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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to
Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the
fiscal year ended Commission File
November 30, 2001 #09-9599
HIA, INC.
(Exact name of registrant as specified in its charter)
New York 16-1028783
(State or other jurisdiction of (Federal employer
Incorporation or Organization) identification number)
4275 Forest Street
Denver, Colorado 80216
(Address of principal executive office)
(303) 394-6040
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
----------------------------
(Title of Class)
The check mark below indicates whether the Issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or reports), and (2) has been subject
to such filing requirements for the past ninety days.
YES X NO
---------- ----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-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-K or any amendment to this
Form 10-K. (X).
The Issuer had net sales of $31,270,000 for the fiscal year ended November 30,
2001.
The aggregate market value of voting stock held by non-affiliates of the Issuer
as of January 10, 2002 was $801,765 based on market value of stock as compiled
by finance.yahoo.com.
The number of shares of the only class of Common Stock of the Issuer outstanding
as of January 10, 2002 was 10,281,526.
PART I
Item 1. Business
(a) General Development of Business
HIA, Inc. (the "Company" or "HIA") was incorporated in 1974. The Company is
a holding company with all of its business conducted through its wholly
owned subsidiary, CPS Distributors, Inc. ("CPS"). Through CPS, the Company
distributes turf irrigation equipment and commercial, industrial and
residential well pumps and equipment on a wholesale basis. The principal
executive offices of the Company are located at 4275 Forest Street, Denver,
Colorado 80216, telephone (303) 394-6040.
(b) Narrative Description of Business
General (Y) 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 14% and 86%,
respectively, of net sales for 2001, approximately 10% and 90%,
respectively, of net sales for 2000 and 12% and 88%, respectively, of net
sales for 1999.
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. 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.
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
majority of the branches were located in metropolitan Denver). 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.
On October 31, 2000, the Company sent to all its shareholders a tender
offer for up to 3,000,000 shares of its common stock for a purchase price
of $.25 per share. The total amount expected to be disbursed, as a result
of the tender offer was $850,000 ($750,000 for the common stock and
$100,000 for the associated legal, accounting and transfer agent fees). The
total amount was to be financed by Wells Fargo Bank, Denver by increasing
the existing line of credit by $500,000 (to an aggregate amount of
$5,000,000) and a term note not to exceed $500,000 at an interest rate of
1/8th percent less than prime interest rate; the note to be amortized no
more than five years.
The purposes of the offer was to (1) offer the shareholders the opportunity
to sell some or all of their shares on a basis that was more favorable than
could probably be achieved in the open market (the closing price as of
October 19th, 2000 was $.13 per share) and (2) extend an offer which
represented a good investment opportunity for the Company and its existing
shareholders.
The Company filed the necessary Schedule TO and related documents with the
SEC on October 27, 2000. A revision was filed on November 6, 2000 and the
final amendment was filed on January 4, 2001. The offer expired on December
15, 2000. 732,456 shares of common stock were tendered for a total purchase
prices of $183,114. A total of $56,677 was incurred for legal, accounting,
transfer agent and other related costs.
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 25% and 19% of its
products volume from two manufacturers. 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 (Y) CPS's customers include contractors,
dealers and municipalities with the majority of sales derived from
contractors. The Company believes neither its aggregate sales nor those of
any of its business units are concentrated in or materially dependent upon
any single customer or small group of customers.
Quotation activity is especially intense in the winter and spring months
(December to April) when contracts are reviewed and eventually awarded for
spring or summer construction. Since approximately 86% of CPS's business is
composed of turf and irrigation products, its sales are concentrated from
March to October and are therefore seasonal in nature.
Competition - The Company operates in a highly competitive market.
Manufacturers have abandoned the exclusive relationships with their
distributors. As a result, the Company is competing with other wholesalers
of the same products.
Most manufacturers have also abandoned prices based on volume buying and
have gone to a pricing system based on a percentage of purchases over the
previous years' business. This change allows smaller wholesalers to buy at
the same price levels as the larger wholesalers. Therefore, a mid-to-large
sized wholesalers, such as CPS, no longer has a price advantage to cover
the higher operating costs of a larger operation.
CPS offers standard discounts on merchandise to its customers. Additional
discounts are given based on quantity of order or annual volume of
purchases, depending on product and competitive conditions. The Company has
monthly specials on certain of its inventory and provides discounts for
orders placed at trade shows. The majority of the programs offered are
based on discounts received from the Company's suppliers. Therefore, there
is no material effect on operating results from providing these discounts.
Each territory salesperson receives a draw against commission. Commission
is determined as a percentage of the gross profit generated from sales to
the accounts in the sales representative's territory. Sales quotas are
established for each area. Additional remunerative incentives are created
for meeting or exceeding assigned quotas.
CPS emphasizes customer service, convenient availability of products and
knowledge of the industry. However, pricing, currently an important factor,
is expected to continue in importance because the competition can provide
the same products and warranties.
CPS has seven major competitors in its market area for turf and irrigation
equipment and six major competitors in its market area for industrial,
commercial and residential pumps and equipment. It is estimated by
management that CPS has over 15% of the total market in Colorado for
residential pumps and over 38% of the total market in Colorado for turf and
irrigation equipment. Some of CPS's competitors have financial resources
greater than CPS.
CPS increased its market share considerably in 1999 with the purchase of
WPS which had net sales of over $7 million in 2000 (the first full year the
Company had ownership of WPS). The acquisition increased the number of
branch outlets the Company owns and operates from nine branch outlets to
eleven 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 (Y) At November 30, 2001, the Company employed 89 persons, of
which 23 were warehouse and branch counter employees and 66 were sales and
administrative employees. The Company considers its employee relations to
be good. None of the Company's employees is covered by union contracts or
collective bargaining agreements.
The Company uses computer resources for its order entry, inventory, payroll
and accounting function.
Item 2. Properties
The Company's leased facilities in Denver, Colorado are comprised of an
aggregate of 32,265 square feet of offices and warehouse on 166,000 square
feet of land. This building serves as the main warehouse of CPS and the
executive offices of the Company. The lease has a ten-year term, beginning
March 1995, with monthly rent at $9,500 for the first five years, after
which the monthly rent is adjusted by the percentage increase in the
Consumer Price Index. The Company has an option to purchase the related
property at the end of the initial ten-year term at a price approximating
the market value at that time, subject to certain conditions. The Company
also has two five-year options to extend the lease term, one at the
beginning of the eleventh year and one at the beginning of the 16th year.
The Company is to pay for all taxes, insurance and maintenance on the
property.
The Company sold its property in Casper, Wyoming, which consisted of 6,159
square feet of office/warehouse space on 33,600 square feet of land in a
private transaction with an unrelated third party. The sale took place on
September 18, 2001. The property was sold for $58,000 less commissions and
related costs of $5,131. The Company executed a contract for deed with the
buyer which called for payment of $53,000 ($5,000 paid down at closing)
amortized over 15 years at an interest rate of 8.75% per annum, principal
and interest payments made monthly. The Company recorded a capital gain on
the sale of $1,956.
The Company leased a new warehouse facility in Casper, Wyoming on February
18, 2000 with 14,544 square feet of office/warehouse space situated on 2.65
acres of land.
The Company also leases 9,954 square feet of office/warehouse space on
21,781 square feet of land in Colorado Springs, Colorado; 4,100 square feet
of office and warehouse space on 14,000 square feet of land in Fort
Collins, Colorado; 10,000 square feet of office and warehouse space in
Thornton, Colorado; 10,000 square feet of office and warehouse space in
Littleton, Colorado; 13,400 square feet of warehouse/office space in
Englewood, Colorado; 9,120 square feet of office and warehouse space in
Cheyenne, Wyoming and 6,400 square feet of office and warehouse space in
Broomfield, Colorado.
On May 25, 1999, CPS acquired Western Pipe Supply Company (WPS) in
Longmont, Colorado and contracted with the former owner to lease its
existing two facilities. One warehouse facility is located in Boulder,
Colorado consisting of 8,000 square feet of office and warehouse space
situated on 1.8 acres of land. The main warehouse facility is located in
Longmont, Colorado consisting of 14,340 square feet of warehouse and office
space situated on 3.9 acres of land. Both facilities utilize the available
land for outside storage and customer pickup of pipe and accessories. Both
leases are for a five-year period with an option to renew the lease for
another five years.
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, 2001 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, 2001.
PART II
Item 5. Market for the Company's Common Stock and Related Security Holders
Matters
- -------------------------------------------------------------------------------
The principal market on which HIA's common stock is traded is the
over-the-counter market. Although at least one market maker continues to
quote prices for HIA's common stock, the Company is not aware of any
established public trading market for HIA's common stock since June 6,
1986.
