-----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, P6fpP5+S/YkB64xybPutazivEmNgSJ2Jmttfh91uFbOxKraJIKxkaGaVUVYe5dD3 eJFo1VT9XiSfnjcBch62zA== 0000950152-02-006386.txt : 20020814 0000950152-02-006386.hdr.sgml : 20020814 20020814134435 ACCESSION NUMBER: 0000950152-02-006386 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-30905 FILM NUMBER: 02734098 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-Q 1 l95275ae10vq.txt HMI INDUSTRIES INC. 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2002 ------------- OR [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _______________ to _______________ Commission File Number 2-30905 HMI INDUSTRIES INC. (Exact name of Registrant as Specified in Its Charter) DELAWARE 36-1202810 - ------------------------------------------------------------------------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) Genesis Building, 6000 Lombardo Center, Suite 500, Seven Hills, Ohio 44131 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (216) 986-8008 -------------- - -------------------------------------------------------------------------------- Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. Yes [X] No ____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 1, 2002 ------------------------------------ ----------------------------------- Common stock, $1 par value per share 6,745,609 ================================================================================
INDEX PART I. FINANCIAL INFORMATION....................................................................................3 ITEM 1. FINANCIAL STATEMENTS...................................................................................3 CONSOLIDATED CONDENSED BALANCE SHEETS.......................................................................3 CONSOLIDATED CONDENSED STATEMENTS OF INCOME.................................................................4 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW..............................................................5 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)............................................6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................8 Critical Accounting Policies................................................................................8 Results of Operations......................................................................................10 Liquidity and Capital Resources............................................................................12 Future Accounting Requirements.............................................................................13 Cautionary Statement for "Safe Harbor" Purposes Under the Private Securities Litigation Reform Act of 1995...............................................................................................14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................14 PART II. OTHER INFORMATION......................................................................................15 ITEM 1. LEGAL PROCEEDINGS....................................................................................15 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................15 ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................15 ITEM 5. OTHER INFORMATION....................................................................................15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................15 (a) Index to Exhibits......................................................................................15 (b) Reports on Form 8-K....................................................................................15
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED) JUNE 30, September 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 601 $ 6,865 Trade accounts receivable (net of allowance of $543,628 and $463,577) 2,702,828 2,130,847 Note receivable -- 35,071 Inventories: Finished goods 2,370,059 1,902,050 Work-in-progress, raw material and supplies 2,244,449 1,845,243 Deferred income taxes 1,428,122 1,680,758 Prepaid expenses 335,933 184,137 Other current assets 55,116 362,972 - ------------------------------------------------------------------------------------------------------------------- Total current assets 9,137,108 8,147,943 - ------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, NET 4,315,584 3,809,977 - ------------------------------------------------------------------------------------------------------------------- OTHER ASSETS: Cost in excess of net assets of acquired businesses (net of amortization of $3,677,274 and $3,493,148) 5,530,006 5,698,247 Deferred income taxes 2,593,380 2,580,648 Trademarks (net of amortization of $150,454 and $120,083) 419,162 337,190 Other 256,034 268,865 - ------------------------------------------------------------------------------------------------------------------- Total other assets 8,798,582 8,884,950 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 22,251,274 $ 20,842,870 =================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 801,000 $ 1,191,000 Trade accounts payable 3,322,205 1,902,373 Income taxes payable 517,745 531,748 Accrued expenses and other liabilities 2,286,354 2,016,303 Long-term debt due within one year 308,819 583,949 - ------------------------------------------------------------------------------------------------------------------- Total current liabilities 7,236,123 6,225,373 - ------------------------------------------------------------------------------------------------------------------- LONG-TERM LIABILITIES: Long-term debt (less amounts due within one year) 82,931 75,112 - ------------------------------------------------------------------------------------------------------------------- Total long-term liabilities 82,931 75,112 - ------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY: Preferred stock, $5 par value; authorized, 300,000 shares; issued, none -- -- Common stock, $1 par value; authorized, 10,000,000 shares; issued and outstanding, 6,745,609 and 6,707,832 shares 6,745,609 6,707,832 Capital in excess of par value 8,279,310 8,279,309 Unearned compensation, net (4,082) (8,145) Retained earnings 794,919 463,403 Accumulated other comprehensive loss (883,536) (900,014) - ------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 14,932,220 14,542,385 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 22,251,274 $ 20,842,870 ===================================================================================================================
