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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, 1998 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. [ ]
1,762,148 shares of common stock, $.001 par value, were issued and outstanding
on March 24, 1999.
The aggregate market value of the Registrant's common stock held by
nonaffiliates of the Registrant as of the close of business on March 24, 1999
(an aggregate of 786,614 shares out of a total of 1,762,148 shares outstanding
at that time) was $2,556,496 computed by reference to the closing price of $3
1/4 on March 24, 1999.
Portions of the Registrant's proxy statement for its 1999 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 with respect to all
of its outstanding redeemable common stock purchase warrants, which were
exercisable at $3.00 per share. An aggregate of 231,983 of such warrants was
exercised pursuant to the notice. In total, 290,983 warrants were exercised,
8,917 were redeemed and 100 were not presented, resulting in net proceeds of
$805,616. Proceeds from the exercise of the warrants enabled the Company to
increase its capital base and expand its operations.
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,
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.
2
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 also other distribution companies not in direct
competition with Abatix. The Company continues to evaluate the direct
importation of products to obtain a consistent supply of products at 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 the importation of 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 serves the central and south Texas area.
In December 1995, the Company opened its eighth facility in Las Vegas. Although
the Las Vegas operation handles the entire product line, its primary focus is
the construction tool industry.
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.
Effective January 1, 1999, the Company consummated an Asset Purchase Agreement
with Keliher Hardware Company ("Keliher"), a California corporation, pursuant to
which the Company assumed the operations of Keliher. Keliher, based in Los
Angeles, California, with a satellite facility in Long Beach, is a $3.5 million
industrial supply distributor, primarily for the construction and industrial
markets. The estimated fair value of the assets acquired was approximately
$1,000,000. The aggregate purchase price was settled with the assumption of
certain liabilities (approximately $900,000), the issuance of 23,500 shares of
the Company's $.001 par value common stock at a value of $3.375 per share and
the remainder in cash. This acquisition will be accounted using the purchase
method.
On March 22, 1999, the Company decided to close its Denver facility. The Denver
facility had sales of approximately $1,449,000, $1,076,000 and $1,544,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. The Company does
not expect any significant charges related to the shutdown.
3
The Company intends to expand and diversify the revenue base through the
expansion of product lines, hiring additional personnel, and acquisitions. In
addition, the Company is developing an e-commerce site to help solidify
relationships with the existing base of customers and expand our presence beyond
its local market presence.
(b) Financial Information About Operating Segments
Information about the Company's operating segments is included in the Notes to
the Consolidated Financial Statements at Item 14.
(c) Narrative Description of Business
Asbestos Abatement Industry Background
Between 1900 and the early 1970's, asbestos was extensively used for insulation
and fireproofing in industrial, commercial and governmental facilities as well
as private residences in the United States and in other industrialized
countries. 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.
4
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 rules regarding lead-based paint in the residential
markets. These rules give homebuyers the right to test for lead-based paint
before any contracts are signed. In addition, although a landlord or home seller
is not required to test for lead-based paint, the rules do require disclosure of
a known lead hazard.
Many asbestos abatement contractors added lead abatement to their range of
services in an attempt to enter a market considered to be in its infancy. The
asbestos abatement contractors bring equipment, a trained labor force, and
experience working in a regulatory environment to the lead abatement industry.
Although the Company does not anticipate a significant increase of lead
abatement projects, these rules and their opportunities encourage management.
Such rules could create a long-term positive impact on the Company through
expenditures for equipment and supplies to ensure the safe and proper removal
and disposal of lead paint.
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.
5
Currently, the Company supplies the construction tools industry in its Las
Vegas, Los Angeles, and, to a lesser degree, Phoenix facilities. This industry
is directly tied to the local economies and more specifically, the real estate
conditions within those markets. The real estate market in the Las Vegas area is
strong with vacancy rates for commercial properties low and rental rates high
and construction of hotels and casinos strong. The condition of the real estate
industry in the Los Angeles and Phoenix areas remains stable.
Geographic Distribution of Business
With the acquisition of Keliher, the Company distributes over 30,000 personal
protection, safety, hazardous waste remediation and construction tool products
to approximately 6,000 customers primarily located in the Southwest, Midwest and
Pacific Coast. Approximately 48 percent of its products are sold to asbestos and
lead abatement contractors, 23 percent to the industrial safety market, 12
percent to construction related firms and 17 percent to other firms, including
hazardous material contractors and other distributors. The Company believes a
majority of its sales for the foreseeable future will continue to be made to
asbestos and lead abatement contractors, project organizers and managers. At
present, the Company estimates its share of the asbestos abatement supply market
to be approximately 15 to 20 percent in the geographic markets served by the
Company. The Company considers its relationship with its customers to be
excellent.
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, Los Angeles, Long Beach and Hayward, California, in Dallas and Houston,
Texas, in Phoenix, Arizona, in Las Vegas, Nevada, and in Kent, Washington.
Equipment and Supplies
The Company buys products from manufacturers based on orders received from its
customers as well as anticipated needs based on prior buying patterns, customer
inquiries and industry experiences. The Company maintains an inventory of
disposable products and commodities as well as low cost equipment items.
Approximately 85 percent of the Company's sales for 1998 and 1997 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.
