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, 2000 Commission File Number - 1-10184
ABATIX CORP.
(Exact name of registrant as specified in its charter)
Delaware 75-1908110
- ---------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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. [X]
1,711,148 shares of common stock, $.001 par value, were issued and outstanding
on March 14, 2001.
The aggregate market value of the Registrant's common stock held by
nonaffiliates of the Registrant as of the close of business on March 14, 2001
(an aggregate of 748,914 shares out of a total of 1,711,148 shares outstanding
at that time) was $1,310,600 computed by reference to the closing bid price of
$1.750 on March 14, 2001
Portions of the Registrant's proxy statement for its 2001 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.
During 1994, because of increased purchasing power, the Company, through its
wholly owned subsidiary International Enviroguard Systems, Inc. ("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.
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 $3.45
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 and $1,449,000 for the years ended December
31, 1999 and 1998, 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, if appropriate. In addition, the Company is developing an
e-commerce solution to help solidify relationships with the existing customer
base and expand its geographic presence.
2
(b) FINANCIAL INFORMATION AB0UT 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
Based on 2000 sales, approximately 33 percent of the Company's products are sold
to asbestos and lead abatement contractors, 26 percent to construction related
firms, 21 percent to the industrial safety market, and 20 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 although these sales should continue to decline as a
percentage of overall revenues. 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.
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.
Congress refers to asbestos as "one of the most dangerous substances known to
science." 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.
3
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, 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.
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 being 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; however, such rules create a potential 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.
MOLD REMEDIATION INDUSTRY BACKGROUND
Although mold remediation has been around for years, recent litigation
surrounding the health hazards of human exposure to mold has created public
awareness and is forcing property owners and the construction industry to deal
with the problem. To grow, mold needs moisture, a carbon source (wood,
plasterboard, natural fibers, any organic matter), lack of air movement and lack
of light. The energy crisis in the 1970's inspired many energy efficiency
programs, including the building of structures that promoted less air movement.
When a moisture source is introduced, the conditions are ripe for mold growth.
Although there are approximately 100,000 species of fungi, currently about 100
are considered to be pathogenic to humans. Currently, the regulations concerning
mold levels or remediation are few; however, there has been some discussion at
the EPA and state government levels about defining the level of mold spores
considered to be hazardous.
Many asbestos abatement contractors added mold remediation to their range of
services. Beginning in late 2000 the Company began to see activity from this
industry and anticipates continued growth for the immediate future.
4
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 and on a limited basis from its other
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 Company's other markets
remain stable.
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 expenditure for supplies
and equipment for handling, remediation and disposal of hazardous substances and
the creation of safe living and working conditions.
GEOGRAPHIC DISTRIBUTION OF BUSINESS
With the acquisition of Keliher and North State in 1999, the Company distributes
over 49,000 industrial, construction tool, personal protection, safety and
hazardous waste remediation products to approximately 7,400 customers primarily
located in the Southwest, Midwest and Pacific Coast.
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
An estimated 36 percent of the Company's sales include safety products, 31
percent included construction tools and supplies, while environmental products
accounted for 24 percent of its sales. The remaining 9 percent of sales included
miscellaneous products used by asbestos and lead abatement contractors,
construction contractors and industrial manufacturing facilities.
5
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 78 percent of the Company's sales for 2000 and 1999 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 leaders at each of its operating
facilities. The sales representatives are compensated by a combination of salary
and/or commission, which is based upon negotiated sales standards.
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.
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 2000 inflation rate being 3.4
percent. The 2001 inflation rate is projected to be in the 3 to 4 percent range.
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.
6
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 seasonality is not a major characteristic in the
non-educational or private sector, which includes the industrial, commercial and
residential 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 most 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 28, 2001, the Company employed a total of 125 full time employees
including 3 executive officers, 11 managers, 63 administrative and marketing
personnel and 48 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, 2000, the seven distribution facilities lease a total
of 143,495 square feet of general office and warehouse space. These facilities
range in size from 9,000 square feet to 33,600 with leases expiring between
November 2001 and February 2005.
