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, 1997 Commission File Number - 1-10184
ABATIX ENVIRONMENTAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 75-1908110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification number)
8311 Eastpoint Drive, Suite 400, Dallas, Texas 75227
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 381-1146
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
1,937,564 shares of common stock, $.001 par value, were issued and outstanding
on March 23, 1998.
The aggregate market value of the Registrant's common stock held by
nonaffiliates of the Registrant as of the close of business on March 23, 1998
(an aggregate of 922,764 shares out of a total of 1,937,564 shares outstanding
at that time) was $3,229,674 computed by reference to the closing bid price of
$3 1/2 on March 23, 1998.
Portions of the Registrant's proxy statement for its 1998 annual meeting of
stockholders are incorporated into Part III, herein, by this reference thereto.
PART I
ITEM 1. BUSINESS
(a) DEVELOPMENT OF BUSINESS
Abatix Environmental Corp. ("Abatix" or the "Company") markets and distributes
personal protection and safety equipment, and durable and nondurable supplies to
the asbestos and lead abatement, industrial safety and hazardous materials
industries. In addition to these products, the Company also distributes tools
and tool supplies to the construction industry.
The Company began operations in May 1983 as an industrial safety supply company
located in Dallas, Texas, and was originally incorporated in Texas as T&T Supply
Company, Inc. ("T&T") in March 1984. T&T expanded its operations to become a
supplier to the asbestos abatement industry in January 1986. 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. Unless the context provides
otherwise, all references to the Company include T&T and the Company's wholly
owned subsidiary, International Enviroguard Systems, Inc. ("IESI").
The Company opened its Nederland, Texas sales office in May 1988 and its
Hayward, California distribution location in December 1988. During 1989, the
Company expanded its customer base to supply the hazardous materials remediation
industry.
In March 1989, the Company completed its initial public offering of its
securities with the sale of 300,000 units, each consisting of two shares of
common stock and one redeemable common stock purchase warrant, at a price of
$5.00 per unit. Net proceeds of $1,135,251 were realized from the offering.
Pursuant to provisions of the initial public offering, the Company issued, on
March 2, 1990, a notice of redemption to the warrantholders in respect of all of
its outstanding redeemable common stock purchase warrants which were exercisable
at $3.00 per share. An aggregate of 231,983 of such warrants was exercised
pursuant to the notice. In total, 290,983 warrants were exercised, 8,917 were
redeemed and 100 were not presented, resulting in net proceeds of $805,616.
Proceeds from the exercise of the warrants enabled the Company to increase its
capital base and expand its operations.
In February 1990, the Company expanded its Hayward location and opened its
Houston, Texas office/warehouse location. In August 1991, the Company opened its
Santa Fe Springs, California office/warehouse location and, in April 1992, the
Nederland, Texas location was converted to a warehouse location and was later
combined with the Houston, Texas location. In August 1992, sales and
administrative staff were added to the Santa Fe Springs facility to initiate
distribution services to the construction tools supply industry.
On October 5, 1992, the Company entered into and consummated an Asset Purchase
Agreement with International Enviroguard Systems, Inc. ("IES"), a Texas
corporation, pursuant to which the Company assumed the operation of this company
and issued 250,000 shares of the Company's $.001 par value common stock. IES,
2
based in Corpus Christi, Texas, was a manufacturer of sorbents, primarily for
the hazardous materials industry. The Company transferred the assets purchased
and liabilities assumed to IESI, a Delaware corporation wholly owned by the
Company.
In response to improved competitive conditions, the Company began asbestos
abatement supply distribution operations in Phoenix and Denver in January and
February of 1993, respectively, and Seattle in January 1994. The Company opened
a distribution center in Corpus Christi, Texas in June 1994 as an attempt to
more fully utilize the IESI facilities.
During 1994, because of increased purchasing power, the Company, through IESI,
began to import certain products sold through not only the Company's
distribution channels, but other distribution companies not in direct
competition with Abatix. The Company will continue to review the direct
importation of products to obtain lower costs.
In December 1994, because of the significant use of cash, the negative impact on
earnings and the limited potential for progress towards profitability, the
Company announced plans to discontinue the sorbent manufacturing business of
IESI. This process was completed during the second quarter of 1995; however,
IESI continues to import products.
The Corpus Christi location was closed as of September 30, 1995 primarily
because the projected costs to operate the facility exceeded the market
potential. As was done prior to opening the Corpus Christi location, Abatix's
Houston facility will serve the central and south Texas area.
In October 1995, the Company expanded its Phoenix location to initiate
distribution services to the construction tools supply industry. In December
1995, the newest facility opened in Las Vegas. Although the Las Vegas operation
will handle the entire product line, its primary focus is the construction tool
industry.
The Company's lease agreement on the building that was occupied by both the
operations of IESI and the Corpus Christi branch included an option to purchase
the building. In March 1996, the Company purchased this facility and
simultaneously sold the building to a third party. This transaction terminated
the Company's lease obligation. Concurrent with the sale, the Company reversed
the remaining reserves resulting in the special credit and the earnings from
discontinued operations in 1996.
The Company, based on local market conditions, intends to expand and diversify
the revenue base by developing its full product line in all locations.
Acquisitions and the hiring of experienced personnel are two alternatives that
will continue to be explored to accomplish this goal.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is considered to be in one industry segment for financial reporting
purposes; therefore, no financial information is presented regarding industry
segments.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
ASBESTOS ABATEMENT INDUSTRY BACKGROUND
Between 1900 and the early 1970's, asbestos was extensively used for insulation
and fireproofing in industrial, commercial and governmental facilities as well
as private residences in the United States and in other industrialized
countries. It is 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." A study performed in the 1980's, predicted that as many as 225,000
Americans will die of asbestos related ailments before the year 2000 and that
there are currently 65,000 known cases of asbestosis. Litigation involving
claimants exposed to asbestos has forced several firms to seek the protection of
the bankruptcy courts, and the volume of pending claims has inundated state and
Federal courts throughout the country, thus prompting many commentators to
propose legislative solutions.
The United States Environmental Protection Agency ("EPA") estimated, in a survey
conducted in 1984, that asbestos is present in 30 percent of the nation's
110,000 schools and in 20 percent of the nation's 3.6 million government and
commercial buildings. Maintenance, repair, renovation or other activities can
disturb asbestos-containing material and, if disturbed or damaged, asbestos
fibers become airborne and pose a hazard to building occupants and the
environment.
Prompted by such concerns, Congress, in 1984, authorized the EPA to spend $800
million for asbestos abatement in schools under the Asbestos School Hazard
Abatement Act. In October 1986, Congress passed the Asbestos Hazard Emergency
Response Act ("AHERA") which mandates inspections for asbestos, the adoption of
asbestos abatement plans and the removal of asbestos from schools and facilities
scheduled for demolition. In addition, state and local governments have also
adopted asbestos-related regulations.
Notwithstanding such legislative impetus and continued awareness of health
related hazards associated with asbestos, the budgetary constraints and the lack
of improvement in the industrial sectors continue to limit the number and scope
of asbestos abatement projects. However, as the U.S. economy improves and
commercial real estate demand increases, the Company believes the overall
industry will also improve on a limited basis.