See notes to consolidated condensed financial statements. 3 CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
For the three months For the nine months ended June 30, ended June 30, 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------- REVENUES: Net product sales $9,306,956 $8,979,782 $29,275,300 $ 25,326,448 - -------------------------------------------------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES: Cost of products sold 5,444,621 5,424,051 16,415,191 14,894,683 Selling, general and administrative expenses 3,512,708 3,391,540 11,996,221 10,389,340 Interest expense 22,023 21,910 64,474 71,794 Other expense, net 61,542 51,899 189,737 104,148 - -------------------------------------------------------------------------------------------------------------------------- Total operating costs and expenses 9,040,894 8,889,400 28,665,623 25,459,965 - -------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 266,062 90,382 609,677 (133,517) Provision (benefit) for income taxes 108,796 41,357 278,163 (457,641) - -------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 157,266 $ 49,025 $ 331,514 $ 324,124 ========================================================================================================================== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 6,729,860 6,701,204 6,735,303 6,712,652 Diluted 6,729,957 6,715,309 6,735,335 6,739,639 ========================================================================================================================== PER SHARE OF COMMON STOCK: Basic and diluted $ 0.02 $ 0.01 $ 0.05 $ 0.05 ==========================================================================================================================
See notes to consolidated condensed financial statements. 4 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (Unaudited)
For the nine months ended June 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 331,514 $ 324,124 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization 663,209 665,595 Provision for loss on disposal of assets 17,000 -- Common/treasury shares issued, net of unearned compensation 41,841 81,411 Provision for losses on receivables 27,526 5,744 Deferred income taxes 239,904 (84,565) CHANGES IN OPERATING ASSETS AND LIABILITIES: (Increase) decrease in receivables (564,436) 16,744 Increase in inventories (867,215) (583,527) (Increase) decrease in prepaid expenses (151,796) 75,058 Decrease (increase) in other current assets 307,856 (62,320) Increase in accounts payable 1,419,832 220,059 Increase (decrease) in accrued expenses and other liabilities 270,051 (710,000) Decrease in income taxes payable (14,003) (415,117) Other, net (83,033) (202,234) - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 1,638,250 (669,028) - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (732,204) (1,556,936) - ------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (732,204) (1,556,936) - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings under credit facility (390,000) 863,085 Payment of long term debt (522,310) (12,498) - ------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (912,310) 850,587 - ------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (6,264) (1,375,377) Cash and cash equivalents, beginning of period 6,865 1,535,051 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 601 $ 159,674 =============================================================================================================
See notes to consolidated condensed financial statements. 5 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The interim consolidated condensed financial statements included in this report have been prepared, without audit, by HMI Industries Inc. from our consolidated statements and those of our subsidiaries, pursuant to the rules and regulations of the Securities and Exchange Commission. Although we believe that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including significant accounting policies, normally included in the annual financial statements have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the unaudited financial information for the interim periods presented reflects all adjustments (which include only normal, recurring adjustments) necessary for a fair presentation. These consolidated condensed financial statements and related notes should be read in conjunction with the consolidated condensed financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2001. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. 2. RECLASSIFICATION Certain amounts in the fiscal 2001 consolidated condensed financial statements have been reclassified to conform to the fiscal 2002 presentation. 3. SHIPPING AND HANDLING COSTS Costs incurred for shipping and handling are included in the cost of products sold when incurred. Amounts billed to customers for shipping and handling are reported as net product sales. 4. PREPAID ADVERTISING We expense the production costs of advertising the first time the advertising takes place, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits, in no event longer than one year. Direct-response advertising consisted primarily of design and development costs incurred in connection with a Filter Queen(R) television spot, which directs viewers to call a 1-800-number to purchase our products. The capitalized costs of the advertisement were being amortized over a twelve-month period, which began in July 2001, following the first introduction of the advertisement into our Americas sales division. At June 30, 2002 and 2001, $-0- and $396,700 of advertising, respectively, was reported as other current assets. 6 5. 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):
