Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission File Number - 1-10184
ABATIX CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1908110
- --------------------------------------------- ----------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
8201 EASTPOINT DRIVE, SUITE 500, DALLAS, TEXAS 75227
- ---------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 381-1146
----------------------------
Securities registered pursuant to Section 12 (b) of the Act: NONE
------------------
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK
------------------
Indicate by check mark whether the registrant (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 for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
1,711,148 shares of common stock, $.001 par value, were issued and outstanding
on March 20, 2000.
The aggregate market value of the Registrant's common stock held by
nonaffiliates of the Registrant as of the close of business on March 20, 2000
(an aggregate of 748,914 shares out of a total of 1,711,148 shares outstanding
at that time) was $1,451,021 computed by reference to the closing bid price of
$1 15/16 on March 20, 2000.
Portions of the Registrant's proxy statement for its 2000 annual meeting of
stockholders are incorporated into Part III, herein, by this reference thereto.
PART I
ITEM 1. BUSINESS
(a) DEVELOPMENT OF BUSINESS
Abatix Corp. (the "Company") markets and distributes personal protection and
safety equipment and durable and nondurable supplies predominantly based on
revenues, to the asbestos abatement industry. The Company also supplies these
products to the industrial safety and hazardous materials industries and,
combined with tools and tool supplies, to the construction industry.
The Company began operations in May 1983 as a supply company located in Dallas,
Texas, and was originally incorporated in Texas as T&T Supply Company, Inc. in
March 1984. Abatix was incorporated in Delaware on December 5, 1988 to effect
and complete an Agreement and Plan of Merger with T&T on December 9, 1988.
In March 1989, the Company completed its initial public offering of its
securities with the sale of 300,000 units, each consisting of two shares of
common stock and one redeemable common stock purchase warrant, at a price of
$5.00 per unit. Net proceeds of $1,135,251 were realized from the offering.
Pursuant to provisions of the initial public offering, the Company issued, on
March 2, 1990, a notice of redemption to the warrantholders with respect to all
of its outstanding redeemable common stock purchase warrants, which were
exercisable at $3.00 per share. An aggregate of 231,983 of such warrants was
exercised pursuant to the notice. In total, 290,983 warrants were exercised,
8,917 were redeemed and 100 were not presented, resulting in net proceeds of
$805,616. Proceeds from the exercise of the warrants enabled the Company to
increase its capital base and expand its operations.
On October 5, 1992, the Company entered into and consummated an Asset Purchase
Agreement with International Enviroguard Systems, Inc. ("IES"), a Texas
corporation, pursuant to which the Company assumed the operation of this company
and issued 250,000 shares of the Company's $.001 par value common stock. IES,
based in Corpus Christi, Texas, was a manufacturer of sorbents, primarily for
the hazardous materials industry. The Company transferred the assets purchased
and liabilities assumed to International Enviroguard Systems, Inc. ("IESI"), a
Delaware corporation wholly owned by the Company.
During 1994, because of increased purchasing power, the Company, through IESI,
began to import certain products sold through not only the Company's
distribution channels, but also other distribution companies not in direct
competition with Abatix. In December 1994, because of the significant use of
cash, the negative impact on earnings and the limited potential for progress
towards profitability, the Company announced plans to discontinue the sorbent
manufacturing business of IESI. This process was completed during the second
quarter of 1995; however, IESI continues the importation of products.
In December 1995, the Company opened its eighth facility in Las Vegas. Although
the Las Vegas operation handles the entire product line, its primary focus is
the construction tool industry.
2
Effective January 1, 1999, the Company consummated an Asset Purchase Agreement
with Keliher Hardware Company, a California corporation, pursuant to which the
Company assumed the operations of Keliher. Keliher, based in Los Angeles,
California, is an industrial supply distributor, primarily for the construction
and industrial markets. The estimated fair value of the assets acquired was
approximately $975,000. The aggregate purchase price was settled with the
assumption of certain liabilities (approximately $900,000), the issuance of
23,500 shares of the Company's $.001 par value common stock at a value of $3.375
per share and the remainder in cash. This acquisition has been accounted for
using the purchase method.
On April 6, 1999, the Company closed its Denver facility. The Denver facility
had sales of approximately $353,000, $1,449,000, and $1,076,000 for the years
ended December 31, 1999, 1998, and 1997, respectively. The Company did not incur
any significant charges related to the shutdown.
Effective June 1, 1999, the Company consummated an Asset Purchase Agreement with
North State Supply Co. of Phoenix, an Arizona corporation, pursuant to which the
Company assumed the operations of North State, a construction supply
distributor. The estimated fair value of the identifiable assets acquired was
approximately $1,800,000. The aggregate purchase price was settled with the
assumption of certain liabilities (approximately $785,000) and approximately
$2,100,000 in cash. This acquisition has been accounted for using the purchase
method.
The Company intends to expand and diversify the revenue base through the
expansion of product lines, hiring additional personnel, and additional
acquisitions. In addition, the Company is developing an e-commerce solution to
help solidify relationships with the existing customer base and expand its
geographic presence.
(b) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
Information about the Company's operating segments is included in the Notes to
the Consolidated Financial Statements at Item 14.
(c) NARRATIVE DESCRIPTION OF BUSINESS
ASBESTOS ABATEMENT INDUSTRY BACKGROUND
Between 1900 and the early 1970's, asbestos was extensively used for insulation
and fireproofing in industrial, commercial and governmental facilities as well
as private residences in the United States and in other industrialized
countries. In the mid-1980's it was estimated that in the United States,
approximately 20 percent of all buildings, excluding residences and schools,
contain friable asbestos-containing materials that are brittle, readily crumble
and are susceptible to the release of asbestos dust. Various diseases such as
asbestosis, lung cancer and mesothelioma, linked to the exposure to airborne
asbestos, and the presence of asbestos in insulation, service applications and
finishing materials have given rise to the concern about exposure to asbestos.
Public awareness of the health hazards posed by asbestos has increased as the
results of continuing medical studies have become widely known. Business and
other publications and studies have listed asbestos abatement as one of
America's critical problems, and legislation previously introduced to the U.S.
3
Congress refers to asbestos as "one of the most dangerous substances known to
science." A study performed in the 1980's predicted that as many as 225,000
Americans will die of asbestos related ailments before the year 2000 and that
there are approximately 50,000 to 75,000 known cases of asbestosis. Litigation
involving claimants exposed to asbestos has forced several firms to seek the
protection of the bankruptcy courts, and the volume of pending claims has
inundated state and Federal courts throughout the country, thus prompting many
commentators to propose legislative solutions.
The United States Environmental Protection Agency ("EPA") estimated, in a survey
conducted in 1984, that asbestos was present in 30 percent of the nation's
110,000 schools and in 20 percent of the nation's 3.6 million government and
commercial buildings. Maintenance, repair, renovation or other activities can
disturb asbestos-containing material and, if disturbed or damaged, asbestos
fibers become airborne and pose a hazard to building occupants and the
environment.
Prompted by such concerns, Congress, in 1984, authorized the EPA to spend $800
million for asbestos abatement in schools under the Asbestos School Hazard
Abatement Act. In October 1986, Congress passed the Asbestos Hazard Emergency
Response Act ("AHERA") which mandates inspections for asbestos, the adoption of
asbestos abatement plans and the removal of asbestos from schools and facilities
scheduled for demolition. In addition, state and local governments have also
adopted asbestos-related regulations.
Notwithstanding such legislative impetus and continued awareness of health
related hazards associated with asbestos, the budgetary constraints and the lack
of improvement in the industrial sectors continue to limit the number and scope
of asbestos abatement projects. However, if the U.S. economy remains strong and
commercial real estate demand increases, the Company believes the overall
industry will improve on a limited basis.
