Consolidated net sales for the year ended December 31, 2001, increased 14 percent to $54,726,000 from $47,987,000 in 2000. The Abatix operating segment net sales grew 19 percent to $52,461,000 in 2001 and the IESI operating segment net sales decreased 41 percent to $2,265,000 in 2001. Sales were significantly impacted by the increasing awareness of toxic molds in homes and buildings and by the continuing cleanup from the effects of Tropical Storm Allison on the Houston area. The decrease in IESI sales is due to the exit from a distribution channel during the second quarter of 2001.
Sales to the mold 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 implemented an e-commerce solution in 2001 to help solidify relationships with the existing customer base and expand its geographic presence.
Gross profit for 2001 of $15,384,000 increased 19 percent from gross profit in 2000 of $12,982,000 due to increased sales volume. The Company’s gross profit margins, expressed as a percentage of sales, were approximately 28 percent for 2001 and 27 percent for 2000. Although overall margins are expected to remain at their current levels in 2002, competitive pressures could negatively impact any and all efforts by the Company to maintain or improve product margins.
Selling, general and administrative expenses for 2001 of $12,991,000 increased 14 percent over 2000 expenses of $11,395,000. These expenses were 24 percent of sales for 2001 and 2000. Selling, general and administrative expenses are expected to be in the 24 to 25 percent range for 2002.
Interest expense of $380,000 decreased $182,000 from 2000 interest expense of $562,000 primarily due to lower 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, 2001, of $1,206,000 or $.70 per share increased $608,000 from net earnings of $598,000 or $.35 per share in 2000. The increase in net earnings is primarily due to the higher sales volume and lower interest expense, partially offset by the higher general and administrative costs.
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.
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.
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.
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.
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.
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 used in operations during 2001 of $422,000 resulted principally from the increase in accounts receivable and inventories, net of the increase of net earnings adjusted for depreciation and amortization. The increase in accounts receivable is attributed to higher sales in November and December 2001 versus 2000. Cash flow from operations for the entire year of 2002 is expected to be positive, although at any given point, it may be negative.
Cash requirements for non-operating activities during 2001 resulted primarily from the purchases of property and equipment. In addition, net working capital line of credit borrowings occurred primarily as a result of the higher levels of accounts receivable and inventory and purchases of fixed assets. The equipment purchases in 2001 were primarily costs associated with building the Company’s e-commerce solution and delivery vehicles.
The development of the Company’s e-commerce solution required a significant capital outlay in 2001. This solution, which could cost $100,000 to market and maintain in 2002, 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 August 2001, the Company increased its working capital line of credit at a commercial lending institution from $7,000,000 to $8,000,000 to help fund additional working capital requirements due to higher sales. 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 19, 2002, there are advances outstanding under this credit facility of $4,816,000. Based on the borrowing formula, the Company had the capacity to borrow an additional $3,184,000 as of March 19, 2002. 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 19, 2002, were $55,000. 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
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (Statement) No. 141, “Business Combinations.” Statement No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company believes that the adoption of Statement No. 141 will not have a significant impact on its financial statements.
In July 2001, the FASB issued Statement No. 142, “Goodwill and Other Intangible Assets”, which is effective for fiscal years beginning after December 15, 2001. Statement No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for testing impairment of existing goodwill and other intangibles. Upon adoption of Statement 142, the Company will cease to amortize approximately $820,000 of goodwill. The Company recorded $110,540 of amortization on this goodwill during 2001 and would have recorded the same amount during 2002. In addition, the Company will be required to perform an impairment review of its goodwill balance upon the initial adoption of Statement No. 142.
The Company expects to complete this impairment review during the first quarter of 2002. Based on preliminary calculations, the Company estimates it will record an impairment charge of approximately $820,000 (unaudited). Any charge resulting from this initial impairment test is considered transitional impairment and will be presented on the Consolidated Statement of Operations as a cumulative effect of change in accounting principle, net of applicable income taxes.
The FASB issued Statement 143, “Accounting for Asset Retirement Obligations” in August 2001. Statement 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. Statement 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset and to depreciate that cost over the remaining useful life of the asset. Statement 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not believe it will have a material impact on the operations of the Company.
In October 2001, the FASB issued Statement 144, “Accounting For the Impairment or Disposal of Long-Lived Assets.” Statement 144 has broadened the presentation of discontinued operations to include more disposal transactions, and has enhanced management’s ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. Statement 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company does not believe it will have a material impact on the operations of the Company.
