UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
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, 1999 #09-9599
HIA, INC.
(Exact name of small business issuer 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-B 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-KSB or any amendment to this Form 10-KSB. (X).
The Issuer had net sales of $ 26,139,848 for the fiscal year ended
November 30, 1999.
The aggregate market value of voting stock held by non-affiliates of
the Issuer as of February 1, 2000 was approximately $2,590,058 based
on transactions which took place in the last 50 days of 1999.
The number of shares of the only class of Common Stock of the Issuer
outstanding as of January 1, 2000 was 10,360,231.
Transitional Small Business Disclosure Format (check one):
Yes _____ No __X___
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, a one 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 12% and 88%, respectively, of
net sales for 1999 and approximately 16% and 84%, respectively, of
net sales in 1998.
During 1999, the Company's directors investigated the best possible
means to expand the business operations. In the past, the Company
has grown the business by establishing branch operations as start-up
enterprises. This strategy has been very successful over the past
ten years with each branch operating at a profit after its first
full year of operations. At the end of 1998, the Company had nine
branch operations in Colorado and two branch operations in Wyoming.
The majority of the branches were located in metropolitan Denver.
In order to expand operations further, the choices were to continue
to set up branches (start-ups) or acquire a company in the same or
similar type of business. The Company currently performs
distribution of wholesale-related products in the construction
field. Since the Company had an internally-calculated market share
for its turf and irrigation products of over 38% at the end of 1999,
it was determined by the directors of the Company that present
market territories were adequately represented by its existing
branches and further expansion of the present product lines would
probably be best served by acquisition into a local market in which
the Company was not adequately represented. The directors identified
a short list of these local market territories and consulted its
financial advisors in determining the size of business the Company
could purchase without adversely affecting its liquidity.
On May 25th, 1999, the Company through its wholly-owned subsidiary,
CPS, acquired all of the issued and outstanding common stock of
Western Pipe Supply, Inc. ("WPS"), a privately-held corporation
established under the laws of Colorado, for a purchase price of
$2,746,739 including $84,244 in acquisition costs. 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. The cash paid to the seller was financed in
part by additional borrowings on the existing line of credit with
Norwest Bank of Denver and a $1,000,000 five-year note payable also
with Norwest Bank of Denver.
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 21% of its products 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.
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 over
88% 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. During at least
the past ten years, manufacturers have abandoned the exclusive
relationships with their distributors. As a result, the Company is
competing with other wholesalers of the same products.
In the past several years, 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 medium-sized
wholesaler, 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 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. Sales personnel are eligible
to receive a bonus for meeting or exceeding their assigned quota.
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 20% 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.
CPS increased its market share considerably in 1999 with the
purchase of WPS which had net sales of over $6 million in 1998. The
acquisition increased the number of branch outlets the Company owned
operates to twelve branch outlets.
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, 1999, the Company employed 93 persons, of which 37
were warehouse employees and 56 were sales and administrative
employees. The Company considers its employee relations to be good.
None of the Company's employees are covered by union contracts or
collective bargaining agreements.
The Company uses computer resources for its order entry, inventory,
payroll and accounting function.
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. In
addition, the Company owns property in Casper, Wyoming, which
consists of 6,159 square feet of office/warehouse space on 33,600
square feet of land. The Company also leases 6,370 square feet of
office/warehouse space on 21,781 square feet of land in Colorado
Springs, Colorado; 4,000 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;
5,000 square feet of office and warehouse space in Littleton,
Colorado; 4,000 square feet of office and warehouse space in Aurora,
Colorado; 8,400 square feet of office and warehouse space in the
central section of Denver, Colorado (lease terminated in January,
2000); 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. The Company terminated its lease on the
facility located in the northern section of Colorado Springs,
Colorado during October, 1999.
On May 25, 1999, CPS acquired 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.
During November 1994, the Company entered into an agreement to lease
warehouse space for its main warehouse. 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 may be 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 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, 1999 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, 1999.
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
Denver over-the-counter market. Prior to June 6, 1986, the
Company's stock was traded on the NASDAQ National Market System. On
June 6, 1986, HIA's common stock was de-listed from NASDAQ because
the Company no longer satisfied the minimum total capital and
surplus requirement for continued listing. 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 approximate number of holders of record of HIA's common stock as
of November 30, 1999 was 1,900.
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.
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-KSB 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. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
During the year ended November 30, 1998, the Company used $6,845
in cash from operations compared to $1,183,001 in cash provided from
operations during the year ended November 30, 1998. Accounts
receivable levels increased over prior year due to the acquisition
of WPS and the increased business during the last quarter of the
fiscal year due to the unseasonably warm temperatures and dry
weather conditions in Colorado. Depreciation and amortization
increased by $218,900 during fiscal 1999 compared to fiscal 1998.
The increase in depreciation and amortization is due to $1,534,081
in goodwill, $150,000 in non-compete agreement and the $177,545 in
property and equipment acquired from the acquisition of WPS on May
25, 1999. During fiscal 1999, the Company recognized a $93,788 loss
from abandonment of its JD Edward's World software. The decrease in
accounts payable in comparison to the prior year is due to the fact
that the Company utilized its line of credit to pay it accounts
payable. The increase in other current liabilities is attributable
to the acquisition of WPS.
The following is a two-year summary of working capital and
current ratios:
<TABLE>
<S> <C> <C>
1999 1998
Working Capital $3,321,803 $2,793,585
Current Ratios 1.95 to 1 3.40 to 1
</TABLE>
The decrease in the current ratio was primarily due to the purchase
of WPS which increased short-term borrowings by $927,889 at the date
of the acquisition. The resultant ratios were effected directly by
the overall increases in current assets of $1,375,158 and current
liabilities of $265,157 attributable to WPS at the end of the fiscal
year.