6
Except with regard to certain specialty equipment associated with asbestos
abatement activities such as filtration, vacuum and pressure differential
systems, many of the Company's products can be used interchangeably within many
of the industries it supplies. Equipment distributed by the Company includes
manufacturers' product descriptions and instructions pertaining to use.
Marketing
The Company's marketing program is conducted by its sales representatives, as
well as by senior management and the general managers at each of its operating
facilities. These sales representatives are compensated by a combination of
salary and/or commission, which is based upon, negotiated sales standards.
Backlog
Substantially all the Company's products are shipped to customers within 48
hours following receipt of the order, therefore backlog is not material to the
Company's operations.
Inflation
The inflation rate for the U.S. economy has averaged approximately 3 percent
annually over the past several years, with the 1998 inflation rate below 2
percent. The 1999 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. In the event of increased inflation,
the Company anticipates it would be able to pass along increases in product
costs to its customers in the form of higher selling prices, thereby having 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
internal operations are not substantially affected by federal laws and
regulations including those promulgated by the EPA and OSHA. Most of the
contractors and other purchasers of the Company's equipment and supplies are
subject to various government regulations, 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. Substantial regulatory or economic barriers to entry do not
characterize the Company's business. 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, 1999, the Company employed a total of 103 full time employees
including 4 executive officers, 8 managers, 53 administrative and marketing
personnel and 38 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 Company is currently negotiating
for additional lease space in the Dallas area. As of December 31, 1998, 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. In
March 1999, the Company decided to close its Denver facility, which lease of
6,875 square feet expired in February 1999.
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 was receiving indemnification under the
manufacturer's insurance and legal representation at the cost of the
manufacturer. The Company received notification this lawsuit was dismissed
without prejudice in August 1998.
8
In December 1998, the Company was named as a defendant in a lawsuit filed in the
District Court of Harris County, Texas (Asbestos Handlers, Inc. ("AHI") vs.
Abatix Environmental Corp., et al). The lawsuit alleges the Company and other
defendants together participated in the conversion and unauthorized sale of AHI
inventory totaling $27,756. The plaintiff seeks actual damages, exemplary
damages, interest and attorney's fees. The Company purchased the inventory in
good faith and believed that the manager of AHI's Houston facility was
representing AHI's interests. Management intends to vigorously defend against
this claim.
Item 4. Submission of Matters to a Vote of Security Holders
None
9
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 prices for the common stock for the periods indicated. These
quotations reflect prices between dealers, do not include retail mark-ups,
mark-downs or commissions and may not necessarily represent actual transactions.
Common Stock
Price
----------------------------
1997 High Low
- ------------------------- ----------- -----------
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
1998
- -------------------------
First Quarter $ 3 7/8 $ 2 5/8
Second Quarter 4 1/2 3 3/8
Third Quarter 4 1/4 2 3/4
Fourth Quarter 3 15/16 2 3/4
On March 24, 1999, the closing bid price for the common stock was $3 1/4.
(b) As of March 24, 1999, the approximate number of holders of record of the
Company's common stock was 700.
(c) The Company has never paid cash dividends on its common stock. The Company
presently intends to retain any future earnings to finance the expansion of its
business or repay borrowings on its lines of credit and does not anticipate that
any cash dividends will be paid in the foreseeable future. Future dividend
policy will depend on the Company's earnings, capital requirements, expansion
plans, financial conditions, and other relevant factors.
(d) In November 1998, the Board of Directors authorized an additional purchase
of up to 250,000 shares of the Company's common stock. With this additional
authorization, management has the authority to purchase up to 726,500 shares. As
of March 24, 1999, the Company has purchased 652,400 shares, including a block
of 102,600 shares in March 1999. In addition to the purchased shares, the
Company received 22,766 shares from an officer of the Company as payment for
monies owed to the Company of approximately $80,000 in January 1999. Both the
block purchase and the shares received from the officer of the Company are held
as treasury 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,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Selected Operating Results:
Net sales $ 37,328 $ 34,955 $ 33,067 $ 27,632 $ 25,982
Gross profit $ 10,481 $ 9,651 $ 9,202 $ 7,977 $ 7,164
Earnings from continuing operations $ 1,167 $ 841 $ 734 $ 813 $ 580
Earnings (loss) from discontinued
operations, net of income taxes - - 22 - (363)
---------- ---------- ---------- ---------- ----------
Net earnings $ 1,167 $ 841 $ 756 $ 813 $ 217
========== ========== ========== ========== ==========
Basic earnings per common share:
Earnings from continuing operations $ .60 $ .43 $ .35 $ .37 $ .25
Earnings (loss) from discontinued
operations - - .01 - (.16)
---------- ---------- ---------- ---------- ----------
Net earnings $ .60 $ .43 $ .36 $ .37 $ .09
========== ========== ========== ========== ==========
Diluted earnings per common share:
Earnings from continuing operations $ .60 $ .43 $ .35 $ .36 $ .25
Earnings (loss) from discontinued
operations - - .01 - (.16)
---------- ---------- ---------- ---------- ----------
Net earnings $ .60 $ .43 $ .36 $ .36 $ .09
========== ========== ========== ========== ==========
Weighted average shares outstanding:
Basic 1,934 1,934 2,076 2,207 2,311
========== ========== ========== ========== ==========
Diluted 1,934 1,934 2,111 2,238 2,330
========== ========== ========== ========== ==========
As of December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Selected Balance Sheet Data:
Current assets $ 9,918 $ 9,003 $ 9,722 $ 8,230 $ 7,426
Current liabilities 4,408 4,676 6,219 4,659 4,208
Total assets 10,596 9,854 10,678 8,977 8,184
Total liabilities 4,408 4,676 6,219 4,659 4,283
Retained earnings 5,252 4,085 3,244 2,488 1,674
Stockholders' equity 6,187 5,178 4,459 4,318 3,901
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Consolidated net sales for the year ended December 31, 1998 increased 7 percent
to $37,328,000 from $34,955,000 in 1997. The Abatix operating segment net sales
grew 4 percent to $34,928,000 in 1998 and the IESI operating segment net sales
increased 70 percent to $2,400,000 in 1998. The increase in consolidated net
sales resulted from efforts to further expand and diversify the customer base.
