D, the reporting persons intend to seek, among other things, (i) control of our board of directors and (ii) to have our board of directors engage an investment banking firm to explore strategic alternatives. We have rejected these proposals; however, we are engaged in negotiations with Mr. Foley regarding what role, if any, the Schedule 13D filers will have in the company on a going forward basis. FUTURE ACCOUNTING REQUIREMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS 144 replaces FAS 121, "Accounting for the Impairment of long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The FASB issued FAS 144 to establish a single accounting model, based on the framework established in FAS 121, as FAS 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB 30 "Reporting The Results of Operations - Reporting The Effects of Disposal of a Segment if a Business, and Extraordinary Unusual and Infrequently Occurring Events and Transactions." FAS 144 also resolves significant implementation issues related to FAS 121. Companies are required to adopt FAS 144 for fiscal years beginning after December 15, 2001, but early adoption is permitted. We have not yet determined the impact, if any, this standard will have on our operating results and financial position. In July 2001, the FASB issued FAS 141 "Business Combinations". FAS 141 requires that all business combinations be accounted for under the purchase method of accounting. In addition, 18 this Statement addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. The Statement also provides criteria for the separate recognition of intangible assets acquired in a business combination. FAS 141 is effective for all business combinations initiated after June 30, 2001. In July 2001, the FASB also issued FAS 142 "Goodwill and Other Intangible Assets". FAS 142 addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets at acquisition. FAS 142 presumes that goodwill and certain intangible assets have indefinite useful lives. Accordingly, goodwill and certain intangibles with indefinite lives will not be amortized, but rather will be tested at least annually for impairment. FAS 142 also addresses accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. FAS 142 is effective for fiscal years beginning after December 15, 2001. As of the date of this filing, we have not yet completed our assessment of the impact of FAS 142 on our financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101 (SAB 101), "Revenue Recognition in Financial Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants with additional time to implement SAB 101. We adopted SAB 101 during the fourth quarter of fiscal 2001. The adoption of this statement did not have a material impact on our financial statements. In June 1998, FASB issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities." In May 1999, the FASB delayed the effective date of FAS 133 by one year. We were required to adopt FAS 133 for the quarter ended December 31, 2000. This statement establishes a new model for accounting for derivatives and hedging activities. Under FAS 133, certain derivatives must be recognized as assets and liabilities and measured at fair value. Due to the fact that we are currently not engaged in hedging activities, the adoption of FAS 133 did not have any effect on our results of operations or financial position. CAUTIONARY STATEMENT FOR "SAFE HARBOR" - PURPOSES UNDER THE PRIVATE SECURITIES LITIGATION 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, but not limited to, the statements made in "Net Product Sales" relating to infomercial sales and brand awareness and in "Liquidity" regarding anticipated cash requirements and the adequacy of our current means to be able to meet those requirements. Such forward-looking statements are subject to uncertainties such as anticipated sales trends, improved lead generation and recruiting and the ability to obtain financing for the end consumer through consumer financing companies. Such uncertainties are difficult to predict and could cause our actual results of operation to differ materially from those matters expressed or implied by such forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to interest rate risk is related to our borrowings. Fixed rate borrowings may have their fair market value adversely impacted from changes in interest rates. Variable rate 19 borrowings will lead to additional interest expense if interest rates increase. As of September 30, 2001, we had $1,191 outstanding under our credit facility bearing interest at the prime rate. If interest rates were to increase 50 basis points (0.5%) from the September 30, 2001 rates and assuming no changes in outstanding debt levels from the September 30, 2001 levels, we would realize an increase in our annual interest expense of approximately $6. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Index to Financial Statements included on page 23 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT See Item 13. ITEM 11. EXECUTIVE COMPENSATION See Item 13. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See Item 13. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information provided under the captions "Election of Directors," "Committees and Compensation of the Board of Directors", "Security Ownership", and "Executive Compensation" in the Proxy Statement for the 2002 Annual Meeting of Shareholders is incorporated herein by reference. See "Executive Officers of the Registrant" following Item 1 in this Report for information concerning executive officers. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report. 1. FINANCIAL STATEMENTS - Reference is made to the Index to Financial Statements, included as page 23 of this report. 2. FINANCIAL STATEMENT SCHEDULES - Reference is made to the Index to Financial Statements, included as page 23 of this report. 3. EXHIBITS - Reference is made to the Index to Exhibits, included as pages 45-46 of this report. (b) Report on Form 8-K. No report on Form 8-K was filed during the last quarter of fiscal 2001. 20 (c) Exhibits. Reference is made to the Index to Exhibits, included as pages 45-46 of this report. (d) Financial Statement Schedules. Reference is made to the Index to Financial Statements, included as page 23 of this report. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. HMI INDUSTRIES INC. (Registrant) by /s/ Julie A. McGraw ------------------------------------------ Julie A. McGraw Vice President, Chief Financial Officer and Treasurer December 17, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ James R. Malone /s/ Carl H. Young III /s/ Robert J. Abrahams - ------------------------------------------ ---------------------------------------- ---------------------------------------- James R. Malone Carl H. Young III Robert J. Abrahams Chairman of the Board, Chief Executive Vice President and Director Director Officer and Director December 17, 2001 December 19, 2001 December 17, 2001 /s/ Thomas N. Davidson /s/ John S. Meany, Jr. /s/ Barry L. Needler - ------------------------------------------ ---------------------------------------- ---------------------------------------- Thomas N. Davidson John S. Meany, Jr. Barry L. Needler Director Director Director December 18, 2001 December 17, 2001 December 20, 2001 /s/ Murray Walker /s/ Ivan J. Winfield /s/ Earl J. Watson - ------------------------------------------ ---------------------------------------- ---------------------------------------- Murray Walker Ivan J. Winfield Earl J. Watson Director Director Corporate Controller December 21, 2001 December 21, 2001 December 17, 2001
22 INDEX TO FINANCIAL STATEMENTS PAGE Report of Management .................................................. 24 Report of Independent Accountants ..................................... 25 FINANCIAL STATEMENTS Consolidated Balance Sheets as of September 30, 2001 and 2000 .......................................................... 26 Consolidated Statements of Operations for the years ended September 30, 2001, 2000 and 1999 ................................. 27 Consolidated Statements of Stockholders' Equity for the years ended September 30, 2001, 2000 and 1999 ........................... 28 Consolidated Statements of Cash Flow for the years ended September 30, 2001, 2000 and 1999 ................................. 29 Notes to Consolidated Financial Statements .......................... 30-42 Report of Independent Accountants on Financial Statement Schedule ... 43 FINANCIAL STATEMENT SCHEDULE: II - Valuation and Qualifying Accounts and Reserves ................................................. 44 Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the consolidated financial statements, the notes thereto or in Management's Discussion and Analysis of Financial Condition and Results of Operations. 23 REPORT OF MANAGEMENT To the Board of Directors and Stockholders of HMI Industries Inc. The management of HMI Industries Inc. is responsible for the preparation, integrity and objectivity of the financial statements and all other financial information included in this report. Management believes that the financial statements have been prepared in accordance with generally accepted accounting principles and that any amounts included herein which are based on estimates of the expected effects of events and transactions have been made with sound judgment and approved by qualified personnel. HMI maintains an internal control structure to provide reasonable assurance that assets are safeguarded and that transactions and events are recorded properly. The internal control structure is regularly reviewed, evaluated and revised as necessary by management. Additionally, HMI requires employees to maintain the highest level of ethical standards in the conduct of all aspects of HMI's business, and their compliance is regularly monitored. The financial statements in this report have been audited by the independent accounting firm of PricewaterhouseCoopers LLP. Their audits were conducted in accordance with auditing standards generally accepted in the United States of America and included a study and evaluation of our internal control structure as they considered necessary to determine the extent of tests and audit procedures required for expressing an opinion on HMI's financial statements. The Audit Committee of the Board of Directors, of which outside directors are members, meets periodically with the independent accountants and management to review accounting, auditing, internal control and financial reporting matters. The independent accountants have full and free access to the Audit Committee and its individual members at any time. /s/ John A. Pryor ---------------------------------- John Pryor President, Chief Operating Officer /s/ Carl H. Young III ---------------------------------- Carl H. Young III Vice President /s/ Julie A. McGraw ---------------------------------- Julie A. McGraw Vice President, Chief Financial Officer and Treasurer 24 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of HMI Industries Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and of cash flow present fairly, in all material respects, the financial position of HMI Industries Inc. and its subsidiaries at September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP - --------------------------------- Cleveland, Ohio December 17, 2001 25
