10-K 1 l11072ae10vk.txt HMI INDUSTRIES INC. 10-K/FISCAL YEAR END 9-30-04 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 2-30905 HMI INDUSTRIES INC. (Exact name of registrant as specified in its charter) DELAWARE 36-1202810 -------------------------------- ----------------------------------- State or other jurisdiction of (IRS Employer Identification No.) Incorporation or organization) 13325 Darice Parkway, Unit A, Strongsville, Ohio 44149 ---------------------------------------------------- ----------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (440) 846-7800 Securities registered pursuant to Section 12(b) of the Act: None ---------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Title of class -------------- Common Stock, $1 par value per share Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past ninety (90) days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act). Yes [ ] No [X] The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the average bid and asked price in the Pink Sheets, as of March 31, 2004 was $1,485,386. The number of shares outstanding of the registrant's common stock was 6,745,609 as of November 30, 2004. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant's 2005 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant's fiscal year ended September 30, 2004. Index to Exhibits is found on page 28. This report consists of 57 pages. ================================================================================ 1 TABLE OF CONTENTS PART I.............................................................................................. 2 ITEM 1. BUSINESS................................................................................. 2 ITEM 2. PROPERTIES............................................................................... 9 ITEM 3. LEGAL PROCEEDINGS........................................................................ 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 10 PART II............................................................................................. 10 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES................................................................... 10 ITEM 6. SELECTED FINANCIAL DATA.................................................................. 13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (DOLLARS IN THOUSANDS)....... 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................. 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 25 ITEM 9A. CONTROLS AND PROCEDURES................................................................. 25 ITEM 9B. OTHER................................................................................... 26 PART III............................................................................................ 26 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.......................................... 26 ITEM 11. EXECUTIVE COMPENSATION.................................................................. 26 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................... 26 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 26 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.................................................. 26 PART IV............................................................................................. 27 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................... 27 SIGNATURES.......................................................................................... 30

1 PART I (DOLLARS IN THOUSANDS) ITEM 1. BUSINESS In this document, the words "HMI," "the Company," "we," "our," "ours," and "us" or any derivation thereof, refer only to HMI Industries Inc., and its direct or indirect subsidiaries and not any other person or entity. GENERAL DEVELOPMENT OF THE BUSINESS We are a manufacturer of high quality indoor air filtration systems whose products are sold exclusively through a worldwide direct sales channel. We provide our direct sellers an opportunity, through our quality products and educational programs, to achieve their individual objectives. Our products, a high filtration portable surface cleaner and portable room air cleaner are sold under the trade names Filter Queen(R), Princess(R), Majestic(R), Empress(R), and Defender(R) (portable room air cleaner only). Although we were known as Health-Mor Inc. until 1995, when our name was changed to HMI Industries Inc., we continue to distribute our products under the Health-Mor brand name. HMI was reorganized in 1968 in Delaware, succeeding an Illinois corporation formed originally in 1928. Over the last five years we continued to streamline processes and lower costs while creating new sales programs to position ourselves for future growth opportunities. Examples include but are not limited to: - Creation of a U.S. program to aid in the retention of Distributors and help with the development of their professional careers and independent businesses (see U.S. MARKET below for additional information). - Creation and continued development of Health-Mor at Home(TM), a direct to consumer outbound sales force designed to assist consumers in locations where Distributors are no longer located. - Fully automated our assembly and distribution by moving all production areas to a new and more efficient facility in Strongsville, Ohio. - Obtaining approval for our manufacturing facility as both a Medical Class II facility by the Food and Drug Administration ("FDA") and as a Foreign Trade Zone. The Foreign Trade Zone status provides dollar saving benefits on such things as duty exemption on re-exports, duty elimination on waste and scrap, no duty on rejected or defective parts, duty deferral, no duty on domestic content or value added and relief from local taxes. - Implementation, in fiscal 2003, of our proven U.S. Edge Success Sales Program into the international markets. - Continued development of our After-Market-Sales (AMS) program and improved lead generations for our network as in accordance with the Federal "Do Not Call" legislation. See the U.S. MARKETS, MARKETS OUTSIDE THE U.S., and MARKETING AND ADVERTISING sections below for additional information. 2 - Formation, in the third quarter of fiscal 2004 of a wholly-owned subsidiary called AdvantEdge Credit Management Services Inc. ("ACMS"), which is a brokerage service provider for sourcing consumer credit to assist its clients, our Americas distribution network, in securing third party financing for end consumers who purchase products manufactured by HMI. - Reduction of overhead costs by relocating our sales and administrative personnel from the Seven Hills, Ohio location to the Strongsville, Ohio manufacturing facility. GOING CONCERN The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern. During the year ended September 30, 2004, we incurred a net loss of $3,492, had deficit equity of $12,247 at September 30, 2004, and as of the date of the audit opinion did not have an executed long-term financing agreement. As a result of these factors, our accounting firm has issued an audit report with a modification expressing substantial doubt about our ability to continue as a going concern. The financial statements and financial information presented do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Our operations consist of a single operating segment. See Note 1 of the Notes to the Consolidated Financial Statements for further information. NARRATIVE DESCRIPTION OF BUSINESS Products and Distribution We regard ourselves as a leader in the management of indoor air quality by offering a complete solution that keeps indoor air cleaner and safer to breathe. Our principal products include a high filtration portable surface cleaner that is marketed as a healthier alternative to the typical vacuum cleaner and a portable room air cleaner that helps to remove particles, gases and odors from the air. The two products are sold together as a complete Filter Queen Indoor Air Quality System(TM) throughout the world. To improve indoor air quality in a consumers' home our Filter Queen(R) products use a patented multi-filtration system consisting of our Cellupure(R), MEDIPure(R), and Enviropure(R) filter cones and cartridges. The Filter Queen Indoor Air Quality System(TM) is designed and proven to reduce airborne particles and allergens such as dust, smoke, pollen, mold spores, animal dander, dust mites, and harmful fibers that may lead to allergic reactions. Independent tests confirm that the Filter Queen Indoor Air Quality System(TM), when used with our named filters and cartridges, removes 99.98% of particles at .01 micron, which is better than HEPA (high efficiency particulate arrestance technologies), the industry standard. WARRANTY. We believe that we offer a superior warranty in the U.S. for our high filtration portable surface cleaner than all other U.S. manufacturers and sellers of vacuum cleaners. We warrant our surface cleaner for a two-year period from the date of purchase and offer a lifetime service benefit for the replacement of the surface cleaner's motor at a price not to exceed $99 USD (not in thousands). 3 We also support a five-year optional extended warranty on the portable surface cleaner offered by our U.S. Distributors to the end consumer as a sales promotion during an in-home product demonstration. As an enticement to the end consumer to buy our product during that demonstration, the five year optional extended warranty is offered to them at no cost; accordingly no revenue for this optional warranty is recognized by HMI. Our warranty reserve is recorded to provide for the above extended warranties. We do not allocate a portion of the product revenue to the extended warranty as there is no objective and reliable evidence associated with the fair value of the warranty, as we are not in the business of separately selling extended warranties on our products. In addition, a general right of return relative to the delivered product does not exist. Outside the U.S. we offer a two-year warranty for our high filtration portable surface cleaner. The portable room air cleaner is warranted for renewable one-year periods if the main air filter is replaced annually. A five-year warranty is offered for our built-in vacuum system. DISTRIBUTION NETWORK. Our distribution system consists of approximately 300 independent authorized Distributors and Importers who sell our products. These Distributors and Importers sell our products in 25 countries worldwide. Each Distributor and Importer has a defined territory in which it maintains the exclusive right to sell our products. Each Distributor and Importer sells the products to consumers through an in-home presentation given by a sales associate who, in some parts of the world, has been trained and certified by independent HMI trainers as an "Indoor Air Quality Specialist." Distributors are granted the right to market our products using the demonstration method and utilizing our trademarks. These same Distributors and Importers are responsible for providing service and replacement parts and supplies to the end consumers in their territories, which provides them with another source of revenue and potential referral network. U.S. MARKET. In the United States, we primarily sell our high filtration portable surface cleaner and portable room air cleaner through Distributors who sell our products to end consumers through sales associates. To aid in the retention of Distributors and help with the development of their professional careers and independent businesses, we developed an award winning unique training and development program called "The Edge Success Program" or "Distributor Development Program" (the "Edge" or "Program"). The Edge is an innovative, highly structured multi-step program that provides business training for all people in our distribution network, from the earliest level of a new recruit to the most senior level, a Premier Master Distributor. The program provides incentives at each level to promote the development and retention of quality Distributors and sales associates. Personal and professional training includes: sales and recruiting seminars, a business management correspondence course, and a week-long educational and training course called the Business Management Institute ("BMI") redesigned in conjunction with Cleveland State University in Cleveland, Ohio. BMI addresses sales techniques; lead generation; personal finances; moral, legal and ethical standards; human resource compliance issues; business ownership; and more. Every Distributor that opens a Filter Queen(R) office must attend BMI. Our information shows that offices operated by BMI graduates are more successful in terms of unit sales and associate retention than those operated before the 4 inception of the program. The reward for working your way through The Edge and selling 30,000 Filter Queen(R) units within fifteen years is payments from us totaling $1 million. To date two distributors have earned the million dollar Edge status. In May of 2001 we received the distinguished Education for Life Award from the Direct Selling Association for our unique and outstanding education program, The Edge Success Program. The Direct Selling Association recognizes companies in the direct selling industry that go beyond just sales training. Other companies who received this honor in the past include Tupperware, Avon and Mary Kay. In an effort to improve our customer service to end consumers, in fiscal 2001 we created Health-Mor at Home(TM) ("HMAH"). HMAH is a revenue generating inside sales organization selling replacement parts to Filter Queen(R) owners throughout the United States who no longer have an authorized Distributor in their area. The implementation of several FQ@Home Service Centers in late fiscal 2003 and into fiscal 2004 will serve to complement our HMAH program. FQ@Home Service Centers, focused aftermarket businesses aimed at generating repeat business, are being set-up in territories with a high concentration of customers and no Distributor. These Service Centers will provide convenient, proactive in-home replacement of parts and accessories for existing Filter Queen(R) customers. MARKETS OUTSIDE THE U.S. Success in exporting has occurred for us mostly in the last twenty years. To sell our products in a foreign market, we usually engage the services of a single Importer to represent our products in each country. We have less contact with the direct sales networks employed by Importers because we have fewer field staff outside the U.S. to support such sales networks. Since each country poses its own unique set of challenges (among others, currency fluctuations, differing political and economic systems, unique business and legal environments, inconsistent duty and tax requirements and even civil unrest and war), it can be very difficult to penetrate a new market without the help of an individual from that market. As a consequence, we are dependent on our Importers to address those challenges. In fiscal 2002 a reorganization of the management for our international market resulted in the planned introduction of the most successful U.S. programs. For example in fiscal 2003, the Edge, BMI, the "System" selling strategy, and the new power nozzle (formally sold only as an option) were introduced to some of our largest foreign markets in parts of Asia, Europe and the Middle East. Marketing and Advertising Traditionally, we have relied on our Distributors to market and sell our products to consumers. A portion of the sales of our products by our Distributors and their sales associates is dependent on telemarketing as a tool for developing sales leads and arranging in-home demonstrations of our products with end consumers who purchase these products. Regulatory efforts in Europe and the U.S. have focused on imposing more restrictions on telemarketing. In October 2003 the federal National "Do Not Call" registry became active, limiting the number of potential consumers reachable by telephone. There can be no assurance that such regulations will not further restrict telemarketing, and thereby make it increasingly difficult to sell our products with the aid of telemarketing. Because of these increased regulations and the high relative cost of telemarketing, many of the Distributors have been developing alternative methods to generate leads for in-home demonstrations. We have assisted our Distributors by creating a National Exhibit Booth Program that encourages Distributors to participate in local exhibits, tradeshows, 5 home shows, shopping malls and fairs. As part of this program we developed a National Sweepstakes Program titled "Live Better Sweepstakes." We have also created an International outline for this program which will be introduced into this market in fiscal 2005. Additionally, we will continue to promote a national mail lead generation program in order to generate leads and provide opportunities for our distribution network to demonstrate and sell our products. This program offers consumers the chance to win prizes and an opportunity to view a Filter Queen(R) presentation. Raw Material We assemble finished units from parts purchased from various suppliers. The raw materials used by our manufacturing operations are purchased from a number of suppliers and substantially all such materials are readily available. Patents and Trademarks We have numerous United States and foreign patents, patent and trademark applications, registered trademarks, and trade names that are used in our business. We generally own the trademarks under which our products are marketed and have registered our trademarks and will continue to register and protect them as they are developed or acquired. Trademarks are registered for varying finite periods but are usually renewable for an unlimited number of periods so long as they are still in use. Patents are registered for finite periods and are not renewable. In the case of trademarks used which are owned by others, we have entered into long-term license agreements to use the trademarks. We also believe that certain of the trademarks and trade names are of material importance to the businesses/products to which they relate and may be of material importance to us as a whole. Although protection of our patents and related technologies are important components of our business strategy, none of the individual patents is believed to be material to us. The remaining duration of the patents and trademarks varies. Seasonality Historically, we experience lower product sales in our fiscal fourth quarter, as compared to the first three fiscal quarters, resulting from fluctuations in our European product sales as the European importers adjust their inventory volumes in July/August for the standard European holiday month of August. European net product sales approximated 15.7%, 11.8%, and 14.6% for the fiscal fourth quarters in 2004, 2003, and 2002, respectively, as compared to the average of the first three fiscal quarters in 2004, 2003, and 2002 of 17.6%, 20.5%, and 19.0%, respectively. Major Customers and Dependence on Independent Distributors We are subject to risks specific to the individual customers with whom we do business. In fiscal 2004 and 2003, no individual customer accounted for more than 10% of our product sales. In fiscal 2002, one international customer in Japan accounted for more than 10% of our product sales. This international customer's product sales were 11.9% of our total product sales. Our revenues, and the stability of such revenues, are dependent on our relationships with third-party distributors and their sales persons and their level of satisfaction with our products and us. The Distributors and Importers are independent third parties who are not our employees and are not directly under our control. There can be no assurance that the current relationships with Distributors and Importers will continue on acceptable terms and conditions to us, nor can there be any assurance that additional distributorship arrangements with third parties will be obtained 6 on acceptable terms. Moreover, there can be no assurance that the Distributors and Importers will devote sufficient time and resources to our products to enable the products to be successfully marketed. Failure of some or all of our products to be successfully and efficiently distributed could have a material adverse effect on our financial condition and results of operations. Backlog We operate monthly with a minimal backlog (backlog at September 30, 2004, 2003, and 2002 was $3, $-0-, and $6, respectively). Competition We experience strong competition in the sale of our high filtration portable surface cleaners, and portable room air cleaners. Not only do we compete for consumer sales but also for Distributors and Importers to sell our products. Participants in the vacuum and indoor air cleaner industries compete primarily on price, quality, brand name recognition, product availability, and product performance, including the perceived amount of particles removed by a vacuum cleaner or air filter. Economy or disposable vacuums and indoor air filters are sold through a variety of channels including department stores, discount houses, appliance stores, and catalogs, generally at substantially lower prices than our products. We believe that our high filtration portable surface cleaner is superior to other vacuum cleaners because of its outstanding performance and warranty. Our high filtration portable surface cleaner (The Majestic(R)) competes with many significant vacuum cleaner manufacturers and with regional and private label manufacturers, including other direct selling companies, such as Rainbow, Tristar, Kirby, Miracle Mate, Electrolux, and Water-Matic, and companies that sell through retail outlets such as Miele, Eureka, Hoover, Kenmore, and Royal. We also manufacture and distribute a portable room air cleaner (The Defender(R)) recognized as a Class II Medical Device by the FDA. (There are basically two types of air cleaners. The Defender(R) is a mechanical filter that forces dirty air through a series of filters releasing only cleaner, fresher air. The second type is an electrostatic precipitator that emits an electronic charge into the air.) The portable room air cleaner market is primarily a retail and catalog business. HMI's Defender(R) competes directly with air cleaners like Alpine, Honeywell, Bionaire, Hunter, Holmes, Hoover, and Sharper Image. Many of our competitors have greater financial, marketing, and manufacturing resources and better brand name recognition than us, and sell their products through broader and more extensive distribution channels. Research and Development Our ongoing research and development program involves redesigning existing products to reduce manufacturing costs and to increase product quality and efficiencies. In fiscal year 2004, 2003, and 2002, we invested $53, $75, and $273, respectively, in new product development. We do not anticipate expending significant monies on the redesigning of products in fiscal year 2005. Environmental To our knowledge, we are in compliance with all applicable Federal, State, and local laws relating to the protection of the environment. While we anticipate no current expenses for environmental issues, there can be no assurance that we will not receive claims for 7 environmental conditions in the future, nor any assurance that any such claims, if received, would not have a material adverse impact on our financial condition and results of operations. Employees We employed 101 full-time and 11 part-time employees at September 30, 2004. None of our employees are parties to a collective bargaining agreement, and we believe our relationships with all our employees to be good. FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS Sales to international customers represented 41.1%, 35.8%, and 43.1% of net product sales for the years ending September 30, 2004, 2003, and 2002, respectively. AVAILABLE INFORMATION Our principal executive offices are located at 13325 Darice Parkway, Unit A, Strongsville, Ohio 44149, and the telephone number is (440) 846-7800. We regularly file reports with the Securities Exchange Commission (SEC). These reports include, but are not limited to, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and security transaction reports on Forms 3, 4, or 5. The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room located at 450 Fifth Street NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of our reports on its website at http://www.sec.gov. We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and other reports filed or furnished with the SEC available to the public, free of charge, through our website at www.filterqueen.com. These reports are provided through our website as soon as reasonably practicable after we file or furnish these reports with the SEC. Executive Officers of the Registrant

