SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Commission File
Earliest event reported): Number:
May 25, 1999 0-9599
HIA, Inc.
(Exact name of registrant as specified in its charter)
New York 16-1028783
State or other jurisdiction of I.R.S (Employer
Incorporation or organization) Identification Number)
4275 Forest Street
Denver, Colorado 80216
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(303) 394-6040
Item 5. Other Events
On May 25th, 1999, HIA,Inc. (the Company or HIA) acquired all of the
common stock issued and outstanding of Western Pipe Supply, Inc. (WPS), a
privately-held corporation established under the laws of Colorado, for a
purchase price of $2,662,495. Of the total purchase price, $1,485,385 was paid
in cash directly to the seller and $1,177,110 was in the form of a subordinated
promissory note taken by the seller with a ten year amortization schedule
bearing interest at 8% per annum. The cash paid to seller was financed in part
by additional borrowings on HIA's existing line of credit from Norwest Bank
Denver of $927,888 (of which $442,504 was the amount required to pay off the
seller's existing line of credit with Colorado Business Bank secured by all
existing assets of WPS) and a $1,000,000 five year note payable to the Norwest
Bank of Denver amortized monthly bearing interest at an 8.25% fixed rate.
A portion of the common stock of WPS was pledged as collateral for the
promissory note given to the seller as part of the purchase price.
The Company incurred direct costs, including legal and audit fees, totaling
$82,309.
The acquisition was recorded using the purchase method of accounting by which
the assets are valued at fair market value at the date of acquisition. The
operating results of the financial statements of the Company reflect the
preliminary allocation of the purchase price. The preliminary allocation has
resulted in acquired goodwill of $1,695,245 and a non-compete agreement of
$150,000 that are being amortized on a straight line basis over ten years. The
Company has not completed the review of the purchase price allocation and will
determine the final allocation, if different, prior to the end of fiscal year
November 30, 1999.
Item 7. Financial Statements and Exhibits
Item 7(a). Financial Statements of Business Acquired.
Filed herewith as a part of this report are the financial statements of Western
Pipe Supply, Inc. (i) Report of Independent Certified Accountants, (ii) Balance
Sheets as of March 31, 1999 (unaudited), December 31, 1998 and 1997 (iii)
Statements of Operations for the three months ended March 31, 1999 and 1998
(unaudited) and for the years ended December 31, 1998 and 1997, (iv) Statements
of Changes in Stockholder's Equity (Deficit) for the three months ended March
31, 1999 (unaudited) and for the years ended December 31, 1998 and 1997, (v)
Statements of Cash Flows for the three months ended March 31, 1999 and 1998
(unaudited) and for the years ended December 31, 1998 and 1997, (vi) Summary of
Accounting Policies for the years ended December 31, 1998 and 1997, (vii) Notes
to Financial Statements for the years ended December 31, 1998 and 1997.
Item 7(b). Pro Forma Financial Information.
Filed herewith as a part of this report are the Company's Pro Forma Condensed
Consolidated Statements of operations for the six months ended May 31, 1999
(unaudited) and for the year ended November 30, 1998 and the notes thereto.
Report of Independent Certified Public Accountants
To the Stockholders of
Western Pipe Supply Co., Inc.
Longmont, Colorado
We have audited the accompanying balance sheets of Western Pipe Supply Co.,
Inc. (the "Company") as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' deficit 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Western Pipe Supply Co., Inc.
as of December 31, 1998 and 1997 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
Denver, Colorado
April 23, 1999, except for
Note 8 which is dated May 25, 1999
<TABLE>
Western Pipe Supply Co., Inc.