HMI Industries Inc. CONSOLIDATED BALANCE SHEETS Dollars and shares in thousands, except par values SEPTEMBER 30, September 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7 $ 1,535 Trade accounts receivable (net of allowance of $464 and $507) 2,131 3,207 Note receivable 35 105 Inventories: Finished goods 1,902 1,778 Work-in-progress, raw material and supplies 1,845 1,437 Deferred income taxes 1,681 1,528 Prepaid expenses 184 411 Other current assets 363 290 - ------------------------------------------------------------------------------------------------------------ Total current assets 8,148 10,291 - ------------------------------------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT, NET 3,810 1,551 - ------------------------------------------------------------------------------------------------------------ OTHER ASSETS: Long-term note receivable (less amounts due within one year) - 35 Cost in excess of net assets of acquired businesses (net of accumulated amortization of $3,493 and $3,248) 5,698 5,963 Deferred income taxes 2,581 2,504 Trademarks (net of accumulated amortization of $120 and $80) 337 309 Other 269 190 - ------------------------------------------------------------------------------------------------------------ Total other assets 8,885 9,001 - ------------------------------------------------------------------------------------------------------------ Total assets $ 20,843 $ 20,843 ============================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 1,191 $ - Trade accounts payable 1,902 2,558 Income taxes payable 532 963 Accrued expenses and other liabilities 2,016 2,840 Long-term debt due within one year 584 17 - ------------------------------------------------------------------------------------------------------------ Total current liabilities 6,225 6,378 - ------------------------------------------------------------------------------------------------------------ LONG-TERM LIABILITIES: Long-term debt (less amounts due within one year) 75 71 - ------------------------------------------------------------------------------------------------------------ Total long-term liabilities 75 71 - ------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY: Preferred stock, $5 par value; authorized, 300 shares; issued, none - - Common stock, $1 par value; authorized, 10,000 shares; issued and outstanding, 6,708 and 6,658 shares 6,708 6,658 Capital in excess of par value 8,279 8,279 Unearned compensation, net (8) (41) Retained earnings 464 377 Accumulated other comprehensive loss (Note 1) (900) (879) - ------------------------------------------------------------------------------------------------------------ Total stockholders' equity 14,543 14,394 - ------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 20,843 $ 20,843 ============================================================================================================
See notes to consolidated financial statements. 26
HMI Industries Inc. CONSOLIDATED STATEMENTS OF OPERATIONS Dollars and shares in thousands, except per share data FOR THE YEARS ENDED SEPTEMBER 30, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ REVENUES: Net product sales $ 32,299 $ 34,621 $ 36,927 - ------------------------------------------------------------------------------------------------------------------------ OPERATING COSTS AND EXPENSES: Cost of products sold 19,133 20,448 24,098 Selling, general and administrative expenses 13,385 13,067 14,349 Impairment loss (Note 3) - - 2,665 Interest expense 101 47 71 Other expense (income), net 186 (53) (131) - ------------------------------------------------------------------------------------------------------------------------ Total operating costs and expenses 32,805 33,509 41,052 - ------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (506) 1,112 (4,125) (Benefit) provision for income taxes (593) (353) 116 - ------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS 87 1,465 (4,241) - ------------------------------------------------------------------------------------------------------------------------ Gain (loss) on disposals- Bliss Manufacturing (net of taxes of $-0-, $-0-, and $-0-) - 425 (375) - ------------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) $ 87 $ 1,890 $ (4,616) ========================================================================================================================= Weighted average number of shares outstanding: Basic 6,691 6,113 5,263 Diluted 6,724 6,140 5,263 ========================================================================================================================= BASIC AND DILUTED PER SHARE OF COMMON STOCK (NOTE 1): Income (loss) from continuing operations $ 0.01 $ 0.24 $ (0.81) Gain (loss) on disposals $ - $ 0.07 $ (0.07) - ------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 0.01 $ 0.31 $ (0.88) =========================================================================================================================
See notes to consolidated financial statements. 27 HMI Industries Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
Dollars in thousands Capital in Accumulated Excess Retained Other Treasury Total Common of Par Unearned Earnings Comprehensive Treasury Stock Stockholders' Stock Value Compensation (Deficit) Loss Shares Amount Equity --------- ------- ------------- --------- -------------- -------- --------- ------------- Balance at September 30, 1998 $ 5,369 $8,246 ($595) $ 3,103 ($ 1,038) 210 ($ 986) $ 14,099 Comprehensive loss: Net loss (4,616) (4,616) Translation adjustment 31 31 ---------- Total comprehensive loss (4,585) Write off of sold subsidiaries cumulative translation adjustment 139 139 Treasury shares issued (613) (178) 860 247 Unearned compensation 450 450 Employee benefit stock (24) (24) ======= ======= ===== ======= ====== ======== ======= ========== Balance at September 30, 1999 5,369 7,609 (145) (1,513) (868) 32 (126) 10,326 Comprehensive loss: Net income 1,890 1,890 Translation adjustment (11) (11) ---------- Total comprehensive income 1,879 Treasury shares issued (92) (32) 126 34 Issuance of common stock 1,289 714 2,003 Unearned compensation 104 104 Employee benefit stock 48 48 ======= ======= ===== ======= ====== ======== ======= ========== Balance at September 30, 2000 6,658 8,279 (41) 377 (879) - - 14,394 COMPREHENSIVE INCOME: NET INCOME 87 87 TRANSLATION ADJUSTMENT (21) (21) ---------- TOTAL COMPREHENSIVE INCOME 66 ISSUANCE OF COMMON STOCK 50 50 UNEARNED COMPENSATION 33 33 ======= ======= ===== ======= ====== ======== ======= ========== BALANCE AT SEPTEMBER 30, 2001 $ 6,708 $8,279 ($ 8) $ 464 ($ 900) - - $ 14,543 ======= ======= ===== ======= ====== ======== ======= ==========
See notes to consolidated financial statements. 28
HMI Industries Inc. CONSOLIDATED STATEMENTS OF CASH FLOW Dollars in thousands FOR THE YEARS ENDED SEPTEMBER 30, 2001 2000 1999 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 87 $ 1,890 $(4,616) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 913 802 823 Impairment of asset -- -- 2,665 (Gain) loss on disposal of discontinued operations -- (425) 375 Provision for loss on sale/disposal of assets -- 12 48 Treasury/common shares issued, net of unearned compensation 83 263 674 Deferred income taxes (230) (435) -- Changes in operating assets and liabilities: Decrease (increase) in receivables 1,181 (868) 1,881 (Increase) decrease in inventories (532) (380) 1,529 Decrease (increase) in prepaid expenses 227 (234) 49 Increase in other current assets (73) (244) (46) Decrease in accounts payable (656) (329) (2,231) (Decrease) increase in accrued expenses and other liabilities (824) 71 (575) Decrease in income taxes payable (431) (53) (110) Other, net (169) (205) 161 - ----------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (424) (135) 627 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets, net -- -- 793 Capital expenditures (2,278) (970) (76) - ----------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (2,278) (970) 717 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under credit facility 1,191 -- (508) Payment of long term debt (17) (51) (122) Net proceeds from issuance of common stock -- 1,926 -- - ----------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 1,174 1,875 (630) - ----------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (1,528) 770 714 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,535 765 51 - ----------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7 $ 1,535 $ 765 =================================================================================================
See notes to consolidated financial statements. 29 HMI Industries Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) BASIS OF CONSOLIDATION The consolidated financial statements include all controlled subsidiaries. Operations include the accounts of HMI Industries Inc and the following wholly-owned subsidiaries: Health-Mor International Inc., HMI Incorporated, Health-Mor Acceptance Corporation, HMI Acceptance Corporation, and Health-Mor Acceptance Pty. Ltd. All significant intercompany accounts and transactions have been eliminated. Our principal products include a high filtration portable surface cleaner that is marketed as a healthier alternative to the typical vacuum cleaner, and a portable room air cleaner that helps to remove particles, gases and odors from the air. The two products are sold together as a complete Filter Queen Indoor Air Quality System(TM), primarily in the United States. In other areas, primarily Asia and Europe, the two products are sold separately. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS Our financial instruments consist principally of cash and cash equivalents, accounts and notes receivable, accounts payable, accrued expenses and other liabilities, line of credit, and short and long-term debt in which the fair value of these financial instruments approximates the carrying value. CASH EQUIVALENTS We consider all highly liquid instruments purchased with a maturity of less than three months to be cash equivalents. Cash equivalents are comprised primarily of commercial paper. We believe the carrying amounts approximate fair value due to the short maturities of these instruments. ALLOWANCE FOR DOUBTFUL ACCOUNTS On a quarterly basis, we perform a review of potentially uncollectible trade accounts receivable to provide our best estimate of the net realizable value of the receivables. PREPAID ADVERTISING We expense the production costs of advertising the first time the advertising takes place, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits, in no event longer than one year. Direct-response advertising consists primarily of design and development costs incurred in connection with a Filter Queen(R) television spot, which directs viewers to call a 1-800-number to purchase our products. The capitalized costs of the advertisement is being amortized over a 30 twelve-month period, which began in July 2001, following the first introduction of the advertisement into our Americas sales division. At September 30, 2001 and 2000, $275, and $254, respectively, of advertising was reported as other current assets. Advertising expense was $591, $193, and $49, in fiscal 2001, 2000 and 1999, respectively. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined principally on the last-in, first-out (LIFO) method, which provides a better matching of current costs and revenues. The following presents the effect on inventories and income before taxes had the Company used the first-in, first-out (FIFO) method of inventory valuation.