4
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 home buyers the right to test for lead-based paint
before any contracts are signed. In addition, although a landlord or home seller
is not required to test for lead-based paint, the rules do require disclosure of
a known lead hazard.
Many asbestos abatement contractors added lead abatement to their range of
services in an attempt to enter a market considered to be in its infancy. The
asbestos abatement contractors bring equipment, a trained labor force, and
experience working in a regulatory environment to the lead abatement industry.
Although the Company does not anticipate these rules to result in an increase of
lead abatement projects, management is encouraged by these rules and their
opportunities. Such rules could create a long-term positive impact on the
Company through expenditures for equipment and supplies to ensure the safe and
proper removal and disposal of lead paint.
SAFETY AND HAZARDOUS MATERIALS INDUSTRIES BACKGROUND
The EPA and the Occupational Safety and Health Administration ("OSHA"), together
over time, have established numerous rules and regulations governing
environmental protection and worker safety and health. The demand for supplies
and equipment by U.S. businesses and governments to meet these rules and
regulations has resulted in the creation of a multi-billion dollar industry.
As research identifies the degree of environmental or health risk associated
with various substances and working conditions, new rules and regulations can be
expected. These actions inevitably will require more expenditures for supplies
and equipment for handling, remediation and disposal of hazardous substances and
the creation of safe living and working conditions.
CONSTRUCTION TOOLS SUPPLY INDUSTRY BACKGROUND
Besides the normal hand and power tools, and associated consumable parts,
supplied to the construction industry, the EPA and OSHA have also established
certain rules and regulations governing the protection of the environment and
the protection of workers in this industry.
Currently, the Company supplies the construction tools industry in its Santa Fe
Springs, Phoenix and Las Vegas 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. The condition of the
real estate industry in the Los Angeles and Phoenix areas remains stable.
5
GEOGRAPHIC DISTRIBUTION OF BUSINESS
The Company distributes over 9,000 personal protection, safety, hazardous waste
remediation and construction tool products to over 4,000 customers primarily
located in the Southwest, Midwest and Pacific Coast. Approximately 53 percent of
its products are sold to asbestos and lead abatement contractors, 25 percent to
the industrial safety market, 11 percent to construction related firms and 11
percent to other firms, including hazardous material contractors. The Company
believes a majority of its sales for the foreseeable future will continue to be
made to asbestos and lead abatement contractors, project organizers and
managers. At present, the Company estimates its share of the asbestos abatement
supply market to be approximately 15 to 20 percent in the geographic markets
served by the Company. The Company considers its relationship with its customers
to be excellent.
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 abatement contractors who require
immediate deliveries because their work is often performed during non-business
hours, involves substantial costs because of the specialized labor crews
involved or may arise on short notice as a result of exigent conditions.
The Company maintains sales, distribution and warehouse centers in Santa Fe
Springs and Hayward, California, in Dallas and Houston, Texas, in Phoenix,
Arizona, in Las Vegas, Nevada, in Denver, Colorado, and in Kent, Washington.
EQUIPMENT AND SUPPLIES
The Company buys products from manufacturers based on orders received from its
customers as well as anticipated needs based on prior buying patterns, customer
inquiries and industry experiences. The Company maintains an inventory of
disposable products and commodities as well as low cost equipment items.
Approximately 85 percent of the Company's sales for 1997 and 1996 are of
disposable items and commodity products which are sold to customers at 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.
6
MARKETING
The Company's marketing program is conducted by its sales representatives, as
well as by senior management and the general managers at each of its operating
facilities. These sales representatives are compensated by a combination of
salary and/or commission which is based upon negotiated sales standards.
BACKLOG
Substantially all the Company's products are shipped to customers within 48
hours following receipt of the order, therefore backlog is not material to the
Company's operations.
INFLATION
The inflation rate for the U.S. economy has averaged approximately 3 percent
annually over the past several years, with the 1997 inflation rate below 2
percent. The 1998 inflation rate is projected to be in the 2 to 3 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 inflation remains stable. 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 no effect on product margins.
ENVIRONMENTAL IMPACT
The Company distributes a variety of products in the asbestos abatement industry
all of which require the Company to maintain on file Material Safety Data Sheets
("MSDS") that inform all purchasers and users of any potential hazards which
could occur if the products spilled or leaked. Although the Company provides no
assurance, it reviews all products that could have a potential for environmental
hazards and tries to ensure the products are safe for on site storage and
distribution. The Company currently distributes no products it believes would
create an environmental hazard if leaked or spilled. The Company has safety
procedures in place to minimize any impact if a product were to leak or spill.
SEASONALITY
Historically, the asbestos abatement services and supply business has been
seasonal as a result of the substantial number of abatement contracts performed
in educational facilities during the summer months or during other vacation
periods. The Company believes the non-educational or private sector, which
includes the industrial, commercial and residential markets, is an area of
potential growth, and that seasonality is not a major characteristic of these
markets. In addition to the private sector asbestos business, the Company's
expansion of the hazardous material remediation, industrial safety and
construction tools supply markets have mitigated any seasonal impacts of
government asbestos projects.
7
GOVERNMENT REGULATION
As a supplier of products manufactured by others to the asbestos and lead
abatement, industrial safety and hazardous materials industry, the Company's
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, and developments in legislation and regulations
affecting manufacturers and purchasers of the Company's products could have a
substantial effect on the Company.
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. The Company's business is not characterized by substantial regulatory
or economic barriers to entry. Additional companies could enter the asbestos and
lead abatement, industrial safety, hazardous materials and construction tools
supply industries and may have greater financial, marketing and technical
resources than the Company
EMPLOYEES
As of February 28, 1998, the Company employed a total of 78 full time employees
including 3 executive officers, 8 managers, 40 administrative and marketing
personnel and 27 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
3,200 square feet of leased general office space in conjunction with the Dallas
branch. This lease expires in July 1999. The eight distribution facilities lease
a total of 105,145 square feet of general office and warehouse space. These
facilities range in size from 6,875 square feet to 24,000 with leases expiring
between January 1999 and March 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company was also named as a third party defendant in a wrongful
death/product liability lawsuit filed in the District Court of the State of
Texas for the County of Bexar (MARIBEL FLORES VS. OLMOS ENVIRONMENTAL SERVICES,
INC., NUTEC INDUSTRIAL CHEMICAL, INC. AND WALTER J. LYSSY, Case No.
96-CI-12845). In early 1998, this lawsuit was settled within its insurance
policy limits. In addition to the accident that resulted in death, three other
people were severely burned. A settlement was reached with these burn victims in
early 1998, prior to any lawsuit being filed. This settlement was also within
the Company's insurance policy limits.
8
The Company was named as a defendant in a product liability lawsuit filed in the
Superior Court of the State of California for the County of Los Angeles -
Central District (PLACIDO ALVAREZ VS. ABATIX ENVIRONMENTAL CORP., ET AL, Case
No. BC133537). The Company is currently receiving indemnification under the
manufacturer's insurance and legal representation at the cost of the
manufacturer. At this time, the Company does not anticipate any material impact
on its financial position or results of operations as a result of this case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 quotations 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
-----------------------------
1996 High Low
- ------------------------ ------------ -----------
First Quarter $ 4 1/2 $ 3
Second Quarter 5 3 5/8
Third Quarter 5 2 7/8
Fourth Quarter 4 1/8 2 7/8
1997
- ------------------------
First Quarter $ 3 3/8 $ 2 1/2
Second Quarter 3 15/16 2 3/16
Third Quarter 3 3/8 2
Fourth Quarter 3 7/16 2 1/2
On March 24, 1998, the closing bid price for the common stock was $3 1/2.