LEAD ABATEMENT INDUSTRY BACKGROUND
The hazards of lead-based paint have been known for many years; however, the
federal and state regulations requiring identification, disclosure and cleanup
have been minimal. In early 1996, the EPA and the Department of Housing and
Urban Development unveiled rules regarding lead-based paint in the residential
markets. These rules give homebuyers the right to test for lead-based paint
before any contracts are signed. In addition, although a landlord or home seller
is not required to test for lead-based paint, the rules do require disclosure of
a known lead hazard.
Many asbestos abatement contractors added lead abatement to their range of
services in an attempt to enter a market considered to be in its infancy. The
asbestos abatement contractors bring equipment, a trained labor force, and
experience working in a regulatory environment to the lead abatement industry.
To date, the Company has not experienced a significant increase in lead
abatement projects, although these rules and their opportunities encourage
management. Such rules could create a long-term positive impact on the Company
through expenditures for equipment and supplies to ensure the safe and proper
removal and disposal of lead paint.
4
SAFETY AND HAZARDOUS MATERIALS INDUSTRIES BACKGROUND
The EPA and the Occupational Safety and Health Administration ("OSHA"), together
over time, have established numerous rules and regulations governing
environmental protection and worker safety and health. The demand for supplies
and equipment by U.S. businesses and governments to meet these rules and
regulations has resulted in the creation of a multi-billion dollar industry.
As research identifies the degree of environmental or health risk associated
with various substances and working conditions, new rules and regulations can be
expected. These actions inevitably will require more expenditures for supplies
and equipment for handling, remediation and disposal of hazardous substances and
the creation of safe living and working conditions.
CONSTRUCTION TOOLS SUPPLY INDUSTRY BACKGROUND
Besides the normal hand and power tools, and associated consumable parts,
supplied to the construction industry, the EPA and OSHA have also established
certain rules and regulations governing the protection of the environment and
the protection of workers in this industry.
Currently, the Company supplies the construction tools industry in its Las
Vegas, Los Angeles, and Phoenix facilities. This industry is directly tied to
the local economies and more specifically, the real estate conditions within
those markets. The real estate market in the Las Vegas area is strong with
vacancy rates for commercial properties low and rental rates high and
construction of hotels and casinos strong. The condition of the real estate
industry in the Los Angeles and Phoenix areas remains stable.
GEOGRAPHIC DISTRIBUTION OF BUSINESS
With the acquisition of Keliher and North State, the Company distributes over
40,000 industrial, construction tool, personal protection, safety and hazardous
waste remediation products to approximately 6,500 customers primarily located in
the Southwest, Midwest and Pacific Coast. An estimated 36 percent of the
Company's sales include safety products, 30 percent include environmental
products, while construction tools and supplies account for 20 percent of its
sales. The remaining 14 percent of sales include miscellaneous products used by
asbestos and lead abatement contractors, construction contractors and industrial
manufacturing facilities.
Approximately 40 percent of the Company's products are sold to asbestos and lead
abatement contractors, 23 percent to the industrial safety market, 20 percent to
construction related firms and 17 percent to other firms, including hazardous
material contractors and other distributors. The Company believes a majority of
its sales for the foreseeable future will continue to be made to asbestos and
lead abatement contractors, project organizers and managers. At present, the
Company estimates its share of the asbestos abatement supply market to be
approximately 15 to 20 percent in the geographic markets served by the Company.
The Company considers its relationship with its customers to be excellent.
5
The Company maintains 24-hours-a-day/7-days-a-week telephone service for its
customers and typically delivers supplies and equipment within two or three days
of receipt of an order. The Company is prepared to provide products on an
expedited basis in response to requests from customers who require immediate
deliveries because their work is performed during non-business hours, involves
substantial costs because of the specialized labor crews involved or may arise
on short notice as a result of exigent conditions.
The Company maintains sales, distribution and warehouse centers in Los Angeles
and San Leandro, California, in Dallas and Houston, Texas, in Phoenix, Arizona,
in Las Vegas, Nevada, and in Kent, Washington.
EQUIPMENT AND SUPPLIES
The Company buys products from manufacturers based on orders received from its
customers as well as anticipated needs based on prior buying patterns, customer
inquiries and industry experiences. The Company maintains an inventory of
disposable products and commodities as well as low cost equipment items.
Approximately 82 percent of the Company's sales for 1999 and 1998 are of
disposable items and commodity products, which are sold to customers at unit
prices ranging from under $1.00 to $50.00. The balance of sales is attributable
to items consisting of lower priced equipment beginning at $20.00 to major
product assemblies such as decontamination trailers which retail for
approximately $15,000. The Company currently does not manufacture or lease any
products and does not perform any repairs thereon. The Company distributes, on a
limited basis, disposable items under its own private label.
Except with regard to certain specialty equipment associated with asbestos
abatement activities such as filtration, vacuum and pressure differential
systems, many of the Company's products can be used interchangeably within many
of the industries it supplies. Equipment distributed by the Company includes
manufacturers' product descriptions and instructions pertaining to use.
MARKETING
The Company's marketing program is conducted by its sales representatives, as
well as by senior management and the general managers at each of its operating
facilities. These sales representatives are compensated by a combination of
salary and/or commission, which is based upon negotiated sales standards.
BACKLOG
Substantially all the Company's products are shipped to customers within 48
hours following receipt of the order, therefore backlog is not material to the
Company's operations.
INFLATION
The inflation rate for the U.S. economy has averaged approximately 3 percent
annually over the past several years, with the 1999 inflation rate below 3
percent. The 2000 inflation rate is projected to be in the 2 to 3 percent range.
6
The Company believes inflation has not been a substantial concern nor will
inflation have a material impact to the Company's operations or profitability in
the near term, if it remains stable. In the event of increased inflation, the
Company anticipates it would be able to pass along increases in product costs to
its customers in the form of higher selling prices, thereby having little effect
on product margins.
ENVIRONMENTAL IMPACT
The Company distributes a variety of products in the asbestos abatement industry
all of which require the Company to maintain on file Material Safety Data Sheets
("MSDS") that inform all purchasers and users of any potential hazards which
could occur if the products spilled or leaked. Although the Company provides no
assurance, it reviews all products that could have a potential for environmental
hazards and tries to ensure the products are safe for on site storage and
distribution. The Company currently distributes no products it believes would
create an environmental hazard if leaked or spilled. The Company has safety
procedures in place to minimize any impact if a product were to leak or spill.
SEASONALITY
Historically, the asbestos abatement services and supply business has been
seasonal as a result of the substantial number of abatement contracts performed
in educational facilities during the summer months or during other vacation
periods. The Company believes the non-educational or private sector, which
includes the industrial, commercial and residential markets, is an area of
potential growth, and that seasonality is not a major characteristic of these
markets. In addition to the private sector asbestos business, the Company's
expansion of the construction, industrial safety and hazardous material
remediation supply markets have mitigated any seasonal impacts of government
asbestos projects on the Company's sales.
The Company's profitability historically increases in the second and third
quarters, relative to the first and fourth quarters. This increase is
attributable to the small increase in revenues during the second and third
quarters without a corresponding increase in costs, as fixed costs represent a
majority of total selling, general and administrative costs.
GOVERNMENT REGULATION
As a supplier of products manufactured by others to the asbestos and lead
abatement, construction tool, industrial safety and hazardous materials
industry, the Company's internal operations are not substantially affected by
federal laws and regulations including those promulgated by the EPA and OSHA.
Most of the contractors and other purchasers of the Company's equipment and
supplies are subject to various government regulations. Developments in
legislation and regulations affecting manufacturers and purchasers of the
Company's products could have a substantial effect on the Company.
7
COMPETITION
The asbestos and lead abatement, industrial safety, hazardous materials and
construction tools supply businesses are highly competitive. These markets are
served by a limited number of large national firms as well as many local firms,
none of who can be characterized as controlling the market. The Company competes
on the basis of price, delivery, credit arrangements and product variety and
quality. Substantial regulatory or economic barriers to entry do not
characterize the Company's business. Furthermore, additional companies,
including e-commerce based companies, could enter any of these industries and
may have greater financial, marketing and technical resources than the Company.
