U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For The Quarterly Period Ended: Commission File Number:
June 30, 1997 0-17776
LEAK-X ENVIRONMENTAL CORPORATION
(Exact name of Small Business Issuer as specified in Its Charter)
Delaware 23-2823596
(State or other jurisdiction of (IRS Employer Identi-
Incorporation or Organization) fication Number)
790 East Market Street, Suite 270, West Chester, 19382
(Address of Principal Executive Offices) (Zip Code)
(610) 344-3380
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock, par value $.001 per share, outstanding
as of August 6, 1997 is 1,219,645 shares.
Transitional Small Business Disclosure Format: Yes No X
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 296,766 $ 156,617
Accounts receivable, net 2,089,658 1,383,857
Estimated earnings in excess of billings 71,392 20,357
Inventory 339,426 398,848
Other current assets 126,169 84,765
Net assets of discontinued operations 499,234 499,234
TOTAL CURRENT ASSETS 3,422,645 2,543,678
PROPERTY AND EQUIPMENT, NET 172,068 197,851
OTHER ASSETS
Goodwill, net of accumulated amortization of $105,666
in 1997 and $75,666 in 1996 1,720,325 1,750,325
Patents and other assets, net of accumulated
amortization of $3,195 in 1997 and $2,982 in 1996 20,116 20,329
TOTAL OTHER ASSETS 1,740,441 1,770,654
TOTAL ASSETS $5,335,154 $4,512,183
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES
Accounts payable and accrued expenses $2,389,728 $1,625,832
Unearned revenue 103,172 112,272
Line of credit 422,000 222,000
Notes payable to directors 126,473 0
Current portion of long term debt 47,974 50,337
Net liabilities of discontinued operations 476,714 501,707
TOTAL CURRENT LIABILITIES 3,566,061 2,512,148
LONG TERM DEBT 26,560 215,176
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value:
5,000,000 shares authorized,
0 Issued and outstanding in 1997 and 1996 0 0
Common stock $.001 par value:
30,000,000 shares authorized,
1,219,645 issued and outstanding in 1997 and 1996 1,220 1,220
Additional paid-in capital 8,308,015 8,308,015
Accumulated deficit (6,566,702) (6,524,376)
TOTAL STOCKHOLDERS' EQUITY 1,742,533 1,784,859
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,335,154 $4,512,183
</TABLE>
See notes to consolidated financial statements
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended June 30,
1997 1996
<S> <C> <C>
Revenues:
Service $1,840,897 $1,500,026
Product 584,708 546,927
2,425,605 2,046,953
Cost of Revenues:
Service 1,445,095 1,118,007
Product 365,457 404,455
1,810,552 1,522,462
Selling, general and
administrative expenses 587,939 591,130
Operating income (loss) 27,114 (66,639)
Other income (2,792) (6,454)
Interest expense 17,773 18,175
Net income (loss) before taxes 12,133 (78,360)
Income tax expense 840 (245)
Net income (loss) $11,293 ($78,115)
Weighted average shares of
common stock outstanding 1,219,645 1,104,166
Net income (loss) per share $0.01 ($0.07)
</TABLE>
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
<S> <C> <C>
Revenues:
Service $3,287,120 $2,747,195
Product 1,135,375 1,116,496
4,422,495 3,863,691
Cost of Revenues:
Service 2,512,200 2,009,252
Product 761,550 951,690
3,273,750 2,960,942
Selling, general and
administrative expenses 1,168,380 1,248,414
Operating loss (19,635) (345,665)
Other income (21,836) (12,729)
Interest expense 42,847 32,359
Net loss before taxes (40,646) (365,295)
Income tax expense 1,680 369
Net loss ($42,326) ($365,664)
Weighted average shares of
common stock outstanding 1,219,645 1,104,166
Net loss per share ($0.03) ($0.33)
</TABLE>
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
<S> <C> <C>
CASH FLOW FROM
OPERATING ACTIVITIES:
Net loss ($42,326) ($365,664)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 34,800 33,010
Goodwill amortization 30,000 29,178
Gain on sale of asset (4,831) ---
Valuation of stock options -------- 13,500
(Increase) decrease in accounts receivable (705,801) 695,804
(Increase) decrease in costs and estimated
earnings in excess of billings (51,035) 70,804
Decrease in inventories 59,422 163,966
Increase in other current assets (41,402) (3,985)
Increase (decrease) in accounts payable 761,015 (305,655)
Decrease in billings in excess of cost (9,100) (82,397)
Increase (decrease) in accrued
expenses and other liabilities 2,880 (66,397)
Change in net assets of discontinued operations (24,993) (30,730)
NET CASH PROVIDED BY OPERATIONS $8,629 $151,434
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditur (18,265) (27,290)
Sale of assets 14,079 ---