ITEM 3. LEGAL PROCEEDINGS
In January and February 2000, the Company airfreighted products to two
customers, which contained chemicals classified by the Department of
Transportation as hazardous material. During transportation, some of these
chemicals leaked. On June 15, 2000, the Federal Aviation Administration ("FAA")
notified the Company of their findings for the first incident which indicated
the Company did not comply with the Department of Transportation's Hazardous
Material Regulations. In October 2000, the FAA proposed, and the Company
accepted, $25,000 civil penalty for the first incident. The settlement amount,
less the initial payment of $7,000, is accrued at December 31, 2000. The Company
resolved the second incident with the FAA; no damages or penalties were
assessed.
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
-----------------------------
2000 High Low
- -------------------------- ------------ -----------
First Quarter $ 3.375 $ 1.000
Second Quarter 1.844 0.250
Third Quarter 2.500 1.344
Fourth Quarter 2.250 1.063
1999
- --------------------------
First Quarter $ 3.625 $ 2.500
Second Quarter 3.688 2.813
Third Quarter 3.188 2.250
Fourth Quarter 2.563 1.625
On March 14, 2001, the closing bid price for the common stock was $1.750.
(b) As of March 14, 2001, 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
14, 2001, 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 $79,681. 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,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- ----------- ----------- ---------- -----------
Selected Operating Results:
Net sales $ 47,987 $ 44,576 $ 37,684 $ 34,341 $ 33,367
Gross profit $ 12,982 $ 12,217 $ 10,837 $ 10,037 $ 9,502
Earnings from continuing operations $ 598 $ 461 $ 1,167 $ 841 $ 734
Earnings from discontinued
operations, net of income taxes - - - - 22
--------- ----------- ----------- ---------- -----------
Net earnings $ 598 $ 461 $ 1,167 $ 841 $ 756
========= =========== =========== ========== ===========
Basic and diluted earnings per common share:
Earnings from continuing operations $ .35 $ .26 $ .60 $ .43 $ .35
Earnings from discontinued
operations - - - - .01
--------- ----------- ----------- ---------- -----------
Net earnings $ .35 $ .26 $ .60 $ .43 $ .36
========= =========== =========== ========== ===========
Weighted average shares outstanding:
Basic 1,711 1,779 1,934 1,934 2,076
========= =========== =========== ========== ===========
Diluted 1,711 1,779 1,934 1,934 2,111
========= =========== =========== ========== ===========
As of December 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ----------- ----------- ---------- -----------
Selected Balance Sheet Data:
Current assets $ 12,075 $ 13,220 $ 9,918 $ 9,003 $ 9,722
Current liabilities 7,411 9,171 4,408 4,676 6,219
Total assets 14,042 15,204 10,596 9,854 10,678
Total liabilities 7,411 9,171 4,408 4,676 6,219
Retained earnings 6,312 5,714 5,252 4,085 3,244
Stockholders' equity 6,631 6,033 6,187 5,178 4,459
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Consolidated net sales for the year ended December 31, 2000, increased 8 percent
to $47,987,000 from $44,576,000 in 1999. The Abatix operating segment net sales
grew 5 percent to $44,145,000 in 2000 and the IESI operating segment net sales
increased 58 percent to $3,842,000 in 2000. The increase in consolidated net
sales resulted from efforts to further expand and diversify the customer base,
including the introduction of a new distribution channel for IESI and the 1999
acquisition of North State, a construction supply distributor. The acquisition
provides a larger customer base and the ability to cross sell products to both
North State and Abatix customers. The increase in net sales is also a result of
the stable economic conditions in the geographic regions serviced by the
Company's facilities. The increase in net sales for 2000 was partially offset by
an 11 percent decline in sales to asbestos abatement contractors and by the
April 1999 closure of the Company's Denver facility. This facility had 1999
revenues of approximately $353,000. Further diversification of the customer
base, cross selling of products, along with the economic conditions, if
maintained, should allow the Company to internally grow its revenues in 2001.
Although the decline in sales to asbestos abatement contractors is expected to
continue for the foreseeable future, sales to these contractors for the first
two months of 2001 were slightly higher than the same period in 2000. 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 single 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 2000 of $12,982,000 increased 6 percent from gross profit in
1999 of $12,217,000 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 27 percent for 2000 and 1999. Although overall margins are
expected to remain at their current levels in 2001, competitive pressures could
negatively impact any and all efforts by the Company to maintain or improve
product margins.