EMPLOYEES
As of February 29, 2000, the Company employed a total of 119 full time employees
including 4 executive officers, 9 managers, 59 administrative and marketing
personnel and 47 clerical and warehouse personnel. The Company believes
relations with its employees are excellent.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's headquarters are located in Dallas, Texas and occupy approximately
6,400 square feet of leased general office space. This lease expires in February
2005. As of December 31, 1999, the seven distribution facilities lease a total
of 172,571 square feet of general office and warehouse space. These facilities
range in size from 3,300 square feet to 33,600 with leases expiring between
February 2000 and February 2005.
ITEM 3. LEGAL PROCEEDINGS
In December 1998, the Company was named as a defendant in a lawsuit filed in the
District Court of Harris County, Texas (Asbestos Handlers, Inc. ("AHI") vs.
Abatix Environmental Corp., et al). The lawsuit alleges the Company and other
defendants together participated in the conversion and unauthorized sale of AHI
inventory with a resell value of approximately $28,000. The plaintiff seeks
actual damages, exemplary damages, interest and attorney's fees. The Company
purchased the inventory in good faith and believed that the manager of AHI's
Houston facility was representing AHI's interests. In late March 2000, a
settlement agreement was signed by all parties which required the Company to
replace the inventory in question.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) The Company's common stock trades on The Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol "ABIX". The following table sets forth the
high and low bid prices for the common stock for the periods indicated. These
quotations reflect prices between dealers, do not include retail mark-ups,
mark-downs or commissions and may not necessarily represent actual transactions.
Common Stock
Bid Price
-----------------------------
1998 High Low
- -------------------------- ------------ -----------
First Quarter $ 3 7/8 $ 2 5/8
Second Quarter 4 1/2 3 3/8
Third Quarter 4 1/4 2 3/4
Fourth Quarter 3 15/16 2 3/4
1999
- --------------------------
First Quarter $ 3 5/8 $ 2 1/2
Second Quarter 3 11/16 2 13/16
Third Quarter 3 3/16 2 1/4
Fourth Quarter 2 9/16 1 5/8
On March 20, 2000, the closing bid price for the common stock was $1 15/16.
(b) As of March 20, 2000, the approximate number of holders of record of the
Company's common stock was 700.
(c) The Company has never paid cash dividends on its common stock. The Company
presently intends to retain any future earnings to finance the expansion of its
business or repay borrowings on its lines of credit and does not anticipate that
any cash dividends will be paid in the foreseeable future. Future dividend
policy will depend on the Company's earnings, capital requirements, expansion
plans, financial conditions, and other relevant factors.
(d) At various times since November 1984, the Board of Directors authorized the
acquisition of the Company's common stock totaling 726,500 shares. As of March
20, 2000, the Company has acquired 726,166 shares and does not intend to acquire
any additional shares for the foreseeable future. Included in these shares is a
block of 102,600 shares purchased in March 1999, a block of 51,000 shares
purchased in October 1999, and 22,766 shares received in January 1999 from an
officer of the Company as payment for monies owed to the Company of
approximately $80,000. All of these shares are held as treasury shares.
9
ITEM 6. SELECTED FINANCIAL DATA
The tables below set forth, in summary form, selected financial data of the
Company. This data, which is not covered by the independent auditors' report,
should be read in conjunction with the consolidated financial statements and
notes thereto which are included elsewhere herein (amounts in thousands except
per share amounts).
Year Ended December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ----------- ----------
Selected Operating Results:
Net sales $ 44,230 $ 37,328 $ 34,955 $ 33,067 $ 27,632
Gross profit $ 11,871 $ 10,481 $ 9,651 $ 9,202 $ 7,977
Earnings from continuing operations
$ 461 $ 1,167 $ 841 $ 734 $ 813
Earnings from discontinued
operations, net of income taxes - - - 22 -
---------- ----------- ----------- ---------- -----------
Net earnings $ 461 $ 1,167 $ 841 $ 756 $ 813
========== =========== =========== ========== ===========
Basic earnings per common share:
Earnings from continuing operations $ .26 $ .60 $ .43 $ .35 $ .37
Earnings from discontinued operations - - - .01 -
---------- ----------- ----------- ---------- -----------
Net earnings $ .26 $ .60 $ .43 $ .36 $ .37
========== =========== =========== ========== ===========
Diluted earnings per common share:
Earnings from continuing operations $ .26 $ .60 $ .43 $ .35 $ .36
Earnings from discontinued operations - - - .01 -
---------- ----------- ----------- ---------- -----------
Net earnings $ .26 $ .60 $ .43 $ .36 $ .36
========== =========== =========== ========== ===========
Weighted average shares outstanding:
Basic 1,779 1,934 1,934 2,076 2,207
========== =========== =========== ========== ===========
Diluted 1,779 1,934 1,934 2,111 2,238
========== =========== =========== ========== ===========
As of December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Selected Balance Sheet Data:
Current assets $ 13,220 $ 9,918 $ 9,003 $ 9,722 $ 8,230
Current liabilities 9,086 4,408 4,676 6,219 4,659
Total assets 15,120 10,596 9,854 10,678 8,977
Total liabilities 9,086 4,408 4,676 6,219 4,659
Retained earnings 5,714 5,252 4,085 3,244 2,488
Stockholders' equity 6,033 6,187 5,178 4,459 4,318
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Consolidated net sales for the year ended December 31, 1999 improved 18 percent
to $44,230,000 from $37,328,000 in 1998. The Abatix operating segment net sales
grew 20 percent to $41,841,000 in 1999, and the IESI operating segment net sales
of $2,388,000 in 1999 remained constant with the prior year. The increase in
consolidated net sales was primarily the result of the acquisition of North
State in June 1999 and the January 1999 acquisition of Keliher. The increase in
sales resulting from these acquisitions was partially offset by a decline in
sales derived from customers in oil related industries. In addition, on April 6,
1999, the Company closed its Denver facility. The Denver facility had sales of
approximately $353,000 and $1,449,000 for the years ended December 31, 1999 and
1998, respectively. The Company will serve the Denver market primarily from its
Phoenix location.
Industry-wide sales of asbestos abatement products are expected to remain
relatively flat for the foreseeable future. However, the asbestos abatement
industry will likely diminish over time as asbestos containing materials, last
used in construction during 1977-1980, are removed from schools, office
buildings, homes and factories.
Sales to the hazardous materials remediation, industrial safety and construction
tools supply markets are increasing both in absolute amounts and as a percentage
of revenues to the Company. The acquisitions of Keliher and North State, other
potential acquisitions, additional salespeople and internal growth in these
markets should decrease the dependency of the Company on any one product,
geographic market or on sales to the asbestos abatement industry. In addition,
the Company is developing an e-commerce solution to help solidify relationships
with the existing customer base and expand its geographic presence.
Gross profit for 1999 of $11,871,000 increased 13 percent from 1998 gross profit
of $10,481,000 due to an increase in sales volume. As seen in previous years,
gross profit margins varied by location as a result of sales mix and local
market conditions. Reported as a percentage of sales, the Company's gross profit
margins were 27 percent and 28 percent for 1999 and 1998, respectively. The one
percent decline in gross profit margin was attributable to a change in the mix
of products being sold primarily as a result of the acquisitions of Keliher and
North State. Overall margins are expected to remain at their current levels in
2000. However, competitive pressures could negatively impact any and all efforts
by the Company to maintain or improve product margins.
Selling, general and administrative expenses increased 28 percent to $10,737,000
over 1998 expenses of $8,373,000. The increase was due to the inclusion of North
State and Keliher costs, as well as costs incurred, including facilities,
payroll, travel, and marketing costs, in preparation for expected growth. In
order to accommodate growth, the Company relocated several of its distribution
centers to larger facilities, which also included higher per square foot rental
rates. This increase in rent expense, coupled with the costs associated with
efforts to further enhance customer service contributed to the higher selling,
general and administrative expenses in 1999.
