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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, 1995 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 Identification Number)
incorporation or organization)
8311 EASTPOINT DRIVE, SUITE 400, DALLAS, TEXAS 7522
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: (214) 381-1146
Securities registered pursuant to Section 12 (b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock Boston Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
2,123,964 shares of common stock, $.001 par value were issued and outstanding
on February 29, 1996.
The aggregate market value of the Registrant's common stock held by
nonaffiliates of the Registrant as of the close of business on February 29,
1996 (an aggregate of 1,126,764 shares out of a total of 2,123,964 shares
outstanding at that time) was $4,366,211 computed by reference to the closing
bid price of $ 3 7/8 on February 29, 1996.
Portions of the Registrant's proxy statement for its 1996 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.
During 1995, the Company sold over 9,000 products consisting of equipment and
supplies to over 4,000 customers from its eight distribution centers in Texas,
California, Arizona, Colorado, Washington and Nevada. Currently, approximately
63 percent of the Company's sales are to the asbestos and lead abatement
industries, and approximately 13 percent, 12 percent and 12 percent of its
sales are to the industrial safety, construction and hazardous materials
industries, respectively. The Company believes a majority of its sales for
the forseeable 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 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. 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, 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. IESI
continues to import products utilizing the Dallas facility.
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, 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.
(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 a few years
ago, 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") estimates, 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.
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 new rules regarding lead-based paint in the
residential markets. The new 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 know lead hazard.
Many asbestos abatement contractors added lead abatement to their portfolios
in an attempt to enter a market considered to be in its infancy. The
asbestos abatement contractors bring experience, working in a regulatory
environment. Although the Company does not anticipate these new rules to
result in an onslaught of lead abatement projects, management is encouraged
by these new rules and their opportunities, as such rules could create a
long-term positive impact on the Company.
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 to 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 the markets served by Abatix. The real estate market in
the Las Vegas and Phoenix areas are strong with vacancy rates for commercial
properties low and rental rates high. The condition of the real estate
industry in the Los Angeles area has stabilized from a decline over the past
several years.
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
63 percent of its products are sold to asbestos and lead abatement firms, 21
percent of its products are sold to manufacturing, chemical and petrochemical
firms while the remaining 16 percent of its products are sold to hazardous
materials and general construction contractors. The Company estimates that at
present, approximately 85 percent of asbestos abatement related sales are made
directly to abatement project organizers and managers. During 1995 and 1994,
the Company did not have a customer that aggregated 10 percent or more of its
sales. The Company considers its relationship with its customers to be
excellent and does not believe the loss of any one particular customer would
have a material adverse effect on the business.
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. A substantial amount of asbestos abatement is
performed after working hours, on weekends and on holidays. 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, Dallas and Houston, Texas, Phoenix, Arizona,
Las Vegas, Nevada, Denver, Colorado, and Kent, Washington. The Company
expanded its distribution operations in 1995 by opening the Las Vegas
facility, as well as, hiring additional salespeople at some of our existing
locations.
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 lower cost
equipment items. Approximately 85 percent of the Company's sales for 1995
and 1994 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 does not manufacture or lease
any products and does not perform any repairs thereon. The Company
distributes on a limited basis, disposable items and equipment under its own
private label.
Except with regard to certain specialty equipment associated with asbestos
abatement activities such as filtration, vacuum and pressure differential
systems, many of the Company's products can be used interchangeably within
many of the industries it supplies. Equipment distributed by the Company
includes manufacturers' product descriptions and instructions pertaining to
use.
MARKETING
The Company's marketing program is conducted by its sales representatives,
as well as by senior management and the general managers at each of its
operating facilities. These sales representatives are compensated by a
combination of salary and/or commission which is based upon negotiated sales
standards. The Company's personnel participate in training programs at
various universities and training schools which enhance the Company's
reputation and recognition of its name, personnel and services.
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
As the inflation of the U.S. economy has averaged approximately 3 percent
annually, 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 constant. 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, the Company 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.
SEASONALITY
Historically, the asbestos abatement services and supply business has been
seasonal as a result of the substantial number of abatement contracts that
were 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.
GOVERNMENT REGULATION
As a supplier of products manufactured by others to the asbestos and lead
abatement, industrial safety and hazardous materials industry, the Company is
not subject to federal laws and regulations including those promulgated by
the EPA and OSHA. However, 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 29, 1996, the Company employed a total of 73 full time
employees including 3 executive officers, 8 managers, 36 administrative and
marketing personnel and 26 clerical and plant 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 119,840 square feet of general
office and warehouse space. These facilities range in size from 6,875 square
feet to 18,680 with leases expiring between August 1996 and November 2000.
Pursuant to the acquisition of certain operating assets of IESI in October
1992, the Company entered into seven-year leases for both its manufacturing
plant and office/warehouse facilities in Corpus Christi, Texas. In December
1994, the Company negotiated the termination of the manufacturing plant lease
effective February 15, 1995, for a cash payment equivalent to one year's
rent. The Company continues to pay lease obligations for the
office/warehouse facility, however, no operations are performed and no assets
are located at that facility. This lease expires in September 1999 and
includes a purchase option. The Company is currently negotiating for a sale
or lease of this facility which, if completed, would relieve the Company from
its lease obligation.
