Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to
Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the
fiscal year ended Commission File
November 30, 2002 #09-9599
HIA, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-1028783
------------------------------ --------------------
(State or other jurisdiction of (Federal employer
Incorporation or Organization) identification number)
4275 Forest Street
Denver, Colorado 80216
-------------------------------------
(Address of principal executive office)
(303) 394-6040
----------------------------------------------
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
--------------
(Title of Class)
The check mark below indicates whether the Issuer (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 twelve months (or reports), and (2) has been subject
to such filing requirements for the past ninety 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. (X).
Indicate by check mark whether the Issuer is an accelerated filer (as defined in
Rule 12b-2 of the Act):
YES NO X
---------- ----------
The Issuer had net sales of $31,205,000 for the fiscal year ended November 30,
2002.
The aggregate market value of voting stock held by non-affiliates of the Issuer
as of January 01, 2003 was $652,000 based on market value of stock as compiled
by finance.yahoo.com.
The number of shares of the only class of Common Stock of the Issuer outstanding
as of January 01, 2003 was 9,985,526.
PART I
Item 1. Business
- ----------------
(a) General Development of Business
- -----------------------------------
HIA, Inc. (the "Company" or "HIA") was incorporated in 1974. The Company is
a holding company with all of its business conducted through its wholly
owned subsidiary, CPS Distributors, Inc. ("CPS"). Through CPS, the Company
distributes turf irrigation equipment and commercial, industrial and
residential well pumps and equipment on a wholesale basis. The principal
executive offices of the Company are located at 4275 Forest Street, Denver,
Colorado 80216, telephone (303) 394-6040.
(b) Narrative Description of Business
- -------------------------------------
General " The Company acquired CPS, over a hundred-year-old company based
in Denver, Colorado, in February 1984. CPS serves customers in the Rocky
Mountain region in five states consisting of Colorado, Wyoming, New Mexico,
Kansas and Nebraska. CPS carries a variety of brand name products,
including pumps and water systems, water conditioning equipment, pump and
well accessories, pipe valves and fittings and sprinkler system equipment.
The Company's net sales for industrial, commercial and residential pumps
and turf irrigation equipment represented approximately 10% and 90%,
respectively, of net sales for 2002, approximately 14% and 86%,
respectively, of net sales for 2001 and 10% and 90%, respectively, of net
sales for 2000.
On October 31, 2000, the Company sent to all its shareholders a tender
offer for up to 3,000,000 shares of its common stock for a purchase price
of $.25 per share. The total amount expected to be disbursed, as a result
of the tender offer was $850,000 ($750,000 for the common stock and
$100,000 for the associated legal, accounting and transfer agent fees). The
total amount was to be financed by Wells Fargo Bank, Denver by increasing
the existing line of credit by $500,000 (to an aggregate amount of
$5,000,000) and a term note not to exceed $500,000 at an interest rate of
1/8th percent less than prime interest rate; the note to be amortized no
more than five years.
The purposes of the offer was to (1) offer the shareholders the opportunity
to sell some or all of their shares on a basis that was more favorable than
could probably be achieved in the open market (the closing price as of
October 19th, 2000 was $.13 per share) and (2) extend an offer which
represented a good investment opportunity for the Company and its existing
shareholders.
2
The Company filed the necessary Schedule to and related documents with the
SEC on October 27, 2000. A revision was filed on November 6, 2000 and the
final amendment was filed on January 4, 2001. The offer expired on December
15, 2000. 732,456 shares of common stock were tendered for a total purchase
prices of $183,114. A total of $56,677 was incurred for legal, accounting,
transfer agent and other related costs.
During the spring of 2002, the Company's directors decided to repurchase
more of the Company's stock from shareholders. The Company was experiencing
10% growth in sales and a substantially greater growth in operating profits
for the year and financial projections looked very favorable for the
remainder of the year. It was decided by the Board to repurchase up to
$750,000 worth of common stock from existing non-affiliated shareholders.
Wells Fargo Bank, the Company's provider for operating capital, was
contacted to accommodate the repurchase plan by increasing the line of
credit and adjusting any loan covenants which may be affected by the
repurchase. The Company's attorneys were contacted to begin creating the
documents necessary to do a tender offer in the financial range specified
above.
On July 3, 2002, the Company purchased 420,000 shares of common stock from
a non-affiliated stockholder for approximately $.56 per share, a total
purchase price of $235,000.
On August 15, 2002 the Company entered into a new loan financing agreement
with Wells Fargo Bank increasing the maximum line of credit to $5,750,000
and specifically authorizing up to $1,000,000 for the repurchase of HIA
common stock.
During late summer to early fall, the Company began to feel the effects of
the continued drought conditions in the Rocky Mountains. Sales
(particularly to residential contractors) began to drop from the prior
year's results and the municipal water agencies began to severely restrict
domestic water usage, especially for watering lawns and shrubs. At this
time, it was decided by the Board of Directors to abandon the prospective
tender offer and wait until more advantageous business conditions developed
for our industry in particular. The Company had spent $11,000 on legal fees
in the tender offer before abandonment of the project.
Marketing - CPS's line of products has changed in response to the supply
and demand forces of the marketplace. The management of CPS believes that
its two divisions (i.e., turf and irrigation equipment and industrial,
commercial and residential pumps and equipment) reduce the cyclicality of
sales and earnings that would otherwise be affected by product line shifts
caused by economic and demographic changes; however, the Company is subject
to the ups and downs of the overall construction activity in the Rocky
Mountain region. The Company purchases approximately 17% of its products
volume from one manufacturer. However, the products purchased can be
obtained from other competing manufacturers but not as a consolidated
product group.
CPS's sales and service engineers provide technical support to assist
customers in developing a system specifically tailored to the customers'
needs.
3
The irrigation and landscape industry in the Rocky Mountain region will be
facing a critical dilemma in the next few years. The continued drought in
the region has forced municipal water suppliers and government agencies to
restrict water usage, especially for domestic landscape and irrigation
purposes. The desire of homeowners and businesses to maintain lush
blue-grass lawns and expansive gardens will be in direct conflict with
conservation measures dictated by these public and private organizations
until such time as the drought conditions recede or are eliminated.
It is the position of the Company that (considering drought conditions will
continue for the next few years) the market for its products will be
reduced, although not significantly. A 15% to 25% reduction in sales would
not necessarily place the Company in a substantially negative financial
condition. The Company has flexibility within its expense structure to
accommodate such a decline without losing a significant amount of money.
However, declines in excess of those amounts would necessarily cause the
Company to reorganize its operations and possibly the strategic direction
of the Company would need to be changed in order to survive. The Company,
at this time, does not think that these kinds of drastic measures would
need to be put into place.
General conservation measures could be a positive event for the industry,
particularly when considering the business generated by homeowners desiring
to modify their existing irrigation and landscape systems to make them more
drought tolerant. Consumer education required to make these changes in
planning using creative landscape techniques is not new to the industry,
particularly in the dry Southwest region of the country. Colorado, in
particular, and its governmental representatives (in addition to
conservation methods) are looking at increasing water supplies through the
addition of new dams and making existing dams and reservoirs larger and
more efficient. The Company's employees are diligently working with
government agencies and trade organizations to insist that changes in
policy are made in a positive manner with the clear intent of continuing
the vitality and prosperity of our industry.
Customer Base and Seasonality - CPS's customers include contractors,
dealers and municipalities with the majority of sales derived from
contractors. The Company believes neither its aggregate sales nor those of
any of its business units are concentrated in or materially dependent upon
any single customer or small group of customers.
Quotation activity is especially intense in the winter and spring months
(December to April) when contracts are reviewed and eventually awarded for
spring or summer construction. Since approximately 90% of CPS's business is
composed of turf and irrigation products, its sales are concentrated from
March to October and are therefore seasonal in nature.
Competition - The Company operates in a highly competitive market.
Manufacturers have abandoned the exclusive relationships with their
distributors. As a result, the Company is competing with other wholesalers
of the same products.
4
Most manufacturers have also abandoned prices based on volume buying and
have gone to a pricing system based on a percentage of purchases over the
previous years' business. This change allows smaller wholesalers to buy at
the same price levels as the larger wholesalers. Therefore, a mid-to-large
sized wholesalers, such as CPS, no longer has a price advantage to cover
the higher operating costs of a larger operation.
CPS offers standard discounts on merchandise to its customers. Additional
discounts are given based on quantity of order or annual volume of
purchases, depending on product and competitive conditions. The Company has
monthly specials on certain of its inventory and provides discounts for
orders placed at trade shows. The majority of the programs offered are
based on discounts received from the Company's suppliers. Therefore, there
is no material effect on operating results from providing these discounts.
Each territory salesperson receives a draw against commission. Commission
is determined as a percentage of the gross profit generated from sales to
the accounts in the sales representative's territory. Sales quotas are
established for each area.
CPS emphasizes customer service, convenient availability of products and
knowledge of the industry. However, pricing, currently an important factor,
is expected to continue in importance because the competition can provide
the same products and warranties.
CPS has seven major competitors in its market area for turf and irrigation
equipment and six major competitors in its market area for industrial,
commercial and residential pumps and equipment. It is estimated by
management that CPS has over 15% of the total market in Colorado for
residential pumps and over 38% of the total market in Colorado for turf and
irrigation equipment. Some of CPS's competitors have financial resources
greater than CPS.