11
As a percent of sales, selling, general and administrative expenses were 24
percent for 1999 as compared to 22 percent for 1998. As a percent of sales,
these expenses are higher in 1999 due to the higher operating cost structure of
Keliher, expenses related to the integration of North State's operations, and
the costs associated with marketing initiatives to improve our internal growth
rate. As a result of higher rent expense, increased health care costs, costs to
integrate acquisitions, and costs related to the marketing initiatives, selling,
general and administrative expenses are expected to be in the 23 percent to 24
percent range for the year 2000. The Company did not incur any significant
charges related to the closing of its Denver facility.
Other expense, net, of $374,000 increased 70 percent from 1998 expense of
$220,000 primarily due to a 62 percent increase in interest expense. In addition
to a higher prime rate, borrowings used to finance the acquisition of North
State resulted in the higher interest expense. Since the Company's lines of
credit are tied to the prime rate, any increases in the prime rate would
negatively affect the Company's earnings. The prime rate has increased 50 basis
points since December 31, 1999.
Net earnings of $461,000 or $.26 per share in 1999 declined 60 percent from 1998
net earnings of $1,167,000 or $.60 per share. The decrease in net earnings was
due to a one percent decline in profit margins combined with higher selling,
general and administrative costs and increased interest expense.
The Company's credit policies remain stringent, and accounts receivable written
off are consistent with historical experience. Monthly average days of sales in
net accounts receivable remained consistent from 1998 to 1999. The Company
believes the reserve for doubtful accounts is adequate.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Consolidated net sales for the year ended December 31, 1998 increased 7 percent
to $37,328,000 from $34,955,000 in 1997. The Abatix operating segment net sales
grew 4 percent to $34,928,000 in 1998 and the IESI operating segment net sales
increased 70 percent to $2,400,000 in 1998. The increase in consolidated net
sales resulted from efforts to further expand and diversify the customer base.
The increase was also a result of the stable economic conditions in the
geographic regions serviced by the Company's facilities.
Gross profit in 1998 of $10,481,000 increased 9 percent from gross profit in
1997 of $9,651,000 due to increased sales volume. As expected, margins varied
from location to location due to sales mix and local market conditions. The
Company's gross profit margins, expressed as a percentage of sales, were
approximately 28 percent for 1998 and 1997.
Selling, general and administrative expenses for 1998 of $8,373,000 increased 5
percent over 1997 expenses of $7,953,000. The increase was attributable
primarily to higher employment costs as a result of additional marketing and
support personnel. Selling, general and administrative expenses were 22 percent
of sales for 1998 and 23 percent of sales for 1997.
12
Other expense, net, of $220,000 in 1998 decreased 40 percent from 1997 expense
of $365,000. This decrease was primarily due to lower interest expense resulting
from lower borrowings on the Company's working capital line of credit and lower
interest rates. The lower borrowings were due to improved receivables and
inventory management.
Net earnings in 1998 of $1,167,000 or $.60 per share increased $326,000 from net
earnings of $841,000 or $.43 per share in 1997. The 39 percent increase in net
earnings was primarily due to increased sales volume and lower interest expense,
partially offset by higher general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements historically result from the growth
of its accounts receivable and inventories, partially offset by increased
accounts payable and accrued expenses, associated with increases in sales volume
and/or the addition of new locations. Net cash provided by operations during
1999 of $559,000 resulted principally from the increase in accounts payable, the
net earnings and the adjustment for depreciation and amortization partially
offset by an increase in inventories and receivables. The increase in accounts
payable, inventories and receivables was primarily related to the increase in
revenue related to the acquisitions of Keliher and North State.
Cash requirements for non-operating activities during 1999 resulted primarily
from the acquisition of North State, the purchases of property and equipment,
primarily delivery vehicles and computer and communications equipment, amounting
to $445,000, and the repurchase of the Company's common stock totaling $612,000.
These cash requirements were partially offset by borrowings, net of the
repayments, on the working capital line of credit. The Company repurchased its
common stock because of the Board of Directors' belief that it was undervalued
in the marketplace. All of the cash requirements were funded by borrowings on
the Company's lines of credit.
Cash flow from operations for the entire year of 2000 is expected to be
positive, although at any given point, it may be negative. The development of
the Company's e-commerce solution, which is expected to be operational in
mid-2000, will require a significant capital outlay. This solution, which could
cost a total of $250,000 to implement, market and maintain, is expected to
provide customers a more efficient method of doing business with Abatix and
could provide some cost savings in the future, as well as expand the customer
base.
The Company maintains a $6,500,000 working capital line of credit at a
commercial lending institution that allows the Company to borrow up to 80
percent of the book value of eligible trade receivables plus the lesser of 40
percent of eligible inventory or $2,000,000. As of March 20, 2000, there are
advances outstanding under this credit facility of $5,726,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional $774,000
as of March 20, 2000. The Company also maintains a $550,000 capital equipment
credit facility providing for borrowings at 80 percent of cost on purchases. The
advances outstanding under this credit facility as of March 20, 2000 were
$198,000. Both credit facilities are payable on demand and bear a variable rate
of interest computed at the prime rate.
13
Management believes the Company's current credit facilities, together with cash
provided by operations, will be sufficient for its capital and liquidity
requirements for the next twelve months. In the event the Company pursues
additional acquisitions and is unable to use its common stock as payment, the
Company would need to negotiate with a lender to secure additional borrowings to
be used to acquire another company's assets.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, as amended by SFAS No. 137,
is effective for fiscal quarters of all fiscal years beginning after June 15,
2000 and establishes accounting and reporting standards for derivative
instruments. Management of the Company does not expect the adoption of SFAS No.
133 to have a material impact on the Company's financial condition or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Company's working capital and equipment lines of credit are variable
rate notes, the Company is exposed to interest rate risk. Based on the Company's
debt at December 31, 1999 and 1998, an increase of 100 basis points in the
United States prime rate would negatively impact the Company's net earnings by
$36,000 and $18,000, respectively.
Except for the historical information contained herein, the matters set forth in
this Form 10-K are forward looking and involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are the following: federal funding of environmental related projects,
general economic and commercial real estate conditions in the local markets,
changes in interest rates, inability to pass on price increases to customers,
unavailability of products, strong competition and loss of key personnel. In
addition, further increases in oil prices or shortages in oil supply could
significantly impact the Company's petroleum based products and its ability to
supply those products at a reasonable price. Furthermore, lack of acceptance of
our proposed e-commerce solution or the impairment of goodwill resulting from
the 1999 acquisitions could also cause actual results to differ materially.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data are included under
Item 14(a)(l) and (2) of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This Item 10 is incorporated herein by reference from the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission not
later than one hundred twenty (120) days after December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
This Item 11 is incorporated herein by reference from the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission not
later than one hundred twenty (120) days after December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This Item 12 is incorporated herein by reference from the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission not
later than one hundred twenty (120) days after December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This Item 13 is incorporated herein by reference from the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission not
later than one hundred twenty (120) days after December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2. CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The consolidated financial statements and financial statement schedule listed on
the index to consolidated financial statements on page F-l are filed as part of
this Form l0-K.
(b) REPORTS ON FORM 8-K
(i) Item 2. Acquisition of North State Supply Co. of Phoenix filed on
June 15, 1999.
(ii) Item 5. Change the name of the corporation to Abatix Corp. filed on
June 15, 1999.
(iii) Item 6. Resignations of Registrant's Directors, filed February 2, 2000.
(c) EXHIBITS
(1)(a) Form of Underwriting Agreement (filed as Exhibit (1)(a) to the
Registration Statement on Form S-18, filed February 9, 1989).
15
(1)(b) Form of Selected Dealer Agreement (filed as Exhibit (1)(b) to
the Registration Statement on Form S-18, filed
January 11, 1989).
(1)(c Warrant Solicitation Agent and Exercise Fee Agreement
(filed as Exhibit (l)(c) to the Report on Form 10-K for the
year ended December 31, 1989).