The increase is also a result of the stable economic conditions in the
geographic regions serviced by the Company's facilities. These economic
conditions, if maintained, should provide the ability for the Company to grow
its revenues in 1999. In addition, the acquisition of Keliher, an industrial
supply distributor, in January 1999 provides a larger customer base and the
ability to cross sell products to both Keliher and Abatix customers. These
efforts also provide the groundwork for broadening the Company's revenues among
its different product markets, thereby decreasing its dependence on any one of
its markets.
On March 22, 1999, the Company decided to close its Denver facility. The Denver
facility had sales of approximately $1,449,000 and $1,076,000 for the years
ended December 31, 1998 and 1997, respectively. The Company will serve the
Denver market primarily from its Phoenix and Dallas locations.
Industry-wide sales of asbestos abatement products are expected to remain
relatively flat for the foreseeable future. The Company believes the current
U.S. economic 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 acquisition of Keliher, other potential
acquisitions, additional salespeople and internal growth in these markets should
decrease the dependency of the Company on any one product or geographic market.
Gross profit in 1998 of $10,481,000 increased 9 percent from gross profit in
1997 of $9,651,000 due to increased sales volume. As expected, margins varied
from location to location due to sales mix and local market conditions. The
Company's gross profit margins, expressed as a percentage of sales, were
approximately 28 percent for 1998 and 1997. Overall margins are expected to
remain at their current levels in 1999. However, competitive pressures could
negatively impact any and all efforts by the Company to maintain or improve
product margins.
12
Selling, general and administrative expenses for 1998 of $8,373,000 increased 5
percent over 1997 expenses of $7,953,000. The increase was attributable
primarily to higher employment costs as a result of additional marketing and
support personnel. Selling, general and administrative expenses were 22 percent
of sales for 1998 and 23 percent of sales for 1997. These expenses are expected
to remain in their current range for 1999. The Company does not expect any
significant charges related to the shutdown of its Denver facility.
Other expense, net, of $220,000 in 1998 decreased 40 percent from 1997 expense
of $365,000. This decrease is primarily due to lower interest expense resulting
from lower borrowings on the Company's working capital line of credit and lower
interest rates. The lower borrowings are due to improved receivables and
inventory management. 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.
Net earnings in 1998 of $1,167,000 or $.60 per share increased $326,000 from net
earnings of $841,000 or $.43 per share in 1997. The 39 percent increase in net
earnings is primarily due to increased sales volume and lower interest expense,
partially offset by higher general and administrative expenses.
The Company's credit policies remain stringent, and accounts receivable written
off are below industry experience. Monthly average days of sales in net accounts
receivable decreased slightly from 1997 to 1998. The Company believes the
reserve for doubtful accounts is adequate.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Results of Continuing Operations
Consolidated 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. The Abatix
operating segment net sales grew 4 percent to $33,544,000 in 1997 and the IESI
operating segment net sales increased 66 percent to $1,412,000 in 1997. The
Denver facility had sales of approximately $1,076,000 and $1,544,000 for the
years ended December 31, 1997 and 1996, respectively.
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.
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 administrative expenses were 23 percent
of sales for both 1997 and 1996.
13
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.
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.
Liquidity and Capital Resources
The Company's working capital requirements historically result from the growth
of its accounts receivable and inventories, partially offset by increased
accounts payable and accrued expenses, associated with significant increases in
sales volume and/or the addition of new locations. Net cash provided by
operations during 1998 of $420,000 resulted principally from net earnings
adjusted for non-cash charges and the decrease in inventories, all of which were
partially offset by the increase in accounts receivable. The increase in
receivables as of December 31, 1998 is due to unusually strong sales in December
1998 as compared to December 1997.
Cash requirements for non-operating activities during 1998 resulted primarily
from the working capital line of credit payments, the purchases of property and
equipment amounting to $192,000 and the repurchase of the Company's common stock
totaling $158,000. The working capital line of credit payments, net of
borrowings, occurred as a result of reductions in inventory and better
management of accounts receivable. The equipment purchases in 1998 were
primarily delivery vehicles 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 1999 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 1999 is
projected to be higher than 1998, but not at a level that will require
significant net cash flows from sources other than operations.