Management believes CPS has an established reputation as a distributor of
quality product lines such as Rainbird, Hunter, Lasco and Jacuzzi. CPS
competes primarily on service and, to a lesser extent, on price, quality
and reliability of products, technical services and availability of
products.
Employees - At November 30, 2002, the Company employed 88 persons, of which
24 were warehouse and branch counter employees and 64 were sales and
administrative employees. The Company considers its employee relations to
be good. None of the Company's employees is covered by union contracts or
collective bargaining agreements.
The Company uses computer resources for its order entry, inventory, payroll
and accounting function.
5
Item 2. Properties
- ------------------
The Company's leased facilities in Denver, Colorado are comprised of an
aggregate of 32,265 square feet of offices and warehouse on 166,000 square
feet of land. This building serves as the main warehouse of CPS and the
executive offices of the Company. The lease has a ten-year term, beginning
March 1995, with monthly rent at $9,500 for the first five years, after
which the monthly rent is adjusted by the percentage increase in the
Consumer Price Index. The Company has an option to purchase the related
property at the end of the initial ten-year term at a price approximating
the market value at that time, subject to certain conditions. The Company
also has two five-year options to extend the lease term, one at the
beginning of the eleventh year and one at the beginning of the 16th year.
The Company is to pay for all taxes, insurance and maintenance on the
property.
The Company sold its property in Casper, Wyoming, which consisted of 6,159
square feet of office/warehouse space on 33,600 square feet of land in a
private transaction with an unrelated third party. The sale took place on
September 18, 2001. The property was sold for $58,000 less commissions and
related costs of $5,131. The Company executed a contract for deed with the
buyer which called for payment of $53,000 ($5,000 paid down at closing)
amortized over 15 years at an interest rate of 8.75% per annum, principal
and interest payments made monthly. The Company recorded a capital gain on
the sale of $1,956.
The Company leased a new warehouse facility in Casper, Wyoming on February
18, 2000 with 14,544 square feet of office/warehouse space situated on 2.65
acres of land.
The Company also leases 9,954 square feet of office/warehouse space on
21,781 square feet of land in Colorado Springs, Colorado; 10,100 square
feet of office and warehouse space on 14,000 square feet of land in Fort
Collins, Colorado; 10,000 square feet of office and warehouse space in
Thornton, Colorado; 10,000 square feet of office and warehouse space in
Littleton, Colorado; 13,400 square feet of warehouse/office space in
Englewood, Colorado; 9,120 square feet of office and warehouse space in
Cheyenne, Wyoming and 6,400 square feet of office and warehouse space in
Broomfield, Colorado.
On April 1, 2002, the Company leased a facility in Lakewood, Colorado with
15,000 square feet of warehouse and office space. The facility is located
conveniently next to a major highway and services the west-central
territory of the metropolitan Denver area, a territory previously not
serviced by the Company.
On May 25, 1999, CPS acquired Western Pipe Supply Company (WPS) in
Longmont, Colorado and contracted with the former owner to lease its
existing two facilities. One warehouse facility is located in Boulder,
Colorado consisting of 8,000 square feet of office and warehouse space
situated on 1.8 acres of land. The main warehouse facility is located in
Longmont, Colorado consisting of 14,340 square feet of warehouse and office
space situated on 3.9 acres of land. Both facilities utilize the available
land for outside storage and customer pickup of pipe and accessories. Both
leases are for a five-year period with an option to renew the lease for
another five years.
6
The Company believes its leased facilities are adequate to meet its needs
for the next several years and anticipates that it would encounter little
difficulty in locating alternative facilities should its requirements
change.
Item 3. Legal Proceedings
- -------------------------
As part of its ordinary course of business, the Company is involved in
certain litigious activities from time to time. No litigation exists at
November 30, 2002 or to the date of this report that management or its
legal counsel believe will have a material impact on the financial position
or operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
There were no matters submitted to a shareholder vote during the fiscal
year ended November 30, 2002.
7
PART II
Item 5. Market for the Company's Common Stock and Related Security Holders
- --------------------------------------------------------------------------
Matters
-------
The principal market on which HIA's common stock is traded is the
over-the-counter market. Although at least one market maker continues to
quote prices for HIA's common stock, the Company is not aware of any
established public trading market for HIA's common stock since June 6,
1986.
The following table sets forth the high and low closing bid quotations for
the common stock for the fiscal years ended November 30, 2002 and 2001. The
quotations reflect inter-dealer prices, without adjustment for retail
mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
Fiscal year ended November 30, 2002 Bid Quotations
----------------------------------------------------------------------
High Low
-----------------------------
First Quarter .37 .19
Second Quarter .35 .22
Third Quarter .27 .16
Fourth Quarter .28 .16
Fiscal year ended November 30, 2001 Bid Quotations
----------------------------------------------------------------------
High Low
-----------------------------
First Quarter .38 .19
Second Quarter .25 .22
Third Quarter .26 .22
Fourth Quarter .30 .20
The approximate number of holders of record of HIA's common stock as of
November 30, 2002 was 1,650.
The Company has never declared any dividends with respect to HIA's common
stock. The Company has not in the past and is currently restricted from
paying cash dividends under its existing line-of-credit agreement.
During fiscal 2002, 2001 and 2000, the Company issued no shares, 600,000
shares and 600,000 shares from treasury to its executive officers for cash
proceeds of $0, $150,000 and $112,000 in conjunction with their exercise of
options previously granted. All of the foregoing shares were sold in
reliance upon exemptions afforded by Section 4(2) of the Securities Act and
Regulation D promulgated under the Securities Act.
8
Forward Looking Statements
--------------------------
Statements made in this Form 10-K that are historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 ("The ACT") and Section 21E of
the Securities Exchange Act of 1934. These statements often can be
identified by the use of terms such as "may," "will," "expect," "believes,"
"anticipate," "estimate," "approximate," or "continue," or the negative
thereof. The Company intends that such forward-looking statements be
subject to the safe harbors for such statements. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. Any forward-looking
statements represent management's best judgements as to what may occur in
the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond the control of the Company that
could cause actual results and events to differ materially from historical
results of operations to revise any forward-looking statements to reflect
events or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
Item 6. Selected Financial Data
- --------------------------------
The following table sets forth selected consolidated financial data for each of
the Company's last five fiscal years:
Years Ended November 30,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Net Sales $31,205,000 $31,270,000 $32,141,000 $26,133,000 $18,786,000
Net Income $ 696,000 $ 365,000 $ 378,000 $ 488,000 $ 418,000
Net Income
Per Common
Share $ .07 $ .04 $ .04 $ .05 $ .04
Cash Dividend Per - - - - -
Common Share
AT YEAR END
Total Assets $ 8,644,000 $ 9,320,000 $10,181,000 $ 9,305,000 $ 4,609,000
Long-Term $ 860,000 $ 1,282,000 $ 1,772,000 $ 2,106,000 $ 287,000
Obligations
9
The following table sets forth selected unaudited consolidated financial data
for each of the Company's last eight fiscal quarters:
2002
---------------------------------------------------------------------------
Nov. 30, 2002 Aug. 31, 2002 May 31, 2002 Feb. 28, 2002
------------- ------------- ------------ -------------
Net Sales $ 5,696,000 $ 11,186,000 $ 10,605,000 $ 3,718,000
Gross Profit $ 2,075,000 $ 3,811,000 $ 3,404,000 $ 1,075,000
Net Income ($ 106,000) $ 590,000 $ 774,000 ($ 562,000)
Income (Loss) $ (.01) $ .06 $ .08 $ (.06)
Per share
2001
---------------------------------------------------------------------------
Nov. 30, 2001 Aug. 31, 2001 May 31, 2001 Feb. 28, 2001
------------- ------------- ------------ -------------
Net Sales $ 6,483,000 $ 11,729,000 $ 9,285,000 $ 3,773,000
Gross Profit $ 2,440,000 $ 3,365,000 $ 2,705,000 $ 1,162,000
Net Income $ 52,000 $ 876,000 $ 471,000 ($ 1,034,000)
Income (Loss) $ .01 $ .09 $ .05 $ (.10)
Per share
Item 7. Management's Discussion and Analysis or Plan of Operation
- -----------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
For the year ended November 30, 2002, the Company's net income was $696,000
compared to $365,000 for the year ended November 30, 2001 (previous year). Net
income increased by $331,000 primarily as a result of an increase in gross
profit of $693,000 and a decrease in interest expense of $162,000 partially
offset by an increase in sales, general and administrative expenses of $394,000
and an increase in income taxes of $117,000. These changes are further explained
in the Results of Operations section of this report.
During the year ended November 31, 2002, the Company provided net cash from
operations of $1,683,000 as compared to $1,076,000 for the previous year. The
increase of $607,000 was primarily attributable to the increase in net income of
$331,000, the increase in accounts receivable of $692,000, the decrease in
inventories of $659,000 and the increase in other current liabilities of
$250,000.
10
The increase in accounts receivable was primarily attributable to the increase
in average days outstanding in payment terms due to the sluggish economy and the
drought conditions in the Rocky Mountain region which severely curtailed the
cash flow from operations from some of the Company's customer base going into
the late fall and winter months. The decrease in inventories was primarily due
to the continued diligence of the Company's purchasing department and inventory
control constraints implemented with the installation of the new computer system
in February of 2000. Decreased sales of $787,000 in the fourth quarter of 2002
as compared to the same period in the previous year, reducing the requirement
for stocking of inventories, further attributed to the net reductions in
inventory levels. The increase in current liabilities was primarily attributable
to the increase in bonuses paid to management and officers of $249,000 due to
the increased operating income for 2002.