Critical Accounting Policies
The Company follows certain significant accounting policies when preparing its consolidated financial statements. A summary of these policies is included in Note 1 of the Notes to the Consolidated Financial Statements. Certain policies require the Company to make significant and subjective estimates and assumptions which are sensitive to deviations from actual results. In particular, the Company makes estimates regarding future undiscounted cash flows from the use of long-lived assets, including goodwill, in assessing potential impairment whenever events or changes in circumstances indicate the carrying value of a long-lived asset may not be recoverable. Since there were no events or changes in circumstances to indicate the carrying value of long-lived assets, including goodwill, were impaired, the Company recorded no adjustment to the carrying value of these assets. The Company does not expect events or circumstances to significantly change, thereby affecting the carrying value of long-lived assets with the possible exception of the implementation of Statement No. 142.
In addition, the Company has estimated the net realizable value of accounts receivable by evaluating the current pool of accounts receivable in light of past experience and current knowledge of its customer base. The Company believes the reserves recorded in the financial statements are adequate for potential credit losses. It is possible the accuracy of the estimation process could be materially impacted as the composition of this pool of accounts receivable changes over time or if the health of the economy or the construction industry deteriorates.
Finally, the Company evaluates whether inventory is stated at the lower of cost or market based on historical experience with the carrying value and life of inventory. The assumptions used in this evaluation are based on current market conditions and the Company believes inventory is stated at the lower of cost or market in the financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market RiskSince 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, 2001 and 2000, 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 $33,000 and $26,000, 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: the long-term impact of the September 11, 2001, tragic events on the commercial construction and domestic preparedness markets, the impact of insurance coverage on mold remediation jobs, adverse weather conditions, inability to hire and train quality people, changes in interest rates, unavailability of products and strong competition. In addition, 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 e-commerce solution or an impairment of goodwill resulting from the 1999 acquisitions could cause actual results to differ materially.
Item 8. Consolidated Financial Statements and Supplementary DataThe 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. NonePART III
Item 10. Directors and Executive Officers of the RegistrantThis 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, 2001.
Item 11. Executive CompensationThis 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, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and ManagementThis 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, 2001.
Item 13. Certain Relationships and Related TransactionsThis 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, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1 and 2.Consolidated Financial Statements and Financial Statement ScheduleThe 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).
(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.
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 20th day of March, 2002.
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 20, 2002
Terry W. Shaver and Director (Principal Executive Officer)
/s/ Gary L. Cox Executive Vice President, March 20, 2002
Gary L. Cox Chief Operating Officer and Director
/s/ Daniel M. Birnley Director March 20, 2002
Daniel M. Birnley
/s/ Donald N. Black Director March 20, 2002
Donald N. Black
/s/ Eric A. Young Director March 20, 2002
Eric A. Young
/s/ Frank J. Cinatl Vice President, Chief Financial Officer March 20, 2002
Frank J. Cinatl, IV and Director (Principal Accounting Officer)
ABATIX CORP. AND SUBSIDIARY
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
II - Valuation and Qualifying Accounts for the years ended
December 31, 2001, 2000 and 1999 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.
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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 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.
KPMG LLP
Dallas, Texas
March 1, 2002
ABATIX CORP. AND SUBSIDIARY
Consolidated Balance Sheets December 31, 2001 and 2000
Assets 2001 2000
------
---------------- --------------
Current assets:
Cash $ 13,843 $ 5,678
Trade accounts receivable, net of allowance for doubtful accounts of
$447,037 in 2001 and $559,963 in 2000 (note 4) 7,452,983 6,371,419
Inventories (note 4) 6,170,810 5,124,727
Prepaid expenses and other assets 716,974 296,254
Deferred income taxes (note 5) 174,738 277,170
---------------- --------------
Total current assets 14,529,348 12,075,248
Receivables from officers and employees 7,676 14,933
Property and equipment, net (notes 3 and 4) 903,675 716,993
Deferred income taxes (note 5) 115,781 197,180
Goodwill, net of accumulated amortization of $406,795 in 2001
and $249,275 in 2000 819,841 977,361
Other assets 64,850 60,722
---------------- --------------
$ 16,441,171 $ 14,042,437
================ ==============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable to bank (note 4) $ 5,358,513 $ 4,334,852
Accounts payable 2,163,379 2,418,470
Accrued compensation 324,169 158,668
Other accrued expenses 757,431 499,119
---------------- --------------
Total current liabilities 8,603,492 7,411,109
---------------- --------------
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 2001 and 2000 2,437 2,437
Additional paid-in capital 2,574,560 2,574,560
Retained earnings 7,518,024 6,311,673
Treasury stock at cost, 726,166 common shares in 2001 and 2000
(2,257,342) (2,257,342)
---------------- --------------
Total stockholders' equity 7,837,679 6,631,328
Commitments and contingencies (note 10)
---------------- --------------
$ 16,441,171 $ 14,042,437
================ ==============
See accompanying notes to consolidated financial statements.
