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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 March 31, 2000
--------------
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)
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
--------------
3631 Perkins Avenue, Cleveland, Ohio 44114
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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 April 6, 2000
------------------------------------ ----------------------------------
Common stock, $1 par value per share 6,606,931
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INDEX
<TABLE>
<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..................8
Results of Operations.......................................................................................8
Liquidity and Capital Resources-...........................................................................12
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......................................................................................14
ITEM 1. LEGAL PROCEEDINGS....................................................................................14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................14
ITEM 5. OTHER INFORMATION....................................................................................14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................15
(a) Index to Exhibits......................................................................................15
(b) Reports on Form 8-K....................................................................................15
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
March 31, September 30,
2000 1999
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,311,843 $ 764,719
Trade accounts receivable (net of allowance of $596,641
and $691,205) 3,139,544 2,233,356
Notes receivable 105,211 105,211
Inventories:
Finished goods 1,714,276 1,697,577
Work-in-progress, raw material and supplies 1,205,635 1,136,980
Deferred income taxes 1,555,677 1,458,480
Prepaid expenses 108,971 177,199
Other current assets 93,054 46,471
- -----------------------------------------------------------------------------------------------
Total current assets 10,234,211 7,619,993
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PROPERTY, PLANT AND EQUIPMENT, NET 1,230,853 1,005,848
- -----------------------------------------------------------------------------------------------
OTHER ASSETS:
Long-term notes receivable (less amounts due within one
year) 87,676 140,281
Cost in excess of net assets of acquired businesses
(net of amortization of $3,124,895 and $3,002,144) 6,101,008 6,218,464
Deferred income taxes 2,040,990 2,138,187
Unamortized trademarks 284,077 260,832
Other 186,867 81,496
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Total other assets 8,700,618 8,839,260
- -----------------------------------------------------------------------------------------------
Total assets $ 20,165,682 $ 17,465,101
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 2,734,544 $ 2,887,198
Income taxes payable 992,962 1,015,730
Accrued expenses and other liabilities 3,401,218 3,062,879
Long-term debt due within one year 16,879 41,929
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Total current liabilities 7,145,603 7,007,736
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LONG-TERM LIABILITIES:
Long-term debt (less amounts due within one year) 79,895 -
Other - 131,156
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Total long-term liabilities 79,895 131,156
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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, 6,602,552 shares 6,602,552 5,368,556
Capital in excess of par value 8,170,530 7,561,586
Unearned compensation, net (9,157) (96,515)
Retained deficit (951,486) (1,512,922)
Other comprehensive loss (Note 6) (863,934) (868,197)
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12,948,505 10,452,508
Less treasury stock 1,775 and 32,233 shares, respectively,
at cost 8,321 126,299
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Total stockholders' equity 12,940,184 10,326,209
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Total liabilities and stockholders' equity $ 20,165,682 $ 17,465,101
===============================================================================================
</TABLE>
See notes to consolidated condensed financial statements.
3
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CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31, For the six months ended March 31,
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net product sales $ 9,655,463 $ 9,519,630 $ 18,134,686 $ 18,691,603
Financing revenue and other 70 148,310 36,763 263,969
- ---------------------------------------------------------------------------------------------------------------------
9,655,533 9,667,940 18,171,449 18,955,572
OPERATING COSTS AND EXPENSES:
Cost of products sold 5,642,118 6,447,990 10,742,599 13,004,395
Selling, general and administrative expenses 3,740,627 3,888,692 6,851,154 7,162,608
Interest expense 8,989 16,253 18,613 44,576
Impairment loss (Note 4) - - - 2,664,574
Other (income) expenses (67,328) 66,113 (23,353) 114,436
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Total expenses 9,324,406 10,419,048 17,589,013 22,990,589
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Income (loss) before income taxes 331,127 (751,108) 582,436 (4,035,017)
Provision for income taxes 21,000 39,000 21,000 39,000
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INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS 310,127 (790,108) 561,436 (4,074,017)
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Loss on disposal of Bliss Manufacturing - (375,000) - (375,000)
(net of taxes of $-0-)
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NET INCOME (LOSS) $ 310,127 $ (1,165,108) $ 561,436 $ (4,449,017)
=====================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 5,846,161 5,222,659 5,596,693 5,202,245
Diluted 5,852,332 5,222,659 5,599,778 5,202,245
=====================================================================================================================
BASIC AND DILUTED PER SHARE OF COMMON
STOCK (NOTE 3):
Income (loss) before discontinued operations $ 0.05 $ (0.15) $ 0.10 $ (0.78)
Loss on disposals $ - $ (0.07) $ - $ (0.07)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.05 $ (0.22) $ 0.10 $ (0.85)
=====================================================================================================================
CASH DIVIDENDS PER COMMON SHARE $ - $ - $ - $ -
=====================================================================================================================
</TABLE>
See notes to consolidated condensed financial statements.