On September 9, 1997, the Company entered into an agreement with US
BankCorp to finance up to $500,000 of computer and related
equipment. The Company contracted with a local software company to
provide software, equipment and technical services to upgrade and
enhance its enterprise data and information systems. During 1998,
the implementation project was abandoned due to the problems with
the JD Edwards "One World" software programming which had numerous
"bugs" and was not capable of being installed within a reasonable
time period. As a result, after further analysis, management
decided to swap the "One World" software for a similar enterprise
software also developed by JD Edwards called "World". The new
software was swapped out by JD Edwards at no additional cost to the
Company.
The World software was installed on October 4, 1999 and fully
implemented by the end of the fiscal year. After utilization of the
new software by the Company's staff, particularly the counter sales
personnel, it was determined by management that the level of overall
customer service diminished. It was estimated by management that an
additional $200,000 would have to be spent on the World software in
program changes and training to bring it up to the desired level of
customer service. After further investigation and analysis,
management decided to abandon the World software and convert to the
Trend software product which was currently installed and utilized by
the WPS operations. The contract for the Trend software was signed
on January 12, 2000 at an estimated cost of $200,000 for hardware,
software and implementation.
As a result of the abandonment of the JD Edward's World software,
the Company incurred additional costs and expenses of $286,779 which
are included in selling, general and administrative expenses for
fiscal year 1999. Included in the $286,779, the Company recognized a
$93,788 loss on abandonment of the computer software, and the
Company incurred $192,991 of consulting fees during fiscal 1999.
During fiscal 1998 and 1997, the Company purchased $90,354 and
$306,068 of computer and related equipment for the JD Edwards
project. The Company financed the purchase of this computer and
related equipment through a capital lease obligation (See Note 3 to
the Consolidated Financial Statements). The Company purchased an
additional $162,280 of equipment and software during fiscal 1999 in
order to implement the JD Edward's World enterprise software system.
This purchase was also financed through a capital lease obligation
(See Note 3). The Company anticipates financing the majority of the
additional $200,000 required to install the Trend software by adding
the amount to the aforementioned lease.
Investing and financing activities were directly effected by the
purchase of WPS on May 25, 1999. The Company financed the business
acquisition with a $1,177,110 subordinated promissory note with the
seller and $1,378,765 in cash.
The Company's line of credit activity increased during fiscal 1999
primarily due to the fact that the Company borrowed an additional
$927,889 to partially fund its business acquisition discussed in
Note 1. In addition, the Company entered into a $1,000,000 five-
year term note payable during May 1999 to partially fund its
business acquisition. Also, during the end of the fiscal year, the
Company used its line-of-credit to fund the increase in inventory
and accounts receivable levels due to the unseasonably warm
temperatures and dry weather conditions in Colorado. As of November
30, 1999, the Company and its subsidiaries have an available line-
of-credit totaling $4,000,000 of which $2,777,498 was unused.
During fiscal 1999, the Company acquired from non-affiliate
stockholders 119,239 shares of its common stock at $.15 to $.20 per
share for a total cost of $22,848. During fiscal 1998, the Company
acquired from non-insider stockholders 159,200 shares of its common
stock at $.13 to $.20 per share for a total cost of $26,424. During
fiscal 1999, the Company issued 485,287 shares from treasury at $.20
per share to its officers for cash proceeds of $97,350.
Approximately 300,000 of these shares issued in fiscal 1999 were
from the exercise of stock options. During fiscal 1998, the Company
issue 450,000 shares from treasury at $.18585 per share to its
officers from cash proceeds of $83,632 as provided by the Company's
stock option plan.
Management believes that the present working capital is adequate to
conduct its present operations. The Company does not have any
additional purchase commitments nor does it anticipate any
additional material capital expenditures for fiscal 2000 with the
exception of the computer-related lease described above.
Results of Operations
Comparison Fiscal 1999 vs. Fiscal 1998
Net sales were up $7,353,613 primarily as a result of the
acquisition of WPS on May 25, 1999 which had sales of $4,132,831 for
the last six months of fiscal 1999. The remaining increase primarily
related to an across-the-board price increase of approximately 5%
and the general volume increase in construction related activity in
the Colorado front-range area. Cost of sales increased by
$5,211,230 primarily due to the acquisition of WPS which accounted
for $2,821,075 of the increase. The remainder was proportional to
the increase in sales for the year. Gross profit percent was 29.8%
and 30% for fiscal years 1999 and 1998, respectively. Selling,
general and administrative expenses were up $1,921,611 primarily as
a result of the additional expenses of WPS of $728,534, the
abandonment of the JD Edwards enterprise software system and related
costs of $286,779 and the increase in payroll costs of $535,992
which was necessitated by the very competitive labor market in the
Rocky Mountain region. Pay rates increased greater than the rate of
inflation and other types of compensation or accommodations were
required to attract and keep valuable employees. It is anticipated
that these tight labor market conditions will continue for the next
two to three years or until such time as the economic growth begins
to flatten out in the Rocky Mountain region.
The weighted-average interest rates on bank borrowings were 7.5% and
9.25% for 1999 and 1998, respectively. The weighted-average balance
outstanding of $1,118,798 for 1999 increased by $768 compared to
1998.
Net income for fiscal 1999 increased by $70,007 primarily as a
result of the additional gross profit of $2,142,383 partially offset
by the additional selling, general and administrative expenses of
$1,921,611 and the additional tax expense of $128,371.
