<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
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OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _______________ to _______________
Commission File Number 2-30905
HMI INDUSTRIES INC.
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(Exact name of Registrant as Specified in Its Charter)
DELAWARE 36-1202810
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
Genesis Building, 6000 Lombardo Center, Suite 500, Seven Hills, Ohio 44131
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (216) 986-8008
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes X No ____
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 July 19, 2000
------------------------------------ ----------------------------------
Common stock, $1 par value per share 6,630,625
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<TABLE>
<CAPTION>
INDEX
<S> <C>
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........................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................9
Results of Operations.......................................................................................9
Liquidity and Capital Resources-...........................................................................14
Cautionary Statement for "Safe Harbor" Purposes Under the Private Securities Litigation Reform Act of 1995.15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................16
PART II. OTHER INFORMATION......................................................................................16
ITEM 1. LEGAL PROCEEDINGS....................................................................................16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................16
ITEM 5. OTHER INFORMATION....................................................................................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................17
(a) Index to Exhibits......................................................................................17
(b) Reports on Form 8-K....................................................................................17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, September 30,
2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,388,283 $ 764,719
Trade accounts receivable (net of allowance of $614,921
and $691,205) 3,128,134 2,233,356
Notes receivable (due within one year) 105,211 105,211
Inventories:
Finished goods 2,024,201 1,697,577
Work-in-progress, raw material and supplies 1,099,013 1,136,980
Deferred income taxes 1,672,126 1,458,480
Prepaid expenses 207,454 177,199
Other current assets 43,392 46,471
------------------------------------------------------------------------------------------------------------
Total current assets 9,667,814 7,619,993
------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 1,450,823 1,005,848
------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Long-term notes receivable (less amounts due within one year) 61,373 140,281
Cost in excess of net assets of acquired businesses
(net of amortization of $3,186,270 and $3,002,144) 6,031,113 6,218,464
Deferred income taxes 1,924,541 2,138,187
Unamortized trademarks 303,266 260,832
Other 354,502 81,496
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Total other assets 8,674,795 8,839,260
------------------------------------------------------------------------------------------------------------
Total assets $ 19,793,432 $ 17,465,101
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 2,194,968 $ 2,887,198
Income taxes payable 943,682 1,015,730
Accrued expenses and other liabilities 2,805,414 3,062,879
Long-term debt due within one year 16,484 41,929
------------------------------------------------------------------------------------------------------------
Total current liabilities 5,960,548 7,007,736
------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 75,636 -
Other - 131,156
------------------------------------------------------------------------------------------------------------
Total long-term liabilities 75,636 131,156
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STOCKHOLDERS' EQUITY:
Preferred stock, $5 par value; authorized, 300,000
shares; issued, none - -
Common stock, $1 par value; authorized, 10,000,000 shares;
issued, 6,622,625 shares 6,622,625 5,368,556
Capital in excess of par value 8,172,141 7,561,586
Unearned compensation, net 7,091 (96,515)
Retained deficit (172,180) (1,512,922)
Other comprehensive loss (Note 7) (872,429) (868,197)
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13,757,248 10,452,508
Less treasury stock -0- and 32,233 shares, respectively,
at cost - 126,299
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Total stockholders' equity 13,757,248 10,326,209
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Total liabilities and stockholders' equity $ 19,793,432 $ 17,465,101
============================================================================================================
</TABLE>
See notes to consolidated condensed financial statements.