ITEM 3. LEGAL PROCEEDINGS
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 has requested and received (1) indemnification
under the manufacturer's product liability insurance and (2) legal
representation at the cost of the manufacturer. As of February 29, 1996, no
depositions have been taken, therefore management is not able to assess the
merit of the plaintiff's case. However, the Company does not anticipate any
material impact on its financial statements as a result of this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In September 1995, the Company mailed to each of its registered shareholders
a copy of an information statement informing them that the Company was
applying to the State of Delaware for a reduction in its authorized capital.
Effective October 6, 1995, the Company's Certificate of Incorporation with
the State of Delaware was changed to reduce the Company's authorized
preferred stock from 2,000,000 shares to 500,000 shares and to reduce the
Company's authorized common stock from 20,000,000 shares to 5,000,000 shares.
Since the Company had a written consent from stockholders owning 51.6 percent
of the then outstanding common stock, this action did not require a vote by
all of the Company's stockholders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
(a) The Company's common stock is traded 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 Price
-------------------
1994 High Low
-------------- ------ ------
First Quarter $3 3/4 $2 1/2
Second Quarter 2 3/4 1 7/8
Third Quarter 2 1/4 2 1/8
Fourth Quarter 2 1/4 1 3/4
1995
--------------
First Quarter $3 3/8 $2 1/16
Second Quarter 3 5/8 2 1/4
Third Quarter 4 2 5/8
Fourth Quarter 4 1/8 2 3/8
On February 29, 1996, the closing bid price for the common stock was $ 3 7/8.
The Company's common stock is also listed on the Boston Stock Exchange under
the symbol "ABIX.B". No sales were reported by the Boston Stock Exchange for
1994 or 1995.
(b) As of February 29, 1996, the approximate number of holders of record of
the Company's common stock was 700.
(c) The Company has never paid cash dividends on its common stock. The
Company presently intends to retain future earnings, if any, 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 do require the Company maintain a minimum net
worth, which increases each year through 1997. The notes payable to bank
also require the Company maintain minimum net income levels through 1997.
(d) Since November 1994, the Board of Directors has authorized management to
purchase up to 326,500 shares of the Company's common stock. As of December
31, 1995, the Company has purchased 207,100 shares. Of the 180,600 shares
purchased during 1995, 90,000 shares were purchased from a former officer and
director of the Company in a privately negotiated transaction in February 1995.
(e) During 1994, warrants and options were exercised totaling 43,830 shares,
resulting in an increase to stockholders' equity of $122,000. In 1995,
options totaling 46,566 shares were exercised, resulting in an increase to
stockholders' equity of $86,000.
(f) In October 1995, the Company amended its Certificate of Incorporation to
reduce its authorized capital from 5,000,000 shares to 500,000 shares of
preferred stock, and from 20,000,000 shares to 5,000,000 shares of common
stock.
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,
------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Selected Operating Results:
Net sales $27,632 $25,982 $19,085 $11,362 $10,601
Gross profit $ 7,977 $ 7,164 $ 5,354 $ 3,053 $ 2,865
Earnings from continuing
operations $ 813 $ 580 $ 283 $ 28 $ 212
Loss from discontinued
operations, net of
income taxes - (363) (144) (55) -
Cumulative effect of change
in accounting principle - - 20 - -
------- ------- ------- ------- -------
Net earnings (loss) $ 813 $ 217 $ 159 $ (27) $ 212
======= ======= ======= ======= =======
Earnings (loss) per common
and common equivalent share:
Earnings from continuing
operations $ .36 $ .25 $ .12 $ .01 $ .10
Loss from discontinued
operations - (.16) (.06) (.02) -
Cumulative effect of change
in accounting principle - - .01 - -
------- ------- ------- ------- -------
Net earnings (loss) $ .36 $ .09 $ .07 $ (.01) $ .10
======= ======= ======= ======= =======
Weighted average common
and common equivalent
shares outstanding 2,238 2,330 2,304 2,074 2,148
======= ======= ======= ======= =======
As of December 31,
-----------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Selected Balance Sheet Data:
Current assets $ 8,230 $ 7,426 $ 6,605 $ 4,055 $ 3,742
Current liabilities 4,659 4,208 3,669 1,898 1,013
Total assets 8,977 8,184 7,341 4,959 4,185
Total liabilities 4,659 4,283 3,724 1,928 1,013
Retained earnings 2,488 1,674 1,457 1,299 1,325
Stockholders' equity 4,318 3,901 3,618 3,031 3,138
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
RESULTS OF CONTINUING OPERATIONS
Net sales from continuing operations for the year ended December 31, 1995
increased 6 percent to $27,632,000 from $25,982,000 in 1994. The increase in
sales is due to efforts to further expand and diversify revenues without
sacrificing product margins. The increase is a result of recovery in the
general economic conditions in the southwest and the expansion of business
along the pacific coast region. In addition, the Company expanded its
Phoenix and Las Vegas facilities in October and December, 1995, respectively.