The following table sets forth the high and low closing bid quotations for
the common stock for the fiscal years ended November 30, 2001 and 2000. The
quotations reflect inter-dealer prices, without adjustment for retail
mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
Fiscal year ended November 30, 2001 Bid Quotations
------------------------------------------------------------- -----------------------------------------
High Low
-------------------- --------------------
First Quarter .38 .19
Second Quarter .25 .22
Third Quarter .26 .22
Fourth Quarter .30 .20
Fiscal year ended November 30, 2000 Bid Quotations
------------------------------------------------------------- -----------------------------------------
High Low
-------------------- --------------------
First Quarter .30 .25
Second Quarter .40 .156
Third Quarter .21 .156
Fourth Quarter .21 .13
The approximate number of holders of record of HIA's common stock as of
November 30, 2001 was 1,650.
The Company has never declared any dividends with respect to HIA's common
stock. The Company has not in the past and is currently restricted from
paying cash dividends under its existing line-of-credit agreement.
During fiscal 2001, 2000 and 1999, the Company issued 600,000 shares,
600,000 shares and 300,000 shares from treasury to its executive officers
for cash proceeds of $150,000, $111,000 and $67,000 in conjunction with
their exercise of options previously granted. During the year ended
November 30, 1999, the officers of the Company purchased 185,287 shares
from the Company's treasury at $0.16 per share for gross proceeds of
$31,000. All of the foregoing shares were sold in reliance upon exemptions
afforded by Section 4(2) of the Securities Act and Regulation D promulgated
under the Securities Act.
Forward Looking Statements
Statements made in this Form 10-K that are historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 ("The ACT") and Section 21E of
the Securities Exchange Act of 1934. These statements often can be
identified by the use of terms such as "may," "will," "expect," "believes,"
"anticipate," "estimate," "approximate," or "continue," or the negative
thereof. The Company intends that such forward-looking statements be
subject to the safe harbors for such statements. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. Any forward-looking
statements represent management's best judgements as to what may occur in
the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond the control of the Company that
could cause actual results and events to differ materially from historical
results of operations to revise any forward-looking statements to reflect
events or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data for each of
the Company's last five fiscal years:
Years Ended November 30,
------------------------
2001 2000 1999* 1998 1997
--------- ---------- ---------- ---------- -----------
Net Sales $31,270,000 $32,141,000 $26,133,000 $18,786,000 $17,016,000
Net Income $ 365,000 $ 378,000 $ 488,000 $ 418,000 $ 418,000
Net Income
Per Common
Share $ .04 $ .04 $ .05 $ .04 $ .05
Cash Dividend Per - - - - -
Common Share
* During 1999, the company purchased Western Pipe Supply Company (WPS).
Refer to item 1 (b)
AT YEAR END
Total Assets $ 9,320,000 $10,181,000 $ 9,305,000 $ 4,609,000 $ 5,033,000
Long-Term $ 1,282,000 $ 1,772,000 $ 2,106,000 $ 287,000 - 0 -
Obligations
The following table sets forth selected unaudited consolidated financial data
for each of the Company's last eight fiscal quarters:
2001
----
Nov. 30, 2001 Aug. 31, 2001 May 31, 2001 Feb. 28, 2001
------------- ------------- ------------ -------------
Net Sales $ 6,483,000 $11,729,000 $ 9,285,000 $ 3,773,000
Gross Profit $ 2,440,000 $ 3,365,000 $ 2,705,000 $ 1,162,000
Net Income (loss) $ 52,000 $ 876,000 $ 471,000 $(1,034,000)
----------- ----------- ----------- ------------
Income (Loss) $ .01 $ .09 $ .05 $ (.10)
Per share
2000
----
Nov. 30, 2000 Aug. 31, 2000 May 31, 2000 Feb. 28, 2000
------------- ------------- ------------ -------------
Net Sales $ 6,898,000 $10,693,000 $ 9,922,000 $ 4,628,000
Gross Profit $ 2,064,000 $ 3,132,000 $ 2,950,000 $ 1,245,000
Net Income (loss) $ (126,000) $ 392,000 $ 663,000 $ (551,000)
----------- ----------- ----------- ------------
Income (Loss) $ (.01) $ .04 $ .06 $ (.05)
Per share
Item 7. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
For the year ended November 31, 2001, the Company's net income was $365,000
compared to $378,000 for the year ended November 30, 2000. Net income decreased
by $13,000 as compared to the prior year primarily as a result of the decrease
in operating income of $199,000 substantially offset by the increase in other
income of $156,000 (including a reduction in interest expense of $67,000) and
the decrease in income tax expense of $30,000. During the year ended November
30, 2001, the Company provided $1,127,000 in cash from operations compared to
$527,000 used in operations during the year ended November 30, 2000.
The decrease in inventories of $480,000 in 2001 as compared to an increase of
$905,000 in 2000 was attributable to the efficiencies of utilization of the new
computer system installed in March of 1999 and management's response to reduced
sales volumes in early spring of 2001 which prompted management to reduce large
stock orders from manufacturers in anticipation of a "flat" sales year. The
decrease in accounts payable in 2001 of $319,000 as compared to a decrease of
$147,000 in 2000 was primarily attributable to the decrease in purchases of
merchandise inventory at the end of 2001 together with the increase in rebates
from manufacturers in 2001 of $51,000 which further reduced accounts payable at
year end. The increase in accounts receivable in 2001 of $21,000 as compared to
an increase in 2000 of $154,000 was primarily due to better credit management
with the hiring of a full time credit manager in April 2000. The increase in
other current liabilities of $72,000 in 2001 as compared to the decrease of
$9,000 in 2000 was primarily attributable to the increase in compensation
payable at the end of 2001 by $70,000.
Net cash used for investing activities decreased by $106,000 in 2001 as compared
to a decrease of $1,257,000 in 2000. The change was attributable to a $49,000
decrease in purchases of property plant and equipment in 2001 as compared to
2000 and a decrease of $57,000 for the purchases of other assets.
Net cash used in financing activities increased by $1,738,000 in 2001 as
compared to a decrease of $749,000 in 2000 primarily as a result of a decrease
in net borrowings on the line of credit with the bank of $1,725,000. The
decrease was due principally to the decrease in cash provided by inventories of
a $1,337,000 change from 2000 to 2001.
During 2001, the Company issued 600,000 shares of treasury stock at $.25 per
share for cash proceeds of $150,000 pursuant to stock options granted to the
officers in 1999. In early 2001, the Company purchased 732,456 shares of common
stock pursuant to the tender offer proffered to all shareholders on October 31,
2000 for a total purchase price of $183,114. An additional $56,677 was paid for
legal and stock transfer fees for the tender offer. The Company purchased an
additional 101,550 shares during 2001 from non-affiliates at an average price of
$.276 per share.
For the year ended November 30, 2000, the Company's net income was $378,000
compared to $488,000 for the year ended November 30, 1999. Net income decreased
by $110,000 as compared to the prior year primarily as a result of the increase
in interest expense of $259,000 partially offset by the increase in operating
income of $146,000. During the year ended November 30, 2000, the Company used
$527,000 in cash from operations compared to $7,000 in cash used in operations
during the year ended November 30, 1999.
The increase in inventories of $905,000 in 2000 as compared to 1999 was
attributable to the change in the method of stocking inventory at the branch
operations of the Company. In early 2000, management decided that operational
efficiencies would be realized and sales would be increased if the branch
operations stock a larger share of the stocking inventory as compared to the
hub-and-spoke method of inventory distribution utilized in the past, whereby
larger quantities of inventory were kept at the central location and less at the
branch level. Management contemplated the overall increase in inventory at the
time the decision was made, and expected that after a full year of operations,
inventory levels would begin to decrease (assuming the same volume of sales) as
the central distribution center adjusted its inventory levels to accommodate the
change in inventory procedures.
Deferred income taxes decreased by $118,000 primarily as the result of the
utilization of net operating losses acquired from the WPS purchase. The decrease
in both accounts payable and checks written against future deposits of $283,000
as compared to the prior year was primarily due to the precipitous drop in
inventory stocking volume (over $1.4 million) during the last 60 days of the
fiscal year 2000 in order to reach the projected inventory levels to coincide
with the Company's cash flow budget. All payables are normally paid within a
30-day period from date of invoice.
The decrease in other current liabilities which includes accrued payroll and
bonuses, income taxes payable and other current liabilities of $240,000 was
primarily attributable to the overall decreases in accrued income taxes at
fiscal year end 2000 due to the fact that the Company's estimated tax payments
made during the year slightly exceeded the liability at November 30, 2000.
Investing and financing activities were directly effected by the purchase of WPS
on May 25, 1999. The Company financed the business acquisition with a $1,177,000
subordinated promissory note with the seller and $1,379,000 in cash.
Net borrowings on the line-of-credit increased by $1,599,000 primarily to
finance the increases in inventories for fiscal year 2000. The Company had no
proceeds from long-term debt in fiscal 2000 as compared to the prior year when
the Company entered into a $1,000,000 five-year term note payable during May
1999 to partially fund its business acquisition. Payments on long-term debt and
capital lease obligations increased by $212,000 during fiscal 2000 due to the
additional loans executed as a result of the purchase of WPS in May 1999, and
the purchase of $216,000 and $162,000 in equipment during fiscal 2000 and 1999
through capital lease obligations.