14
Capital requirements for 1999 are expected to be higher than in 1998 primarily
due to the Company's plans to develop an e-commerce site on the internet and to
invest in other technology solutions. In addition, the Company's acquisition
strategy for increasing the standard of service to the customer base could
require higher capital expenditures.
The Company has continued to purchase common stock in open market and privately
negotiated transactions. The Company has purchased 134,700 shares of common
stock for approximately $443,000 from January 1, 1999 through March 24, 1999,
including a 102,600 share block purchase in March 1999. Management has
authorization from the Board of Directors to purchase an additional 51,000
shares. The Company will use cash flow from operations and borrowings on the
working capital line of credit to fund the purchases of stock.
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 24, 1999, there are
advances outstanding under this credit facility of $3,337,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional
$2,163,000 as of March 24, 1999. 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 24,
1999 were $360,000. Both credit facilities are payable on demand and bear a
variable rate of interest computed at the prime rate.
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.
Year 2000 Compliance
The Company relies on information technology, such as computer and
telecommunications hardware and software systems, in every aspect of its
business. In addition, the Company relies on non-information system technology,
such as facsimile machines, photocopiers, and similar equipment that typically
includes embedded technology such as microcontrollers, to function effectively
on a day to day basis. A plan has been developed to assess the impact of the
Year 2000 issues on the Company's operations and to replace or repair all
critical information technology and non-information technology systems that are
not Year 2000 compliant.
The Company is currently assessing the impact of Year 2000 issues on its
information technology systems, and has begun remediation efforts in certain
areas, principally in the application software used for the day to day
operations of the Company. This software package also integrates the accounting
system. In addition, the Company has begun testing and remediation efforts of
the personal computers and software used by the employees for day to day
operational tasks. The anticipated completion date for the assessment,
implementation and testing phases of the information technology systems is July
31, 1999. The Company will not begin its assessment of the non-information
technology systems until the second quarter of 1999, and anticipates completion
by September 30, 1999. In addition, the Company has begun requesting that third
parties, with which the Company has material relationships, confirm in writing
their plans for Year 2000 compliance. The Company anticipates response from
these business partners no later than May 31, 1999. After testing the
information technology systems and non-information technology systems and
evaluation of the third party responses, the Company will prepare, if necessary,
a contingency plan to minimize Year 2000 issues.
15
To date, the Company has incurred less than $10,000 in costs related to this
project. The total cost to complete this project is not known at this time, but
is not expected to exceed $200,000. It is anticipated the cost to complete this
project will be funded through cash flow from operations or borrowings on the
lines of credit. The inability of the Company or the aforementioned third
parties to successfully complete their Year 2000 projects could prevent delivery
of products to customers, receipt of products from suppliers, payment for these
products and collection of monies owed to the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Since the Company's working capital and equipment lines of credit are variable
rate notes, the Company is exposed to interest rate risk. An increase of 100
basis points in the United States prime rate would have a $18,000 negative
impact on the net earnings of the Company.
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, increases in oil prices or shortages in oil supply could significantly
impact the Company's petroleum based products and its ability to supply those
products at a reasonable price. Among the factors that could impact the
Company's ability to continue a successful acquisition strategy are: general
economic conditions, adequate capital resources, and retention of key personnel.
Unanticipated Year 2000 problems in the Company's information technology
systems, the inability of third parties to be compliant by December 31, 1999, or
unavailable financial or non-financial resources to remedy the Year 2000
problems could also cause actual results to differ materially.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("Statement 133"). Statement 133 is effective for fiscal
quarters of all fiscal years beginning after June 15, 1999 and establishes
accounting and reporting standards for derivative instruments. Management of the
Company does not expect the adoption of Statement 133 to have a material impact
on the Company's financial condition or results of operations.
16
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, 1998.
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, 1998.
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, 1998.
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, 1998.
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.
17
(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).
(2)(c) Asset Purchase Agreement for Keliher Hardware Company.*
(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).
18
(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)(a)(iv) Employment Agreement with Terry W. Shaver effective January 1,
1997 (filed as Exhibit (10)(a)(iv) to the Report on Form 10-K
for the year ended December 31, 1996).
(10)(a)(v) Employment Agreement with Terry W. Shaver effective January 1,
1999.*
(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).
19
(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)(b)(iv) Employment Agreement with Gary L. Cox effective January 1, 1999.*
(10)(c) Revolving Credit Agreement with Texas American Bank/Duncanville,
N.A. (filed as Exhibit (10)(c) to the Registration Statement on
Form S-18, filed January 11, 1989).
(10)(d) Demand Credit Facility with Comerica Bank-Texas dated February
15, 1989 (filed as Exhibit (10)(d) to the Report on Form 10-Q
for the Quarter ended March 31, 1989, filed May 15,1989).
(10)(e) Demand Credit Facility with Comerica Bank-Texas dated June 15,
1989 (filed as Exhibit (10)(e) to the Report on Form 10-Q for
the Quarter ended June 30, 1989, filed August 11, 1989).
(10)(e)(i) Demand Credit Facility with Comerica Bank-Texas dated March 1,
1993 (filed as Exhibit (10)(e)(i) to the Report on Form 10-K for
the year ended December 31, 1992).