4
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended March 31,
2000 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 561,436 $(4,449,017)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 473,078 444,825
Impairment of asset - 2,664,574
Provision for loss on sale/disposal of assets 11,564 47,331
Loss on disposal of discontinued operation - 375,000
Treasury/common shares issued, net of unearned 122,362 371.492
compensation
Provision for losses on receivables 35,723 -
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in receivables (889,306) 1,013,883
(Increase) decrease in inventories (85,354) 999,067
Decrease in prepaid expenses 68,228 109,868
Increase in other current assets (46,583) (55,099)
Decrease in accounts payable (152,654) (1,648,035)
Increase (decrease) in accrued expenses and
other liabilities 207,183 (597,151)
Decrease in income taxes payable (22,768) (29,747)
Other, net (142,180) 240,314
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Net cash provided by (used in) operating activities 140,729 (512,695)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets - 792,670
Capital expenditures (477,620) (11,310)
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Net cash (used in) provided by investing activities (477,620) 781,360
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,925,944 -
Net repayments under credit facility - (256,838)
Payment of long term debt (41,929) (60,587)
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Net cash provided by (used in) financing activities 1,884,015 (317,425)
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Net increase (decrease) in cash and cash 1,547,124 (48,760)
equivalents
Cash and cash equivalents, beginning of period 764,719 51,365
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,311,843 $ 2,605
================================================================================================
</TABLE>
See notes to consolidated condensed financial statements.
5
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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. 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.
3. 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):
Six Months Ended March 31,
--------------------------
2000 1999
----------------- ----------------
Per Per
Share Share
Shares Amount Share Amount
------ ------ ----- ------
Basis EPS 5,597 $0.10 5,202 $(0.85)
Effect of dilutive stock options 3 $ - - $ -
----- ----- ----- ------
Diluted EPS 5,600 $0.10 5,202 $(0.85)
===== ===== ===== ======
6
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Three Months Ended March 31,
---------------------------
2000 1999
----------------- ----------------
Per Per
Share Share
Shares Amount Share Amount
------ ------ ----- ------
Basis EPS 5,846 $0.05 5,223 $(0.22)
Effect of dilutive stock options 6 $ - - $ -
----- ----- ----- ------
Diluted EPS 5,852 $0.05 5,223 $(0.22)
===== ===== ===== ======
As of March 31, 2000, 467,800 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 $1.31 to $11.63 per share and expire between
the period January 2, 2001 and February 18, 2004.
The denominators for calculating our basic and diluted earnings per share were
identical as of March 31, 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.
4. 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.
5. 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 March 31, 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.
7
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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 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 $307,600 and $565,700 for the three and six months ended
March 31, 2000, respectively and comprehensive loss of $1,147,600 and $4,429,000
for the corresponding periods ending March 31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
NET PRODUCT SALES-
Second Quarter of Fiscal 2000 Compared to Second Quarter of Fiscal 1999
-----------------------------------------------------------------------
Net product sales of $9,655,500 for the quarter ended March 31, 2000, increased
by $135,900 or 1.4% as compared to $9,519,600 for the same quarter in fiscal
1999. The increase in sales is primarily related to the growth in Eastern
Europe/Middle East, Western Europe and Canada of $822,600, $198,100 and
$145,000, respectively. Offsetting this increase is a $1,029,000 decline in
Asian sales.
The favorability in sales, both units and AMS (After Market Sales), in the
Eastern European/Middle Eastern region is primarily related to increased sales
in 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.