Income Taxes
At November 30, 1999, the Company has recorded a current net
deferred tax asset totaling $100,665 and has recorded a noncurrent
net deferred tax asset totaling $222,771. 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 5 to the Company's
Consolidated Financial Statements.
Year 2000 Compliant
The Company, like most other companies, is faced with the Year 2000
Issue, which is the result of computer programs that are written
using two digits rather than four to define the applicable year. Any
computer programs that affect the Company's activities and that have
date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations that
depend upon such date-sensitive software or computer hardware. The
potential problems include, among other things, a temporary
inability to process transactions, send invoices, transfer funds, or
engage in similar normal business activities. The problems caused
by the Year 2000 Issue may be exacerbated and cause widespread
business disruption because of the interdependence of computer and
telecommunications systems in the United States and throughout the
world.
We continue to assess the compliance of our major customers,
suppliers and vendors. Management believes that third-party
relationships upon which we rely represent the greatest risk with
respect to the Year 2000 issue, because we cannot guarantee that
third parties will be able to adequately assess and address their
Year 2000 compliance issues in a timely manner. As a consequence, we
can give no assurances that issues related to Year 2000 will not
have a material adverse effect on future results of operations or
financial condition.
Since the beginning of 2000, the Company did not have any
interruptions of its business due to the Year 2000 issue. During
the next few months, the Company will continue to monitor its
operations and assess whether the Year 2000 Issue has an impact on
the Company.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has recently issued
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 established standards for recognizing all derivative
instruments at fair value. This Statement is effective for fiscal
years beginning after June 15, 2000. Management believes the
adoption of this statement will have no impact on the Company's
consolidated financial statements.
Item 7. Financial Statements
The response to this item is submitted as a separate section of this
report.
Item 8. 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.
PART III
Item 9. 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.
<TABLE>
<S> <C> <C> <C>
Name Age Positions Director
Since
Carl J. Bentley 66 Chairman of the Board 1994
and Director
Alan C. Bergold 51 President, Treasurer 1981
and Director
Donald Champlin 48 Executive Vice 1994
President, Secretary
and Director
</TABLE>
(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.
<TABLE>
<S> <C> <C> <C>
Name Age Positions Year First Elected
(1)
Carl J. Bentley 66 Chairman of the 1996
Board and Director 1994
Alan C. Bergold 51 President,Treasurer 1996
and Director 1981
Donald L. Champlin 48 Executive Vice
President, 1996
Secretary
and Director 1994
<CAPTION>
(1)All officers serve at the discretion of the Board of Directors.
</CAPTION>
</TABLE>
(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 66, 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 51, 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 Champlin, age 48, 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
Item 10.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,
1999, 1998 and 1997 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:
<TABLE>
Annual Compensation
<S> <C> <C> <C>
Name and Year
Principal Ended
Position Nov. 30 Salary Bonus
Year
Carl J. Bentley 1999 $157,500 $99,381
Chairman of the 1998 143,620 70,890
Board 1997 132,750 61,000
Alan C. Bergold 1999 155,000 99,381
President 1998 141,120 70,890
1997 130,250 61,000
Donald Champlin 1999 155,000 99,381
Executive 1998 141,120 70,890
Vice-president 1997 127,750 61,000
</TABLE>
<TABLE>
Long Term Compensation
<S> <C> <C> <C> <C> <C>
Other Securities
Name and Year Annual Restricted Underlying
Principal Ended Compen- Stock Options/ LTIP
Position Nov. 30 sation Award SARs Payouts
Carl J. Bentley 1999 - - 200,000 -
Chairman of the 1998 - - - -
Board 1997 - - - -
Alan C. Bergold 1999 - - 200,000 -
President 1998 - - - -
1997 - - - -
Donald Champlin 1999 - - 200,000 -
Executive 1998 - - - -
Vice-President 1997 - - - -
</TABLE>
<TABLE>
<S> <C> <C>
Name and Year All
Principal Ended Other
Position Nov. 30 Compensation
Carl J. Bentley 1999 -
Chairman of the 1998 -
Board 1997 -
Alan C. Bergold 1999 -
President 1998 -
1997 -
Donald Champlin 1999 -
Executive 1998 -
Vice President 1997 -
</TABLE>
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 has employment agreements as follows:
Carl J. Bentley (1): $169,900 annual salary per year, adjusted for
cost of living plus five percent per annum base increase; plus seven
and one-half percent bonus of net pretax income exclusive of profit-
sharing contribution; term of five years beginning December 1, 1998.
Alan C. Bergold (1): $167,400 annual salary per year, adjusted for
cost of living plus five percent per annum base increase; plus seven
and one-half percent bonus of net pretax income exclusive of profit-
sharing contribution; term of five years beginning December 1, 1998.
Donald Champlin (1): $167,400 annual salary per year, adjusted for
cost of living plus five percent per annum base increase; plus seven
and one-half percent bonus of net pretax income exclusive of profit-
sharing contribution; term of five years beginning December 1, 1998.
(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
<TABLE>
Percent of
Number of Total options/
Securities SARs granted Market
Underlying to Employees Exercise Price on
Options/ in Fiscal or Base Date of Expiration
<S> <C> <C> <C> <C> <C>
Name SARs Granted Year Price Grant Date
Alan C.
Bergold 200,000 33% $.1859 $.1859 12/31/99
Carl J.
Bentley 200,000 33% $.1859 $.1859 12/31/99
Donald
Champlin 200,000 33% $.1859 $.1859 12/31/99
</TABLE
<CAPTION>
(c)Aggregated Option/SAR Exercises and Last Fiscal Year and Year-End
Option/SAR Values
</CAPTION>
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
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)
Alan C.
Bergold 100,000 $22,282 200,000 $12,820
Carl J.