(10)(e)(ii) Demand Credit Facility with Comerica Bank-Texas extension,
renewal and increase dated June 1, 1993 (filed as Exhibit
(10)(e)(ii) to the Report on Form 10-K for the year ended
December 31, 1993).
(10)(e)(iii) Demand Credit Facility with Comerica Bank-Texas extension,
renewal and increase dated September 22, 1994 (filed as Exhibit
(10)(e)(iii) to the Report on Form 10-K for the year ended
December 31, 1994).
(10)(f) Employment Agreement with S. Stanley French effective October 1,
1992 (filed as Exhibit (10)(f) to the Report on Form 8-K, filed
October 19, 1992).
(22) Information Statement dated September 1, 1995 (filed as Exhibit
(22) to the Report on Form 10-K for the year ended December 31,
1995).
(23) Consent of Independent Auditors (filed as Exhibit (23) to the
Report on Form 10-K for the year ended December 31, 1997).
(27) Financial Data Schedule for the twelve months ended December 31,
1998.*
* 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 26th day of March,
1999.
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 26, 1999
Terry W. Shaver and Director (Principal Executive Officer)
/s/ Gary L. Cox Executive Vice President, March 26, 1999
Gary L. Cox Chief Operating Officer and Director
/s/ Lamont C. Laue Director March 26, 1999
Lamont C. Laue
/s/ Donald N. Black Director March 26, 1999
Donald N. Black
/s/ Frank J. Cinatl Vice President, Chief Financial Officer March 26, 1999
Frank J. Cinatl, IV and Director (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, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
II - Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997 and 1996 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Dallas, Texas
February 19, 1999
F-2
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
------------ ------------
Assets
Current assets:
Cash $ 223,997 $ 304,947
Trade accounts receivable, net of allowance for doubtful accounts of
$514,696 in 1998 and $495,092 in 1997 (note 4) 5,701,314 4,768,279
Inventories (note 4) 3,424,914 3,538,355
Prepaid expenses and other assets 424,865 249,426
Deferred income taxes (note 5) 143,299 142,466
------------ ------------
Total current assets 9,918,389 9,003,473
Receivables from officers and employees 79,505 73,729
Property and equipment, net (notes 3 and 4) 450,991 632,120
Deferred income taxes (note 5) 120,324 115,531
Other assets 26,296 29,396
------------ ------------
$10,595,505 $ 9,854,249
============ ============
Liabilities and Stockholders' Equity Current liabilities
Notes payable to bank (note 4) $ 2,854,206 $ 3,010,733
Accounts payable 958,656 1,230,107
Accrued compensation 181,071 107,272
Other accrued expenses 414,416 328,460
------------ ------------
Total current liabilities 4,408,349 4,676,572
------------ ------------
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 2,414 2,414
Additional paid-in capital 2,498,508 2,498,508
Retained earnings 5,252,301 4,084,892
Treasury stock at cost, 517,700 common shares in 1998 and 476,250
common shares in 1997 (1,566,067) (1,408,137)
------------ ------------
Total stockholders' equity 6,187,156 5,177,677
Commitments and contingencies (note 10)
------------ ------------
$10,595,505 $ 9,854,249
============ ============
See accompanying notes to consolidated financial statements.
F-3
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Net sales $37,327,629 $34,955,477 $33,066,831
Cost of sales 26,846,279 25,304,902 23,864,836
------------ ------------ ------------
Gross profit 10,481,350 9,650,575 9,201,995
Selling, general and administrative expenses (8,373,030) (7,953,179) (7,707,546)
Special credit (note 2) - - 56,711
------------ ------------ ------------
Operating profit 2,108,320 1,697,396 1,551,160
Other income (expense):
Interest income 15,824 36,187 19,840
Interest expense (238,706) (381,655) (359,712)
Other, net 2,400 (19,215) (15,944)
------------ ------------ ------------
Earnings from continuing operations before
income taxes 1,887,838 1,332,713 1,195,344
Income tax expense (note 5) (720,429) (491,607) (460,941)
------------ ------------ ------------
Earnings from continuing operations 1,167,409 841,106 734,403
Discontinued operations - earnings on discontinuance
of business, net of tax expense of $8,348 (note 2) - - 21,545
------------ ------------ ------------
Net earnings $ 1,167,409 $ 841,106 $ 755,948
============ ============ ============
Basic earnings per common share:
Earnings from continuing operations $ .60 $ .43 $ .35
Earnings from discontinued operations - - .01
------------ ------------ ------------
Net earnings $ .60 $ .43 $ .36
============ ============ ============
Diluted earnings per common share:
Earnings from continuing operations $ .60 $ .43 $ .35
Earnings from discontinued operations - - .01
------------ ------------ ------------
Net earnings $ .60 $ .43 $ .36
============ ============ ============
Weighted average shares outstanding (note 1(f)):
Basic 1,933,769 1,933,896 2,076,241
============ ============ ============
Diluted 1,933,769 1,933,896 2,110,582
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
Additional
Common Stock Treasury Stock
----------------------- Paid-in Retained ----------------------- Total
Shares Amount Capital Earnings Shares Amount Equity
----------- ---------- ------------ ------------ ---------- ------------ ------------
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
Purchase of treasury stock - - - - 41,450 (157,930) (157,930)
Net earnings - - - 1,167,409 - - 1,167,409
----------- ---------- ------------ ------------ ---------- ------------ ------------
Balance at December 31, 1998 2,413,814 $ 2,414 $ 2,498,508 $ 5,252,301 517,700 $(1,566,067) $ 6,187,156
=========== ========== ============ ============ ========== ============ ============
See accompanying notes to consolidated financial statements.