The improved economic conditions, if maintained, and the expansion should
provide the ability for the Company to grow its revenues and maintain its
margins, thereby promoting continued profitability in 1996. In addition,
these efforts should 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 in 1996. However, the Company's sales and share of the
asbestos abatement market are expected to continue to increase primarily
because of the marketplace's recognition of the Company as a reliable and
stable supplier. Several of the Company's competitors have ceased operations
or significantly reduced their presence over recent years in the Company's
geographic locations.
Spending on asbestos abatement has dropped in the U.S. over the past several
years due largely to the lack of full recovery in the commercial real estate
industry. Concerns raised about the comparative health risks of removing
asbestos and the costs related to such removal, as opposed to leaving it in
place, also have resulted in the delay or cancellation of some projects. The
Company also believes that as the U.S. economy continues its economic
rebound, it will have a positive impact on its operations. Notwithstanding
the above, the asbestos abatement industry will likely diminish over time as
asbestos containing materials, last used in construction during 1977-1980,
ultimately 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 the next 20 years for asbestos removal, of which
the Company estimates $8 billion relates to abatement supplies. Approximately
$2 billion in abatement supplies will 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 based on its
historical ability to increase its share of this market.
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 additional salespeople and expects these
revenues to increase at a faster rate than the asbestos abatement revenues.
In addition, using the Company's financial strength to expand geographically,
it has diversified its geographical risk allowing the Company to better
serve its regional and national customers.
Gross profit in 1995 of $7,977,000 increased 11 percent from gross profit in
1994 of $7,164,000 due to increased revenues and increased margins. Gross
profit margins, expressed as a percentage of sales, increased to 29 percent
for 1995 compared to 28 percent for 1994. As expected, margins varied
somewhat from location to location due to sales mixes and local market
conditions. Gross margins on sales of construction tools and industrial
safety products typically were higher than the Company's average margins,
while gross margins on sales of asbestos abatement and hazardous material
remediation products varied from one market to the next and generally were
lower than those of the Company's other products. Overall margins are
expected to remain at their current levels in 1996 as continued efforts to
increase sales of construction tools and the focus of management on profit
margins of all product lines should offset any competitive pressures.
Selling, general and administrative expenses for 1995 of $6,342,000 increased
7 percent over 1994 expenses of $5,933,000. The increase was attributable
primarily to the higher employment costs as a result of additional personnel.
Selling, general and administrative expenses were 23 percent of sales for
both 1995 and 1994. These expenses are expected to remain in their current
range for 1996.
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
expires September 1999. The Company's lease agreement on the building that
was occupied by both the operations of IESI and the Corpus Christi branch
includes an option enabling the Company to purchase the building. The
Company is currently negotiating a sale of this facility which, if completed,
would relieve the Company from its lease obligation.
Other expense, net, of $248,000 in 1995 decreased 4 percent over 1994 expense
of $258,000. This decrease is primarily due to decreased interest expense
resulting from lower borrowings on the Company's lines of credit. 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 charge-offs are
significantly below industry experience. Days of sales in net accounts
receivable improved 5 days from 1994 to 1995. In August 1995, the Company
added another employee to the credit department to improve the collection
cycle. The Company believes the reserve for doubtful accounts is adequate.
RESULTS OF DISCONTINUED OPERATIONS
The Company experienced no impact from discontinued operations to its 1995
financial statements because an estimate of $139,000, net of taxes, was
recorded in 1994 to accrue for the losses from the discontinuance of the
sorbent manufacturing business. This amount included an estimate of a loss
from operations from the date of discontinuance through the expected date of
disposal. The Company ceased the sorbent manufacturing business in the
summer of 1995. The remainder of the reserve relates to the obligation under
a noncancelable operating lease which expires September 1999. The lease on
this facility, which was shared with the Corpus Christi branch, included a
purchase option. The Company is currently negotiating a sale of this
facility which, if completed, would relieve the Company from its lease
obligation.
NET RESULTS
Net earnings in 1995 of $813,000 or $.36 per share increased $596,000 from
net earnings of $217,000 or $.09 per share in 1994. The 275 percent increase
in net earnings is due to the growth in revenues and product margins, and the
losses recorded in 1994 related to the discontinuance of the sorbent
manufacturing business, partially offset by the charge in 1995 to close the
Corpus Christi branch office.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement must be adopted in the first quarter of 1996. Implementation of
this statement is not expected to have a material effect on the Company's
financial position or results of operations.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
RESULTS OF CONTINUING OPERATIONS
Net sales from continuing operations for the year ended December 31, 1994
increased 36 percent to $25,982,000 from $19,085,000 in 1993. The increase
in sales is due to efforts to further expand and diversify revenues without
sacrificing product margins. The increase is a result of (i) the opening of
the Seattle location in January 1994, (ii) the continued development in Santa
Fe Springs of the asbestos abatement and construction tools supply businesses,
(iii) the development of the Phoenix and Denver distribution locations, and
(iv) the impact for the entire year of additional key sales and marketing
personnel in the Houston and Santa Fe Springs distribution locations.
Gross profit in 1994 of $7,164,000 increased 34 percent from gross profit in
1993 of $5,354,000 due to increased revenues. Gross profit margins,
expressed as a percentage of sales, remained relatively flat at 28 percent
for 1994 when compared to 1993. As expected, margins varied somewhat from
location to location due to sales mixes and local market conditions. Gross
margins on sales of construction tools and industrial safety products
typically were higher than the Company's average margins. As in prior years,
gross margins on sales of asbestos abatement and hazardous material
remediation products varied from one market to the next and generally were
lower than those of the Company's other products.