~~TABLE~~Name OFAge ~~CONTENTS~~Position and Terms of Service as Officer ------------------ ~~PART~~--- ~~I............................................................................................................2~~------------------------------------------------------ ~~ITEM~~Kirk 1W. ~~BUSINESS..............................................................................................2~~Foley ~~ITEM~~62 2.Chairman ~~PROPERTIES............................................................................................9~~and ~~ITEM~~Principal 3.Executive ~~LEGAL~~Officer ~~PROCEEDINGS.....................................................................................9~~(1) ~~ITEM~~John ~~4. SUBMISSION OF MATTERS TO~~ A ~~VOTE OF SECURITY HOLDERS~~.~~..................................................9~~ ~~PART~~Pryor ~~II...........................................................................................................9~~61 ~~ITEM~~President 5.and ~~MARKET~~Chief ~~FOR~~Operating ~~THE~~Officer ~~REGISTRANT'S~~(2) ~~COMMON~~Julie ~~EQUITY AND RELATED STOCKHOLDER MATTERS~~A.~~............................9~~ ~~ITEM~~McGraw 6.40 ~~SELECTED~~Vice ~~FINANCIAL~~President, ~~DATA..............................................................................12~~Chief ~~ITEM~~Financial 7.Officer, ~~MANAGEMENT'S~~Treasurer ~~DISCUSSION~~and ~~AND~~Assistant ~~ANALYSIS~~Secretary OF(3) ~~FINANCIAL~~Joseph ~~CONDITION~~Najm ~~AND~~46 ~~RESULTS~~Vice OFPresident-Operations ~~OPERATIONS................13~~(4) ~~ITEM~~Daniel 7AJ. ~~QUANTITATIVE~~Duggan ~~AND~~44 ~~QUALITATIVE~~Vice ~~DISCLOSURES~~President ~~ABOUT~~(5) ~~MARKET~~Darrell ~~RISK...........................................19~~Weeter ~~ITEM~~48 8.Vice ~~FINANCIAL~~President STATEMENTS AND SUPPLEMENTARY DATA..........................................................20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................20 PART III.........................................................................................................20 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT......................................................20 ITEM 11. EXECUTIVE COMPENSATION..............................................................................20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................20 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................20 PART IV..........................................................................................................20 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....................................20 SIGNATURES.......................................................................................................22 INDEX TO FINANCIAL STATEMENTS....................................................................................23 INDEX TO EXHIBITS................................................................................................45(6)

(1) Mr. Foley was elected as Chairman and Principal Executive Officer in February, 2004. Since 1997 he has also been Chairman and Chief Executive Officer of Tube-Fab Ltd., a company that shapes, bends and machines metal tubing. He previously served as Chief Executive Officer of the Company from 1989 to 1997. (2) Effective November 22, 2004, Mr. Pryor resigned as President and Chief Operating Officer although he continues to serve on the Board of Directors. Mr. Pryor was elected President and Chief Operating Officer in 2001. From 1992 to 2001 he was President of Pryor & Associates, which provided consulting services to the food service industry. From 1996 to 8 2000 he was President and Chief Executive Officer of Valley Innovative Services, a food services management company. (3) Ms. McGraw was elected Chief Financial Officer and Treasurer in 2000 and Vice President in 1999. She also served as Corporate Controller from 1998 to 2001. (4) Mr. Najm was elected Vice President-Operations in 1999. (5) Mr. Duggan has served in various capacities with the Company since 1990. He was elected Vice President in 2001 and has served as President of the International Sales Division since 2002. From 1997 to 2002 he was President of the Asia-Pacific Sales Division. (6) Mr. Weeter was elected Vice President in 2001. He has also served as President of the Americas Sales Division since 2000, and was Vice President of the Americas Sales Division from 1998 to 2000. He has also served as President of FVS Inc., a distributor of products manufactured by the Company, since 1985. ITEM 2. PROPERTIES The following table sets forth the location, character, and size of the real estate we used in our operations at September 30, 2004:

~~NAME~~Square ~~AGE~~Location ~~POSITION~~Character ~~AND~~Feet ~~TERMS OF SERVICE AS OFFICER~~ -------------------------~~---~~ -------- ----------------------------------------- ------~~-----------------------------~~ ~~James~~United R.States ~~Malone~~of 58America~ ~~Chairman~~Strongsville, ~~and~~Ohio ~~Chief~~Leased ~~Executive~~office, ~~Officer~~manufacturing, ~~(1) John A. Pryor 58 President~~ and ~~Chief~~warehouse ~~Operating~~space ~~Officer(2) Carl H. Young III 60 Vice President and General Counsel (3) Julie A. McGraw 37 Vice President~~73,000 ~~Chief~~Seven ~~Financial Officer~~Hills, ~~Treasurer~~Ohio ~~and~~Leased ~~Assistant~~office ~~Secretary~~space ~~(4) Joseph Najm 41 Vice President-Operations (5)~~15,700

Upon the expiration of our Seven Hills, Ohio facility, in November, 2004 we relocated all of our personnel at the Seven Hills, Ohio location to the Strongsville, Ohio facility. An additional 7,000 square feet will be added to the Strongsville office space, via the creation of a mezzanine level, to house the executive, selling and administrative personnel. The completion of the mezzanine is anticipated by March 2005. We believe our facility in Strongsville is adequate for both our manufacturing and office space needs. ITEM 3. LEGAL PROCEEDINGS Bliss Technologies, Inc. ("Bliss"), the company formed from the 1998 sale of the subsidiary of HMI, filed for bankruptcy in January 2000 in the United States Bankruptcy Court, Eastern District of Michigan. In a separate action filed in 2002, the Official Committee of Unsecured Creditors of Bliss alleges a fraudulent conveyance claim against us asserting that the sale of Bliss in 1998 was a fraudulent transfer insofar as we received more for Bliss than it was worth and that Bliss was insolvent from its inception. Former directors of Bliss, Mark Kirk and Carl 9 Young, are also named as defendants in the action. Claims pending against them allege that in their capacity as Bliss directors they breached fiduciary duties to Bliss creditors. The complaint seeks damages in an unspecified sum. In September 2004 the parties conducted a mediation session with an agreed-upon mediator which did not result in a settlement. Although we may continue to pursue the settlement discussions that began at the mediation we are also continuing to move forward in court with the vigorous defense of the claims against us and the claims against Mr. Kirk and Mr. Young. Claims arising in the ordinary course of business are also pending against us. In the third quarter of fiscal 2004 we increased reserves by $500 to provide for any contingent liabilities associated with various litigation and contingent claims. There can be no assurance that an unfavorable outcome in these various litigation and contingent claims would not have a material adverse effect on our consolidated financial position, results of operations, or cash flow. Included in the accompanying Consolidated Balance Sheets at September 30, 2004, and 2003, were accruals of $515 and $15, respectively, relating to litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our Common Stock was quoted in the over-the-counter market on the OTC Bulletin Board under the symbol "HMII.OB" until February 19, 2004, the date it was removed. The removal occurred because we were no longer current with regards to our SEC filings, primarily our Form 10-K for the year ended September 30, 2003, and therefore the members of the OTC Bulletin Board could no longer quote our shares. It is now quoted in the Pink Sheets. As of September 30, 2004, there were 221 stockholders of record. A summary of the quarterly high and low bid price of our common stock in the Pink Sheets for the year ended September 30, 2004 and on the OTC Bulletin Board for the year ended September 30, 2003 are as follows: 2004

~~Location~~High ~~Character~~[1] ~~Square~~Low ~~Feet~~[1] --------~~-----------------------------~~ -------~~---------------------------------------~~ ~~--------------------~~1st ~~United~~Quarter ~~States~~$ of1.05 ~~America~~$ ~~Strongsville,~~0.64 ~~Ohio~~2nd ~~Leased~~Quarter ~~office,~~$ ~~manufacturing~~0.70 ~~and~~$ ~~warehouse~~0.51 ~~space~~3rd ~~72,991~~Quarter ~~Seven~~$ ~~Hills,~~0.51 ~~Ohio~~$ ~~Leased~~0.35 ~~office~~4th ~~space~~Quarter ~~15,706~~$ ~~Naples,~~0.40 ~~Florida~~$ ~~Leased office space 2,180~~0.35

10 2003

~~2001~~High ~~2000~~[1] ~~1999~~Low ~~1998~~[1] ~~1997~~ --------- -------~~---~~ ~~---------~~1st ~~----------~~Quarter ~~--------- Net Product Sales~~ $ 32,299 $ 34,621 $ 36,927 $ 38,748 $ 49,878 Cost of Product Sold and SG&A Expenses $ 32,518 $ 33,515 $ 38,447 $ 48,203 $ 68,603 Impairment Loss $ -- $ -- $ 2,665 $ -- $ -- Other Income (Expense), net $ 287 $ 6 $ 60 $ (1,335) $ (2,038) (Loss) Income From Continuing Operations Before Taxes $ (506) $ 1,112 $ (4,125) $(10,790) $(20,763) (Loss) Income Margin From Continuing Operations Before Taxes (1.6%) 3.2% (11.2%) (27.8%) (41.6%) Income Tax (Benefit) Expense $ (593) $ (353) $ 116 $ (2,217) $ (7,286) Income Tax Rate 117.2% (31.7%) (2.8%) 20.5% 35.1% Income (Loss) From Continuing Operations $ 87 $ 1,465 $ (4,241) $ (8,573) $(13,477) Income (Loss) Margin From Continuing Operations 0.3%70 ~~4.2% (11.4%) (21.9%) (26.7%) Income From Discontinued Operations~~ $ ~~-- $ -- $ -- $ 441 $ 2,347 Gain (Loss) on Disposals $ -- $ 425 $ (375) $ 7,157 $ (5,520) Net Income (Loss) $ 87 $ 1,890 $ (4,616) $ (975) $(16,650) Net Income (Loss) Margin~~ 0.3%18 ~~5.5%~~2nd ~~(12.4%)~~Quarter ~~(2.5%) (33.0%) Per Share Data - Basic and Diluted: Income (Loss) Before Discontinued Operations~~ $ 0.0165 $ 0.2441 $3rd ~~(0.81)~~Quarter $ ~~(1.66) $ (2.72) Income From Discontinued Operations $ -- $ -- $ -- $ .09 $ .47 Gain (Loss) on Disposals $ -- $~~ 0.0765 $ (0.~~07)~~51 $4th ~~1.38~~Quarter $ (1.~~11)~~05 ~~Net Income (Loss)~~ $ 0.01 $ 0.31 $ (0.88) $ (0.19) $ (3.36) Weighted Average Number of Common Shares Outstanding: Basic 6,691 6,113 5,263 5,170 4,956 Diluted 6,724 6,140 5,263 5,170 4,956 Total Assets $ 20,843 $ 20,843 $ 17,465 $ 24,409 $ 54,590 Long-Term Debt $ 75 $ 71 $ -- $ 42 $ 763 Stockholders' Equity $ 14,543 $ 14,394 $ 10,326 $ 14,099 $ 14,552 Working Capital $ 1,923 $ 3,913 $ 612 $ (18) $ 2,680 Ratio of Current Assets to Current Liabilities 1.31 1.61 1.09 1.00 1.07 Percent of Earnings on Average Stockholders' Equity 0.6% 15.3% (37.8%) (6.80%) (73.3%) Stock High 1 11/16 1 3/4 2 1/4 6 1/2 8 1/8 Stock Low 11/16 1/2 1 1 1/4 3 7/855

[1] The bid price for our common stock was received from Pink Sheets and/or Nasdaq Trading & Market Services. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. The declaration and payment of quarterly dividends is at the discretion of the Board of Directors, which may raise, lower, or omit the dividend in any quarter. No dividends were declared in 2004 or 2003 as the credit agreement with our lender presently prohibits us from declaring or paying any dividends. The Company has no intention of paying dividends in the foreseeable future. Securities Authorized for Issuance Under Equity Compensation Plans. Information about HMI equity compensation plans at September 30, 2004, was as follows (shares in thousands):

~~HMI~~Number ~~Industries~~of ~~Inc.~~shares ~~CONSOLIDATED~~Number ~~BALANCE~~of ~~SHEETS Dollars and~~ shares into ~~thousands,~~remaining ~~except~~available ~~par~~be ~~values~~issued ~~SEPTEMBER~~upon ~~30,~~Weighted ~~September~~average ~~30,~~for ~~2001~~future ~~2000~~issuance ~~------------------------------------------------------------------------------------------------------------~~Plan ~~ASSETS~~Category ~~CURRENT~~exercise ~~ASSETS:~~of ~~Cash~~exercise ~~and~~price ~~cash equivalents $ 7 $ 1,535 Trade accounts receivable (net~~ of ~~allowance~~under ofequity ~~$464~~outstanding ~~and~~options ~~$507)~~outstanding ~~2,131~~options ~~3,207~~compensation ~~Note~~plans ~~receivable 35 105 Inventories: Finished goods 1,902 1,778 Work~~-in-~~progress, raw material and supplies 1,845 1,437 Deferred income taxes 1,681 1,528 Prepaid expenses 184 411 Other current assets 363 290~~ --------------------------------------- -------------------~~--------------------------------------------------~~ ~~Total current assets 8,148 10,291~~ -------------------~~-----------------------------------------------------------------------------------------~~ ~~PROPERTY, PLANT AND EQUIPMENT, NET 3,810 1,551~~ -------------------~~-----------------------------------------------------------------------------------------~~ ~~OTHER~~Equity ~~ASSETS:~~compensation ~~Long-term~~plans ~~note~~approved ~~receivable~~by ~~(less~~shareholders ~~amounts due within one year) - 35 Cost in excess of net assets of acquired businesses~~ (~~net of accumulated amortization of $3,493 and $3,248~~a) ~~5,698~~532 ~~5,963 Deferred income taxes 2,581 2,504 Trademarks (net of accumulated amortization of~~ $~~120~~ and $80) 337 309 Other 269 190 ------------------------------------------------------------------------------------------------------------ Total other assets 8,885 9,001 ------------------------------------------------------------------------------------------------------------ Total assets $ 20,843 $ 20,843 ============================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 1~~,191 $ - Trade accounts payable 1,902 2,558 Income taxes payable 532 963 Accrued expenses and other liabilities 2,016 2,840 Long-term debt due within one year 584~~ .17 -~~-----------------------------------------------------------------------------------------------------------~~ ~~Total current liabilities 6,225 6,378 ------------------------------------------------------------------------------------------------------------ LONG-TERM LIABILITIES: Long-term debt~~ (~~less amounts due within one year~~b) ~~75 71~~ ------- ---------~~--------------------------------------------------------------------------------------------~~ ~~Total long~~-~~term liabilities 75 71~~ -----~~-------------------------------------------------------------------------------------------------------~~ ~~STOCKHOLDERS'~~Equity ~~EQUITY:~~compensation ~~Preferred~~plans ~~stock,~~not $5approved ~~par~~by ~~value;~~shareholders authorized, 300 shares; issued, none - - Common stock, $1 par value; authorized, 10,000 shares; issued and outstanding, 6,708 and 6,658 shares 6,708 6,658 Capital in excess of par value 8,279 8,279 Unearned compensation, net (8c) ~~(41)~~385 ~~Retained~~$ ~~earnings~~2.72 ~~464~~- ~~377 Accumulated other comprehensive loss (Note 1) (900) (879)~~ ------- ---------~~--------------------------------------------------------------------------------------------~~ ~~Total stockholders' equity 14,543 14,394~~ ------~~------------------------------------------------------------------------------------------------------~~ Total ~~liabilities~~917 ~~and stockholders' equity~~ $ ~~20,843~~1.82 ~~$ 20,843 ============================================================================================================~~-

(a) These options were issued under the 1992 Omnibus Long-Term Compensation Plan. See "Notes to Consolidated Financial Statements, Note 6 - Long-Term Compensation Plan." (b) The 1992 Omnibus Long-Term Compensation Plan (the "Plan") does not contain any restriction on the number of shares that can be issued pursuant to an award under the Plan except for Incentive Stock Options ("ISO"), which are limited to 2,500 shares, as adjusted for stock splits. No new ISO grants may be made under the Plan because the Plan was adopted more than ten years ago. Regulations of the Internal Revenue Service which determine whether or not an option is an ISO require that the Plan under which an ISO is granted must have been adopted within the prior ten years. The number of shares available for grant each year is equal to 5% of the Company's outstanding Common Stock on December 31 of the prior year. To the extent that the number of awards in any year is less than 5%, this unused amount may be carried over to future years. Awards which have lapsed or been forfeited may also be reissued in future years. The maximum number of awards that can be made in any year, including carryovers and lapsed and forfeited 11 awards, is equal to 10% of the Company's outstanding Common Stock on December 31 of the prior year. (c) Awards of non-qualified stock options were made to two outside consultants in connection with their services to HMI. The option price was the fair market value on the date of grant. One option for 100 shares expires ten years from the date of grant (2006), while the other option for 35 shares expires five years from the date of grant (2005). A third grant to our current Chairman of the Board for 250 shares expires in 2009, five years from the date of the grant. 12 ITEM 6. SELECTED FINANCIAL DATA In thousands except per share amounts, stock prices, percentages, and ratios