2001 2000 --------- --------- Percentage of total inventories on LIFO 100% 100% Inventory amount had FIFO method been utilized to value inventory $ 4,147 $ 3,709 Increase in net income before taxes due to LIFO $ 94 $ 38
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is provided on the straight-line method over estimated useful lives of 5 years for leasehold improvements and 3 to 10 years for machinery and equipment. Improvements, which extend the useful life of property, plant and equipment, are capitalized, and maintenance and repairs are expensed. When property, plant and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in income. GOODWILL AND OTHER INTANGIBLE ASSETS Intangibles resulting from business acquisitions, comprising cost in excess of net assets of businesses acquired, are being amortized on a straight-line basis over 40 years. Quarterly, we evaluate the recoverability of intangibles resulting from business acquisitions and measure the amount of impairment, if any, by assessing current and future levels of income and cash flows as well as other factors, such as business trends and market and economic conditions. If there is an impairment in value, recorded balances will be adjusted. Other intangible assets are amortized on a straight-line basis over their useful lives, ranging from ten to seventeen years. FOREIGN CURRENCY TRANSLATION All consolidated foreign operations use the local currency of the country of operation as the functional currency and translate the local currency asset and liability accounts at year-end exchange rates while income and expense accounts are translated at weighted average exchange rates. The resulting translation adjustments are accumulated as a separate component of Stockholders' Equity titled "Accumulated Other Comprehensive Loss". Such adjustments will affect net income only upon sale or liquidation of the underlying foreign investments. In February 1999, we finalized the closing of our Holland sales office. This action resulted in an expense of $139 associated with the write off of the Holland cumulative translation adjustment 31 previously included within the accumulated other comprehensive loss caption of the Consolidated Balance Sheets. Exchange gains and losses from transactions in a currency other than the local currency of the entity involved are included in income as they occur. Significantly all of our product sales to our customer base are conducted in U.S. dollars and therefore net transaction and translation adjustments are not significant. COMPREHENSIVE INCOME/LOSS Comprehensive income/loss combines net income/loss and "other comprehensive items," which represents foreign currency translation adjustments, which are reported as a separate component of stockholders' equity in the accompanying Consolidated Balance Sheets. We present such information in our Statements of Stockholders' Equity on an annual basis and in a footnote in our quarterly reports. SEGMENT REPORTING We conduct our business as a single reportable segment. CONCENTRATIONS Sales of our products to three of our international importers accounted for 13.1%, 11.2% and 10.2% of total product sales in fiscal 200l, 13.1%, 12.9% and 11.3% of total product sales in fiscal year 2000, and 20.5%, 11.6% and 11.0% of total product sales in fiscal year 1999. The loss of any significant portion of our sales from these importers would have a material adverse impact on our sales and earnings. Our revenues, and the stability of such revenues, are dependent on our relationships with third-party distributors and their sales persons and their level of satisfaction with our products and us. The distributors are independent third parties who are not our employees and are not directly under our control. There can be no assurance that the current relationships with distributors will continue on acceptable terms and conditions to us, nor can there be any assurance that additional distributorship arrangements with third parties will be obtained on acceptable terms. Moreover, there can be no assurance that the distributors will devote sufficient time and resources to our products to enable the products to be successfully marketed. Failure of some or all of our products to be successfully and efficiently distributed could have a material adverse effect on our business, prospects, financial condition and results of operations. Sales to international customers represent 57.8%, 64.4% and 67.0% of net product sales for the years ending September 30, 2001, 2000 and 1999, respectively. REVENUE RECOGNITION Our revenue recognition policy is to recognize revenues when products are shipped, or for certain customers when the products are received by the customer's shipping agent, at which time title transfers to the customer. WARRANTY Estimated future warranty obligations related to our products are provided by charges to operations in the period in which the related revenue is recognized. This provision is reviewed, and if necessary, adjusted quarterly to reflect the actual experience. 32 RESEARCH AND DEVELOPMENT COSTS Costs incurred in research and development are expensed as incurred and included in SG&A expenses. In fiscal year 2001, 2000 and 1999, we invested $351, $643 and $290, respectively, in new product development. INCOME TAXES We account for income taxes pursuant to the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109, the tax consequences in the future years for differences between the financial and tax bases of assets and liabilities at year-end are reflected as deferred income taxes. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest was $96, $44 and $68 for the years ended September 30, 2001, 2000 and 1999, respectively. Each of the following transactions has been treated as non-cash items for purposes of the Consolidated Statements of Cash Flows. During the fourth quarter of fiscal 2001, we recorded $588 in debt in exchange for assets. These assets have been vendor-financed and consist primarily of tools, molds and production equipment associated with our new unit, anticipated for launch in fiscal 2003. During the second quarter of fiscal 2000, by entering into three capital leases, we incurred debt totaling $97 in exchange for assets. The assets consisted of racking and compactors for our Strongsville, Ohio manufacturing facility. EARNINGS PER SHARE Earnings per share have been computed according to Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations (shares in thousands) for the year ended September 30,
2001 2000 --------------- ---------------- Per Per Share Share Shares Amount Shares Amount ----- ----- ----- ----- Basic EPS 6,691 $ 0.01 6,113 $ 0.31 Effect of dilutive stock options 33 -- 27 -- ------ ------ ------ ------ Diluted EPS 6,724 $ 0.01 6,140 $ 0.31 ====== ====== ====== ======
The shares used for calculating our basic and diluted earnings per share amounts were identical as of September 30, 1999 as the outstanding options were not included as the result would have been anti-dilutive since a loss from continuing operations existed for that period. Options outstanding during the years ended September 30, 2001 and 2000 to purchase approximately 1,322, and 616 shares of common stock, respectively, were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market prices of the common stock during the period and, therefore, the effect would be anti-dilutive. 33 FUTURE ACCOUNTING REQUIREMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS 144 replaces FAS 121, "Accounting for the Impairment of long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The FASB issued FAS 144 to establish a single accounting model, based on the framework established in FAS 121, as FAS 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB 30 "Reporting The Results of Operations - Reporting The Effects of Disposal of a Segment if a Business, and Extraordinary Unusual and Infrequently Occurring Events and Transactions." FAS 144 also resolves significant implementation issues related to FAS 121. Companies are required to adopt FAS 144 for fiscal years beginning after December 15, 2001, but early adoption is permitted. We have not yet determined the impact, if any, this standard will have on our operating results and financial position. In July 2001, the FASB issued FAS 141 "Business Combinations". FAS 141 requires that all business combinations be accounted for under the purchase method of accounting. In addition, this Statement addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. The Statement also provides criteria for the separate recognition of intangible assets acquired in a business combination. FAS 141 is effective for all business combinations initiated after June 30, 2001. In July 2001, the FASB also issued FAS 142 "Goodwill and Other Intangible Assets". FAS 142 addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets at acquisition. FAS 142 presumes that goodwill and certain intangible assets have indefinite useful lives. Accordingly, goodwill and certain intangibles with indefinite lives will not be amortized, but rather will be tested at least annually for impairment. FAS 142 also addresses accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. FAS 142 is effective for fiscal years beginning after December 15, 2001. As of the date of this filing, we have not yet completed our assessment of the impact of FAS 142 on our financial statements. 2. DISCONTINUED OPERATIONS In fiscal 1998, we reported our subsidiary Bliss, as a discontinued operation. On March 27, 1998, we completed the sale of, our then wholly-owned subsidiary, Bliss Manufacturing to an investor group led by Mr. Mervin Dunn and Rhone Capital L.L.C. pursuant to a Stock Purchase Agreement, dated December 17, 1997, as subsequently amended. In March 1999, we recorded a reserve of $425,000 for future environmental damage expenditures pursuant to section 8.5 of this Purchase Agreement. This amount was recorded as an estimate of potential liability under the Stock Purchase Agreement as studies conducted by independent third parties noted no obligations under existing regulatory guidelines. 34 On January 21, 2000, Bliss, under the ownership of Rhone Capital L.L.C., filed Chapter 11 bankruptcy with the Michigan Eastern Bankruptcy Court, in Detroit, Michigan. Subsequently, all Bliss facilities were auctioned through the Bankruptcy Court. The indemnification obligation noted in the Stock Purchase Agreement did not survive the sale through the bankruptcy court, and as a result, in June 2000 the $425,000 reserve, recorded in accordance with the Stock Purchase Agreement, was reversed to income and recorded as a gain on disposal of discontinued operations in the Consolidated Statements of Operations. 3. PROPERTY, PLANT AND EQUIPMENT