(b) As of March 24, 1998, the approximate number of holders of record of the
Company's common stock was 700.
9
(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. Although the Company's
notes payable to bank do not restrict the payment of dividends, they required
the Company to have a minimum net worth at December 31, 1997. The notes payable
to bank also required the Company to have specified quarterly net income levels
through 1997.
(d) Since November 1994, the Board of Directors authorized management to
purchase 476,500 shares of the Company's common stock. As of December 31, 1997,
the Company has purchased 476,250 shares.
10
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,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
Selected Operating Results:
Net sales $ 34,955 $ 33,067 $ 27,632 $ 25,982 $ 19,085
Gross profit $ 9,651 $ 9,202 $ 7,977 $ 7,164 $ 5,354
Earnings from continuing operations
$ 841 $ 734 $ 813 $ 580 $ 283
Earnings (loss) from discontinued
operations, net of income taxes - 22 - (363) (144)
Cumulative effect of change in
accounting principle - - - - 20
----------- ----------- ----------- ----------- ----------
Net earnings $ 841 $ 756 $ 813 $ 217 $ 159
=========== =========== =========== =========== ==========
Basic earnings (loss) per common share:
Earnings from continuing operations $ .43 $ .35 $ .37 $ .25 $ .13
Earnings (loss) from discontinued
operations - .01 - (.16) (.07)
Cumulative effect of change in
accounting principle - - - - .01
----------- ----------- ----------- ----------- ----------
Net earnings $ .43 $ .36 $ .37 $ .09 $ .07
=========== =========== =========== =========== ==========
Diluted earnings (loss) per common share:
Earnings from continuing operations $ .43 $ .35 $ .36 $ .25 $ .12
Earnings (loss) from discontinued
operations - .01 - (.16) (.06)
Cumulative effect of change in
accounting principle - - - - .01
----------- ----------- ----------- ----------- ----------
Net earnings $ .43 $ .36 $ .36 $ .09 $ .07
=========== =========== =========== =========== ==========
Weighted average shares outstanding:
Basic 1,934 2,076 2,207 2,311 2,205
=========== =========== =========== =========== ==========
Diluted 1,934 2,111 2,238 2,330 2,304
=========== =========== =========== =========== ==========
As of December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
Selected Balance Sheet Data:
Current assets $ 9,003 $ 9,722 $ 8,230 $ 7,426 $ 6,605
Current liabilities 4,676 6,219 4,659 4,208 3,669
Total assets 9,854 10,678 8,977 8,184 7,341
Total liabilities 4,676 6,219 4,659 4,283 3,724
Retained earnings 4,085 3,244 2,488 1,674 1,457
Stockholders' equity 5,178 4,459 4,318 3,901 3,618
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
RESULTS OF CONTINUING OPERATIONS
Net sales from continuing operations for the year ended December 31, 1997
increased 6 percent to $34,955,000 from $33,067,000 in 1996 due to efforts to
further expand and diversify the customer base. The increase is also a result of
the general economic recovery in the geographic regions serviced by the
Company's facilities. The improved economic conditions, if maintained, should
provide the ability for the Company to grow its revenues in 1998. These efforts
also provide the groundwork for broadening the Company's revenues among its
different markets, thereby decreasing its dependence on any one of its markets.
Industry-wide sales of asbestos abatement products are expected to remain
relatively flat for the foreseeable future. The Company believes the current
U.S. economy expansion will positively impact its operations. However, the
asbestos abatement industry will likely diminish over time as asbestos
containing materials, last used in construction during 1977-1980, are removed
from schools, office buildings, homes and factories. A 1992 estimate by an
industry analyst predicted that as much as $80 billion may be spent nationwide
over a 20 year period for asbestos removal, of which the Company estimates $8
billion relates to abatement supplies. Approximately $2 billion in abatement
supplies is estimated to be spent during this 20 year period in the geographic
areas served by the Company's eight distribution centers. At this potential rate
of expenditure, and at a presently estimated 15 to 20 percent market share of
the asbestos abatement markets served by the Company, the current and
intermediate term effects of the diminishing market are not expected to have a
material adverse impact on the Company.
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 Company plans to expand its customer base in
these areas through internal growth and additional salespeople and expects these
revenues to increase at a faster rate than the asbestos abatement revenues.
Gross profit in 1997 of $9,651,000 increased 5 percent from gross profit in 1996
of $9,202,000 due to increased volume. As expected, margins varied somewhat 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 28 percent for
1997 and 1996. Overall margins are expected to remain at their current levels in
1998. However, as experienced in 1996, competitive pressures could negatively
impact any and all efforts by the Company to maintain or improve product
margins.
Selling, general and administrative expenses for 1997 of $7,953,000 increased 3
percent over 1996 expenses of $7,708,000. The increase was attributable
primarily to higher employment costs as a result of additional marketing and
support personnel. Selling, general and
12
administrative expenses were 23 percent of sales for both 1997 and 1996. These
expenses are expected to remain in their current range for 1998.
In March 1996, the Company's lease obligation for its closed Corpus Christi
branch was terminated. This lease termination enabled the Company to reverse all
remaining reserves, resulting in the 1996 special credit.
Other expense, net, of $365,000 in 1997 increased 2 percent over 1996 expense of
$356,000. This increase is primarily due to increased interest expense resulting
from higher borrowings on the Company's working capital line of credit to fund
the growth in inventory and the growth in receivables during the first nine
months of the year. Since the Company's lines of credit are tied to the prime
rate, any increases in the prime rate would negatively affect the Company's
earnings.
See note 5 to the consolidated financial statements for a description of income
taxes.
The Company's credit policies remain stringent, and amounts written off are
below industry experience. Days of sales in net accounts receivable were
unchanged from 1996 to 1997. The Company believes the reserve for doubtful
accounts is adequate.
RESULTS OF DISCONTINUED OPERATIONS
The Company realized earnings of $22,000 or $.01 per share from discontinued
operations in 1996, resulting from the termination of the lease obligation.
NET RESULTS
Net earnings in 1997 of $841,000 or $.43 per share increased $85,000 from net
earnings of $756,000 or $.36 per share in 1996. The 11 percent increase in net
earnings is primarily due to increased volume, partially offset by higher
general and administrative expenses. In addition, the 1996 net earnings included
a special credit and income from discontinued operations.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
RESULTS OF CONTINUING OPERATIONS
Net sales from continuing operations for the year ended December 31, 1996
increased 20 percent to $33,067,000 from $27,632,000 in 1995 due to efforts to
further expand and diversify the customer base. The increase is also a result of
the general economic recovery in the geographic regions serviced by the
Company's facilities. In addition, 1996 included a full year of operation for
the Company's Las Vegas facility.
Gross profit in 1996 of $9,202,000 increased 15 percent from gross profit in
1995 of $7,977,000 due to increased revenues. As expected, margins varied
somewhat from location to location due to sales mix and local market conditions.