(Increase) decrease in other assets, 213 (2,056)
NET CASH USED BY INVESTING ACTIVITIES ($3,973) ($29,346)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on line of credit 200,000 (78,000)
Payments on long-term debt (29,210) (25,551)
Payments on notes payable to directors (35,297) ---
Proceeds from subscription receivable,
net of expenses -------- 139,491
NET CASH PROVIDED BY
FINANCING ACTIVITIES $135,493 $35,940
NET INCREASE IN CASH $140,149 $158,028
CASH, beginning of the year 156,617 442,946
CASH, end of the period $296,766 $600,974
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEAK-X ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
(UNAUDITED)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Note 1. Basis of Presentation
General
The accompanying unaudited consolidated financial statements of Leak-X
Environmental Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation (consisting of normal recurring
accruals) have been included. 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. Operating results for the six month period ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996.
Per share data for the periods are based upon the weighted average number
of common shares outstanding during such periods, plus net additional shares
issued upon exercise of options and warrants. Outstanding options and
warrants have not been included in the computation of per share data in the
three and six month periods ended June 30, 1997 or June 30, 1996 as they would
be immaterial or anti-dilutive, respectively.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board, "FASB",
issued SFAS No.128, "Earnings Per Share," which becomes effective in Fiscal
1998. Early application is not permitted. SFAS No. 128 simplifies the
standards for computing earnings per share, or "EPS". It replaces the
presentation of primary EPS with the presentation of basic EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of shares outstanding for the
period. If SFAS No. 128 had been applied to the results reported on Form
10-QSB's since Fiscal 1996, the Company's basic EPS would not have changed
since its results from operations were primarily losses.
In February 1997, The FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which becomes effective in Fiscal 1998.
SFAS No.129 requires the following disclosures: liquidation preferences of
preferred stock, information about rights and privileges of outstanding equity
securities and redemption criteria for all issues of capital stock. Due to
the Securities and Exchange Commissions' disclosure requirements of
publicly-held entities, there will be no additional disclosure required by the
Company.
In June 1997, the FASB issued SFAS No.130, "Reporting Comprehensive
Income," which becomes effective in Fiscal 1998. SFAS No.130 requires the
disclosure of the components of the change in equity of a business enterprise
during a period from transactions and other events except for distributions
and investments to be reported in the statement of operations, cash flows and
in ceratin circumstances as a component of equity as a separate category,
"accumulated other comprehensive income." Examples of items included in
comprehensive income are foreign currency translation adjustments, unrealized
securities gains or losses and pension liability adjustments. In addition,
publicly-held entities will be required to provide such disclosure on an
interim basis. Currently, there is no increased disclosure for items defined
under comprehensive income for the Company.
In June 1997, the FASB issued SFAS NO. 131, "Disclosure about Segments of
an Enterprise and Related Information," which becomes effective in Fiscal 1998
for publicly-held entities only. SFAS No. 131 requires the disclosure of
various data pertaining to entities operating with different business
segments. The Company does operate in two different business segments and the
statement of operations currently discloses the required data relating to the
Company under SFAS No. 131. The implementation of SFAS No. 131 will not
require any additional material disclosure.
Note 2. Financial Matters
Total interest expense for the six months ended June 30, 1997 and June
30, 1996 was $42,847 and $32,359, respectively.
Note 3. Discontinued Operations
Net assets of discontinued operations at June 30, 1997 consist of
accounts receivable of $499,234. Net liabilities of discontinued operations
at March 31, 1997 include accounts payable and accrued expenses of $346,314
and $130,400, respectively.