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
---------------- ---------------- ----------------
Net sales $ 54,726,290 $ 47,986,591 $ 44,576,180
Cost of sales 39,342,062 35,004,764 32,358,985
---------------- ---------------- ----------------
Gross profit 15,384,228 12,981,827 12,217,195
Selling, general and administrative expenses (12,990,978) (11,394,760) (11,083,429)
---------------- ---------------- ----------------
Operating profit 2,393,250 1,587,067 1,133,766
Other income (expense):
Interest expense (380,139) (561,826) (386,856)
Other, net (27,349) 2,372 13,009
---------------- ---------------- ----------------
Earnings before income taxes 1,985,762 1,027,613 759,919
Income tax expense (note 5) (779,411) (429,699) (298,461)
---------------- ---------------- ----------------
Net earnings $ 1,206,351 $ 597,914 $ 461,458
================ ================ ================
Basic and diluted earnings per common share $ .70 $ .35 $ .26
================ ================ ================
Basic and diluted weighted average shares outstanding 1,711,148 1,711,148 1,779,029
================ ================ ================
See accompanying notes to consolidated financial statements.ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999
Common Stock Additional Treasury Stock
----------------------- Paid-in Retained -------------------------- Total
Shares Amount Capital Earnings Shares Amount Equity
---------- --------- ----------- ---------- ---------- -------------- ------------
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
Net earnings - - - 1,206,351 - - 1,206,351
---------- --------- ----------- ---------- ---------- -------------- ------------
Balance at December 31, 2001 2,437,314 $ 2,437 $ 2,574,560 $ 7,518,024 726,166 $ (2,257,342) $ 7,837,679
========== ========= =========== ========== ========== ============== ============
See accompanying notes to consolidated financial statements.ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------------- ----------------- -----------------
Cash flows from operating activities:
Net earnings $ 1,206,351 $ 597,914 $ 461,458
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 590,731 521,888 469,032
Deferred income taxes 183,831 (93,929) (116,798)
Provision for losses on receivables 79,536 85,247 125,370
Provision for obsolescence of inventory 168,878 95,823 89,823
Gain on disposal of assets (19,158) (5,974) (19,609)
Changes in operating assets and liabilities, net of
business acquisitions:
Receivables (1,161,100) 571,605 (413,178)
Inventories (1,214,961) 172,805 (474,104)
Refundable income taxes - 87,986 (87,986)
Prepaid expenses and other assets (420,720) 72,329 64,968
Other assets, primarily deposits (4,128) 6,251 (30,515)
Accounts payable (255,091) (186,117) 556,542
Accrued expenses 423,813 (83,299) (96,221)
----------------- ----------------- -----------------
Net cash (used in) provided by operating activities (422,018) 1,842,529 528,782
----------------- ----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (620,679) (476,238) (444,642)
Proceeds from sale of property and equipment 19,944 30,646 35,750
Business acquisitions, net of cash acquired (note 2) - - (2,160,574)
Advances to officers and employees (20,043) (39,162) (63,897)
Collection of advances to officers and employees 27,300 31,979 60,170
----------------- ----------------- -----------------
Net cash used in investing activities (593,478) (452,775) (2,573,193)
----------------- ----------------- -----------------
Cash flows from financing activities:
Purchase of treasury stock - - (611,594)
Borrowings on notes payable to bank 17,226,585 14,137,514 19,927,926
Repayments on notes payable to bank (16,202,924) (15,628,383) (17,389,125)
----------------- ----------------- -----------------
Net cash provided by (used in) financing activities 1,023,661 (1,490,869) 1,927,207
----------------- ----------------- -----------------
Net increase (decrease) in cash 8,165 (101,115) (117,204)
Cash at beginning of year 5,678 106,793 223,997
----------------- ----------------- -----------------
Cash at end of year $ 13,843 $ 5,678 $ 106,793
================= ================= =================
See accompanying notes to consolidated financial statements.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 environmental industry, the industrial safety industry and, combined with tools and tool supplies, the construction industry. At December 31, 2001, 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 in the United States of America 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. |
(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. Shipping fees billed to customers are included in net sales. The costs related to this revenue which are included in selling, general and administrative expense, were $1,026,400, $965,019 and $826,634 for the years December 31, 2001, 2000 and 1999. |
(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, 2001, 2000 and 1999, there were no dilutive securities outstanding. Basic earnings per share and diluted earnings per share amounts were equal for the years ended December 31, 2001, 2000, and 1999. |
(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, 2001 or 2000. |