The Company's gross profit margins, expressed as a
13
percentage of sales, decreased to 28 percent for 1996 compared to 29 percent for
1995, primarily as a result of pressure from low-price competition.
Selling, general and administrative expenses for 1996 of $7,708,000 increased 22
percent over 1995 expenses of $6,342,000. The increase was attributable
primarily to the higher employment costs as a result of additional marketing and
support personnel and a full year of operations in Las Vegas. Selling, general
and administrative expenses were 23 percent of sales for both 1996 and 1995.
In the third quarter of 1995, the Company incurred a special charge of $80,000
to accrue for future lease commitments resulting from the closure of its
distribution center in Corpus Christi, Texas. The noncancelable lease was to
expire in September 1999. The Company's lease agreement on the building that was
occupied by both the operations of IESI and the Corpus Christi branch included
an option enabling the Company to purchase the building. In March 1996, the
Company purchased this facility and simultaneously sold the building to a third
party. This transaction terminated the Company's lease obligation and enabled
the Company to reverse all remaining reserves resulting in the 1996 special
credit.
Other expense, net, of $356,000 in 1996 increased 43 percent over 1995 expense
of $248,000. This increase is primarily due to increased interest expense
resulting from higher borrowings on the Company's working capital line of credit
to fund the growth in receivables and inventory. Since the Company's lines of
credit are tied to the prime rate, any increases in the prime rate would
negatively affect the Company's earnings.
See note 5 to the consolidated financial statements for a description of income
taxes.
The Company's credit policies remain stringent, and amounts written off are
below industry experience. Days of sales in net accounts receivable increased
one day from 1995 to 1996.
RESULTS OF DISCONTINUED OPERATIONS
The Company realized earnings of $22,000 or $.01 per share from discontinued
operations, resulting from the termination of the lease obligation in March
1996.
NET RESULTS
Net earnings in 1996 of $756,000 or $.36 per share decreased $57,000 from net
earnings of $813,000 or $.36 per share in 1995. The 7 percent decrease in net
earnings is due to lower product margins, higher selling, general and
administrative and interest expenses. This decline was partially offset by the
increased sales volume.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements historically result from the growth
of its accounts receivable and inventories, offset by increased accounts payable
14
and accrued expenses, associated with significant increases in sales volume
and/or the addition of new locations. Net cash provided by operations during
1997 of $2,133,000 resulted principally from the net earnings, the decrease in
accounts receivable, the non-cash charge to earnings for depreciation and
amortization and the receipt of the income tax receivable.
Cash requirements for non-operating activities during 1997 resulted primarily
from the working capital line of credit payments, the purchases of property and
equipment amounting to $286,000 and the repurchase of the Company's common stock
totaling $213,000. The working capital line of credit payments occurred as a
result of significant collections of accounts receivable in the second half of
1997. The equipment purchases in 1997 were primarily delivery vehicles, office
furniture and computer equipment. The Company repurchased its common stock
because of the Board of Directors' belief that it was undervalued in the
marketplace. The repurchase of common stock and purchases of property and
equipment were funded by borrowings on the Company's lines of credit.
Cash flow from operations for the entire year of 1998 is expected to be
break-even, although at any given point, it may be negative. Break-even cash
flow from operations is expected because the rate of revenue growth in 1998 is
projected to be higher than 1997, but at a level that will not require
significant net cash flows from operations.
Capital expenditures for 1998 are expected to approximate those in 1997. The
Company currently has no plans to expand geographically in 1998, however, the
Company will continue to search for geographic locations that would complement
the existing infrastructure. If another location were to be opened in 1998, the
Company would fund the startup expenses through its lines of credit.
The Company is reviewing its business for potential Year 2000 issues. Although
the entire scope related to this issue is unknown at this time, the impact to
the Company's financial statements for compliance with Year 2000 problems is not
expected to be material. Anticipated cash requirements in 1998 for capital
expenditures, including those related to the Year 2000 issue, if any, will be
satisfied from operations and borrowings on the lines of credit, as required.
The Company maintains a $5,500,000 working capital line of credit at a
commercial lending institution that allows the Company to borrow up to 80
percent of the book value of eligible trade receivables plus the lesser of 40
percent of eligible inventory or $1,500,000. As of March 2, 1998, there are
advances outstanding under this credit facility of $1,949,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional
$3,433,000 as of March 2, 1998. 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 2,
1998 were $420,000. Both credit facilities are payable on demand and bear a
variable rate of interest computed at the prime rate plus one-quarter of one
percent.
Management believes, that based on its equity position, the Company's current
credit facilities can be expanded during the next twelve months, if necessary,
15
and that these facilities, together with cash provided by operations, will be
sufficient for its capital and liquidity requirements for the next twelve
months.
The Company has retained Banc One Capital Corporation ("Banc One") as strategic
advisors. The exclusive agreement is for Banc One to render financial advisory
and investment banking services in connection with evaluating the Company's
strategic alternatives.
Except for the historical information contained herein, the matters set forth in
this Form 10-K are forward looking and involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are the following: federal funding of environmental related projects,
general economic and commercial real estate conditions in the local markets,
changes in interest rates, inability to pass on price increases to customers,
unavailability of products, strong competition and loss of key personnel. In
addition, many of the Company's products are petroleum based. Increases in oil
prices or shortages in supply could significantly impact the Company's business
and its ability to supply customers with certain products at a reasonable price.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("Statement 130"). Statement 130 is effective for fiscal years beginning after
December 15, 1997 and requires companies to report all components of
comprehensive income in a financial statement that is displayed with the same
prominence as other financial statements. Management of the Company does not
expect the adoption of Statement 130 to have a material impact on the Company's
currently reported results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("Statement 131"). Statement 131 is
effective for financial statements for periods beginning after December 15,
1997; however, application in interim periods is not required until the second
year of application. Since Statement 131 only requires financial and descriptive
information be disclosed about an entity's reportable operating segments, there
will be no impact on the Company's financial position or results of operations.
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.
16
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, 1997.
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, 1997.
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, 1997.
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, 1997.
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
17
(c) EXHIBITS
(1)(a) Form of Underwriting Agreement (filed as Exhibit (1)(a) to the
Registration Statement on Form S-18, filed February 9, 1989).
(1)(b) Form of Selected Dealer Agreement (filed as Exhibit (1)(b) to the
Registration Statement on Form S-18, filed January 11, 1989).
(1)(c) Warrant Solicitation Agent and Exercise Fee Agreement (filed as Exhibit
(l)(c) to the Report on Form 10-K for the year ended December 31, 1989).
(2)(a) Agreement of Merger (filed as Exhibit (2) to the Registration Statement
on Form S-18, filed January 11, 1989).
(2)(b) Asset Purchase Agreement (filed as Exhibit (2)(b) to the Report on Form
8-K, filed October 19, 1992).
(3)(a)(1) Certificate of Incorporation (filed as Exhibit (3)(a)(1) to the
Registration Statement on Form S-18, filed January 11, 1989; filed
electronically as Exhibit 3(i)(a) to the Form 10-Q for the quarter ended
September 30, 1995, filed on November 9, 1995).