F-5
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $ 1,167,409 $ 841,106 $ 755,948
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 367,789 378,076 392,019
Deferred income taxes (5,626) (74,106)
(7,515)
Loss (gain) on disposal of assets (3,310) 2,681 15,805
Changes in assets and liabilities:
Receivables (933,035) 527,570 (925,254)
Inventories 113,441 (97,798) (352,281)
Refundable income taxes - 285,784 (285,784)
Prepaid expenses and other assets (175,439) 36,365 (62,604)
Net liabilities of discontinued operations - - (56,813)
Accounts payable (271,451) 163,680 (474,877)
Accrued expenses 159,755 69,645 (63,121)
------------ ------------ ------------
Net cash provided by (used in) operating activities 419,533 2,133,003 (1,064,477)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (191,850) (285,900) (611,407)
Proceeds from sale of property and equipment 8,500 36,666 33,000
Advances to officers and employees (40,609) (25,647) (51,270)
Collection of advances to officers and employees 34,833 28,265 45,500
Other assets, primarily deposits 3,100 6,426 3,171
------------ ------------ ------------
Net cash used in investing activities (186,026) (240,190) (581,006)
------------ ------------ ------------
Cash flows from financing activities:
Exercise of stock options - 90,938 42,500
Purchase of treasury stock (157,930) (212,890) (657,703)
Borrowings on notes payable to bank 36,258,601 34,600,365 36,133,863
Repayments on notes payable to bank (36,415,128) (36,376,567) (33,978,756)
------------ ------------ ------------
Net cash (used in) provided by financing activities (314,457) (1,898,154) 1,539,904
------------ ------------ ------------
Net decrease in cash (80,950) (5,341) (105,579)
Cash at beginning of year 304,947 310,288 415,867
------------ ------------ ------------
Cash at end of year $ 223,997 $ 304,947 $ 310,288
============ ============ ============
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, 1998, 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
prior year amounts have been reclassified for consistency in
presentation.
(b) Inventories
Inventories consist of materials and equipment for resale and are
stated at the lower of cost, determined by a method that
approximates the first-in, first-out method, or market.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation for
financial statement purposes is provided by the straight-line
method over the estimated useful lives of the depreciable
properties.
(d) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate the carrying amount of
an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
F-7
(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, 1998 and 1997, there were no
dilutive securities outstanding. The following table reconciles
the weighted average shares used for basic and diluted earnings
per share for the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996
------------ ------------ ------------
Weighted average shares outstanding - basic 1,933,769 1,933,896 2,076,241
Dilutive effects of stock options and
warrants - - 34,341
------------ ------------ ------------
Weighted average shares outstanding -
diluted 1,933,769 1,933,896 2,110,582
============ ============ ============
(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, 1998 or 1997.
The Company paid interest of $247,298, $383,735 and $351,645 in
1998, 1997 and 1996, respectively, and income taxes of $667,963,
$524,635 and $736,544 in 1998, 1997 and 1996, respectively.
(h) Income Taxes
The Company accounts for income taxes using the asset and
liability method. Under this method the Company records deferred
income taxes for the temporary differences between the financial
reporting basis and the tax basis of assets and liabilities at
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 accordance with Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation"
("Statement 123"), the Company applies the accounting provisions
of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees ("Opinion 25"), and related
interpretations and provides pro forma net income and pro forma
earnings per share disclosures for employee stock option grants as
if the fair-value-based method defined in Statement 123 had been
applied. Compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds
the exercise price.
(j) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" ("Statement 130"),
requires companies to report all components of comprehensive
income in a financial statement that is displayed with the same
prominence as other financial statements. The Company has no
"other comprehensive income."
(2) Restructuring and Discontinued Operations
On December 15, 1994, the Company announced a formal plan to
discontinue the sorbent manufacturing business of IESI and recorded an
estimated loss on disposal of IESI in 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. Except for the
remaining lease obligation discussed below, actual costs through
December 31, 1996 approximated management's estimate.