During fiscal 2000, the Company issued 600,000 shares of treasury stock at
$0.1859 per share to its officers for cash proceeds of $112,000 pursuant to
stock options granted to the officers in 1998. During fiscal 1999, the Company
issued 485,287 shares from treasury at $.20 per share to its officers for cash
proceeds of $97,000. 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 $22,000.
On October 31, 2000 the Company sent to all its shareholders a tender offer for
up to 3,000,000 shares of its common stock for a purchase price of $.25 per
share. The total amount expected to be disbursed as a result of the tender offer
was $850,000 ($750,000 for the common stock and $100,000 for the associated
legal, accounting and transfer agent fees). The total amount was to be financed
by Wells Fargo Bank, Denver by increasing the existing line of credit by
$500,000 (to an aggregate amount of $5,000,000) and a term note not to exceed
$500,000 at an interest rate of 1/8th percent less than prime interest rate; the
note to be amortized no more than five years.
The purposes of the offer was to (1) offer the shareholders the opportunity to
sell some or all of their shares on a basis that was more favorable than could
probably be achieved in the open market (the closing price as of October 19th,
2000 was $.13 per share) and (2) extend an offer which represented a good
investment opportunity for the Company and its existing shareholders.
The Company filed the necessary Schedule TO and related documents with the SEC
on October 27, 2000. A revision was filed on November 6, 2000 and the final
amendment was filed on January 4, 2001. The offer expired on December 15, 2000.
A total of 732,456 shares of common stock were tendered for a total purchase
prices of $183,000. A total of $57,000 was incurred for legal, accounting,
transfer agent and other related costs.
Given the amount of stock that was ultimately acquired through the tender offer,
the Company increased its line of credit to a maximum of $5,000,000 on December
12, 2001, but did not enter into a term note as was expected.
The following is a two-year summary of working capital and current ratios:
2001 2000
---- ----
Working Capital $3,862,000 $3,757,000
Current Ratios 2.07 to 1 1.89 to 1
The increase in the current ratio in 2001 was primarily due to the decreased
levels of inventories carried at November 30, 2001 as compared to November 30,
2000.
The decrease in the current ratio in 2000 was primarily due to the increased
levels of inventories carried at November 30, 2000 as compared to November 30,
1999.
As of November 30, 2001, the Company and its subsidiary had an available
line-of-credit totaling $5,000,000 of which $3,185,000 was available and unused.
The line of credit expires on December 31, 2002 however, management believes
that they will have the opportunity to renew upon expiration.
Management believes that the present working capital as well as its available
line-of-credit is adequate to conduct its present operations. The Company does
not have any additional purchase commitments nor does it anticipate any
additional material capital expenditure for fiscal 2002.
Results of Operations
Comparison Fiscal 2001 vs. Fiscal 2000
Net sales were down $871,000 primarily as a result of the inclement weather in
early spring which delayed contractors on beginning jobs for at least a month.
This work was not able to be made up by the end of the year by the contractors.
Cost of sales decreased by $1,152,000 due to adjustments to pricing on specific
lines of inventory, lower sales volume, better pricing from vendors and reduced
inventory shrinkage due to better inventory control in 2001 by $194,000. Due to
the reduction of cost of sales the gross profit percentage increased by 1.7%
30.9% in 2001 versus 29.2% in 2000).
Selling, general and administrative expenses increased by $480,000 primarily due
to the increase in payroll of $166,000 as a result of a buildup of staff for the
first quarter of 2001 in anticipation of a robust sales year and the increase of
truck leasing and maintenance of $149,000 due to the purchase of additional
trucks for each branch location to better their ability to deliver merchandise
to the customer on a timely basis (improved customer service). In addition,
there was an increase of $102,000 in general expenses in 2001 for the Southeast
Denver branch (opened April 2000).
Other income increased by $156,000 in 2001 as compared to the prior year
primarily due to a decrease in interest expense of $67,000 which was a result of
the decrease in the weighted average rate on bank borrowings from 9.5% to 7.4%
(reduction of prime interest rate) and the reduced amount of interest paid on
long term, amortized loans of $38,000. In addition, there was an increase of
$55,000 in miscellaneous income primarily due to the sale of a limited
partnership at the end of 2000 for a recorded loss of $46,000.
The weighted-average interest rates on bank borrowings were 7.4% and 9.5% for
2001 and 2000, respectively. The weighted-average bank borrowing balance
outstanding of $3,095,000 for 2001 increased by $365,000 compared to 2000.
Net Income decreased by $13,000.
Income Taxes
At November 30, 2001, the Company has recorded a current net deferred tax
asset totaling $151,000 and has recorded a noncurrent net deferred tax
asset totaling $36,000. Based upon the Company's recent history of taxable
income and its projections for future earnings, management believes that is
more likely than not that sufficient taxable income will be generated in
the near term to utilize the net deferred tax assets. See Note 7 to the
Company's Consolidated Financial Statements.
The Company's effective tax rate for the year ended November 30, 2001 of
approximately 46% differs from the Company's blended Federal and State tax
rate of 37% due primarily to the non-deductible nature of the amortization
of goodwill for tax purposes and other non-deductible items which is
consistent with prior years.
Comparison Fiscal 2000 vs. Fiscal 1999
Net sales were up $6,008,000 primarily as a result of a four percent
increase in the sale price of merchandise, the additional sales generated
by WPS for the first six months of 2000 of $3,159,000, and the effect of
the general increase in business activity in the Rocky Mountain Region.
Cost of sales increased by $4,409,000 which increase was generally in
proportion to the increase in sales with the exception of a general
decrease in gross margins due to competitive bidding in the Company's
general market territories. Gross profit percent decreased by .6% (29.2% in
2000 versus 29.8% in 1999) primarily due to competitive pricing.
Selling, general and administrative expenses increased by $1,453,000
primarily due to the increase in payroll of $843,000 of which $312,000 was
attributable to the WPS payroll for the first 6 months of 2000. The
additional increase in payroll of $531,000 was due primarily to increase in
pay to compensate essential employees in a tight labor market and the
addition of salaries due to adding five key administrative positions and
ten non-administrative positions. It was 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. In addition, rent increased by $218,000 primarily due to
general cost-of-living increases and the addition of the new branch in
Englewood, Colorado of $114,000. Data processing expense increased by
$102,000 primarily as a result of the expenses associated with the
changeover in computer systems during the last quarter of 1999 and the
first quarter of 2000.
Interest expense increased $259,000, primarily due to the first six month's
interest in the amount of $80,000 for the two loans used to finance the WPS
purchase in May of 1999 and the increase in interest due to the increase in
the weighted average line-of-credit loan of $1,119,000 contributing an
additional $153,000 in interest as a result (computed at 9.5% per annum).
The weighted-average interest rates on bank borrowings were 9.5% and 7.5%
for 2000 and 1999, respectively. The weighted-average bank borrowing
balance, outstanding of $2,730,000 for 2000 increased by $1,611,000
compared to 1999.
Net income for fiscal 2000 decreased by $110,000 primarily as a result of
the additional interest expense of $259,000 partially offset by the net
increase in the additional operating income of $146,000.
Income Taxes
At November 30, 2000, the Company has recorded a current net deferred tax
asset totaling $137,000 and has recorded a noncurrent net deferred tax
asset totaling $68,000. Based upon the Company's recent history of taxable
income and its projections for future earnings, management believes that is
more likely than not that sufficient taxable income will be generated in
the near term to utilize the net deferred tax assets. See Note 7 to the
Company's Consolidated Financial Statements.
The Company's effective tax rate for the year ended November 30, 2000 of
approximately 47% differs from the Company's blended Federal and State tax
rate of 37% due primarily to the non-deductible nature of the amortization
of goodwill for tax purposes and other non-deductible items which is
consistent with prior years.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 "Business
Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated
after June 30, 2001 to be accounted for under the purchase method. For all
business combinations for which the date of acquisition is after June 30,
2001, SFAS 141 also establishes specific criteria for the recognition of
intangible assets separately from goodwill and requires unallocated
negative goodwill to be written off immediately as an extraordinary gain,
rather than deferred and amortized. SFAS 142 changes the accounting for
goodwill and other intangible assets after an acquisition. The most
significant changes made by SFAS 142 are: 1) goodwill and intangible assets
with indefinite lives will no longer be amortized; 2) goodwill and
intangible assets with indefinite lives must be tested for impairment at
least annually; and 3) the amortization period for intangible assets with
finite lives will no longer be limited to forty years. SFAS 142 is
effective for fiscal years beginning after December 15, 2001, with early
application permitted in certain circumstances. The Company does not
believe that the adoption of SFAS 141 will have a material effect on its
financial position, results of operations, or cash flows. At this time, the
Company cannot estimate the effect of Statement SFAS 142 on it's financial
position, results of operations or cash flows.