(3)(a)(2) Certificate of Amendment of Certificate of Incorporation (filed as
Exhibit (3)(a)(2) to the Registration Statement on Form S-18, filed January
11, 1989; filed electronically as Exhibit 3(i)(b) to the Form 10-Q for the
quarter ended September 30, 1995, filed on November 9, 1995).
(3)(a)(3) Certificate of Amendment of Certificate of Incorporation (filed as
Exhibit (3)(i)(c) to the Form 10-Q for the quarter ended September 30,
1995, filed November 9, 1995; filed electronically as Exhibit 3(i)(c) to
the Form 10-Q for the quarter ended September 30, 1995, filed on November
9, 1995).
(3)(b) Bylaws (filed as Exhibit (3)(b) to the Registration Statement on Form
S-18, filed January 11, 1989; filed electronically as Exhibit 3(ii) to the
Form 10-Q for the quarter ended September 30, 1995, filed on November 9,
1995).
(4)(a) Specimen Certificate of Common Stock (filed as Exhibit (4)(a) to the
Registration Statement on Form S-18, filed January 8, 1989).
(4)(b) Specimen of Redeemable Common Stock Purchase Warrant (filed as Exhibit
(4)(b) to the Registration Statement on Form S-18, filed February 9, 1989).
(4)(c) Form of Warrant to be sold to Culverwell & Co., Inc. (filed as Exhibit
(4)(c) to the Registration Statement on Form S-18, filed February 9, 1989).
18
(4)(d) Warrant Agency Agreement between the Registrant and North American
Transfer Company (filed as Exhibit (4)(d) to the Registration Statement on
Form S-18, filed February 9, 1989).
(9)(a)(ii) Form of Escrow Agreement with State Street Bank and Trust Company
(filed as Exhibit (9)(a)(ii) to the Registration Statement on Form S-18,
filed January 11, 1989).
(10)(a) Employment Agreement with Terry W. Shaver (filed as Exhibit (10)(a) to
the Registration Statement on Form S-18, filed January 11, 1989).
(10)(a)(i) Employment Agreement with Terry W. Shaver effective January 2, 1991
(filed as Exhibit (10)(a)(i) to the Report on Form 10-K for the year ended
December 31, 1990).
(10)(a)(ii) Employment Agreement with Terry W. Shaver effective January 4, 1993
(filed as Exhibit (10)(a)(ii) to the Report on Form 10-K for the year ended
December 31, 1992).
(10)(a)(iii) Employment Agreement with Terry W. Shaver effective January 1, 1995
(filed as Exhibit (10)(a)(iii) to the Report on Form 10-K for the year
ended December 31, 1994).
(10)(a)(iv) Employment Agreement with Terry W. Shaver effective January 1, 1997
(filed as Exhibit (10)(a)(iv) to the Report on Form 10-K for the year ended
December 31, 1996).
(10)(b) Employment Agreement with Gary L. Cox (filed as Exhibit (10)(b) to the
Registration Statement on Form S-18, filed January 11, 1989).
(10)(b)(i) Employment Agreement with Gary L. Cox effective January 2, 1991
(filed as Exhibit (10)(b)(i) to the Report on Form 10-K for the year ended
December 31, 1990).
(10)(b)(ii) Employment Agreement with Gary L. Cox effective January 4, 1993
(filed as Exhibit (10)(b)(ii) to the Report on Form 10-K for the year ended
December 31, 1992).
(10)(b)(iii) Employment Agreement with Gary L. Cox effective January 1, 1995
(filed as Exhibit (10)(b)(iii) to the Report on Form 10-K for the year
ended December 31, 1994).
(10)(b)(iv) Employment Agreement with Gary L. Cox effective January 1, 1997
(filed as Exhibit (10)(b)(iv) to the Report on Form 10-K for the year ended
December 31, 1996).
(10)(c) Revolving Credit Agreement with Texas American Bank/Duncanville, N.A.
(filed as Exhibit (10)(c) to the Registration Statement on Form S-18, filed
January 11, 1989).
19
(10)(d) Demand Credit Facility with Comerica Bank-Texas dated February 15, 1989
(filed as Exhibit (10)(d) to the Report on Form 10-Q for the Quarter ended
March 31, 1989, filed May 15,1989).
(10)(e) Demand Credit Facility with Comerica Bank-Texas dated June 15, 1989
(filed as Exhibit (10)(e) to the Report on Form 10-Q for the Quarter ended
June 30, 1989, filed August 11, 1989).
(10)(e)(i) Demand Credit Facility with Comerica Bank-Texas dated March 1, 1993
(filed as Exhibit (10)(e)(i) to the Report on Form 10-K for the year ended
December 31, 1992).
(10)(e)(ii) Demand Credit Facility with Comerica Bank-Texas extension, renewal
and increase dated June 1, 1993 (filed as Exhibit (10)(e)(ii) to the Report
on Form 10-K for the year ended December 31, 1993).
(10)(e)(iii) Demand Credit Facility with Comerica Bank-Texas extension, renewal
and increase dated September 22, 1994 (filed as Exhibit (10)(e)(iii) to the
Report on Form 10-K for the year ended December 31, 1994).
(10)(f) Employment Agreement with S. Stanley French effective October 1, 1992
(filed as Exhibit (10)(f) to the Report on Form 8-K, filed October 19,
1992).
(22) Information Statement dated September 1, 1995 (filed as Exhibit (22) to the
Report on Form 10-K for the year ended December 31, 1995).
(23) Consent of Independent Auditors.*
(27) Financial Data Schedule for the twelve months ended December 31, 1997.*
* Filed herewith as part of the Company's electronic filing.
20
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 13th day of March,
1998.
ABATIX ENVIRONMENTAL 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 13, 1998
Terry W. Shaver and Director (Principal Executive Officer)
/s/ Gary L. Cox Executive Vice President, March 13, 1998
Gary L. Cox Chief Operating Officer and Director
/s/ Lamont C. Laue Director March 13, 1998
- ------------------
Lamont C. Laue
/s/ Donald N. Black Director March 13, 1998
- -------------------
Donald N. Black
/s/ Frank J. Cinatl Vice President and Chief Financial March 13, 1998
Frank J. Cinatl, IV Officer (Principal Accounting Officer)
21
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
II - Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995 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 Environmental Corp.:
We have audited the consolidated financial statements of Abatix Environmental
Corp. and subsidiary as listed in the accompanying index. In connection with our
audits of the consolidated financial statements we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Abatix Environmental
Corp. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Dallas, Texas
February 20, 1998
F-2
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
1997 1996
------------- -------------
Assets
Current assets:
Cash $ 304,947 $ 310,288
Trade accounts receivable, net of allowance for doubtful accounts of
$495,092 in 1997 and $376,117 in 1996 (note 4) 4,768,279 5,295,849
Inventories (note 4) 3,538,355 3,440,557
Refundable income taxes - 285,784
Prepaid expenses and other assets 249,426 285,791
Deferred income taxes (note 5) 142,466 103,723
------------- -------------
Total current assets 9,003,473 9,721,992
Receivables from officers and employees 73,729 76,347
Property and equipment, net (notes 3 and 4) 632,120 763,643
Deferred income taxes (note 5) 115,531 80,168
Other assets 29,396 35,822
------------- -------------
$ 9,854,249 $ 10,677,972
============= =============
Liabilities and Stockholders' Equity Current liabilities:
Notes payable to bank (note 4) $ 3,010,733 $ 4,786,935
Accounts payable 1,230,107 1,066,427
Accrued compensation 107,272 106,090
Other accrued expenses 328,460 259,997
------------- -------------
Total current liabilities 4,676,572 6,219,449
------------- -------------
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
2,413,814 shares in 1997 and 2,381,314 shares in 1996 2,414 2,381
Additional paid-in capital 2,498,508 2,407,603
Retained earnings 4,084,892 3,243,786
Treasury stock at cost, 476,250 common shares in 1997 and 392,750
common shares in 1996 (1,408,137) (1,195,247)
------------- -------------
Total stockholders' equity 5,177,677 4,458,523
Commitments and contingencies (note 10)
------------- -------------
$ 9,854,249 $ 10,677,972
============= =============
See accompanying notes to consolidated financial statements.