Balance Sheets
March 31, December 31,
1999 1998 1997
(Unaudited)
<S> <C> <C> <C>
Assets (Note 1)
Current assets:
Cash $ 187,643 $ 11,703 $ 11,214
Accounts receivable, less allowance of
$10,300,$10,300 and $20,500
for possible losses 606,549 418,407 373,233
Inventories, less allowance of $50,200
For obsolescence in 1999 and 1998 1,466,473 1,040,516 1,212,386
Note receivable, stockholder (Note 3) - 326,001 252,689
Other current assets 15,945 15,945 14,640
-------- ------- ------
Total current assets 2,276,610 1,812,572 1,864,162
--------- --------- --------
Property and equipment (Note 2):
Furniture and office equipment 554,877 547,919 537,515
Vehicles 152,055 132,055 151,306
Leasehold improvements 99,885 97,436 97,436
-------- -------- ------
806,817 777,410 786,257
Less accumulated depreciation and
Amortization 607,882 572,112 444,321
-------- ------- ------
Net property and equipment 198,935 205,298 341,936
$ 2,475,545 $ 2,017,870 $ 2,206,098
------------ ----------- ----------
------------ ----------- ----------
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
<TABLE>
March 31, December 31,
1999 1998 1997
(Unaudited)
<S> <C> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Note payable, stockholder (Note 3) $ - $ 1,254,314 $ 914,314
Line-of-credit (Note 1) 540,000 390,000 810,000
Accounts payable 1,079,719 341,343 453,950
Accounts payable, related party (Note 3) - - 14,000
Checks written against future deposits - 3,455 3,078
Accrued liabilities 83,782 92,112 95,553
Current portion of notes payable (Note 4) - 2,402 16,748
Current portion of capital lease
obligations (Note 2) 44,054 42,971 38,898
--------- ------ -----
Total current liabilities 1,747,555 2,126,597 2,346,541
--------- --------- --------
Notes payable, less current portion
(Note 4) - - 2,402
Capital lease obligations, less current
portion (Note 2) 11,716 23,145 66,116
------- ------- ------
Total liabilities 1,759,271 2,149,742 2,415,059
--------- ---------- --------
Commitments and contingency
(Notes 2, 3 and 9)
Stockholders' equity(deficit)
Class A common stock, no par value;
50,000 shares authorized;
22,500, 4,104 and 4,104 issued
and outstanding 1,349,713 - -
Class B common stock, no par value;
100,000 shares authorized;
0, 48,296 and 48,296 issued and outstanding - 414,640 414,640
Accumulated deficit (633,439) (546,512) (623,601)
Total stockholders' equity (deficit) 716,274 (131,872) (208,961)
-------- -------- -------
$ 2,475,545 $ 2,017,870 $ 2,206,098
----------- ----------- ----------
----------- ----------- ----------
See accompanying summary of accounting policies and notes to financial
statements
</TABLE>
<TABLE>
Western Pipe Supply Co., Inc.
Statements of Operations
Three Months Ended Years Ended
March 31, December 31,
1999 1998 1998
1997
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 1,297,106 $ 919,405 $ 6,268,790 $ 5,601,873
Cost of sales (Note 6) 940,174 665,077 4,316,765 3,854,183
---------- -------- ----------- ---------
Gross profit 356,932 254,328 1,952,025 1,747,690
-------- -------- --------- --------
Costs and expenses:
Selling, general and
administrative 366,100 327,923 1,585,840 1,595,236
Lease expense, related party
(Note 3) 37,500 43,408 162,772 150,000
------- ------ ------- ------
Total costs and expenses 403,600 371,331 1,748,612 1,745,236
------- ------- --------- --------
Income (loss) from operations (46,668) (117,003) 203,413 2,454
Other income (expense):
Interest income 4,496 5,724 29,772 13,999
Interest expense (11,755) (22,621) (73,053) (104,549)
Interest expense, related party
(Note 3) (33,000) (22,000) (95,970) (68,590)
Gain on sale of vehicles (Note 3) - 12,927 12,927 -
------- ------- ------ ------
Total other income (expense) (40,259) (25,970) (126,324) (159,140)
-------- ------- -------- -------
Income (loss) before
income tax expense (86,927) (142,973) 77,089 (156,686)
Taxes on income (Note 5) - - - -
------- -------- ------ --------
Net income (loss) $ (86,927) $ (142,973) $ 77,089 $ (156,686)
---------- ----------- -------- ----------
---------- ----------- -------- ----------
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
<TABLE>
Western Pipe Supply Co., Inc.