Nine Months Ended June 30, -------------------------- 2002 2001 -------------------------- -------------------------- Per Per Share Share Shares Amount Shares Amount -------- -------- --------- --------- Basic EPS 6,735 $ 0.05 6,713 $ 0.05 Effect of dilutive stock options -- $ -- 27 $ -- -------- -------- -------- -------- Diluted EPS 6,735 $ 0.05 6,740 $ 0.05 ======== ======== ======== ======== Three Months Ended June 30, -------------------------- 2002 2001 -------------------------- -------------------------- Per Per Share Share Shares Amount Shares Amount -------- -------- -------- ----------- Basic EPS 6,730 $ 0.02 6,701 $ 0.01 Effect of dilutive stock options -- $ -- 14 $ -- -------- -------- -------- -------- Diluted EPS 6,730 $ 0.02 6,715 $ 0.01 ======== ======== ======== ========
As of June 30, 2002, 1,212,700 outstanding options were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. The exercise prices of these options range from $1.0625 to $7.50 per share and expire between the period July 2, 2002 and August 29, 2010. As of June 30, 2001, 556,800 outstanding options, subject to purchase, were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. The exercise prices of these options ranged from $1.25 to $7.50 per share and expired between the period January 2, 2002 and August 29, 2010. 6. COMPREHENSIVE INCOME/LOSS Comprehensive income/loss combines net income/loss and "other comprehensive items," which represents foreign currency translation adjustments, reported as a component of stockholders' equity in the accompanying Consolidated Condensed Balance Sheets. We present such information in our Statement of Stockholders' Equity on an annual basis and in a footnote in our quarterly reports. We had comprehensive income of $178,500 and $348,000 for the three and nine months ended June 30, 2002, respectively and comprehensive income of $65,500 and $319,300 for the corresponding periods ending June 30, 2001. 7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The following transaction has been treated as a non-cash item for purposes of the Consolidated Condensed Statements of Cash Flow. During the third quarter of fiscal 2002, we recorded $255,000 in debt in exchange for an asset. This asset has been vendor-financed and consists of production equipment associated with our filter cone product. 7 8. DEBT On March 1, 2002, we entered into an additional $1 million revolving line of credit with our current lender consisting of loans against our eligible receivables and inventory. This additional line, which expired on May 31, 2002, carried the same interest rate and covenants as our existing $2 million revolving line of credit and was obtained to assist, if necessary, with the build-up of inventory associated with the launch of our new product and other strategic initiatives. As of the date of this report, our lender has approved the reinstatement of the additional $1 million line at the same terms as when originally obtained, with an expiration of January 31, 2003. In addition, under the same agreement mentioned above, we reset the capital expenditure covenant in anticipation of exceeding the previously established levels during our fiscal year ending September 30, 2002. There were no covenant violations under the credit facility agreement as of or for the period ended June 30, 2002. 9. INCOME TAXES 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 these 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon the consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated condensed financial statements required us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements. Actual results may differ from these estimated under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgment and uncertainties, and potentially may result in materially different outcomes under different assumptions and conditions. We believe that the critical accounting policies are limited to those that are described below. 8 ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Quarterly, we perform a review of all customer accounts with respect to aging of receivables, historical payment patterns, customers' financial condition, and from this review determine if an allowance is needed. If the financial condition of the customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. SALES RETURN AND ALLOWANCE We record a provision for estimated sales returns and allowances on product sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns and other known factors. If future returns do not reflect the historical data we use to calculate these estimates, additional allowances may be required. EXCESS AND OBSOLESCENCE RESERVES We evaluate our inventory to determine excess or slow moving items based on current order activity and projections of future demand. For those items identified, we estimate their market value or net sales value based on current trends. An allowance is created for those items having a net sales value less than cost. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be necessary. GOODWILL AND OTHER INTANGIBLE ASSETS Quarterly, we evaluate the recoverability of intangibles resulting from business acquisitions and measure the amount of impairment, if any, by assessing current and future levels of income and cash flows as well as other factors, such as business trends and market and economic conditions. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded. During the nine months ended June 30, 2002, we did not record any impairment losses related to goodwill and other intangible assets (Refer also to our comments under the Future Accounting Requirements section below concerning the adoption of FAS 142). INCOME TAXES Carrying value of our domestic net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, we may be required to record additional valuation allowances against our deferred tax assets resulting in additional income tax expense in our Consolidated Condensed Statement of Income. Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for additional valuation allowances quarterly. WARRANTY RESERVES Estimated future warranty obligations, based on historical trends, related to our products are provided by charges to operations in the period in which the related revenue is recognized. If future returns do not reflect the historical data we use to calculate these estimates, additional allowances may be required. 9 RESULTS OF OPERATIONS NET PRODUCT SALES THIRD QUARTER OF FISCAL 2002 COMPARED TO THIRD QUARTER OF FISCAL 2001 Net product sales of $9,307,000 for the quarter ended June 30, 2002, were $327,200 or 3.6% higher when compared to sales for the same quarter in fiscal 2001 of $8,979,800. The increase was entirely attributable to the Americas, offset by decreased European sales. Revenue growth in the Americas was largely attributable to the opening of additional offices by several key master distributors within our existing network, as well as the promotion of certain regional distributors to master distributor status. The sales decline in Europe was primarily due to lower sales to Portugal, Spain and Belgium of which Portugal was the largest. Due to the relocation of some of Portugal's best distributors to Brazil and the closing of non-performing offices, the distribution network in Portugal is going through a period of reorganization. FIRST NINE MONTHS OF FISCAL 2002 COMPARED TO FIRST NINE MONTHS OF FISCAL 2001 Net product sales of $29,275,300 for the nine months ended June 30, 2002, were $3,948,900 or 15.6% higher when compared to sales for the same period in fiscal 2001 of $25,326,400. The increase in sales was primarily attributable to increased sales in the Americas and Asia offset by decreased sales in Europe, primarily due to the aforementioned lower sales to Portugal. The increased sales in the Americas were largely due to the increased network sales as discussed above. Also contributing to the Americas revenue growth were sales from the National Advertising Campaign (NAC), and Health-Mor at Home(TM) offset by unfavorable Canadian sales. The NAC centers around the continued testing and refinement of a thirty-minute infomercial. The NAC was designed to increase brand awareness, generate sales-leads, and open new territories. Health-Mor at Home(TM) created in October 2001, is a direct to consumer outbound sales force designed to assist consumers in locations where distributors are no longer located. Defender(R) sales to Japan and Korea drove the year-to-date Asian revenue increase. They were sold to distributors there that purchased them with the intention of selling the Majestic(R) and Defender(R) together as a system rather than as stand-alone products. Korea has had the most success marketing the products together and we are hopeful that this trend of increased Defender(R) sales will continue. GROSS PROFIT THIRD QUARTER OF FISCAL 2002 COMPARED TO THIRD QUARTER OF FISCAL 2001 The gross margin for the quarter ended June 30, 2002, was $3,862,300 or 41.5% of sales as compared to $3,555,700 or 39.6% of sales in 2001. This represents an increase in gross margin of $306,600 and was largely driven by a favorable sales volume variance and improved product mix from the prior year. 10 FIRST NINE MONTHS OF FISCAL 2002 COMPARED TO FIRST NINE MONTHS OF FISCAL 2001 The gross margin for the nine months ended June 30, 2002, was $12,860,100 or 43.9% of sales as compared to $10,431,800 or 41.2% of sales for the same period in 2001. Favorable sales volume variances represent the largest portion of the $2,428,300 gross margin increase. SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") THIRD QUARTER OF FISCAL 2002 COMPARED TO THIRD QUARTER OF FISCAL 2001 SG&A expenses of $3,512,700 or 37.7% of sales for the quarter ended June 30, 2002, were $121,200 higher when compared to the same period in fiscal 2001 of $3,391,500 or 37.8% of sales. These higher costs were attributable to increased sales commissions and certain accrued benefit expenses, which followed the increased level of sales and earnings. They were also impacted by expenses associated with our NAC initiative and expenses relating to the launch of our 75th Anniversary units. Offsetting these increases were reduced video, career development program and consulting expenses, incurred during the same period in fiscal 2001. FIRST NINE MONTHS OF FISCAL 2002 COMPARED TO FIRST NINE MONTHS OF FISCAL 2001 SG&A expenses for the nine months ended June 30, 2002, were $11,996,200 or 41.0% of sales as compared to $10,389,300 or 41.0% of sales for the same period in fiscal 2001; an increase of $1,606,900. The increase in SG&A expenses was largely attributable to the aforementioned expenses associated with our NAC initiative and non-recurring expenses of $425,400 relating to the Form 13D that was filed with the Securities Exchange Commission on October 19, 2001, and later amended on December 24, 2001 (See the Liquidity and Capital Resources section below for additional information on the Form 13D filing). It was also impacted by the aforementioned increased sales commissions and accrued benefit expenses. Offsetting