~~HMI~~2004 ~~Industries~~2003 ~~Inc.~~2002 ~~CONSOLIDATED STATEMENTS OF OPERATIONS Dollars and shares in thousands, except per share data FOR THE YEARS ENDED SEPTEMBER 30,~~ 2001 2000 ~~1999~~ ------------- ----------- ---------- ---------- ---------~~-------------------------------------------------------------------~~ ~~REVENUES:~~ Net product sales $ 3231,~~299~~990 $ 3430,~~621~~170 $ 3634,~~927~~524 ~~------------------------------------------------------------------------------------------------------------------------~~$ ~~OPERATING~~31,527 ~~COSTS~~$ ~~AND~~34,621 ~~EXPENSES:~~ Cost of ~~products~~product sold ~~19,133~~and ~~20,448~~SG&A ~~24,098~~expenses ~~Selling~~$ 35,464 ~~general~~$ ~~and~~35,334(0) ~~administrative~~$ ~~expenses 13~~35,~~385~~889 13$ 32,~~067~~676 14$ 33,~~349~~515 ~~Impairment~~Loss ~~loss~~on ~~(Note~~impairment 3)of -asset $ - 2$ 1,~~665~~711(1) ~~Interest~~$ ~~expense~~- ~~101~~$ 47- 71$ - Other expense (income), net ~~186~~$ 11 $ (53105) $ 430 $ 272 $ (~~131~~6) ~~------------------------------------------------------------------------------------------------------------------------~~(Loss) ~~Total~~income ~~operating~~from ~~costs~~continuing operations before taxes and ~~expenses~~cumulative ~~32,805~~effect ~~33,509~~of ~~41,052~~accounting ~~------------------------------------------------------------------------------------------------------------------------~~change ~~INCOME~~$ (~~LOSS~~3,485) ~~FROM~~$ ~~CONTINUING~~(6,770) ~~OPERATIONS~~$ ~~BEFORE~~(1,795) ~~INCOME~~$ ~~TAXES~~ (~~506~~1,421) $ 1,112 (Loss) income margin from continuing operations before taxes and cumulative effect of accounting change (10.9%) (22.4~~,125~~%) (~~Benefit~~5.2%) ~~provision~~(4.5%) 3.2% Provision (benefit) for income taxes $ 7 $ 18 $ 38 $ 3,672(~~593~~2) $ (353) ~~116~~Income ~~------------------------------------------------------------------------------------------------------------------------~~tax ~~INCOME~~rate (~~LOSS~~0.2%) ~~FROM~~(0.3%) ~~CONTINUING~~(2.1%) ~~OPERATIONS~~(258.4%) 87(31.7%) (Loss) income from continuing operations before cumulative effect of accounting change $ (3,492) $ (6,788) $ (1,~~465~~833) $ (45,~~241~~093) ~~------------------------------------------------------------------------------------------------------------------------~~$ ~~Gain~~1,465 (~~loss~~Loss) onincome ~~disposals-~~margin ~~Bliss~~from ~~Manufacturing~~continuing ~~(net~~operations before cumulative effect of ~~taxes~~accounting change (10.9%) (22.5%) (5.3%) (16.2%) 4.2% Cumulative effect of accounting change $ -~~0-,~~ $~~-0-~~ (5,451)(3) ~~and~~ $~~-0-)~~ - ~~425~~$ (~~375~~4,943)(4) $ - Gain on disposals $ - $ - $ - $ -~~-------------------------------------------------------------------------------------------------------------------~~ ~~NET~~$ ~~INCOME~~425 Net (~~LOSS~~loss) income $ 87(3,492) $ 1(12,~~890~~239) $ (41,~~616~~833) ~~=========================================================================================================================~~$ ~~Weighted~~(10,036) ~~average~~$ ~~number~~1,890 ofNet ~~shares~~(loss) ~~outstanding:~~income ~~Basic~~margin ~~6,691~~(10.9%) (40.6~~,113~~%) (5~~,263~~.3%) (31.8%) 5.5% Per Share Data - Basic and Diluted: ~~6,724~~(Loss) ~~6,140~~income ~~5,263~~from ~~=========================================================================================================================~~continuing ~~BASIC~~operations ~~AND~~before ~~DILUTED~~cumulative ~~PER~~effect ~~SHARE~~of OFaccounting ~~COMMON~~change ~~STOCK~~$ (~~NOTE~~0.52) $ (1.01): ~~Income~~$ (~~loss~~0.27) ~~from continuing operations~~ $ (0.0176) $ 0.24 Cumulative effect of accounting change $ - $ (0.81) ~~Gain~~$ - $ (~~loss~~0.74) $ - Gain on disposals $ - $ - $ - $ - $ 0.07 Net (loss) income $ (0.0752) ~~------------------------------------------------------------------------------------------------------------------------~~$ ~~Net~~(1.82) ~~income~~$ (~~loss~~0.27) $ 0(1.0150) $ 0.31 Weighted Average Number of Common Shares Outstanding: Basic 6,746 6,744 6,719 6,691 6,113 Diluted 6,746 6,744 6,719 6,691 6,140 Total Assets $ 10,491 $ 10,668 $ 17,430 $ 16,979 $ 20,843 Long-Term Debt $ - $ 11 $ 33 $ 75 $ 71 Stockholders' (0Deficit) Equity $ (12,247) $ (8,754) $ 2,577 $ 4,419 $ 14,394 Working Capital $ 1,999 $ 1,444 $ 992 $ 580 $ 4,137 Ratio of Current Assets to Current Liabilities 1.8829 1.22 1.16 1.09 1.67 Stock High(a) ~~=========================================================================================================================~~1 1/20 1 1/20 1 1/5 1 11/16 1 3/4 Stock Low(a) 7/20 13/50 25/49 11/16 1/2

(0) This amount includes a $905 write-off, recorded during the second quarter of fiscal 2003, relating to cumulative translation adjustments associated with the liquidation of our Canadian subsidiary. In addition it includes a $300 reserve for obsolete inventory associated with impaired tooling. See Note 1 for further information. (1) During the fourth quarter of fiscal 2003, we performed an analysis on the potential impairment of certain tooling assets, and related patents and trademarks, approximating $1,711. We concluded from our analysis, which was based upon the held and used model that the tooling assets were fully impaired and accordingly recorded an impairment charge of $1,711 as of September 30, 2003. (2) In the second quarter of fiscal 2001, we concluded that a full valuation allowance for our deferred tax assets was required. Accordingly, we recorded a non-cash charge in the second quarter of fiscal 2001 of $6,118 to increase our valuation allowance for our deferred tax assets. 13 (3) As of October 1, 2002, a full impairment of the goodwill recorded on HMI's books was recorded through a non-cash charge of $5,451. Such charge is non-operational in nature. See Note 1 for further information. (4) In the second quarter of fiscal 2001 a non-cash charge of $4,943 was recorded on HMI's books to reflect the adoption of the Emerging Issues Task Force EITF 01-9, Accounting for consideration Given by a Vendor to a Customer relative to our distributor development program. (a) Represents closing price of stock ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) GOING CONCERN During the year ended September 30, 2004, we incurred a net loss of $3,492, had deficit equity of $12,247 at September 30, 2004, and as of the date of the audit opinion did not have an executed long-term financing agreement. As a result of these factors, our accounting firm has issued an audit report with a modification expressing substantial doubt about our ability to continue as a going concern. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern. The financial statements and financial information presented do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated 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 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. Allowance for Doubtful Accounts At September 30, 2004, our bad debt reserve was $132. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Quarterly, we evaluate the collectability of our accounts receivable based on a combination of factors. In cases where we are aware of circumstances that may impair a specific customer's ability to meet its financial obligations to us, we record a specific allowance against amounts due to us, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment, and our historical experience, including payment patterns. If the financial condition of our customers deteriorates or if economic conditions worsen, additional allowances may be required in the future, which could have an adverse impact on our future operating results. 14 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. Accrued Distributor Development Liabilities We account for the potential one million dollar award for the Edge Program pursuant to Emerging Issues Task Force Consensus ("EITF") 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of a Vendor's Products)"; accordingly we reflect the accrual for this award as a reduction of revenues. We have determined that for purposes of EITF 01-9 it is not possible to reasonably estimate such a liability and therefore accrue such awards assuming a maximum accrual rate whereby we assume each eligible distributor will earn the award. In other words, for each qualifying sale, we have recorded a liability by reducing revenue. Such a liability will only be derecognized (i.e. the accrual eliminated) when (i) the award is paid out or (ii) when a distributor is no longer eligible for the award. For the years ended September 30, 2004, 2003 and 2002, the accounting for this Program decreased sales by $3,687, $4,369 and $2,589, respectively. On our Consolidated Balance Sheets as of September 30, 2004, and 2003 we had accrued $16,321, and $12,958, respectively, relative to this Program. Excess and Obsolescence Reserves Quarterly 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 Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" we ceased amortizing goodwill in the period beginning October 1, 2002. Prior to the adoption of SFAS No. 142, we amortized goodwill on a straight-line basis over 40 years. Other intangible assets are amortized on a straight-line basis over their useful lives, ranging from ten to seventeen years. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets, require that goodwill and indefinite-lived intangible assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), require that reporting units be identified for the purpose of assessing potential impairments of goodwill, and remove the forty-year limitation on the amortization period of intangible assets that have finite lives. During the first quarter of fiscal 2003 we completed the first step of the two-step implementation process by obtaining a valuation of HMI for comparison to the carrying value and began the process of measuring the amount of the impairment (step two). Management does not believe that the market value of our common stock fairly reflects the value of HMI, because of, among other things, the absence of liquidity, and the absence of analyst coverage. Accordingly, the valuation experts employed by us utilized the market value of the common stock as of October 1, 2002, but also weighted the valuation for comparable values of peer companies, recent sales of similar types of companies, and a discounted cash flow methodology. Based on the assumptions 15 used in any of the three valuations referred to above and depending on the weighting used for each valuation, results of the valuation could be significantly changed. However, for accounting purposes we believed that the weighting methodology used was reasonable and resulted in an accurate and fair value of HMI. During the second quarter of fiscal 2003 we completed our initial impairment test for October 1, 2002, resulting in a full impairment of the goodwill recorded on HMI's books through a non-cash charge of $5,451. Such charge is non-operational in nature and is reflected as a Cumulative Effect of Accounting Change in the accompanying Consolidated Statements of Operations for the year ended September 30, 2003. Valuation of Long-Lived Assets In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" we assess potential impairments to our long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. During the fourth quarter of fiscal 2003 we performed an analysis on the potential impairment on certain tooling assets, and related patents and trademarks, approximating $1,711 which related to a potential new product. Based upon our analysis, we concluded that the tooling assets were fully impaired as of September 30, 2003; this conclusion was based upon the held and used model which includes significant assumptions regarding future cash flows and utilizes a model of weighted probability cash flow projections over the estimated life of the product. Scrap value for these assets was determined to be nominal; accordingly a $1,711 impairment of this asset was recorded as of September 30, 2003, to write the assets down to their net realizable value. This product will not have any additional resources devoted to its refinement and completion, nor will the product be marketed or sold as an ongoing part of our product portfolio. As a result the impairment is not expected to have an impact on future revenue or net income. Different assumptions or different weightings of the projected cash flows could significantly impact our conclusion concerning the impairment of such assets. Income Taxes In determining income (loss) for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. SFAS No. 109 "Accounting for Income Taxes" requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent three fiscal years, and our forecast of future taxable income. In determining future taxable income, we are responsible for assumptions utilized including the amount of state and federal pre-tax operating income, the reversal of temporary differences, and the implementation 16 of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage our business. Periodically, and when indicators suggest, we assess the realizability of our domestic deferred tax assets, giving consideration to our actual historical results supplemented by future expected results. SFAS No. 109 considers a historic pattern of losses as significant negative evidence that tax assets will not be realized and this consideration is not outweighed by any prospective view of management that sufficient taxable income will ultimately be available to realize the tax benefits. Given the history of losses and the results in 2004, we concluded that under the "more likely than not" criteria of SFAS No. 109 a full valuation allowance is still required against the net U.S. deferred tax assets at September 30, 2004. The valuation allowance has been subject to periodic review and can be partially or totally reversed either when income is generated that utilizes the loss or when sufficient positive evidence emerges (i.e. A sustained positive trend of U.S. income for financial accounting purposes.) Our income tax expense recorded in the future will be reduced to the extent of offsetting decreases in our valuation allowance. Warranty Reserves Our policy is to record a provision for the expected cost of warranty-related claims at the time of the sale and adjust the provision to reflect actual experience quarterly. The amount of warranty liability accrued reflects management's best estimate of the expected future cost of honoring our obligations under the warranty plans. Historically, the cost of fulfilling our warranty obligations has principally involved replacements parts, labor and sometimes travel. Our estimates are based on historical experience, the number of units involved, and the extent of features/components included in product models. If future returns and warranty settlements do not reflect the historical data we use to calculate these estimates, additional allowances may be required. RESULTS OF OPERATIONS - 2004 COMPARED WITH 2003 PRODUCT SALES- Product sales, net of returns and allowances and before distributor development program revenue reduction ("Product Sales"), were $35,591 for the year ended September 30, 2004, $1,052 or 3.0% higher than prior year Product Sales of $34,539. The increase was largely attributable to increased sales in Asia of $2,766, offset by decreased revenues in the Americas and Europe/Middle East of $1,266 and $468, respectively. Asian sales increased primarily as a result of shipments to a new customer in Malaysia whose first shipment was in December 2003, and improved sales to Hong Kong and Korea. The largest increase was associated with Malaysia. The sales decline in the Americas was largely related to office closings in a particular sales territory. A new divisional director was assigned to this territory during the year in order to provide the additional support that had been requested. The sales decline in Europe/Middle East was driven by reduced sales to Portugal and was attributable to the ongoing challenges of lead generation, the recruiting of new sales associates and the retention of existing associates within this importer's territories. Product sales after returns and allowances were not materially impacted by changing prices. DISTRIBUTOR DEVELOPMENT PROGRAM- The reduction to Product Sales associated with the Edge Program for the year ended September 30, 2004 was $3,687 compared to $4,369 in fiscal 2003, a 17 $682 decrease. This decrease was driven by termination gains which were largely attributable to one established U.S. distributor who left the business during the second quarter and consequently lost his eligibility to participate in the Program and therefore the accrued liability related to him was derecognized. The termination gain was offset by increased international sales volume as well as the number of international countries participating in the Program. See Note 1 to our Consolidated Financial Statements for a further discussion of the accounting pertaining to this Program. OTHER REVENUE- We formed a wholly owned subsidiary, AdvantEdge Credit Management Services ("ACMS") during the third quarter of fiscal 2004. ACMS is a brokerage service provider for sourcing consumer credit and assists its clients, our Americas distribution network, in securing third party financing for end consumers who purchase products manufactured by HMI. We earned $86 in brokerage service revenue during the third and fourth quarters of fiscal 2004 for these services. GROSS MARGIN, EXCLUSIVE OF DISTRIBUTOR DEVELOPMENT PROGRAM- The gross margin, exclusive of Distributor Development Program costs, for the year ended September 30, 2004, was $14,112 or 39.7% of sales as compared to $13,514 or 39.1% of sales in 2003, an increase of $598. The $598 increase was a result of favorable sales and materials variances approximating $584 and $197, respectively, offset by increased overhead expenses of $197. The favorable materials variance was a direct result of lower current year inventory obsolescence expense. As a result of the discontinuance of our Central Vac product and the abandonment of a potential new product we recorded loss on disposal charges of $170 during the third quarter of fiscal 2004 to fully impair the associated tools and molds as their estimated net realizable value which was considered to be nominal. SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A")- SG&A expenses of $13,985 for the year ended September 30, 2004, were greater than fiscal 2003 expenses of $13,404 by $581. This increase was largely due to a $500 and $317 increase in litigation reserve and audit expenses, respectively, related to pending legal proceedings and the restatement of our prior years' financial statements in connection with the adoption of EITF 01-9. It was also impacted by $240 of expenses associated with certain independent professionals who were engaged by a Special Committee of the Board of Directors to review relationships we had with certain affiliates, as well as by the February 2, 2004 resignation and retirement of James R. Malone, the former Chairman and Chief Executive Officer. We recorded $200 of compensation expense in association with Mr. Malone's resignation. The remaining difference was largely the result of reductions of $632 related to commissions and compensation expenses which followed the lower sales in the Americas and Europe/Middle East. LOSS ON IMPAIRMENT OF ASSET- During the fourth quarter of fiscal 2003, we performed an analysis on the potential impairment of certain tooling assets, and related patents and trademarks. We concluded from our analysis, which was based upon the held and used model that the tooling assets were fully impaired and accordingly recorded an impairment charge of $1,711 as of September 30, 2003, as the scrap value for these assets was determined to be nominal. LOSS ON LIQUIDATION OF SUBSIDIARY- During the second quarter of fiscal 2003, after reviewing possible future options for our Canadian subsidiary, we chose to liquidate the entity and therefore recorded a loss on disposal of $905 for cumulative translation adjustments associated with this subsidiary. 18 INTEREST EXPENSE- Interest expense for fiscal year 2004 was $77 or $24 higher than the fiscal 2003 amount of $53. The increased expense primarily reflects the increased level of borrowings on our line of credit when compared to the prior year. OTHER EXPENSE (INCOME), NET- The decrease of $92 in other (income) expense, net, from ($158) in fiscal 2003 to ($66) for the year ended September 30, 2004, was attributable to a variety of individually insignificant items. INCOME TAXES- The effective income tax rate for the year ended September 30, 2004, was (0.2%) compared to (0.3%) in fiscal 2003. Driven by pre-tax earnings, the recorded tax expense, which is associated with state franchise taxes, was not material in either year because of the full valuation allowance against our deferred tax assets. CUMULATIVE EFFECT OF ACCOUNTING CHANGE- On October 1, 2002, we adopted SFAS No. 142. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. During the second quarter of fiscal 2003, we completed our initial impairment test as of October 1, 2002, and recorded a non-cash charge of $5,451 to fully eliminate the carrying value of our goodwill (See Note 1 to the Consolidated Financial Statements). There was no tax effect related to this item, as this charge is a permanent difference for income tax purposes. INFLATION AND PRICING- While inflation or changing prices have not had, and we do not expect them to have, a material impact upon operating results, there can be no assurances that our business will not be affected by inflation or changing prices in the future. RESULTS OF OPERATIONS - 2003 COMPARED WITH 2002 PRODUCT SALES- Product Sales of $34,539 for the year ended September 30, 2003, were $2,574 or 6.9% lower when compared to the prior year sales of $37,113. The decrease in Product Sales was primarily attributable to reduced international sales, largely Asia, and the cessation of the National Advertising Campaign ("NAC"), offset by increased revenues in the Americas of $2,466. The largest decline in Asia was attributable to lower sales to Japan. Our Japanese importer struggled all year to realign his inventory levels in anticipation of the launch of our 75th Anniversary Majestic(R) (our portable surface cleaner), which occurred in Japan in fiscal 2004. The reduced sales to Japan also reflected Defender(R) (our portable room air cleaner) sales that were made in the prior year with the intent of selling them with the Majestic(R) as a system similar to how our products are marketed in the U.S.; however, this program was not as successful as anticipated, resulting in lower Defender(R) sales while the importer sold this inventory. To assist our importer in Japan with their continued inventory realignment as well as the development and execution of training and sales programs, we created a new sales position within HMI to provide experienced, dedicated sales support to this region. The NAC, a thirty-minute television infomercial which began airing in July 2001, was designed to increase brand awareness, generate sales leads, and open new territories. In August 2002 we stopped broadcasting the infomercial as anticipated profits for this program were not being achieved, and the infomercial had exceeded the industry standard expected life cycle of twelve months. NAC sales accounted for $1,495 of total revenue in fiscal 2002. The increase in the Americas was due to the growth of several of our key distributors who grew their businesses through effective recruiting, retention, and the opening of new offices. Product sales after returns and allowances were not materially impacted by changing prices. 19 DISTRIBUTOR DEVELOPMENT PROGRAM- The reduction to product sales associated with the Distributor Development Program for the year ended September 30, 2003 was $4,369 compared to $2,589 in fiscal 2002, a $1,780 increase. This increase was primarily a result of making the international market part of the Program during the first quarter of fiscal 2003 which accounted for approximately $1,350 of the $1,780 increase in sales reduction. See Note 1 to our Consolidated Financial Statements for a further discussion of the accounting pertaining to this program. GROSS MARGIN, EXCLUSIVE OF DISTRIBUTOR DEVELOPMENT PROGRAM- The gross margin, exclusive of Distributor Development Program costs, for the year ended September 30, 2003, was $13,514 or 39.1% of sales as compared to $15,815 or 42.6% of sales in 2002, a decrease of $2,301. Approximately $1,256 of the decrease in gross margin was associated with the cessation of the NAC. The balance of the decrease was primarily the result of an unfavorable volume variance due to lower international sales, increased Defender(R) warranty costs of $167 largely associated with certain international markets that utilize peak demand electricity transmission and control systems, and an additional charge of $299 related to obsolete inventory associated with impaired tooling, of which the unfavorable international sales volume variance was the largest. SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A")- SG&A expenses of $13,404 for the year ended September 30, 2003, were favorable to fiscal 2002 expenses of $14,591 by $1,187. The reduced level of expense was driven by the absence of advertising and administrative costs associated with our aforementioned NAC of approximately $2,334, costs associated with the Form 13D that was filed, in fiscal 2002, by a group led by our current Chairman, Kirk W. Foley, with the Securities and Exchange Commission of $435, and reduced outside consulting expenses of $235. These decreases were partially offset by increased costs of $1,223 associated with the training, development, and retention of our Americas and International networks as well as expenses approximating $871 associated with certain growth initiatives in the Americas division. LOSS ON IMPAIRMENT OF ASSET- During the fourth quarter of fiscal 2003, we performed an analysis on the potential impairment of certain tooling assets, and related patents and trademarks. We concluded from our analysis, which was based upon the held and used model that the tooling assets were fully impaired and accordingly recorded an impairment charge of $1,711 as of September 30, 2003, as the scrap value for these assets was determined to be nominal. LOSS ON LIQUIDATION OF SUBSIDIARY- During the second quarter of fiscal 2003, after reviewing possible future options for our Canadian subsidiary, we chose to liquidate the entity and therefore recorded a loss on disposal of $905 for cumulative translation adjustments associated with this subsidiary. INTEREST EXPENSE- Interest expense for fiscal year 2003 was $53 or $33 lower than the fiscal 2002 amount of $86 due primarily to lower interest expense associated with our line of credit whose balance was on average lower than the prior year. It was also impacted by reduced interest expense on our capital lease obligations which reflects lower outstanding balances compared to those in fiscal 2002. OTHER (INCOME) EXPENSE, NET- The increase of $502 in other (income) expense, net, from $344 of expense in fiscal 2002 to $158 of income for the year ended September 30, 2003, largely resulted from the absence of goodwill amortization associated with the adoption of SFAS No. 142 (see Note 1 to the Consolidated Financial Statements). INCOME TAXES- The effective income tax rate for the year ended September 30, 2003, was (0.3%) compared to (2.1%) in fiscal 2002. This difference was driven by pre-tax earnings as the tax 20 expense recorded was not material in either year as a result of a full valuation allowance against our deferred tax assets. CUMULATIVE EFFECT OF ACCOUNTING CHANGE- On October 1, 2002, we adopted SFAS No. 142. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. During the second quarter of fiscal 2003, we completed our initial impairment test as of October 1, 2002, and recorded a non-cash charge of $5,451 to fully eliminate the carrying value of our goodwill (See Note 1 to the Consolidated Financial Statements). There was no tax effect related to this item, as this charge was a permanent difference for income tax purposes. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES- Cash flows from operating activities provided net cash of $902 for the year ended September 30, 2004, principally due to non-cash expenses of $3,986, cash inflows resulting from decreases in inventories and prepaid expenses of $300 and $201, respectively, as well as increases in distributor development liabilities, and accrued expenses and other liabilities of $200 and $508, respectively. Offsetting cash inflows were net losses of $3,492 and increases in receivables of $875. Non-cash expenses consisted of $3,163 relating to the accounting associated with our distributor development program, $653 in depreciation and amortization, and $170 associated with the loss on disposal of our Central Vac product and the abandonment of a potential new product, both which were impaired in the third quarter of fiscal 2004. A general trend to improve our working capital balances, through improved procurement and production policies, is largely responsible for the decrease in inventories, while amortization of prepaid risk insurance was the contributing factor to the decrease in prepaid expenses. The $200 increase in our distributor development liability is associated with the amount to be paid in fiscal 2005 to our second Edge Program achiever. Accrued expenses and other liabilities increased largely as a result of a $500 accrual recorded in the third quarter of fiscal 2004 to provide for reasonably estimated and probable obligations associated with current litigation issues. The increase in the receivables balance is largely attributable to sales volume increases related to several international customers all of whom receive credit terms to assist with the time delay in shipping products overseas. Additional increases are associated with our newly formed subsidiary AdvantEdge Credit Management Services Inc. ("ACMS"). ACMS, formed in the third quarter of fiscal 2004, is a brokerage service provider for sourcing consumer credit and assists its clients, our Americas distribution network, in securing third party financing for end consumers who purchase products manufactured by HMI. The ACMS receivable balance of $298 at September 30, 2004 represents monies owed to them from third party financing companies. INVESTING ACTIVITIES- Capital expenditures of $96 represent the entire net cash used in investing activities for the year ended September 30, 2004, which relates to engineering testing equipment, computer hardware, and tooling associated with our current product line. FINANCING ACTIVITIES- Net cash used in financing activities for the year ended September 30, 2004 was $443, which included $421 for net repayments under our credit facility and $22 for payment of other long-term debt. 21 Our $3,000 credit facility agreement includes various covenants that limit our ability to incur additional indebtedness, restricts paying dividends and limits capital expenditures, and requires we maintain a minimum net worth. As of September 30, 2003, we were not in compliance with our interest coverage ratio, and net worth covenants; however, we obtained a waiver on these covenants which was effective until February 20, 2004. We were required to maintain an interest coverage ratio of greater than or equal to 5.0 to 1.0 interest to earnings before interest, taxes, depreciation and amortization ("EBITDA") and a net worth of at least $7,400, calculated quarterly and increasing by 50% of net income annually. On February 20, 2004, an amendment of our credit facility agreement was executed with our lender. The expiration date was extended to October 15, 2004. The amended agreement carried the same interest rate and similar covenants as the previous amended loan agreement, with the exception of the interest coverage ratio which was amended to exclude non-cash expenses from the 5.0 to 1.0 ratio, including but not limited to, the impairment of tooling assets and associated inventory, and the tangible net worth covenant in which the minimum amount was reset to $2,400. On October 15, 2004, an amendment of our $3,000 credit facility agreement was executed with our lender. The bank agreed to extend the maturity date of the loan until December 31, 2004. The amended agreement carries an interest rate of prime plus one percent and covenants similar to the previous amended loan agreement, with the exception of the tangible net worth covenant which was eliminated through the maturity date of the loan. On December 16, 2004, we received a letter from our current lender which outlined their commitment to amend the maturity date of our credit facility until March 31, 2005. Additionally, we agreed to reduce the facility availability from $3,000 to the original $2,000 credit limit. The purpose of the additional $1,000 availability, to assist with the build-up of inventory associated with new product launches, has been fulfilled and consequently the borrowing capacity is no longer necessary. We are actively seeking; through the use of both internal personnel and an outside broker, finance sources to replace the credit facility prior to its expiration. Although no long-term debt arrangement is in place as of the date of this filing, our current lender has been agreeable to extending our current facility on a quarter-to-quarter basis until such time, in the near future, as we have a new lender in place. As of November 30, 2004, there was $847 borrowed on the $3,000 credit facility. Management's other plans to alleviate substantial concern about the Company's ability to continue as a going concern include, but are not limited to, the following: - We have generated net cash from operations of $902, $954, and $1,356 for the three years ended September 30, 2004, 2003, and 2002. Overall, since February 2004, we have reduced expenses, both in the manufacturing environment and in administrative arenas, by approximately $2 million on an annualized basis. It is our intention to continue to concentrate on expense reduction with a significant concentration on product sourcing and material costs through fiscal 2005. We currently anticipate that our operating activities will continue to provide net cash from operations through fiscal 2005. - We have approximately $1,370 invested in 90-day treasury bills. This investment, although segregated for our Edge Program, can be utilized for working capital needs. If 22 we cannot replace the credit facility prior to March 31, 2005, we currently anticipate that we will have sufficient liquidity to repay the credit facility and cover all our cash needs through September, 2005 without use of the treasury bill investment, and, if we were to use the treasury bill investment, we believe we will have sufficient liquidity to cover our cash needs through December 2005. CONTRACTUAL OBLIGATIONS / OFF-BALANCE SHEET ARRANGEMENTS- We have no significant contractual obligations not fully recorded on our Consolidated Balance Sheets or fully disclosed in the Notes to our Consolidated Financial Statements. We have no material off-balance sheet arrangements. Set forth below, in tabular form, is information as of September 30, 2004, for the periods indicated concerning our obligations and commitments to make future payments under long-term obligations:

~~Dollars~~Fiscal inFiscal ~~thousands~~Beyond ~~Capital~~Fiscal in2006- ~~Accumulated~~2008- ~~Excess~~Fiscal ~~Retained~~Contractual ~~Other~~Obligations ~~Treasury~~ Total ~~Common~~2005 of2007 ~~Par~~2009 ~~Unearned~~2009 ~~Earnings Comprehensive Treasury Stock Stockholders' Stock Value Compensation (Deficit) Loss Shares Amount Equity~~ --------- ------- -------------- --------- ---------- ---- -------- --------- ----------~~---~~ ~~Balance~~Line atof ~~September~~credit ~~30, 1998~~ $ ~~5,369~~962 $~~8,246~~ ~~($595)~~962 $ ~~3,103~~- ($ ~~1,038)~~- ~~210 (~~$ ~~986)~~- $Long-term ~~14,099~~debt ~~Comprehensive~~11 ~~loss:~~11 ~~Net~~- ~~loss~~- ~~(4,616) (4,616) Translation adjustment 31 31~~ -~~---------~~ ~~Total~~Operating ~~comprehensive~~leases ~~loss (~~4,~~585)~~514 ~~Write~~524 ~~off~~811 of798 sold subsidiaries cumulative translation adjustment 139 139 Treasury shares issued (613) (178) 860 247 Unearned compensation 450 450 Employee benefit stock (24) (24) ======= ======= ===== ======= ====== ======== ======= ========== Balance at September 302,381 ~~1999~~Earned ~~5,369~~distributor ~~7,609~~development ~~(145)~~program ~~(1,513)~~awards ~~(868) 32 (126) 10,326 Comprehensive loss: Net income~~ 1,~~890~~400 ~~1,890~~400 ~~Translation~~800 ~~adjustment~~200 ~~(11)~~- ~~(11)~~--------- ---------- Total comprehensive income 1,879 Treasury shares issued (92) (32) 126 34 Issuance of common stock 1,289 714 2,003 Unearned compensation 104 104 Employee benefit stock 48 48 ======= ======= ===== ======= ====== ======== ======= ========== Balance at September 30, 2000 6,658 8,279 (41) 377 (879) ---------- -------- ~~14,394 COMPREHENSIVE INCOME: NET INCOME 87 87 TRANSLATION ADJUSTMENT (21) (21)~~ ---------- ~~TOTAL~~Total ~~COMPREHENSIVE INCOME 66 ISSUANCE OF COMMON STOCK 50 50 UNEARNED COMPENSATION 33 33 ======= ======= ===== ======= ====== ======== ======= ========== BALANCE AT SEPTEMBER 30, 2001~~ $ 6,~~708~~887 $8 1,~~279~~897 ($ 8)1,611 $ ~~464~~998 ($ ~~900) - - $ 14~~2,~~543~~381 ======= == ===== ===== ======= ===~~===~~ ======== ======= ===~~=======~~

Our line of credit is our credit facility as described above. Long-term debt of $11 consists entirely of capital leases for certain plant equipment which we expect will be fully paid by March 2005. Rent associated with our manufacturing and corporate office buildings as well as monthly obligations for various office equipment, primarily a phone system and copiers, largely comprise our operating leases. These leases expire on various dates through 2014. ACCRUED DISTRIBUTOR DEVELOPMENT LIABILITIES We account for the potential one million dollar award for the Edge Success Program ("Program") pursuant to EITF 01-9 "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)". The Program was designed to aid the Master Distributors in their retirement/succession plan, and promote growth and retention within the new Distributor network. Prior to the adoption of EITF 01-9 in fiscal 2001, we utilized the services of an independent actuary who developed a model based on our historical sales and other factors that identified the probability of distributors reaching the goal (in aggregate) thereby triggering our cash payment obligation. We recognized expense and recorded a liability based on that model. However, as HMI is selling to distributors, any monetary amounts that are paid to the distributors, pursuant to a program that is geared to volume of sales falls within EITF 01-9. EITF 01-9 states that any such amounts accrued must be reflected in the income statement as a reduction of sales rather than selling expense. It also sets out the standard that a liability should be recognized based on a systematic and rational allocation of the cost of honoring rebates or refunds earned and claimed to each of the underlying revenue transactions that result in progress by the customer toward earning the rebate or refund. Breakage (the amount of distributors who 23 will not reach the goal) should be estimated only if it can be reasonably estimated. EITF 01-9 indicates that the ability to make a reasonable estimate depends on many factors. Certain factors (such as a relatively long period in which a particular rebate or refund may be claimed, as is in the case of our Program) may indicate that breakage cannot be reasonably estimated. Related guidance states that if recurring variances between the actual and estimated amount of refunds are immaterial to either revenue or net income in quarterly or annual financial statements then the item is considered reasonably estimable. Over fifteen quarters ended September 30, 2004 to which EITF 01-9 applies, our average actuarial gain (loss) may or may not be deemed material; however, on an individual quarter-by-quarter basis the significant volatility of the actuarial gains/loss to pre-tax income was deemed material to our financial results. Therefore we concluded breakage from that perspective may not be reasonably estimated and we could not use our actuarial method to estimate the liability. This results in our recording a liability related to every qualifying sale and only derecognizing such liability (i.e. the accrual is eliminated) when (i) the award is paid out or (ii) when a distributor is no longer eligible for the award. The application of EITF 01-9 requires a $16,321 accrual at September 30, 2004, to reflect the future obligation associated with the Program since the effective adoption of EITF 01-9. This amount was determined by multiplying the percentage of attainment of the 30,000 unit goal for every eligible distributor by the present value of five payments of $200,000, discounted at a risk adjusted interest rate. We have been operating with a distributor network for over seventy years and we implemented the Program in 1997. During those periods we have closely monitored the distributor network and the turnover rate in the network. Based on that accumulated knowledge, we believe that application of EITF 01-9, which requires accruing on each sale as if every distributor involved with the sale was going to earn the $1 million award, results in the recognition of an obligation we believe will be significantly in excess of the payouts from the Program for the foreseeable future. This is due to the assumption inherent in the maximum accrual calculation that every distributor involved with a sale will qualify to earn the award. Our history shows this not to be the case. During the twelve quarters ended September 30, 2004, our turnover rate was, on average, more than 50%. For example, the participants in the Program from the Americas network who left the Program during the twelve months ended September 30, 2004 represented an accrual of over $2,800 and that period was not a period of extraordinary turnover. Because we measure the accrual quarterly, departures may cause quarterly results to vary greatly. In addition, the criteria for derecognizing the accrual for any distributor requires that the distributor has lost eligibility to participate in the Program. We have been funding the actuarially determined present value of total award payouts calculated on an aggregate basis under this program since September 2000 and such fund had a balance of $1,293 as of September 30, 2004. It is our current intention to continue to fund the projected stream of cash payouts subject to our cash flow model based on our aggregate actuarial model, which will continue to be updated annually by our independent actuaries based on our experience. These funds are maintained in a short term investment account and recorded as cash and cash equivalents in our Consolidated Balance Sheets. 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 24 securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature, including by way of example, but not limited to, the statements made in "Product Sales" regarding the hope to rebuild a certain sales territory in the Americas, and "Liquidity" regarding anticipated cash requirements and the adequacy of our current ability to meet those requirements. Such forward-looking statements are subject to uncertainties such as difficulty in protecting our intellectual property rights in a particular foreign jurisdiction; dependency on key personnel and the ability to retain them; recessions in economies where we sell our products; longer payment cycles for and greater difficulties collecting accounts receivable; export controls, tariffs and other trade protection measures; social, economic and political instability; changes in United States and foreign countries laws and policies affecting trade; anticipated sales trends; the ability to attract and retain Distributors and Importers; improved lead generation and recruiting; and the ability to obtain financing for the end consumer through consumer financing companies, including ACMS. Such uncertainties are difficult to predict and could cause our actual results of operation to differ materially from those matters expressed or implied by such forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (DOLLARS IN THOUSANDS) 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 September 30, 2004, we had $962 outstanding under our credit facility bearing interest at prime rate (4.75%). If interest rates were to increase 50 basis points (0.5%) from the September 30, 2004, rates and assuming no changes in outstanding debt levels from the September 30, 2004, levels, we would realize an increase in our annual interest expense of approximately $5. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Index to Financial Statements included in this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Under the supervision and with the participation of management, including our principal executive officer and principal financial officer we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). The principal executive officer and principal financial officer have concluded, based on their review, that our disclosure controls and procedures, were effective as of the end of the period covered by this annual report to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in Securities and Exchange Commission rules and forms. 25 CHANGES IN INTERNAL CONTROLS We have undertaken and are in the process of hiring an employee in the Finance department with a prime responsibility being the ongoing research and analysis of all new accounting pronouncements and their implications to our Company. The analysis of the new pronouncements will be reviewed with the Chief Financial Officer, Corporate Controller and outside accountants to access their applicability to the financial statements and disclosure requirements necessary to meet the requirements of the SEC and generally accepted accounting principles. Other then noted above, no significant changes were made to our internal controls or other factors during the last fiscal quarter that could significantly affect the evaluation of these controls as referenced in the above section "Evaluation of Disclosure Controls and Procedures." ITEM 9B. OTHER None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by this item regarding directors is incorporated by reference to our Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held in 2005 (the "2005 Proxy Statement") under the headings "Election of Directors." Information regarding executive officers is set forth in Item 1 of Part I of this Report under the caption "Executive Officers." The information regarding our code of ethics is available on our website at www.filterqueen.com. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the 2005 Proxy Statement under the heading "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the 2005 Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the 2005 Proxy Statement under the heading "Certain Transactions." ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated by reference to the 2005 Proxy Statement under the heading "Fees Paid to Grant Thornton LLP and PricewaterhouseCoopers LLP." 26 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS PART OF THIS REPORT. 1. FINANCIAL STATEMENTS AND RELATED SCHEDULES:

~~HMI~~Page ~~Industries~~Number ~~Inc. CONSOLIDATED STATEMENTS OF CASH FLOW Dollars in thousands FOR THE YEARS ENDED SEPTEMBER 30, 2001 2000 1999~~ ------~~-----------------------------------------------------------------------------------------~~ ~~CASH~~Report ~~FLOWS~~of ~~FROM~~Independent ~~OPERATING~~Registered ~~ACTIVITIES:~~Public ~~Net~~Accounting ~~income~~Firm ~~(loss)~~on $the 87September ~~$ 1~~30,~~890~~ ~~$(4,616)~~2004 ~~Adjustments~~financial tostatements ~~reconcile~~31 ~~net~~Report ~~income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 913 802 823 Impairment~~ of ~~asset~~Independent --Registered --Public ~~2,665~~Accounting ~~(Gain)~~Firm ~~loss~~ on ~~disposal~~the ofSeptember ~~discontinued operations -- (425) 375 Provision for loss on sale/disposal of assets -- 12 48 Treasury/common shares issued~~30, ~~net~~2003 ~~of unearned compensation 83 263 674 Deferred income taxes (230) (435) -- Changes in operating assets~~ and ~~liabilities:~~2002 ~~Decrease~~financial ~~(increase)~~statements in32 ~~receivables~~Consolidated ~~1,181~~Balance ~~(868)~~Sheets ~~1,881~~as ~~(Increase)~~of ~~decrease~~September ~~in inventories (532) (380) 1~~30,~~529~~ ~~Decrease (increase) in prepaid expenses 227 (234) 49 Increase in other current assets (73) (244) (46) Decrease in accounts payable (656) (329) (2~~2004,~~231)~~ ~~(Decrease) increase in accrued expenses~~ and ~~other~~2003 ~~liabilities~~33 ~~(824)~~Consolidated 71Statements ~~(575)~~of ~~Decrease~~Operations infor ~~income~~the ~~taxes~~years ~~payable~~ended ~~(431)~~September ~~(53)~~30, ~~(110)~~2004, ~~Other~~2003, ~~net~~and ~~(169)~~2002 ~~(205)~~34 ~~161~~Consolidated ~~-----------------------------------------------------------------------------------------------~~Statements ~~Net~~of ~~cash~~Stockholders' ~~(used~~Equity ~~in)~~for ~~provided~~the byyears ~~operating~~ended ~~activities~~September ~~(424) (135) 627 ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets~~30, ~~net -- -- 793 Capital expenditures (2~~2004,~~278)~~ ~~(970) (76) ----------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (2~~2003,~~278)~~ ~~(970)~~and ~~717~~2002 ~~-----------------------------------------------------------------------------------------------~~35 ~~CASH~~Consolidated ~~FLOWS~~Statements ~~FROM FINANCING ACTIVITIES: Net borrowings (repayments) under credit facility 1,191 -- (508) Payment~~ of ~~long~~Cash ~~term~~Flows ~~debt~~for ~~(17)~~the ~~(51)~~years ~~(122)~~ended ~~Net~~September ~~proceeds from issuance of common stock -- 1~~30,~~926~~ ~~-- ----------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 1~~2004,~~174~~ 12003,~~875~~ ~~(630) ----------------------------------------------------------------------------------------------- Net (decrease) increase in cash~~ and ~~cash~~2002 ~~equivalents~~36 ~~(1,528)~~Notes ~~770~~to ~~714~~Consolidated ~~CASH~~Financial ~~AND~~Statements ~~CASH~~37 ~~EQUIVALENTS,~~Schedule ~~BEGINNING~~II ~~OF PERIOD 1,535 765 51~~ -~~----------------------------------------------------------------------------------------------~~ ~~CASH~~Valuation ~~AND~~and ~~CASH~~Qualifying ~~EQUIVALENTS,~~Accounts ~~END~~and OFReserves ~~PERIOD $ 7 $ 1,535 $ 765 =================================================================================================~~57

Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the consolidated financial statements, the notes thereto, or in Management's Discussion and Analysis of Financial Condition and Results of Operations. 27 2. EXHIBIT LIST:

~~2001~~Exhibit ~~2000~~Number Description ------- -- ------------------------------------------------------------------------------------ ~~Percentage~~3.1 Certificate of ~~total~~Incorporation~ ~~inventories~~Incorporated by reference from Annual Report on ~~LIFO~~form ~~100%~~10-K ~~100%~~for ~~Inventory~~the ~~amount~~year ~~had~~ended ~~FIFO~~September ~~method~~30, ~~been~~1995 ~~utilized~~3.2 toBylaws~ ~~value~~Incorporated ~~inventory~~by reference from Form 10-Q for the quarter ended June 30, 2003 Voting Trust Agreement~ 9.0 Stockholders Voting Agreement, incorporated by reference from Form 13-D filed on October 19, 2001, and Form 13-D/A3 filed on October 11, 2004. 10.00 Material Contracts~ U.S. Bank N.A. $2,000,000 4Revolving Credit Note,~~147~~ incorporated by reference from Form 10-Q for the quarter ended June 30, 2001 10.01 Material Contracts~ U.S. Bank N.A.$1,000,000 3Revolving Credit Note,~~709~~ ~~Increase~~incorporated inby ~~net~~reference ~~income~~from ~~before~~Form ~~taxes~~10-Q ~~due~~for the period ended March 31, 2002 10.02 Material Contracts~ Amendment to ~~LIFO~~U.S. Bank N.A. $1,000,000 94Revolving Credit Note, incorporated by reference from Form 10-K for the year ended September 30, 2002 10.03 Material Contracts~ Amendment to U.S. Bank N.A. $2,000,000 38Revolving Credit Note, incorporated by reference from Form 10-Q for the quarter ended December 31, 2002 10.04 Material Contracts~ Amendment to U.S. Bank N.A. $2,000,000 Revolving Credit Note, incorporated by reference from Form 10-K for the year ended September 30, 2003 10.05 Material Contracts~ U.S. Bank N.A. Waiver Letter and Amendment to Revolving Credit Note, dated February 20, 2004, incorporated by reference from Form 10-K for the year ended September 30, 2003. 10.06 Material Contracts~ U.S. Bank N.A. Waiver Letter and Amendment to Revolving Credit Note, dated October 15, 2004, incorporated by reference from Form 8-K filed on October 21, 2004. 10.07 Material Contracts~ 13-D Settlement Agreement incorporated by reference from Form 8-K filed on February 19, 2002 10.08 Material Contracts~ Change of Control Agreement - Weeter, incorporated by reference from Form 10-K for the year ended September 30, 2003. 10.09 Material Contracts~ Change of Control Agreement - Duggan, incorporated by reference from Form 10-K for the year ended September 30, 2002

28 10.10 Material Contracts~ Change of Control Agreements - McGraw, incorporated by reference from Form 10-K/A3 for the year ended September 30, 1997 10.11 Material Contracts~ Incentive Stock Option Agreement - Pryor, incorporated by reference from Form 10-K for the year ended September 30, 2001 10.12 Material Contracts~ Incentive Stock Option Agreements, incorporated by reference from Form 10-K for the year ended September 30, 2001 10.13 Material Contracts~ Incentive Stock Option Agreements, incorporated by reference from Form 10-K for the year ended September 30, 2000 11 Statement re: Computation of per share earnings~ See Note 1 on Page 45 of the Financial Statements 14 Code of Ethics~ Code of Ethics and related amendment available on the Company's website at www.filterqueen.com. 21 Subsidiaries of Registrant~ Note 1 on Page 57 of this report 23.1 Consent of Independent Accountants (Grant Thornton LLP)~ Attached 23.2 Consent of Independent Accountants (PricewaterhouseCoopers LLP)~ Attached 31.1 Rule 13a-14(a)/15d-14(a) Certification~ Certification Pursuant to 15 U.S.C. Section 7241 for Kirk. W. Foley, attached 31.2 Rule 13a-14(a)/15d-14(a) Certification~ Certification Pursuant to 15 U.S.C. Section 7241 for Julie A. McGraw, attached 32.1 Section 1350 Certification~ Certification for Kirk W. Foley Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), attached 32.2 Section 1350 Certification~ Certification for Julie A. McGraw Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), attached

(B) REPORTS ON FORM 8-K. We filed a report with the SEC on Form 8-K dated November 19, 2004, announcing that John Pryor, President of the Company, resigned effective November 22, 2004. Mr. Pryor will remain a member of the Company's Board of Directors. (C) EXHIBITS. 29 Reference is made to the above Exhibit List table. (D) FINANCIAL STATEMENT SCHEDULES. Schedules required to be filed in response to this Item are listed above in the Financial Statements and Related Schedules table. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. HMI INDUSTRIES INC. (Registrant) by /s/ Julie A. McGraw ----------------------------------- Julie A. McGraw Vice President, Chief Financial Officer and Treasurer December 17, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Kirk W. Foley /s/ John A. Pryor /s/ Robert Breadner ------------------------------------------ ---------------------------------------- --------------------------------------- Kirk W. Foley John A. Pryor Robert Breadner Chairman of the Board and Director Director Director December 17, 2004 December 17, 2004 December 17, 2004 /s/ Wesley E. Foley /s/ Murray Walker /s/ Ivan J. Winfield ------------------------------------------ ---------------------------------------- --------------------------------------- Wesley E. Foley Murray Walker Ivan J. Winfield Director Director Director December 17, 2004 December 17, 2004 December 17, 2004 /s/ Earl J. Watson ------------------------------------------ Earl J. Watson Corporate Controller December 17, 2004

30 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders of HMI Industries Inc. We have audited the accompanying consolidated balance sheet of HMI Industries Inc. (a Delaware corporation) and its subsidiaries as of September 30, 2004, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of HMI Industries Inc. and its subsidiaries as of September 30, 2004, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company incurred aggregate net losses of $17,564,000 during its most recent three fiscal years and, as of September 30, 2004 the Company's total liabilities exceeded its total assets by $12,247,000. In addition, the Company's credit agreement expires on December 31, 2004. These factors, among others, as discussed in Note 2, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Grant Thornton LLP Cleveland, Ohio December 16, 2004 31 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of HMI Industries, Inc. and its subsidiaries at September 30, 2003, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets to comply with the provisions of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets," effective October 1, 2002. As discussed in Note 5, the Company's credit facility agreement expires on December 31, 2004. The consolidated financial statements reflect the restatement described in Note 2 to the September 30, 2003 consolidated financial statements (which Note is not separately presented herein). /s/ PricewaterhouseCoopers LLP Cleveland, Ohio February 13, 2004 (except for the restatement described above and Note 5, as to which the date is October 20, 2004) 32 HMI INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS

~~2001~~SEPTEMBER ~~2000~~30, September 30, Dollars and shares in thousands, except par values 2004 2003 --------------------------------------------------------------------------- ------------- ------------- ~~Per~~ASSETS ~~Per~~CURRENT ~~Share~~ASSETS: ~~Share~~Cash ~~Shares~~and ~~Amount~~cash ~~Shares~~equivalents ~~Amount~~$ 1,311 $ 948 Trade accounts receivable (net of allowance of $132 and $194) 2,767 1,892 Inventories: Finished goods 2,458 2,555 Work-in-progress, raw material and supplies 1,950 2,153 Prepaid expenses 196 397 Other current assets 134 152 ------------- ------------- Total current assets 8,816 8,097 ------------- ------------- ~~Basic~~PROPERTY, ~~EPS~~PLANT 6AND EQUIPMENT,~~691~~ NET 1,526 2,178 ------------- ------------- OTHER ASSETS: Trademarks (net of accumulated amortization of $239 ~~0.01~~and 6$202) 149 272 Other - 121 ------------- ------------- Total other assets 149 393 ------------- ------------- Total assets $ 10,~~113~~491 $ ~~0.31~~10,668 ~~Effect~~============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of ~~dilutive~~credit ~~stock~~$ ~~options~~962 33$ 1,383 Trade accounts payable 2,036 2,143 Income taxes payable 501 506 Accrued expenses and other liabilities 2,907 2,399 Distributor Development Liability due within one year 400 200 Long-term debt due within one year 11 22 ------------- 27------------- Total current liabilities 6,817 6,653 ------------- ------------- LONG-TERM LIABILITIES: Long-term debt (less amounts due within one year) - 11 Distributor Development Liability (less amounts due within one year) 15,921 12,758 ------------- ------------- Total long-term liabilities 15,921 12,769 ------------- ~~Diluted~~------------- ~~EPS~~STOCKHOLDERS' 6DEFICIT: Preferred stock,~~724~~ $5 ~~0.01~~par value; authorized, 300 shares; issued, none - - Common stock, $1 par value; authorized, 10,000 shares; issued and outstanding, 6,~~140~~746 shares 6,746 6,746 Capital in excess of par value 8,230 8,231 Accumulated deficit (27,223) (23,731) ------------- ------------- Total stockholders' deficit (12,247) (8,754) ------------- ------------- Total liabilities and stockholders' deficit $ ~~0.31~~10,491 $ 10,668 ====== ======= ====== =======

See notes to consolidated financial statements. 33 HMI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS

~~2001~~FOR ~~2000~~THE YEARS ENDED SEPTEMBER 30, Dollars and shares in thousands, except per share data 2004 2003 2002 --------------------------------------------------------------------------- ------------ ~~Leasehold~~------------ ~~improvements~~------------ $REVENUES: ~~288~~Product $sales, ~~288~~less ~~Machinery~~returns and ~~equipment~~allowances 635,~~168~~591 534,~~178~~539 ~~Construction~~37,113 inDistributor ~~progress~~development program (3,687) (4,369) (2,~~074~~589) ~~197~~------------ ------------ ------------ 8Net product sales 31,~~530~~904 530,~~663~~170 ~~Accumulated~~34,524 ~~depreciation~~Other 4revenues 86 - - ------------ ------------ ------------ Total revenues $ 31,~~720~~990 4$ 30,~~112~~170 $ 34,524 ------------ ------------ ~~Net~~------------ ~~property~~OPERATING COSTS AND EXPENSES: Cost of products sold 21,479 ~~plant~~21,025 21,298 Selling, general and ~~equipment~~administrative expenses 13,985 13,404 14,591 Loss on impairment of asset - 1,711 - Loss on liquidation of subsidiary - 905 - Interest expense 77 53 86 Other (income) expense, net (66) (158) 344 ------------ ------------ ------------ Total operating costs and expenses 35,475 36,940 36,319 ------------ ------------ ------------ Loss before income taxes and cumulative effect of accounting change (3,485) (6,770) (1,795) Provision for income taxes 7 18 38 ------------ ------------ ------------ Loss before cumulative effect of accounting change (3,492) (6,788) (1,833) Cumulative effect of accounting change - 5,451 - ------------ ------------ ------------ NET LOSS $ (3,~~810~~492) $ (12,239) $ (1,~~551~~833) ============ ============ ============ Weighted average number of shares outstanding: Basic 6,746 6,744 6,719 Diluted 6,746 6,744 6,719 ============ ============ ============ BASIC AND DILUTED PER SHARE OF COMMON STOCK (NOTE 1): Loss before cumulative effect of accounting change $ (0.52) $ (1.01) $ (0.27) Cumulative effect of accounting change $ - $ (0.81) $ - ------------ ------------ ------------ NET LOSS $ (0.52) $ (1.82) $ (0.27) ============ ============ ============