Bentley 100,000 22,282 200,000 12,820
Donald
Champlin 100,000 22,282 200,000 12,820
</TABLE>
Refer to Note 6 to the Consolidated Financial Statements for
description of Stock Option Plan
Item 11.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
<TABLE>
<S> <C> <C>
Name and Address of Amount and nature Percent
Beneficial Owner Beneficial Ownership of Class
Carl J. Bentley 1,916,153(1) 18.5%
4275 Forest Street
Denver, CO 80216
Alan C. Bergold 2,402,646(1) 23.2%
4275 Forest Street
Denver, CO 80216
Don Champlin 1,989,797(1) 19.2%
</TABLE>
(1) Includes 200,000 shares, which may be acquired pursuant to the
exercise of stock options exercisable on or before December 31,
2000.
(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
<TABLE>
<S> <C> <C>
Name and Address of Amount and nature Percent
Beneficial Owner Beneficial Ownership of Class
Carl J. Bentley 1,916,153(1) 18.5%
4275 Forest Street
Denver, CO 80216
Alan C. Bergold 2,402,646(1) 23.2%
4275 Forest Street
Denver, CO 80216
Don Champlin 1,989,797(1) 19.2%
</TABLE>
(1) Includes 200,000 shares, which may be acquired pursuant to the
exercise of stock options exercisable on or before December 31,
2000.
(2) Directors and Officers as a Group
<TABLE>
<S> <C> <C>
Amount and Nature of Percent
Title of Class Beneficial Ownership of Class
Common Stock 6,308,596(1) 60.9%
<CAPTION>
(1) Includes 200,000 shares, which may be acquired pursuant to the
exercise of stock options exercisable on or before December 31,2000.
</CAPTION>
</TABLE>
(c) Changes in Control
None.
Item 12.Certain Relationships and Related Transactions
(a) Transactions With Management and Others
On November 30, 1995, the Board of Directors granted an option to
each of the three executive officers of CPS to purchase up to
200,000 shares of treasury stock at $.18585 per share by December
31, 1997. The options' exercise price was equal to the common
stock's market price at the date of grant. On December 31, 1997,
the officers and directors of the Company exercised a total of
450,000 shares of the November 30, 1995 option at $.18585 per share.
Concurrently, the remaining 150,000 shares of the November 30, 1995
options expired.
On November 30, 1996, the Board of Directors granted an option to
each of the three executive officers of CPS to purchase up to
200,000 shares of treasury stock at $.22282 per share by December
31, 1998. The options' exercise price was equal to the common
stock's market price at the date of grant. On December 31, 1998,
the officers and directors of the Company exercised a total of
300,000 shares of the November 30, 1996 option at $.22282 per share.
Concurrently, the remaining 300,000 shares of the November 30, 1996
options expired.
On January 1, 1999, the Board of Directors granted an option to
each of the officers of the Company to purchase 600,000 shares of
treasury stock at $.18585 per share by December 31, 1999. On
December 31, 1999, the officers and directors of the Company
exercised a total of 600,000 shares of the January 1, 1999 option at
$.18585 per share. During the year ended November 30, 1999, the
Company issued 185,287 shares from treasury to its officers for cash
proceeds of $30,504.
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.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
Not applicable.
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Summary of Accounting Policies
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors
HIA, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of HIA,
Inc. and subsidiaries (the "Company") as of November 30, 1999 and 1998
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 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
consolidated 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 at November 30, 1999 and 1998 and the
results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Denver, Colorado
January 14, 2000
HIA, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
November 30, 1999 199
<S> <C> <C>
Assets (Note 2)
Current assets:
Cash $ 21,117 $ 29,869
Accounts receivable, less
allowance of $111,000 and $100,000
for possible losses 3,311,736 1,654,434
Inventories 3,359,705 2,163,434
Other current assets (Note 5) 116,327 107,875
- ------------------------------------------------------------------------
Total current assets 6,808,885 3,955,612
- ------------------------------------------------------------------------
Property and equipment:
Land and improvements 45,295 45,295
Buildings and improvements 294,138 286,441
Equipment (Note 3) 1,089,934 851,978
- ------------------------------------------------------------------------
1,429,367 1,183,714
Less accumulated depreciation and
amortization 839,372 654,582
- ------------------------------------------------------------------------
Net property and equipment 589,995 529,132
- ------------------------------------------------------------------------
Other assets
Goodwill, net of accumulated of
$108,954(Note 1) 1,425,127 -
Deferred tax asset(Note 5) 222,771 5,242
Non-compete agreement, net of
Accumulated amortization of
$9,000(Note 1) 141,000 -
Investments 91,894 91,894
Other 25,000 27,394
- ------------------------------------------------------------------------
Total other assets 1,905,792 124,530
- ------------------------------------------------------------------------
$ 9,304,672 $ 4,609,274
========================================================================
<CAPTION>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
HIA, Inc. and Subsidiaries
Consolidated Balance Sheets
(continued)
</CAPTION>
November 30, 1999 1998
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Note payable (Note 2) $ 1,222,502 $ 219,613
Current maturities of long-term
Debt(Note 2) 253,349 -
Current maturities of capital lease
obligation (Note 3) 126,121 64,087
Accounts payable 942,428 298,974
Checks written against future deposits 258,878 221,405
Accrued payroll and bonuses 314,810 209,000
Accrued profit sharing plan
contribution (Note 7) 86,661 72,000
Income taxes payable (Note 5) 217,417 26,604
Other current liabilities 53,613 50,344
- ----------------------------------------------------------------------
Total current liabilities 3,475,779 1,162,027
- ----------------------------------------------------------------------
Long-term liabilities:
Long-term debt, less current
Maturities(Note 2) 1,784,506 -
Capital lease obligation, less current
portion (Note 3) 321,879 287,187
- ----------------------------------------------------------------------
Total Long-term liabilities 2,106,385 287,187
Total liabilities 5,582,164 1,449,214
- ---------------------------------------------------------------------
Commitments