In June 2001, the FASB also approved for issuance SFAS 143 "Asset
Retirement Obligations." SFAS 143 establishes accounting requirements for
retirement obligations associated with tangible long-lived assets,
including (1) the timing of the liability recognition, (2) initial
measurement of the liability, (3) allocation of asset retirement cost to
expense, (4) subsequent measurement of the liability and (5) financial
statement disclosures. SFAS 143 requires that an asset retirement cost
should be capitalized as part of the cost of the related long-lived asset
and subsequently allocated to expense using a systematic and rational
method. The Company will adopt the statement effective no later than
January 1, 2003, as required. The transition adjustment resulting from the
adoption of SFAS 143 will be reported as a cumulative effect of a change in
accounting principle. The Company does not believe that the adoption of
this statement will have a material effect on its financial position,
results of operations, or cash flows.
In October 2001, the FASB also approved SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 replaces SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The new accounting model for long-lived assets to
be disposed of by sale applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB Opinion No. 30,
Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, for the disposal of segments of a business.
Statement 144 requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value
or include amounts for operating losses that have not yet occurred.
Statement 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from
the ongoing operations of the entity in a disposal transaction. The
provisions of Statement 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, are to
be applied prospectively. The Company does not believe that the adoption of
this statement will have a material effect on its financial position,
results of operations, or cash flows.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company does not have material market risk on market risk sensitive
instruments. It has no exposure to fluctuations in currency exchange rates
or commodity prices. Its only interest rate risk arises from its bank
line-of-credit.
The Company's long-term debt consists of fixed rate loans and capital
leases that are unaffected by interest rate fluctuations and have fair
values approximately equal to their carrying values. It's operating
line-of-credit bears interest at lender prime (5% at November 30, 2001).
For the year ended November 30, 2001, the Company's total interest expense
was $394,000. Assuming outstanding borrowings under the Company's revolving
line-of-credit at the same levels that prevailed during fiscal 2001, a 10%
decrease or increase in the prime rate prevailing at year-end 2001 (i.e.,
from 5% to 4.5% or 5.5%) would result in a decrease or increase of $39,400
in the Company's interest expense in fiscal 2002.
Item 8. Financial Statements
The response to this item is submitted as a separate section of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- -------------------------------------------------------------------------------
There have been no disagreements between the Company and its independent
accountants on any matter of accounting principles or practices or
financial statement disclosure since the Company's inception. On November
15, 2001 the Company dismissed BDO Seidman, LLP as its independent
accountant and engaged Hein + Associates LLP as the principal accountant to
audit the registrant's financial statements. The decision to change was
approved by the Board of Directors. Form 8-K was filed regarding the change
of auditors dated November 15, 2001.
PART III
Item 10. Directors and Executive Officers of the Company
(a) Identification of Directors
The list presented below sets forth the names and ages of all
directors of the Company indicating all positions and offices with the
Company held by each such person and his term of office as director
and the period during which he has served as such.
Name Age Positions Director Since
---- ---- --------- -----------------
Carl J. Bentley 68 Chairman of the Board 1994
and Director
Alan C. Bergold 53 President, Treasurer 1981
and Director
Donald L. Champlin 50 Executive Vice President, 1994
Secretary and Director
(b) Identification of Executive Officers
The list presented below sets forth the names and ages of all
executive officers of the Company indicating all positions and offices
held by such person and the period during which he has served as such.
Name Age Positions Year First Elected (1)
---- ---- --------- -----------------------
Carl J. Bentley 68 Chairman of the Board 1996
and Director 1994
Alan C. Bergold 53 President, Treasurer 1996
and Director 1981
Donald L. Champlin 50 Executive Vice President, 1996
Secretary
and Director 1994
(1) All officers serve at the discretion of the Board of Directors.
(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 68, 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 53, was appointed President in October 1996 and
Executive Vice President of the Company in July 1983. He served as
Vice President and Secretary of the Company from 1981 to 1983. Mr.
Bergold has been a director of the Company since 1981.
Donald L. Champlin, age 50, was appointed Executive Vice President in
October 1996. He joined the Company as Pump Product Manager in October
1983. In February 1989, he became Vice President of Marketing and a
member of the Board of Directors of CPS. He was appointed to the
Company's Board of Directors in 1994.
(d) Involvement in Certain Legal Proceedings
None.
(e) Promoters and Control Persons
Not applicable.
(f) Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during fiscal 2001 and Forms 5 and amendments thereto
furnished to the Company with respect to fiscal 2001, if any, and written
representations furnished to the Company as to the absence of any requirement
for the filing of Forms 5, the Company believes that its officers, directors and
10% beneficial owners have filed on a timely basis all required Forms 3, 4 and 5
under Section 16(a) of the Exchange Act due in or in respect of the 2001 fiscal
year.
Item 11. Executive Compensation
Summary Compensation Table
The following table reflects cash and non-cash compensation paid or
accrued by the Company during the fiscal years ended November 30,
2001, 2000 and 1999 to or for the account of the chief executive
officer and each executive officer whose cash compensation exceeded
$100,000, and all executives of the Company as a group:
Annual Compensation Long-term Compensation
Name and Year Other Restricted Securities
Principal Ended Annual Stock Underlying LTIP All Other
Position Nov. 30 Salary Bonus Compensation Award Options/SARs Payouts Compensation
-------- ------- ------ ----- ------------ ----- ------------ ------- ------------
Carl J. Bentley 2001 $185,000 $ 96,723 $12,000 $ - 250,000 $ - $6,720
Chairman of the 2000 169,900 81,407 - - 200,000 - 3,400
Board 1999 157,500 99,381 - - 200,000 - -
Alan C. Bergold 2001 182,500 96,723 $12,000 - 250,000 - $16,876
President 2000 167,400 81,407 - - 200,000 - 8,700
1999 155,000 99,381 - - 200,000 - -
Donald L. Champlin 2001 182,500 96,723 $12,000 - 250,000 - $18,708
Executive 2000 167,400 81,407 - - 200,000 - 9,800
Vice-President 1999 155,000 99,381 - - 200,000 - -
The preceding table does not include any amounts for non-cash
compensation, including personal benefits, paid to the above-listed
officers. The Company believes that the value of such non-cash
benefits and compensation paid during the periods presented did not
exceed the lessor of $50,000 or 10% of the cash compensation reported.
The Company compensated the directors for payments they made on life
insurance policies on the life of each of the director's lives in
order to substantially complete the purchase of the other director's
common stock ownership in case of death of a director. The details of
the stock purchase agreement are included in the employment agreement
of the officers with the Company. The agreement basically calls for
the first right of refusal by the Company to purchase the deceased
directors stock for a price per share in relation to net book value.
The Company has employment agreements as follows:
Carl J. Bentley (1): $185,000 annual salary per year, adjusted for
cost of living plus seven percent per annum base increase; plus eight
and one-half percent bonus of net pretax income exclusive of
contributions to the 401(k) and profit sharing plan; term of five
years beginning May 31, 2001.
Alan C. Bergold (1): $182,500 annual salary per year, adjusted for
cost of living plus seven percent per annum base increase; plus eight
and one-half percent bonus of net pretax income exclusive of
contributions to the 401(k) and profit sharing plan; term of five
years beginning May 31, 2001.
Donald L. Champlin (1): $182,500 annual salary per year, adjusted for
cost of living plus seven percent per annum base increase; plus eight
and one-half percent bonus of net pretax income exclusive of
contributions to the 401(k) and profit sharing plan; term of five
years beginning May 31, 2001.
(1) There is a provision for payment of one year's compensation as a
result of the sale of all or substantially all of the Company's
assets.
(b) Option/SAR Grants in Last Fiscal Year
% of Total
Number of Options/SARs
Securities Granted to Grant
Underlying Market Date
Options/SARs Price on Date Expiration Present
Name Granted of Grant Date Value
---- ------- -------- ---- -----
Employees Exercise
in Fiscal or Base
Price/
Year ($ Share)
Carl J. Bentley 250,000 21% $ .20 $ .19 12/31/03 $.11
Alan C. Bergold 250,000 21% .20 .19 12/31/03 $.11
Donald L. Champlin 250,000 21% .20 .19 12/31/03 $.11
(c) Aggregated Option/SAR Exercises and Last Fiscal Year and Year-End Option/
SAR Values
--------------------------------------------------------------------------
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/
Shares Options/SARs SARs at
Acquired Value at FY-end FY-end
Name on Exercise Realized (all exercisable) (all exercisable)
--------------------- ----------- ---------- ----------------- -----------------
Carl J. Bentley 200,000 $ 50,000 250,000 $ 50,000
Alan C. Bergold 200,000 50,000 250,000 50,000
Donald L. Champlin 200,000 50,000 250,000 50,000
Refer to Note 8 to the Consolidated Financial Statements for
description of Stock Option Plan.
