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.
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.
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.
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.
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.
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.
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data for each of the Company's last five fiscal years:
The following table sets forth selected unaudited consolidated financial data for each of the Company's last eight fiscal quarters:
Item 7.
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.
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.
Item 8. Financial Statements
The response to this item is submitted as a separate section of this report.
Item 9.
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.
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.
(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.
(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.
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:
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
(c) Aggregated Option/SAR Exercises and Last Fiscal Year and Year-End Option/ SAR Values --------------------------------------------------------------------------
Refer to Note 8 to the Consolidated Financial Statements for description of Stock Option Plan.
Item 12.
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.
(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
(2) Directors and Officers as a Group
(c) Changes in Control ------------------
None.
Item 13.
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.
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
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
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
See accompanying notes to consolidated financial statements.
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
HIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
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.
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.
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.
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.
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:
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
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.
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.
4. LONG-TERM DEBT: --------------
Long-term debt consisted of the following:
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
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.
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:
A reconciliation of taxes on income at the federally statutory rate to the effective tax rate is shown below:
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:
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.
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.
The following table summarizes information on stock option activity:
The following information summarizes stock options outstanding at November 30, 2001:
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.
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:
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:
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.
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:
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.
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.
HIA, Inc. and Subsidiaries
Consolidated Financial Statements For the Years Ended November 30, 2001, 2000 and 1999