11
Selling, general and administrative expenses for 2000 of $11,395,000 increased 3
percent over 1999 expenses of $11,083,000. The increase was attributable
primarily to the inclusion of North State costs and increased rent due to larger
facilities and higher rent rates for three distribution centers and the
corporate offices. Leases on three facilities were renegotiated at the end of
1999. Rental rates are higher with the new leases as a result of improved real
estate conditions. These expenses were 24 percent of sales for 2000 and 25
percent of sales for 1999. Selling, general and administrative expenses are
expected to be in the 23 to 24 percent range for 2001.
Interest expense of $562,000 increased $175,000 from 1999 interest expense of
$387,000 primarily due to the additional borrowings used to finance the
acquisition of North State and higher interest rates. The Company's credit
facilities are variable rate notes tied to the Company's lending institution's
prime rate. Increases in the prime rate could negatively affect the Company's
earnings.
Net earnings for the year ended December 31, 2000, of $598,000 or $.35 per share
increased $137,000 from net earnings of $461,000 or $.26 per share in 1999. The
increase in net earnings is primarily due to the higher sales volume, partially
offset by the higher general and administrative costs and the increased interest
expense.
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 $44,576,000 from $37,684,000 in 1998. The Abatix operating segment net sales
grew 20 percent to $42,147,000 in 1999, and the IESI operating segment net sales
of $2,429,000 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.
Gross profit for 1999 of $12,217,000 increased 13 percent from 1998 gross profit
of $10,837,000 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 29 percent for 1999 and 1998, respectively. The two
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.
Selling, general and administrative expenses increased 27 percent to $11,083,000
over 1998 expenses of $8,729,000. 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.
12
As a percent of sales, selling, general and administrative expenses were 25
percent for 1999 as compared to 23 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. 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.
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 two percent decline in profit margins combined with higher selling,
general and administrative costs and increased interest expense.
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. Net cash provided by operations during 2000 of $1,836,000 resulted
principally from the decrease in accounts receivable, the net earnings adjusted
for depreciation and amortization and the decrease in inventories. The decrease
in accounts receivable is attributed to higher than normal collections and lower
sales in December 2000 versus 1999. Cash flow from operations for the entire
year of 2001 is expected to be positive, although at any given point, it may be
negative.
Cash requirements for non-operating activities during 2000 resulted primarily
from the purchases of property and equipment. In addition, net working capital
line of credit repayments occurred primarily as a result of the net cash
provided by operations. The equipment purchases in 2000 were primarily costs
associated with building the Company's e-commerce solution, office furniture and
fixtures, warehouse equipment, and a delivery vehicle.
The development of the Company's e-commerce solution, which should begin beta
testing in the first half of 2001, has required a significant capital outlay.
This solution, which could cost $200,000 to implement, market and maintain in
2001, 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.
In early May 2000, the Company increased its working capital line of credit at a
commercial lending institution from $6,500,000 to $7,000,000 to help fund
additional capital requirements resulting from the business growth and the
development of its e-commerce site. The working capital line of credit agreement
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 14, 2001, there are advances outstanding under this
credit facility of $3,636,000. Based on the borrowing formula, the Company had
the capacity to borrow an additional $3,364,000 as of March 14, 2001. The
13
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 14, 2001, were $97,000. Both credit
facilities are payable on demand and bear a variable rate of interest computed
at the prime rate.
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
The Company will adopt the reporting and disclosure requirements of SFAS No.
133, "Accounting For Derivative Instruments and Hedging Activities" during the
first quarter of fiscal 2001. This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires the recognition of all derivatives on the balance sheet at fair value.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of the derivatives will either be offset against the change in
fair value of the hedged item through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
adoption of this standard will not have a material impact on the Company.
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, 2000 and 1999, an increase of 100 basis points in the
United States prime rate would have negatively impacted the Company's net
earnings for the years then ended by $26,000 and $36,000, 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: inability to hire and train quality people,
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 and strong
competition. 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.
14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
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, 2000.
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, 2000.
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, 2000.
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, 2000.
15
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
None
(c) EXHIBITS
(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 December 31, 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 December 31, 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
December 31, 1995, filed November 9, 1995; filed electronically
as Exhibit 3(i)(c) to the Form 10-Q for the quarter ended
December 31, 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
December 31, 1995, filed on November 9, 1995).
16
(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).