Statements of Stockholders' Equity (Deficit)
Class A Class B
Three Months Ended
March 31, 1999 (Unaudited) Common Stock Common Stock
and Years Ended
December 31,1998 and 1997 Shares Amount Shares
Amount
<S> <C> <C> <C>. <C>
Balance, January 1, 1997 4,104 $ - 48,296 $ 414,640
Net loss - - - -
----- -------- ------- --------
Balance, December 31, 1997 4,104 - 48,296 414,640
Net income - - - -
----- --------- ------- ---------
Balance, December 31, 1998 4,104 - 48,296 414,640
Issuance of Class B common stock
for the conversion of note payable,
stockholder (Note 3) (Unaudited) - - 94,830 935,073
Conversion of Class B common stock
Into Class A common stock
(Note 3) (Unaudited) 18,396 1,349,713 (143,126) (1,349,713)
Net loss (Unaudited) - - - -
------ --------- ------- ----------
Balance, March 31, 1999
(Unaudited) 22,500 $1,349,713 $ - $ -
------ ---------- -------- ----------
------ ---------- -------- ----------
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
<TABLE>
Total
Three Months Ended March 31, 1999 (Unaudited) Accumulated Stockholders'
And Years Ended December 31, 1998 and 1997 Deficit Equity
(Deficit)
<S> <C> <C>
Balance, January 1, 1997 $ (466,915) $ (52,275)
Net Loss (156,686) (156,686)
------------ --------
Balance, December 31, 1997 (623,601) (208,961)
Net income 77,089 77,089
------- -------
Balance, December 31, 1998 (546,512) (131,872)
Issuance of Class B common stock for
the conversion of note payable,
stockholder (Note 3) (Unaudited) - 935,073
Conversion of Class B common stock into
Class A common stock (Note 3) (Unaudited) - -
Net loss (Unaudited) (86,927) (86,927)
-------- -------
Balance, March 31, 1999 (Unaudited) $ (633,439) $ 716,274
-------- --------
-------- --------
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
<TABLE>
Western Pipe Supply Co., Inc.
Statements of Cash Flows
Increase (Decrease) in Cash
Three Months Ended Years Ended
March 31, December 31,
1999 1998 1998
1997
(Unaudited)
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ (86,927) $ (142,973) $ 77,089 $ (156,686)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 35,770 38,420 143,081 153,679
Amortization of covenant
not to compete - - - 40,000
Bad debt expense (recovery) - - (10,173) 9,807
Allowance for inventory obsolescence - - 50,168 -
Gain on sale of vehicles - (12,927) (12,927) -
Changes in operating assets and liabilities:
Accounts receivable (188,142) (123,988) (35,001) (9,113)
Inventories (425,957) (375,495) 121,702 (44,670)
Other current assets - (11,187) (1,305) 3,784
Accounts payable 738,376 677,743 (112,609) 96,996
Accounts payable, related party - (14,000) (14,000) 14,000
Accrued liabilities 8,330 40,838 (3,441) 49,602
------ ------ ------ -----
Net cash provided by
operating activities 81,450 76,431 202,584 157,399
------- ------ ------- ------
Investing activities:
Repayments (advances) on note receivable,
Stockholder (9,900) 7,615 (57,939) (121,759)
Purchase of property
and equipment (29,407) (17,789) (25,088) (72,795)
Proceeds from sale of vehicles - 16,200 16,200 -
------- ------ ------ --------
Net cash provided by (used in)
investing activities (39,307) 6,026 (66,827) (194,554)
------- ----- ------- --------
</TABLE>
<TABLE>
Increase (Decrease) in Cash
Three Months Ended Years Ended
March 31, December 31,
1999 1998 1998 1997
(Unaudited)
<S> <C> <C> <C> <C>
Financing activities:
Net borrowings on line of credit 150,000 (60,000) (420,000) (135,809)
Proceeds from notes payable - - - 20,000
Repayments on notes payable (2,402) (4,804) (16,746) (69,778)
Proceeds from note payable,
stockholder - - 340,000 304,500
Repayments on capital
lease obligations (10,346) (9,563) (38,899) (33,953)
Checks written against
future deposits (3,455) (3,078) 377 (38,186)
------ ------- ---- -------
Net cash provided by (used in)
financing activities 133,797 (77,445) (135,268) 46,774
Increase in cash 175,940 5,012 489 9,619
Cash, beginning of year 11,703 11,214 11,214 1,595
------- ------ ------ -----
Cash, end of year $ 187,643 $ 16,226 $ 11,703 $ 11,214
-------- -------- -------- --------
-------- -------- -------- --------
============================================================================
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
Western Pipe Supply Co., Inc.