(Notes 4 and 7)
Stockholders' equity (Note 6):
Common stock, $.01 par value;
20,000,000 shares authorized;
13,107,896 issued and 9,760,231
and 9,394,183 outstanding 131,079 131,079
Additional paid-in capital 3,109,271 3,109,271
Retained earnings 1,087,404 599,458
- ---------------------------------------------------------------------
4,327,754 3,839,808
Less treasury stock at cost;
3,347,665 and 3,713,713 shares 605,246 679,748
- ---------------------------------------------------------------------
Total stockholders' equity 3,722,508 3,160,060
- ---------------------------------------------------------------------
$ 9,304,672 $ 4,609,274
=====================================================================
<CAPTION>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
HIA, Inc. and Subsidiaries
Consolidated Statements of Income
</CAPTION>
Years Ended November 30, 1999 1998
<S> <C> <C>
Net sales $ 26,139,848 $ 18,786,235
Cost of Sales(Note 8) 18,348,265 13,137,035
- ------------------------------------------------------------------------
Gross Profit 7,791,583 5,649,200
Selling, general and administrative 6,815,059 4,893,448
- ------------------------------------------------------------------------
Operating income 976,524 755,752
Other income (expense):
Interest income 52,229 18,327
Interest expense (201,865) (135,668)
Miscellaneous Income 35,669 25,768
- ------------------------------------------------------------------------
Total other expense (113,967) (91,573)
- ------------------------------------------------------------------------
Income before taxes on income 862,557 664,179
Taxes on income (Note 5) 374,611 246,240
- ------------------------------------------------------------------------
Net Income $ 487,946 $ 417,939
========================================================================
Net income per common share:
Basic $ .05 $ .04
Diluted $ .05 $ .04
========================================================================
Basic weighted-average
Common shares outstanding 9,774,376 9,442,729
========================================================================
Diluted weighted-average
Common shares outstanding 9,812,836 9,442,729
========================================================================
<CAPTION>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
HIA, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
</CAPTION>
Additional Retained
Common Stock Paid-In Earnings
Years Ended November
30, 1999 and 1998 Shares Amount Capital
<S> <C> <C> <C> <C>
Balance, December
1, 1998 13,107,896 $ 131,079 $ 3,109,271 $ 181,519
Acquisition of
treasury stock
(Note 6) - - - -
Issuance of shares
held in treasury
(Note 6) - - - -
Net income - - - 417,939
- ---------------------------------------------------------------------
Balance, November
30, 1999 13,107,896 131,079 3,109,271 599,458
Acquisition of
treasury stock
(Note 6) - - - -
Issuance of shares
held in treasury
(Note 6) - - - -
Net income - - - 487,946
- ----------------------------------------------------------------------
Balance, November
30, 1999 13,107,896 $131,079 $3,109,271 $ 1,087,404
======================================================================
</TABLE>
<TABLE>
Treasury Stock Total
Shares Amount Stockholders'
Years Ended November
30, 1999 and 1998 Equity
<S> <C> <C> <C>
Balance, December
1, 1998 4,004,513 $(736,956) $2,684,913
Acquisition of
treasury stock
(Note 6) 159,200 (26,424) (26,424)
Issuance of shares
held in treasury
(Note 6) (450,000) 83,632 83,632
Net income - - 417,939
- ---------------------------------------------------------------------
Balance, November
30, 1998 3,713,713 (679,748) 3,160,060
Acquisition of
treasury stock
(Note 6) 119,239 (22,848) (22,848)
Issuance of shares
held in treasury
(note 6) (485,287) 97,350 97,350
Net income - - 487,946
- ---------------------------------------------------------------------
Balance, November
30, 1999 3,347,665 $(605,246) $ 3,722,508
<CAPTION>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
HIA, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
</CAPTION>
Increase (Decrease) in Cash
Years Ended November 30, 1999 1998
<S> <C> <C>
Operating activities:
Net income $ 487,946 $ 417,939
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 347,485 128,585
Loss on abandonment of computer
Software 93,788 -
Allowance for doubtful accounts 10,508 13,938
Deferred income taxes (81,982) 3,042
Changes in operating assets and liabilities,
Net of business combination:
Accounts receivable (861,708) 7,850
Inventories 131,588 335,536
Other current assets 35,046 36,978
Accounts payable (408,486) 117,465
Other current liabilities 238,970 121,668
- ------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (6,845) 1,183,001
- ------------------------------------------------------------------------
Investing activities:
Purchase of WPS, net of cash acquired (1,378,765) -
Purchase of property and equipment (44,357) -
Increase in other assets 2,393 2,606
- ------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (1,420,729) 2,606
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HIA, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash
</CAPTION>
Years Ended November 30, 1999 1998
<S> <C> <C>
Financing activities:
Proceeds from note payable to bank 7,552,888 4,988,373
Repayments on note payable to bank (6,992,502) (6,267,373)
Proceeds on long-term debt 1,000,000 -
Repayments on long-term debt (139,255) -
Repayments on capital lease obligation (114,284) (45,148)
Acquisitions of treasury stock (22,848) (26,424)
Proceeds from sale of treasury stock 97,350 83,632
Checks written against future deposits 37,473 95,907
- ----------------------------------------------------------------------
Net cash provided by (used in)
financing activities 1,418,822 (1,171,033)
- ----------------------------------------------------------------------
Increase (decrease) in cash (8,752) 14,574
Cash, beginning of year 29,869 15,295
- ----------------------------------------------------------------------
Cash, end of year $ 21,117 $ 29,869
======================================================================
<CAPTION>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</CAPTION>
</TABLE>
HIA, Inc. and Subsidiaries
Summary of 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 subsidiaries, 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 subsidiaries, is
the wholesale 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:
Accounts Receivable, Accounts Payable and Other Current Liabilities
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 and their
carrying amounts approximate fair value or they are receivable or
payable on demand.