(2)(a) Agreement of Merger (filed as Exhibit (2) to the Registration
Statement on Form S-18, filed January 11, 1989).
(2)(b) Asset Purchase Agreement (filed as Exhibit (2)(b) to the Report
on Form 8-K, filed October 19, 1992).
(2)(c) Asset Purchase Agreement for Keliher Hardware Company
(filed as exhibit(2)(c) to the Report on Form 10-K for the year
ended December 31, 1998).
(2)(d) Asset Purchase Agreement for North State Supply Co.of Phoenix
(filed with Report on Form 8-K on June 15, 1999).
(3)(a)(1) Certificate of Incorporation (filed as Exhibit (3)(a)(1) to the
Registration Statement on Form S-18, filed January 11, 1989;
filed electronically as Exhibit 3(i)(a) to the Form 10-Q for the
quarter ended September 30, 1995, filed on November 9, 1995).
(3)(a)(2) Certificate of Amendment of Certificate of Incorporation (filed
as Exhibit (3)(a)(2) to the Registration Statement on Form S-18,
filed January 11, 1989; filed electronically as Exhibit 3(i)(b)
to the Form 10-Q for the quarter ended September 30, 1995, filed
on November 9, 1995).
(3)(a)(3) Certificate of Amendment of Certificate of Incorporation (filed
as Exhibit (3)(i)(c) to the Form 10-Q for the quarter ended
September 30, 1995, filed November 9, 1995; filed electronically
as Exhibit 3(i)(c) to the Form 10-Q for the quarter ended
September 30, 1995, filed on November 9, 1995).
(3)(b) Bylaws (filed as Exhibit (3)(b) to the Registration Statement on
Form S-18, filed January 11, 1989; filed electronically as
Exhibit 3(ii) to the Form 10-Q for the quarter ended
September 30, 1995, filed on November 9, 1995).
(4)(a) Specimen Certificate of Common Stock (filed as Exhibit (4)(a) to
the Registration Statement on Form S-18, filed January 8, 1989).
(4)(b) Specimen of Redeemable Common Stock Purchase Warrant(filed as
Exhibit (4)(b) to the Registration Statement on Form S-18,
filed February 9, 1989).
(4)(c) Form of Warrant to be sold to Culverwell & Co., Inc. (filed as
Exhibit (4)(c) to the Registration Statement on Form S-18,
filed February 9, 1989).
16
(4)(d) Warrant Agency Agreement between the Registrant and North
American Transfer Company (filed as Exhibit (4)(d) to the
Registration Statement on Form S-18, filed February 9, 1989).
(9)(a)(ii) Form of Escrow Agreement with State Street Bank and Trust
Company (filed as Exhibit (9)(a)(ii) to the Registration
Statement on Form S-18, filed January 11, 1989).
(10)(a) Employment Agreement with Terry W. Shaver (filed as Exhibit
(10)(a) to the Registration Statement on Form S-18,
filed January 11, 1989).
(10)(a)(i) Employment Agreement with Terry W. Shaver effective January 2,
1991 (filed as Exhibit (10)(a)(i) to the Report on Form 10-K for
the year ended December 31, 1990).
(10)(a)(ii) Employment Agreement with Terry W. Shaver effective January 4,
1993 (filed as Exhibit (10)(a)(ii) to the Report on Form 10-K
for the year ended December 31, 1992).
(10)(a)(iii) Employment Agreement with Terry W. Shaver effective January 1,
1995 (filed as Exhibit (10)(a)(iii) to the Report on Form 10-K
for the year ended December 31, 1994).
(10)(a)(iv) Employment Agreement with Terry W. Shaver effective January 1,
1997 (filed as Exhibit (10)(a)(iv) to the Report on Form 10-K
for the year ended December 31, 1996).
(10)(a)(v) Employment Agreement with Terry W. Shaver effective January 1,
1999 (filed as Exhibit (10)(a)(v) to the Report on Form 10-K for
the year ended December 31, 1998).
(10)(b) Employment Agreement with Gary L. Cox (filed as Exhibit (10)(b)
to the Registration Statement on Form S-18,
filed January 11, 1989).
(10)(b)(i) Employment Agreement with Gary L. Cox effective January 2, 1991
(filed as Exhibit (10)(b)(i) to the Report on Form 10-K for the
year ended December 31, 1990).
(10)(b)(ii) Employment Agreement with Gary L. Cox effective January 4, 1993
(filed as Exhibit (10)(b)(ii) to the Report on Form 10-K for the
year ended December 31, 1992).
(10)(b)(iii) Employment Agreement with Gary L. Cox effective January 1, 1995
(filed as Exhibit (10)(b)(iii) to the Report on Form 10-K for
the year ended December 31, 1994).
(10)(b)(iv) Employment Agreement with Gary L. Cox effective January 1, 1997
(filed as Exhibit (10)(b)(iv) to the Report on Form 10-K for the
year ended December 31, 1996).
17
(10)(b)(v) Employment Agreement with Gary L. Cox effective January 1, 1999
(filed as Exhibit (10(b)(iv) to the Report on Form 10-K for the
year ended December 31, 1998).
(10)(c) Revolving Credit Agreement with Texas American Bank/Duncanville,
N.A. (filed as Exhibit (10)(c) to the Registration Statement on
Form S-18, filed January 11, 1989).
(10)(d) Demand Credit Facility with Comerica Bank-Texas dated February
15, 1989 (filed as Exhibit (10)(d) to the Report on Form 10-Q
for the Quarter ended March 31, 1989, filed May 15,1989).
(10)(e) Demand Credit Facility with Comerica Bank-Texas dated June 15,
1989 (filed as Exhibit (10)(e) to the Report on Form 10-Q for
the Quarter ended June 30, 1989, filed August 11, 1989).
(10)(e)(i) Demand Credit Facility with Comerica Bank-Texas dated March 1,
1993 (filed as Exhibit (10)(e)(i) to the Report on Form 10-K for
the year ended December 31, 1992).
(10)(e)(ii) Demand Credit Facility with Comerica Bank-Texas extension,
renewal and increase dated June 1, 1993 (filed as Exhibit
(10)(e)(ii) to the Report on Form 10-K for the year ended
December 31, 1993).
(10)(e)(iii) Demand Credit Facility with Comerica Bank-Texas extension,
renewal and increase dated September 22, 1994 (filed as Exhibit
(10)(e)(iii) to the Report on Form 10-K for the year ended
December 31, 1994).
(10)(f) Employment Agreement with S. Stanley French effective
October 1, 1992 (filed as Exhibit (10)(f) to the Report on Form
8-K, filed October 19, 1992).
(22) Information Statement dated September 1, 1995 (filed as Exhibit
(22) to the Report on Form 10-K for the year ended
December 31, 1995).
(23) Consent of Independent Auditors.*
(27) Financial Data Schedule for the twelve months ended
December 31, 1999.*
* Filed herewith as part of the Company's electronic filing.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned; thereunto duly authorized, on the 27th day of March,
2000.
ABATIX CORP.
By: /S/ TERRY W. SHAVER
Terry W. Shaver
President, Chief Executive Officer
and Director (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant, and
in the capacities and on the date indicated.