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CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended June 30, For the nine months ended June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
REVENUES:
Net product sales $ 8,312,578 $ 8,710,672 $ 26,447,264 $ 27,402,275
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OPERATING COSTS AND EXPENSES:
Cost of products sold 5,019,300 5,696,620 15,761,899 18,701,015
Selling, general and administrative
expenses 2,997,770 3,403,937 9,848,924 10,566,545
Interest expense 15,855 12,933 34,468 57,509
Impairment loss (Note 8) - - - 2,664,574
Other (income) expenses (74,653) (41,004) (134,769) (190,537)
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Total expenses 7,958,272 9,072,486 25,510,522 31,799,106
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Income (loss) before income taxes 354,306 (361,814) 936,742 (4,396,831)
Provision for income taxes - 19,000 21,000 58,000
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INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS 354,306 (380,814) 915,742 (4,454,831)
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Gain (loss) on disposal of Bliss
Manufacturing (net of taxes of $-0-) 425,000 - 425,000 (375,000)
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NET INCOME (LOSS) $ 779,306 $ (380,814) $ 1,340,742 $ (4,829,831)
=====================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 6,615,012 5,317,012 5,936,133 5,240,501
Diluted 6,627,390 5,317,012 5,944,350 5,240,501
=====================================================================================================================
BASIC PER SHARE OF COMMON STOCK (NOTE 6):
Income (loss) before discontinued
operations $ 0.054 $ (0.072) $ 0.154 $ (0.850)
Gain (loss) on disposals $ 0.064 $ - $ 0.072 $ (0.072)
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Net income (loss) $ 0.118 $ (0.072) $ 0.226 $ (0.922)
=====================================================================================================================
DILUTED PER SHARE OF COMMON STOCK
(NOTE 6):
Income (loss) before discontinued
operations $ 0.053 $ (0.072) $ 0.154 $ (0.850)
Gain (loss) on disposals
$ 0.064 $ - $ 0.071 $ (0.072)
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Net income (loss)
$ 0.117 $ (0.072) $ 0.225 $ (0.922)
=====================================================================================================================
CASH DIVIDENDS PER COMMON SHARE $ - $ - $ - $ -
=====================================================================================================================
</TABLE>
See notes to consolidated condensed financial statements.
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended June 30,
2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,340,742 $(4,829,831)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
USED IN OPERATING ACTIVITIES:
Depreciation and amortization 593,626 655,099
Impairment of asset -- 2,664,574
Provision for loss on sale/disposal of assets 11,952 47,331
(Gain) loss on disposal of discontinued operation (425,000) 375,000
Treasury/common shares issued, net of unearned
compensation 168,609 534,230
Provision for losses on receivables 48,224 --
Deferred income taxes -- (500)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in receivables (864,094) 1,697,441
(Increase) decrease in inventories (288,657) 1,203,066
(Increase) decrease in prepaid expenses (30,255) 212,584
Decrease (increase) in other current assets 3,079 (66,758)
Decrease in accounts payable (692,230) (2,356,482)
Increase (decrease) in accrued expenses and
other liabilities 36,379 (574,141)
Decrease in income taxes payable (72,048) (148,217)
Other, net (346,724) 251,360
-------------------------------------------------------------------------------------------------
Net cash used in operating activities (516,397) (335,244)
-------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets -- 792,670
Capital expenditures (739,400) (41,744)
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Net cash (used in) provided by investing activities (739,400) 750,926
-------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,925,944 --
Net repayments under credit facility -- (357,864)
Payment of long term debt (46,583) (90,692)
-------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,879,361 (448,556)
-------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash 623,564 (32,874)
equivalents
Cash and cash equivalents, beginning of period 764,719 51,365
-------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,388,283 $ 18,491
=================================================================================================
</TABLE>
See notes to consolidated condensed financial statements.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS FOR PREPARATION OF THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 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 condensed
consolidated financial statements and related notes should be read in
conjunction with the consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the fiscal year ended September
30, 1999. Operating results for interim periods are not necessarily indicative
of operating results for an entire fiscal year.
2. RECLASSIFICATION
Certain amounts in the 1999 consolidated condensed financial statements have
been reclassified to conform to the 2000 presentation.
3. 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.
Direct-response advertising consists primarily of design and development costs
incurred in connection with a Filter Queen television spot, which directs
viewers to call a 1-800-number to purchase our products. The capitalized costs
of the advertisement will be amortized over a twelve-month period following the
first introduction of the advertisement into our Americas sales division, which
is anticipated in the fall of 2000.
At June 30, 2000, $164,600 of advertising was reported as assets.
4. DISCONTINUED OPERATIONS
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. The accrual was established based on an independent third
party assessment of the costs associated with remediation efforts.