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, 1998 and 1997
follows:
Estimated
Useful Life 1998 1997
--------------- ------------ ------------
Furniture and equipment 3 - 10 years $ 1,767,738 $ 1,676,136
Transportation equipment 3 - 5 years 423,890 359,006
Leasehold improvements 3 - 5 years 71,715 70,915
------------ ------------
2,263,343 2,106,057
Less accumulated depreciation and
amortization 1,812,352 1,473,937
------------ ------------
Net property and equipment $ 450,991 $ 632,120
============ ============
(4) Notes Payable to Bank
At December 31, 1998, 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 $5,500,000 at December 31, 1998,
of which approximately $2,516,000 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, 1998, the Company had borrowed approximately $338,000 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 1998, the Company
negotiated a one-quarter of one percent reduction in its rate, thereby
reducing the rate of interest on its agreements to prime. As of
December 31, 1998 and 1997, the Company's rate of interest on these
agreements was 7.75 percent and 8.75 percent, respectively. 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, 1998,
1997 and 1996 consists of:
1998 1997 1996
------------ ------------ ------------
Continuing Operations:
Current:
Federal $ 605,621 $ 483,323 $ 413,759
State 120,433 82,390 72,083
Deferred:
Federal (5,766) (63,253) (23,775)
State 141 (10,853) (1,126)
------------ ------------ ------------
Income tax expense related
to continuing operations 720,429 491,607 460,941
Discontinued operations:
Current - - (9,038)
Deferred - - 17,386
------------ ------------ ------------
Total income tax expense $ 720,429 $ 491,607 $ 469,289
============ ============ ============
A reconciliation of expected federal income tax expense relating to
continuing operations (based on the U.S. corporate income tax rate of
34 percent) to actual income tax expense for the years ended December
31, 1998, 1997 and 1996 follows:
1998 1997 1996
------------ ------------ ------------
Expected income tax expense $ 641,865 $ 453,122 $ 406,417
State income taxes, net of related federal
tax benefit 79,579 47,215 46,832
Nondeductible meals and entertainment expense
6,479 11,119 13,047
Other (7,494) (19,849) (5,355)
------------ ------------ ------------
Actual income tax expense relating to
continuing operations $ 720,429 $ 491,607 $ 460,941
============ ============ ============
F-11
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31,
1998 and 1997 follow:
1998 1997
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts $ 196,283 $ 188,499
Inventory reserve 25,921 -
Property and equipment, principally due to
differences in depreciation 120,324 115,531
------------ ------------
Total gross deferred tax assets 342,528 304,030
Deferred tax liabilities - prepaid expenses (78,905) (46,033)
------------ ------------
Net deferred tax assets $ 263,623 $ 257,997
============ ============
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
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. All options vested on the grant
date. At December 31, 1998 and 1997, there were no additional shares
available for grant under the Plan. The per share weighted average fair
value of stock options granted during 1996 was $1.14 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 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.
F-12
The Company applies Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company recognized
compensation cost based on the fair value at the grant date for its
stock options under Statement 123, there would be no effect on the
Company's net earnings and earnings per share in 1998 and 1997 and the
Company's net earnings and earnings per share for 1996 would be reduced
to the following pro forma amounts:
1996
-----------------
Net earnings:
As reported $755,948
Pro forma $743,609
Diluted earnings per share:
As reported $.36
Pro forma $.36
Options activity for the three years ended December 31, 1998 is as
follows:
Weighted
Number of Average
Shares Under Price Per
Option Share
------------ ----------
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 and 1998 -
============
Shares exercisable at December 31, 1996 67,500 $ 3.06
============
The Company granted 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
F-13
stock on the date of grant and were exercisable immediately. The
activity of warrants granted to various consultants is summarized in
the following table:
Weighted
Average
Number of Price Per
Shares Share
------------ ----------
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
726,500 shares of the Company's common stock, of which the Company has
purchased 517,700 shares, including 41,450 shares during 1998.
(7) Benefit Plans
The Company has a 401(k) profit sharing plan, under which eligible
employees may request the Company to deduct and contribute a portion of
their salary to the plan. The Company may also, at its discretion,
match a portion of employee contributions to the plan. Contributions by
the Company to the 401(k) plan aggregated $38,154, $59,195 and $46,549
during 1998, 1997 and 1996, respectively.
(8) Fair Value of Financial Instruments
The reported amounts of financial instruments such as cash, accounts
receivable, accounts payable and accrued expenses approximate fair
value because of their short maturity. The carrying value of notes
payable to bank approximates fair value because these instruments bear
interest at current market rates.
(9) Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in 1998. Identification of
operating segments was based principally upon differences in the types
and distribution channel of products. The Company's reportable segments
consist of Abatix and IESI. The Abatix operating segment includes eight
aggregated branches, principally engaged in distributing environmental,
safety and construction supplies to contractors and industrial
manufacturing facilities in the western half of the United States and
the Company's corporate operations. The IESI operating segment, which
consists of the Company's wholly-owned subsidiary, International
Enviroguard Systems, Inc., is engaged in the wholesale distribution of
disposable clothing to companies similar to, and including, Abatix. The
IESI operating segment distributes products throughout the United
States.
F-14
The accounting policies of the operating segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements.
The Company evaluates the performance of its operating segments based
on income before income taxes and accounting changes, and after an
allocation of corporate expenses. Intersegment sales are at agreed upon
pricing and intersegment profits are eliminated in consolidation.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. There are no other
significant noncash items.