Net cash used in investing activities decreased by $77,000 during 2002 as
compared to a decrease of $7,000 during 2001, a net decrease of $70,000,
primarily as a result of additional purchases of property and equipment of
$43,000 in 2002.
Net cash used in financing activities increased by $1,600,000 during 2002 as
compared to an increase of $1,068,000 during 2001, a net increase of $532,000.
The increase was primarily attributable to the decrease in line-of-credit
balances of $240,000, the increase in checks written against future deposits of
$204,000 and the decrease in the proceeds from sale of treasury stock of
$103,000.
The decrease in the line-of-credit balances were primarily attributable to the
increase in net income of $331,000 during 2002 as compared to the previous year.
As of December 31, 2001, 105,000 shares of common stock options were subscribed
to by senior managers and executives of the Company, for a total purchase price
of $31,500. Three senior executive managers were given, as a bonus for 2001, an
additional 16,667 shares each (valued at $.30 per share), a total of $15,000. As
of December 31, 2000, 600,000 shares of common stock options were subscribed to
by Directors of the Company for a total purchase price of $150,000.
On July 3, 2002, the Company purchased 420,000 shares of common stock from a
non-affiliated stockholder for approximately $.56 per share, a total purchase
price of $235,000.
As of December 31, 2002, senior managers subscribed to 124,000 shares of options
at a price of $.30 per share. The remaining options outstanding, a total of
171,000 shares, expired on that date.
For the year ended November 30, 2001, the Company's net income was $365,000
compared to $378,000 for the year ended November 30, 2000. Net income decreased
by $13,000 as compared to the prior year primarily as a result of the decrease
in operating income of $199,000 substantially offset by the increase in other
income of $156,000 (including a reduction in interest expense of $67,000) and
the decrease in income tax expense of $30,000. During the year ended November
30, 2001, the Company provided $1,127,000 in cash from operations compared to
$527,000 used in operations during the year ended November 30, 2000.
11
The decrease in inventories of $480,000 in 2001 as compared to an increase of
$905,000 in 2000 was attributable to the efficiencies of utilization of the new
computer system installed in March of 1999 and management's response to reduced
sales volumes in early spring of 2001 which prompted management to reduce large
stock orders from manufacturers in anticipation of a "flat" sales year. The
decrease in accounts payable in 2001 of $319,000 as compared to a decrease of
$147,000 in 2000 was primarily attributable to the decrease in purchases of
merchandise inventory at the end of 2001 together with the increase in rebates
from manufacturers in 2001 of $51,000 which further reduced accounts payable at
year end. The increase in accounts receivable in 2001 of $21,000 as compared to
an increase in 2000 of $154,000 was primarily due to better credit management
with the hiring of a full time credit manager in April 2000. The increase in
other current liabilities of $72,000 in 2001 as compared to the decrease of
$9,000 in 2000 was primarily attributable to the increase in compensation
payable at the end of 2001 by $70,000.
Net cash used for investing activities decreased by $106,000 in 2001 as compared
to a decrease of $1,257,000 in 2000. The change was attributable to a $49,000
decrease in purchases of property plant and equipment in 2001 as compared to
2000 and a decrease of $57,000 for the purchases of other assets.
Net cash used in financing activities increased by $1,738,000 in 2001 as
compared to a decrease of $749,000 in 2000 primarily as a result of a decrease
in net borrowings on the line of credit with the bank of $1,725,000. The
decrease was due principally to the decrease in cash provided by inventories of
a $1,337,000 change from 2000 to 2001.
During 2001, the Company issued 600,000 shares of treasury stock at $.25 per
share for cash proceeds of $150,000 pursuant to stock options granted to the
officers in 1999. In early 2001, the Company purchased 732,456 shares of common
stock pursuant to the tender offer proffered to all shareholders on October 31,
2000 for a total purchase price of $183,114. An additional $56,677 was paid for
legal and stock transfer fees for the tender offer. The Company purchased an
additional 101,550 shares during 2001 from non-affiliates at an average price of
$.276 per share.
During fiscal 2000, the Company issued 600,000 shares of treasury stock at
$0.1859 per share to its officers for cash proceeds of $112,000 pursuant to
stock options granted to the officers in 1998.
12
On October 31, 2000 the Company sent to all its shareholders a tender offer for
up to 3,000,000 shares of its common stock for a purchase price of $.25 per
share. The total amount expected to be disbursed as a result of the tender offer
was $850,000 ($750,000 for the common stock and $100,000 for the associated
legal, accounting and transfer agent fees). The total amount was to be financed
by Wells Fargo Bank, Denver by increasing the existing line of credit by
$500,000 (to an aggregate amount of $5,000,000) and a term note not to exceed
$500,000 at an interest rate of 1/8th percent less than prime interest rate; the
note to be amortized no more than five years.
The purposes of the offer was to (1) offer the shareholders the opportunity to
sell some or all of their shares on a basis that was more favorable than could
probably be achieved in the open market (the closing price as of October 19th,
2000 was $.13 per share) and (2) extend an offer which represented a good
investment opportunity for the Company and its existing shareholders.
The Company filed the necessary Schedule TO and related documents with the SEC
on October 27, 2000. A revision was filed on November 6, 2000 and the final
amendment was filed on January 4, 2001. The offer expired on December 15, 2000.
A total of 732,456 shares of common stock were tendered for a total purchase
prices of $183,000. A total of $57,000 was incurred for legal, accounting,
transfer agent and other related costs.
Given the amount of stock that was ultimately acquired through the tender offer,
the Company increased its line of credit to a maximum of $5,000,000 on December
12, 2001, but did not enter into a term note as was expected.
The following is a two-year summary of working capital and current ratios:
2002 2001
---- ----
Working Capital $4,087,000 $3,862,000
Current Ratios 2.45 to 1 2.07 to 1
The increase in the current ratio in 2002 was primarily due to the increased net
income at November 30, 2002 as compared to November 30, 2001.
As of November 30, 2002, the Company and its subsidiary had an available
line-of-credit totaling $5,750,000 of which $4,741,000 was available and unused.
The line of credit expires on June 30, 2004 however, management believes that
they will have the opportunity to renew upon expiration.
13
Management believes that the present working capital as well as its available
line-of-credit is adequate to conduct its present operations. The Company does
not have any additional purchase commitments nor does it anticipate any
additional material capital expenditure for fiscal 2003.
Results of Operations
- ---------------------
Comparison Fiscal 2002 vs. 2001
- -------------------------------
Net sales were down $65,000. Net sales for the first two quarters of 2002 were
10% greater than the previous year's results, however, the lagging economy and
the continued drought conditions in the Rocky Mountain region suppressed sales
for the remaining two quarters of 2002, thereby creating a virtual match for the
two years being compared.
Gross profit percentage increased from 31% in 2001 to 33% in 2002, an increase
of 2%. This increase was primarily attributable to a continued effort by the
purchasing and marketing departments of the Company to secure better pricing
from vendors and target profitability on sales of specific lines of inventory.
Selling, general and administrative expenses increased by $394,000 primarily due
to the addition of a new branch located in Lakewood, Colorado during April,
2002. The additional expenses incurred by the new branch were $233,000 for 2002.
Other expense decreased by $149,000 primarily as a result of reduced interest
expense of $162,000. This decrease was primarily due to the decrease in the
average bank borrowings ($2,210,000) during 2002, $3,095,000 during 2001).
Weighted average interest rates on bank borrowings were 4.8% during 2002 and
7.4% during 2001. Additionally, there was a decrease of $39,000 of interest paid
on long term notes and leases due to the principal reductions on the notes
during 2002.
Net income increased by $331,000 for the year ended November 30, 2002, the
Company's net income was $696,000 compared to $365,000 for the year ended
November 30, 2001 (previous year). Net income increased by $331,000 primarily as
a result of an increase in gross profit of $693,000 and a decrease in interest
expense of $162,000 partially offset by an increase in sales, general and
administrative expenses of $394,000 and an increase in income taxes of $117,000.
Income Taxes
- ------------
At November 30, 2002, the Company has recorded a current net deferred tax
asset totaling $170,000 and has recorded a noncurrent net deferred tax
asset totaling $53,000. Based upon the Company's recent history of taxable
income and its projections for future earnings, management believes that is
more likely than not that sufficient taxable income will be generated in
the near term to utilize the net deferred tax assets. See Note 6 to the
Company's Consolidated Financial Statements.
The Company's effective tax rate for the year ended November 30, 2002 of
approximately 38% differs from the Company's blended Federal and State tax
rate of 37% due primarily to the non-deductible nature of the amortization
of goodwill for tax purposes and other non-deductible items which is
consistent with prior years.
14
Comparison Fiscal 2001 vs. Fiscal 2000
- --------------------------------------
Net sales were down $871,000 primarily as a result of the inclement weather in
early spring which delayed contractors on beginning jobs for at least a month.
This work was not able to be made up by the end of the year by the contractors.
Cost of sales decreased by $1,152,000 due to adjustments to pricing on specific
lines of inventory, lower sales volume, better pricing from vendors and reduced
inventory shrinkage due to better inventory control in 2001 by $194,000. Due to
the reduction of cost of sales the gross profit percentage increased by 1.7%
(30.9% in 2001 versus 29.2% in 2000).