2001 2000 ---------- --------- Leasehold improvements $ 288 $ 288 Machinery and equipment 6,168 5,178 Construction in progress 2,074 197 ---------- --------- 8,530 5,663 Accumulated depreciation 4,720 4,112 ---------- --------- Net property, plant and equipment $ 3,810 $ 1,551 ========== =========
On January 12, 1999, we sold our Perkins Avenue facility and related land in Cleveland, Ohio, to Rose Management Company, a local real estate investment company, for $840. The net book value of the related land and building at the time of sale was $3,505. In December 1998, we recorded a non-cash impairment loss of $2,665 on the building to reflect the difference between the sales price and the net book value of the property. The impairment loss was recorded as a separate line item under operating expenses in the Consolidated Statements of Operation. Depreciation expense relating to continuing operations for the years ended September 30, 2001, 2000, and 1999 was $608, $523, and $560, respectively. 4. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following:
2001 2000 --------- --------- Accrued distributor development $ 530 $ 459 Distributor fund payable 483 347 Accrued compensation 407 987 Accrued warranty 299 431 Other 297 616 --------- --------- $ 2,016 $ 2,840 ========= =========
In June 2000, an adjustment was made to a certain distributor development program accrual. This adjustment was based on the results of an actuarial study and resulted in a credit to income of $331. The actuarial study was commissioned to refine the existing calculation and to provide the credibility of a third party verification. 35 5. DEBT AND CREDIT FACILITY In May 1999, we entered into a $3,500 revolving line of credit with Finova Capital, consisting of loans against our eligible receivables and inventory. A pre-payment penalty waiver for early termination of our old credit facility was obtained from Heller Financial in February 1999. The credit agreement with Finova Capital expired in 2002 and called for interest to accrue at a rate of prime plus 2%, or 11.50% as of September 30, 2000. During the quarter ended March 31, 2000, we entered into capital leases totaling $97. These leases, with a term of 60 months, require monthly payments, principal and interest, of $2. The nominal annual interest rates on these leases range from 2.62% to 12.0%, compounding monthly. In June 2001, we terminated our credit facility with Finova Capital and entered into a $2,000 revolving line of credit with a new lender consisting of loans against our eligible receivables and inventory. The new credit agreement expires in 2003 and calls for interest to accrue at the prime rate (6.0% at September 30, 2001). The new facility provides us with an improved interest rate, increased availability and more favorable eligibility requirements, lower annual fees and less restrictive covenants. The credit facility agreement includes various covenants that include, but are not limited to, restrictions on paying dividends, limitations on our ability to incur additional indebtedness, and minimal requirements on tangible net worth, interest coverage ratio and capital expenditures. There were no covenant violations under the credit facility agreement as of September 30, 2001. During the fourth quarter of fiscal 2001, we recorded $588 in obligations relating to vendor-financed assets. These assets consist primarily of tools, molds and production equipment associated with our new unit, anticipated for launch in fiscal 2002. These obligations require monthly payments, including principal and interest, of $67, with the nominal annual interest rates on these leases ranging from 0.0% to 11.5%, compounding monthly. The remaining terms of the obligations range from 6 to 13 months. Long-term debt consists of the following:
2001 2000 --------- --------- Bank Line of Credit - See Above $ 1,191 $ --- - ------------------------------- Vendor-finance Obligations 588 --- - -------------------------- bearing interest at 0.0% to 11.50% due in monthly installments of $67 (including interest) through October 2002
36 Capitalized Lease Obligations 71 88 - ----------------------------- bearing interest at 2.62% to 12.00% due in monthly installments of $2 (including interest) through March 2005 --------- --------- 1,850 88 Less amounts due within one year 1,775 17 --------- --------- $ 75 $ 71 ========= =========
The principal amount of long-term debt payable in the five years ending September 30, 2002 through 2006 is $1,775, $42, $22, $11 and $-0-. The weighted average interest rate on short-term borrowings at September 30, 2001 and 2000 was 6.05% and 8.87%, respectively. 6. LONG-TERM COMPENSATION PLAN We adopted the Health-Mor Inc. 1992 Omnibus Long-Term Compensation Plan in 1992. The Plan provides for the granting of stock options, stock appreciation rights, restricted stock awards, phantom stock and/or performance shares ("Awards") to our key employees and stock options for our non-employee directors. Options granted under the Plan expire up to ten years after the date of grant if not exercised and may be exercisable in whole or in part at the discretion of the Committee established by the Board of Directors. Shares available for issuance under the Plan may be authorized and unissued shares or treasury shares. The maximum number of shares of Common Stock available for grant of Awards under the Plan are limited on an annual and cumulative basis as further defined in the Plan. Stock options under the Plan generally have exercise prices equal to the fair market values at dates of grant, otherwise, if the option price is less than the fair market value at the date of the grant, compensation expense is recorded for the difference. For restricted or phantom stock, we record compensation expense as the excess of the quoted market price of the unrestricted share of stock at the award date over the purchase price, if any. During fiscal 1999, the Board of Directors granted 308,000 incentive stock options (298,000 at $1.50 per share and 10,000 at $1.375 per share) and 77,000 restricted shares to certain of our key employees in accordance with the Plan. The majority of the options and restricted shares vest over a 36-month period with the exception of 133,000 options and 26,000 restricted shares that vested immediately. No compensation expense was recorded related to the stock options during fiscal 1999, as the exercise price was equal to the fair market value at the grant date. During fiscal 2000, the Board of Directors granted 415,000 incentive stock options (215,000 at $1.0625 per share and 200,000 at $1.25 per share) and 10,000 restricted shares to certain of our key employees in accordance with the Plan. Vesting immediately were 215,000 options. The remaining options or, 200,000 options, vest over a 48-month period with the vesting subject to acceleration clauses based upon our company's stock price. No compensation expense was recorded related to the stock options during fiscal 2000, as the exercise price was equal to the fair market value at the grant date. 37 During fiscal 2001, the Board of Directors granted 560,000 incentive stock options (410,000 at $1.15 per share and 150,000 at $1.30 per share) to certain of our key employees in accordance with the Plan. All 560,000 options vest over a three-year period. No compensation expense was recorded related to the stock options, as the exercise price was equal to the fair market value at the grant date. There were -0-, 10,000 and 77,000 shares issued and -0-, 16,700 and 7,000 non-vested shares forfeited pursuant to the Plan in fiscal 2001, 2000 and 1999, respectively. Unamortized deferred compensation amounted to $8, $41, and $144 at September 30, 2001, 2000, and 1999, respectively. Total compensation expense, in conjunction with the Plan was $33, $95, and $511 in fiscal 2001, 2000, and 1999, respectively. We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for our stock plans as allowed under SFAS Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Had compensation cost for the stock granted in 2001, 2000 and 1999 been determined consistent with SFAS 123, pro forma net income (loss) and earnings per common share would have been as follows (dollars in thousands, except per share data):
2001 2000 1999 ------------ ----------- ------------ Net income (loss), as reported $ 87 $ 1,890 ($ 4,616) Net (loss) income, pro forma $ (153) $ 1,685 ($ 4,781) Income (loss) per common share (basic and diluted): As reported $ 0.01 $ 0.31 ($ 0.88) Pro forma ($ 0.02) $ 0.27 ($ 0.91)
The fair value for all options granted in 2001, 2000 and 1999 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
2001 2000 1999 OPTIONS OPTIONS OPTIONS ----------------------- ------------------------ ----------------------- Risk free interest rate 3.9% to 4.9% 6.1% to 6.5% 4.7% to 5.1% Expected life of option 3 yrs. to 4 yrs. 3 yrs. to 4 yrs. 3 yrs. Expected dividend yield of stock 0.0% 0.0% 0.0% Expected volatility of stock 95.3% to 102.5% 79.4% to 85.5% 75.3% to 80.4%
38 A summary of our stock option activity, and related information for the years ended September 30, 2001, 2000, and 1999, is shown in the following table.