these increases were reduced professional fees of $345,500 relating to non-recurring expenses, incurred during fiscal 2001, associated with the evaluation of potential growth opportunities, as well as the costs associated with certain career development programs and activities. INCOME (LOSS) BEFORE INCOME TAXES The year-to-date income before taxes of $609,700 was $743,200 higher when compared to the prior year, which reflected a loss of ($133,500). Exclusive of the above-mentioned non-recurring fees and expenses, our year-to-date income before taxes would have been $1,035,100 and $212,000 for fiscal 2002 and 2001, respectively. INCOME TAXES The effective tax rate for the quarter ended June 30, 2002 was 40.9% compared to an effective tax rate of 45.8% for the same period in fiscal 2001. The change in the effective tax rate is primarily attributable to additional tax benefits associated with export sales. The effective income tax rate for the nine months ended June 30, 2002 was 45.6% compared to 342.8% in fiscal 2001. This difference was primarily attributable to the reversal of income tax reserves in the prior year. During the second quarter of fiscal 2001, the Internal Revenue Service informed us that examinations for fiscal years 1994 through 1997 were completed. As these 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 tax rate absent the reversal of these reserves would have been 9.5%. 11 INFLATION AND PRICING Net product sales and income from continuing operations were not materially impacted by inflation or changing prices. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES Cash flows from operating activities provided net cash of $1,638,200 for the nine months ended June 30, 2002, principally due to cash inflows resulting from an increase in accounts payable of $1,419,800, net income of $331,500, as well as net non-cash expenses of $989,500 primarily relating to depreciation and amortization of $663,200 and deferred income taxes of $239,900, offset by increases in inventory and accounts receivables of $867,200 and $ 564,400, respectively. The increase in accounts payable reflects higher purchasing activity associated with the increased sales volume and new product models as well as a more conscientious effort to monitor and improve working capital balances. The inventory increase was largely a result of safety stock that was built to prevent any shipping interruptions to the distribution network for a planned one-week plant shutdown in July 2002, the purchase of raw material for the new product models released in May and another scheduled for release in fiscal 2003, as well as increased finished good stock levels associated with the buildup of expected June 2002 orders that will not occur until July/August 2002. The increase in our receivables balance is largely attributable to sales volume increases related to several international customers who all receive credit terms to assist in the growth and revitalization of these areas, and to growth in our NAC program which provides for extended payment terms. INVESTING ACTIVITIES Capital expenditures of $732,200 represent the entire net cash used in investing activities for the nine months ended June 30, 2002, of which the largest portion relates to tooling associated with new products anticipated for release during 2003. FINANCING ACTIVITIES Net cash used in financing activities was $912,300, which included $522,300 for payment of long-term debt and $390,000 for net repayments under the credit facility. Current working capital, together with anticipated cash flows generated from future operations and our existing credit facility are believed to be adequate to cover our anticipated cash requirements, including but not limited to capital expenditures and expenses associated with the launch of our new products. As of June 30, 2002, there was $801,000 borrowed on our $2,000,000 credit facility. 12 SCHEDULE 13D On October 19, 2001, and as amended on December 24, 2001, Kirk W. Foley and certain other reporting persons filed a Statement on Schedule 13D reporting the acquisition of additional shares of our common stock by such persons. According to the Schedule 13D, the reporting persons intended to seek, among other things, (i) control of our board of directors and (ii) to have our board of directors engage an investment banking firm to explore strategic alternatives. We entered into an agreement with Kirk W. Foley, dated February 14, 2002, in settlement of certain proposals made by Mr. Foley in the 13D. Under the terms of the settlement, we have restructured our Board of Directors by reducing the size of the Board from nine to six directors and providing for annual elections of all directors. The six directors consist of the five continuing directors: James R. Malone, Chairman, Thomas Davidson, John Pryor, Murray Walker and Ivan Winfield. Our Board of Directors has elected Mr. Foley to fill the sixth director seat. The six directors will serve until the 2003 stockholders' meeting. In conjunction with the reduction in Board size, four of our original nine directors resigned from the Board. The resigning directors are Carl H. Young, III, Robert J. Abrahams, John S. Meany, Jr. and Barry L. Needler. FUTURE ACCOUNTING REQUIREMENTS In May 2002, the FASB issued SFAS No. 145, Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002. The provisions of this Statement related to the rescission of SFAS No. 4 are effective for fiscal years beginning after May 15, 2002, while provisions related to SFAS No. 13 are effective for transactions occurring after May 15, 2002, and all remaining provisions of this Statement shall be effective for financial statements issued on or after May 15, 2002. This Statement eliminates SFAS No. 4, as a result, gains and losses from extinguishment of debt should be classified as