(10)(a)(vi) Employment Agreement with Terry W. Shaver effective January 1,
2001.*
(10)(b)(vi) Employment Agreement with Gary L. Cox effective January 1,2001.*
(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).
(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.*
* Filed herewith as part of the Company's electronic filing.
17
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 21st day of March,
2001.
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 21, 2001
- ------------------- and Director (Principal Executive Officer)
Terry W. Shaver
/s/ Gary L. Cox Executive Vice President, March 21, 2001
- --------------- Chief Operating Officer and Director
Gary L. Cox
/s/ Daniel M. Birnley Director March 21, 2001
- ---------------------
Daniel M. Birnley
/s/ Donald N. Black Director March 21, 2001
- -------------------
Donald N. Black
/s/ Frank J. Cinatl Vice President, Chief Financial Officer March 21, 2001
- ------------------- and Director (Principal Accounting Officer)
Frank J. Cinatl, IV
18
ABATIX CORP. AND SUBSIDIARY
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
II - Valuation and Qualifying Accounts for the years ended
December 31, 2000, 1999 and 1998 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 the financial statement schedule based on
our audits.
We conducted our audits 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 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, 2000 and 1999, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. 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.
/s/ KPMG LLP
Dallas, Texas
March 2, 2001
F-2
ABATIX CORP. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2000 and 1999
ASSETS 2000 1999
-------------- --------------
Current assets:
Cash $ 5,678 $ 106,793
Trade accounts receivable, net of allowance for doubtful accounts of
$559,963 in 2000 and $616,678 in 1999 (note 4) 6,371,419 7,028,271
Inventories (note 4) 5,124,727 5,393,355
Prepaid expenses and other assets 296,254 368,583
Refundable income taxes - 87,986
Deferred income taxes (note 5) 277,170 235,505
-------------- -------------
Total current assets 12,075,248 13,220,493
Receivables from officers and employees 14,933 7,750
Property and equipment, net (notes 3 and 4) 716,993 629,796
Deferred income taxes (note 5) 197,180 144,916
Goodwill, net of accumulated amortization of $249,275 in 2000
and $91,756 in 1999 977,361 1,134,880
Other assets 60,722 66,973
-------------- -------------
$ 14,042,437 $ 15,204,808
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank (note 4) $ 4,334,852 $ 5,825,721
Accounts payable 2,418,470 2,604,587
Accrued compensation 158,668 198,127
Other accrued expenses 499,119 542,959
-------------- --------------
Total current liabilities 7,411,109 9,171,394
-------------- --------------
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 2000 and 1999 2,437 2,437
Additional paid-in capital 2,574,560 2,574,560
Retained earnings 6,311,673 5,713,759
Treasury stock at cost, 726,166 common shares in 2000 and 1999 (2,257,342) (2,257,342)
-------------- -------------
Total stockholders' equity 6,631,328 6,033,414
Commitments and contingencies (note 10)
-------------- -------------
$ 14,042,437 $ 15,204,808
============== =============
See accompanying notes to consolidated financial statements.
F-3
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------ ------------- -------------
Net sales $ 47,986,591 $ 44,576,180 $ 37,683,774
Cost of sales 35,004,764 32,358,985 26,846,279
------------ ------------- -------------
Gross profit 12,981,827 12,217,195 10,837,495
Selling, general and administrative expenses (11,394,760) (11,083,429) (8,729,175)
------------ ------------- -------------
Operating profit 1,587,067 1,133,766 2,108,320
Other income (expense):
Interest income 689 573 15,824
Interest expense (561,826) (386,856) (238,706)
Other, net 1,683 12,436 2,400
------------ ------------- -------------
Earnings before income taxes 1,027,613 759,919 1,887,838
Income tax expense (note 5) (429,699) (298,461) (720,429)
------------ -------------- -------------
Net earnings $ 597,914 $ 461,458 $ 1,167,409
============ ============== =============
Basic and diluted earnings per common share $ .35 $ .26 $ .60
============ ============== =============
Basic and diluted weighted average shares outstanding 1,711,148 1,779,029 1,933,769
============ ============== =============
See accompanying notes to consolidated financial statements.