SIGNATURES TITLE DATE
/S/ TERRY W. SHAVER President, Chief Executive Officer March 27, 2000
- ------------------- and Director
Terry W. Shaver (Principal Executive Officer)
/S/ GARY L. COX Executive Vice President, March 27, 2000
- --------------- Chief Operating Officer and Director
Gary L. Cox
/S/ DANIEL M. BIRNLEY Director March 27, 2000
- ---------------------
Daniel M. Birnley
/S/ DONALD N. BLACK Director March 27, 2000
- -------------------
Donald N. Black
/S/ FRANK J. CINATL Vice President, March 27, 2000
- ------------------- Chief Financial Officer
Frank J. Cinatl, IV and Director
(Principal Accounting Officer)
19
ABATIX CORP. AND SUBSIDIARY
Index to Consolidated Financial Statements
PAGE
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
II - Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998 and 1997 S-1
All other schedules have been omitted as the required information is
inapplicable or the information required is presented in the consolidated
financial statements or the notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Abatix Corp.:
We have audited the consolidated financial statements of Abatix Corp. and
subsidiary as listed in the accompanying index. In connection with our audits of
the consolidated financial statements we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 Abatix Corp. and
subsidiary as of December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1999 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Dallas, Texas
February 29, 2000
F-2
ABATIX CORP. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
ASSETS 1999 1998
-------------- --------------
Current assets:
Cash $ 106,793 $ 223,997
Trade accounts receivable, net of allowance for doubtful accounts of
$616,678 in 1999 and $514,696 in 1998 (note 4) 7,028,271 5,701,314
Inventories (note 4) 5,393,355 3,424,914
Prepaid expenses and other assets 368,583 424,865
Refundable income taxes 87,986 -
Deferred income taxes (note 5) 235,505 143,299
-------------- --------------
Total current assets 13,220,493 9,918,389
Receivables from officers and employees 7,750 79,505
Property and equipment, net (notes 3 and 4) 629,796 450,991
Deferred income taxes (note 5) 144,916 120,324
Goodwill, net of accumulated amortization of $91,751 1,134,880 -
Other assets 66,973 26,296
-------------- --------------
$ 15,204,808 $ 10,595,505
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank (note 4) $ 5,825,721 $ 2,854,206
Accounts payable 2,604,587 958,656
Accrued compensation 198,127 181,071
Other accrued expenses 542,959 414,416
-------------- --------------
Total current liabilities 9,171,394 4,408,349
-------------- --------------
Stockholders' equity (note 6):
Preferred stock - $1 par value, 500,000 shares authorized; none issued - -
Common stock - $.001 par value, 5,000,000 shares authorized; issued
2,437,314 shares in 1999 and 2,413,814 shares in 1998 2,437 2,414
Additional paid-in capital 2,574,560 2,498,508
Retained earnings 5,713,759 5,252,301
Treasury stock at cost, 726,166 common shares in 1999 and 517,700
common shares in 1998 (2,257,342) (1,566,067)
-------------- --------------
Total stockholders' equity 6,033,414 6,187,156
Commitments (note 10)
--------------- ---------------
$ 15,204,808 $ 10,595,505
=============== ===============
See accompanying notes to consolidated financial statements.
F-3
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---------------- ---------------- ----------------
Net sales $ 44,229,758 $ 37,327,629 $ 34,955,477
Cost of sales 32,358,985 26,846,279 25,304,902
---------------- ---------------- ----------------
Gross profit 11,870,773 10,481,350 9,650,575
Selling, general and administrative expenses (10,737,007) (8,373,030) (7,953,179)
---------------- ---------------- ----------------
Operating profit 1,133,766 2,108,320 1,697,396
Other income (expense):
Interest income 573 15,824 36,187
Interest expense (386,856) (238,706) (381,655)
Other, net 12,436 2,400 (19,215)
---------------- ---------------- ----------------
Earnings before income taxes 759,919 1,887,838 1,332,713
Income tax expense (note 5) (298,461) (720,429) (491,607)
---------------- ---------------- ----------------
Net earnings $ 461,458 $ 1,167,409 $ 841,106
================ ================ ================
Basic and diluted earnings per common share $ .26 $ .60 $ .43
================ ================ ================
Basic and diluted weighted average shares outstanding
(note 1(f)) 1,779,029 1,933,769 1,933,896
================ ================ ================
See accompanying notes to consolidated financial statements.
F-4
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
Common Stock Additional Treasury Stock
---------------------- Paid-in Retained ------------------------- Total
Shares Amount Capital Earnings Shares Amount Equity
---------- -------- ------------ ----------- ---------- ------------- -----------
Balance at December 31, 1996 2,381,314 $ 2,381 $ 2,407,603 $ 3,243,786 392,750 $ (1,195,247) $ 4,458,523
Purchase of treasury stock - - - - 83,500 (212,890) (212,890)
Exercise of stock options 32,500 33 90,905 - - - 90,938
Net earnings - - - 841,106 - - 841,106
---------- -------- ----------- ----------- ---------- ------------- -----------
Balance at December 31, 1997 2,413,814 2,414 2,498,508 4,084,892 476,250 (1,408,137) 5,177,677
Purchase of treasury stock - - - - 41,450 (157,930) (157,930)
Net earnings - - - 1,167,409 - - 1,167,409
---------- -------- ----------- ----------- ---------- ------------- -----------
Balance at December 31, 1998 2,413,814 2,414 2,498,508 5,252,301 517,700 (1,566,067) 6,187,156
Stock issued for the
Purchase of Keliher
Hardware (note 2) 23,500 23 76,052 - - - 76,075
Purchase of treasury
stock - - - - 185,700 (611,594) (611,594)
Stock received to repay
debt from officer - - - - 22,766 (79,681) (79,681)
Net earnings - - - 461,458 - - 461,458
---------- -------- ----------- ----------- ---------- -------------- -----------
Balance at December 31, 1999 2,437,314 $ 2,437 $ 2,574,560 $ 5,713,759 726,166 $ (2,257,342) $6,033,414
========== ======== =========== =========== ========== ============== ===========
See accompanying notes to consolidated financial statements.
F-5
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------------- ----------------- -----------------
Cash flows from operating activities:
Net earnings $ 461,458 $ 1,167,409 $ 841,106
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 469,032 367,789 378,076
Deferred income taxes (116,798) (5,626) (74,106)
Loss (gain) on disposal of assets (19,609) (3,310) 2,681
Changes in assets and liabilities, net of
business acquisitions:
Receivables (287,808) (933,035) 527,570
Inventories (384,281) 113,441 (97,798)
Refundable income taxes (87,986) - 285,784
Prepaid expenses and other assets 64,968 (175,439) 36,365
Accounts payable 556,542 (271,451) 163,680
Accrued expenses (96,221) 159,755 69,645
----------------- ----------------- -----------------
Net cash provided by operating activities 559,297 419,533 2,133,003
----------------- ----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (444,642) (191,850) (285,900)
Proceeds from sale of property and equipment 35,750 8,500 36,666
Business acquisitions, net of cash acquired (note 2) (2,160,574) - -
Advances to officers and employees (63,897) (40,609) (25,647)
Collection of advances to officers and employees 60,170 34,833 28,265
Other assets, primarily deposits (30,515) 3,100 6,426
----------------- ----------------- -----------------
Net cash used in investing activities (2,603,708) (186,026) (240,190)
----------------- ----------------- -----------------
Cash flows from financing activities:
Exercise of stock options - - 90,938
Purchase of treasury stock (611,594) (157,930) (212,890)
Borrowings on notes payable to bank 19,927,926 36,258,601 34,600,365
Repayments on notes payable to bank (17,389,125) (36,415,128) (36,376,567)
----------------- ----------------- -----------------
Net cash provided by (used in) financing activities 1,927,207 (314,457) (1,898,154)
----------------- ----------------- -----------------
Net decrease in cash (117,204) (80,950) (5,341)
Cash at beginning of year 223,997 304,947 310,288
----------------- ----------------- -----------------
Cash at end of year $ 106,793 $ 223,997 $ 304,947
================= ================= =================
See accompanying notes to consolidated financial statements.
F-6
ABATIX CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
Abatix Corp. ("Abatix") and subsidiary (collectively, the
"Company") market and distribute personal protection and safety
equipment and durable and nondurable supplies predominantly, based
on revenues, to the asbestos abatement industry. The Company also
supplies these products to the industrial safety and hazardous
materials industries and, combined with tools and tool supplies,
to the construction industry. At December 31, 1999, the Company
operated seven distribution centers in five states. The Company's
wholly-owned subsidiary, International Enviroguard Systems, Inc.