Selling, general and administrative expenses increased by $480,000 primarily due
to the increase in payroll of $166,000 as a result of a buildup of staff for the
first quarter of 2001 in anticipation of a robust sales year and the increase of
truck leasing and maintenance of $149,000 due to the purchase of additional
trucks for each branch location to better their ability to deliver merchandise
to the customer on a timely basis (improved customer service). In addition,
there was an increase of $102,000 in general expenses in 2001 for the Southeast
Denver branch (opened April 2000).
Other income increased by $156,000 in 2001 as compared to the prior year
primarily due to a decrease in interest expense of $67,000 which was a result of
the decrease in the weighted average rate on bank borrowings from 9.5% to 7.4%
(reduction of prime interest rate) and the reduced amount of interest paid on
long term, amortized loans of $38,000. In addition, there was an increase of
$55,000 in miscellaneous income primarily due to the sale of a limited
partnership at the end of 2000 for a recorded loss of $46,000.
The weighted-average interest rates on bank borrowings were 7.4% and 9.5% for
2001 and 2000, respectively. The weighted-average bank borrowing balance
outstanding of $3,095,000 for 2001 increased by $365,000 compared to 2000.
Net Income decreased by $13,000.
Income Taxes
- ------------
At November 30, 2001, the Company has recorded a current net deferred tax
asset totaling $151,000 and has recorded a noncurrent net deferred tax
asset totaling $36,000. Based upon the Company's recent history of taxable
income and its projections for future earnings, management believes that is
more likely than not that sufficient taxable income will be generated in
the near term to utilize the net deferred tax assets. See Note 7 to the
Company's Consolidated Financial Statements.
The Company's effective tax rate for the year ended November 30, 2001 of
approximately 46% differs from the Company's blended Federal and State tax
rate of 37% due primarily to the non-deductible nature of the amortization
of goodwill for tax purposes and other non-deductible items which is
consistent with prior years.
15
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our significant accounting policies are outlined within Item 8 as Note 2 to the
consolidated financial statements. Some of those accounting policies require us
to make estimates and assumptions that affect the amounts reported by us. The
following items require the most significant judgment and often involve complex
estimation:
Allowance for doubtful accounts: We continuously monitor payments from our
customers and maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. When we
evaluate the adequacy of our allowances for doubtful accounts, we take into
account various factors including our accounts receivable aging, customer
credit-worthiness, historical bad debts, and geographic risk. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. As of
November 30, 2002, our net accounts receivable balance was $2,702,000.
Inventory: Inventory is stated at the lower of cost or net realizable value.
Cost is based on a first-in, first-out basis. We review net realizable value of
inventory in detail on an on-going basis, with consideration given to
deterioration, obsolescence, and other factors. If actual market conditions are
less favorable than those projected by management, and our estimates prove to be
inaccurate, additional write-downs or adjustments to recognize additional cost
of sales may be required. As of November 30, 2002, our inventory balance was
$4,011,000.
Goodwill and intangible assets: We review the value of our long-lived assets,
including goodwill, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no longer appropriate.
As of November 30, 2002, we had $1,249,000 of goodwill and intangible assets
remaining on the balance sheet, the value of which we believe is realizable
based on the estimated future cash flows.
Recent Accounting Pronouncements
- --------------------------------
In October 2001, the FASB also approved SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 replaces SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The new accounting model for long-lived assets to
be disposed of by sale applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB Opinion No. 30,
Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, for the disposal of segments of a business.
Statement 144 requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value
or include amounts for operating losses that have not yet occurred.
Statement 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from
the ongoing operations of the entity in a disposal transaction. The
provisions of Statement 144 are effective for financial statements issued
16
for fiscal years beginning after December 15, 2001 and, generally, are to
be applied prospectively. The Company does not believe that the adoption of
this statement will have a material effect on its financial position,
results of operations, or cash flows.
In December 2002, the FASB issued Statements of Financial Accounting
Standards No.148, "Accounting for Stock-Based compensation - Transition and
Disclosure - an amendment of FASB Statement 123" (SFAS 123). For entities
that change their accounting for stock-based compensation from the
intrinsic method to the fair value method under SFAS 123, the fair value
method is to be applied prospectively to those awards granted after the
beginning of the period of adoption (the prospective method). The amendment
permits two additional transition methods for adoption of the fair value
method. In addition to the prospective method, the entity can choose to
either (i) restate all periods presented (retroactive restatement method)
or (ii) recognize compensation cost from the beginning of the fiscal year
of adoption as if the fair value method had been used to account for awards
(modified prospective method). For fiscal years beginning December 15,
2003, the prospective method will no longer be allowed. The Company
currently accounts for its stock-based compensation using the intrinsic
value method as proscribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and plans on continuing using
this method to account for stock options , therefore, it does not intend to
adopt the transition requirements as specified in SFAS 148. The Company
will adopt the new SFAS 148 disclosure requirements in the first quarter of
fiscal 2003.
17
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The Company does not have material market risk on market risk sensitive
instruments. It has no exposure to fluctuations in currency exchange rates or
commodity prices. Its only interest rate risk arises from its bank
line-of-credit.
The Company's long-term debt consists of fixed rate loans and capital
leases that are unaffected by interest rate fluctuations and have fair values
approximately equal to their carrying values. It's operating line-of-credit
bears interest at lender prime (4.25% at November 30, 2002). For the year ended
November 30, 2002, the Company's total interest expense was $232,000. Assuming
outstanding borrowings under the Company's revolving line-of-credit at the same
levels that prevailed during fiscal 2002, a 10% decrease or increase in the
prime rate prevailing at year-end 2001 (i.e., from 4.25% to 4.75% or 3.75%)
would result in a decrease or increase of $11,000 in the Company's interest
expense in fiscal 2003.
Item 8. Financial Statements
- ----------------------------
The response to this item is submitted as a separate section of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
--------------------
There have been no disagreements between the Company and its independent
accountants on any matter of accounting principles or practices or
financial statement disclosure since the Company's inception. On November
15, 2001 the Company dismissed BDO Seidman, LLP as its independent
accountant and engaged Hein + Associates LLP as the principal accountant to
audit the registrant's financial statements. The decision to change was
approved by the Board of Directors. Form 8-K was filed regarding the change
of auditors dated November 15, 2001.
18
PART III
Item 10. Directors and Executive Officers of the Company
- ---------------------------------------------------------
(a) Identification of Directors
The list presented below sets forth the names and ages of all
directors of the Company indicating all positions and offices with the
Company held by each such person and his term of office as director
and the period during which he has served as such.
Name Age Positions Director Since
---- --- --------- --------------
Carl J. Bentley 69 Chairman of the Board 1994
and Director
Alan C. Bergold 54 President, Treasurer 1981
and Director
Donald L. Champlin 51 Executive Vice President, 1994
Secretary and Director
(b) Identification of Executive Officers
The list presented below sets forth the names and ages of all
executive officers of the Company indicating all positions and offices
held by such person and the period during which he has served as such.
Year First
Name Age Positions Elected (1)
---- --- --------- -----------
Carl J. Bentley 69 Chairman of the Board 1996
and Director 1994
Alan C. Bergold 54 President, Treasurer 1996
and Director 1981
Donald L. Champlin 51 Executive Vice President, 1996
Secretary
and Director 1994
(1) All officers serve at the discretion of the Board of Directors.
19
(c) Business Experience
- -----------------------
The material presented below sets forth a brief account of the business
experience during at least the past five years of each director, executive
officer and significant employee.
Carl J. Bentley, age 69, was appointed Chairman of the Board in October
1996. He joined the Company as General Manager of CPS in July 1985. In
November 1986, he became President and a member of the Board of Directors
of CPS. He was appointed to the Company's Board of Directors in 1994.
Alan C. Bergold, age 54, was appointed President in October 1996 and
Executive Vice President of the Company in July 1983. He served as Vice
President and Secretary of the Company from 1981 to 1983. Mr. Bergold has
been a director of the Company since 1981.
Donald L. Champlin, age 51, was appointed Executive Vice President in
October 1996. He joined the Company as Pump Product Manager in October
1983. In February 1989, he became Vice President of Marketing and a member
of the Board of Directors of CPS. He was appointed to the Company's Board
of Directors in 1994.
(d) Involvement in Certain Legal Proceedings
- --------------------------------------------
None.
(e) Promoters and Control Persons
- ---------------------------------
Not applicable.
(f) Section 16(a) Beneficial Ownership Reporting Compliance
- -----------------------------------------------------------
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during fiscal 2002 and Forms 5 and amendments thereto
furnished to the Company with respect to fiscal 2002, if any, and written
representations furnished to the Company as to the absence of any requirement
for the filing of Forms 5, the Company believes that its officers, directors and
10% beneficial owners have filed on a timely basis all required Forms 3, 4 and 5
under Section 16(a) of the Exchange Act due in or in respect of the 2002 fiscal
year.