Note Payable, Long-Term Debt, and Capital Lease Obligations
The note payable, long-term debt, and capital lease obligations bear
interest at floating rates of interest based upon lending institutions'
prime lending rate. Accordingly, their fair value approximates their
reported carrying amounts at November 30, 1999 and 1998.
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.
Depreciation, Amortization, Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method of accounting 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 $229,531 and $128,585 for the years ended November 30, 1999
and 1998.
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. Included in selling, general and
administrative expense for 1999 is approximately $94,000 related to the
impairment loss of certain capitalized computer software abandoned by
the Company.
Goodwill and Non-Compete Agreement
Goodwill and the non-compete agreement, which relate to the acquisition
of WPS in 1999 (see Note 1), are being amortized over a 10-year period
using the straight-line method. Amortization expense was $117,954 for
the year ended November 30, 1999.
Revenue Recognition
The Company recognizes revenue at the time sales are shipped to
customers in the normal course of business.
Income Taxes
The Company accounts for income taxes under the liability method, which
requires an entity to recognize, deferred tax assets and liabilities.
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.
Advertising Costs
The Company recognizes advertising expense when incurred. Advertising
expense was approximately $25,000 and $9,300 for the years ended
November 30, 1999 and 1998.
Net Income Per Common Share
The Company implemented Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS No. 128") in 1998. SFAS No. 128
provides for the calculation of "Basic" and "Diluted" earnings or net
income per 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 reflect the potential dilution of
securities that could share in the earnings of an entity, similar to
fully diluted net income per share. The adoption of SFAS No. 128 did
not affect the income per share calculation at November 30, 1998.
For the year ended November 30, 1998, stock options of 600,000 were not
included in the computation of diluted income per share because the
exercise price of the options exceeded the average market price of the
common stock during the period.
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.
Stock Option Plans
The Company applies Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees," and the related
Interpretation 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 1998 financial
statements in order for them to conform to the 1999 presentation. Such
reclassifications have no impact on the Company's consolidated
financial position or results of operation.
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 consolidated
statement of stockholders' equity, except those changes made due to
investments by stockholders, changes in paid-in-capital and
distributions to stockholders. The adoption of SFAS No. 130 had no
impact on the Company's 1999 and 1998 consolidated financial
statements.
Fourth Quarter Adjustments
The Company recorded in the fourth quarter of the year ended November
30, 1999, an adjustment to properly accrue for officer bonuses in the
amount of $200,000.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has recently issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
established standards for recognizing all derivative instruments
including those for hedging activities as either assets or liabilities
in the statement of financial position and measuring those instruments
at fair value. This Statement is effective for fiscal years beginning
after June 15, 2000. Management believes the adoption of this statement
will have no impact on the Company's consolidated financial statements.
HIA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1.) Business Acquisition
On May 25, 1999, the Company, through its wholly-owned subsidiary, CPS,
acquired all of the issued and outstanding common stock of Western Pipe
Supply, Inc. ("WPS") for a purchase price of $2,746,739 including
$84,244 in acquisition costs. 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. The cash paid to the seller was
financed in part by additional borrowings on the Company's existing
line of credit of $927,889 (of which $442,504 was the amount required
to pay off the seller's existing line of credit) and a $1,000,000 five-
year term note payable.
The acquisition was recorded using the purchase method of accounting by
which the assets were valued at fair market value at the date of
acquisition. The preliminary purchase price allocation as reflected in
the Company's 1999 quarterly financial statements was adjusted to
reflect deferred tax assets of $163,099 that existed at the purchase
date. Accordingly, the amount of goodwill recorded pursuant to the
preliminary purchase price allocation was reduced by $163,099. The
operating results of this acquisition have been included in the
accompanying consolidated financial statements from the date of
acquisition.
The final allocation of the purchases price was as follows:
<TABLE>
<S> <C>
Cash $ 190,864
Accounts receivable, net 806,102
Inventories 1,327,859
Other current assets 15,946
Property and equipment 177,545
Deferred tax assets 163,099
Goodwill 1,534,081
Non-compete agreement 150,000
Less:
Accounts payable 1,051,941
Other current liabilities 101,167
Line of credit 442,504
Long-term obligation 23,145
- ------------------------------------------------
Total purchase price $2,746,739
===============================================
</TABLE>
The following unaudited pro forma information presents the consolidated
results of operations of the Company as if the acquisition of WPS
occurred at the beginning of fiscal year 1998. The unaudited pro forma
financial data does not purport to be indicative of the results which
actually would have been obtained had the purchase been effected on the
dates indicated or of the results which may be obtained in the future.
<TABLE>
Year Ended November 30, 1999 1998
<S> <C> <C>
Net sales $ 29,327,944 $ 25,055,025
Net income $ 363,486 $ 418,359
Net income per common share:
Basic $ .04 $ .04
Diluted $ .04 $ .04
</TABLE>
2.Note Payable and Long-Term Debt
Line-of-Credit Agreement
CPS and its subsidiaries have a line-of-credit agreement with a bank,
which expires on April 30, 2001. The available loan amount is the
lesser of $4,000,000 or the computed borrowing base, as defined by the
terms of the agreement. The line-of-credit provides for interest at the
lower of the bank's prime rate (8% and 7.75% at November 30, 1999 and
1998) or 8.5%. 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.