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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. Therefore, in June 2000, the $425,000 reserve recorded in
accordance with the Purchase Agreement, was reversed to income and recorded as a
gain on disposal of discontinued operations in the Consolidated Condensed
Statement of Income.
5. 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 second quarter of
fiscal 2000, by entering into three capital leases totaling $96,800, we incurred
debt in exchange for assets. The assets consist of racking and compactors for
our Strongsville, Ohio manufacturing facility.
6. 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):
<TABLE>
<CAPTION>
Nine Months Ended June 30,
----------------------------
2000 1999
------------------------- --------------------------
Per Per
Share Share
Shares Amount Shares Amount
---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Basic EPS 5,936 $ 0.226 5,240 $ (0.922)
Effect of dilutive stock options 8 $ (0.001) - $ -
---------- ---------- --------- -----------
Diluted EPS 5,944 $ 0.225 5,240 $ (0.922)
========== ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
2000 1999
------------------------- --------------------------
Per Per
Share Share
Shares Amount Shares Amount
---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Basic EPS 6,615 $ 0.118 5,317 $ (0.072)
Effect of dilutive stock options 12 $ (0.001) - $ -
---------- ---------- --------- -----------
Diluted EPS 6,627 $ 0.117 5,317 $ (0.072)
========== ========== ========= ===========
</TABLE>
As of June 30, 2000, 421,800 outstanding options, subject to purchase, were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares. The exercise
prices of these options range from $1.50 to $11.63 per share and expire between
the period January 2, 2001 and February 18, 2004.
In August 2000, management anticipates the allocation of 215,000 stock options
at an exercise price of $1.0625. The majority of these options would vest
immediately and would have an expiration date of March 8, 2005. Mr. James R.
Malone, our Chairman and Chief Executive
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<PAGE> 8
Officer, had been authorized by our Board of Directors to designate key
employees to participate in an equity pool created as part of our private stock
offering, which was completed March 1, 2000. All 215,000 options would have been
dilutive at June 30, 2000, as their exercise price was lower than the average
market price of the common shares for the quarter ending June 30, 2000. However,
these options would have had a zero dollar impact on the dilutive per share of
common stock calculation for the three and nine months ended June 30, 2000.
The denominators for calculating our basic and diluted earnings per share were
identical as of June 30, 1999 as the outstanding options were not assumed as the
result would have been anti-dilutive since a loss from continuing operations
existed for this period.
7. 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 shareholders' 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 $770,800 and $1,336,500 for the three and nine months
ended June 30, 2000, respectively and comprehensive loss of $365,100 and
$4,794,100 for the corresponding periods ending June 30, 1999.
8. PROPERTY, PLANT AND EQUIPMENT
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 $840,000. The net book value of the related land and building at
the time of sale was $3,504,600. In December 1998 we recorded a non-cash
impairment loss of $2,664,600 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
Condensed Statement of Income.
9. CREDIT FACILITY AND LONG-TERM DEBT
Our credit facility agreement includes, but is not limited to, various covenants
that limit our ability to incur additional indebtedness, limit compensation to
key personnel and transactions with affiliates, restrict paying dividends, limit
book net worth and limit the ability for capital expenditures. On December 17,
1999, we entered into an agreement with our lender to reset certain of these
covenants in anticipation of exceeding the previous established levels during
our fiscal year ending September 30, 2000. There were no covenant violations
under the credit facility agreement as of June 30, 2000.
During the quarter ended March 31, 2000, we entered into capital leases totaling
$96,800. These leases, with a term of 60 months, require monthly payments,
principal and interest, of $2,000. The nominal annual interest rates on these
leases range from 2.62% to 12.0%, compounding monthly.
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<PAGE> 9
10. ACCRUED EXPENSES AND OTHER LIABILITIES
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 $331,500. The actuarial study was
commissioned in an attempt to better refine the existing calculation and to
provide the credibility of a third party verification.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
NET PRODUCT SALES-
THIRD QUARTER OF FISCAL 2000 COMPARED TO THIRD QUARTER OF FISCAL 1999
Net product sales of $8,312,600 for the quarter ended June 30, 2000, decreased
by $398,100 or 4.6% as compared to $8,710,700 for the same quarter in fiscal
1999. The decrease in sales is primarily related to the decline in sales in Asia
and Canada of $578,100 and $341,600, respectively, offset by increases in the
Americas, Eastern Europe/Middle East, and Western Europe of $320,800, $105,700,
and $88,000, respectively.