Summary of Accounting Policies
Information as to the Three Months Ended
March 31, 1999 and 1998 is Unaudited
Business
Western Pipe Supply Co., Inc. (the "Company") incorporated in the state of
Colorado on February 14, 1977 is a wholesale distributor of turf irrigation
equipment and commercial, industrial and residential well pumps and equipment
in Colorado.
Unaudited Interim Financial Statements
In the opinion of management, the unaudited interim consolidated financial
statements for the three months ended March 31, 1999 and 1998 are presented on
a basis consistent with the audited financial statements and reflect all
adjustments, consisting only of normal recurring accruals, necessary for fair
presentation of the results of such periods. The results of operations for the
interim period ended March 31, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company 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.
As of December 31, 1998, one customer represented approximately 11% of total
accounts receivable. 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 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.
Inventories
Inventories consist of wholesale goods held for resale which are primarily
valued at the lower of cost (as determined using the first-in, first-out
method) or market.
Depreciation, Amortization, Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
straight-line method over the estimated useful lives of the assets, ranging
from five to seven years. Amortization on leasehold improvements is computed
using the straight-line method over the lesser of the lease term or the
estimated useful lives of the assets. Upon sale or retirement, the cost and
related accumulated depreciation or accumulated amortization of disposed assets
are eliminated from the respective accounts and the resulting gain or loss is
included in the statement of operations. Depreciation and amortization expense
was $36,104 and $38,420 for the three months ended March 31, 1999 and 1998 and
$143,081 and $153,679 for the years ended December 31, 1998 and 1997.
Long-Lived Assets
Long-lived assets 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 assets 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.
Revenue Recognition
The Company recognizes revenue at the time products are shipped to customers in
the normal course of business.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"). Temporary differences are differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in
future years.
Stockholders' Equity (Deficit)
The Company has two classes of common stock as follows: Class A Common Stock-
The Company has authorized for issuance 50,000 shares of voting no par value
Class A common stock. Each stockholder of Class A common stock is entitled to
a pre-emptive right to subscribe and acquire Class A common stock as defined.
Class B Common Stock-The Company has authorized for issuance 100,000 shares of
voting no par value Class B common stock. Each stockholder of Class B common
stock has no pre-emptive right to subscribe to or to acquire additional Class B
common stock.
Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS No. 130"), "Reporting Comprehensive Income". Comprehensive income is
comprised of net income and all changes to the statements of stockholders'
equity, except those due to investments by stockholders, changes in paid in
capital and distributions to stockholders. The adoption of SFAS No. 130 does
not impact the Company's financial statements for the three months ended March
31, 1999 and 1998 and for the years ended December 31, 1998 and 1997.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Western Pipe Supply Co., Inc.
Notes to Financial Statement
Information as to the Three Months Ended March 31, 1999 and 1998 is Unaudited.
1. Line-of-Credit
The Company has a line-of-credit agreement with a bank which expires June 30,
1999. The current available loan amount is the lesser of $750,000 or the
computed borrowing base, as defined. The line-of-credit provides for interest
at the bank's index rate (7.25% at December 31, 1998) plus 1.5%. The agreement
is collateralized by substantially all of the Company's assets. The agreement
is also guaranteed by the stockholders of the Company.
The agreement contains several covenants which, among other things, require
that
the Company maintain certain financial ratios and minimum net worth as defined
in the line-of-credit agreement. As of March 31, 1999, December 31, 1998 and
1997, the Company was either in compliance with these covenants under the line-
of-credit agreement or has obtained applicable waivers.
As of March 31, 1999, December 31, 1998 and 1997, $540,000, $390,000 and
$810,000 were outstanding under the line-of-credit agreement.
2. Capital Lease Obligations
The Company leases computer equipment and software under various capital lease
agreements. The initial lease terms under these capital lease obligations are
five years. As of March 31, 1999, December 31, 1998 and 1997, the capital
leases consisted of $186,885 of computer equipment and software net of
accumulated amortization of $143,278, $133,934 and $96,557.
The following is a schedule, by year, of future noncancellable minimum payments
required under the capital leases, together with the present value of the
related payments as of December 31, 1998.