("IESI"), a Delaware corporation, imports disposable products sold
through the Company's distribution channels and through other
distributors.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The accompanying consolidated financial statements include the
accounts of Abatix and IESI. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain
prior year amounts have been reclassified for consistency in
presentation.
(b) INVENTORIES
Inventories consist of materials and equipment for resale and are
stated at the lower of cost, determined by a method that
approximates the first-in, first-out method, or market.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation for
financial statement purposes is provided by the straight-line
method over the estimated useful lives of the depreciable
properties.
(d) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate the carrying amount of
an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
F-7
ABATIX CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
(e) REVENUE RECOGNITION
Revenue is recognized when the goods are shipped.
(f) EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average
number of common shares outstanding during each year, while
diluted earnings per share includes the effects of all dilutive
potential common shares. As of December 31, 1999, 1998 and 1997,
there were no dilutive securities outstanding. Basic earnings per
share and diluted earnings per share amounts were equal for the
years ended December 31, 1999, 1998, and 1997. Options to purchase
67,500 shares of common stock at various prices were outstanding
during 1997, but were not included in the computation of diluted
earnings per share because the options' exercise price was greater
than the average market price of the common stock. These options
either were exercised or expired on December 31, 1997.
(g) STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, the Company
considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. The
Company held no cash equivalents at December 31, 1999 or 1998.
The Company paid interest of $362,249, $247,298, $383,735 in 1999,
1998, and 1997, respectively, and income taxes of $637,957,
$667,963, $524,635 in 1999, 1998, and 1997, respectively. In 1999,
the Company issued stock for a business acquisition at a value of
$76,075 and received stock from an officer to repay debt in the
amount of $79,681.
(h) INCOME TAXES
The Company accounts for income taxes using the asset and
liability method. Under this method the Company records deferred
income taxes for the temporary differences between the financial
reporting basis and the tax basis of assets and liabilities at
enacted tax rates expected to be in effect when such amounts are
realized or settled. The resulting deferred tax liabilities and
assets are adjusted to reflect changes in tax laws or rates in the
period that includes the enactment date.
F-8
ABATIX CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(i) GOODWILL
Goodwill represents the excess of purchase price over the fair
value of net assets acquired. Amortization is provided using the
straight-line method over estimated useful lives of three and ten
years.
The Company assesses the recoverability of goodwill by
determining whether the amortization of the asset balance over
its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of
impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate commensurate
with that attainable by the Company for secured borrowings.
(2) ACQUISITION AND DISPOSITION OF ASSETS
Effective January 1, 1999, the Company consummated an asset purchase agreement
with Keliher Hardware Company, a California corporation, pursuant to which the
Company assumed the operations of Keliher. Keliher, based in Los Angeles,
California, is an industrial supply distributor, primarily for the construction
and industrial markets. The estimated fair value of the assets acquired was
approximately $975,000. The aggregate purchase price was settled with the
assumption of certain liabilities (approximately $900,000), the issuance of
23,500 shares of the Company's $.001 par value common stock at a value of $3.375
per share and $35,000 in cash. This acquisition has been accounted for using the
purchase method of accounting and, accordingly, results of Keliher's operations
are included in the Company's consolidated financial statements since the
acquisition date. The excess of the purchase price over the fair value of net
assets acquired is being amortized on a straight-line basis over three years.
On April 6, 1999, the Company closed its Denver distribution and sales center.
The Denver facility had sales of $353,000, $1,449,000, and $1,076,000 for the
years ended December 31, 1999, 1998, and 1997, respectively. Expenses related to
the closing of this location were not material.
Effective June 1, 1999, the Company consummated an asset purchase agreement with
North State Supply Co. of Phoenix, an Arizona corporation, pursuant to which the
Company assumed the operations of North State, a construction supply
distributor. The estimated fair value of the assets acquired was approximately
$1,800,000. The aggregate purchase price was settled with the assumption of
certain liabilities (approximately $785,000) and approximately $2,100,000 in
cash. This acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of North State's operations are
included in the Company's consolidated financial statements since the
acquisition date. The excess of the purchase price over the fair value of net
assets acquired is being amortized on a straight-line basis over ten years.
F-9
ABATIX CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Unaudited pro forma results, as if the Keliher and North State acquisitions had
occurred at the beginning of 1998, are as follows:
For the years ended
December 31,
---------------------------------------
1999 1998
------------------ ----------------
Net sales $ 46,741,163 $ 46,675,077
================== ================
Net income $ 484,561 $ 1,039,893
================== ================
Basic and diluted earnings per share $ .27 $ .53
================== ================
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1999 and 1998
follows:
Estimated
Useful Life 1999 1998
--------------- -------------- --------------
Furniture and equipment 3 - 10 years $ 2,183,305 $ 1,767,738
Transportation equipment 3 - 5 years 489,917 423,890
Leasehold improvements 3 - 5 years 85,141 71,715
-------------- --------------
2,758,363 2,263,343
Less accumulated depreciation and
amortization 2,128,567 1,812,352
-------------- --------------
Net property and equipment $ 629,796 $ 450,991
============== ==============
(4) NOTES PAYABLE TO BANK
At December 31, 1999, the Company had two lines of credit with a bank
that are due on demand. A working capital facility allows the Company
to borrow up to 80 percent of the book value of eligible trade
receivables plus the lesser of 40 percent of eligible inventory or
$2,000,000, up to a maximum of $6,500,000. Under this formula, the
Company had the ability to borrow $6,500,000 at December 31, 1999, of
which approximately $5,595,000 was used. A capital equipment facility
provides for individual borrowings, aggregating up to $550,000, at 80
percent of the purchased equipment's cost. At December 31, 1999, the
Company had borrowed approximately $230,000 on this facility. Each
borrowing under the capital equipment line is due on the earlier of
demand or in terms ranging from thirty-six to sixty monthly
installments of principal and interest.
F-10
ABATIX CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
During 1998, the Company negotiated a one-quarter of one percent
reduction in its rate, thereby reducing the rate of interest on its
agreements to prime. As of December 31, 1999 and 1998, the Company's
rate of interest on these agreements was 8.5 percent and 7.75 percent,
respectively. These credit facilities are secured by accounts
receivable, inventories, and equipment.
(5) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1999,
1998 and 1997 consists of:
1999 1998 1997
--------------- --------------- ---------------
Current:
Federal $ 342,903 $ 605,621 $ 483,323
State 72,355 120,433 82,390
Deferred:
Federal (88,946) (5,766) (63,253)
State (27,851) 141 (10,853)
--------------- --------------- ---------------
Total income tax expense $ 298,461 $ 720,429 $ 491,607
=============== =============== ===============
A reconciliation of expected federal income tax expense (based on the
U.S. corporate income tax rate of 34 percent) to actual income tax
expense for the years ended December 31, 1999, 1998 and 1997 follows:
1999 1998 1997
-------------- -------------- --------------
Expected income tax expense $ 258,372 $ 641,865 $ 453,122
State income taxes, net of related federal
tax benefit 29,373 79,579 47,215
Nondeductible meals and entertainment
expense 10,667 6,479 11,119
Other 49 (7,494) (19,849)
-------------- -------------- --------------
Actual income tax expense $ 298,461 $ 720,429 $ 491,607
============== ============== ==============
F-11
ABATIX CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31,
1999 and 1998 follow:
1999 1998
--------------- ---------------
Deferred tax assets:
Allowance for doubtful accounts $ 238,801 $ 196,283
Inventory reserve 36,637 25,921
Goodwill, due to differences in
amortization periods 16,982 -
Property and equipment, principally due
to differences in depreciation 127,933 120,324
Other 7,466 -
--------------- ---------------
Total gross deferred tax assets 427,819 342,528
Deferred tax liabilities - prepaid expenses (47,398) (78,905)
--------------- ---------------
Net deferred tax assets $ 380,421 $ 263,623
=============== ===============
Management has determined, based on the Company's history of prior
operating earnings and its expectations for the future, operating
earnings will more likely than not be sufficient to realize the benefit
of the deferred tax assets. Accordingly, the Company has not provided a
valuation allowance for deferred tax assets in any period presented.