The unfavorable sales in both Asia and Canada are driven primarily by a decrease
in Majestic(R) sales. The Asian decrease is largely due to the reorganization of
the territories within the Japanese distribution network by the Japanese
importer. A strategy is being finalized with the assistance of an outside
consultant and we are hopeful that this strategy, once implemented, will return
this market to at least its historical sales levels. The Canadian decrease is
largely due to the recent consolidation of consumer credit lenders (similar to
the situation experienced in the U.S. market in fiscal 1999). To assist with
this situation, our financing consultant is working with the Canadian importer
to obtain a national financing plan similar to the one obtained in the U.S. in
the fourth quarter of fiscal 1999.
The growth in the Americas is primarily the result of increased Defender(R)
volume which is largely attributable to the marketing of our products (the
Majestic(R) and Defender(R)) as a side-by-side system (IAQS - Indoor Air Quality
System) rather than as "stand-alone" products. Defender(R) unit sales as a
percentage of Majestic(R) unit sales have risen from 58% in fiscal 1998, to 72%
and 85% for fiscal 1999 and the nine months ended June 30, 2000, respectively.
The Eastern European/Middle Eastern increase is due to increased sales from
Turkey and Norway. In fiscal 2000, these importers have increased their volume
enough to be able to place container-sized orders directly from HMI. As such,
they are no longer purchasing product from our Holland importer, as was done in
fiscal 1999.
The increase in Western Europe is largely due to higher Majestic(R) sales to
Portugal of approximately $517,500. Portugal has continued to purchase product
at the fiscal 2000 year-to-date average, whereas in 1999 they reduced their
orders during the third quarter to lower their inventory levels in anticipation
of lower sales during the summer months. Offsetting this
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<PAGE> 10
increase is decreased Defender(R) volume of $106,200. This is a result of
decreased sales to our Holland importer due to the fact that Norway is now
ordering directly from HMI and a drastic decline in the growth in Slovenian
sales due to the economic crisis in that region. In fiscal 1999 Norway and
Slovenia comprised approximately 73% of our Holland importer's Defender(R)
sales.
FIRST NINE MONTHS OF FISCAL 2000 COMPARED TO FIRST NINE MONTHS OF FISCAL
1999
Net product sales for the nine months ended June 30, 2000, were $26,447,300.
This represents a decrease of $955,000 or 3.5% when compared to $27,402,300 of
product sales for the nine months ended June 30, 1999. This decline is primarily
the result of decreased Majestic(R) sales in Asia of $1,368,400 coupled with
overall sales declines in Western Europe, Canada, and the Americas of $460,800,
$245,900, $195,600, respectively. Offsetting these decreases is an overall sales
increase in Eastern Europe/Middle East of $1,205,600.
The rationale for the above variances pertaining to Asia, Canada, and Eastern
Europe/Middle East is primarily the same as those discussed in the third quarter
of fiscal 2000 compared to third quarter of fiscal 1999 discussions above.
The decline in the Americas division is related to year-to-date Majestic(R)
sales, which were $363,400 lower than the prior year. This decrease was offset
by a $184,300 increase in Defender(R) sales (see Quarter Vs. Prior Year
discussion regarding Defender(R) sales growth). Approximately 95% of the
Americas unfavorable Majestic(R) sales variance occurred during the first
quarter of fiscal 2000. This is attributable to the fact that Majestic(R) sales
in the Americas have remained below last year's figures primarily due to
recruiting challenges and consumer financing constraints. The sustained, strong
U.S. economy makes recruiting much more difficult. As a result, not as many
people enter the "Edge Success Program" (the "Edge") or open new offices. 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 cooperation
with Eckerd College in Florida. The program addresses everything from in-home
demonstration techniques to generation of sales leads, personnel recruiting,
compliance matters, and other aspects of owning and operating a distributorship.