Selling, general and administrative expenses for 1994 of $5,933,000 increased
24 percent over 1993 expenses of $4,774,000. The increase was attributable
primarily to the inclusion of the Seattle branch operation, established early
in 1994 and the carryover of acquisition, installation and training for the
new computer and telecommunication systems. Selling, general and
administrative expenses for 1994 were 23 percent of sales compared to 25
percent of sales for 1993.
Other expense, net of $258,000 in 1994 increased 85 percent over 1993 expense
of $139,000. This increase is primarily due to increased interest expense
resulting from higher borrowings on the Company's lines of credit to finance
its growth and higher interest rates.
See note 5 to the consolidated financial statements for a description of
income taxes.
RESULTS OF DISCONTINUED OPERATIONS
Sales at IESI were $426,000 for the year ended December 31, 1994 compared to
sales of $412,000 for 1993. The 1994 loss from discontinued operations of
IESI, net of taxes, of $224,000 was higher than the loss in 1993 of $144,000,
net of taxes. The higher loss in 1994 is primarily due to the writedown of
fixed assets to net realizable value.
The results from discontinued operations include an estimate of $139,000, net
of taxes, to accrue for the losses from the discontinuance of the sorbent
manufacturing business and includes an estimate of a loss from operations
from the date of discontinuance through the expected date of disposal.
NET RESULTS
Net earnings in 1994 of $217,000 or $.09 per share increased $58,000 from net
earnings of $159,000 or $.07 per share in 1993. The 36 percent increase in
net earnings is due to the growth in revenues and lower selling, general and
administrative expenses relative to the revenue increase, partially offset by
higher interest expense and the losses related to the sorbent manufacturing
business.
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 and accrued expenses, associated with increases in sales
volume and the addition of new locations. Net cash provided by operations
during 1995 of $1,188,000 resulted principally from increases in the net
earnings of the Company and the increases in accounts payable and accrued
expenses, partially offset by the increase in inventory.
Cash requirements for non-operating activities during 1995 resulted primarily
from the purchases of property and equipment amounting to $233,000 and the
repurchases of the Company's common stock totaling $482,000. The equipment
purchases in 1995 were primarily computer and telecommunications equipment
and delivery vehicles. The Company repurchased its common stock because of
the Board of Directors' belief that it was undervalued in the marketplace.
The Board of Directors has committed to continue supporting the stock price
in the marketplace as long as it remains undervalued. The purchases of
property and equipment, repurchase of common stock and the repayment of
borrowings from the bank were funded by cash from operations.
Although cash flow from operations at any given point in 1996 may be
negative, the entire year is expected to be positive. Several factors
contribute to this expectation. The rate of revenue growth in 1996 is
expected to be higher than 1995, but at a level that can be funded by cash
flow from operations. Also, the Company will not have to fund the operating
losses at the Corpus Christi branch in 1996, and the capital expenditures for
1996 are expected to be similar to 1995, as the Company will continue to
replace delivery vehicles as needed. The Company currently has no plans to
expand geographically in 1996, however, the Company will continue to search
for geographic locations that would complement the existing infrastructure.
If another location were to be opened in 1996, the Company would fund the
startup expenses through its lines of credit. Anticipated cash requirements
in 1996 will be satisfied from operations and borrowings on the lines of
credit, as required.
In addition, the Company is committed to investing in technology to improve
the productivity of employees and to enhance the level of customer service.
This commitment will require an investment in additional computer hardware
and software and additional telecommunications equipment, which will be
funded by the Company's capital equipment line of credit. The current excess
capacity in the equipment line of credit should be sufficient to fund this
investment.
The Company maintains a $4,100,000 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 lessor of 25
percent of eligible inventory or $500,000. As of February 29, 1996, there
are advances outstanding under this credit facility of $2,721,000. Based on
the borrowing formula, the Company had the capacity to borrow an additional
$1,150,000 as of February 29, 1996. The Company also maintains a $350,000
capital equipment credit facility providing for borrowings at 80 percent of
cost on purchases. The advances outstanding under this credit facility as of
February 29, 1996 were $215,000. Both credit facilities are payable on
demand and bear a variable interest rate of interest computed at the prime
rate plus one-half 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,
and that these facilities, together with cash provided by operations, will be
sufficient for its capital and liquidity requirements for the next twelve
months.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data are included
under Item 14(a)(l) and (2) of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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, 1995.
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, 1995.
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, 1995.
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, 1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2. CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
The consolidated financial statements and financial statement schedules
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
(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 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).
(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)(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)(c) Revolving Credit Agreement with Texas American Bank/Duncanville,
N.A. (filed as Exhibit (10)(c) to the Registration Statement on
Form S-18, filed January 11, 1989).
(10)(d) Demand Credit Facility with Comerica Bank-Texas dated
February 15, 1989 (filed as Exhibit (10)(d) to the Report on
Form 10-Q for the Quarter ended March 31, 1989, filed May 15,1989).