Years Ending December 31,
1999 $ 47,649
2000 23,824
71,473
------
Less amount representing interest 5,357
Present value of minimum lease payments 66,116
Less current portion 42,971
-------
Long-term capital lease obligations $ 23,145
--------
--------
2. Related Party Transactions
Note Receivable and Note Payable, Stockholder As of December 31, 1998
and 1997, the Company's majority stockholder and president owed
$326,001 and $252,689 to the Company primarily for advances made to him
by the Company. The note bore no interest and was due on demand.
During 1998, the Company sold a vehicle to its majority stockholder for
$15,373. In lieu of cash proceeds, the Company increased the note receivable
due from the stockholder. The Company recognized a $3,843 gain from the
sale.
As of December 31, 1998 and 1997, the Company also owed $1,254,314 and
$914,314 to this majority stockholder and president of the Company. The note
bore interest at a variable rate which ranges from 6% to 9% and was due on
demand. For the three months ended March 31, 1999 and 1998 and for the years
ended December 31, 1998 and 1997, the Company incurred $33,000, $22,000,
$95,970 and $68,590 in interest expense on the note payable. As of December
31,
1997, the Company owed $32,590 in accrued interest on the note payable. As of
March 31, 1999 and December 31, 1998, no accrued interest was due under the
note payable.
During March 1999, this majority stockholder and president of the
Company converted his note payable and his note receivable into 94,830 shares
of Class B common stock. On March 29, 1999, the Company converted all of its
outstanding Class B common stock into 18,396 shares of Class A common stock.
Lease Expense
The Company has month-to-month verbal agreements to lease office and
warehouse space from two companies owned by the stockholders of the
Company and from a company owned by the majority stockholder's father.
For the three months ended March 31, 1999 and 1998 and for the years
ended December 31, 1998 and 1997, the Company incurred $37,500, $43,408,
$162,772 and $150,000 in
lease expense with the related parties. As of December 31, 1997, the
Company owed $12,500 in unpaid rent to related parties under these
agreements. As of March 31, 1999 and December 31, 1998, no amounts
were due to the related parties under these agreements.
4. Notes Payable
Notes payable as of December 31, 1998 and 1997 consist of the
following:
<TABLE>
December 31, 1998 1997
<S> <C> <C>
Note payable to bank payable in monthly
payments of $1,203 including interest
at 10%. The note was collateralized
by a vehicle and was paid off on
February 22, 1999 $ 2,402 $ 15,816
Other - 3,334
Total 2,402 19,150
Less current portion 2,402 16,748
- ---------------------------------------------------------------------------
Total long-term portion $ - $ 2,402
============================================================================
</TABLE>
5. Taxes on Income
Taxes on income (benefit) consisted of the following:
<TABLE>
Three Months Ended Years Ended
March 31, December 31,
1999 1998 1998 1997
<S> <C> <C> <C> <C>
Current:
Federal $ - $ - $ - $ -
State - - - -
Deferred:
Federal (28,000) (48,000) 17,000 (47,000)
State (3,000) (5,000) 2,000 (2,000)
- -------------------------------------------------------------------------
(31,000) 53,000 19,000 (49,000)
Change in valuation
allowance 31,000 53,000 (19,000) 49,000
- --------------------------------------------------------------------------
$ - $ - $ - $ -
</TABLE>
A reconciliation of taxes on income (benefit) computed at the federally
statutory rate to the effective tax rate is shown below:
<TABLE>
Three Months Ended Years Ended
March 31, December 31,
1999 1998 1998 1997
<S> <C> <C> <C> <C>
Taxes on income (benefit)
computed at the federal
statutory rate $ (29,000) $ (48,000) $ 26,000 $ (53,000)
State income tax expense
(benefit), net of
federal benefit (1,000) (2,000) 2,000 (5,000)
Increase (decrease) in
valuation allowance 31,000 53,000 (19,000) 49,000
Other (1,000) 3,000 (9,000) 9,000
- -------------------------------------------------------------------------------
Taxes on income (benefit) $ - $ - $ - $ -
</TABLE>
Temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities that give rise to significant portions of
the net deferred tax asset at March 31, 1999, December 31, 1998 and 1997 relate
to the following:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Net operating loss
Carryforwards $ 202,000 $ 172,000 $210,000
Contribution carryforwards 6,000 6,000 6,000
Intangible asset 32,000 33,000 36,000
Accrued liabilities 14,000 16,000 22,000
Accounts receivable 4,000 4,000 8,000
Inventories 19,000 19,000 -
Property and equipment (3,000) (7,000) (20,000)
- -----------------------------------------------------------------------------
274,000 243,000 262,000
Valuation allowance (274,000) (243,000) (262,000)
- -----------------------------------------------------------------------------
Net deferred tax asset $ - $ - $ -
------------ ---------- ---------
------------ ---------- ---------
As of December 31, 1998, the Company had available federal net operating loss
carryforwards of approximately $440,000 and state net operating loss
carryforwards of approximately $627,000. The net operating loss carryforwards
expire through 2012. The net operating losses are subject to various
limitations imposed by the rules and regulations of the Internal Revenue
Service. A valuation allowance equal to the net deferred tax asset has been
recorded as management of the Company has not been able to determine that it
is more likely than not that the net deferred tax asset will be realized.