Item 12.Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The following table shows the beneficial ownership of Common Stock by
each person known by the Company to own beneficially more than 5
percent of the outstanding shares of its Common Stock. The Company has
no other class of voting securities.
Common Stock
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
- --------------------------------------- ---------------------- ---------
Carl J. Bentley 2,166,153 (1) 20.6%
4275 Forest Street
Denver, CO 80216
Alan C. Bergold 2,652,646 (1) 25.2%
4275 Forest Street
Denver, CO 80216
Donald L. Champlin 2,239,797 (1) 21.3%
4275 Forest Street
Denver, CO 80216
(1) Includes 250,000 shares, which may be acquired pursuant to the
exercise of stock options exercisable on or before December 31, 2003.
(b) Security Ownership of Management
The following table shows the equity securities beneficially owned by
all directors of the Company and all directors and officers of the
Company as a group.
(1) Directors
Common Stock
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
- --------------------------------------- ----------------------------- ---------
Carl J. Bentley 2,166,153 (1) 20.6%
4275 Forest Street
Denver, CO 80216
Alan C. Bergold 2,652,646 (1) 25.2%
4275 Forest Street
Denver, CO 80216
Donald L. Champlin 2,239,797 (1) 21.3%
4275 Forest Street
Denver, CO 80216
(1) Includes 250,000 shares, which may be acquired pursuant to the exercise of
stock options exercisable on or before December 31, 2003.
(2) Directors and Officers as a Group
Amount and Nature of Percent
Title of Class Beneficial Ownership of Class
- --------------------------------------- ----------------------------- ---------
Common Stock 7,058,596 (1) 64.0%
(par value $.01)
(1) Includes 750,000 shares, which may be acquired pursuant to the exercise of
stock options exercisable on or before December 31, 2003.
(c) Changes in Control
------------------
None.
Item 13. Certain Relationships and Related Transactions
(a) Transactions With Management and Others
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. The options' exercise
price was equal to the common stock's market price at the date of
grant. 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. During the year ended November 30, 2000, the Company issued
600,000 shares from treasury to its officers for cash proceeds of
$111,510.
On January 1, 2001, the Board of Directors granted an option to each
of the officers of the Company to purchase 750,000 shares of treasury
stock at $.20 per share by December 31, 2003. The options' exercise
price was greater than the common stock's market price at the date of
grant.
On July 18, 2001, the Board of Directors granted common stock options
to ten middle and senior managers of the Company. The options totaled
460,000 shares of which 165,000 shares of options expired on December
31, 2001 if not subscribed by that date. The option price was $.30 per
share. The remainder of the options were to be exercised no later than
December 31, 2002. As of December 31, 2001, 105,000 shares were
subscribed to by the managers which meant that the remaining 60,000
options expired as of that date. Three senior managers were given, as
a bonus for 2001, an additional 16,667 shares (valued at $0.30 per
share) which were granted on December 20, 2001 when the market price
was $.21 per share.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
Not applicable.
PART IV
Item 14. Exhibits and Reports on Form 8-K
Exhibits
(a) The documents listed below have been filed as exhibits to this report.
As used in this exhibit list, "Form 10" means the Company's
Registration Statement on Form 10 filed with the Securities and
Exchange Commission in March 1981.
3.1 Articles of Incorporation (incorporated by reference to Exhibits
3.1 and 3.2 to Form 10).
3.2 By-laws (incorporated by reference to Exhibit 3.3 to the Form
10).
21 Subsidiary of the Company.
(b) During the last quarter of the period covered by this report the
Company filed a Current Report on Form 8-K dated November 15, 2001
reporting a change of accountants pursuant to Item 4 of that form.
Exhibit 21
SUBSIDIARY OF THE COMPANY
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
- ---------------------------------------
Carl J. Bentley and Director
/s/ Alan C. Bergold President,
- ---------------------------------------
Alan C. Bergold Treasurer and Director
/s/ Donald L. Champlin Executive Vice
- ---------------------------------------
Donald L. Champlin President, Secretary
and Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report...........................................F-2
Report of Independent Certified Public Accountants.....................F-3
Financial Statements
Consolidated Balance Sheets - November 30, 2001 and 2000........F-4
Consolidated Statements of Income - For the Years Ended
November 30, 2001, 2000 and 1999................................F-6
Consolidated Statements of Stockholders' Equity - For the
Years Ended November 30, 2001, 2000, and 1999...................F-7
Consolidated Statements of Cash Flows - For the Years
Ended November 30, 2001, 2000, and 1999.........................F-8
Notes to Consolidated Financial Statements........................F-9
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors
HIA, Inc. and Subsidiaires
Denver, Colorado
We have audited the accompanying consolidated balance sheet of HIA, Inc. and
Subsidiaries (the "Company") as of November 30, 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HIA, Inc. and
Subsidiaries as of November 30, 2001 and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
HEIN + ASSOCIATES LLP
Denver, Colorado
January 21, 2002
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors
HIA, Inc. and Subsidiary
Denver, Colorado
We have audited the accompanying consolidated balance sheet of HIA, Inc. and
subsidiary (the "Company") as of November 30, 2000 and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
November 30, 2000 and 1999. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HIA, Inc. and
subsidiary at November 30, 2000 and the results of their operations and their
cash flows for the years ended November 30, 2000 and 1999 in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
Denver, Colorado
January 10, 2001
F-3
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30,
-----------------------------------
---------------- ----------------
2001 2000
------------------- ----------------
ASSETS
CURRENT ASSETS:
Cash $ 1,000 $ -
Accounts receivable, net of allowance of $146,000 and $111,000, respectively 3,452,000 3,466,000
Inventories 3,784,000 4,264,000
Other current assets 204,000 224,000
------------- -------------
Total current assets 7,441,000 7,954,000
PROPERTY AND EQUIPMENT:
Leasehold improvements 289,000 286,000
Equipment 1,347,000 1,308,000
------------- -------------
1,636,000 1,594,000
Less accumulated depreciation and amortization (1,216,000) (1,009,000)
------------- -------------
Net property and equipment 420,000 585,000
OTHER ASSETS:
Goodwill, net of accumulated amortization of $383,000 and $230,000 1,151,000 1,304,000
Deferred tax asset 36,000 68,000
Non-compete agreement, net of accumulated amortization of $37,000 and $23,000 113,000 127,000
Other 159,000 143,000
------------- -------------
Total other assets 1,459,000 1,642,000
------------- -------------
TOTAL ASSETS $ 9,320,000 $ 10,181,000
============= =============
See accompanying notes to consolidated financial statements.
F-4
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
NOVEMBER 30,
----------------------------------
--------------- ----------------
2001 2000
--------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line-of-credit $ 1,815,000 $ 2,381,000
Current maturities of long-term debt 298,000 290,000
Current maturities of capital lease obligations 189,000 174,000
Accounts payable 477,000 796,000
Checks written against future deposits 207,000 124,000
Accrued payroll and bonuses 354,000 301,000
Income taxes payable 36,000 -
Other current liabilities 203,000 131,000
------------- -------------
Total current liabilities 3,579,000 4,197,000
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 1,165,000 1,464,000
Capital lease obligations, less current maturities 117,000 308,000
------------- -------------
Total long-term liabilities 1,282,000 1,772,000
------------- -------------
Total liabilities 4,861,000 5,969,000
COMMITMENTS (Notes 6 and 9)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares authorized; 13,108,196 and
13,107,896 issued and 10,126,525 and 10,360,231 outstanding 131,000 131,000
Additional paid-in capital 3,109,000 3,109,000
Retained earnings 1,831,000 1,466,000
Less treasury stock at cost; 2,981,671 and 2,747,665 shares (612,000) (494,000)
------------- -------------
Total stockholders' equity 4,459,000 4,212,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,320,000 $ 10,181,000
============= =============
See accompanying notes to consolidated financial statements.
F-5
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
2001 2000 1999
---------------- ---------------- -----------------
---------------- ---------------- -----------------
NET SALES $ 31,270,000 $ 32,141,000 $ 26,133,000
COST OF SALES 21,598,000 22,750,000 18,341,000
------------- ------------- -------------
Gross profit 9,672,000 9,391,000 7,792,000
SELLING, GENERAL AND ADMINISTRATIVE 8,748,000 8,268,000 6,815,000
------------- ------------- -------------
OPERATING INCOME 924,000 1,123,000 977,000
OTHER INCOME (EXPENSE):
Interest income 84,000 50,000 52,000
Interest expense (394,000) (461,000) (202,000)
Miscellaneous income 56,000 1,000 36,000
------------- ------------- -------------
Total other expense (254,000) (410,000) (114,000)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 670,000 713,000 863,000
INCOME TAXES 305,000 335,000 375,000
------------- ------------- -------------
NET INCOME $ 365,000 $ 378,000 $ 488,000
============= ============= =============
NET INCOME PER COMMON SHARE:
Basic $ .04 $ .04 $ .05
Diluted $ .04 $ .04 $ .05
BASIC WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 10,184,000 10,309,000 9,774,000
------------- ------------- -------------
DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 10,217,000 10,324,000 9,813,000
------------- ------------- -------------
See accompanying notes to consolidated financial statements.