(10)(e) Demand Credit Facility with Comerica Bank-Texas dated June 15,
1989 (filed as Exhibit (10)(e) to the Report on Form 10-Q for
the Quarter ended June 30, 1989, filed August 11, 1989).
(10)(e)(i) Demand Credit Facility with Comerica Bank-Texas dated March 1,
1993 (filed as Exhibit (10)(e)(i) to the Report on Form 10-K for
the year ended December 31, 1992).
(10)(e)(ii) Demand Credit Facility with Comerica Bank-Texas extension,
renewal and increase dated June 1, 1993 (filed as Exhibit
(10)(e)(ii) to the Report on Form 10-K for the year ended
December 31, 1993).
(10)(e)(iii) Demand Credit Facility with Comerica Bank-Texas extension,
renewal and increase dated September 22, 1994 (filed as Exhibit
(10)(e)(iii) to the Report on Form 10-K for the year ended
December 31, 1994).
(10)(f) Employment Agreement with S. Stanley French effective October 1,
1992 (filed as Exhibit (10)(f) to the Report on Form 8-K, filed
October 19, 1992).
(11) Statement Re Computation of Per Share Earnings (Loss).*
(22) Information Statement dated September 1, 1995.*
(23) Consent of Independent Auditors.*
(27) Financial Data Schedule for the twelve months ended December 31,
1995.*
* 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 13th day
of March, 1996.
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 and March 13, 1996
- ------------------- Director (Principal Executive Officer)
Terry W. Shaver
/S/ GARY L. COX Executive Vice President, Chief March 13, 1996
- ------------------- Operating Officer and Director
Gary L. Cox
/S/ LAMONT C. LAUE Director March 13, 1996
- -------------------
Lamont C. Laue
/S/ FRANK J. CINATL Vice President and Chief Financial March 13, 1996
- ------------------- Officer (Principal Accounting Officer)
Frank J. Cinatl, IV
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, 1995 and 1994 F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
II - Valuation and Qualifying Accounts for the years ended
December 31, 1995, 1994 and 1993 F-16
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
consolidated 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 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.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1993.
/s/KPMG Peat Marwick LLP
Dallas, Texas
February 23, 1996
F-2
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1995 and 1994
ASSETS 1995 1994
-------- ---------- ----------
Current assets:
Cash $ 415,867 $ 150,727
Trade accounts receivable, net of allowance for
doubtful accounts of $336,486 in 1995
and $163,233 in 1994 (note 4) 4,370,595 4,428,853
Inventories (note 4) 3,088,276 2,398,252
Prepaid expenses and other assets 218,187 210,585
Deferred income taxes (note 5) 136,719 146,205
Net assets of discontinued operations (note 2) - 91,249
---------- ----------
Total current assets 8,229,644 7,425,871
Receivables from officers and employees 70,577 58,685
Property and equipment, net (notes 3 and 4) 593,060 677,431
Deferred income taxes (note 5) 39,657 -
Other assets 43,993 21,936
---------- ----------
$8,976,931 $8,183,923
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable to bank (note 4) $2,631,828 $2,919,718
Current maturities of obligations
under capital leases - 3,487
Accounts payable 1,031,481 792,663
Other accrued expenses 845,782 403,355
Accrued compensation 93,249 88,627
Net liabilities of discontinued operations (note 2) 56,813 -
---------- ----------
Total current liabilities 4,659,153 4,207,850
---------- ----------
Obligations under capital leases, less current maturities - 1,232
Deferred income taxes (note 5) - 74,005
---------- ----------
Total liabilities 4,659,153 4,283,087
---------- ----------
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 2,366,314 shares in 1995
and 2,319,748 shares in 1994 2,366 2,320
Additional paid-in capital 2,365,118 2,279,653
Retained earnings 2,487,838 1,674,461
Treasury stock at cost, 207,100 shares in
1995 and 26,500 shares in 1994 (537,544) (55,598)
---------- ----------
Total stockholders' equity 4,317,778 3,900,836
---------- ----------
Commitments and contingencies (note 10)
---------- ----------
$8,976,931 $8,183,923
========== ==========
See accompanying notes to consolidated financial statements.