6. Economic Dependency
During 1998, the Company purchased approximately 15%, 14%
and 10% of its products from three manufacturers, and during 1997, the Company
purchased approximately 20%, 11% and 11% of its products from three
manufacturers. However, management believes the products purchased can be
obtained from other competing manufacturers but not necessarily as a
consolidated product group.
</TABLE>
<TABLE>
7. Supplemental Disclosures of Cash Flow Information
Three Months Ended Years Ended
March 31, December 31,
1999 1998 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash paid during
the year for:
Interest $ 44,755 $ 44,621 $ 201,613 $ 140,549
Income taxes - - - -
</TABLE>
Noncash financing activities are summarized as follows:
During 1999, the Company offset its $319,241 note receivable, stockholder
against its note payable, stockholder. Also, during 1999, the Company
converted its $935,073 note payable, stockholder into shares of Class B common
stock. Finally, during 1999, the Company converted $1,349,713 in Class B
common stock into 18,396 shares of Class A common stock.
For the three months ended March 31, 1998 and for the year ended December 31,
1998, the Company increased its note receivable, stockholder by $15,373 from
the sale of a vehicle to the majority stockholder (see Note 3).
8.Subsequent Event
On March 25, 1999, HIA, Inc. acquired all of the issued and outstanding common
stock of the Company for a total purchase price of $2,662,495.
9.Year 2000 Issues (Unaudited)
Like other companies, the Company could be adversely affected if the computer
systems the Company, its suppliers or
customers use do not properly process and calculate date-related information
and data from the period surrounding and including January 1, 2000. This is
commonly known as the "Year 2000" issue. Additionally, this issue could impact
non-computer systems and devices such as production equipment, elevators, etc.
At this time, because of the complexities involved in the issue, management
cannot provide assurances that the Year 2000 issue will not have an impact on
the Company's operations. The Company has updated its business technologies to
be ready for the Year 2000.
Item 7(c). Exhibits.
The following exhibits were filed with the SEC on June 9, 1999 as part of an 8-
K filing in regards to the acquisition of Western Pipe Supply, Inc. by the
Company.
1. Stock Purchase Agreement between Bruce J. Grinnell, Jr., as Seller, CPS
Distributors, Inc., as Buyer, and HIA, Inc., as Guarantor dated as of March
30, 1999.
2. Second Amended and Restated Credit Agreement dated as of May 25, 1999 among
CPS Distributors, Inc., Water Systems, Inc., Western Pipe Supply Co., Inc.,
and Norwest Bank Colorado, National Association.
3. Amended and Restated Guaranty by the Company dated May 25, 1999 by HIA, Inc.
for the benefit of Norwest Bank Colorado, N.A.
HIA, Inc.
Unaudited Pro Forma Condensed Consolidated Financial Statements
The following unaudited pro forma condensed consolidated statements of
operations give effect to the acquisition by the Company of Western Pipe
Supply, Inc. (WPS) and are based on the estimates and assumptions set forth
herein and in the notes to such Unaudited Pro Forma financial statements. This
pro forma presentation has been prepared utilizing historical financial
statements and notes thereto, certain of which are included herein as well as
pro forma adjustments as described in the Notes to Unaudited Pro Forma
Condensed Consolidated Financial Statements. The pro forma financial data does
not purport to be indicative of the results which actually would have been
obtained had the acquisition been effected on the dates indicated or the
results which may be obtained in the future.