F-6
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Paid-In Retained
Common Stock Capital Earnings
-------------------------------- -------------- ----------------
--------------------------------
Shares Amount
------------ ----------------- -------------- ----------------
------------ -------------- ----------------
Balance, December 1, 1998 13,107,896 $ 131,000 $ 3,109,000 $ 600,000
Acquisition of treasury stock - - - -
Issuance of shares held in treasury - - - -
Net income - - - 488,000
----------- ---------- --------- ----------
Balance, November 30, 1999 13,107,896 131,000 3,109,000 1,088,000
Issuance of shares held in treasury - - - -
Net income - - - 378,000
----------- ---------- --------- ----------
Balance, November 30, 2000 13,107,896 131,000 3,109,000 1,466,000
Issuance of common stock 300 - - -
Issuance of shares held in treasury - - - -
Acquisition of treasury stock - - - -
Net income - - - 365,000
----------- ---------- --------- ----------
Balance, November 30, 2001 13,108,196 $ 131,000 $ 3,109,000 $ 1,831,000
=========== ============= =========== ============
Total
Stockholders
Treasury Stock Equity
----------------------------- -------------------
-----------------------------
Shares Amount
-------------- -------------- -------------------
-------------- -------------------
Balance, December 1, 1998 3,713,713 $ (681,000) $ 3,159,000
Acquisition of treasury stock 119,239 (22,000) (22,000)
Issuance of shares held in treasury (485,287) 97,000 97,000
Net income - - 488,000
---------- --------- ---------
Balance, November 30, 1999 3,347,665 (606,000) 3,722,000
Issuance of shares held in treasury (600,000) 112,000 112,000
Net income - - 378,000
--------- -------- ---------
Balance, November 30, 2000 2,747,665 (494,000) 4,212,000
Issuance of common stock - - -
Issuance of shares held in treasury (600,000) 150,000 150,000
Acquisition of treasury stock 834,006 (268,000) (268,000)
Net income - - 365,000
---------- ------------ ------------
Balance, November 30, 2001 2,981,671 $ (612,000) $ 4,459,000
========== ============ =============
See accompanying notes to consolidated financial statements.
F-7
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30,
-----------------------------------------------------
-----------------------------------------------------
2001 2000 1999
--------------- ---------------- ----------------
--------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 365,000 $ 378,000 $ 488,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 374,000 396,000 347,000
Gain on sale property (2,000) - -
Loss on disposal of assets - 46,000 94,000
Allowance for doubtful accounts 35,000 - 10,000
Allowance for inventory obsolescence 48,000 - -
Deferred income taxes 18,000 118,000 (82,000)
Changes in operating assets and liabilities, net
of business combination:
Accounts receivable (21,000) (154,000) (862,000)
Inventories 432,000 (905,000) 132,000
Other current assets (15,000) (19,000) 35,000
Accounts payable (319,000) (147,000) (408,000)
Other current liabilities 161,000 (240,000) 239,000
------------- ------------- -------------
Net cash provided by (used in) operating
activities 1,076,000 (527,000) (7,000)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of WPS, net of cash acquired - - (1,379,000)
Purchase of property and equipment (42,000) (91,000) (44,000)
Increase (decrease) in other assets 35,000 (73,000) 2,000
------------- ------------- -------------
Net cash used in investing activities (7,000) (164,000) (1,421,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line-of-credit 10,087,000 9,578,000 7,553,000
Repayments on line-of-credit (10,653,000) (8,419,000) (6,992,000)
Proceeds on long-term debt - - 1,000,000
Repayments on long-term debt (291,000) (283,000) (139,000)
Repayments on capital lease obligations (176,000) (182,000) (114,000)
Acquisitions of treasury stock (268,000) - (23,000)
Proceeds from sale of treasury stock 150,000 112,000 97,000
Increase (decrease) in checks written against future 83,000 (136,000) 37,000
------------- ------------- -------------
deposits
Net cash provided by (used in) financing activities (1,068,000) 670,000 1,419,000
------------- ------------- -------------
INCREASE (DECREASE) IN CASH 1,000 (21,000) (9,000)
CASH, beginning of year - 21,000 30,000
------------- ------------- -------------
CASH, end of year $ 1,000 $ - $ 21,000
============= ============= =============
See accompanying notes to consolidated financial statements.
F-8
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------------
Principles of Consolidation - The consolidated financial statements include
the accounts of HIA, Inc. (the "Company" or "HIA"), its wholly-owned
subsidiary CPS Distributors, Inc. ("CPS"), and CPS's wholly-owned
subsidiary, Western Pipe Supply ("WPS") and Water Systems, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Lines of Business - The principal business of HIA, conducted through its
subsidiary, is the wholesale business distribution of turf irrigation
equipment and pumps.
Concentration of Risk - The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash and
accounts receivable. The Company invests temporary cash in demand deposits
with federally insured financial institutions. Such demand deposit accounts
at times may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers and generally short payment
terms. The Company reviews a customer's credit history before extending
credit and establishes an allowance for doubtful accounts based upon the
credit risk of specific customers, historical trends and other information.
Generally, the Company does not require collateral from its customers.
Use of Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Actual
results could differ from those estimates.
Financial Instruments - The following methods and assumptions were used to
estimate the fair value of each instruments class of financial instruments
for which it is practicable to estimate that value.
Fair values of accounts receivables, accounts payable and other current
liabilities are assumed to approximate carrying values for these financial
instruments since they are short term in nature.
The note payable, long-term debt, and capital lease obligations bear
interest at fixed and floating rates of interest based upon lending
institutions' prime lending rate. Accordingly, their fair value
approximates their reported carrying amounts at November 30, 2001 and 2000.
Inventories - Inventories consist of wholesale goods held for resale, which
are primarily valued at the lower of cost (as determined using first-in,
first-out method) or market.
Cost of Sales - Cost of sales consists of the actual cost of products
purchased for resale and related in-bound shipping charges.
F-9
Fulfillment Costs - Included in selling, general and administrative expense
are fulfillment costs, which consist of the cost of operating and staffing
each branch location. Such costs include those attributable to receiving,
inspecting and warehousing inventories. Fulfillment costs amounted to
approximately $3,283,000, $3,608,000 and $2,628,000 in fiscal 2001, 2000,
and 1999, respectively.
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 $207,000, $261,000, and $230,000 for the years
ended November 30, 2001, 2000, and 1999.
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 Agreement 1999 (see
Note 2), are being amortized over a 10-year period using the straight-line
method. Amortization expense was $167,000, $135,000, and $118,000 for the
years ended November 30, 2001, 2000, and 1999.
Revenue Recognition - The Company recognizes revenue at the time goods 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 $31,000, $10,000, and
$25,000 for the years ended November 30, 2001, 2000, and 1999.
Net Income Per Common Share - Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" 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 reflects the potential
dilution of securities that could share in the earnings of an entity.
F-10
For the year ended November 30, 2001, 32,738 shares were included in
dilutive shares outstanding which related to employee stock options to
purchase 750,000 shares of the Company's common stock at $.20 per share.
For the year ended November 30, 2000, 15,000 shares were included in
dilutive shares outstanding which relate to employee stock options to
purchase 600,000 shares of the Company's common stock at $.1859 per share.
Employee stock options to purchase 460,000 and 600,000 shares of the
Company's common stock at $.30 and $.25 per share were not included in
dilutive shares outstanding for the year ended November 30, 2001 and 2000
as their exercise price exceeded the average market price of the Company's
common stock during the period. Likewise, for the year ended November 30,
1999, 600,000 employee stock options to purchase the common stock of the
Company at $0.1859 were not included in calculating dilutive shares
outstanding as the exercise price exceeded the average market price of the
common stock during the period.
Cash Equivalents - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Stock Option Plans - The Company applies Accounting Principles Board
("APB") Opinion 25, "Accounting for Stock Issued to Employees," and the
related interpretations in accounting for all stock option plans. Under APB
Opinion 25, no compensation cost has been recognized for stock options
issued to employees as the exercise price of the Company's stock options
granted equals or exceeds the market price of the underlying common stock
on the date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide
pro forma information regarding net income as if compensation cost for the
Company's stock options plans had been determined in accordance with the
fair value based method prescribed in SFAS No. 123. To provide the required
pro forma information, the Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing model.
Reclassifications - Certain reclassifications have been made to the 1999
and 2000 financial statements in order for them to conform to the 2001
presentation. Such reclassifications have no material impact on the
Company's consolidated financial position or results of operations.