20
Item 11. Executive Compensation
- --------------------------------
Summary Compensation Table
--------------------------
The following table reflects cash and non-cash compensation paid or
accrued by the Company during the fiscal years ended November 30,
2002, 2001 and 2000 to or for the account of the chief executive
officer and each executive officer whose cash compensation exceeded
$100,000, and all executives of the Company as a group:
Annual Compensation Long-term Compensation
------------------- ----------------------
Name and Year Other Restricted Securities
Principal Ended Annual Stock Underlying LTIP All Other
Position Nov. 30 Salary Bonus Compensation Award Options/SARs Payouts Compensation
-------- ------- ------ ----- ------------ ----- ------------ ------- ------------
Carl J. Bentley 2002 $201,650 $156,357 $ 12,000 $ - - $ - $ 5,060
Chairman of the 2001 185,000 96,723 12,000 - 250,000 - 6,720
Board 2000 169,900 81,407 - 200,000 - 3,400
Alan C. Bergold 2002 $199,150 $156,347 $ 12,000 - - $ - $ 16,218
President 2001 182,500 96,723 12,000 - 250,000 - 16,876
2000 167,400 81,407 - - 200,000 - 8,700
Donald L. Champlin 2002 $199,150 $156,347 $ 12,000 - - $ - $ 17,727
Executive 2001 182,500 96,723 12,000 - 250,000 - 18,708
Vice-President 2000 167,400 81,407 - - 200,000 - 9,800
The preceding table does not include any amounts for non-cash
compensation, including personal benefits, paid to the above-listed
officers. The Company believes that the value of such non-cash
benefits and compensation paid during the periods presented did not
exceed the lessor of $50,000 or 10% of the cash compensation reported.
The Company compensated the directors for payments they made on life
insurance policies on the life of each of the director's lives in
order to substantially complete the purchase of the other director's
common stock ownership in case of death of a director. The details of
the stock purchase agreement are included in the employment agreement
of the officers with the Company. The agreement basically calls for
the first right of refusal by the Company to purchase the deceased
directors stock for a price per share in relation to net book value.
21
The Company has employment agreements as follows:
Carl J. Bentley (1): $201,650 annual salary per year, adjusted for
cost of living plus seven percent per annum base increase; plus eight
and one-half percent bonus of net pretax income exclusive of
contributions to the 401(k) and profit sharing plan; term of five
years beginning May 31, 2001.
Alan C. Bergold (1): $199,150 annual salary per year, adjusted for
cost of living plus seven percent per annum base increase; plus eight
and one-half percent bonus of net pretax income exclusive of
contributions to the 401(k) and profit sharing plan; term of five
years beginning May 31, 2001.
Donald L. Champlin (1): $199,150 annual salary per year, adjusted for
cost of living plus seven percent per annum base increase; plus eight
and one-half percent bonus of net pretax income exclusive of
contributions to the 401(k) and profit sharing plan; term of five
years beginning May 31, 2001.
(1) There is a provision for payment of one year's compensation as a
result of the sale of all or substantially all of the Company's
assets.
(b) Option/SAR Grants in Last Fiscal Year
- -------------------------------------------
% of Total
Options/SARs
Number of Granted to
Securities Exercise Market Grant
Underlying Employees or Base Price Date
Options/SARs in Fiscal Price/ on Date Expiration Present
NONE
22
(c) Aggregated Option/SAR Exercises and Last Fiscal Year and Year-End
- ----------------------------------------------------------------------
Option/SAR Values
-----------------
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/
Shares Options/SARs SARs at
Acquired Value at FY-end FY-end
Name on Exercise Realized (all exercisable) (all exercisable)
---- ----------- ---------- ----------------- -----------------
NONE
Refer to Note 8 to the Consolidated Financial Statements for
description of Stock Option Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
- --------------------------------------------------------
The following table shows the beneficial ownership of Common Stock by
each person known by the Company to own beneficially more than 5
percent of the outstanding shares of its Common Stock. The Company has
no other class of voting securities.
Common Stock
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
Carl J. Bentley 2,166,153 (1) 21.4%
4275 Forest Street
Denver, CO 80216
Alan C. Bergold 2,652,646 (1) 26.2%
4275 Forest Street
Denver, CO 80216
Donald L. Champlin 2,239,797 (1) 22.2%
4275 Forest Street
Denver, CO 80216
(1) Includes 250,000 shares, which may be acquired pursuant to the
exercise of stock options exercisable on or before December 31, 2003.
23
(b) Security Ownership of Management
- -------------------------------------
The following table shows the equity securities beneficially owned by
all directors of the Company and all directors and officers of the
Company as a group.
(1) Directors
- ------------- Common Stock
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
Carl J. Bentley 2,166,153 (1) 21.4%
4275 Forest Street
Denver, CO 80216
Alan C. Bergold 2,652,646 (1) 26.2%
4275 Forest Street
Denver, CO 80216
Donald L. Champlin 2,239,797 (1) 22.2%
4275 Forest Street
Denver, CO 80216
(1) Includes 250,000 shares, which may be acquired pursuant to the
exercise of stock options exercisable on or before December 31, 2003.
(2) Directors and Officers as a Group
- -------------------------------------
Amount and Nature of Percent
Title of Class Beneficial Ownership of Class
-------------- -------------------- --------
Common Stock 7,058,596 (1) 65.8%
(par value $.01)
(1) Includes 750,000 shares, which may be acquired pursuant to the
exercise of stock options exercisable on or before December 31, 2003.
(c) Changes in Control
- ----------------------
None.
24
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
(a) Transactions With Management and Others
- ---------------------------------------------
On January 1, 2000, the Board of Directors granted an option to each
of the officers of the Company to purchase 600,000 shares of treasury
stock at $.25 per share by December 31, 2000. The options' exercise
price was equal to the common stock's market price at the date of
grant. During the year ended November 30, 2000, the Company issued
600,000 shares from treasury to its officers for cash proceeds of
$111,510.
On January 1, 2001, the Board of Directors granted an option to each
of the officers of the Company to purchase 750,000 shares of treasury
stock at $.20 per share by December 31, 2003. The options' exercise
price was greater than the common stock's market price at the date of
grant.
On July 18, 2001, the Board of Directors granted common stock options
to ten middle and senior managers of the Company. The options totaled
460,000 shares of which 165,000 shares of options expired on December
31, 2001 if not subscribed by that date. The option price was $.30 per
share. The remainder of the options were to be exercised no later than
December 31, 2002. As of December 31, 2001, 105,000 shares were
subscribed to by the managers which meant that the remaining 60,000
options expired as of that date. Three senior managers were given, as
a bonus for 2001, an additional 16,667 shares (valued at $0.30 per
share) which were granted on December 20, 2001 when the market price
was $.21 per share.
On July 3, 2002, the Company purchased 420,000 shares of common stock
from a non-affiliated stockholder for approximately $.56 per share, a
total purchase price of $235,000.
As of December 31, 2002, senior managers subscribed to 124,000 shares
of options at a price of $.30 per share. The remaining options
outstanding, a total of 171,000 shares, expired on that date.
(b) Certain Business Relationships
- ----------------------------------
None.
(c) Indebtedness of Management
- ----------------------------------
None.
(d) Transactions with Promoters
- -------------------------------
Not applicable.
25
Item 14. Controls and Procedures.
- ----------------------------------
Within the 90 days prior to the date of this Annual Report on Form 10-K,
the Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures and its internal controls and procedures for
financial reporting. This evaluation was done under the supervision and with the
participation of management, including the President and Chief Financial
Officer. In accord with SEC requirements, the President and Chief Financial
Officer notes that, since the date of the evaluation to the date of this Annual
Report, there have been no significant changes in internal controls or in other
factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses. Based upon the Company's evaluation, the President and Chief
Financial Officer has concluded that the Company's disclosure controls are
effective to ensure that material information relating to the Company is made
known to management, including the President and Chief Financial Officer,
particularly during the period when the Company's periodic reports are being
prepared, and that the Company's internal controls are effective to provide
reasonable assurance that the Company's financial statements are fairly
presented in conformity with generally accepted accounting principles.
26
PART IV
Item 15. Exhibits and Reports on Form 8-K
- ------------------------------------------
Exhibits
- --------
(a) The documents listed below have been filed as exhibits to this report. As
used in this exhibit list, "Form 10" means the Company's Registration
Statement on Form 10 filed with the Securities and Exchange Commission in
March 1981.
3.1 Articles of Incorporation (incorporated by reference to Exhibits
3.1 and 3.2 to Form 10).
3.2 By-laws (incorporated by reference to Exhibit 3.3 to the Form
10).
21 Subsidiary of the Company.
99.1 Certification
(b) During the last quarter of the period covered by this report the Company
filed a Current Report on Form 8-K dated November 15, 2001 reporting a
change of accountants pursuant to Item 4 of that form.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HIA, INC.
By: /s/ Alan C. Bergold
---------------------------------
Alan C. Bergold,
President,
Treasurer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Chairman of the Board
- ----------------------------- and Director --------------
Carl J. Bentley
/s/ Alan C. Bergold President, 02/27/03
- ----------------------------- Treasurer and Director --------------
Alan C. Bergold
/s/ Donald L. Champlin Executive Vice 02/27/03
- ----------------------------- President, Secretary --------------
Donald L. Champlin and Director
28
HIA, Inc. and Subsidiaries
Consolidated Financial Statements
For the Years Ended
November 30, 2002, 2001 and 2000
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report...............................................F-2
Report of Independent Certified Public Accountants.........................F-3
Financial Statements
--------------------
Consolidated Balance Sheets - November 30, 2002 and 2001............F-4
Consolidated Statements of Income - For the Years Ended
November 30, 2002, 2001 and 2000.............................F-6
Consolidated Statements of Stockholders' Equity - For the
Years Ended November 30, 2002, 2001, and 2000................F-7
Consolidated Statements of Cash Flows - For the Years
Ended November 30, 2002, 2001, and 2000......................F-8
Notes to Consolidated Financial Statements............................F-9
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors
HIA, Inc. and Subsidiaires
Denver, Colorado
We have audited the accompanying consolidated balance sheets of HIA, Inc. and
Subsidiaries (the "Company") as of November 30, 2002 and November 30, 2001, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years then ended. 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 in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HIA, Inc. and
Subsidiaries as of November 30, 2002 and November 30, 2001 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.