The unaudited pro forma condensed consolidated statements of operations are
presented for illustrative purposes only and do not purport to represent what
the Company's results of operations would have been had the acquisition
described herein occurred on the dates indicated for any future period or at
any future date, and are therefore qualified in their entirety by reference to
and should be read in conjunction with the historical consolidated financial
statements of the Company and the historical financial statements of WPS
contained elsewhere herein.
The unaudited pro forma condensed statements of operations for the six months
ended May 31, 1999 and for the year ended November 30, 1998 assume that the
acquisition was consummated as of December 1, 1997.
Acquisitions
On May 25, 1999, the Company acquired from Bruce J. Grinnell, Jr. all of the
issued and outstanding common stock of WPS, a Colorado corporation, for a
purchase price of $2,662,495. Of the total purchase price, $1,485,385 was paid
in cash and $1,177,110 was in the form of a subordinated promissory note, ten
year amortizing bearing interest at 8% per annum. The subordinated promissory
note is secured by a portion of the outstanding common stock of WPS. The cash
portion of the purchase price was paid, in part, from additional borrowings on
the Company's existing line of credit from Norwest Bank Denver and with the
proceeds of a new $1,000,000 loan from Norwest Bank Denver which is repayable
over five years with interest at 8.25% per annum. In addition, the Company
borrowed $442,504 against the line of credit with Norwest Bank Denver to
refinance WPS' bank debt.
The Company incurred direct costs, including legal and audit fees, totaling
$82,309. The acquisition was recorded using the purchase method of accounting
by which the assets are valued at fair market value at the date of acquisition.
WPS is engaged in the business of distributing plumbing, irrigation and
sprinkler supplies. It has locations in Boulder and Longmont, Colorado. The
assets of WPS consist primarily of inventories, accounts receivables and the
equipment and trade fixtures in its two locations. WPS leases the land and
buildings it occupies from partnerships of which Mr. Grinnell, former owner of
WPS, is a partner. The Company intends to continue the business of WPS
substantially in accordance with past practices, with modification to fit the
Company's systems and procedures. Mr. Grinnell did not continue his employment
with WPS.
<TABLE>
<CAPTION>
HIA, Inc.
Unaudited Pro Forma Condensed Consolidated Statements of Operations
Six months Ended May 31, 1999.
HIA WPS
Six Months Six Months
Ended 5/31/99 Ended 5/31/99
(9) Adjustments Pro forma
---------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $8,746,960 $3,188,096 $11,935,056
Cost of sales 6,087,268 2,256,801 8,344,069
---------- ---------- -----------
Gross profit 2,659,692 931,295 3,590,987
Selling, general
and administrative
expenses 2,494,368 903,129 (1)(45,000) 3,444,759
--------- -------- ---------
(6) 84,762
(7) 7,500
Operating income 165,324 28,166 146,228
Other income (expense)
Interest income 14,224 11,031 25,255
Interest expense (35,785) (20,933) (4)(39,235) (161,804)
(5)(19,416)
(3)(46,435)
Interest expense,
related party -0- (55,000) (2) 55,000 -0-
Misc. income 9,921 10,074 19,995
------- -------- ------
Total other
income (expense) (11,640) ( 54,828) (116,554)
-------- -------- --------
Income before income
tax expense 153,684 ( 26,662) 29,674
Income tax expense 76,000 -0- (8)(76,000) -0-
-------- ---------- ---------
Net income (loss) $77,684 $ (26,662) $29,674
========= ========== ========
Net income
per share
Basis and
diluted $ .01 $ .01
========= ========
Basis and diluted
weighted
average number
of shares
outstanding 9,753,261 9,753,261
=========== =========
</TABLE>
<TABLE>
<CAPTION>
HIA, Inc.