F-3
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
----------- ----------- -----------
Net sales $27,632,245 $25,981,570 $19,085,467
Cost of sales 19,654,858 18,817,805 13,731,422
----------- ----------- -----------
Gross profit 7,977,387 7,163,765 5,354,045
Selling, general and
administrative expenses 6,342,241 5,933,246 4,773,929
Special charge (note 2) 80,000 - -
----------- ----------- -----------
Earnings from operations 1,555,146 1,230,519 580,116
Other income (expense):
Interest income 15,311 6,540 2,751
Interest expense (258,079) (271,046) (146,088)
Other, net (5,487) 6,880 3,942
----------- ----------- -----------
Earnings from continuing
operations before income taxes 1,306,891 972,893 440,721
Income tax expense (note 5) 493,514 392,684 157,520
----------- ----------- -----------
Earnings from
continuing operations 813,377 580,209 283,201
Discontinued operations (note 2):
Loss from operations of discontinued
business, net of tax benefit of
$125,522 in 1994 and $47,939 in 1993 - (223,746) (144,073)
Loss on discontinuance of business,
net of tax benefit of $71,857 - (139,487) -
----------- ----------- -----------
Earnings before cumulative
effect of change in
accounting principle 813,377 216,976 139,128
Cumulative effect at January 1, 1993
of change in accounting for
income taxes - - 19,697
----------- ----------- -----------
Net earnings $ 813,377 $ 216,976 $ 158,825
=========== =========== ===========
Earnings (loss) per common
and common equivalent share:
Earnings from continuing operations $ .36 $ .25 $ .12
Loss from discontinued operations - (.16) (.06)
Cumulative effect of change
in accounting for income taxes - - .01
----------- ----------- -----------
Net earnings $ .36 $ .09 $ .07
=========== =========== ===========
Weighted average common and common
equivalent shares outstanding 2,238,312 2,330,074 2,304,359
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993
Common Stock Additional Treasury Stock
---------------- Paid-in Retained ----------------- Total
Shares Amount Capital Earnings Shares Amount Equity
--------- ------ ----------- --------- ------- --------- -----------
Balance at
December
31, 1992 2,540,983 $2,541 $2,179,717 $1,298,660 433,350 $(449,895) $3,031,023
Retirement
of treasury
stock (433,350) (433) (449,462) - (433,350) 449,895 -
Exercise of
stock options,
including
$135,976
income tax
benefit 168,285 168 427,628 - - - 427,796
Net earnings - - - 158,825 - - 158,825
--------- ------ ---------- ---------- ------- --------- ----------
Balance at
December
31, 1993 2,275,918 2,276 2,157,883 1,457,485 - - 3,617,644
Purchase
of treasury
stock - - - - 26,500 (55,598) (55,598)
Exercise of
warrants 40,000 40 117,465 - - - 117,505
Exercise
of stock
options 3,830 4 4,305 - - - 4,309
Net earnings - - - 216,976 - - 216,976
--------- ------ ---------- ---------- ------- --------- ----------
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
========= ====== ========== ========== ======= ========= ==========
See accompanying notes to consolidated financial statements.
F-5
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
---------- ---------- ----------
Cash flows from operating activities:
Net earnings $ 813,377 $ 216,976 $ 158,825
Adjustments to reconcile net earnings to
net cash provided by (used in)
operating activities:
Depreciation and amortization 337,309 307,625 161,574
Deferred income taxes (104,176) (82,462) 92,389
Gain on disposal of assets (11,615) (6,695) (7,840)
Changes in assets and liabilities:
Receivables 58,258 (970,740) (1,353,927)
Inventories (690,024) (267,700) (540,251)
Refundable income taxes - 236,236 (6,088)
Prepaid expenses and other (7,602) (69,867) (51,786)
Net liabilities of discontinued
operations (note 2) 91,627 336,853 (60,282)
Accounts payable 238,819 (6,629) 30,104
Accrued expenses 461,778 200,384 61,060
---------- ---------- ----------
Net cash provided by (used in)
operating activities 1,187,751 (106,019) (1,516,222)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (232,980) (359,205) (385,971)
Proceeds from sale of
property and equipment 48,091 35,195 56,846
Advances to officers and employees (50,604) (9,125) (251,813)
Collection of advances to
officers and employees 38,712 12,130 228,615
Other assets, primarily deposits (22,057) (2,000) (1,496)
---------- ---------- ----------
Net cash used in investing activities (218,838) (323,005) (353,819)
---------- ---------- ----------
Cash flows from financing activities:
Exercise of stock options 70,782 121,814 84,142
Purchase of treasury stock (481,946) (55,598) -
Net (repayments) borrowings on
notes payable to bank (287,890) 344,888 1,899,830
Principal payments on
capital lease obligations (4,719) (3,539) (8,607)
---------- ---------- ----------
Net cash (used in) provided
by financing activities (703,773) 407,565 1,975,365
---------- ---------- ----------
Net increase (decrease) in cash 265,140 (21,459) 105,324
Cash at beginning of year 150,727 172,186 66,862
---------- ---------- ----------
Cash at end of year $ 415,867 $ 150,727 $ 172,186
========== ========== ==========
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, 1995,
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 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. Accelerated depreciation methods
are used for tax purposes.
(d) REVENUE RECOGNITION
Revenue is recognized when the goods are shipped.
F-7
(e) EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Earnings (loss) per share is calculated using the weighted average number of
common and, when dilutive, common equivalent shares outstanding during each
year. Common equivalent shares are comprised of dilutive stock options and
warrants. Fully diluted earnings per share are not presented as the effect
is immaterial.
(f) 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, 1995 or 1994.
The Company paid interest of $263,707, $263,850 and $137,513 in 1995, 1994
and 1993, respectively, and income taxes of $544,200, $155,472, and $3,145 in
1995, 1994 and 1993, respectively.
Significant noncash transactions include the transfer of accrued compensation
totaling $14,729 and $207,678 to additional paid-in capital upon exercise of
stock options during 1995 and 1993, respectively.
(g) INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"), which requires enterprises to change from the deferred
method to the asset and liability method of accounting for income taxes. The
asset and liability method establishes 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.