HEIN + ASSOCIATES LLP
Denver, Colorado
January 24, 2003
F-2
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors
HIA, Inc. and Subsidiary
Denver, Colorado
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of HIA, Inc. and subsidiary (the "Company")
for the year ended November 30, 2000. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
HIA, Inc. and subsidiary for the year ended November 30, 2000 in conformity with
auditing principles generally accepted in the United States of America.
BDO Seidman, LLP
Los Angeles, California
January 10, 2001
F-3
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30,
--------------------------
2002 2001
------------ -----------
ASSETS
------
CURRENT ASSETS:
Cash $ 7,000 $ 1,000
Accounts receivable, net of allowance of
$225,000 and $146,000, respectively 2,702,000 3,452,000
Inventories 4,011,000 3,784,000
Other current assets 184,000 204,000
----------- -----------
Total current assets 6,904,000 7,441,000
PROPERTY AND EQUIPMENT:
Leasehold improvements 337,000 289,000
Equipment 1,387,000 1,347,000
----------- -----------
1,724,000 1,636,000
Less accumulated depreciation and amortization (1,437,000) (1,216,000)
----------- -----------
Net property and equipment 287,000 420,000
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $383,000 and $383,000 1,151,000 1,151,000
Deferred tax asset 53,000 36,000
Non-compete agreement, net of accumulated
amortization of $52,000 and $37,000 98,000 113,000
Other 151,000 159,000
----------- -----------
Total other assets 1,453,000 1,459,000
----------- -----------
TOTAL ASSETS $ 8,644,000 $ 9,320,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
NOVEMBER 30,
-------------------------
2002 2001
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line-of-credit $ 1,009,000 $ 1,815,000
Current maturities of long-term debt 306,000 298,000
Current maturities of capital
lease obligations 118,000 189,000
Accounts payable 294,000 477,000
Checks written against future deposits 86,000 207,000
Accrued payroll and bonuses 633,000 354,000
Income taxes payable 73,000 36,000
Other current liabilities 298,000 203,000
----------- -----------
Total current liabilities 2,817,000 3,579,000
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 860,000 1,165,000
Capital lease obligations, less
current maturities -- 117,000
----------- -----------
Total long-term liabilities 860,000 1,282,000
----------- -----------
Total liabilities 3,677,000 4,861,000
COMMITMENTS (Notes 4, 5 and 8)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000
shares authorized; 13,108,196 and
13,108,196 issued and 9,861,525 and
10,126,525 outstanding 131,000 131,000
Additional paid-in capital 3,109,000 3,109,000
Retained earnings 2,527,000 1,831,000
Less treasury stock at cost; 3,246,671 and
2,981,671 shares (800,000) (612,000)
----------- -----------
Total stockholders' equity 4,967,000 4,459,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,644,000 $ 9,320,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-5
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30,
--------------------------------------------------------
2002 2001 2000
------------ ------------ ------------
NET SALES $ 31,205,000 $ 31,270,000 $ 32,141,000
COST OF SALES 20,840,000 21,598,000 22,750,000
------------ ------------ ------------
Gross profit 10,365,000 9,672,000 9,391,000
SELLING, GENERAL AND ADMINISTRATIVE 9,142,000 8,748,000 8,268,000
------------ ------------ ------------
OPERATING INCOME 1,223,000 924,000 1,123,000
OTHER INCOME (EXPENSE):
Interest income 87,000 84,000 50,000
Interest expense (232,000) (394,000) (461,000)
Miscellaneous income 40,000 56,000 1,000
------------ ------------ ------------
Total other expense (105,000) (254,000) (410,000)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,118,000 670,000 713,000
INCOME TAXES 422,000 305,000 335,000
------------ ------------ ------------
NET INCOME $ 696,000 $ 365,000 $ 378,000
============ ============ ============
NET INCOME PER COMMON SHARE:
Basic $ .07 $ .04 $ .04
Diluted $ .07 $ .04 $ .04
BASIC WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 10,096,000 10,184,000 10,309,000
------------ ------------ ------------
DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 10,158,000 10,217,000 10,324,000
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
F-6
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------------------ PAID-IN RETAINED ------------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
---------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 1, 1999 13,107,896 $ 131,000 $ 3,109,000 $ 1,088,000 3,347,665 $ (606,000) $ 3,722,000
Issuance of shares
held in treasury -- -- -- -- (600,000) 112,000 112,000
Net income -- -- -- 378,000 -- -- 378,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, November 30, 2000 13,107,896 131,000 3,109,000 1,466,000 2,747,665 (494,000) 4,212,000
Issuance of common stock 300 -- -- -- -- -- --
Issuance of shares held
in treasury -- -- -- -- (600,000) 150,000 150,000
Acquisition of treasury stock -- -- -- -- 834,006 (268,000) (268,000)
Net income -- -- -- 365,000 -- -- 365,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, November 30, 2001 13,108,196 131,000 3,109,000 1,831,000 2,981,671 (612,000) 4,459,000
Issuance of shares held
in treasury -- -- -- -- (155,000) 47,000 47,000
Acquisition of treasury stock -- -- -- -- 420,000 (235,000) (235,000)
Net income -- -- -- 696,000 -- -- 696,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, November 30, 2002 13,108,196 $ 131,000 $ 3,109,000 $ 2,527,000 3,246,671 $ (800,000) $ 4,967,000
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-7
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30,
--------------------------------------------------
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 696,000 $ 365,000 $ 378,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 236,000 374,000 396,000
Gain on sale property (3,000) (2,000) --
Loss on disposal of assets -- -- 46,000
Allowance for doubtful accounts 79,000 35,000 --
Allowance for inventory obsolescence -- 48,000 --
Deferred income taxes (17,000) 18,000 118,000
Changes in operating assets and liabilities, net of
business combination:
Accounts receivable 671,000 (21,000) (154,000)
Inventories (227,000) 432,000 (905,000)
Other current assets 20,000 (15,000) (19,000)
Accounts payable (183,000) (319,000) (147,000)
Other current liabilities 411,000 161,000 (240,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,683,000 1,076,000 (527,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (85,000) (42,000) (91,000)
Increase (decrease) in other assets 8,000 35,000 (73,000)
------------ ------------ ------------
Net cash used in investing activities (77,000) (7,000) (164,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line-of-credit 8,859,000 10,087,000 9,578,000
Repayments on line-of-credit (9,665,000) (10,653,000) (8,419,000)
Repayments on long-term debt (297,000) (291,000) (283,000)
Repayments on capital lease obligations (188,000) (176,000) (182,000)
Acquisitions of treasury stock (235,000) (268,000) --
Proceeds from sale of treasury stock 47,000 150,000 112,000
Increase (decrease) in checks written against future deposits (121,000) 83,000 (136,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities (1,600,000) (1,068,000) 670,000
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 6,000 1,000 (21,000)
CASH, beginning of year 1,000 -- 21,000
------------ ------------ ------------
CASH, end of year $ 7,000 $ 1,000 $ --
============ ============ ============
See accompanying notes to consolidated financial statements.
F-8
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------------
Principles of Consolidation - The consolidated financial statements include
the accounts of HIA, Inc. (the "Company" or "HIA"), its wholly-owned
subsidiary CPS Distributors, Inc. ("CPS"), and CPS's wholly-owned
subsidiary, Western Pipe Supply ("WPS") and Water Systems, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Lines of Business - The principal business of HIA, conducted through its
subsidiary, is the wholesale business distribution of turf irrigation
equipment and pumps.
Concentration of Risk - The Company's financial instruments that are exposed
to concentrations of credit risk consist primarily of cash and accounts
receivable. The Company invests temporary cash in demand deposits with
federally insured financial institutions. Such demand deposit accounts at
times may exceed federally insured limits. The Company has not experienced
any losses in such accounts.
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers and generally short payment
terms. The Company reviews a customer's credit history before extending
credit and establishes an allowance for doubtful accounts based upon the
credit risk of specific customers, historical trends and other information.
Generally, the Company does not require collateral from its customers.
Use of Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from
those estimates.
Financial Instruments - The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it
is practicable to estimate that value.
Fair values of accounts receivables, accounts payable and other current
liabilities are assumed to approximate carrying values for these financial
instruments since they are short term in nature.
The note payable, long-term debt, and capital lease obligations bear
interest at fixed and floating rates of interest based upon lending
institutions' prime lending rate. Accordingly, their fair value approximates
their reported carrying amounts at November 30, 2002 and 2001.
Inventories - Inventories consist of wholesale goods held for resale, which
are primarily valued at the lower of cost (as determined using first-in,
first-out method) or market.
Cost of Sales - Cost of sales consists of the actual cost of products
purchased for resale and related in-bound shipping charges.