Comprehensive Income - Comprehensive income is comprised of net income and
all changes to the consolidated statement of stockholders' equity, except
those changes made due to investments by stockholders, changes in
paid-in-capital and distributions to stockholders. There is no difference
between net income and comprehensive income for the years ended November
30, 2001, 2000, and 1999.
Fourth Quarter Adjustments - The Company recorded in the fourth quarter of
the year ended November 30, 2001, 2000, and 1999, adjustments to properly
accrue for officer bonuses in the amount of $140,000, $24,000, and
$298,000, respectively.
F-11
Recent Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board ("FASB") issued Statements of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for
under the purchase method. For all business combinations for which the date
of acquisition is after June 30, 2001, SFAS 141 also establishes specific
criteria for the recognition of intangible assets separately from goodwill
and requires unallocated negative goodwill to be written off immediately as
an extraordinary gain, rather than deferred and amortized. SFAS 142 changes
the accounting for goodwill and other intangible assets after an
acquisition. The most significant changes made by SFAS 142 are: 1) goodwill
and intangible assets with indefinite lives will no longer be amortized; 2)
goodwill and intangible assets with indefinite lives must be tested for
impairment at least annually; and 3) the amortization period for intangible
assets with finite lives will no longer be limited to forty years. SFAS 142
is effective for fiscal years beginning after December 15, 2001, with early
application permitted in certain circumstances. The Company does not
believe that the adoption of SFAS 141 will have a material effect on its
financial position, results of operations, or cash flows. At this time, the
Company cannot estimate the effect of statement SFAS 142 on its financial
position, results of operations, or cash flows.
In June 2001, the FASB also approved for issuance SFAS 143 "Asset
Retirement Obligations." SFAS 143 establishes accounting requirements for
retirement obligations associated with tangible long-lived assets,
including (1) the timing of the liability recognition, (2) initial
measurement of the liability, (3) allocation of asset retirement cost to
expense, (4) subsequent measurement of the liability and (5) financial
statement disclosures. SFAS 143 requires that an asset retirement cost
should be capitalized as part of the cost of the related long-lived asset
and subsequently allocated to expense using a systematic and rational
method. The Company will adopt the statement effective no later than
January 1, 2003, as required. The transition adjustment resulting from the
adoption of SFAS 143 will be reported as a cumulative effect of a change in
accounting principle. The Company does not believe that the adoption of
this statement will have a material effect on its financial position,
results of operations, or cash flows.
In October 2001, the FASB also approved SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 replaces SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The new accounting model for long-lived assets to
be disposed of by sale applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB Opinion No. 30,
Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, for the disposal of segments of a business.
Statement 144 requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value
or include amounts for operating losses that have not yet occurred.
Statement 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from
the ongoing operations of the entity in a disposal transaction. The
provisions of Statement 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, are to
be applied prospectively. The Company does not believe that the adoption of
this statement will have a material effect on its financial position,
results of operations, or cash flows.
F-12
HIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. 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. (See Note 4.) 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:
Cash $ 191,000
Accounts receivable, net 806,000
Inventories 1,328,000
Other current assets 16,000
Property and equipment 178,000
Deferred tax assets 163,000
Goodwill 1,534,000
Non-compete agreement 150,000
Less:
Accounts payable 1,052,000
Other current liabilities 101,000
Line-of-credit 443,000
Long-term obligation 23,000
-----------------
Total purchase price $ 2,747,000
=================
The result of WPS' operations for the year ended November 30, 2001 and 2000
are included in the Company's consolidated statement of income. For the
year ended November 30, 1999, the results of WPS' operations are included
from May 25, 1999, the date of purchase, through November 30, 1999.
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 1999. The unaudited pro forma financial
F-13
data does not purport to be indicative of the results which actually would
have been obtained had the purchase occurred on the dates indicated or of
the results which may be obtained in the future.
Year Ended November 30, 1999
------------------------------------------------- ---------------------
------------------------------------------------- ---------------------
Net sales $ 29,327,944
Net income $ 363,486
Net income per common share:
Basic .04
Diluted .04
3. NOTE PAYABLE AND LONG-TERM DEBT:
-------------------------------
Line-of-Credit Agreement - CPS and its subsidiary have a line-of-credit
agreement with a bank, which expires on December 31, 2002. During fiscal
2001, the available line-of-credit was increased from $4,500,000 to
$5,000,000. The available loan amount is the lesser of $5,000,000 or the
computed borrowing base, as defined by the terms of the agreement. The
line-of-credit provides for interest at the bank's prime rate (5% at
November 30, 2001). 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, 2001, the Company was in compliance with
these covenants under the line-of-credit agreement.
As of November 30, 2001 and 2000, $1,815,000 and $2,381,000 were
outstanding under this line-of-credit agreement.
F-14
4. LONG-TERM DEBT:
--------------
Long-term debt consisted of the following:
November 30,
-------------------------------------------
------------------- -- --------------------
2001 2000
------------------- --------------------
-------------------
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. $ 963,000 $ 1,054,000
Promissory note dated May 24, 1999; monthly principal and interest
payments of approximately $23,000 through May 2004, including
interest at 8.125% per annum. Collateralized by substantially all of
the Company's business assets including accounts receivable,
inventories and property and equipment, excluding owned real estate.
500,000 700,000
---------------- -----------------
Total long-term debt 1,463,000 1,754,000
Less current maturities (298,000) (290,000)
---------------- -----------------
Long-term debt, less current maturities $ 1,165,000 $ 1,464,000
================ =================
Aggregate maturities of long-term debt at November 30, 2001 are as
follows:
2002 $ 298,000
2003 306,000
2004 215,000
2005 124,000
2006 134,000
Thereafter 386,000
-----------------
$ 1,463,000
F-15
5. CAPITAL LEASE OBLIGATIONS:
--------------------------
The following is a schedule by year of future non-cancelable minimum
payments required under the capital lease, together with the present value
of the related payments as of November 30, 2001.
2002 $ 208,000
2003 121,000
-----------------
329,000
Less amount representing interest (23,000)
-----------------
Present value of minimum lease payments 306,000
Less current maturities (189,000)
-----------------
Long-term capital lease obligation,
less current maturities $ 117,000
As of November 30, 2001, 2000, and 1999, the cost of the computer-related
equipment leased under the capital lease obligations were $244,000,
$662,000, and $446,000, net of accumulated amortization of $387,000,
$276,000, and $154,000.
6. COMMITMENTS:
-----------
Operating Leases - The Company leases its main warehouse under a
non-cancelable operating lease requiring monthly payments through February
2005. The Company has an option to purchase the related property at the end
of the initial ten-year term at a price approximating the market value at
that time, subject to certain conditions. The lease also provides for two
five-year options to extend the lease term.
The Company also leases vehicles, equipment and other warehouse space under
noncancellable operating leases.
Total lease expense was approximately $1,043,000, $908,000, and $648,000
for fiscal 2001, 2000, and 1999.
F-16
As of November 30, 2001 future annual minimum lease payments under
non-cancelable operating leases are as follows:
Years Ending November 30,
-----------------------------------------------------
-----------------------------------------------------
2002 $ 989,000
2003 925,000
2004 640,000
2005 208,000
2006 137,000
-----------------
$ 2,899,000
Employment Agreements - The Company has entered into employment agreements
that extend to May 31, 2006 with three officers. The employment agreements
set forth annual compensation to its officers of between $183,000 and
$185,000 each. Compensation is adjusted annually based on the cost of
living index plus seven percent per annum base increase; plus an eight and
one-half percent bonus of net pretax income exclusive of the
401(k)/profit-sharing contribution.
7. TAXES ON INCOME:
---------------
The provision for taxes on income for the years ended November 30, 2001,
2000, and 1999 consisted of the following:
2001 2000 1999
---------------- --------------- ---------------
---------------- --------------- ---------------
Current:
Federal $ 259,000 $ 188,000 $ 395,000
State 28,000 29,000 62,000
------------- ------------- -------------
287,000 217,000 457,000
Deferred (benefit):
Federal 18,000 99,000 (75,000)
State - 19,000 (7,000)
------------- ------------- -------------
18,000 118,000 (82,000)
------------- ------------- -------------
$ 305,000 $ 335,000 $ 375,000
============= ============= =============
F-17
A reconciliation of taxes on income at the federally statutory rate to the
effective tax rate is shown below:
Years Ended November 30,
---------------------------------------------------
2001 2000 1999
---------------- --------------- ---------------
---------------- --------------- ---------------
Income taxes computed at the federal
statutory rate $ 228,000 $ 243,000 $ 293,000
State income taxes, net of federal benefit 21,000 21,000 26,000
Amortization of goodwill 41,000 41,000 41,000
Other permanent differences 15,000 30,000 15,000
------------- ------------- -------------
Taxes on income $ 305,000 $ 335,000 $ 375,000
============= ============= =============
Temporary differences between the consolidated financial statements
carrying amounts and the tax basis of assets and liabilities that give rise
to significant portions of the net deferred tax assets at November 30, 2001
and 2000 relate to the following:
2001 2000
-------------------------------------- --------------------------------------
---------------- --- ----------------- ---------------- --- -----------------
Current Long-Term Current Long-Term
---------------- ----------------- ---------------- -----------------
---------------- ----------------- ---------------- -----------------
Inventories $ 97,000 $ - $ 96,000 $ -
Allowance for bad debt 54,000 - 41,000 -
Property and equipment - 5,000 - 10,000
Net operating loss
carryforwards - - - 26,000
Intangible assets - 29,000 - 30,000
Other - 2,000 - 2,000
------------- --------------- ------------- ---------------
Net deferred tax asset $ 151,000 $ 36,000 $ 137,000 $ 68,000
============= =============== ============= ===============
At November 30, 2001 and 2000, $151,000 and $137,000 of the net deferred
tax asset is classified as current and included in other current assets in
the accompanying consolidated balance sheets. The Company has recorded no
valuation allowance to offset the net deferred tax assets because
management believes that it is more likely than not that sufficient taxable
income will be generated in the foreseeable future to realize the net
deferred tax assets.