See notes to consolidated financial statements. 34 HMI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003, AND 2002

~~2001~~Capital ~~2000~~in Accumulated Total Excess Other Treasury Stockholders' Common of Par Unearned Accumulated Comprehensive Treasury Stock Equity Dollars in thousands Stock Value Compensation Deficit Loss Shares Amount (Deficit) ----------------------------- ------ ------- ~~Accrued~~------------ ~~distributor~~----------- ~~development~~------------- -------- -------- ------------- Balance at September 30, 2001 $6,708 ~~530~~$ 8,279 ($ ~~459~~8) ~~Distributor~~($ ~~fund~~9,659) ~~payable~~($ ~~483~~900) ~~347~~- ~~Accrued~~$ - $ 4,420 Comprehensive income: Net loss, restated (1,833) (1,833) Translation adjustment (5) (5) --------- Total comprehensive income (1,838) Issuance of common stock 38 38 Unearned compensation ~~407~~5 ~~987~~5 ~~Accrued~~Employee ~~warranty~~benefit ~~299~~stock ~~431~~(48) ~~Other~~(48) ~~297~~------ ~~616~~------- ------------ ----------- $---------- -------- -------- --------- Balance at September 30, 2002 6,746 8,231 (3) (11,492) (905) - - 2,~~016~~577 Comprehensive income: Net loss, restated (12,239) (12,239) Translation adjustment - --------- Total comprehensive income (12,239) Cumulative translation adjustment associated with liquidation of foreign 905 905 subsidiary Unearned compensation 3 3 ------ ------- ------------ ----------- ---------- -------- -------- --------- Balance at September 30, 2003 6,746 8,231 - (23,731) - - - (8,754) NET LOSS (3,492) (3,492) OTHER ADJUSTMENT (1) (1) ------ ------- ------------ ----------- ---------- -------- -------- --------- BALANCE AT SEPTEMBER 30, 2004 $6,746 2$ 8,~~840~~230 $ - ($ 27,223) $ - - $ - ($ 12,247) ====== ======= ============ =========== ========== ======== ======== =========

See notes to consolidated financial statements. 35 HMI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

~~2001~~FOR ~~2000~~THE YEARS ENDED SEPTEMBER 30, Dollars in thousands 2004 2003 2002 --------------------------------------------------------------------------- ------------ ~~Bank~~------------ ~~Line~~------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,492) $ (12,239) $ (1,833) Adjustments to reconcile net loss to net cash provided by operating activities: Cumulative effect of ~~Credit~~accounting change - ~~See~~5,451 ~~Above~~- $Loss on impairment of asset - 1,~~191~~711 $- Loss on liquidation of foreign subsidiary - 905 - Distributor development program 3,163 3,969 2,589 Depreciation and amortization 653 744 928 Provision for loss on sale/disposal of assets 170 - 17 Provision for loss on receivables - - 59 Treasury/common shares issued, net of unearned compensation and employee benefit stock - - (5) Unearned compensation - 3 - Changes in operating assets and liabilities: (Increase) decrease in receivables (875) 115 100 Decrease (increase) in inventories 300 (518) (441) Decrease (increase) in prepaid expenses 201 (105) (108) Decrease (increase) in other current assets 18 (98) 309 (Decrease) increase in accounts payable (107) 186 (343) Increase in accrued expenses and other liabilities 508 536 188 Increase in distributor development liability 200 200 - Decrease in income taxes payable (5) (11) (18) Other, net 168 105 (86) ------------ ------------ ~~Vendor~~-~~finance~~----------- ~~Obligations~~Net ~~588~~cash provided by operating activities 902 954 1,356 --- --------- ------------ ------------ ~~bearing~~CASH ~~interest~~FLOWS atFROM ~~0.0%~~INVESTING toACTIVITIES: ~~11.50%~~Capital ~~due~~expenditures (96) (176) (866) ------------ ------------ ------------ Net cash used in ~~monthly~~investing ~~installments~~activities (96) (176) (866) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowing under credit facility (421) (9) 201 Payment of ~~$67~~long term debt (~~including~~22) ~~interest~~(302) ~~through~~(615) ~~October~~------------ ~~2002~~------------ ------------ Net cash used in financing activities (443) (311) (414) ------------ ------------ ------------ Net increase in cash and cash equivalents 363 467 76 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 948 481 405 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,311 $ 948 $ 481 ============ ============ ============

See notes to consolidated financial statements. 36 HMI Industries Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) BASIS OF CONSOLIDATION The consolidated financial statements include all controlled subsidiaries. Operations include the accounts of HMI Industries Inc. and the following wholly-owned subsidiaries: AdvantEdge Credit Management Services Inc., Health-Mor International Inc., HMI Incorporated, Health-Mor Acceptance Corporation, and HMI Acceptance Corporation. All significant intercompany accounts and transactions have been eliminated. Our principal products include a high filtration portable surface cleaner that is marketed as a healthier alternative to the typical vacuum cleaner and a portable room air cleaner that helps to remove particles, gases, and odors from the air. The two products are sold together as a complete Filter Queen Indoor Air Quality System(TM). USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS Our financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities, line of credit, and short and long-term debt in which the fair value of these financial instruments approximates the carrying value. CASH EQUIVALENTS We consider all highly liquid instruments purchased with a maturity of less than three months to be cash equivalents. Cash equivalents are comprised primarily of commercial paper. We believe the carrying amounts approximate fair value due to the short maturities of these instruments. ALLOWANCE FOR DOUBTFUL ACCOUNTS 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. 37 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. ADVERTISING COSTS We expense the production costs of advertising the first time the advertising takes place. Advertising expense was $50, $151, and $1,808, in fiscal 2004, 2003, and 2002, respectively. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out (LIFO) method, which provides a better matching of current costs and revenues. The following presents the effect on inventories and income before taxes had we used the first-in, first-out (FIFO) method of inventory valuation.

~~2001~~2004 ~~2000~~2003 ~~1999~~ ------------ ----------- ~~------------~~Percentage ~~Net~~of ~~income~~total ~~(loss),~~inventories ason ~~reported~~LIFO $100% 87100% $Inventory ~~1,890~~amount ($had ~~4,616)~~FIFO ~~Net~~method ~~(loss)~~been ~~income,~~utilized ~~pro~~to ~~forma~~value $inventory ~~(153)~~ $ 14,~~685~~798 ($ 45,~~781)~~103 ~~Income~~Decrease ~~(loss)~~in ~~per~~net ~~common~~loss ~~share~~before ~~(basic~~taxes, ~~and~~due ~~diluted):~~to AsLIFO ~~reported~~reserve $ ~~0.01 $ 0.31~~ (~~$ 0.88~~6) ~~Pro forma (~~$ ~~0.02) $ 0.27~~ (~~$ 0.91~~14)

EXCESS AND OBSOLESCENCE RESERVES We evaluate our inventory quarterly 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. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is provided on the straight-line method over estimated useful lives of 5 years for leasehold improvements and 3 to 10 years for machinery and equipment. Improvements, which extend the useful life of property, plant and equipment, are capitalized, and maintenance and repairs are expensed. When property, plant and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in income. GOODWILL AND OTHER INTANGIBLE ASSETS Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" we ceased amortizing goodwill in the period beginning October 1, 2002. Prior to the adoption of SFAS No. 142, we amortized goodwill on a straight-line basis over 40 years. Other intangible assets are amortized on a straight-line basis over their useful lives, ranging from ten to seventeen years. Goodwill amortization for the year ended September 30, 2002 was $245. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets, require that goodwill and indefinite-lived intangible assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), require that reporting units be identified for the purpose of assessing potential impairments of goodwill, and remove the forty-year limitation on the amortization period of intangible assets that have finite lives. 38 During the first quarter of fiscal 2003 we completed the first step of the two-step implementation process by obtaining a valuation of HMI for comparison to the carrying value and began the process of measuring the amount of the impairment (step two). Management does not believe that the market value of common stock fairly reflects the value of HMI, because of, among other things, the absence of liquidity, and the absence of analyst coverage. Accordingly, the valuation experts employed by us utilized the market value of the common stock as of October 1, 2002, but also weighted the valuation for comparable values of peer companies, recent sales of similar types of companies, and a discounted cash flow methodology. Based on the assumptions used in any of the three valuations referred to above and depending on the weighting used for each valuation, results of the valuation could be significantly changed. However, for accounting purposes we believed that the weighting methodology used was reasonable and resulted in an accurate and fair value of HMI. During the second quarter of fiscal 2003 we completed our initial impairment test for October 1, 2002, resulting in a full impairment of the goodwill recorded on HMI's books through a non-cash charge of $5,451. Such charge is non-operational in nature and is reflected as a Cumulative Effect of Accounting Change in the accompanying Consolidated Statements of Operations for the year ended September 30, 2003. A reconciliation of the reported net loss and net loss per share to the amounts adjusted for the exclusion of amortization of goodwill and the cumulative effect of a change in accounting principle for the years ended September 30, 2003, and 2002, respectively, had the provisions of SFAS No. 142 been applied on October 1, 2001, is as follows:

~~2001~~2003 ~~2000~~2002 ~~1999 OPTIONS OPTIONS OPTIONS~~ ---------- ---------- Loss before cumulative effect of accounting change $ (6,788) $ (1,833) Cumulative effect of accounting change 5,451 --- ---------- ---------- Net loss (12,239) (1,833) Goodwill amortization add back, net of tax -~~---~~ 245 ---------- ----------~~---~~ ~~Risk~~Adjusted ~~free~~net ~~interest~~loss ~~rate~~$ ~~3.9%~~(12,239) to$ ~~4.9% 6.~~(1%,588) to========== ~~6.5%~~========== ~~4.7%~~Weighted toaverage ~~5.1%~~number ~~Expected~~of ~~life~~shares ofoutstanding: ~~option~~Basic 3and ~~yrs.~~diluted to6,744 46,719 ~~yrs.~~========== 3========== ~~yrs.~~Basic toand 4diluted ~~yrs.~~per 3share ~~yrs.~~of ~~Expected~~common ~~dividend~~stock: ~~yield~~Loss before cumulative effect of ~~stock~~accounting 0change $ (1.0%01) $ (0.0%27) Cumulative effect of accounting change $ (0.0%81) ~~Expected~~- ~~volatility~~Goodwill amortization add back, net of ~~stock~~tax ~~95.3%~~- to$ ~~102~~0.5%04 ~~79.4%~~========== to========== ~~85.5%~~Adjusted 75net loss $ (1.3%82) to$ 80(0.4%23) ========== ==========

Total amortization expense for trademarks and patents was $39, $49, and $41 for the years ended September 30, 2004, 2003, and 2002, respectively. Amortization expense for trademarks and patents is estimated for the next five fiscal years ending September 30, 2005, through 2009, as $17, $16, $14, $12, and $11, respectively. VALUATION OF LONG-LIVED ASSETS In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" we assess potential impairments to our long-lived assets when there is evidence that 39 events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. During the fourth quarter of fiscal 2003 we performed an analysis on the potential impairment on certain tooling assets, and related patents and trademarks, approximating $1,711 which related to a potential new product. Based upon our analysis, we concluded that the tooling assets were fully impaired as of September 30, 2003; this conclusion was based upon the held and used model which includes significant assumptions regarding future cash flows and utilizes a model of weighted probability cash flow projections over the estimated life of the product. Scrap value for these assets was determined to be nominal; accordingly a $1,711 impairment of these assets was recorded as of September 30, 2003, to write the assets down to their net realizable value. This product will not have any additional resources devoted to its refinement and completion, nor will the product be marketed or sold as an ongoing part of our product portfolio. As a result the impairment is not expected to have an impact on future revenue or net income. ACCRUED DISTRIBUTOR DEVELOPMENT LIABILITIES We account for the potential one million dollar award for the Edge Success Program "Edge or Program" pursuant to Emerging Issues Task Force Consensus ("EITF") 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of a Vendor's Products)"; accordingly we reflect the accrual for this award as a reduction of revenues. We have determined that for purposes of EITF 01-9 it is not possible to reasonably estimate breakage (the amount of distributors who will not reach the goal) and therefore accrue such awards assuming a maximum accrual rate whereby we assume each eligible distributor will eventually earn the award. In other words, for each qualifying sale, we have recorded a liability by reducing revenue. Such a liability will only be derecognized (i.e. the accrual eliminated) when (i) the award is paid out or (ii) when a distributor is no longer eligible for the award. For the years ended September 30, 2004, 2003 and 2002, the accounting for this Program decreased sales by $3,687, $4,369 and $2,589, respectively. On our Consolidated Balance Sheets as of September 30, 2004, and 2003 we had accrued $16,321, and $12,958, respectively, relative to this Program. FOREIGN CURRENCY TRANSLATION Prior to the liquidation, in the second quarter of fiscal 2003, of our remaining foreign subsidiaries, all consolidated foreign operations used the local currency of the country of operation as the functional currency and translated the local currency asset and liability accounts at year-end exchange rates while income and expense accounts were translated at weighted average exchange rates. The resulting translation adjustments were accumulated as a separate component of Stockholders' Equity titled "Accumulated Other Comprehensive Loss." Such adjustments affected net income only upon sale or liquidation of the underlying foreign investments. Exchange gains and losses from transactions in a currency other than the local currency of the entity involved are included in income as they occur. All of our product sales to our customer 40 base are conducted in U.S. dollars and therefore net transaction and translation adjustments are not significant. During the second quarter of fiscal 2003 we recorded a write-off of $905 for cumulative translation adjustments associated, primarily, with the liquidation of our Canadian subsidiary. The loss on disposal solely related to cumulative foreign currency translation adjustment as a result of the Canadian subsidiary ceasing to function as an operating entity in a prior fiscal year and in part the result of the goodwill impairment associated with the adoption of SFAS No. 142. In March 1998, we changed the way we operated in Canada by engaging an importer to assume responsibility for and manage the distribution network in that country, similar to the way we do business in the rest of our international markets. Consequently it was no longer necessary to maintain a physical presence in Canada, gradually reducing the necessity for the entity. For a period of time after we began selling to the importer in Canada and based on his sales results in Canada, we considered the possibility of utilizing the subsidiary again. Moreover, at the time we completed step two of our SFAS No. 142 Goodwill implementation the only material remaining items in the financial records of the Canadian subsidiary related to Goodwill and Cumulative Translation Adjustments ("CTA"). As discussed above, the goodwill was deemed to be fully impaired and was written off as a cumulative change in accounting principal due to the adoption of SFAS No. 142. In conjunction with the goodwill write off we reviewed possible future options for our Canadian subsidiary, and we chose to liquidate the entity. Therefore we recorded a loss on disposal of $905 associated with cumulative translation adjustments for this subsidiary. COMPREHENSIVE INCOME/LOSS Prior to the liquidation in the second quarter of fiscal 2003 of our remaining foreign subsidiaries, comprehensive income/loss combined net income/loss and "other comprehensive items," which represented foreign currency translation adjustments, were reported as a separate component of Stockholders' Equity in the Consolidated Balance Sheets. We presented such information in our Statements of Stockholders' Equity on an annual basis and in a footnote in our quarterly reports. Subsequent to the liquidation of our Canadian subsidiary, we did not incur foreign currency translation adjustments. GUARANTEES We have guaranteed repayment to a finance company for certain events of default by some of our Canadian distributors. The finance company purchases the installment sales contracts that the distributors entered into with their customers for the sale of products manufactured by HMI. Our obligation to repurchase any contracts is limited to situations in which the borrower has any valid defense, right of set-off or counterclaim regarding the loan; the loan does not comply with all applicable laws and regulations; or the loan is not a binding obligation of the borrower. For example, we would be required to purchase from the finance company a contract entered into by an end consumer to finance the purchase of our product if the finance company believes that the contract has been improperly obtained. We require the participating Canadian distributors to provide us with cash reserves, which are recorded as liabilities on our books, in order to provide a fund for the payments of any defaults by the participating Canadian distributors. We had $85 and $75 of cash reserves received from Canadian Distributors as of September 30, 2004 and 2003, respectively. These amounts were 41 included in the accrued expenses and other liabilities line item of our Consolidated Balance Sheets. We expect to hold the funds for at least a period approximating the term of the finance contracts with the end consumers, which typically have a 36 month term. Although it is not practical for us to estimate future cash payments on possible repurchases; the maximum potential of future payments that we could be required to make under the guarantee is the total contracts outstanding of $679 and $843 at September 30, 2004 and 2003, respectively. However, from the commencement of the contract in July 2002 we have repurchased only one contract for approximately $3 under this guarantee. Moreover, we are permitted pursuant to agreements with our Canadian distributors to be reimbursed from the cash reserves referred to above for the costs and expenses incurred in fulfilling our guarantee to the finance company. In addition, we formed a wholly owned subsidiary, AdvantEdge Credit Management Services ("ACMS") during the third quarter of fiscal 2004 to provide brokerage services for the sourcing of consumer credit by assisting our U.S. based independent distributor network in securing third party financing of our products that they sell to end consumers. ACMS has guaranteed repayment to various finance companies for certain events of default by some of our U.S. distributors in a manner similar to our guarantee with the aforementioned Canadian Finance Company. The maximum potential of future payments that ACMS could be required to make under the guarantees is associated with the total contacts outstanding at three finance companies in an aggregate amount of $3,574 at September 30, 2004. We have not been required to repurchase any contracts pursuant to this guarantee. Warranty We warrant our surface cleaner for a two-year period from the date of purchase and offer a lifetime service benefit for the replacement of the surface cleaner's motor at a price not to exceed $99 (Dollar's not in thousands). On occasion, we also support a five-year optional extended warranty on the portable surface cleaner offered by our U.S. Distributors to the end consumer as a sales promotion during an in home product demonstration. As an enticement to the end consumer to buy our product during that demonstration, the five year optional extended warranty is offered to them at no cost; accordingly no revenue for this optional warranty is recognized by HMI. Outside the U.S. we offer a two-year warranty for our high filtration portable surface cleaner. The portable room air cleaner is warranted for renewable one-year periods so long as the main air filter is replaced annually. A five-year warranty is offered for our built-in vacuum system. Our policy is to record a provision for the expected cost of warranty-related claims at the time of the sale and adjust the provision to reflect actual experience quarterly. The amount of warranty liability accrued reflects management's best estimate of the expected future cost of honoring our obligations under the warranty plans. Historically, the cost of fulfilling our warranty obligations has principally involved replacements parts, labor and sometimes travel. Our estimates are based on historical experience, the number of units involved, and the extent of features/components included in product models. 42 Changes in our warranty liability for the years ended September 30, 2004, 2003, and 2002, were as follows:

~~Shares~~2004 ~~subject~~2003 ~~Weighted~~2002 ~~to option average option (in thousands) price per share~~ -------- --------~~---~~ --------~~----------~~ ~~September~~Balance ~~30,~~at ~~1998,~~beginning ~~Outstanding~~of ~~454~~period $ ~~7.83~~193 ~~Granted~~$ ~~350~~190 ~~1.47~~$ ~~Canceled~~299 ~~(63)~~Charges ~~9.14~~to ~~-------------------~~expense ~~September~~254 ~~30,~~245 ~~1999~~60 ~~741~~Usage ~~4.72~~(250) ~~Granted~~(242) ~~457 1.14 Canceled~~ (~~137~~169) ~~7.01~~ -------- --------~~---~~ ~~September 30, 2000 1,061 2.89 Granted 596 1.18 Canceled (54) 5.14~~ --------~~-----------~~ ~~September~~Balance ~~30,~~at ~~2001,~~end ~~Outstanding~~of ~~1,603~~period $ ~~2.18~~197 $ 193 $ 190 ======== ======== ========

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. SEGMENT REPORTING We conduct our business as a single reportable segment. CONCENTRATIONS We are subject to risks specific to the individual customers with whom we do business. In fiscal 2004 and 2003 no individual customer accounted for more than 10% of our product sales. In fiscal 2002 one international customer in Japan accounted for 11.9% of our product sales. Our revenues, and the stability of such revenues, are dependent on our relationships with third-party distributors and their sales persons and their level of satisfaction with our products and us. The Distributors and Importers are independent third parties who are not our employees and are not directly under our control. There can be no assurance that the current relationships with Distributors and Importers will continue on acceptable terms and conditions to us, nor can there be any assurance that additional distributorship arrangements with third parties will be obtained on acceptable terms. Moreover, there can be no assurance that the Distributors and Importers will devote sufficient time and resources to our products to enable the products to be successfully marketed. Failure of some or all of our products to be successfully and efficiently distributed could have a material adverse effect on our financial condition and results of operations. Sales to international customers represent 41.1%, 35.8%, and 43.1% of net product sales for the years ended September 30, 2004, 2003, and 2002 respectively. REVENUE RECOGNITION Our revenue recognition policy is to recognize revenues when products are shipped, or for certain customers when the products are received by the customer's shipping agent, at which time title transfers to the customer. Our sales are based on standard pricing and our product is shipped with FOB shipping point terms (ExWorks for all but one international customer) at which time all of the risks and rewards of ownership pass to the customer including the risk of collection from the end consumer; accordingly, revenue is recognized at the time of shipment. Additionally we are not required to repurchase the product nor do we have bill and hold arrangements with any of our customers. 43 In the U.S. and Canada terms are generally prepaid or C.O.D. In some limited cases shipments bear net 30 day terms; however, in no instances is payment ever dependent on the distributors' sale of product to our end consumer. Therefore the guarantee to the Canadian finance company for certain events of default by some of our Canadian distributors does not impact the recognition of revenue for sales made to these distributors. When the financing company finances an end consumer purchase (and pays the distributor), we guarantee that the contract was not fraudulently prepared or entered into only. See "Guarantees" above for further information. On occasion, our customers (distributors) in the United States and Canada offer a five year extended warranty to the end consumers of our surface cleaner product as a promotion to purchase the product during that demonstration. The five year optional extended warranty is offered to them at no cost; accordingly no revenue is recognized. Discounts earned based on promotional programs in place, volume of purchases or other factors are also estimated at the time of revenue recognition and recorded as a reduction of that revenue. In February 2002, the Emerging Issues Task Force codified and issued EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)." The pronouncement requires that cash consideration, including sales incentives, given by a vendor to a customer be presumed to be a reduction of the selling prices of the vendor's products or services and, therefore, characterized as a reduction of revenue when recognized in the vendor's income statement. Breakage occurs when a distributor is no longer eligible for the award; the associated accrued liability is derecognized at that time and the resultant termination gain is netted in the contra sales Distributor Development Program line item of our Consolidated Statements of Operations. RESEARCH AND DEVELOPMENT COSTS Costs incurred in research and development are expensed as incurred and included in SG&A expenses. In fiscal years 2004, 2003, and 2002, we invested $53, $75, and $273, respectively, in new product development. INCOME TAXES We account for income taxes pursuant to the provisions of SFAS No. 109, "Accounting for Income Taxes." Under SFAS No.109, the tax consequences in the future years for differences between the financial and tax bases of assets and liabilities at year-end are reflected as deferred income taxes. 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. Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for additional valuation allowances quarterly. 44 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest was $68, $53, and $86 for the years ended September 30, 2004, 2003, and 2002, respectively. Cash paid for income taxes was $15, $29, and $56 for the years ended September 30, 2004, 2003, and 2002, respectively. The following transaction has been treated as a non-cash financing item for purposes of the Consolidated Statements of Cash Flows. During the third and fourth quarters of fiscal 2002 we recorded $290 in debt in exchange for assets. These vendor-financed assets consisted primarily of tools, molds, and equipment associated with new product development. EARNINGS PER SHARE Earnings per share have been computed according to SFAS No. 128, "Earnings Per Share." The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations (shares in thousands) for the years ended September 30,

~~2001~~2004 ~~2000~~2003 ~~1999~~2002 ----------------------- ----------------------- ----------------------- ~~Options~~Per ~~exercisable~~Per ~~784~~Per ~~667~~Share ~~438~~Share ~~Weighted~~Share Shares Amount Shares Amount Shares Amount -~~average~~--------- ~~option~~---------- ~~price~~---------- ~~per~~---------- ~~share~~---------- of---------- ~~options~~Basic ~~exercisable~~EPS 6,746 $3 (0.1652) 6,744 $3 (1.7482) $ 6~~.01~~,719 ~~Weighted-average~~$ ~~fair~~(0.27) ~~value~~Effect of dilutive stock options ~~granted~~- ~~during~~- ~~the~~- ~~year~~- - - ---------- ---------- ---------- ---------- ---------- ---------- Diluted EPS 6,746 $ (0.7752) 6,744 $0 (1.6782) $ 6,719 $ (0.8127) ========== ========== ========== ========== ========== ==========

Options outstanding during the years ended September 30, 2004, 2003 and 2002, to purchase approximately 917, 1,159, and 1,147 shares of common stock, respectively, were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market prices of the common stock during the period and, therefore, the effect would be anti-dilutive. The exercise prices of the options outstanding at September 30, 2004, range from $1.00 to $7.50 per share and expire between January 4, 2005, and March 29, 2009. LONG-TERM COMPENSATION PLAN We apply Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for our stock plans as allowed under SFAS No. 123, "Accounting for Stock-Based Compensation". Had compensation cost for the stock granted in 2004, 2003, and 2002 been determined consistent with SFAS No. 123, pro forma net loss and loss per common share would have been as follows (dollars in thousands, except per share data):

~~2001~~2004 ~~2000~~2003 ~~1999~~2002 ---------- ------------ ------------ ~~Current:~~Net ~~Federal~~loss, ~~and~~as ~~state~~reported $ (~~363~~3,492) $ 82(12,239) $ ~~116~~(1,833) ~~Foreign~~Add: Stock---based ~~---~~employee ~~---~~compensation ~~---------~~expense ~~------------~~included in reported net income -~~-----------~~ ~~(363)~~2 823 ~~116~~Deduct: ~~Deferred~~Total ~~(benefit)~~stock-based employee compensation expense ~~(230)~~determined ~~(435)~~under ~~---~~fair value based method for all awards 139 93 150 ---------- ------------ ------------ PRO FORMA NET LOSS $ (~~593~~3,631) $ (~~353~~12,330) $ ~~116~~(1,980) ========== ============ ============ BASIC AND DILUTED PER SHARE OF COMMON STOCK: As reported $ (0.52) $ (1.82) $ (0.27) Proforma $ (0.54) $ (1.83) $ (0.29)

45 2. GOING CONCERN The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern. During the year ended September 30, 2004, we incurred a net loss of $3,492, had deficit equity of $12,247 at September 30, 2004, and as of the date of the audit opinion did not have an executed long-term financing agreement. As a result of these factors, our accounting firm has issued an audit report with a modification expressing substantial doubt about our ability to continue as a going concern. The financial statements and financial information do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence. We are actively seeking through of the use of both internal personnel and an outside broker, finance sources to replace the credit facility prior to its expiration on March 31, 2005. Although no long-term debt arrangement is in place as of the date of this filing, our current lender has been agreeable to extending our current facility on a quarter-to-quarter basis until such time, in the near future, as we have a new lender in place. As of November 30, 2004, there was $847 borrowed on the $3,000 credit facility. Management's other plans to alleviate substantial concern about the Company's ability to continue as a going concern include, but are not limited to, the following: - We have generated net cash from operations of $902, $954, and $1,356 for the three years ended September 30, 2004, 2003, and 2002. Overall since February 2004, we have reduced expenses, both in the manufacturing environment and in administrative arenas, by approximately $2 million on an annualized basis. It is our intention to continue to concentrate on expense reduction with a significant concentration on product sourcing and material costs through fiscal 2005. We currently anticipate that our operating activities will continue to provide net cash from operations through fiscal 2005. - We have approximately $1,370 invested in 90-day treasury bills. This investment, although segregated for our Edge Program, can be utilized for working capital needs. If we cannot replace the credit facility prior to March 31, 2005, we currently anticipate that we will have sufficient liquidity to repay the credit facility and cover all our cash needs through September, 2005 without use of the treasury bill investment, and, if we were to use the treasury bill investment, we believe we will have sufficient liquidity to cover our cash needs through December, 2005. 3. PROPERTY, PLANT AND EQUIPMENT

~~2001~~2004 ~~2000~~2003 ~~1999~~ ------------ ------------ ~~-----------~~Leasehold ~~Tax~~improvements ~~at Federal statutory rate of 34%~~ $ ~~(172)~~288 $ ~~378~~288 $Machinery ~~(1,402) (Reductions) increases in taxes resulting from: Tax expense relating to Internal Revenue Service audits~~ and ~~settlements~~equipment ~~(445) --- --- Foreign Sales Corporation earnings --- (104) Amortization of cost in excess of net assets of acquired businesses 84 84 86 Valuation allowances against deferred tax assets --- (1~~7,~~008)~~314 17,~~466~~747 ~~Other~~ - ~~net (60) 193 70~~ ---------~~---~~ ------------ 7,602 8,035 Accumulated depreciation 6,076 5,857 ----------~~- $ (593) $ (353) $ 116 ============ ============ ===========~~

46 ~~---------- ---------- Net property, plant and equipment $ 1,526 $ 2,178 ========== ==========~~

Depreciation expense relating to operations for the years ended September 30, 2004, 2003, and 2002, was $625, $695, and $639, respectively. 47 4. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following:

~~2001~~2004 ~~2000~~2003 ---------- ---------- ~~Gross~~Distributor ~~deferred~~fund ~~tax~~payable ~~assets:~~$ ~~Operating~~902 ~~loss carryforwards~~ $ 41,~~741~~020 $Accrued ~~4,921~~compensation ~~Receivable~~637 ~~and~~544 ~~inventory~~Accrued ~~reserves~~litigation ~~233~~515 ~~267~~15 ~~Accrued~~Other ~~compensation~~853 48820 ~~126~~---------- ---------- $ 2,907 $ 2,399 ========== ==========

The distributor fund payable represents the accumulation of distributor price overrides ("DPO's") such as those that are paid by promoted distributors to promoting distributors. The promoted distributors represent individuals who are recruited as sales associates and subsequently promoted to become distributors themselves. DPO's are a unit price override charged on top of our standard unit sales price for which we, HMI, act as a pass through, meaning that we collect the DPO from the promoted distributor and disburse it to the promoting distributor upon their request; accordingly these DPO's are not reflected in our income statement as revenue, but rather are recorded as an accrual when the cash is received. The decrease in the Distributor Fund Payable is a result of the decreased sales volume in the Americas and payments on behalf of our Americas distribution network associated with liabilities previously recorded in fiscal 2003. 5. DEBT AND CREDIT FACILITY Our $3,000 credit facility agreement includes various covenants that limit our ability to incur additional indebtedness, restricts paying dividends and limits capital expenditures, and requires we maintain a minimum net worth. As of September 30, 2003, we were not in compliance with our interest coverage ratio, and net worth covenants; however, we obtained a waiver on these covenants which was effective until the February 20, 2004 amendment of the credit facility. We were required to maintain an interest coverage ratio of greater than or equal to 5.0 to 1.0 interest to earnings before interest, taxes, depreciation and amortization ("EBITDA") and a net worth of at least $7,400, calculated quarterly and increasing by 50% of net income annually. On February 20, 2004, an amendment of our credit facility agreement was executed with our lender. The expiration date was extended to October 15, 2004. The amended agreement carried the same interest rate and similar covenants as the previous amended loan agreement, with the exception of the interest coverage ratio which was amended to exclude non-cash expenses from the 5.0 to 1.0 ratio, including but not limited to, the impairment of tooling assets and associated inventory, and the tangible net worth covenant in which the minimum amount was reset to $2,400. On October 15, 2004, an amendment of our $3,000 credit facility agreement was executed with our lender. The bank agreed to extend the maturity date of the loan until December 31, 2004. The amended agreement carries an interest rate of prime plus one percent and covenants similar to the previous amended loan agreement, with the exception of the tangible net worth covenant which was eliminated through the maturity date of the loan. On December 16, 2004, we received a letter from our current lender which outlined their commitment to amend the maturity date of our credit facility until March 31, 2005. Additionally, we agreed to reduce the 48 facility availability from $3,000 to the original $2,000 credit limit. The purpose of the additional $1,000 availability, to assist with the build-up of inventory associated with new product launches, has been fulfilled and consequently the borrowing capacity is no longer necessary. We are actively seeking; through of the use of both internal personnel and an outside broker, finance sources to replace the credit facility prior to its expiration. If we cannot replace the credit facility prior to March 31, 2005, we currently anticipate that we will have sufficient liquidity to repay the credit facility and cover all our cash needs through September, 2005. As of November 30, 2004, there was $847 borrowed on the $3,000 credit facility. Long-term debt consists of the following:

~~2001~~2004 ~~----------------------------------------------------------~~2003 ~~December 31, March 31, June 30, September 30,~~ ------------ --------- -~~-------~~ ~~-------------~~Bank ~~Net~~line ~~revenues~~of $credit ~~7,391~~- $see ~~8,956~~above $ ~~8,980~~962 $ 61,~~972~~383 ~~Gross~~Capitalized ~~profit~~lease $obligations ~~3,097~~11 $33 ~~3,780~~bearing $interest ~~3,556~~at $ 2~~,733~~.62% ~~Net~~to ~~(loss)~~12.00% ~~income~~due $in ~~(117)~~monthly $installments ~~392~~of $2 ~~49 $~~ (~~237)~~including ~~Basic and diluted (loss~~interest) ~~income~~through ~~per~~March ~~share~~2005 ~~of common stock: $ (0.02) $ 0.06 $ 0.01 $ (0.04) 2000~~ ---------- ----------~~--------------------------------------~~ ~~December~~973 311,416 ~~March~~Less ~~31,~~amounts ~~June~~due ~~30,~~within ~~September~~one ~~30,~~year ~~------------~~973 ~~---------~~1,405 -------- --~~-----------~~ ~~Net revenues $ 8,479 $ 9,655 $ 8,313 $ 8,174 Gross profit $ 3,379 $ 4,013 $ 3,293 $ 3,488 Income from continuing operations $ 251 $ 331 $ 354 $ 176 Gain on disposal $~~ -- $ -- ~~$ 425 $~~ -- ~~Net income $ 251 $ 310 $ 779 $ 550 Basic and diluted income per share Of common stock: Income from continuing operations $ 0.05 $ 0.05 $ 0.05 $ 0.09 Gain on disposal $~~ -- $ -- $ ~~0.07 $~~ -- ~~Net income~~ $ ~~0.05~~11 $========== ~~0.05 $ 0.12 $ 0.09~~==========

The principal amount of long-term debt payable in the five years ending September 30, 2005, through 2009, is $973, $-0-, $-0-, $-0-, and $-0-. The weighted average interest rate on short-term borrowings at September 30, 2004, and 2003, was 4.80% and 4.08%, respectively. 6. LONG-TERM COMPENSATION PLAN We adopted the Health-Mor Inc. 1992 Omnibus Long-Term Compensation Plan in 1992. The Plan provides for the granting of stock options, stock appreciation rights, restricted stock awards, phantom stock, and/or performance shares ("Awards") to our key employees and stock options for our non-employee directors. Options granted under the Plan expire up to ten years after the date of grant if not exercised and may be exercisable in whole or in part at the discretion of the Committee established by the Board of Directors. Shares available for issuance under the Plan may be authorized and unissued shares or treasury shares. The maximum number of shares of common stock available for grant of Awards under the Plan are limited on an annual and cumulative basis as further defined in the Plan. Stock options under the Plan generally have exercise prices equal to the fair market values at dates of grant, otherwise, if the option price is less than the fair market value at the date of the grant, compensation expense is recorded for the difference. For restricted or phantom stock, we record compensation expense as the excess of the quoted market price of the unrestricted share of stock at the award date over the purchase price, if any. No options or awards were granted during fiscal 2003 or 2002 to key employees. 49 During fiscal 2004 the Board of Directors granted 250,000 stock options to Kirk W. Foley, Chairman. These non-qualified options were not issued under the Plan. All 250,000 options vested immediately and expire in 2009. No compensation expense was recorded related to the stock options as the exercise price was higher than the fair market value at the grant date. There were no shares issued and no non-vested shares forfeited pursuant to the Plan in fiscal 2004, 2003, and 2002. Unamortized deferred compensation amounted to $-0-, $-0-, and $3 at September 30, 2004, 2003, and 2002, respectively. Total compensation expense, in conjunction with the Plan was $-0-, $3, and $5 in fiscal 2004, 2003, and 2002, respectively. The fair value for all options granted in 2004, 2003, and 2002 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