Although the availability of consumer financing has diminished following the
merger of Beneficial and Household Finance and Avco Financial Services, the two
largest U.S. consumer credit companies, a new national financing deal has been
instrumental in improving the closing rate of financed sales. As we continue to
make progress with these issues, we hope to continue the upward trend of
increasing monthly sales.
The decrease in Western European sales from fiscal 1999 is largely due to
decreased Defender(R) volume. This is a result of decreased sales to our Holland
importer due to the fact that Norway is now ordering directly from HMI and a
drastic decline in the growth in Slovenian sales due to the economic crisis in
that region. In fiscal 1999 Norway and Slovenia comprised approximately 73% of
our Holland importer's Defender(R) sales.
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<PAGE> 11
FINANCING REVENUE-
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. Any remaining monies received relating to this business are recorded
in the other income/expense line of our Consolidated Condensed Financial
Statements. Therefore, finance revenue of $91,600 and $355,600 for the three and
nine months ended June 30, 1999, respectively, has been reclassified to conform
to the 2000 presentation.
GROSS PROFIT-
THIRD QUARTER OF FISCAL 2000 COMPARED TO THIRD QUARTER OF FISCAL 1999
The gross margin for the quarter ended June 30, 2000, was $3,293,300 or 39.6% of
sales as compared to $3,014,100 or 34.6% of sales in 1999, an increase of
$279,200. This increase in gross margin is largely attributed to a reduction in
material and overhead costs of $465,400 and $13,200, respectively, as well as an
unfavorable sales volume variance of $199,300 due to the decreased quarter over
quarter sales. Favorable material costs are principally the result of
management's on-going focus to improve quality and reduce costs. The key areas
in which material cost reductions have been obtained are filtration products and
motors, two of the primary components of our products. Additionally, process
improvements and operation efficiencies brought about by Total Quality Control
procedures have reduced direct labor costs in our manufacturing plant.
Reduced LIFO and obsolescence expenses have also had a favorable impact on
material costs. The LIFO reserve has been reduced by $51,000 as a result of the
decline in raw material inventories from the prior year and inventory
obsolescence has been reduced due to the sale of approximately $47,500 of
product previously reserved as obsolete.
FIRST NINE MONTHS OF FISCAL 2000 COMPARED TO FIRST NINE MONTHS OF FISCAL
1999
The gross margin for the nine months ended June 30, 2000, was $10,685,400 or
40.4% of sales as compared to $8,701,300 or 31.8% of sales in 1999. This
increase in the gross margin of $1,984,100 is principally attributed to a
reduction in material and overhead costs of $2,198,000 and $236,100,
respectively, resulting from the aforementioned focus to improve quality and
reduce costs. The lower year-to-date sales volume negatively impacted the gross
margin by $449,100. Since December 1998 we have driven down the cost of our
motors and filters, two of the primary components of our products, reduced labor
costs and implemented Total Quality Control procedures in our manufacturing
plant. In addition, our parts specifications have been conveyed clearly to our
suppliers who must meet our specifications. Vendor charge backs have become the
norm when parts fail our quality inspection. These are examples of where
attention to cost and quality has directly resulted in improved gross margins.
Material costs have also been favorably impacted by LIFO and obsolescence
expenses. The LIFO reserve has been reduced by $123,400 as a result of the
decline in raw material inventories from the prior year. Inventory obsolescence
has been reduced $435,900 due to a large adjustment recorded in the prior year
for motors and product changes, as well as better purchasing and inventory
controls in the current year.
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<PAGE> 12
SELLING, GENERAL, AND ADMINISTRATIVE-
THIRD QUARTER OF FISCAL 2000 COMPARED TO THIRD QUARTER OF FISCAL 1999
SG&A expenses for the quarter ended June 30, 2000, were $2,997,800 or 36.1% of
sales as compared to $3,403,900 or 39.1% of sales for the same period in fiscal
1999, representing a decrease of $406,200. The decrease in SG&A expenses from
the prior year is primarily attributable to an adjustment made to the accrued
liability and related expense for a certain distributor development program.