F-9
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fulfillment Costs - Included in selling, general and administrative expense
are fulfillment costs, which consist of the cost of operating and staffing
each branch location. Such costs include those attributable to receiving,
inspecting and warehousing inventories. Fulfillment costs amounted to
approximately $3,255,000, $3,283,000, and $3,608,000 in fiscal 2002, 2001,
and 2000, respectively.
Depreciation, Amortization, Property and Equipment - Property and equipment
are stated at cost. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, which range from three to ten
years. Leasehold improvements and leased equipment are amortized over the
lesser of the estimated useful lives or over the term of the leases. Upon
sale or retirement, the cost and related accumulated depreciation of
disposed assets are eliminated from the respective accounts and the
resulting gain or loss is included in the statements of income. Depreciation
expense was $221,000, $207,000, and $261,000 for the years ended November
30, 2002, 2001, and 2000.
Long-Lived Assets - Long-lived assets and identifiable intangibles,
including goodwill and the non-compete agreement, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the expected undiscounted future
cash flow from the use of the asset and its eventual disposition is less
than the carrying amount of the assets, an impairment loss is recognized and
measured using the asset's fair value.
Goodwill and Non-Compete Agreement - Goodwill and the non-compete agreement
relate to the acquisition of WPS in 1999. Goodwill in accordance with FASB
No. 142 is no longer amortized beginning in fiscal 2002. Had goodwill been
amortized in fiscal 2002, the Company would have recorded an additional
$153,000 of amortization, which would have decreased net income to $543,000.
Additionally, the Company tests goodwill for impairment annually or on an
interim basis if an event or circumstance occurs between the annual tests
that may indicate impairment of goodwill. The non-compete agreement is being
amortized over a 10-year period using the straight-line method. Amortization
expense was $15,000, $167,000, and $135,000 for the years ended November 30,
2002, 2001, and 2000.
Revenue Recognition - The Company recognizes revenue at the time goods are
shipped to customers in the normal course of business.
Income Taxes - Deferred income taxes are recognized for the tax consequences
in future years for differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end, based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Income tax expense
equals the tax payable for the period plus the net change during the period
in deferred tax assets and liabilities.
Advertising Costs - The Company recognizes advertising expense when
incurred. Advertising expense was approximately $6,700, $31,000, and $10,000
for the years ended November 30, 2002, 2001, and 2000.
Net Income Per Common Share - Basic net income per share includes no
dilution and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted net income per share reflects the potential dilution of securities
that could share in the earnings of an entity.
F-10
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended November 30, 2002 and 2001, 55,556 and 32,738 shares,
respectively, were included in dilutive shares outstanding which related to
employee stock options to purchase 750,000 shares of the Company's common
stock at $.20 per share. For the year ended November 30, 2000, 15,000 shares
were included in dilutive shares outstanding which relate to employee stock
options to purchase 600,000 shares of the Company's common stock at $.1859
per share. Employee stock options to purchase 140,000, 460,000 and 600,000
shares of the Company's common stock at $.30, $.30 and $.25 per share were
not included in dilutive shares outstanding for the year ended November 30,
2002, 2001 and 2000 as their exercise price exceeded the average market
price of the Company's common stock during the period.
Cash Equivalents - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Stock Option Plans - The Company applies Accounting Principles Board ("APB")
Opinion 25, "Accounting for Stock Issued to Employees," and the related
interpretations in accounting for all stock option plans. Under APB Opinion
25, no compensation cost has been recognized for stock options issued to
employees as the exercise price of the Company's stock options granted
equals or exceeds the market price of the underlying common stock on the
date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide
pro forma information regarding net income as if compensation cost for the
Company's stock options plans had been determined in accordance with the
fair value based method prescribed in SFAS No. 123. To provide the required
pro forma information, the Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing model.
Reclassifications - Certain reclassifications have been made to the 2000
financial statements in order for them to conform to the 2002 and 2001
presentation. Such reclassifications have no material impact on the
Company's consolidated financial position or results of operations.
Comprehensive Income - Comprehensive income is comprised of net income and
all changes to the consolidated statement of stockholders' equity, except
those changes made due to investments by stockholders, changes in
paid-in-capital and distributions to stockholders. There is no difference
between net income and comprehensive income for the years ended November 30,
2002, 2001, and 2000.
Fourth Quarter Adjustments - The Company recorded in the fourth quarter of
the years ended November 30, 2001 and 2000, adjustments to properly accrue
for officer bonuses in the amount of $140,000 and $24,000, respectively. In
2002, the fourth quarter adjustment was a decrease of approximately $21,000
to the bonus accrual.
F-11
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements - In October 2001, the FASB also approved
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS 144 replaces SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The new accounting model
for long-lived assets to be disposed of by sale applies to all long-lived
assets, including discontinued operations, and replaces the provisions of
APB Opinion No. 30, Reporting Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, for the disposal of segments of a
business. Statement 144 requires that those long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value
or include amounts for operating losses that have not yet occurred.
Statement 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from
the ongoing operations of the entity in a disposal transaction. The
provisions of Statement 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, are to be
applied prospectively. The Company does not believe that the adoption of
this statement will have a material effect on its financial position,
results of operations, or cash flows.
In December 2002, the FASB issued Statements of Financial Accounting
Standards No.148, "Accounting for Stock-Based compensation - Transition and
Disclosure - an amendment of FASB Statement 123" (SFAS 123). For entities
that change their accounting for stock-based compensation from the intrinsic
method to the fair value method under SFAS 123, the fair value method is to
be applied prospectively to those awards granted after the beginning of the
period of adoption (the prospective method). The amendment permits two
additional transition methods for adoption of the fair value method. In
addition to the prospective method, the entity can choose to either (i)
restate all periods presented (retroactive restatement method) or (ii)
recognize compensation cost from the beginning of the fiscal year of
adoption as if the fair value method had been used to account for awards
(modified prospective method). For fiscal years beginning December 15, 2003,
the prospective method will no longer be allowed. The Company currently
accounts for its stock-based compensation using the intrinsic value method
as proscribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and plans on continuing using this method to
account for stock options , therefore, it does not intend to adopt the
transition requirements as specified in SFAS 148. The Company will adopt the
new SFAS 148 disclosure requirements in the first quarter of fiscal 2003.
2. NOTE PAYABLE AND LONG-TERM DEBT:
-------------------------------
Line-of-Credit Agreement - CPS and its subsidiary have a line-of-credit
agreement with a bank, which expires on June 30, 2004. During fiscal 2002,
the available line-of-credit was increased from $5,000,000 to $5,750,000.
The available loan amount is the lesser of $5,750,000 or the computed
borrowing base, as defined by the terms of the agreement. The line-of-credit
provides for interest at the bank's prime rate (4.25% at November 30, 2002).
The agreement is collateralized by principally all of the Company's business
assets including accounts receivable, inventories and property and
equipment, excluding owned real estate. Additionally, the bank has the right
of set-off under this agreement. The agreement is also guaranteed by HIA.
F-12
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The agreement contains several covenants, which, among other things, require
that the Company maintain certain financial ratios, minimum net worth and
minimum working capital as defined in the line-of-credit agreement. In
addition, the agreement limits the payment of dividends, the purchase of
property and equipment, and officer and stockholder compensation. As of
November 30, 2002, the Company was in compliance with these covenants under
the line-of-credit agreement.
As of November 30, 2002 and 2001, $1,009,000 and $1,815,000 were outstanding
under this line-of-credit agreement.
3. LONG-TERM DEBT:
--------------
Long-term debt consisted of the following:
November 30,
----------------------------------------
2002 2001
----------------- -----------------
Subordinated note dated May 24, 1999; monthly principal and
interest payments of $14,282 through June 2009, including
interest at 8% per annum. Collateralized by common shares of
WPS. $ 866,000 $ 963,000
Promissory note dated May 24, 1999; monthly principal and interest
payments of approximately $23,000 through May 2004, including
interest at 8.125% per annum. Collateralized by substantially
all of the Company's business assets including accounts
receivable, inventories and property and equipment, excluding
owned real estate.
300,000 500,000
---------------- -----------------
Total long-term debt 1,166,000 1,463,000
Less current maturities (306,000) (298,000)
---------------- -----------------
Long-term debt, less current maturities $ 860,000 $ 1,165,000
================ =================
F-13
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate maturities of long-term debt at November 30, 2002 are as follows:
2003 $ 306,000
2004 215,000
2005 124,000
2006 134,000
2007 146,000
Thereafter 241,000
------------
$ 1,166,000
============
4. CAPITAL LEASE OBLIGATIONS:
-------------------------
The following is a schedule by year of future non-cancelable minimum
payments required under the capital lease, together with the present value
of the related payments as of November 30, 2002.
2003 $ 121,000
-----------
Less amount representing interest (3,000)
-----------
Present value of minimum lease payments 118,000
Less current maturities (118,000)
-----------
Long-term capital lease obligation,
less current maturities $ -
===========
As of November 30, 2002, 2001, and 2000, the cost of the computer-related
equipment leased under the capital lease obligations were $630,000, $630,000
and $662,000, net of accumulated amortization of $518,000, $387,000, and
$276,000.
5. COMMITMENTS:
-----------
Operating Leases - The Company leases its main warehouse under a
non-cancelable operating lease requiring monthly payments through February
2005. The Company has an option to purchase the related property at the end
of the initial ten-year term at a price approximating the market value at
that time, subject to certain conditions. The lease also provides for two
five-year options to extend the lease term.