After adjusting his inventory levels, in the first quarter of fiscal 2000, to
reflect the then current conditions in his business, the sales volume for our
Holland importer has increased, thus creating a portion of the Western European
favorable variance from the prior year. The majority of the remaining Western
European sales increase is related to a U.K. importer. During the second quarter
of fiscal 1999, consumer financing companies used in England decreased from four
primary lenders to one thereby making it difficult for our importer's network to
obtain the consumer financing needed to complete sale transactions. To help
rectify this situation, we negotiated with a consumer finance professional who
identified and established new financial services, while revitalizing existing
relationships for the U.K. network. This helped to stabilize, in the fourth
quarter of fiscal 1999, the difficulties being experienced in the U.K. We have
begun to realize the benefit from this stabilization in the second quarter of
fiscal 2000, although, it was slightly offset due to decreased purchases from
this U.K. importer. The network in his region suffered several office closings
at the beginning of fiscal 2000 resulting from the loss of two master
distributors to a competitor. He has since restructured his business and is
working to rebuild his network.
8
<PAGE> 9
Sales of Majestic(R) and Defender(R) have increased in Canada from the same
period in 1999. The quarter over quarter growth is primarily due to the opening
of new offices in the Canadian territory. This in turn is due to a decision made
by the Canadian importer in the prior year to employ a full time recruiter to
build that network of distributors. This trend is expected to continue as the
recruiter works to increase the sales force of existing offices, which
eventually results in the opening of new offices, thereby growing the network
and increasing unit sales.
The decline in Asian sales is primarily attributable to our Japanese importer
reducing his inventory levels while he reorganizes the territories in his
distribution network.
First Six Months of Fiscal 2000 Compared to First Six Months of Fiscal 1999
---------------------------------------------------------------------------
Net product sales for the six months ended March 31, 2000 were $18,134,700. This
represents a decrease of $556,900 or 3.0% when compared to $18,691,600 of
product sales for the six months ended March 31, 1999. This decline in sales is
primarily the result of decreased Majestic(R) sales in Asia and the Americas of
$698,600 and $432,100, respectively and an overall sales decrease in Western
Europe of $548,900. Offsetting these decreases were increases in Eastern
European/Middle Eastern sales of $1,099,900.
The decline in Asian Majestic(R) sales is primarily attributable to our Japanese
importer reducing his inventory levels while he reorganizes the territories in
his distribution network. The overall decline in Asian sales due to the Japanese
situation has been offset by the continued growth in the Korean market over the
same period last year. Our redesign of the marketing structure in Korea from a
few importers to only one importer has been instrumental in focusing the sales
effort and growing the business.
Approximately 90% of the Americas unfavorable sales variance occurred during the
first quarter of the fiscal year. The second (current) quarter represents only a
10% decrease from the prior year. 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 year-to-date upward
trend of increasing monthly sales.
9
<PAGE> 10
The decrease in the Western European year-to-date sales, when compared to the
prior year, all occurred in the first quarter. In addition to the information
provided in the second quarter comparison section above, Defender(R) sales, in
the Western European area, also contributed to the unfavorable variance to prior
year; this is largely attributable to a reduction in orders from France and
Holland. Sales of the Defender(R) in France have decreased as their focus has
been on Majestic(R) sales in an effort to grow their business. Holland orders
are also down as they work to deplete their inventory of the old style of
Defender(R).
The rationale regarding the Eastern Europe/Middle East sales increase is
consistent with the information provided above in the Second Quarter of Fiscal
2000 Compared to the Second Quarter of Fiscal 1999 net product sales section.
FINANCING REVENUE-
Financing revenue represents the interest and fees generated on the contracts
financed by our Australian, Canadian, and United States Subsidiaries. The
decline in financing revenue is attributable to our decision in January 1998 to
discontinue the financing of contracts to the end customers.
GROSS PROFIT- (Exclusive Of Finance Revenue)
Second Quarter of Fiscal 2000 Compared to Second Quarter of Fiscal 1999
-----------------------------------------------------------------------
The gross margin for the quarter ended March 31, 2000 was $4,013,300 or 41.6% of
sales as compared to $3,071,600 or 32.3% of sales in 1999, an increase of
$941,700. This increase in gross margin is largely attributed to a reduction in
material and overhead costs of $841,600 and $34,300 respectively, and a
favorable sale volume variance of $64,700 due to the increased 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.