This adjustment was based on the results of an actuarial study and resulted in a
non-cash credit to income of $331,500. The actuarial study was commissioned in
an attempt to better refine the existing calculation and to provide the
credibility of a third party verification. The decrease is also due to lower
commission expense of $218,800 as a result of lower current quarter sales.
Increased benefits expenses of $145,200 partially offset these reductions from
the prior year. The increase in benefit expenses is primarily due to accrued
profit sharing expense (an accrual was not recorded in the prior year due to
financial results) and a company match on 401(k) contributions which commenced
October 1, 1999.
FIRST NINE MONTHS OF FISCAL 2000 COMPARED TO FIRST NINE MONTHS OF FISCAL
1999
SG&A expenses for the nine months ended June 30, 2000 were $9,848,900 or 37.2%
of sales as compared to $10,566,500 or 38.6% of sales for the period ended June
30, 1999, representing a decrease of $717,600. This is primarily due to the
aforementioned distributor development program adjustment of $331,500, as well
as decreased commission expense of $574,600 resulting from the reduced level of
sales. Additionally, sales convention and career development expenses were down
$328,300 from the same period in the prior year due to the rescheduling of the
European annual sales convention and lower Asian sales. These lower expenses
were offset by increased benefits expenses of $467,800 (see above explanation)
and increased bad debt expense of $175,300 due to a favorable adjustment that
was recorded to the bad debt reserve in the prior year.
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 $840,000.
The net book value of the related land and building at the time of sale was
$3,504,600. In December 1998, we recorded a non-cash impairment loss of
$2,664,600 on the building to reflect the difference between the sales price and
the net book value of the property.
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. The accrual was established based on an independent third
party assessment of the costs associated with remediation efforts.
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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. Therefore in June 2000 the $425,000 reserve, recorded in
accordance with the Purchase Agreement, was reversed to income and recorded as a
gain on disposal of discontinued operations in the Consolidated Condensed
Statement of Income.
INCOME TAXES-
The effective income tax rate for the nine months ended June 30, 2000 is 2.2%.
The effective rate is attributable to a provision for state taxes. The federal
tax provision has been offset by the utilization of net operating loss
carryforwards not previously recognized.
YEAR 2000
GENERAL
Older computer software programs that use two digits rather than four digits to
identify the year in a date field have been and continue to be a concern for
year 2000. If not corrected, many computer applications may fail to treat dates
intended to represent years in the twenty-first century as such but instead
treat them as still in the twentieth century. This could potentially result in
system failures or miscalculations disruptive of business operations, including,
among other things, an inability to initiate, receive, process, invoice or
otherwise complete normal business activities. These Year 2000 issues affect
virtually all companies and organizations.
SYSTEMS
Through the use of internal personnel and outside consultants, we performed a
detailed review to assess the impact of the Year 2000 issue on our continuing
operations and actively addressed each issue noted during our review. All
non-compliant IT and non-IT hardware and software was remediated or replaced to
meet Year 2000 compliance. Individual components, sub-systems, and systems were
thoroughly tested before they were installed. In addition a full compliance test
was completed in November 1999. Testing attempted to verify that all systems
functioned correctly and extended to interfaces with key business partners.
Additionally, our distribution network and our vendors were contacted to ensure
their compliance with Year 2000 issues. No negative responses were received.
Contingency plans were also developed. Approaches to reducing risks of
interruption due to supplier failures included identification of alternate
suppliers and utility providers, accumulation of inventory to assure production
capability where warranted, and establishment of crisis teams to address
unexpected problems. These activities were intended to provide a means of
managing risk, but could not eliminate the potential for disruption due to third
party failure. The inventory accumulation plan included a 60% increase in raw
material safety stock and a buildup of extra finished goods.
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RISKS
As of the date of this filing, we have not experienced any material business
disruptions as a result of our internal IT and non-IT systems or applications,
and have not experienced any problems with the IT and non-IT systems or
applications of our third party vendors, service providers or distributor
network. However, while no such occurrence has developed, Year 2000 issues may
arise that may not become immediately apparent. Therefore, we will continue to
monitor and work to remediate any issues that may arise. Although we expect not
to be materially impacted, such future events cannot be known with certainty.