The Company also leases vehicles, equipment and other warehouse space under
noncancellable operating leases.
Total lease expense was approximately $1,141,000, $1,043,000 and $908,000
for fiscal 2002, 2001, and 2000.
F-14
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of November 30, 2002 future annual minimum lease payments under
non-cancelable operating leases are as follows:
Years Ending November 30,
----------------------------------
2003 $ 1,136,000
2004 833,000
2005 323,000
2006 150,000
2007 35,000
-----------
$ 2,477,000
===========
Employment Agreements - The Company has entered into employment agreements
that extend to May 31, 2006 with three officers. The employment agreements
set forth annual compensation to its officers of between $183,000 and
$185,000 each. Compensation is adjusted annually based on the cost of living
index plus seven percent per annum base increase; plus an eight and one-half
percent bonus of net pretax income exclusive of the 401(k)/profit-sharing
contribution.
6. TAXES ON INCOME:
---------------
The provision for taxes on income for the years ended November 30, 2002,
2001, and 2000 consisted of the following:
2002 2001 2000
----------- ---------- ----------
Current:
Federal $ 414,000 $ 259,000 $ 188,000
State 44,000 28,000 29,000
----------- ---------- ----------
458,000 287,000 217,000
Deferred (benefit):
Federal (36,000) 18,000 99,000
State - - 19,000
----------- ---------- ----------
(36,000) 18,000 118,000
----------- ---------- ----------
$ 422,000 $ 305,000 $ 335,000
=========== ========== ==========
F-15
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of taxes on income at the federally statutory rate to the
effective tax rate is shown below:
2002 2001 2000
-------------- ------------- -------------
Income taxes computed at the federal
statutory rate $ 381,000 $ 228,000 $ 243,000
State income taxes, net of federal benefit 36,000 21,000 21,000
Amortization of goodwill - 41,000 41,000
Other permanent differences 5,000 15,000 30,000
------------- ------------- -------------
Taxes on income $ 422,000 $ 305,000 $ 335,000
============= ============= =============
Temporary differences between the consolidated financial statements carrying
amounts and the tax basis of assets and liabilities that give rise to
significant portions of the net deferred tax assets at November 30, 2002 and
2001 relate to the following:
2002 2001
------------------------------------ ------------------------------------
Current Long-Term Current Long-Term
------------- --------------- ------------- ---------------
Inventories $ 86,000 $ - $ 97,000 $ -
Allowance for bad debt 84,000 - 54,000 -
Property and equipment - 23,000 - 5,000
Net operating loss
carryforwards - - - -
Intangible assets - 28,000 - 29,000
Other - 2,000 - 2,000
------------- --------------- ------------- ---------------
Net deferred tax asset $ 170,000 $ 53,000 $ 151,000 $ 36,000
============= =============== ============= ===============
At November 30, 2002 and 2001, $170,000 and $151,000 of the net deferred tax
asset is classified as current and included in other current assets in the
accompanying consolidated balance sheets. The Company has recorded no
valuation allowance to offset the net deferred tax assets because management
believes that it is more likely than not that sufficient taxable income will
be generated in the foreseeable future to realize the net deferred tax
assets.
F-16
2
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY:
--------------------
Treasury Stock and Common Stock Options - On January 1, 2001, the Board of
Directors granted to the officers of the Company options to purchase 750,000
shares of treasury stock at $.20 per share through December 31, 2003. On
July 1, 2001, the Board of Directors granted key employees of the Company
options to purchase 460,000 shares of treasury stock at $.30 per share with
153,333 shares expiring on December 31, 2001 and the remaining 306,667
shares expiring on December 31, 2002. On January 1, 2000, the Board of
Directors granted to the officers of the Company options to purchase 600,000
shares of treasury stock at $0.25 per share through December 31, 2000. On
January 1, 1999, the Board of Directors granted to the officers of the
Company options to purchase 600,000 shares of treasury stock at $0.1859 per
share through December 31, 1999. The exercise price of these grants was
equal to the market price of the common stock at the date of grant. No
options were granted during 2002.
During fiscal 2002, 2001, and 2000, the Company issued 50,000 shares,
600,000 shares, and 600,000 shares from treasury to its officers for cash
proceeds of $15,000, $150,000, and $112,000 in conjunction with the
officer's exercise of their options to purchase the treasury stock of the
Company. Additionally, in fiscal 2002, the Company also issued 105,000
shares from treasury to its employees for cash proceeds of $31,500 in
conjunction with the exercises of their options to purchase the treasury
stock of the Company.
The Company acquired from non-affiliated stockholders 420,000 shares of its
common stock at an average price of $.56 per share during fiscal 2002,
834,006 shares of its common stock at an average price of $.32 per share
during fiscal 2001 and did not purchase any such shares during fiscal 2000.
F-17
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information on stock option activity:
Weighted
Average
Exercise Price Exercise Price
Number of Shares Per Share Per Share
---------------- ------------- ---------------
Outstanding at November 30,
1999 600,000 $ .1859 $ .1859
Granted 600,000 .2500 .2500
Exercised (600,000) .1859 .1859
--------- ------------ -------------
Outstanding at November 30,
2000 600,000 .25 .25
Granted 1,210,000 .20 - .30 .23
Exercised (600,000) .25 .25
--------- ------------ -------------
Outstanding at November 30,
2001 1,210,000 .20 - .30 .23
Granted - - -
Exercised (155,000) .30 .30
Expired (10,000) - -
Outstanding at November 30,
2002 1,045,000 $ .20 - .30 $ .23
==== ========= ============ =============
F-18
4
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following information summarizes stock options outstanding at November 30, 2002:
Outstanding Exercisable
- ------------------------------------------------------------------- --------------------------------
Weighted Average
----------------------------------
Remaining Weighted
Exercise Number Contractual Exercise Number Average
Price Outstanding Life in Months Price Exercisable Exercise Price
- ---------- ----------- -------------- ------------------------------------------------
$.20 750,000 13 $.20 750,000 $.20
$.30 295,000 1 $.30 295,000 $.30
The weighted average fair value of options granted during the year ended
November 30, 2002, 2001, and 2000 was $.10, $.10, and $.07, respectively.
The exercise price of all the options granted in 2001 exceeded the market
price of the stock on grant date. The exercise price of all the options
granted in 2000 equaled the market price of the stock on grant date.
SFAS No. 123 requires the Company to provide pro forma information regarding
net income and net income per share as if compensation costs for the
Company's stock option plans and other stock awards had been determined in
accordance with the fair value based method prescribed in SFAS No. 123. The
Company estimates the fair value of each stock award at the grant date by
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2001 2000
----------- ----------
Dividend yield 0% 0%
Volatility 110% 63%
Risk free interest rate 6.0% 6.0%
Expected life 1.75 years 1 year
Under the accounting provisions of SFAS No. 123, the Company's net income
per share would have been adjusted to the following pro forma amounts for
the years ended November 30:
2002 2001 2000
-------------- ------------ ---------------
Net income:
As reported $ 704,000 $ 365,000 $ 378,000
Pro forma 704,000 241,000 338,000
Basic and diluted net income per common share:
As reported $ .07 $ .04 $ .04
Pro forma .07 .02 .03
F-19
5
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFITS:
-----------------
Profit Sharing Plan - The Company maintains a participant noncontributory
profit-sharing plan (the "Plan") for the benefit of all full-time employees
of the Company who are at least 18 years of age. Interests vest ratably
after two years and are fully vested after seven years. The Plan is funded
by the Company's contribution determined annually by the Board of Directors.
Contributions to the Plan were approximately $103,000, $50,000, and $42,000
for the years ended November 30, 2002, 2001, and 2000.
401(k) Plan - The Company has adopted a Section 401(k) profit sharing plan,
which is available for employees who are at least 18 years of age and who
have completed one year of service with the Company. Participants in the
plan may contribute up to 15% of their compensation, subject to certain
limitations. Under the plan, the Company may make discretionary
contributions to be determined on a year-to-year basis and may make
discretionary matching contributions. Company matching contributions vest
ratably over 6 years. For the years ended November 30, 2002, 2001, and 2000,
the Company contributed approximately $35,000, $35,000, and $40,000.
9. SIGNIFICANT SUPPLIERS:
---------------------
During fiscal 2002 and 2001, the Company purchased approximately 17% and 16%
of its products from one manufacturer. During 2000, the Company purchased
approximately 19% and 10% of its products from two manufacturers and
approximately 21% of its products from one manufacturer in 1999. The
products purchased can be obtained from other competing manufacturers but
not as a consolidated product group.
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
-------------------------------------------------
Excluded from the statement of cash flows for the years ended November 30,
2000 were the effects of certain noncash investing and financing activities
including the purchase of equipment in 2000 of $216,000 with third party
financing. In 2001, the Company had a sale of property for a note receivable
of $53,000.
Cash payments for interest were $232,000, $394,000, and $461,000 for the
years ended November 30, 2002, 2001, and 2000. Cash payments for income
taxes were $392,000, $250,000, and $455,000, for the years ended November
30, 2002, 2001, and 2000.
F-20
CERTIFICATION
I, Alan C. Bergold, certify that:
1. I have reviewed this annual report on Form 10-K of HIA, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 27, 2003 /s/ Alan C. Bergold
-----------------------------------
Alan C. Bergold, President and
Treasurer and Director