Unaudited Pro Forma Condensed Consolidated Statements of Operations
Twelve Months Ended November 30, 1998 (HIA) and December 31, 1998 (WPS)
HIA WPS
Twelve Months Twelve Months
Ended 11/30/99 Ended 12/31/99
Adjustments Pro Forma
----------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $18,786,235 $6,268,790 $25,055,025
Cost of sales 13,137,035 4,316,765 17,453,800
----------- ---------- -----------
Gross profit 5,649,200 1,952,025 7,601,225
Selling, general
and
administrative
expense 4,893,448 1,748,612 (1)(150,800) 6,675,784
---------- ---------- ---------
(6) 169,524
(7) 15,000
Operating income 755,752 203,413 925,441
Other income (expense)
Interest income 18,327 29,772 48,099
Interest (135,668) ( 73,053) (3)(91,274) (413,876)
expense (4)(75,049)
(5)(38,832)
Interest expense,
related party -0- (95,970) (2) 95,970 -0-
Misc. income 25,768 12,927 38,695
--------- ------- -------
Total income
(expense) (91,573) (126,324) (327,082)
--------- --------- ---------
Income before
income
tax expense 664,179 77,089 598,359
Income tax
expense 246,240 (8) (66,240) 180,000
-------- --------- ---------
Net income $417,939 $ 77,089 $418,359
========== ======= ========
Net income
per share
basis and
diluted $ .04 $ .04
========= ========
Basis and
Diluted
weighted average
number of shares
outstanding 9,695,261 9,695,261
========== =========
</TABLE>
<TABLE>
<CAPTION>
HIA, INC.
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations
Note A. Purchase Price Allocation
The following is the preliminary allocation of the purchase price based on the
fair value of the assets acquired and the liabilities assumed.
Allocation of purchase price:
<S> <C>
Cash $ 190,864
Accounts receivable, net 806,102
Inventories 1,327,859
Other current assets 15,946
Property and equipment 177,545
Goodwill 1,695,245
Non-compete agreement 150,000
--------------
4,363,561
Less:
Accounts payable 1,051,941
Other current liabilities 101,167
Line of credit 442,504
Long-term obligations 23,145
------------
Total purchase price $ 2,744,804
==============
</TABLE>
The financial statements of the Company reflect the preliminary allocation of
the purchase price. The preliminary allocation has resulted in acquired
goodwill of $1,695,245 and a non-compete agreement of $150,000 that are being
amortized on a straight line basis over ten years. The Company has not
completed the review of the purchase price allocation and will determine the
final allocation, if different, prior to the end of the fiscal year, November
30, 1999.
HIA, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations
Note B. Unaudited Pro Forma Condensed Statement of Operations (cont'd)
The following pro forma adjustments to the condensed consolidated statements of
operations are as if the acquisition had been completed at the beginning of the
periods presented and are not indicative of what would have occurred, had the
acquisition actually been made as of such date. WPS was acquired on May 25,
1999, therefore, the results of operations for the period from May 25, 1999 to
May 31, 1999 are included in the historical results of the Company for the six
months ended May 31, 1999.
For Time Period Specified on the Unaudited Pro Forma Condensed Consolidated
Statements of Operations:
(1) To remove prior WPS owner's salary and related payroll and employee benefit
expenses. Mr. Grinnell did not continue his employment with WPS.
(2) To remove interest expense incurred on a note payable to WPS's owner as the
note payable was converted into common stock prior to the sale of WPS to the
Company.
(3) To record accrual of interest expense on promissory note payable to former
WPS owners. Face amount of note is $1,177,110, bearing interest at 8% per
annum, amortized over ten years, equal monthly payments of $14,281.59.
(4) To record accrual of interest expense on promissory note payable to Norwest
Bank Denver. Face amount of note is $1,000,000, bearing interest at 8.25% per
annum, amortized over five years, equal monthly payments of $20,336.27.
(5) To record accrual of interest expense on the additional funds borrowed on
the Company's existing line of credit to effect the acquisition in the amount
of $485,385. Current interest rate is 8% per annum adjusted to equal the prime
lending rate on a monthly basis.
(6) To amortize goodwill ($1,695,245) ratably over a ten year period on a
straight line basis.
(7) To amortize non-compete ($150,000) ratably over a ten year period on a
straight line basis.
(8) To adjust federal and state income taxes to reflect the effect of the above
adjustments.
(9) WPS's historical statement of operations reflect six month's of operations
from December 1, 1998 to May 31, 19999.
Signatures
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed in its
behalf by the undersigned, thereunto duly authorized.
HIA, Inc. (Registrant)
Date August 4, 1999
By _________________________
Alan C. Bergold, President