LIQUIDITY AND CAPITAL RESOURCES-
OPERATING ACTIVITIES
Cash flows from operating activities utilized net cash of $516,400 for the nine
months ended June 30, 2000, principally due to cash inflows resulting from
non-cash adjustments of $397,400 and net income of $1,340,700. These inflows of
cash were offset by decreases of $692,200 and $346,700 in accounts payable and
other operating activities, respectively and increased accounts receivable and
inventories of $864,100 and $288,700, respectively.
Non-cash adjustments consist primarily of depreciation and amortization,
treasury/common shares issued, and gain on the disposal of assets related to the
Bliss Manufacturing sale.
Cash disbursements for the quarter ended June 30, 2000 were approximately
$550,000 greater than purchases recorded for the same time period thus resulting
in a decreased accounts payable balance. This decrease was partially a result of
the $287,000 decrease in raw material purchases due to the decreased sales
volume in the third quarter of fiscal 2000. Cash inflows from other operating
activities consist primarily of direct-response advertising costs incurred in
connection with a Filter Queen television spot.
The increase in accounts receivable is primarily the result of two large
international customers having decided to forego their prepaid discounts in
favor of their "net 30" terms due to the status of the Euro and other cash
related issues. Increases in finished goods inventory primarily drove the
increase in total inventories. Finished goods inventory has been increased to
provide a level of "safety stock" that allows for flexibility in quickly
responding to unforecasted demand for the various SKU's. Also effecting the
inventory increase were third quarter fiscal 2000 adjustments for obsolescence,
and LIFO, as well as the lower than expected June 2000 sales volume.
INVESTING ACTIVITIES
Capital expenditures of $739,400 represent the entire net cash used in investing
activities for the nine months ended June 30, 2000, the largest portion of which
relates to leasehold improvements for our new manufacturing facility.
FINANCING ACTIVITIES
Net cash provided by financing activities consists of $1,925,900 related to the
net proceeds from the sale of common stock, offset by payments of long-term debt
in the amount of $46,600.
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In November 1999, we announced that we expected to offer for sale up to
2,500,000 shares of our common stock in a transaction exempt from the
registration requirements under federal securities law. On March 1, 2000, we
successfully completed this private offering, at $1.625 per share of Common
Stock, generating approximately $2 million in additional capital. 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 will be used in the implementation 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.
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 is 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.
Our credit facility agreement includes, but is not limited to, various covenants
that limit our ability to incur additional indebtedness, limit compensation to
key personnel and transactions with affiliates, restrict paying dividends, limit
book net worth and limit the ability for capital expenditures. On December 17,
1999, we entered into an agreement with our lender to reset certain of these
covenants in anticipation of exceeding the previous established levels during
our fiscal year ending September 30, 2000. There were no covenant violations
under the credit facility agreement as of June 30, 2000.
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
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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" regarding the return of the Japanese market to its
historical sales levels and Americas ability to continue the upward sales trend,
and "Year 2000" concerning the uncertainty of the impact of any future events
and the impact of these events on our future operating results, financial
condition and cash flows. Such forward-looking statements are subject to
uncertainties such as anticipated sales trends and future Year 2000 issues. 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
Not applicable.
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) INDEX TO EXHIBITS
<S> <C> <C>
10.00 Material Contracts Finova Loan and Security Agreement
Covenant Amendment Letter
dated December 17, 1999,
incorporated by reference from
Form 10-Q for the quarter
ended December 31, 1999.
10.01 Material Contracts Real Estate Sale Agreement and Amendment
to Real Estate Sale Agreement,
incorporated by reference from
Form 10-Q for the quarter
ended December 31, 1998.
10.02 Material Contracts Bliss Stock Purchase Agreement,
incorporated by reference from
Form 10-K/A3 for the year
ended September 30, 1997.
10.02 Material Contracts Bliss Stock Purchase Agreement Settlement
Letter, incorporated by
referenced from Form 10-Q for
the quarter ended March 31,
1999.
27.00 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which this report
is filed.
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 10, 2000 /s/ Julie A. McGraw
--------------- ------------------------
Julie A. McGraw
Vice President - Chief Financial
Officer
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