extraordinary items if they meet the criteria of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. This Statement also eliminates SFAS No. 44, which was established to provide accounting requirements for effects of transition for provisions of the Motor Carrier Act of 1980. The deregulation of intrastate operating rights and transition to the provisions of those laws being complete has necessitated the rescission of SFAS No. 44. This Statement also eliminates the need to have SFAS 64, which was an amendment to SFAS 4 and has been rescinded with this Statement. Lastly, this Statement amends SFAS 13, requiring lease modifications that have economic effects similar to sale-leaseback transactions to be accounted for in the same manner as sales-leaseback transactions. We are currently in the process of evaluating this Statement and do not expect the adoption of this Statement to have a material impact on our financial statements and results of operations. In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS 144 replaces FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The FASB issued FAS 144 to establish a single accounting model, based on the framework established in FAS 121, as FAS 121 did not address the accounting for a segment of a business accounted for as a discontinued 13 operation under APB 30 "Reporting The Results of Operations - Reporting The Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and Infrequently Occurring Events and Transactions." FAS 144 also resolves significant implementation issues related to FAS 121. Companies are required to adopt FAS 144 for fiscal years beginning after December 15, 2001, but early adoption is permitted. We have not yet determined the impact, if any, this standard will have on our operating results and financial position. In July 2001, the FASB also issued FAS 142 "Goodwill and Other Intangible Assets". FAS 142 addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets at acquisition. FAS 142 presumes that goodwill and certain intangible assets have indefinite useful lives. Accordingly, goodwill and certain intangibles with indefinite lives will not be amortized, but rather will be tested at least annually for impairment. FAS 142 also addresses accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. FAS 142 is effective for fiscal years beginning after December 15, 2001. As of the date of this filing, we have initiated the process to implement FAS 142 and anticipate the completion of the first implementation step, which is to obtain a valuation for the company which will screen for the potential impairment of goodwill, by December 31, 2002. As FAS 142 utilizes a different accounting model than the current accounting standard, possible impairment of our goodwill could be determined as a result of this step. CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report, including Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature, including by way of example, but not limited to, the statements made in "Net Product Sales" regarding the continued trend of Korean system sales, "Liquidity" regarding anticipated cash requirements and the adequacy of our current means to be able to meet those requirements. Such forward-looking statements are subject to uncertainties such as anticipated sales trends, improved lead generation and recruiting and the ability to obtain financing for the end consumer through consumer financing companies. Such uncertainties are difficult to predict and could cause our actual results of operation to differ materially from those matters expressed or implied by such forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to interest rate risk is related to our borrowings. Fixed rate borrowings may have their fair market value adversely impacted from changes in interest rates. Variable rate borrowings will lead to additional interest expense if interest rates increase. As of June 30, 2002, we had $801,000 outstanding under our credit facility bearing interest at the prime rate. If interest rates were to increase 50 basis points (0.5%) from the June 30, 2002 rates and assuming no changes in outstanding debt levels from the June 30, 2002 levels, we would realize an increase in our annual interest expense of approximately $4,000. 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) INDEX TO EXHIBITS 3.1 Certificate of Incorporated by reference from Annual Report Incorporation on form 10-K for the year ended September 30, 1995 3.2 Bylaws Incorporated by reference from Annual Report on form 10-K for the year ended September 30, 1995 3.3 Amended Bylaws Incorporated by reference from Form 8-K filed on February 19, 2002. 10.00 Material Contract Firstar Bank, NA Revolving Credit Agreement, incorporated by reference from Form 10-Q for the period ended March 31, 2002. 10.01 Material Contract 13-D Settlement Agreement incorporated by reference from Form 8-K filed on February 19, 2002 (b) REPORTS ON FORM 8-K No report on Form 8-K was filed during the quarter ended June 30, 2002. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HMI Industries Inc. ------------------- (Registrant) Date: August 14, 2002 /s/ Julie A. McGraw --------------- ------------------------------------ Julie A. McGraw Vice President - Chief Financial Officer CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF HMI INDUSTRIES INC. PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report on Form 10-Q (the "Report") for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof, each of the undersigned certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of HMI Industries Inc. /s/ James R. Malone /s/ Julie A. McGraw - ----------------------- ----------------------- James R. Malone Julie A. McGraw Chief Executive Officer Chief Financial Officer August 14, 2002 August 14, 2002 15 -----END PRIVACY-ENHANCED MESSAGE-----