F-3
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------- ------------- -------------
Net sales $ 34,955,477 $ 33,066,831 $ 27,632,245
Cost of sales 25,304,902 23,864,836 19,654,858
------------- ------------- -------------
Gross profit 9,650,575 9,201,995 7,977,387
Selling, general and administrative expenses (7,953,179) (7,707,546) (6,342,241)
Special credit (charge) (note 2) - 56,711 (80,000)
------------- ------------- -------------
Operating profit 1,697,396 1,551,160 1,555,146
Other income (expense):
Interest income 36,187 19,840 15,311
Interest expense (381,655) (359,712) (258,079)
Other, net (19,215) (15,944) (5,487)
------------- ------------- -------------
Earnings from continuing operations before
income taxes 1,332,713 1,195,344 1,306,891
Income tax expense (note 5) (491,607) (460,941) (493,514)
------------- ------------- -------------
Earnings from continuing operations 841,106 734,403 813,377
Discontinued operations (note 2):
Earnings on discontinuance of business, net of tax
expense of $8,348 - 21,545 -
------------- ------------- -------------
Net earnings $ 841,106 $ 755,948 $ 813,377
============= ============= =============
Basic earnings per common share:
Earnings from continuing operations $ .43 $ .35 $ .37
Earnings from discontinued operations - .01 -
------------- ------------- -------------
Net earnings $ .43 $ .36 $ .37
============= ============= =============
Diluted earnings per common share:
Earnings from continuing operations $ .43 $ .35 $ .36
Earnings from discontinued operations - .01 -
------------- ------------- -------------
Net earnings $ .43 $ .36 $ .36
============= ============= =============
Weighted average shares outstanding (note 1):
Basic 1,933,896 2,076,241 2,207,456
============= ============= =============
Diluted 1,933,896 2,110,582 2,238,312
============= ============= =============
See accompanying notes to consolidated financial statements.
F-4
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
Additional
Common Stock Treasury Stock
----------------------- Paid-in Retained ------------------------- Total
Shares Amount Capital Earnings Shares Amount Equity
----------- --------- ------------ ------------ ---------- ------------ ------------
Balance at December 31, 1994 2,319,748 $ 2,320 $ 2,279,653 $ 1,674,461 26,500 $ (55,598) $ 3,900,836
Purchase of treasury stock - - - - 180,600 (481,946) (481,946)
Exercise of stock options 46,566 46 85,465 - - - 85,511
Net earnings - - - 813,377 - - 813,377
----------- --------- ------------ ------------ ---------- ------------ ------------
Balance at December 31, 1995 2,366,314 2,366 2,365,118 2,487,838 207,100 (537,544) 4,317,778
Purchase of treasury stock - - - - 185,650 (657,703) (657,703)
Exercise of stock options 15,000 15 42,485 - - - 42,500
Net earnings - - - 755,948 - - 755,948
----------- --------- ------------ ------------ ---------- ------------ ------------
Balance at December 31, 1996 2,381,314 2,381 2,407,603 3,243,786 392,750 (1,195,247) 4,458,523
Purchase of treasury stock - - - - 83,500 (212,890) (212,890)
Exercise of stock options 32,500 33 90,905 - - - 90,938
Net earnings - - - 841,106 - - 841,106
----------- -------- ------------ ------------ ---------- ------------ ------------
Balance at December 31, 1997 2,413,814 $ 2,414 $ 2,498,508 $ 4,084,892 476,250 $(1,408,137) $ 5,177,677
=========== ======== ============ ============ ========== ============ ============
See accompanying notes to consolidated financial statements.
F-5
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------- ------------- -------------
Cash flows from operating activities:
Net earnings $ 841,106 $ 755,948 $ 813,377
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 378,076 392,019 337,309
Deferred income taxes (74,106) (7,515) (104,176)
Loss (gain) on disposal of assets 2,681 15,805 (11,615)
Changes in assets and liabilities:
Receivables 527,570 (925,254) 58,258
Inventories (97,798) (352,281) (690,024)
Refundable income taxes 285,784 (285,784) -
Prepaid expenses and other assets 36,365 (62,604) (7,602)
Net liabilities of discontinued operations - (56,813) 91,627
Accounts payable 163,680 (474,877) 692,816
Accrued expenses 69,645 (63,121) 7,781
------------- ------------- -------------
Net cash provided by (used in) operating activities 2,133,003 (1,064,477) 1,187,751
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (285,900) (611,407) (232,980)
Proceeds from sale of property and equipment 36,666 33,000 48,091
Advances to officers and employees (25,647) (51,270 (50,604)
Collection of advances to officers and employees 28,265 45,500 38,712
Other assets, primarily deposits 6,426 3,171 (22,057)
------------- ------------- -------------
Net cash used in investing activities (240,190) (581,006) (218,838)
------------- ------------- -------------
Cash flows from financing activities:
Exercise of stock options 90,938 42,500 70,782
Purchase of treasury stock (212,890) (657,703) (481,946)
Borrowings on notes payable to bank 34,600,365 36,133,863 29,548,785
Repayments on notes payable to bank (36,376,567) (33,978,756) (29,836,675)
Principal payments on capital lease obligations - - (4,719)
------------- ------------- -------------
Net cash (used in) provided by financing activities (1,898,154) 1,539,904 (703,773)
------------- ------------- -------------
Net (decrease) increase in cash (5,341) (105,579) 265,140
Cash at beginning of year 310,288 415,867 150,727
------------- ------------- -------------
Cash at end of year $ 304,947 $ 310,288 $ 415,867
============= ============= =============
See accompanying notes to consolidated financial statements.
F-6
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a) General
Abatix Environmental Corp. ("Abatix") and subsidiary
(collectively, the "Company") market and distribute personal
protection and safety equipment and durable and nondurable
supplies predominantly, based on revenues, to the asbestos
abatement industry. The Company also supplies these products to
the industrial safety and hazardous materials industries and,
combined with tools and tool supplies, to the construction
industry. At December 31, 1997, the Company operated eight
distribution centers in six states. The Company discontinued the
sorbent manufacturing business of its wholly owned subsidiary,
International Enviroguard Systems, Inc. ("IESI"), a Delaware
corporation, in December 1994 (see note 2). However, IESI
continues to import disposable products sold primarily through the
Company's distribution channels.
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 amounts have been reclassified for consistency in
presentation.