(6) STOCKHOLDERS' EQUITY
In 1994, the Company adopted a stock option plan (the "Plan") pursuant
to which the Company's Board of Directors could grant stock options to
officers and key employees. The Plan authorized grants of up to 140,000
shares of authorized but unissued common stock. Stock options were
granted with an exercise price equal to or greater than the stock's
fair market value at the date of grant. All options vested on the grant
date. At December 31, 1999, 1998, and 1997, there were no options
outstanding or shares available for grant under the Plan.
The Company applies Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company recognized
compensation cost based on the fair value at the grant date for its
stock options under Statement 123, there would be no effect on the
Company's net earnings and earnings per share in 1999, 1998 and 1997.
The Board of Directors has authorized the acquisition of up to 726,500
shares of the Company's common stock. As of February 29, 2000, the
Company has acquired 726,166 shares and does not intend to acquire any
additional shares for the foreseeable future. Included in these shares
is a block of 102,600 shares purchased in March 1999, a block of 51,000
F-12
ABATIX CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
shares purchased in October 1999, and 22,766 shares received from an
officer of the Company in January 1999 as payment for monies owed to
the Company of approximately $80,000. All of these shares are held as
treasury shares.
(7) BENEFIT PLANS
The Company has a 401(k) profit sharing plan, under which eligible
employees may request the Company to deduct and contribute a portion of
their salary to the plan. The Company may also, at its discretion,
match a portion of employee contributions to the plan. Contributions by
the Company to the 401(k) plan aggregated $42,366, $38,154, and $59,195
during 1999, 1998, and 1997, respectively.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported amounts of financial instruments such as cash, accounts
receivable, accounts payable and accrued expenses approximate fair
value because of their short maturity. The carrying value of notes
payable to bank approximates fair value because these instruments bear
interest at current market rates.
(9) SEGMENT INFORMATION
Identification of operating segments is based principally upon
differences in the types and distribution channel of products. The
Company's reportable segments consist of Abatix and IESI. The Abatix
operating segment includes seven aggregated branches, principally
engaged in distributing environmental, safety and construction supplies
to contractors and industrial manufacturing facilities in the western
half of the United States and the Company's corporate operations. The
IESI operating segment, which consists of the Company's wholly-owned
subsidiary, International Enviroguard Systems, Inc., is engaged in the
wholesale distribution of disposable clothing to companies similar to,
and including, Abatix. The IESI operating segment distributes products
throughout the United States.
The accounting policies of the operating segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements.
The Company evaluates the performance of its operating segments based
on income before income taxes and accounting changes, and after an
allocation of corporate expenses. Intersegment sales are at agreed upon
pricing and intersegment profits are eliminated in consolidation.
F-13
ABATIX CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Summarized financial information concerning the Company's reportable
segments is shown in the following table. There are no other
significant noncash items.
Abatix IESI Totals
------------- ------------- -------------
1999
- ----------------------------------------------
Sales from external customers $ 41,841,367 $ 2,388,391 $ 44,229,758
Intersegment sales - 876,734 876,734
Interest income 573 - 573
Interest expense 386,856 - 386,856
Depreciation and amortization 461,924 7,108 469,032
Segment profit 478,441 292,862 771,303
Segment assets 15,056,123 712,996 15,769,119
Capital expenditures 439,941 4,701 444,642
1998
- ----------------------------------------------
Sales from external customers $ 34,928,236 $ 2,399,393 $ 37,327,629
Intersegment sales - 872,332 872,332
Interest income 15,767 57 15,824
Interest expense 238,706 - 238,706
Depreciation and amortization 363,089 4,700 367,789
Segment profit 1,585,546 305,333 1,890,879
Segment assets 10,706,982 993,048 11,700,030
Capital expenditures 177,670 14,180 191,850
1997
- ----------------------------------------------
Sales from external customers $ 33,543,501 $ 1,411,976 $ 34,955,477
Intersegment sales - 822,721 822,721
Interest income 36,001 186 36,187
Interest expense 381,655 - 381,655
Depreciation and amortization 374,940 3,136 378,076
Segment profit 1,155,745 182,471 1,338,216
Segment assets 10,011,038 997,816 11,008,854
Capital expenditures 285,029 871 285,900
F-14
ABATIX CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Below is a reconciliation of (i) total segment profit to earnings
before income taxes on the Consolidated Statements of Operations, and
(ii) total segment assets to total assets on the Consolidated Balance
Sheets for all periods presented. The sales from external customers
represent the net sales on the Consolidated Statements of Operations.
1999 1998 1997
----------------- ----------------- -----------------
Profit for reportable segments $ 771,303 $ 1,890,879 $ 1,338,216
Elimination of intersegment profits (11,384) (3,041) (5,503)
----------------- ----------------- -----------------
Earnings before income taxes $ 759,919 $ 1,887,838 $ 1,332,713
================= ================= =================
Total assets for reportable segments $ 15,769,119 $ 11,700,030 $ 11,008,854
Elimination of intersegment assets (649,594) (1,104,525) (1,154,605)
----------------- ----------------- -----------------
Total assets $ 15,119,525 $ 10,595,505 $ $9,854,249
================= ================= =================
The Company's sales, substantially all of which are on an unsecured
credit basis, are to various customers from its distribution centers in
Texas, California, Arizona, Washington and Nevada. The Company
evaluates credit risks on an individual basis before extending credit
to its customers and it believes the allowance for doubtful accounts
adequately provides for loss on uncollectible accounts. During 1999,
1998 and 1997, no single customer accounted for more than 10 percent of
net sales, although sales to asbestos and lead abatement contractors
were approximately 40 percent, 48 percent, and 48 percent of
consolidated net sales in 1999, 1998, and 1997, respectively. A
reduction in spending on asbestos or lead abatement projects could
significantly impact sales.
Although no vendor accounted for more than 8 percent of purchases, one
product class accounted for approximately 16 percent, 19 percent, and
18 percent of net sales in 1999, 1998, and 1997, respectively. A major
component of these products is petroleum. Further increases in oil
prices or shortages in supply could significantly impact sales and the
Company's ability to supply its customers with certain products at a
reasonable price.
F-15
ABATIX CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) COMMITMENTS
The Company leases warehouse and office facilities under long-term
noncancelable operating leases expiring at various dates through
February 2005. The following is a schedule of future minimum lease
payments under these leases as of December 31, 1999:
2000 $ 959,963
2001 766,389
2002 666,756
2003 544,192
2004 443,538
Thereafter 19,367
--------------
$ 3,400,205
==============
Rental expense under operating leases for the years ended December 31,
1999, 1998 and 1997 was $776,435, $589,658, and $549,612, respectively.
The Company has employment agreements with seven key employees. The
agreements provide for minimum aggregate cash compensation as follows:
2000 $ 782,634
2001 284,700
2002 78,300
--------------
$ 1,145,634
==============
F-16
SCHEDULE II
ABATIX CORP. AND SUBSIDIARY
Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998 and 1997
Additions
Balance at charged
beginning of to costs and Balance at
year expenses Other Deductions end of year
-------------- --------------- ------------- ------------- ------------
Year ended December 31:
Allowance for Doubtful Accounts:
1999 $ 514,696 125,370 - 23,388 A $ 616,678
============== =============== ============ ============= ============
1998 $ 495,092 114,515 - 94,911 A $ 514,696
============== =============== ============ ============= ============
1997 $ 376,117 215,396 - 96,421 A $ 495,092
============== =============== ============ ============= ============
Inventory Reserve:
1999 $ 69,321 89,823 109,993 B 63,915 $ 205,222
============== =============== ============ ============= ============
1998 $ - 69,321 - - $ 69,321
============== =============== ============ ============= ============
A Represents the write-off of uncollectible accounts.
B Represents the reserve required to state inventory acquired from Keliher at
fair value.
S-1