The Company adopted Statement 109 as of January 1, 1993. The cumulative
effect of this change in accounting for income taxes of $19,697 is determined
as of January 1, 1993 and is reported separately in the consolidated
statement of operations for the year ended December 31, 1993.
F-8
(2) RESTRUCTURING
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
leased facility, the writedown of fixed assets and inventory to net
realizable value and the estimated loss from operations up to the expected
disposal date. As of December 31, 1995, the only remaining asset is the fully
reserved accounts receivable and the only remaining liability is the reserve
related to the discontinuance. The balance of this reserve exists primarily
to cover the remaining costs associated with the facility lease, which
expires September 1999. Actual costs through December 31, 1995 approximated
management's December 1994 estimates. Sales for the discontinued operations
of IESI were $142,000, $426,000 and $412,000 in 1995, 1994 and 1993,
respectively.
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
expires September 1999. Sales for the Corpus Christi branch were $294,000
and $140,000 in 1995 and 1994, respectively. The Corpus Christi branch also
had operating losses of $55,000 and $17,000 in 1995 and 1994, respectively.
The Company's lease agreement on the building that was occupied by both the
operations of IESI and the Corpus Christi branch includes an option enabling
the Company to purchase the building. The Company is currently negotiating a
sale of this facility which, if completed, would relieve the Company from its
lease obligation.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1995 and 1994 follows:
Estimated
Useful Life 1995 1994
------------ ---------- ----------
Furniture and equipment 5 - 10 years $1,114,798 $ 968,177
Transportation equipment 3 - 5 years 311,734 286,264
Leasehold improvements 3 - 5 years 53,650 41,831
---------- ----------
1,480,182 1,296,272
Less accumulated depreciation and amortization 887,122 618,841
---------- ----------
Net property and equipment $ 593,060 $ 677,431
========== ==========
F-9
(4) NOTES PAYABLE TO BANK
At December 31, 1995, 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 25 percent of eligible inventory or $500,000, up to a maximum of
$4,100,000. Under this formula, the Company had the capability to borrow
$3,777,000 at December 31, 1995, of which $2,425,000 was used. A capital
equipment facility provides for individual borrowings, aggregating up to
$350,000, at 80 percent of the purchased equipment's cost. At December 31,
1995, the Company had borrowed $206,000 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 1995, the Company negotiated a one-half of one percent
reduction in its rate, thereby reducing the rate of interest on its
agreements to prime plus one-half of one percent. As of December 31, 1995
and 1994, the Company's rate of interest on these agreements was 9 percent and
9.5 percent, respectively. These credit facilities are secured by accounts
receivable, inventory and equipment
The Company's notes payable to bank contain certain financial covenants.
These notes require the Company maintain a minimum net worth, which increases
each year through 1997, and maintain minimum net income levels through 1997.
(5) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1995, 1994 and
1993 consists of:
1995 1994 1993
---------- ---------- ----------
Continuing Operations:
Current:
Federal $ 542,681 $ 320,141 $ 48,405
State 96,233 75,386 16,070
Deferred:
Federal (120,240) (2,318) 78,252
State (25,160) (525) 14,793
---------- ---------- ----------
Income tax expense related
to continuing operations 493,514 392,684 157,520
Discontinued operations:
Current (41,224) (117,760) (66,980)
Deferred 41,224 (79,619) 19,041
---------- ---------- ----------
Total income tax expense $ 493,514 $ 195,305 $ 109,581
========== ========== ==========
F-10
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, 1995, 1994 and
1994 follows:
1995 1994 1993
---------- ---------- ----------
Expected income tax expense $ 444,343 $ 330,784 $ 149,845
Nondeductible meals and
entertainment expense 7,232 6,089 4,400
State income taxes, net of
related federal tax benefit 46,908 49,408 20,370
Other (4,969) 6,403 (17,095)
---------- ---------- ----------
Total income tax expense relating
to continuing operations $ 493,514 $ 392,684 $ 157,520
========== ========== ==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1995 and
1994 follow:
1995 1994
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts $ 132,188 $ 65,792
Accrual for loss on branch closure 28,076 -
Accrual for loss on the
discontinued operations 20,393 74,565
Property and equipment, principally
due to differences in depreciation 39,657 -
Other - 5,848
---------- ----------
Total gross deferred tax assets 220,314 146,205
---------- ----------
Deferred tax liabilities:
Prepaid expenses (43,938) -
Property and equipment, principally
due to differences in depreciation - (74,005)
---------- ----------
Total gross deferred tax liabilities (43,938) (74,005)
---------- ----------
Net deferred tax asset $ 176,376 $ 72,200
========== ==========
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.
F-11
(6) STOCKHOLDERS' EQUITY
Options to purchase the Company's common stock have been granted to officers
and employees under various stock option plans. Compensation expense of
$21,050 was recognized ratably over the three year vesting period for the
options granted in 1992. Options granted subsequent to December 31, 1993 were
for exercise prices equal to or greater than the fair market value of the
Company's common stock on the date of grant. The options outstanding at
December 31, 1995 expire at various dates between March 2, 1996 and
December 31, 1997.