Shares subject Weighted to option average option (in thousands) price per share ------------------- ------------------ September 30, 1998, Outstanding 454 $ 7.83 Granted 350 1.47 Canceled (63) 9.14 ------------------- September 30, 1999 741 4.72 Granted 457 1.14 Canceled (137) 7.01 ------------------- September 30, 2000 1,061 2.89 Granted 596 1.18 Canceled (54) 5.14 ------------------- September 30, 2001, Outstanding 1,603 $ 2.18 ===================
Options exercisable and shares available for future grant on September 30 (in thousands except per share data):
2001 2000 1999 ------------ ------------- ------------- Options exercisable 784 667 438 Weighted-average option price per share of options exercisable $3.16 $3.74 $6.01 Weighted-average fair value of options granted during the year $0.77 $0.67 $0.81
The ranges of exercise prices and the remaining contractual life of options as of September 30, 2001 were: Range of exercise prices $1-$2 $2-$8 Options outstanding: Outstanding as of September 30, 2001 (in thousands) 1,302 301 Weighted-average remaining contractual life 5.02 2.39 Weighted-average exercise price $1.23 $6.28 Options exercisable: Outstanding as of September 30, 2001 (in thousands) 487 297 Weighted-average remaining contractual life 4.07 2.39 Weighted-average exercise price $1.27 $6.28
39 7. INCOME TAXES The provision (benefit) for income taxes relating to continuing operations consists of the following:
2001 2000 1999 --------- ------------ ------------ Current: Federal and state $ (363) $ 82 $ 116 Foreign --- --- --- --------- ------------ ------------ (363) 82 116 Deferred (benefit) expense (230) (435) --- --------- ------------ ------------ $ (593) $ (353) $ 116 ========= ============ ============
A reconciliation of the provision for income taxes at the Federal statutory rate to that included in the Consolidated Statements of Operations related to earnings from continuing operations is as follows:
2001 2000 1999 ------------ ------------ ----------- Tax at Federal statutory rate of 34% $ (172) $ 378 $ (1,402) (Reductions) increases in taxes resulting from: Tax expense relating to Internal Revenue Service audits and settlements (445) --- --- Foreign Sales Corporation earnings --- (104) Amortization of cost in excess of net assets of acquired businesses 84 84 86 Valuation allowances against deferred tax assets --- (1,008) 1,466 Other - net (60) 193 70 ------------ ------------ ----------- $ (593) $ (353) $ 116 ============ ============ ===========
The increase in the effective tax rate (income tax benefit) from fiscal 2000 to fiscal 2001 is primarily attributable to the settlement of the IRS audit for tax years 1993-97 which resulted in the reversal of tax reserves in 2001 and the reversal of the $698 valuation allowance associated with the U.S. net operating loss carryforwards recorded in prior years in 2000. The components of deferred tax assets and liabilities are comprised of the following at September 30,
2001 2000 ---------- --------- Gross deferred tax assets: Operating loss carryforwards $ 4,741 $ 4,921 Receivable and inventory reserves 233 267 Accrued compensation 48 126
40 Other 158 174 ---------- ----------- 5,180 5,488 ---------- ----------- Gross deferred tax liabilities: Accounts receivable fair market value adjustment for tax purposes --- 508 Depreciation 69 99 ---------- ----------- 69 607 Valuation allowances on foreign net deferred tax assets 849 849 ---------- ----------- Net deferred tax asset $ 4,262 $ 4,032 ========== ===========
We have determined that we should fully reserve against this net potential foreign tax asset to the extent it represents excess available net deferred tax assets for certain foreign subsidiaries and divisions as it is more likely than not that these tax assets will not be realized. Accordingly, such benefits will be realized only as, and if, they are used to reduce future tax expense, subject to evaluation of the continuing need for such valuation allowance, or until fully realized. Income taxes paid during the years ended September 30, 2001, 2000, and 1999 were $68, $136, and $226, respectively. Net operating loss carryforwards of approximately $13,369 for tax are available to offset future taxable income. The carryforwards will expire in 2005 through 2019. Undistributed earnings of foreign subsidiaries are reinvested in their operations and therefore, no provision is made for additional income taxes that might be payable on such earnings. 8. EMPLOYEE BENEFIT PLANS We have a qualified profit sharing plan that covers substantially all employees. The overall contribution to our plan and the allocation method is at the discretion of our Board of Directors. The allocation to the participants is based on either a fixed amount per participant, a percentage of eligible wages, or a combination of a fixed amount and a percentage of eligible wages. There was no profit sharing expense for the plan for the years ended September 30, 2001, 2000 and 1999. In addition, we offer a 401(K) savings plan to all of our full-time employees. We match 50% of the first 6% of the employee's contribution to the plan. Employees may contribute up to 15% of compensation to the plan. Amounts expensed for the years ended September 30, 2001 and 2000 were $110 and $42, respectively. 9. COMMITMENTS AND CONTINGENCIES, GUARANTEES AND LEASES We are obligated under certain operating leases for facilities, which expire on various dates through 2006. The minimum annual lease payments under these agreements, including renewal options, if exercised, are $907, $788, $765, $227 and $33 for the years ending September 30, 2002, 2003, 2004, 2005 and 2006, respectively. Rent expense was $1,104, $854 and $705 for the years ended September 30, 2001, 2000 and 1999, respectively. 41 LITIGATION Claims arising in the ordinary course of business are pending against us. Although these are in various stages of the litigation process, we believe that none of these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows. Included in the accompanying Consolidated Balance Sheets at September 30, 2001 and 2000 were accruals of $15 and $177, respectively, relating to various claims. 10. QUARTERLY FINANCIAL DATA (UNAUDITED)
2001 ---------------------------------------------------------- December 31, March 31, June 30, September 30, ------------ --------- -------- ------------- Net revenues $ 7,391 $ 8,956 $ 8,980 $ 6,972 Gross profit $ 3,097 $ 3,780 $ 3,556 $ 2,733 Net (loss) income $ (117) $ 392 $ 49 $ (237) Basic and diluted (loss) income per share of common stock: $ (0.02) $ 0.06 $ 0.01 $ (0.04) 2000 ---------------------------------------------------------- December 31, March 31, June 30, September 30, ------------ --------- -------- ------------- Net revenues $ 8,479 $ 9,655 $ 8,313 $ 8,174 Gross profit $ 3,379 $ 4,013 $ 3,293 $ 3,488 Income from continuing operations $ 251 $ 331 $ 354 $ 176 Gain on disposal $ -- $ -- $ 425 $ -- Net income $ 251 $ 310 $ 779 $ 550 Basic and diluted income per share Of common stock: Income from continuing operations $ 0.05 $ 0.05 $ 0.05 $ 0.09 Gain on disposal $ -- $ -- $ 0.07 $ -- Net income $ 0.05 $ 0.05 $ 0.12 $ 0.09
11. RELATED PARTY TRANSACTIONS In 1995, we converted $750 of accounts receivable from a former Filter Queen distributor to a note receivable. This distributor was an officer of one of our majority owned subsidiaries. In 1996, the officer contributed various assets and liabilities to the subsidiary in exchange for a reduction in the note receivable. During the quarter ended March 31, 1998, we relinquished land and a building valued at $523 and the related mortgage in the amount of $317 in exchange for an increase in the note receivable noted above. The note receivable of $35 and $140 is reflected in current and long-term assets at September 30, 2001 and 2000, respectively. 42 Report of Independent Accountants on FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of HMI Industries Inc. Our audits of the consolidated financial statements of HMI Industries Inc. referred to in our report dated December 17, 2001 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in item 14 of this Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------- Cleveland, Ohio December 17, 2001 43 HMI INDUSTRIES INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Dollars in Thousands Balance At Additions Balance At - -------------------- Beginning of Charged to End of Description Period Costs and Expense Deductions Period ------------- ------------------------------------------------------------- Valuation account for accounts receivable: Year ended September 30, 2001 $ 507 $ -- $ 43 $ 464 Year ended September 30, 2000 $ 691 $ -- $ 184 $ 507 Year ended September 30, 1999 $1,085 $ -- $ 394 $ 691 Valuation account for inventory: Year ended September 30, 2001 $ 235 $ 90 $ 126 $ 199 Year ended September 30, 2000 $ 602 $ 71 $ 438 $ 235 Year ended September 30, 1999 $ 484 $ 762 $ 644 $ 602 Reserve for loss on disposal: Year ended September 30, 2001 $ -- $ -- $ -- $ -- Year ended September 30, 2000 $ 451 $ -- $ 451 $ -- Year ended September 30, 1999 $ 233 $ 375 $ 157 $ 451 Valuation for deferred tax asset: Year ended September 30, 2001 $ 849 $ -- $ -- $ 849 Year ended September 30, 2000 $1,857 $ -- $1,008 $ 849 Year ended September 30, 1999 $1,159 $ 698 $ -- $1,857
44
INDEX TO EXHIBITS 3.1 Certificate of Incorporation Incorporated by reference from, Annual Report on form 10-K for the year ended September 30, 1995 3.2 Bylaws Incorporated by reference from, Annual Report on form 10-K for the year ended September 30, 1995 9.0 Voting Trust Agreement Stockholders Voting Agreement, incorporated by reference from Form 13-D filed on October 19, 2001 10.00 Material Contracts Firstar Revolving Credit Agreement, incorporated by reference from Form 10-Q for the quarter ended June 30, 2001 10.01 Material Contracts Change of Control Agreement, Pryor, attached 10.02 Material Contracts Change of Control Agreements, incorporated by reference from Form 10-K/A3 for the year ended September 30, 1997 10.03 Material Contracts Employment Agreement - Pryor, attached 10.04 Material Contracts Employment Agreement - Malone, incorporated by reference from Form 10-K/A3 for the year ended September 30, 1997 10.05 Material Contracts Employment Agreement - Young, incorporated by reference from Form 10-K/A3 for the year ended September 30, 1997 10.06 Material Contracts Incentive Stock Option Agreements, incorporated by reference from Form 10-K for the year ended September 30, 2000 10.07 Material Contacts Accelerated Incentive Stock Option Agreements, incorporated by reference from Form 10-K for the year ended September 30, 2001 10.08 Material Contracts Restricted Stock Agreements incorporated by reference from Form 10-Q for the quarter ended March 31, 1999 10.09 Material Contracts Amendment to Restricted Stock Agreements incorporated by reference from Form 10-Q for the quarter ended March 31, 1999 10.10 Material Contracts Restricted Stock Agreements incorporated by reference from Form 10-K for the year ended September 30, 1998 10.11 Material Contracts Restricted Stock Agreements, incorporated by reference from Form 10-Q for the quarter ended March 31, 1998 10.12 Material Contracts Restricted Stock Agreements, incorporated by reference from Form 10-K/A3 for the year ended September 30, 1997 10.13 Material Contracts Non-statutory Stock Option Agreements, incorporated
45 by reference from Form 10-K/A3 for the year ended September 30, 1997 10.14 Material Contracts Incentive Stock Option Agreement, Pryor, attached 10.15 Material Contracts Incentive Stock Option Agreements, attached 10.16 Material Contracts Incentive Stock Option Agreements incorporated by reference from Form 10-Q for the quarter ended March 31, 1999. 10.17 Material Contracts Incentive Stock Option Agreements, incorporated by reference from Form 10-K/A3 for the year ended September 30, 1997 11 Statement re: Computation of per Note 1 on Page 33 of the Financial Statements share earnings 21 Subsidiaries of Registrant Note 1 on Page 30 of this report 23 Consent of Experts Attached