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, 1999, the Company was in compliance
with these covenants under the line-of-credit agreement.
As of November 30, 1999 and 1998, $1,222,502 and $219,613 were
outstanding under this line-of-credit agreement.
Long-term debt
<TABLE>
<CAPTION>
Long-term debt consisted of the following:
</CAPTION>
<S> <C> <C>
November 30, 1999 1998
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. $ 1,137,855 $ -
Promissory note dated May 24, 1999;
monthly principal and interest payments
of $20,336 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. 900,000 -
- ---------------------------------------------------------------
Total long-term debt 2,037,855 -
Less current maturities 253,349 -
- ---------------------------------------------------------------
Long-term, less current maturities $1,784,506 $-
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Aggregate maturities of long-term debt at November 30, 1999 are as
follows:
</CAPTION>
<S> <C>
Years Ending November 30,
2000 $ 253,349
2001 282,384
2002 306,082
2003 331,766
2004 218,411
Thereafter 645,863
- -------------------------------------------------------------
$2,037,855
=============================================================
</TABLE>
3. Capital Lease Obligations
As of November 30, 1999 and 1998, the Company's capital lease
obligations consisted of $486,606 and $396,422 of computer-related
equipment net of accumulated amortization of $163,225 and $65,338.
The following is a schedule, by year, of future noncancellable minimum
payments required under the capital lease, together with the present
value of the related payments as of November 30, 1999.
<TABLE>
<S> <C>
Years Ending November 30,
2000 $ 156,119
2001 128,329
2002 128,329
2003 105,375
- --------------------------------------------------------
518,152
Less amount representing interest 70,152
- --------------------------------------------------------
Present value of minimum lease payments 448,000
Less current maturities 126,121
- --------------------------------------------------------
Long-term capital lease obligation, less
current maturities $ 321,879
========================================================
</TABLE>
4. Commitments
Operating Leases
The Company leases its main warehouse under a noncancellable 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 warehouse space under
noncancellable operating leases.
Total lease expense was approximately $648,000 and $538,000 for fiscal
1999 and 1998.
As of November 30, 1999 future annual minimum lease payments under non-
cancelable operating leases are as follows:
<TABLE>
<S> <C>
Years Ending November 30
2000 $ 666,000
2001 547,000
2002 385,000
2003 338,000
2004 202,000
Thereafter 31,000
- ---------------------------------------------------
$2,169,000
===================================================
</TABLE>
Employment Agreements
The Company has entered into employment agreements that extend to
November 30, 2004 with its officers. The employment agreements set
forth annual compensation to its officers of between $167,400 and
$169,900 each. Compensation is adjusted annually based on the cost of
living index plus five percent per annum base increase.
3.Taxes on Income
The provision (benefit) for taxes on income for the years ended
November 30, 1999 and 1998 consisted of the following:
<TABLE>
1999 1998
<S> <C> <C>
Current:
Federal $ 395,107 $ 233,145
State 61,486 10,053
Deferred:
Federal (75,330) 2,795
State (6,652) 247
- -------------------------------------------------------------------
$ 374,611 $ 246,240
===================================================================
</TABLE>
A reconciliation of taxes on income at the federally statutory rate to
the effective tax rate is shown below:
<TABLE>
<S> <C> <C>
Years Ended November 30, 1999 1998
Income taxes computed at the
federal statutory rate $ 293,269 $ 225,821
State income taxes,
net of federal benefit 25,877 19,925
Amortization of goodwill 40,313 -
Other permanent differences 15,152 494
- ----------------------------------------------------------------------
Taxes on income $ 374,611 $ 246,240
======================================================================
</TABLE>
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, 1999 and 1998 relate to the following:
<TABLE>
1999 1998
<S> <C> <C> <C> <C>
Current Long-term Current Long-term
Inventories $ 66,510 $ - $ 36,113 $ -
Accounts receivable 40,888 - 37,000 -
Property and equipment - 80,993 - 3,122
Net operating loss carryforwards - 138,178 - -
Other (6,733) 3,600 - 2,120
- ---------------------------------------------------------------------
Net deferred tax asset $ 100,665 $ 222,771 $ 73,113 $5,242
=====================================================================
</TABLE>
At November 30, 1999 and 1998, $100,665 and $73,113 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.
Included in the net operating loss carryforwards is approximately
$373,000 acquired in the WPS acquisition. As a result of the change in
ownership, as defined by Section 382 of the Internal Revenue Code, the
net operating loss carryforwards acquired are limited in use to
approximately $130,000 per year and must be offset only by taxable
income generated by WPS. The net operating loss carry forwards all
expire in 2011.
6. Stockholders' Equity
Treasury Stock and Common Stock Options
The Company acquired from non-affiliate stockholders 119,239 shares of
its common stock at $.15 to $.20 per share during fiscal 1999 and
159,200 shares of its common stock at $.13 to $.20 per share during
fiscal 1998. During fiscal 1999, the Company issued 485,287 shares from
treasury at $.20 per share to its officers for cash proceeds of
$97,350; 300,000 of those issued shares in fiscal 1999 were from the
exercise of stock options. During fiscal 1998, the Company issued
450,000 shares from treasury at $.18585 per share to its officers for
cash proceeds of $83,632 as provided by the stock option plan described
below.