| | The Company paid interest of $393,602, $565,933 and $362,249 in 2001, 2000, and 1999, respectively, and income taxes of $524,176, $352,562 and $637,957 in 2001, 2000, and 1999, respectively. |
(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. |
(j) New Accounting Standards| | In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (Statement) No. 141, “Business Combinations.” Statement No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company believes that the adoption of Statement No. 141 will not have a significant impact on its financial statements. |
| | In July 2001, the FASB issued Statement No. 142, “Goodwill and Other Intangible Assets”, which is effective for fiscal years beginning after December 15, 2001. Statement No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for testing impairment of existing goodwill and other intangibles. Upon adoption of Statement 142, the Company will cease to amortize approximately $820,000 of goodwill. The Company recorded $110,540 of amortization on this goodwill during 2001 and would have recorded the same amount during 2002. In addition, the Company will be required to perform an impairment review of its goodwill balance upon the initial adoption of Statement No. 142. |
| | The Company expects to complete this impairment review during the first quarter of 2002. Based on preliminary calculations, the Company estimates it will record an impairment charge of approximately $820,000 (unaudited). Any charge resulting from this initial impairment test is considered transitional impairment and will be presented on the Consolidated Statement of Operations as a cumulative effect of change in accounting principle, net of applicable income taxes. |
| | The FASB issued Statement 143, “Accounting for Asset Retirement Obligations” in August 2001. Statement 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. Statement 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset and to depreciate that cost over the remaining useful life of the asset. Statement 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not believe it will have a material impact on the operations of the Company. |
| | In October 2001, the FASB issued Statement 144, “Accounting For the Impairment or Disposal of Long-Lived Assets.” Statement 144 has broadened the presentation of discontinued operations to include more disposal transactions, and has enhanced management’s ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. Statement 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company does not believe it will have a material impact on the operations of the Company. |
(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 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. At December 31, 2001, the Keliher acquisition goodwill is fully amortized. |
| | On April 6, 1999, the Company closed its Denver sales and distribution center. The Denver facility had sales of $353,000 for the year ended December 31, 1999. 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. |
(3) Property and Equipment
| Property and equipment consists of the following at December 31, 2001 and 2000: |
Estimated
Useful Life 2001 2000
---------------- -------------- --------------
Furniture and equipment 3 - 8 years $ 2,439,216 $ 2,512,994
Transportation equipment 3 - 5 years 462,807 523,743
Leasehold improvements 3 - 5 years 164,476 153,966
-------------- --------------
3,066,499 3,190,703
Less accumulated depreciation and
amortization 2,162,824 2,473,710
-------------- --------------
Net property and equipment $ 903,675 $ 716,993
============== ==============
(4) Notes Payable to Bank
| | At December 31, 2001, 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 $8,000,000. Under this formula, the Company had the ability to borrow $7,689,000 at December 31, 2001, of which approximately $5,277,000 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, 2001, the Company had borrowed approximately $81,000 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, 2001 and 2000, the Company’s rate of interest on these agreements was 4.75 percent and 9.5 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, 2001, 2000 and 1999 consists of: |
2001 2000 1999
--------------- --------------- ---------------
Current:
Federal $ 494,613 $ 424,224 $ 342,903
State 100,967 99,404 72,355
Deferred:
Federal 156,256 (77,366) (88,946)
State 27,575 (16,563) (27,851)
--------------- --------------- ---------------
Total income tax expense $ 779,411 $ 429,699 $ 298,461
=============== =============== ===============
| | 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, 2001, 2000 and 1999 follows: |
2001 2000 1999
--------------- -------------- --------------
Expected income tax expense $ 675,159 $ 349,388 $ 258,372
State income taxes, net of related federal
tax benefit 94,214 65,536 29,373
Nondeductible meals, entertainment expense 15,609 15,402 10,667
Other (5,571) (627) 49
--------------- -------------- --------------
Actual income tax expense $ 779,411 $ 429,699 $ 298,461
=============== ============== ==============
| | The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2001 and 2000 follow: |
2001 2000
--------------- ---------------
Deferred tax assets:
Allowance for doubtful accounts $ 178,815 $ 223,985