46 EX-10.01 3 l91936aex10-01.txt EXHIBIT 10.01 EXHIBIT 10.01 [HEALTH-MOR LETTERHEAD] September 11, 2001 Mr. John A. Pryor HMI Industries Inc. 6000 Lombardo Center, Suite 500 Seven Hills, OH 44131 Dear Mr. Pryor: HMI Industries (the "Company") considers it essential to its best interests to foster the continuous employment of key management personnel. Recognizing that there may be some distracting questions or uncertainty concerning the Company's future direction, the Company agrees that you shall receive the severance benefits set forth in this letter agreement (the "Agreement") in the event your employment with the Company is terminated under the circumstances described below subsequent to a "change in control of the Company". (as defined in section 2.) 1. TERM OF AGREEMENT. This agreement shall commence on October 1, 2001, and shall continue in effect through September 30, 2002; provided, however, that commencing on October 1, 2002 and each October 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than July 31 of such year, the Company shall have given notice that it does not wish to extend this Agreement (provided that no such notice may be given during the pendency of a potential change in control of the Company as defined in Section 2); and provided, further, that if a change in control of the Company, as defined in section 2, shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of not less than twelve (12) months beyond the month in which such change in control occurred. Notwithstanding anything provided herein to the contrary, the term of this Agreement shall not extend beyond the end of the month in which you attain "normal retirement age" under the provisions of the HMI Pension Plan (or successor thereto) or any other tax-qualified retirement plan of the Company or any of its subsidiaries in which you are participating (any such plan being referred to herein as the "Company Pension Plan"). 2. CHANGE IN CONTROL; POTENTIAL CHANGE IN CONTROL. (i) No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below. For purposes of the Agreement, a "change in control of the Company" shall be deemed to have occurred if: (a) any "Person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any Company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of either (i) the then outstanding shares of common stock of the Company or (ii) the combined voting power of the Company's then outstanding voting securities; (b) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c), or (d) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company approve a reorganization, merger or consolidation of the Company with any other Company, other than (1) a reorganization, merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such reorganization, merger or consolidation or (2) a reorganization, merger or consolidation effected to implement a reorganization of the Company (or similar transaction) in which no "person" (as hereinabove defined) beneficiary owns, directly or indirectly, 20% or more of the combined voting power of the Company's then outstanding voting securities; or (d) the stockholders of the Company approve a plan of dissolution or complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (ii) For purposes of this Agreement, a "potential change in control of the Company" shall be deemed to have occurred if: (a) the Company enters in an agreement, the consummation of which would result in the occurrence of a change in control of the Company; 2 (b) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; (c) any person (other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company (or a company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), or a person who is then currently properly eligible to file and has properly filed a Schedule l3G (or any successor filing) pursuant to the Exchange Act and the rules and regulations there under, indicating beneficial ownership of securities of the Company and stating that the securities were acquired in the ordinary course of business and were not acquired with the purpose nor with the effect changing or influencing the control of the Company, for so long as such statement is true and correct) who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities and, without the written consent of the ownership of such securities by 3 percentage points or more; or (d) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. 3. TERMINATION FOLLOWING CHANGE IN CONTROL (i) GENERAL. If any of the events described in Section 2 constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 4 (iii) upon termination of your employment within 12 months following such a change in control of the Company unless such termination is (a) because of your death or Disability, (b) by the company for Cause, or (c) by you other than for Good Reason. In the event your employment with the Company is terminated for any reason and subsequently a change in control of the Company should have occurred, you shall not be entitled to any benefits hereunder. (ii) DISABILITY. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months, and within thirty (30) days after written notice of termination is given you shall not have returned to the full-time performance of your duties, your employment may be terminated for "Disability". (iii) CAUSE. Termination by the Company of your employment for "Cause" shall mean termination (a) upon the commission by you of a willful serious act, such as embezzlements a against the Company which is intended to enrich you at the expense of the Company or upon your conviction of a felony involving moral turpitude or (b) in the 3 event of a willful, gross neglect or willful, gross misconduct, resulting in either case in material harm to the Company. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. (iv) GOOD REASON. You shall be entitled to terminate your employment for Good Reason. For purposes of the Agreement, "Good Reason" shall mean, without your express written consent, the occurrence after a change in control of the Company of any of the Following circumstances unless such circumstances are fully corrected prior to the Date of Termination (as defined in Section 3(v) specified in the Notice of Termination (as defined in Section 3(v) given in respect thereof: (a) a reduction by the Company in your annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting management personnel of the Company; (b) the Company's requiring you to be based at a Company office more than 50 miles from the Company's offices at which you are principally employed immediately prior to the date of the change in control except for required travel on the Company's business travel obligations; (c) the failure by the Company to pay to you any portion of your current compensation within seven (7) days of the date of such compensation is due or any portion of your compensation under any deferred compensation program of the Company within thirty (30) days of the date such compensation is due; (d) any purported termination of your employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (v) hereof (and, if applicable, the requirements of Subsection (iii) hereof), which purported termination shall not be effective for purposes of this Agreement. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to any circumstance constituting Good Reason hereunder. (v) NOTICE OF TERMINATION. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon 4 and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so Indicated. (vi) DATE OF TERMINATION. ETC. "Date of Termination" shall mean (a) if your employment is terminated for Disability thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30)-day period), and (b) if your employment is terminated pursuant to Subsection (iii) or (iv) hereof or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall no be less than thirty (30) days from the date such notice of Termination is given, and in the case of a termination for Good Reason shall not be less than thirty (30) days nor more than sixty (60) days from the date such Notice of Termination is given)- provided, however, that if within fifteen (15) days after any Notice of Termination is given, or, if the Notice of Termination is not property given, prior to the Date of Termination (as determined without regard to an extension of such Date of Termination as described in this proviso), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, then the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by a binding arbitration award; and provided, further, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to 9 other amounts due under this Agreement, and shall not be offset against or reduce any other amounts due under this Agreement and shall not be reduced by any compensation earned by you as the result of employment by another employer. 4. COMPENSATION UPON TERMINATION OR DURING DISABILITY. Following a change in control of the Company, you shall be entitled to the following benefits during a period of disability, or upon termination of your employment, as the case may be, provided that such period of disability or termination occurs during the term of this Agreement, (i) During, any period that you fail to perform your full-time duties with the Company as a result of incapacity due to physical or mental illness, you shall continue to receive your base salary at the rate in effect at the commencement of any such period, together with all compensation payable to you under the Company's disability plan or program or other similar plan during such period, until this Agreement is terminated pursuant to Section 3(ii) hereof. Thereafter, or in the event your employment shall be terminated by reason of your death, your benefits shall be determined under the 5 Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (ii) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Company at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (iii) If your employment by the Company should be terminated by the Company other than for Cause or Disability or if you should terminate your employment for Good Reason, you shall be entitled to the benefits provided below: (a) The Company shall pay to you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due; and (b) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you, at the time specified in subsection (iv), a lump sum Severance Payment equal to twelve (12) months salary in effect on the Date of Termination. (iv) The payments provided for in Subsection (iii) shall be made not later than the fifth day following the Date of Termination- provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you payable on the fifth day after demand therefore by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code.) (v) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Company, or otherwise. 6 (vi) Notwithstanding any provision of this Agreement to the contrary, the aggregate present value of all "payments in the nature of compensation" (within the meaning of Section 280G of the Code) provided to you in connection with a change in control of the Company or the termination of your employment shall be one dollar less than the amount that is finally deductible by the Company under Section 280G of the Code and, to the extent necessary, payments and benefits under this Agreement shall be reduced in order that this limitation not be exceeded. It is the intention of this Subsection (vi) to avoid excise taxes on you under Section 4999 of the Code or the disallowance of a deduction to the Company pursuant to Section 280G of the Code. 5. SUCCESSORS: BINDING AGREEMENT. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms to which you would be entitled hereunder if you terminate your employment for Good Reason following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in the Agreement, "Company shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (ii) This agreement shall inure to the benefit of and be enforceable by you and your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder had you continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. (iii) The Company expressly acknowledges and agrees that you shall have a contractual right to the benefits provided hereunder, and the Company expressly waives any ability, if possible, to deny liability for any breach of its contractual commitment hereunder upon the grounds of lack of consideration, accord and satisfaction or any other defense. In any dispute arising after a change in control of the Company as to whether you are entitled to benefits under this Agreement, there shall by a presumption that you are entitled to such benefits and the burden of proving otherwise shall be on the Company. (iv) AR benefits to be paid hereunder shall be in addition to any disability, workers' compensation or other Company benefit plan distribution, unpaid vacation or other unpaid benefits that you have at the Date of Termination. 7 6. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by the United Sates certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notice to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged as agreed unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements, or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Ohio without regard to its conflicts of law principles. Any references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided hereunder shall be paid net of any applicable withholding required under federal, state, or local law. In the event of a change in control of the Company during the term of this Agreement, the obligations of the Company under Section 4 shall survive the expiration of the term of this Agreement, the obligations of the Company under Section 4 shall survive the expiration of the term of this Agreement consistent with the periods referenced in Section 4. 8. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the State of Ohio, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 8 11. ENTIRE AGREEMENT. This Agreement does not constitute an employment agreement between you and the Company. No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise or inducement not so set forth. You acknowledge that you have read this Agreement, understand its terms and that it has been entered into by you voluntary. You acknowledge that the payments to be made hereunder constitute additional compensation to you. You further acknowledge that you have had sufficient opportunity to consider this Agreement and discuss it with advisors of your choice, including your attorney and accountants. You acknowledge that you have been informed that you have the right to consider this Agreement for a period of at least twenty-one (21) days prior to entering into it. You acknowledge that you have taken sufficient time to consider this Agreement before signing it. You also acknowledge that you have the right to revoke this Agreement for a period of seven (7) days following the Agreement's execution by giving written notice to the Company. 12. EFFECTIVE DATE. This Agreement shall become effective as of January 1, 2001. If this letter sets forth our agreement on the subject matter thereof, kindly sign and return to the Company the enclosed copy of this letter, which with then constitute our agreement on this subject. Sincerely, HMI Industries Inc. /s/ John A. Pryor /s/ James R. Malone ---------------------------- James R. Malone Chairman and CEO Accepted and agreed to this 11th day of September, 2001. 9 EX-10.03 4 l91936aex10-03.txt EXHIBIT 10.03 ` ` Exhibit 10.03 [HEALTH-MOR LETTERHEAD] September 11, 2001 Mr. John A Pryor HMI Industries Inc. 6000 Lombardo Center, Suite 500 Seven Hills, OH 44131 RE: Terms and Conditions of Employment ---------------------------------- Dear John: This is to confirm the terms and conditions of your employment as President and Chief Operating Officer of HMI Industries Inc. (the "Company") beginning on September 11, 2001 and continuing thereafter for an indefinite period, subject to the severance terms specified below. The terms and conditions of your employment are as follows: 1. Your duties shall be consistent with the offices of President and Chief Operating Officer, as may be specified from time to time by the Chairman and Chief Executive Officer of the Company and the Board of Directors. You shall devote your time, energies and skills on a full-time basis to performing your duties for the Company. 2. You will be based in the Seven Hills, Ohio office at the address listed above. 3. You shall receive an annual base compensation of $215,000, payable semi-monthly on the 15th and last day of each month, in the amount of $8,958.33. 4. You shall be eligible to participate in the Company's Executive Incentive Plan, and you shall be an eligible participant in the Omnibus Plan (as defined below.) 5. As a "Key Employee" defined under the Company's 1992 Omnibus Long-Term Compensation Plan (the "Omnibus Plan"), you shall receive a grant of certain shares of Restricted Common Stock as defined under the Omnibus Plan. Such shares of the Company's Common Stock shall become fully vested at the earlier of September 10, 2003 or upon a "Change in Control" of the Company, as defined by the Omnibus Plan. Such shares shall be subject to be issued to you due to a subdivision of the Company's outstanding Common Stock resulting from a stock dividend or stock split, or a decrease in the number of such shares due to a combination of the Company's outstanding Common Stock into a smaller number of shares resulting from a reverse stock split. 6. You will be entitled to 4 weeks vacation beginning in 2002. 7. You shall receive an automobile allowance of $750 per month plus reimbursement for gasoline, oil, maintenance, and automobile insurance including full damage and liability coverage. The personal injury liability coverage shall include limits of $500,000 per person and $500,000 per accident, and property damage coverage of $250,000. 8. In the event the Company terminates your employment for any reason other than "for cause" (as defined below"), you shall receive the following severance benefits. a) You shall receive a full years salary of $215,000, promptly upon such termination. b) All shares of Restricted Common Stock granted or to be granted to you under the Omnibus Plan that have not yet vested shall vest immediately, and certificates representing such shares shall be promptly delivered to you. At that time, all restrictions applicable to such shares shall be terminated, except to the extent necessary to comply with applicable securities law. c) All options granted or to be granted to you to purchase the Company's Common Stock that have not yet vested shall vest immediately. Termination "for cause" shall mean termination of your employment by the Company due to your (i) malfeasance or (ii) conviction of, or admission to, a crime involving moral turpitude. I believe that the above terms and conditions of your employment by the Company are consistent with the prior discussion we have had. Please acknowledge your acceptance and agreement below. Sincerely, By: /s/ James R. Malone ------------------------------ James R. Malone Chairman and CEO Accepted and agreed to by: /s/ John A. Pryor - ----------------------------- John A. Pryor EX-10.14 5 l91936aex10-14.txt EXHIBIT 10.14 Exhibit 10.14 INCENTIVE STOCK OPTION AGREEMENT THIS INCENTIVE STOCK OPTION AGREEMENT is entered into as of September 10, 2001 by and between HMI Industries Inc., a Delaware corporation, with its principal place of business at 6000 Lombardo Center, Seven Hills, Ohio (the "Company") and John A. Pryor (the "Participant") WHEREAS, the Company has adopted the 1992 Omnibus Long-Term Compensation plan (the "Plan"); and, WHEREAS Participant is a Key Employee of the Company as defined in the Plan; and, WHEREAS, pursuant to section 8 of the Plan the Participant may be granted an option to purchase shares of Common Stock of the Company. NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Participant hereby agree as follows: 1. GRANT OF OPTION. There is hereby granted to Participant an option to purchase 150,000 shares of Common Stock of the Company at a price of $1.30 per share. The number of shares which may be purchased and the exercise price per share are subject to adjustment as provided in the Plan. This option is intended to be an incentive stock option within the meaning of section 422 of the Internal Revenue Code. 2. EXERCISE OF OPTION. The option granted to Participant herein may be exercised in whole or in part, subject to the following limitations on exercise: Effective Date Shares Exercisable -------------- ------------------ September 10, 2002 50,000 September 10, 2003 50,000 September 10, 2004 50,000 3. EXPIRATION. To the extent not exercised, the option expires on September 10, 2006, unless expiring sooner pursuant to the terms of the Plan, applicable provisions of the Internal Revenue Code or other provisions of this Agreement. 4. ACCELERATION. In the event of a change in control as defined in the Plan, this option shall become immediately exercisable with respect to all unexercised shares. 5. RETIREMENT. If the Participant ceases to be an employee of the Company by reason of retirement in accordance with any retirement plan or policy of the Company then in effect, the Participant, at any time within the six month period following such retirement (but prior to the expiration date of the option as specified in section 3) may exercise the option with respect to the shares then exercisable. 1 6. DEATH OF PARTICIPANT. If the Participant shall die while in the employ of the Company, then within the one year period following his death (but prior to the expiration date of the option as specified in section 3) the person entitled by will or the applicable laws of descent and distribution may exercise the option without regard to the vesting schedule in section 2. 7. TERMINATION OF EMPLOYMENT. If the Participant ceases to be employed by the Company for any reason other than retirement or death, this option shall not be exercisable after the expiration of three months from the date employment terminates and shall be exercisable only to the extent that it was exercisable as of the date of termination of employment. The option must be exercised in any event prior to the expiration date of the option specified in section 3. 8. REGISTRATION. Participant represents and warrants that any shares purchased by him upon the exercise of an option will be acquired for investment only and not with a view to resale or distribution. Provided, however, that this representation and warranty shall not be applicable to an offer for the sale or the sale of any such shares which, at the time of such offer or sale, are registered under the Securities Act of 1933, as amended (the "Act"), and any applicable state securities law, or which without such registration and apart from the provisions of this section could be offered for sale or sold without violation of such Act or law. Nothing herein shall require the Company to file a registration statement or to keep such registration statement current for any shares purchased pursuant to the exercise of options granted hereunder. If requested by the Company, Participant agrees to sign a letter addressed to the Company certifying investment intent. Participant acknowledges that any shares issued without registration will be "restricted securities" as that term is defined in Rule 144 of the Act, and that any transfer or disposition of such shares can be accomplished only in compliance with Rule 144, the Act or other applicable rules under the Act. 9. LEGEND ON CERTIFICATES. Each certificate for shares of Common Stock of the Company issued to Participant upon exercise of an option shall, in the sole discretion of the Company, bear a legend substantially as follows: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended. The shares may not be sold or transferred in the absence of such registration or an opinion of counsel that registration is not required due to an exemption from registration under that Act." 10. EMPLOYMENT RIGHT. This Agreement shall not be construed as requiring the Company to retain Participant as an employee or affect or limit the right of the Company to terminate the employment of Participant at any time for any reason or to give Participant any additional rights as an employee beyond those rights granted by law or by contract. As consideration for receiving the option, Participant agrees that he will remain in the employ of the Company for at least one year from the date of the grant of the option, unless his employment is terminated because of disability or with the consent of the Company. 