(b) Inventories
Inventories consist of materials and equipment for resale and are
stated at the lower of cost, determined by a method which
approximates the first-in, first-out method, or market.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation for
financial statement purposes is provided by the straight-line
method over the estimated useful lives of the depreciable
properties.
(d) Long-Lived Assets
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
F-7
Adoption and implementation of this Statement did not have a
material impact on the Company's financial position or results of
operations in any period presented.
(e) Revenue Recognition
Revenue is recognized when the goods are shipped.
(f) Earnings per Share
Basic earnings per share is calculated using the weighted average
number of common shares outstanding during each year, while
diluted earnings per share includes the effects of all dilutive
securities. As of December 31, 1997, there were no dilutive
securities outstanding. The following table is a reconciliation of
the weighted average shares used for basic and diluted earnings
per share for the years ended December 31, 1997, 1996 and 1995.
1997 1996 1995
--------- --------- ---------
Weighted average shares outstanding - basic 1,933,896 2,076,241 2,207,456
Dilutive stock options and warrants - 34,341 30,856
--------- --------- ---------
Weighted average shares outstanding - diluted 1,933,896 2,110,582 2,238,312
========= ========= =========
(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, 1997 or 1996.
The Company paid interest of $383,735, $351,645 and $263,707 in
1997, 1996 and 1995, respectively, and income taxes of $524,635,
$736,554 and $544,200 in 1997, 1996 and 1995, respectively.
Significant non-cash transactions include the transfer of accrued
compensation totaling $14,729 to additional paid-in capital upon
exercise of stock options during 1995.
(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
F-8
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) Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("Statement 123"). Statement 123
allows entities to continue to apply the provisions of Accounting
Principles Board Opinion No. 25 ("Opinion 25") and provide pro
forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in Statement 123 had been
applied. The Company has elected to continue to apply the
provisions of Opinion 25 and provide the pro forma disclosure
provisions of Statement 123.
(2) Restructuring and Discontinued Operations
On December 15, 1994, the Company announced a formal plan to
discontinue the sorbent manufacturing business of IESI. The Company
recorded an estimated loss on disposal of IESI at December 31, 1994 of
$139,487, net of taxes. This estimated loss on disposal primarily
included costs related to the remaining lease obligation on the
facility, the writedown of fixed assets and inventory to net realizable
value and the estimated loss from operations up to the expected
disposal date. The sorbent manufacturing operations were actually
discontinued in 1995. Except for the remaining lease obligation
discussed below, actual costs through December 31, 1996 approximated
management's estimate. Sales for the discontinued operations of IESI
were $142,000 in 1995.
In the third quarter of 1995, the Company incurred a special charge of
$80,000 to accrue for future lease commitments resulting from the
closure of its distribution center in Corpus Christi, Texas. The
noncancelable lease was to expire in September 1999. Sales and
operating losses for the Corpus Christi branch were $294,000 and
$55,000, respectively, in 1995.
The Company's lease agreement on the building that was occupied by both
the operations of IESI and the Corpus Christi branch included an option
enabling the Company to purchase the building. In March 1996, the
Company purchased this facility and simultaneously sold the building to
a third party. This transaction terminated the Company's lease
obligation. Reversal of the liability for the remaining lease
obligation resulted in the special credit and earnings from
discontinued operations in 1996.
F-9
(3) Property and Equipment
A summary of property and equipment at December 31, 1997 and 1996
follows:
Estimated
Useful Life 1997 1996
-------------- ------------ ------------
Furniture and equipment 3 - 10 years $ 1,676,136 $ 1,592,568
Transportation equipment 3 - 5 years 359,006 324,676
Leasehold improvements 3 - 5 years 70,915 54,609
------------ ------------
2,106,057 1,971,853
Less accumulated depreciation and
amortization 1,473,937 1,208,210
------------ ------------
Net property and equipment $ 632,120 $ 763,643
============ ============
(4) Notes Payable to Bank
At December 31, 1997, the Company had two lines of credit with a bank
that are due on demand. A working capital facility allows the Company
to borrow up to 80 percent of the book value of eligible trade
receivables plus the lesser of 40 percent of eligible inventory or
$1,500,000, up to a maximum of $5,500,000. Under this formula, the
Company had the capability to borrow $5,074,000 at December 31, 1997,
of which approximately $2,564,000 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, 1997, the Company had borrowed approximately $447,000 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. During 1997, the Company
negotiated a one-quarter of one percent reduction in its rate, thereby
reducing the rate of interest on its agreements to prime plus
one-quarter of one percent. As of December 31, 1997 and 1996, the
Company's rate of interest on these agreements was 8.75 percent. These
credit facilities are secured by accounts receivable, inventories and
equipment.
F-10
(5) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 consists of:
1997 1996 1995
---------- ---------- ----------
Continuing Operations:
Current:
Federal $ 483,323 $ 413,759 $ 542,681
State 82,390 72,083 96,233
Deferred:
Federal (63,253) (23,775) (120,240)
State (10,853) (1,126) (25,160)
---------- ---------- ----------
Income tax expense related
to continuing operations 491,607 460,941 493,514
Discontinued operations:
Current - (9,038) (41,224)
Deferred - 17,386 41,224
---------- ---------- ----------
Total income tax expense $ 491,607 $ 469,289 $ 493,514
========== ========== ==========
A reconciliation of the normally expected federal income tax expense
relating to continuing operations based on the U.S. corporate income
tax rate of 34 percent to actual expense for the years ended December
31, 1997, 1996 and 1995 follows:
1997 1996 1995
---------- ---------- ----------
Expected income tax expense $ 453,122 $ 406,417 $ 444,343
Nondeductible meals and entertainment
expense 11,119 13,047 7,232
State income taxes, net of related federal
tax benefit 47,215 46,832 46,908
Other (19,849) (5,355) (4,969)
---------- ---------- ----------
Actual income tax expense relating to
continuing operations $ 491,607 $ 460,941 $ 493,514
========== ========== ==========
F-11
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31,
1997 and 1996 follow:
1997 1996
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts $ 188,642 $ 143,830
Property and equipment, principally due to
differences in depreciation 115,388 80,168
Other - 11,790
---------- ----------
Total gross deferred tax assets 304,030 235,788
Deferred tax liabilities:
Prepaid expenses (46,033) (51,897)
---------- ----------
Net deferred tax asset $ 257,997 $ 183,891
========== ==========
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
Options to purchase the Company's common stock were granted to officers
and employees under various stock option plans. In November 1989 the
Board of Directors approved, and in 1991 the Board of Directors amended
the Company's Stock Option Incentive Plan pursuant to which two key
executives or their designees could purchase up to 180,000 shares of
common stock at $.50 per share, provided the Company attained certain
levels of pre-tax earnings in 1989, 1990 and 1991. In 1990, 60,000
options vested and, in 1992, 33,681 options vested under this plan. No
additional shares are available for grant under this plan.
Pursuant to a 1993 employment agreement, an employee was entitled to
purchase 10,000 shares of common stock in each of the three years
covered by the agreement if certain gross profit levels were obtained.
The exercise price for these options was established as the bid price
of the Company's stock on the day after the employee achieved the
established gross profit level and expired one year from the vesting
date. In 1994, 1995 and 1996, the employee met the predetermined gross
profit levels and vested in these options. No additional shares are
available for grant under this plan.