~~Dollars~~2004 in2003 ~~Thousands~~2002 ~~Balance~~OPTIONS AtOPTIONS ~~Additions~~OPTIONS ~~Balance At~~ ---------------~~-----~~ ~~Beginning of Charged to End of Description Period Costs and Expense Deductions Period~~ ------------- -------~~------------------------------------------------------~~ ~~Valuation~~Risk ~~account~~free ~~for~~interest ~~accounts~~rate ~~receivable:~~2.0% ~~Year~~to ~~ended~~2.7% ~~September~~3.8% ~~30,~~4.5% ~~2001~~Expected $life ~~507~~of $option --3 $yrs. 43to $4 ~~464~~yrs. ~~Year~~4 ~~ended~~yrs. ~~September~~4 ~~30,~~yrs. ~~2000~~Expected $dividend ~~691~~yield $of --stock $0.0% ~~184~~0.0% $0.0% ~~507~~Expected ~~Year~~volatility ~~ended~~of ~~September~~stock ~~30,~~114.0% ~~1999~~to ~~$1,085~~112.2% $108.8% -- $ 394 $ 691 Valuation account for inventory: Year ended September 30, 2001 $ 235 $ 90 $ 126 $ 199 Year ended September 30, 2000 $ 602 $ 71 $ 438 $ 235 Year ended September 30, 1999 $ 484 $ 762 $ 644 $ 602 Reserve for loss on disposal: Year ended September 30, 2001 $ -- $ -- $ -- $ -- Year ended September 30, 2000 $ 451 $ -- $ 451 $ -- Year ended September 30, 1999 $ 233 $ 375 $ 157 $ 451 Valuation for deferred tax asset: Year ended September 30, 2001 $ 849 $ -- $ -- $ 849 Year ended September 30, 2000 $1,857 $ -- $1,008 $ 849 Year ended September 30, 1999 $1,159 $ 698 $ -- $1,857102.2%

A summary of our incentive stock option activity and related information for the years ended September 30, 2004, 2003, and 2002, is shown in the following table.

~~INDEX~~Shares TOsubject ~~EXHIBITS~~Weighted ~~3.1~~to ~~Certificate~~option ofaverage ~~Incorporation~~option ~~Incorporated~~(in bythousands) ~~reference~~price ~~from,~~per ~~Annual~~share ~~Report on form 10~~-K------------- ~~for the year ended September 30, 1995 3.2 Bylaws Incorporated by reference from, Annual Report on form 10~~-K-------------- ~~for the year ended~~ September 30, ~~1995 9.0 Voting Trust Agreement Stockholders Voting Agreement, incorporated by reference from Form 13-D filed on October 19,~~ 2001 ~~10.00 Material Contracts Firstar Revolving Credit Agreement~~, ~~incorporated~~Outstanding ~~by reference from Form 10-Q for the quarter ended June 30~~1,603 ~~2001~~$ 102.0118 ~~Material~~Granted ~~Contracts~~46 ~~Change of Control Agreement, Pryor, attached 10~~1.0208 ~~Material~~Canceled ~~Contracts~~(537) ~~Change of Control Agreements, incorporated by reference from Form 10-K/A3 for the year ended September 30, 1997 10~~2.0384 ~~Material Contracts Employment Agreement~~ - ~~Pryor, attached 10.04 Material Contracts Employment Agreement~~ - ~~Malone, incorporated by reference from Form 10~~-~~K/A3~~----------- ~~for the year ended~~ September 30, ~~1997 10.05 Material Contracts Employment Agreement - Young~~2002, ~~incorporated~~Outstanding ~~by reference from Form 10-K/A3 for the year ended September 30~~1,112 ~~1997 10~~1.0681 ~~Material~~Granted ~~Contracts~~24 ~~Incentive~~1.00 ~~Stock~~Canceled ~~Option~~(12) ~~Agreements,~~3.63 ~~incorporated by reference from Form 10~~-K------------- ~~for the year ended~~ September 30, ~~2000 10.07 Material Contacts Accelerated Incentive Stock Option Agreements~~2003, ~~incorporated~~Outstanding ~~by reference from Form 10-K for the year ended September 30~~1,124 ~~2001 10~~1.0877 ~~Material Contracts Restricted Stock Agreements incorporated by reference from Form 10~~-Q------------- ~~for~~Granted ~~the~~280 ~~quarter ended March 31, 1999 10~~1.0900 ~~Material~~Canceled ~~Contracts~~(522) ~~Amendment to Restricted Stock Agreements incorporated by reference from Form 10-Q for the quarter ended March 31, 1999 10~~1.1024 ~~Material Contracts Restricted Stock Agreements incorporated by reference from Form 10~~-K------------- ~~for the year ended~~ September 30, ~~1998 10.11 Material Contracts Restricted Stock Agreements~~2004, ~~incorporated~~Outstanding by882 ~~reference~~$ ~~from Form 10-Q for the quarter ended March 31, 1998 10~~1.1284 Material Contracts Restricted Stock Agreements, incorporated by reference from Form 10-K/A3 for the year ended September 30, 1997 10.13 Material Contracts Non-statutory Stock Option Agreements, incorporated==============

Options exercisable and shares available for future grant on September 30 (in thousands except per share data):

50 The ranges of exercise prices and the remaining contractual life of options as of September 30, 2004, were: Range of exercise prices $1-$1.25 $1.25-$8 Options outstanding: Outstanding as of September 30, 2004 (in thousands) 622 260 Weighted-average remaining contractual life 2.80 1.80 Weighted-average exercise price $ 1.06 $ 3.69 Options exercisable: Outstanding as of September 30, 2004 (in thousands) 580 260 Weighted-average remaining contractual life 2.75 1.80 Weighted-average exercise price $ 1.07 $ 3.69

7. INCOME TAXES The provision for income taxes consists of the following:

A reconciliation of the provision for income taxes at the federal statutory rate to that included in the Consolidated Statements of Operation related to earnings from continuing operations is as follows:

As a result of the full valuation allowance on all deferred tax assets, an insignificant state provision constituted the entire tax provision for fiscal 2004, 2003, and 2002. 51 The components of deferred tax assets and liabilities are comprised of the following at September 30,

The valuation allowance increased from $10,463 to $11,944 due to an increase in deferred tax assets for which a full allowance had previously been established. Periodically and when indicators suggest, we assess the realizability of our domestic deferred tax assets, giving consideration to our actual historical results supplemented by future expected results. SFAS No. 109, "Accounting for Income Taxes" considers a historic pattern of losses as significant negative evidence that tax assets will not be realized and this consideration is not outweighed by any prospective view of management that sufficient taxable income will ultimately be available to realize the tax benefits. Given the history of losses and the results in 2004, we concluded that under the "more likely than not" criteria of SFAS No. 109 a full valuation allowance is still required against the net U.S. deferred tax assets at September 30, 2004. The valuation allowance will be subject to periodic review and can be partially or totally reversed either when income is generated that utilizes the loss or when sufficient positive evidence emerges (i.e. A sustained positive trend of U.S. income for financial accounting purposes.) Our income tax expense recorded in the future will be reduced to the extent of offsetting decreases in our valuation allowance. Net operating loss carryforwards of approximately $11,550 for tax are available to offset future taxable income. The carryforwards expire in 2005 through 2021. 8. EMPLOYEE BENEFIT PLANS We have a qualified profit sharing plan that covers substantially all employees. The overall contribution to our plan and the allocation method is at the discretion of our Board of Directors. The allocation to the participants is based on a fixed amount per participant, a percentage of eligible wages, or a combination of a fixed amount and a percentage of eligible wages. There was no profit sharing expense for the plan for the years ended September 30, 2004, 2003, and 2002. In addition, we offer a 401(K) savings plan to all of our employees. We match 50% of the first 6% of the employee's contribution to the plan. Employees may currently contribute up to 50% of compensation to the plan. Amounts expensed for the years ended September 30, 2004, 2003, and 2002, were $130, $134, and $91, respectively, of which the Company match in fiscal 2002 was reduced in the second quarter as the match was funded by forfeitures of prior matches from unvested former participant/employees. 52 9. COMMITMENTS AND CONTINGENCIES, GUARANTEES AND LEASES We are obligated under certain operating leases for facilities and equipment which expire on various dates through 2014. The minimum annual lease payments under these agreements, including renewal options, if exercised, are $524, $421, $390, $396, and $402 for the years ending September 30, 2005, 2006, 2007, 2008, and 2009, respectively. Rent expense was $894, $956, and $1,035 for the years ended September 30, 2004, 2003, and 2002, respectively. LITIGATION Bliss Technologies, Inc. ("Bliss"), the company formed from the 1998 sale of the subsidiary of HMI, filed for bankruptcy in January 2000 in the United States Bankruptcy Court, Eastern District of Michigan. In a separate action filed in 2002, the Official Committee of Unsecured Creditors of Bliss alleges a fraudulent conveyance claim against us asserting that the sale of Bliss in 1998 was a fraudulent transfer insofar as we received more for Bliss than it was worth and that Bliss was insolvent from its inception. Former directors of Bliss, Mark Kirk and Carl Young, are also named as defendants in the action. Claims pending against them allege that in their capacity as Bliss directors they breached fiduciary duties to Bliss creditors. The complaint seeks damages in an unspecified sum. In September 2004 the parties conducted a mediation session with an agreed-upon mediator which did not result in a settlement. Although we may continue to pursue the settlement discussions that began at the mediation we are also continuing to move forward in court with the vigorous defense of the claims against us and the claims against Mr. Kirk and Mr. Young. Claims arising in the ordinary course of business are also pending against us. In the third quarter of fiscal 2004 we increased reserves by $500 to provide for any contingent liabilities associated with various litigation and contingent claims. There can be no assurance that an unfavorable outcome in these various litigation and contingent claims would not have a material adverse effect on our consolidated financial position, results of operations, or cash flow. Included in the accompanying Consolidated Balance Sheets at September 30, 2004, and 2003, were accruals of $515 and $15, respectively, relating to litigation and contingent reserves. 10. QUARTERLY FINANCIAL DATA (UNAUDITED)

As of October 1, 2002, a full impairment of the goodwill recorded on HMI's books was recorded through a non-cash charge of $5,451. Such charge is non-operational in nature and is reflected as a Cumulative Effect of Accounting Change in the accompanying Consolidated Statements of Operations for the year ended September 30, 2003. See Note 1 for further information. During the second quarter of fiscal 2003 we recorded a write-off of $905 for cumulative translation adjustments associated with the liquidation of our Canadian subsidiary. During the fourth quarter of fiscal 2003, we performed an analysis on the potential impairment of certain tooling assets, and related patents and trademarks, approximating $1,711. We concluded from our analysis, which was based upon the held and used model that the tooling assets were fully impaired and accordingly recorded an impairment charge of $1,711 as of September 30, 2003, as the scrap value for these assets was determined to be nominal. 11. RELATED PARTY TRANSACTIONS James R. Malone, our former Chairman and Chief Executive Officer, Darrell Weeter, President of the Company's Americas division, and John Glomb, a Regional Vice President of the Company, each owned 31.67% of the membership interests in a Company called Vision Capital Logistics, LLC ("VCL"). VCL, was a brokerage service provider for sourcing consumer credit, and assisted its clients in securing third party financing for its clients' customers to purchase products, including products manufactured by us and sold by our Distributors. VCL charged additional fees to our Distributors for these financing services. VCL's client list also included a number of other "direct sales" companies, including other floor care companies. In securing such financing, VCL may have guaranteed the legal compliance obligations (but not any payment obligations) of our Distributors to a third party lender. The third party lender paid VCL a participation fee for such financing services, a part of which (twelve percent (12%)) VCL paid to us. During the fiscal years ended September 30, 2004, 2003, and 2002, VCL paid 54 us $5, $24, and $17, respectively, in connection with such financing services. Additionally, in certain cases a Distributor may not have been able to complete a sale because of the substandard credit status of the retail customer. In such cases VCL provided the Distributor with financing for this sale. We entered into an arrangement with VCL known as a Swap Program under which VCL would purchase the contract of the retail customer from the Distributor and arrange for the financing of the contract at a significant discount. To replace the product sold by our Distributor and for which the Distributor received only a portion of the consumer sale price, VCL would purchase a replacement product from us at the same price paid by our Master Distributors and we would ship it to the Distributor to replace the product the Distributor just sold. During the fiscal years ended September 30, 2004, 2003, and 2002, VCL purchased an aggregate of $25, $35, and $19, respectively, of our products under the Swap Program. Under the terms of our credit facility in place from time to time, we were prohibited from engaging in certain of the financing activities provided by VCL. During the third quarter of fiscal 2004 we ended our arrangement with VCL. At such time Mr. Weeter and Mr. Glomb sold their membership interests to Mr. Malone. From June 2000 until January 2003 we sublet to VCL a portion of our office space in Naples, Florida. During the fiscal years ended September 30, 2003 and 2002, VCL paid us $8 and $24, respectively, in rent for such space, which amount was based upon an allocation of our total monthly lease payments to the amount of space utilized by VCL. In February 2003 a new lease was entered into for office space with VCL as the tenant, and we began subleasing the office space in Naples, Florida from VCL for $3 per month, which amount was based upon an allocation of VCL's total monthly lease payments to the amount of space that we utilize. For the fiscal years ended September 30, 2004, and 2003, we paid VCL a total of $11 and $21 in lease payments. The sublease was terminated in February 2004. Darrell Weeter, an executive officer of the Company, has served for many years as President of FVS, Inc., a distributor of products manufactured by HMI, and which is owned by Mr. Weeter and his wife. For the fiscal years ended September 30, 2004, 2003, and 2002, FVS, Inc. purchased, at Master Distributor pricing, a total of $56, $78, and $100, respectively, in products from us. Mr. Weeter also received amounts due to him under our Career Development Program of $63, $129, and $126 for the fiscal years ended September 30, 2004, 2003, and 2002, respectively. The amounts paid were distributor paid overrides ("DPO's") collected by us from distributors that were brought into the Filter Queen business by Mr. Weeter. DPO's are a unit price override charged on top of our standard unit sales price for which we, HMI, act as a pass through, meaning that we collect the DPO from the promoted distributor and disburse it to the promoting distributor upon their request; accordingly these DPO's are not reflected in our income statement as revenue. The total DPO's still owed to Mr. Weeter were $7 and $3 as of September 30, 2004, and 2003, respectively. This payable to Mr. Weeter was recorded on the other accrued expense and liabilities line item of our Consolidated Balance Sheets as of September 30, 2004 and 2003. Derek Hookom, an employee of HMI, is President of Summit Air, a distributor of products manufactured by HMI. For the fiscal years ended September 30, 2004, 2003, and 2002, Summit Air purchased, at Master Distributor pricing, a total of $24, $254, and $604, respectively, in products from us. Mr. Hookom became an employee of HMI on January 1, 2003, and under the terms of his employment agreement; Mr. Hookom remains eligible to receive the Millionaires Club Award associated with the Edge Success Program through sales 55 generated by his personally developed sales network. The Company incurred $152 and $173, respectively, of distributor development program revenue reduction associated with Mr. Hookom's participation in the Program for the fiscal years ended September 30, 2004, and 2003, respectively. Mr. Hookom also received DPO's due to him under our Career Development Program of $82, $102, and $58 for the fiscal years ended September 30, 2004, 2003, and 2002, respectively. The amounts paid were distributor paid overrides collected by us from distributors that were brought into the Filter Queen business by Mr. Hookom. The total DPO's still owed to Mr. Hookom were $30 and $38 as of September 30, 2004, and 2003, respectively. This payable to Mr. Hookom was recorded on the other accrued expense and liabilities line item of our Consolidated Balance Sheets as of September 30, 2004, and 2003. Kirk W. Foley, our current Chairman and Principal Executive Officer, owns Tube-Fab Ltd. a manufacturing company specializing in fluid delivery systems for aerospace and other commercial applications. In fiscal 2004, Tube-Fab Ltd. invoiced HMI $5 per month for corporate services performed for Mr. Foley at Tube-Fab Ltd. facilities for work done on HMI's behalf. This amount is intended to cover office space, cell phone bills, supplies, equipment use, clerical and secretarial help, professional assistance with planning and management of information technology needs, procurement activities, and quality systems. We incurred $40 of expense associated with these services for the year ended September 30, 2004, and $6 for certain other out of pocket expenses. The above related party amounts are not considered to be significant to the financial statements as a whole and therefore have not been separately identified in the Consolidated Balance Sheets, Statements of Operations or Statements of Cash Flow. 56 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of HMI Industries Inc. We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of HMI Industries Inc. and its subsidiaries referred to in our report dated December 16, 2004, which is included in this Annual Report on Form 10-K and incorporated by reference in Part II of this form. Our report on the consolidated financial statements includes an explanatory paragraph which discusses factors that raise substantial doubt about the Company's ability to continue as a going concern, as discussed in Note 2 to the consolidated financial statements. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Grant Thornton LLP Cleveland, Ohio December 16, 2004 57 HMI INDUSTRIES INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

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