2 11. COMPLIANCE WITH PLAN. Participant agrees to comply with all applicable provisions of the Plan, a copy of which has been delivered to Participant and receipt of which is hereby acknowledged. 12. CONFLICT WITH PLAN. In the event of any conflict between any term of this Agreement and the Plan, the terms of the Plan shall prevail. Except for terms defined in this Agreement, the definitions contained in the Plan will apply to this Agreement. 13. ASSIGNMENT AND DISPOSITION. Participant shall not transfer or assign or in any way dispose of any option granted herein except in accordance with the Plan and applicable law. 14. NOTICE OF EXERCISE. This option may be exercised by delivering to the Company at the office of its Chief Financial Office a written notice, signed by the person entitled to exercise the option and stating the number of shares to be purchased. Such notice shall, as an essential part thereof, be accompanied by payment of the full purchase price of the shares to be purchased. Upon payment within the time period specified by the Company of the amount, if any, required to be withheld for Federal, state and local tax purposes as a result of the exercise of the option, the option shall be deemed exercised as of the date the Company received the written notice of exercise. The Participant may satisfy any withholding requirement by authorizing the Company at the time of exercise to withhold from his next salary payment all or part of the amount required to be withheld by the Company as a result of such exercise. Participant may satisfy the withholding obligation by authorizing the Company to withhold shares from the shares acquired hereunder equal in value to the amount required to satisfy such withholding. Payment of the purchase price may be made in cash or in shares equal in value to the exercise price, or partly in cash and partly in shares. The option shall not be exercisable if the exercise would violate any applicable state securities law, any registration or other requirements under the Act or any applicable legal requirement of any other governmental authority. IN WITNESS WHEREOF, the Company and Participant have executed this Incentive Stock Option Agreement as of the date indicated above. HMI INDUSTRIES INC. By /s/ James R. Malone --------------------------------- James R. Malone, Chairman of the Board and Chief Executive Officer /s/ John A. Pryor ------------------------------------- John A. Pryor 3 EX-10.15 6 l91936aex10-15.txt EXHIBIT 10.15 Exhibit 10.15 HMI Industries Inc. Exhibit 10 Material Contracts - Incentive Stock Option Agreements PARTICIPANT AGREEMENT SHARES EFFECTIVE DATE/SHARES EXERCISABLE DATE Daniel Duggan 07/25/01 40,000 07/25/02 - 13,333 07/25/03 - 13,333 07/25/04 - 13,334 James R. Malone 07/25/01 100,000 07/25/02 - 33,333 07/25/03 - 33,333 07/25/04 - 33,334 Julie McGraw 07/25/01 40,000 07/25/02 - 13,333 07/25/03 - 13,333 07/25/04 - 13,334 Joseph Najm 07/25/01 50,000 07/25/02 - 16,666 07/25/03 - 16,667 07/25/04 - 16,667 Jackie Purcell 07/25/01 25,000 07/25/02 - 8,333 07/25/03 - 8,333 07/25/04 - 8,334 Daniel Roman 07/25/01 25,000 07/25/02 - 8,333 07/25/03 - 8,333 07/25/04 - 8,334 Ted Timmers 07/25/01 40,000 07/25/02 - 13,333 07/25/03 - 13,333 07/25/04 - 13,334 Darrell Weeter 07/25/01 40,000 07/25/02 - 13,333 07/25/03 - 13,333 07/25/04 - 13,334 Carl Young 07/25/01 50,000 07/25/02 - 16,666 07/25/03 - 16,667 07/25/04 - 16,667 See filed exhibit for James R. Malone Exhibit 10.15 INCENTIVE STOCK OPTION AGREEMENT THIS INCENTIVE STOCK OPTION AGREEMENT is entered into as of July 25,2001 by and between HMI Industries Inc., a Delaware corporation, with its principal place of business at 6000 Lombardo Center, Seven Hills, Ohio (the "Company") and James R. Malone (the "Participant"). WHEREAS, the Company has adopted the 1992 Omnibus Long-Term Compensation Plan (the "Plan"); and, WHEREAS, Participant is a Key Employee of the Company as defined in the Plan; and, WHEREAS, pursuant to section 8 of the Plan the Participant may be granted an option to purchase shares of Common Stock of the Company. NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Participant hereby agree as follows: 1. GRANT OF OPTION. There is hereby granted to Participant an option to purchase 100,000 shares of Common Stock of the Company at a price of $1.15 per share. The number of shares which may be purchased and the exercise price per share are subject to adjustment as provided in the Plan. This option is intended to be an incentive stock option within the meaning of section 422 of the Internal Revenue Code. 2. EXERCISE OF OPTION. The option granted to Participant herein may be exercised in whole or in part, subject to the following limitations on exercise: Effective Date Shares Exercisable -------------- ------------------ July 25, 2002 33,333 July 25, 2003 33,333 July 25, 2004 33,334 3. EXPIRATION. To the extent not exercised, the option expires on July 25, 2006, unless expiring sooner pursuant to the terms of the Plan, applicable provisions of the Internal Revenue Code or other provisions of this Agreement. 4. ACCELERATION. In the event of a change in control as defined in the Plan, this option shall become immediately exercisable with respect to all unexercised shares. 5. RETIREMENT. If the Participant ceases to be an employee of the Company by reason of retirement in accordance with any retirement plan or policy of the Company then in effect, the Participant, at any time within the six month period following such retirement (but prior to the expiration date of the option as specified in section 3) may exercise the option with respect to the shares then exercisable. 1 6. DEATH OF PARTICIPANT. If the Participant shall die while in the employ of the Company, then within the one year period following his death (but prior to the expiration date of the option as specified in section 3) the person entitled by will or the applicable laws of descent and distribution may exercise the option without regard to the vesting schedule in section 2. 7. TERMINATION OF EMPLOYMENT. If the Participant ceases to be employed by the Company for any reason other than retirement or death, this option shall not be exercisable after the expiration of three months from the date employment terminates and shall be exercisable only to the extent that it was exercisable as of the date of termination of employment. The option must be exercised in any event prior to the expiration date of the option specified in section 3. 8. REGISTRATION. Participant represents and warrants that any shares purchased by him upon the exercise of an option will be acquired for investment only and not with a view to resale or distribution. Provided, however, that this representation and warranty shall not be applicable to an offer for the sale or the sale of any such shares which, at the time of such offer or sale, are registered under the Securities Act of 1933, as amended (the "Act"), and any applicable state securities law, or which without such registration and apart from the provisions of this section could be offered for sale or sold without violation of such Act or law. Nothing herein shall require the Company to file a registration statement or to keep such registration statement current for any shares purchased pursuant to the exercise of options granted hereunder. If requested by the Company, Participant agrees to sign a letter addressed to the Company certifying investment intent. Participant acknowledges that any shares issued without registration will be "restricted securities" as that term is defined in Rule 144 of the Act, and that any transfer or disposition of such shares can be accomplished only in compliance with Rule 144, the Act or other applicable rules under the Act. 9. LEGEND ON CERTIFICATES. Each certificate for shares of Common Stock of the Company issued to Participant upon exercise of an option shall, in the sole discretion of the Company, bear a legend substantially as follows: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended. The shares may not be sold or transferred in the absence of such registration or an opinion of counsel that registration is not required due to an exemption from registration under that Act." 10. EMPLOYMENT RIGHT. This Agreement shall not be construed as requiring the Company to retain Participant as an employee or affect or limit the right of the Company to terminate the employment of Participant at any time for any reason or to give Participant any additional rights as an employee beyond those rights granted by law or by contract. As consideration for receiving the option, Participant agrees that he will remain in the employ of the Company for at least one year from the date of the grant of the option, unless his employment is terminated because of disability or with the consent of the Company. 2 11. COMPLIANCE WITH PLAN. Participant agrees to comply with all applicable provisions of the Plan, a copy of which has been delivered to Participant and receipt of which is hereby acknowledged. 12. CONFLICT WITH PLAN. In the event of any conflict between any term of this Agreement and the Plan, the terms of the Plan shall prevail. Except for terms defined in this Agreement, the definitions contained in the Plan will apply to this Agreement. 13. ASSIGNMENT AND DISPOSITION. Participant shall not transfer or assign or in any way dispose of any option granted herein except in accordance with the Plan and applicable law. 14. NOTICE OF EXERCISE. This option may be exercised by delivering to the Company at the office of its Chief Financial Office a written notice, signed by the person entitled to exercise the option and stating the number of shares to be purchased. Such notice shall, as an essential part thereof, be accompanied by payment of the full purchase price of the shares to be purchased. Upon payment within the time period specified by the Company of the amount, if any, required to be withheld for Federal, state and local tax purposes as a result of the exercise of the option, the option shall be deemed exercised as of the date the Company received the written notice of exercise. The Participant may satisfy any withholding requirement by authorizing the Company at the time of exercise to withhold from his next salary payment all or part of the amount required to be withheld by the Company as a result of such exercise. Participant may satisfy the withholding obligation by authorizing the Company to withhold shares from the shares acquired hereunder equal in value to the amount required to satisfy such withholding. Payment of the purchase price may be made in cash or in shares equal in value to the exercise price, or partly in cash and partly in shares. The option shall not be exercisable if the exercise would violate any applicable state securities law, any registration or other requirements under the Act or any applicable legal requirement of any other governmental authority. IN WITNESS WHEREOF, the Company and Participant have executed this Incentive Stock Option Agreement as of the date indicated above. HMI INDUSTRIES INC. By /s/ Carl H. Young ------------------------ Carl H. Young, President /s/ James R. Malone --------------------------- James R. Malone 3 EX-23 7 l91936aex23.txt EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333- 47153) of HMI Industries Inc. of our report dated December 17, 2001, relating to the consolidated financial statements, which appears in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated December 17, 2001 relating to the Financial Statement Schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP Cleveland, Ohio December 19, 2001 -----END PRIVACY-ENHANCED MESSAGE-----