Abatix IESI Totals
------------ ------------ ------------
1998
- ----------------------------------------
Sales from external customers $34,928,236 $ 2,399,393 $37,327,629
Intersegment sales - 872,332 872,332
Interest revenue 15,767 57 15,824
Interest expense 238,706 - 238,706
Depreciation and amortization 363,089 4,700 367,789
Segment profit 1,585,546 305,333 1,890,879
Segment assets 10,706,982 993,048 11,700,030
Capital expenditures 177,670 14,180 191,850
1997
- ----------------------------------------
Sales from external customers $33,543,501 $ 1,411,976 $34,955,477
Intersegment sales - 822,721 822,721
Interest revenue 36,001 186 36,187
Interest expense 381,655 - 381,655
Depreciation and amortization 374,940 3,136 378,076
Segment profit 1,155,745 182,471 1,338,216
Segment assets 10,011,038 997,816 11,008,854
Capital expenditures 285,029 871 285,900
1996
- ----------------------------------------
Sales from external customers $32,214,119 $ 852,712 $33,066,831
Intersegment sales - 807,422 807,422
Interest revenue 19,840 - 19,840
Interest expense 359,712 - 359,712
Depreciation and amortization 390,865 1,154 392,019
Segment profit 1,052,294 (a) 171,330 (b) 1,223,624
Segment assets 10,847,222 598,642 11,445,864
Capital expenditures 603,946 7,461 611,407
(a) Amount includes a special credit of $56,711 related to the termination of a
lease from a closed branch location. See Note 2.
(b) Amount includes a special credit of $29,893 related to the termination of a
lease from a discontinued line of business. See Note 2.
F-15
Below is a reconciliation of (i) total segment profit to earnings from
continuing operations before income taxes on the Consolidated
Statements of Operations, and (ii) total segment assets to total assets
on the Consolidated Balance Sheets for all periods presented. The sales
from external customers represent the net sales on the Consolidated
Statements of Operations.
1998 1997 1996
------------ ------------ ------------
Profit for reportable segments $ 1,890,879 $ 1,338,216 $ 1,223,624
Elimination of intersegment profits (3,041) (5,503) 1,613
Pretax earnings from discontinued
operations - - (29,893)
------------ ------------ ------------
Income from continuing operations before
income taxes $ 1,887,838 $ 1,332,713 $ 1,195,344
============ ============ ============
Total assets for reportable segments $11,700,030 $11,008,854 $11,445,864
Elimination of intersegment assets (1,104,525) (1,154,605) (767,892)
------------ ------------ ------------
Total assets $10,595,505 $ 9,854,249 $10,677,972
============ ============ ============
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
1998, 1997 and 1996, no single customer accounted for more than 10
percent of net sales, although sales to asbestos and lead abatement
contractors was approximately 48% of consolidated net sales in 1998,
1997 and 1996. A reduction in spending on asbestos or lead abatement
projects could significantly impact sales.
Although no vendor accounted for more than 8% of purchases, one product
class accounted for approximately 18% of net 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.
F-16
(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, 1998:
1999 $ 415,637
2000 227,825
2001 128,964
2002 32,241
------------
$ 804,667
============
Rental expense for continuing operations under operating leases for the
years ended December 31, 1998, 1997 and 1996 was $589,658, $549,612 and
$491,374, respectively.
The Company has employment agreements with four key employees. The
agreements provide for minimum aggregate cash compensation as follows:
1999 $ 533,325
2000 451,600
2001 111,600
2002 9,300
------------
$ 1,105,825
============
The Company was named as a defendant in a product liability lawsuit
resulting in injury. The Company received indemnification under the
manufacturer's insurance and legal representation at the cost of the
manufacturer. The Company received notification this lawsuit was
dismissed without prejudice in August 1998.
In December 1998, the Company was named as a defendant in a lawsuit
alleging the Company and other defendants together participated in the
conversion and unauthorized purchase of inventory totaling $27,756 from
a customer of the Company. The plaintiff seeks actual damages,
exemplary damages, interest and attorney's fees. The Company purchased
the inventory in good faith and believed that the manager of the
customer's Houston facility was representing the customers' interests.
Management intends to vigorously defend against this claim.
(11) Subsequent Events
In January 1999, the Company received 22,766 shares of common stock
from an officer of the Company as payment for approximately $80,000
owed to the Company. The shares received from the officer of the
Company are held as treasury shares.
F-17
Effective January 1, 1999, the Company consummated an Asset Purchase
Agreement with Keliher Hardware Company ("Keliher"), a California
corporation, pursuant to which the Company assumed the operations of
Keliher. Keliher, based in Los Angeles, California, with a satellite
facility in Long Beach, is an industrial supply distributor, primarily
for the construction and industrial markets. The estimated fair value
of the assets acquired was approximately $1,000,000. The aggregate
purchase price was settled with the assumption of certain liabilities
(approximately $900,000), the issuance of 23,500 shares of the
Company's $.001 par value common stock at a value of $3.375 per share
and the remainder in cash. This acquisition will be accounted using the
purchase method.
F-18
Schedule II
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
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:
1998 $ 495,092 114,515 94,911 A 514,696
============ ============ ============ ============
1997 $ 376,117 215,396 96,421 A 495,092
============ ============ ============ ============
1996 $ 343,750 196,772 164,405 A 376,117
============ ============ ============ ============
Inventory Reserve:
1998 $ - 69,321 - 69,321
============ ============ ============ ============
Reserve for Loss on Discontinuance of
Business:
1996 $ 54,050 - 54,050 B -
============ ============ ============ ============
Reserve for Loss on Closure of Branch
Location:
1996 $ 72,298 - 72,298 B -
============ ============ ============ ============
A Represents the write-off of uncollectible accounts.
B 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.
S-1