F-4
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2000, 1999 and 1998
Common Stock Additional Treasury Stock
---------------------- Paid-in Retained ------------------------ Total
Shares Amount Capital Earnings Shares Amount Equity
--------- ---------- ----------- ---------- --------- ------------- -----------
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
Net earnings - - - 597,914 - - 597,914
--------- ---------- ----------- ---------- --------- ------------- ------------
Balance at December 31, 2000 2,437,314 $ 2,437 $ 2,574,560 $6,311,673 726,166 $ (2,257,342) $ 6,631,328
========= ========== =========== ========== ========= ============= ============
See accompanying notes to consolidated financial statements.
F-5
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------------- -------------- ---------------
Cash flows from operating activities:
Net earnings $ 597,914 $ 461,458 $ 1,167,409
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 521,888 469,032 367,789
Deferred income taxes (93,929) (116,798) (5,626)
Gain on disposal of assets (5,974) (19,609) (3,310)
Changes in operating assets and liabilities, net of
business acquisitions:
Receivables 656,852 (287,808) (933,035)
Inventories 268,628 (384,281) 113,441
Refundable income taxes 87,986 (87,986) -
Prepaid expenses and other assets 72,329 64,968 (175,439)
Accounts payable (186,117) 556,542 (271,451)
Accrued expenses (83,299) (96,221) 159,755
-------------- --------------- --------------
Net cash provided by operating activities 1,836,278 559,297 419,533
-------------- --------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (476,238) (444,642) (191,850)
Proceeds from sale of property and equipment 30,646 35,750 8,500
Business acquisitions, net of cash acquired (note 2) - (2,160,574) -
Advances to officers and employees (39,162) (63,897) (40,609)
Collection of advances to officers and employees 31,979 60,170 34,833
Other assets, primarily deposits 6,251 (30,515) 3,100
-------------- --------------- --------------
Net cash used in investing activities (446,524) (2,603,708) (186,026)
-------------- --------------- --------------
Cash flows from financing activities:
Purchase of treasury stock - (611,594) (157,930)
Borrowings on notes payable to bank 14,137,514 19,927,926 36,258,601
Repayments on notes payable to bank (15,628,383) (17,389,125) (36,415,128)
-------------- --------------- --------------
Net cash (used in) provided by financing activities (1,490,869) 1,927,207 (314,457)
-------------- --------------- --------------
Net decrease in cash (101,115) (117,204) (80,950)
Cash at beginning of year 106,793 223,997 304,947
-------------- --------------- --------------
Cash at end of year $ 5,678 $ 106,793 $ 223,997
============== =============== ==============
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 to the asbestos
abatement industry, the industrial safety and hazardous materials
industries and, combined with tools and tool supplies, the
construction industry. At December 31, 2000, the Company operated
seven sales and distribution centers in five states. The Company's
wholly-owned subsidiary, International Enviroguard Systems, Inc.
("IESI") imports disposable protective clothing 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 or market. Cost is determined by a
method that approximates the first-in, first-out method.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is
provided by the straight-line method over the estimated useful
lives of the assets.
F-7
(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
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. In July 2000,
the Emerging Issues Task Force ("EITF") reached consensus on Issue
No. 00-10, "Accounting for Shipping and Handling Fees and Costs",
which establishes standards for how companies should account for
shipping and handling fees billed to customers. The consensus
reached was that all amounts billed to a customer should be
classified as revenue. No consensus was reached on classification
of costs, rather the EITF reinforced the requirement to disclose
the policy for accumulating and classifying shipping and handling
costs.
For all years presented, the Company has reclassified shipping
fees billed to customers from selling, general and administrative
expense. This reclassification increased revenue by $408,679,
$346,422 and $356,145 for the years ended December 31, 2000, 1999
and 1998. The costs related to this revenue are included in
selling, general and administrative expense were $965,019,
$826,634 and $781,455 for the years ended December 31, 2000, 1999
and 1998.
(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, 2000, 1999 and 1998,
there were no dilutive securities outstanding. Basic earnings per
share and diluted earnings per share amounts were equal for the
years ended December 31, 2000, 1999 and 1998.
F-8
(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, 2000 or 1999.
The Company paid interest of $565,933, $362,249, $247,298 in 2000,
1999 and 1998, respectively, and income taxes of $352,562,
$637,957, $667,963 in 2000, 1999 and 1998, 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.