Inventory reserve 136,993 73,587
Goodwill, due to differences in amortization
periods 38,970 150,666
Property and equipment, principally due to
differences in depreciation 76,811 46,514
--------------- ---------------
Total gross deferred tax assets 431,589 494,752
Deferred tax liabilities - prepaid expenses (141,070) (20,402)
--------------- ---------------
Net deferred tax assets $ 290,519 $ 474,350
=============== ===============
| | Management has determined, based on the Company’s history of prior operating earnings and its expectations for the future, that 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, 2002, 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 $50,046, $46,346 and $42,366 during 2001, 2000 and 1999, 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 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. |
| | 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
---------------- ----------------- ------------------
2001
----------------------------------------------
Sales from external customer $52,461,190 $2,265,100 $54,726,290
Intersegment sales - 566,315 566,315
Interest expense 380,139 - 380,139
Depreciation and amortization 586,873 3,858 590,731
Segment profit 1,725,611 281,622 2,007,233
Segment assets 16,175,026 631,150 16,806,176
Capital expenditures 620,679 - 620,679
2000
----------------------------------------------
Sales from external customers $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
| | 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. |
2001 2000 1999
----------------- ----------------- -----------------
Profit for reportable segments $2,007,233 $ 1,023,290 $ 771,303
Elimination of intersegment
profits (21,471) 4,323 (11,384)
----------------- ----------------- -----------------
Earnings before income taxes $1,985,762 $ 1,027,613 $ 759,919
================= ================= =================
Total assets for reportable
segments $16,806,176 $14,145,424 $15,854,402
Elimination of intersegment assets (365,005) (102,987) (649,594)
----------------- ----------------- -----------------
Total assets $16,441,171 $14,042,437 $15,204,808
================= ================= =================
| | 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 2001, 2000 and 1999, no single customer accounted for more than 10 percent of net sales, although sales to environmental contractors were approximately 49 percent, 37 percent, and 43 percent of consolidated net sales in 2001, 2000, and 1999, respectively. A reduction in spending on environmental projects could significantly impact sales. |
| | Although no vendor accounted for more than 10 percent of purchases, one product class accounted for approximately 14 percent, 13 percent, and 16 percent of net sales in 2001, 2000, and 1999, respectively. A major component of these products is petroleum. 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. |
(10) Commitments and Contingencies
| | The Company leases warehouse and office facilities under long-term noncancelable operating leases expiring at various dates through November 2006. The following is a schedule of future minimum lease payments under these leases as of December 31, 2001: |
2002 $ 1,001,538
2003 867,821
2004 822,187
2005 313,007
2006 109,685
----------------
$ 3,114,238
================
| | Rental expense under operating leases for the years ended December 31, 2001, 2000 and 1999 was $1,016,209, $950,199 and $776,435, respectively. |
| | The Company has employment agreements with three key employees, all of which expire in 2002. The agreements provide for minimum aggregate cash compensation in 2002 of $414,500. |
(11) Selected Quarterly Data (unaudited)
Quarter
---------------------------------------------------------------------
First Second Third Fourth Total
---------------- ----------------- ----------------- ---------------- -----------------
2001
- ----------------------------
Net sales $12,132,882 $14,782,809 $14,569,000 $13,241,599 $54,726,290
Gross profit 3,387,469 4,019,440 4,103,185 3,874,134 15,384,228
Operating profit 457,541 719,418 731,638 484,653 2,393,250
Net earnings 196,073 368,279 382,936 259,063 1,206,351
Basic and diluted
earnings per
common share .11 .22 .22 .15 .70
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
Schedule II
ABATIX CORP. AND SUBSIDIARY
Valuation and Qualifying Accounts
Years ended December 31, 2001, 2000 and 1999
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:
2001 $ 559,963 79,536 - 192,462 A $ 447,037
============== =============== ============= =============== ============
2000 $ 616,678 85,247 - 141,962 A $ 559,963
============== =============== ============= =============== ============
1999 $ 514,696 125,370 - 23,388 A $ 616,678
============== =============== ============= =============== ============
Inventory Reserve:
2001 $ 288,409 168,878 - 65,362 C $ 391,925
============== =============== ============= =============== ============
2000 $ 205,222 95,823 - 12,636 C $ 288,409
============== =============== ============= =============== ============
1999 $ 69,321 89,823 109,993 B 63,915 C $ 205,222
============== =============== ============= =============== ============
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.