F-18
8. STOCKHOLDERS' EQUITY:
--------------------
Treasury Stock and Common Stock Options - On January 1, 2001, the Board of
Directors granted to the officers of the Company options to purchase
750,000 shares of treasury stock at $.20 per share through December 31,
2003. On July 1, 2001, the Board of Directors granted key employees of the
Company options to purchase 460,000 shares of treasury stock at $.30 per
share with 153,333 shares expiring on December 31, 2001 and the remaining
306,667 shares expiring on December 31, 2002. On January 1, 2000, the Board
of Directors granted to the officers of the Company options to purchase
600,000 shares of treasury stock at $0.25 per share through December 31,
2000. On January 1, 1999, the Board of Directors granted to the officers of
the Company options to purchase 600,000 shares of treasury stock at $0.1859
per share through December 31, 1999. The exercise price of these grants was
equal to the market price of the common stock at the date of grant.
During fiscal 2001, 2000, and 1999, the Company issued 600,000 shares,
600,000 shares, and 300,000 shares from treasury to its officers for cash
proceeds of $150,000, $112,000, and $67,000 in conjunction with the
officer's exercise of their options to purchase the treasury stock of the
Company. During the year ended November 30, 1999, the officers of the
Company purchased 185,287 shares from the Company's treasury at $0.16 for
gross proceeds of $30,000, which represented the market price of the shares
on the day the shares were purchased.
The Company acquired from non-affiliated stockholders 834,006 shares of its
common stock at an average price of $.32 per share during fiscal 2001 and
did not purchase any such shares during fiscal 2000. The Company acquired
from non-affiliate stockholders 119,239 shares of its common stock at
prices ranging from $.15 to $.20 per share during fiscal 1999.
F-19
The following table summarizes information on stock option activity:
Weighted
Average
Exercise Price Exercise Price
Number of Shares Per Share Per Share
----------------- ------------------ ----------------
----------------- ------------------ ----------------
Outstanding at December 1,
1998 600,000 $ .2228 $ .2228
Granted 600,000 .1859 .1859
Exercised (300,000) .2228 .2228
Expired (300,000) .2228 .2228
------------- ------------ ------------
Outstanding at November 30,
1999 600,000 .1859 .1859
Granted 600,000 .2500 .2500
Exercised (600,000) .1859 .1859
------------- ------------ ------------
Outstanding at November 30,
2000 600,000 .25 .25
Granted 1,210,000 .20 - .30 .23
Exercised (600,000) .25 .25
------------- ----------- ----------
Outstanding at November 30,
2001 1,210,000 $ .20 - .30 $ .23
============= ============== ==========
The following information summarizes stock options outstanding at November
30, 2001:
Outstanding Exercisable
- ------------------------------------------------------------------- ---------------------------------
- ------------------------------------------------------------------- ---------------------------------
Weighted Average
----------------------------------
Exercise Number Remaining Exercise Number Weighted
Contractual Average
Price Outstanding Life in Months Price Exercisable Exercise Price
- ------------ --------------- ---------------- --------------- --------------- ---------------
- ------------ --------------- ---------------- ---------------------------------------------------
$.20 750,000 25 $.20 750,000 $.20
$.30 460,000 9 $.30 460,000 $.30
The weighted average fair value of options granted during the year ended
November 30, 2001, 2000, and 1999 was $.10, $.07, and $.04, respectively.
The exercise price of all the options granted in 2001 exceeded the market
price of the stock on grant date. The exercise price of all the options
granted in 2000 and 1999 equaled the market price of the stock on grant
date.
F-20
SFAS No. 123 requires the Company to provide pro forma information
regarding net income and net income per share as if compensation costs for
the Company's stock option plans and other stock awards had been determined
in accordance with the fair value based method prescribed in SFAS No. 123.
The Company estimates the fair value of each stock award at the grant date
by using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2001 2000 1999
----------------- ---------------- -----------------
----------------- ---------------- -----------------
Dividend yield 0% 0% 0%
Volatility 110% 63% 69%
Risk free interest rate 6.0% 6.0% 4.5%
Expected life 1.75 years 1 year 1 year
Under the accounting provisions of SFAS No. 123, the Company's net income
per share would have been adjusted to the following pro forma amounts for
the years ended November 30:
2001 2000 1999
------------------ ---------------- -----------------
------------------ ---------------- -----------------
Net income:
As reported $ 365,000 $ 378,000 $ 488,000
Pro forma 241,000 338,000 456,000
Basic and diluted net income per common share:
As reported $ .04 $ .04 $ .05
Pro forma .02 .03 .05
9. EMPLOYEE BENEFITS:
-----------------
Profit Sharing Plan - The Company maintains a participant noncontributory
profit-sharing plan (the "Plan") for the benefit of all full-time employees
of the Company who are at least 18 years of age. Interests vest ratably
after two years and are fully vested after seven years. The Plan is funded
by the Company's contribution determined annually by the Board of
Directors. Contributions to the Plan were approximately $50,000, $42,000,
and $68,000 for the years ended November 30, 2001, 2000, and 1999.
F-21
401(k) Plan - The Company has adopted a Section 401(k) profit sharing plan,
which is available for employees who are at least 18 years of age and who
have completed one year of service with the Company. Participants in the
plan may contribute up to 15% of their compensation, subject to certain
limitations. Under the plan, the Company may make discretionary
contributions to be determined on a year-to-year basis and may make
discretionary matching contributions. Company matching contributions vest
ratably over 6 years. For the years ended November 30, 2001, 2000, and
1999, the Company contributed approximately $35,000, $40,000, and $31,000.
10. SIGNIFICANT SUPPLIERS:
---------------------
During fiscal 2001, the Company purchased approximately 16% of its products
from one manufacturer. During 2000, the Company purchased approximately 19%
and 10% of its products from two manufacturers and approximately 21% of its
products from one manufacturer in 1999. The products purchased can be
obtained from other competing manufacturers but not as a consolidated
product group.
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
-------------------------------------------------
Excluded from the statement of cash flows for the years ended November 30,
2000 and 1999 were the effects of certain noncash investing and financing
activities including the purchase of equipment in 2000 and 1999 of $216,000
and $162,000 with third party financing. In 2001, the Company had a sale of
property for a note receivable of $53,000.
The following table summarizes the net cash used in conjunction with the
1999 WPS acquisition:
1999
--------------------
--------------------
Working capital, other than cash acquired $ 997,000
Property and equipment 178,000
Deferred tax assets 163,000
Goodwill 1,534,000
Non-compete agreement 150,000
Acquired debt and long-term obligations (1,643,000)
-----------------
$ 1,379,000
Cash payments for interest were $394,000, $461,000, and $202,000 for the
years ended November 30, 2001, 2000, and 1999. Cash payments for income
taxes were $250,000, $455,000, and $234,000 for the years ended November
30, 2001, 2000, and 1999.
F-22
12. PROPERTY HELD FOR SALE:
----------------------
Effective February 18, 2000, the Company leased a new warehouse facility in
Casper, Wyoming and consequently moved out of its owned facility also
located in Casper, Wyoming. At November 30, 2000, this property, which
consists of land and office and warehouse space, has a carrying value of
$51,000 (cost of $143,000 less accumulated depreciation of $92,000) and is
included in other current assets on the Company's consolidated balance
sheet at November 30, 2000. The Company sold the property during fiscal
2001 for $58,000 of which $5,000 was received in cash and the remaining
$53,000 was received as a note receivable. This transaction generated a
gain net of commissions and other related expenses of approximately $2,000.
F-23
HIA, Inc. and Subsidiaries
Consolidated Financial Statements
For the Years Ended
November 30, 2001, 2000 and 1999