(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 $3.45 per
F-9
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 sales and distribution
center. The Denver facility had sales of $353,000 and $1,449,000 for
the years ended December 31, 1999 and 1998, 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.
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 $ 47,087,585 $ 47,031,222
============ =============
Net income $ 484,561 $ 1,039,893
============ =============
Basic and diluted earnings per
common share $ .27 $ .53
============ =============
F-10
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2000
and 1999:
Estimated
Useful Life 2000 1999
------------- ------------ ------------
Furniture and equipment 3 - 10 years $ 2,512,994 $ 2,183,305
Transportation equipment 3 - 5 years 523,743 489,917
Leasehold improvements 3 - 5 years 153,966 85,141
------------ ------------
3,190,703 2,758,363
Less accumulated depreciation and
amortization 2,473,710 2,128,567
------------ ------------
Net property and equipment $ 716,993 $ 629,796
============ ============
(4) NOTES PAYABLE TO BANK
At December 31, 2000, the Company had two lines of credit with a bank.
The 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
$7,000,000. Under this formula, the Company had the ability to borrow
$6,865,000 at December 31, 2000, of which approximately $4,221,000 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, 2000, the Company had borrowed approximately
$114,000 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.
Both credit facilities are payable on demand and bear a variable rate
of interest computed at the prime rate. As of December 31, 2000 and
1999, the Company's rate of interest on these agreements was 9.5
percent and 8.5 percent, respectively. These credit facilities are
secured by accounts receivable, inventories and equipment.
F-11
(5) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2000,
1999 and 1998 consists of:
2000 1999 1998
------------ ------------- ------------
Current:
Federal $ 424,224 $ 342,903 $ 605,621
State 99,404 72,355 120,433
Deferred:
Federal (77,366) (88,946) (5,766)
State (16,563) (27,851) 141
------------ ------------- ------------
Total income tax expense $ 429,699 $ 298,461 $ 720,429
============ ============= ============
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, 2000, 1999 and 1998 follows:
2000 1999 1998
-------------- ------------- -------------
Expected income tax expense $ 349,388 $ 258,372 $ 641,865
State income taxes, net of related federal
tax benefit 65,536 29,373 79,579
Nondeductible meals, entertainment expense
and penalties 15,402 10,667 6,479
Other (627) 49 (7,494)
-------------- ------------- -------------
Actual income tax expense $ 429,699 $ 298,461 $ 720,429
============== ============= =============
F-12
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31,
2000 and 1999 follow:
2000 1999
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 223,985 $ 238,801
Inventory reserve 73,587 36,637
Goodwill, due to differences in amortization
periods 150,666 16,982
Property and equipment, principally due to
differences in depreciation 46,514 127,933
Other - 7,466
----------- -----------
Total gross deferred tax assets 494,752 427,819
Deferred tax liabilities - prepaid expenses (20,402) (47,398)
----------- -----------
Net deferred tax assets $ 474,350 $ 380,421
=========== ===========
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
The Board of Directors has authorized the acquisition of up to 726,500
shares of the Company's common stock. As of February 28, 2001, 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 from an
officer of the Company in January 1999 as payment for monies owed to
the Company of $79,681. 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 compensation 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 $46,346,
$42,366, and $38,154 during 2000, 1999 and 1998, respectively.
F-13
(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 protective 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 earnings 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-14
Summarized financial information concerning the Company's reportable
segments is shown in the following table. There are no other
significant noncash items.
Abatix IESI Total
----------- ---------- -----------
2000
- ----------------------------------------------
Sales from external customer $44,145,042 $3,841,549 $47,986,591
Intersegment sales - 579,733 579,733
Interest income 689 - 689
Interest expense 561,826 - 561,826
Depreciation and amortization 514,538 7,350 521,888
Segment profit 661,051 362,239 1,023,290
Segment assets 13,705,980 439,444 14,145,424
Capital expenditures 474,700 1,538 476,238
1999
- ----------------------------------------------
Sales from external customers $42,146,862 $2,429,318 $44,576,180
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 15,141,406 712,996 15,854,402
Capital expenditures 439,941 4,701 444,642
1998
- ----------------------------------------------
Sales from external customers $35,258,053 $2,425,721 $37,683,774
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
F-15
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.