First Six Months of Fiscal 2000 Compared to First Six Months of Fiscal 1999
---------------------------------------------------------------------------
The gross margin for the six months ended March 31, 2000 was $7,392,100 or 40.8%
of sales as compared to $5,687,200 or 30.4% of sales in 1999. This increase in
the gross margin of $1,704,900 is principally attributed to a reduction in
material costs of $1,736,800, resulting from management's on-going focus to
improve quality and reduce costs. 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 back
has 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.
10
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SELLING, GENERAL, AND ADMINISTRATIVE-
Second Quarter of Fiscal 2000 Compared to Second Quarter of Fiscal 1999
-----------------------------------------------------------------------
SG&A expenses for the quarter ended March 31, 2000 were $3,740,600 or 38.7% of
sales as compared to $3,888,700 or 40.2% of sales for the same period in Fiscal
1999; this is a decrease of $148,100 or 1.5% of sales. The decrease in SG&A
expenses is primarily attributable to lower commission expense of $236,800 due
to sales mix and the restructuring of our AMS commission program and lower legal
fees of $166,000. These reduced expenses were offset by increased rent for the
new office facility and expenses related to the relocation, which were $160,100
for the current quarter. Benefit expenses were also $90,800 higher than the
prior year, primarily due to a higher 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, offset by reduced
restricted stock expense.
First Six Months of Fiscal 2000 Compared to First Six Months of Fiscal 1999
---------------------------------------------------------------------------
SG&A expenses for the six months ended March 31, 2000 were $311,500 lower when
compared to the six months ended March 31, 1999, $6,851,200 or 37.7% of sales
versus $7,162,600 or 37.8%, respectively. This was primarily due to commission
expense that was $355,600 lower than the prior year as a result of the reduced
level of sales; reduced MIS equipment rental of $200,000; and reduced legal
expense of $119,500. Sales meetings and career development expenses were also
down $238,000 in total from the same period in the prior year due to
rescheduling the European annual sales convention and lower Asian sales. These
lower expenses were offset by increased employee and benefit expenses of
$283,000, expenses related to the rent and relocation of the corporate offices
of $171,600, and increased bad debt expense of $162,800 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.
INCOME TAXES-
The effective income tax rate for the three and six months ended March 31, 2000
is 6.3% and 3.6%, respectively. 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.
11
<PAGE> 12
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.
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 provided net cash of $140,700 for the six
months ended March 31, 2000, principally due to cash inflows resulting from
increases in accrued expenses and other liabilities of $207,200, non-cash
adjustments of $642,700, primarily relating to depreciation and amortization,
and net income of $561,400. These inflows of cash were offset by decreases of
$152,700 and $142,200 in accounts payable and other operating activities,
respectively and increased accounts receivable of $889,300.
Increased employee benefit accruals, primarily profit sharing, relocation and
product liability expenses, account for the majority of the increase in accrued
expenses and other liabilities. The increase in accounts receivable is largely
attributed to increased sales volume in March 2000 when compared to the sales
level in September 1999.
Investing Activities
--------------------
Capital expenditures of $477,600 represent the entire net cash used in investing
activities for the six months ended March 31, 2000, the largest portion of which
relates to leasehold improvements for our new manufacturing facility.
12
<PAGE> 13
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 $41,900.
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 March 31, 2000.
13
<PAGE> 14
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, but not limited to, the statements made in "Net Product
Sales" regarding the Canadian and Americas ability to continue the positive
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.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) INDEX TO EXHIBITS
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.
27.00 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On January 14, 2000, we filed a Form 8-K with the Commission, announcing our
approximated earnings for the first quarter ended December 31, 1999.
On February 4, 2000, we filed another Form 8-K with the Commission announcing
the resignation of our Chief Financial Officer.
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: May 17, 2000 /s/ Julie A. McGraw
----------- --------------------------------
Julie A. McGraw
Vice President - Chief Financial
Officer
15
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<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 2,311,843
<SECURITIES> 0
<RECEIVABLES> 3,929,072
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<COMMON> 6,602,552
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