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
$.18585 per share through December 31, 1999. On November 30, 1996, the
Board of Directors of the Company granted to officers of the Company
options to purchase up to 600,000 treasury shares at $.22282 per share
through December 31, 1998. The exercise price of these options was
equal to the common stock's market price at the date of grant.
In addition, the Company has incentive and non-incentive stock option
plans for officers, directors and employees of the Company and its
subsidiaries under which options to purchase the Company's common stock
are granted at no less than 100 percent of the market price of the
stock at the date of grant. At November 30, 1999 and 1998, there were
684,250 shares reserved for future grants. Under these plans, there
were no options granted or outstanding as of November 30, 1999 and
1998.
<TABLE>
<CAPTION>
The following table summarizes information on stock option activity:
</CAPTION>
Weighted
Exercise Average
Number of Price Exercise Expiration
Shares per Share Price per Share Dates
<S> <C> <C> <C> <C>
Outstanding at
December 1,1997 1,200,000 $.1859-.2228 $ .204 1997-1998
Granted - - - -
Exercised (450,000) .1859 .1859 1997
Expired (150,000) .1859 .1859 1997
- -----------------------------------------------------------------------------
Outstanding at
November 30,1998 600,000 .2228 .2228 1998
Granted 600,000 .1859 .1859 1999
Exercised (300,000) .2228 .2228 1998
Expired (300,000) .2228 .2228 1998
- -----------------------------------------------------------------------------
Outstanding at
November 30,1999 600,000 $ .1859 $ .1859 1999
==============================================================================
</TABLE>
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 used for the grant in 1999:
dividend yield of zero percent, expected volatility of 69% and an
expected life of one year. The Company did not grant any stock options
during fiscal 1998.
<TABLE>
Years Ended Nov. 30, 1999 1998
<S> <C> <C>
Net Income
As repoted $ 487,946 $ 417,939
Pro forma 455,735 417,939
Basic net income per common share:
As reported $ .05 $ .04
Pro forma .05 .04
================================================================================
Diluted net income per common shares:
As reported $ .05 $ .04
Pro forma .05 .04
================================================================================
</TABLE>
<TABLE>
<CAPTION>
The following information summarizes stock options outstanding at
November 30, 1999:
</CAPTION>
Outstanding Exercisable
Weighted Average
Remaining Weighted
Number Contractual Exercise Number Average
Exercise Price Outstanding Life in Years Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ .1859 600,000 less than 1 $.1859 600,000 $.1859
================================================================================
</TABLE>
7.Employee Benefits
Profit Sharing Plan
The Company maintains a 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 $68,000 and $72,000 for
the years ended November 30, 1999 and 1998.
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 year ended November 30, 1999, the
Company contributed approximately $31,000. The Company did not make a
contribution to the plan for the year ended November 30, 1998.
8.Economic Dependency
During 1999 and 1998, the Company purchased approximately 21% and 24%
of its products from one manufacturer. However, the products purchased
can be obtained from other competing manufacturers but not as a
consolidated product group.
9.Supplemental Disclosures of Cash Flow Information
Excluded from the statement of cash flows for the years ended November
30, 1999 and 1998 were the effects of certain noncash investing and
financing activities including the purchase of equipment in 1999 and
1998 of $162,280 and $90,354 with third party financing. In addition,
in 1998 the Company converted $306,068 in notes payable to a capital
lease obligation.
The following table summarizes the net cash used in conjunction with
the 1999 WPS acquisition:
<TABLE>
1999
<S> <C>
Working capital, other than cash acquired $ 996,799
Property and equipment 177,545
Deferred tax assets 163,099
Goodwill 1,534,081
Non-compete agreement 150,000
Acquired debt and long-term obligations (1,642,759)
- -------------------------------------------------------------------------
Net cash used to acquire WPS $ 1,378,765
</TABLE>
Cash payments for interest were $201,865 and $135,668 for the years ended
November 30, 1999 and 1998. Cash payments for income taxes were $234,440 and
$226,671 for the years ended November 30, 1999 and 1998.
10.Subsequent Event
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.
PART IV
Item 13. 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 Subsidiaries of the Company.
24 Power of Attorney
(b) No reports on Form 8-K were filed by the Company during the
last quarter of the period covered by this report.
HIA, INC. AND SUBSIDIARIES
Exhibit 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<S> <C>
Name State of Incorporation
CPS Distributors, Inc. Colorado
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
/s/ Carl J. Bentley Chairman of the Board Feb. 28,2000
Carl J. Bentley and Director
/s/ Alan C. Bergold President, Feb. 28,2000
Alan C. Bergold Treasurer and Director
/s/ Donald Champlin Executive Vice Feb. 28,2000
Donald Champlin President, Secretary
and Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE>5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Nov-30-1998
<PERIOD-START> Dec-01-1998
<PERIOD-END> Nov-30-1999
<CASH> 21,117
<SECURITIES> 0
<RECEIVABLES> 2,311,736
<ALLOWANCES> 111,000
<INVENTORY> 3,359,705
<CURRENT-ASSETS> 6,808,885
<PP&E> 1,429,367
<DEPRECIATION> 839,372
<TOTAL-ASSETS> 9,304,672
<CURRENT-LIABILITIES> 3,475,779
<BONDS> 0
<COMMON> 131,079
0
0
<OTHER-SE> 3,591,429
<TOTAL-LIABILITY-AND-EQUITY> 3,722,508
<SALES> 26,139,848
<TOTAL-REVENUES> 976,524
<CGS> 18,348,265
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,815,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201,865
<INCOME-PRETAX> 862,557
<INCOME-TAX> 374,611
<INCOME-CONTINUING> 487,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 487,946
<EPS-BASIC> 5
<EPS-DILUTED> 5
</TABLE>