2000 1999 1998
------------- ------------- ------------
Profit for reportable segments $ 1,023,290 $ 771,303 $ 1,890,879
Elimination of intersegment profits 4,323 (11,384) (3,041)
------------- ------------- ------------
Earnings before income taxes $ 1,027,613 $ 759,919 $ 1,887,838
============= ============= ============
Total assets for reportable segments $ 14,145,424 $ 15,854,402 $ 11,700,030
Elimination of intersegment assets (102,987) (649,594) (1,104,525)
------------- ------------- ------------
Total assets $ 14,042,437 $ 15,204,808 $ 10,595,505
============= ============= ============
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 2000,
1999 and 1998, no single customer accounted for more than 10 percent of
net sales, although sales to asbestos and lead abatement contractors
were approximately 33 percent, 40 percent, and 48 percent of
consolidated net sales in 2000, 1999 and 1998, respectively. A
reduction in spending on asbestos or lead abatement projects could
significantly impact sales.
Although no vendor accounted for more than 10 percent of purchases, one
product class accounted for approximately 13 percent, 16 percent, and
19 percent of net sales in 2000, 1999 and 1998, 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-16
(10) COMMITMENTS AND CONTINGENCIES
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, 2000:
2001 $ 985,506
2002 801,572
2003 600,835
2004 546,373
2005 41,267
--------------
$ 2,975,553
==============
Rental expense under operating leases for the years ended December 31,
2000, 1999 and 1998 was $950,199, $776,435 and $589,658, respectively.
The Company has employment agreements with five key employees. The
agreements provide for minimum aggregate cash compensation as follows:
2001 $ 563,100
2002 459,000
-------------
$ 1,022,100
=============
In January and February 2000, the Company airfreighted products to two
customers, which contained chemicals classified by the Department of
Transportation as hazardous material. During transportation, some of
these chemicals leaked. On June 15, 2000, the Federal Aviation
Administration ("FAA") notified the Company of their findings for the
first incident which indicated the Company did not comply with the
Department of Transportation's Hazardous Material Regulations. In
October 2000, the FAA proposed, and the Company accepted, $25,000 civil
penalty for the first incident. The settlement amount, less the initial
payment of $7,000, is accrued at December 31, 2000. The Company
resolved the second incident with the FAA; no damages or penalties were
assessed.
F-17
(11) SELECTED QUARTERLY DATA
Quarter
---------------------------------------------------------------------
First Second Third Fourth Total
---------------- ----------------- ----------------- ---------------- -----------------
2000
- ----------------------------
Net sales $11,361,744 $13,220,965 $12,353,517 $11,050,365 $47,986,591
Gross profit 3,169,854 3,566,964 3,332,820 2,912,189 12,981,827
Operating profit 232,444 647,973 517,994 188,656 1,587,067
Net earnings 52,307 301,903 223,304 20,400 597,914
Basic and diluted
earnings per
common share $ .03 $ .18 $ .13 $ .01 $ .35
1999
- ----------------------------
Net sales $ 9,959,158 $11,345,680 $11,904,709 $11,366,633 $44,576,180
Gross profit 2,815,980 3,159,827 3,323,329 2,918,059 12,217,195
Operating profit 259,234 434,286 428,895 11,351 1,133,766
Net earnings 115,259 209,733 193,628 (57,162) 461,458
Basic and diluted
earnings per
common share $ .06 $ .12 $ .11 $ (.03) $ .26
F-18
Schedule II
ABATIX CORP. AND SUBSIDIARY
Valuation and Qualifying Accounts
Years ended December 31, 2000, 1999 and 1998
Additions
Balance at charged to
beginning of costs and Balance at
year expenses Other Deductions end of year
--------------- --------------- ------------- --------------- ------------
Year ended December 31:
Allowance for Doubtful Accounts:
2000 $ 616,678 85,247 - 141,962 A $ 559,963
=============== =============== ============= =============== =============
1999 $ 514,696 125,370 - 23,388 A $ 616,678
=============== =============== ============= =============== =============
1998 $ 495,092 114,515 - 94,911 A $ 514,696
=============== =============== ============= =============== =============
Inventory Reserve:
2000 $ 205,222 95,823 - 12,636 C $ 288,409
=============== =============== ============= =============== =============
1999 $ 69,321 89,823 109,993 B 63,915 C $ 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.
C Represents the write-off of obsolete inventory.