In 1994, the Company adopted a stock option plan (the "Plan") pursuant
to which the Company's Board of Directors could grant stock options to
officers and key employees. The Plan authorized grants of up to 140,000
shares of authorized but unissued common stock. Stock options were
granted with an exercise price equal to or greater than the stock's
fair market value at the date of grant. At December 31, 1997, there
F-12
were no additional shares available for grant under the Plan. The per
share weighted average fair value of stock options granted during 1996
and 1995 was $1.14 and $1.24, respectively, on the date of grant using
the Black Scholes option-pricing model with the following
weighted-average assumptions: 1996 - risk-free interest rate of 7.0%,
expected volatility of 58%, expected dividend yield of 0%, and an
expected life ranging from one to two years; 1995 - risk-free interest
rate of 7.0%, expected volatility of 58%, expected dividend yield 0%
and an expected life of one year.
The Company applied Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company recognized
compensation cost based on the fair value at the grant date for its
stock options under Statement 123, there would be no effect on the
Company's net earnings and earnings per share in 1997 and the effect on
the Company's net earnings and earnings per share for 1996 and 1995
would be reduced to the following pro forma amounts:
1996 1995
----------------- -----------------
Net earnings:
As reported $755,948 $813,377
Pro forma $743,609 $811,453
Basic earnings per share:
As reported $.36 $.37
Pro forma $.36 $.37
F-13
The activity of the options granted for the years ended December 31,
1995, 1996 and 1997 is as follows:
Weighted
Number of Average
Shares Under Price Per
Option Share
------------ ------------
Outstanding at December 31, 1994 171,566 $ 2.29
Granted 20,000 2.63
Exercised (46,566) 1.84
------------
Outstanding at December 31, 1995 145,000 2.71
Granted 7,500 3.88
Exercised (15,000) 2.83
Expired (70,000) 2.46
------------
Outstanding at December 31, 1996 67,500 3.06
Exercised (32,500) 2.80
Expired (35,000) 2.99
------------
Outstanding at December 31, 1997 - -
============
Shares exercisable:
December 31, 1995 75,000 $ 2.50
December 31, 1996 67,500 3.06
December 31, 1997 - -
The Company granted to various consultants warrants to purchase shares
of common stock as part of an agreement to secure their services. These
warrants were granted with exercise prices equal to or greater than the
fair market value of the Company's common stock on the date of grant
and were exercisable immediately. The activity of the warrants granted
to various consultants is summarized in the following table:
Weighted
Average
Number of Price Per
Shares Share
------------ ------------
Outstanding at December 31, 1994 70,000 $ 3.02
Expired (10,000) 3.50
Canceled (50,000) 2.63
------------
Outstanding at December 31, 1995 10,000 4.50
Expired (10,000) 4.50
------------
Outstanding at December 31, 1996 - -
============
Since November 1994, the Board of Directors approved the repurchase of
476,500 shares of the Company's common stock in the open market. The
Company has purchased 476,250 shares of stock since that time,
including 83,500 shares of stock during 1997.
F-14
(7) Benefit Plans
The Company has a 401(k) profit sharing plan. Under the 401(k) plan,
eligible employees may request the Company to deduct and contribute a
portion of their salary to the plan. The Company may also, at its
discretion, match a portion of employee contributions to the plan.
Contributions by the Company to the 401(k) plan aggregated $59,195,
$46,549 and $51,358 during 1997, 1996 and 1995, respectively.
(8) Major Vendors, Customers and Credit Risk
Although no vendor accounted for more than 8% of purchases, one product
class accounted for approximately 18% of sales during the last three
years. 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.
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, Colorado, 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.
Through an acquisition in the third quarter 1996, two of the Company's
customers in the asbestos abatement industry came under common
ownership, although they both remain separate legal entities. As of
December 31, 1997 and 1996, less than 1% and 16%, respectively, of the
trade accounts receivable before allowances were represented by these
two customers. Sales to these two companies represented less than 2%
and 4% of total sales for 1997 and 1996, respectively. During 1997, the
common owner sold both entities to different organizations.
During 1997, 1996 and 1995, no single customer accounted for more than
10 percent of sales.
(9) 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.
F-15
(10) Commitments and Contingencies
The Company leases warehouse and office facilities under long-term
noncancelable operating leases expiring at various dates through March
2002. The following is a schedule of future minimum lease payments
under these leases as of December 31, 1997:
1998 $ 541,956
1999 386,740
2000 193,063
2001 117,360
Thereafter 49,200
------------
$ 1,288,319
============
Rental expense for continuing operations under operating leases for the
years ended December 31, 1997, 1996 and 1995 was $549,612, $491,374 and
$341,949, respectively. Rental expense for discontinued operations
under operating leases for the year ended December 31, 1995 was
$16,479.
The Company has employment agreements with four key employees. The
agreements provide for minimum aggregate cash compensation as follows:
1998 $ 550,400
1999 193,325
2000 111,600
2001 111,600
2002 9,300
-----------
$ 976,225
===========
The Company was named as a third party defendant in a product liability
lawsuit which also asserted wrongful death. In early 1998, this lawsuit
was settled within its insurance policy limits. In addition to the
accident that resulted in death, three other people were severely
burned. A settlement was reached with these burn victims in early 1998,
prior to any lawsuit being filed. This settlement was also within the
Company's insurance policy limits.
The Company was named as a defendant in another product liability
lawsuit resulting in injury. The Company is receiving indemnification
under the manufacturer's product liability insurance and legal
representation at the cost of the manufacturer. At this time, the
Company does not anticipate any material impact on its financial
position or results of operations as a result of this case.
F-16
Schedule II
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Valuation and Qualifying Accounts
Years ended December 31, 1997, 1996 and 1995
Additions
Balance at charged to
beginning of costs and Balance at
year expenses Deductions end of year
------------ ------------ ------------ ------------
Year ended December 31:
Allowance for Doubtful Accounts:
1997 $ 376,117 215,396 96,421 A 495,092
============ ============ ============ ============
1996 $ 343,750 196,772 164,405 A 376,117
============ ============ ============ ============
1995 $ 169,776 221,769 47,795 A 343,750 B
============ ============ ============ ============
Reserve for Loss on Discontinuance of
Business:
1996 $ 54,050 - 54,050 C -
============ ============ ============ ============
1995 $ 193,344 - 139,294 D 54,050
============ ============ ============ ============
Reserve for Loss on Closure of Branch
Location:
1996 $ 72,298 - 72,298 C -
============ ============ ============ ============
1995 $ - 80,000 7,702 E 72,298
============ ============= ============ ============
A Represents the write-off of uncollectible accounts.
B Amounts include the allowance for doubtful accounts related to the
Company's discontinued operations, which had a balance of $7,264 at
December 31, 1995.
C Primarily represents the reversal of the reserves due to the termination
of the Company's lease obligation. See Note 2 to the consolidated
financial statements.
D Represents the losses from operations, the loss on sale of fixed assets
and the payment of lease obligations. See Note 2 to the consolidated
financial statements.
E Amount is primarily the payment of lease obligations. See Note 2 to the
consolidated financial statements.
S-1