Number of
Shares
Under Option Price
Option Per Share
--------- ------------
Outstanding at December 31, 1992 193,681 $ .50
Exercised (168,285) .50
---------
Outstanding at December 31, 1993 25,396 .50
Granted 150,000 2.25 - 2.75
Exercised (3,830) .50
---------
Outstanding at December 31, 1994 171,566 .50 - 2.75
Granted 20,000 3.00 - 3.875
Exercised (46,566) .50 - 2.50
---------
Outstanding at December 31, 1995 145,000 $2.25 - 3.875
=========
Shares exercisable:
December 31, 1993 14,131 $ .50
December 31, 1994 51,566 .50 - 2.25
December 31, 1995 75,000 2.25 - 3.00
Shares reserved for issuance under option 145,000
=========
F-12
The Company has 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 warrants remaining at December 31, 1995 expired unexercised
on January 11, 1996. The activity of the warrants granted to various
consultants is summarized in the following table:
Number of Option Price
Shares Per Share
--------- ------------
Outstanding at December 31, 1992 - $ -
Granted 155,000 2.75 - 4.50
Expired (125,000) 4.00
---------
Outstanding at December 31, 1993 30,000 2.75 - 4.50
Granted 50,000 2.25 - 3.00
Exercised (10,000) 2.75
---------
Outstanding at December 31, 1994 70,000 2.25 - 4.50
Expired (10,000) 3.50
Canceled (50,000) 2.25 - 3.00
---------
Outstanding at December 31, 1995 10,000 $ 4.50
=========
The Board of Directors has approved the repurchase of 326,500 shares of the
Company's common stock in the open market. During 1995, the Company purchased
a total of 180,600 shares of stock, including 90,000 shares purchased from a
former officer and director of the Company in February 1995. The Company has
purchased 207,100 shares since November 1994.
In October 1995, the Company amended its Certificate of Incorporation to
reduce its authorized capital from 5,000,000 shares to 500,000 shares of
preferred stock, and from 20,000,000 shares to 5,000,000 shares of common
stock.
(7) BENEFIT PLANS
The Company had a noncontributory Simplified Employee Pension - Individual
Retirement Account Contribution Plan covering employees 21 years of age or
older who had been employed by the Company at least three of the immediately
preceding five years. Plan contributions were discretionary and aggregated
$20,269 in 1993. During 1993, the Company replaced this plan with 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.
Contributions by the Company to the 401(k) plan aggregated $51,358, $25,657
and $5,018 during 1995, 1994 and 1993, respectively.
F-13
(8) MAJOR CUSTOMERS AND CREDIT RISK
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.
During 1993, 1994 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.
(10) COMMITMENTS AND CONTINGENCIES
The Company leases warehouse and office facilities under long-term
noncancelable operating leases. The following is a schedule of future
minimum lease payments under these leases as of December 31, 1995:
1996 $ 321,141
1997 191,612
1998 134,187
1999 76,950
2000 48,000
Thereafter -
----------
$ 771,890
==========
Rental expense for continuing operations under operating leases for the years
ended December 31, 1995, 1994 and 1993 was $341,949, $320,867, and $237,741,
respectively. Rental expense for discontinued operations under operating
leases for the years ended December 31, 1995, 1994 and 1993 was $16,479,
$35,600, and $27,900, respectively.
The Company has employment agreements with four key employees. The
agreements provide for minimum aggregate cash compensation in each of the
next four years as follows:
1996 $ 391,500
1997 138,000
1998 138,000
1999 80,500
----------
$ 748,000
==========
F-14
The Company was named as a defendant in a product liability lawsuit. The
Company has requested and received (1) indemnification under the
manufacturer's product liability insurance and (2) legal representation at
the cost of the manufacturer. As of February 29, 1996, no depositions have
been taken, therefore management is not able to assess the merit of the
defendant's case. However, the Company does not anticipate any material
impact on its financial statements as a result of this litigation.
F-15
SCHEDULE II
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
Additions
Balance at charged to Balance
beginning costs and at end
of year expenses Deductions of year
---------- -------- ---------- ---------
Year ended December 31:
Allowance for
Doubtful Accounts:
1995 $ 169,776 221,769 47,795 A 343,750 B
========== ======= ======= =======
1994 $ 87,811 205,460 123,495 A 169,776 B
========== ======= ======= =======
1993 $ 125,000 80,845 118,034 A 87,811 B
========== ======= ======= =======
Reserve for Loss on
Discontinuance of Business:
1995 $ 193,344 - 139,294 C 54,050 D
========== ======= ======= =======
1994 $ - 211,344 E 18,000 F 193,344 G
========== ======= ======= =======
Reserve for Loss on
Closure of Branch Location:
1995 $ - 80,000 7,702 H 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 balances of $7,264, $6,543 and
$3,456 at December 31, 1995, 1994 and 1993, respectively.
C Represents the losses from operations, the loss on sale of fixed assets and
the payment of lease obligations.
D The balance is included in the net liabilities of discontinued operations
on the consolidated balance sheet.
E Represents the reserve established in December 1994 related to the
discontinued operations. See note 2 to the consolidated financial statements.
F Cash settlement in exchange for release from the lease on one of the
properties related to the discontinued operations. See note 2 to the
consolidated financial statements.
G The balance is included in the net assets of discontinued operations on the
consolidated balance sheet.
H Amount is primarily the payment of lease obligations.
F-16