Note 4. Line of Credit
On July 29, 1997, the Company signed a Loan Modification Agreement (the
"Agreement") to the Company's Revolving Credit Agreement (the "Credit
Agreement") with First Union National Bank. The Agreement extended the
Company's Credit Agreement to December 31, 1997. All other terms of the
existing Credit Agreement remained unchanged. The Company was not in default
of any covenants of the Credit Agreement at June 30, 1997. The Company had
$328,000 of available borrowing at June 30, 1997.
Note 5. Notes Payable to Directors
On May 12, 1997, the Company entered into an agreement with George A.
Nolan and James G. Warburton, Directors of the Company and Officers of
Groundwater Recovery Systems, Inc. ("GRS"), a wholly-owned subsidiary of the
Company, to waive a total of $52,005 each in salary for the period January 1,
1997 through September 30, 1997. The agreement requires aggregate payments of
$61,770 to be made on the notes payable to Messrs. Nolan and Warburton for the
same period. Through June 30, 1997, Messrs. Nolan and Warburton waived a
total of $58,040 in salary and $3,900 in office expense reimbursement and
received an aggregate amount of $35,297 in payment on the notes payable to
directors. The Company also granted 15,000 incentive stock options each to
George Nolan and James Warburton pursuant to the Company's 1996 Stock Option
Plan at an exercise price of $1.50 per share with 5,000 additional options
each which would be granted upon audit if certain operating profits are met
for the fiscal year ended December 31, 1997.
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
Quarter ended June 30, 1997 compared to the Quarter ended June 30, 1996
The Company reported income of $11,293, or $0.01 per share for the
quarter ended June 30, 1997 (the "1997 Quarter"), as compared to a net loss of
$78,115, or ($0.07) per share for the quarter ended June 30, 1996 (the "1996
Quarter"). This improvement is a result of cost cutting measures and
increased sales.
Net revenue increased 19% to $2,425,605 for the 1997 Quarter compared to
$2,046,953 for the 1996 Quarter. The increase in revenues is attributable to
a 23% increase in environmental consulting services primarily from additional
construction management projects and a 7% increase in the Company's
groundwater remediation business due to an increased demand for remediation
equipment. The Company's gross margin remained stable at 25% for the 1997
Quarter as compared to a gross margin of 26% in the 1996 Quarter.
Selling, general and administrative expenses ("SG&A expenses") remained
basically unchanged at $587,939 for the 1997 Quarter, as compared to $591,130
in the 1996 Quarter. SG&A expenses decreased $109,425 at the Company's
groundwater remediation business as a result of a cost containment program
which was continued into Fiscal 1997 and $37,320 in salary waivers by two
directors in the 1997 Quarter. Corporate overhead increased $65,553 due to
the addition of employment contracts for two of the Company's executive
officers, the addition of Directors & Officers insurance and additional costs
related to the pursuit of the Company's growth and acquisition strategy. SG&A
expenses at the Company's environmental consulting business increased $40,681
primarily due to higher overhead costs associated with the investment in
development of a new office in Metro New York City.
The Company incurred slightly lower interest expense of $17,773 in the
1997 Quarter, as compared to $18,175 in the 1996 Quarter due to a lower use of
debt in the 1997 Quarter.
Six Months ended June 30, 1997 compared to the Six Months ended June 30, 1996
Net revenue increased 14% to $4,422,495 for the six months ended June 30,
1997 (the "1997 Period") compared to $3,863,691 for the six months ended June
30, 1996 (the "1996 Period"). The increase in revenues is attributable to a
20% increase in the environmental consulting business with higher construction
management revenues and a slight increase at the Company's groundwater
remediation business due to an increase in demand.
The Company's gross margin increased to 26% for the 1997 Period as
compared to a gross margin of 23% in the 1996 Period. The improvement in the
gross margin is primarily a result of overall improvement in the Company's
groundwater remediation business due to stronger margins from a cost reduction
program and higher demand.
SG&A expenses decreased by $80,034 to $1,168,380 for the 1997 Period, as
compared to $1,248,414 in the 1996 Period. SG&A expenses decreased $240,284
at the Company's groundwater remediation business as a result of a cost
containment program which was continued into Fiscal 1997 and salary waivers
totaling $58,040 by two directors in the 1997 Period. Corporate overhead
increased $113,861 due to the addition of employment contracts for two of the
Company's executive officers, the addition of Directors & Officers insurance
and additional costs related to the pursuit of the Company's growth and
acquisition strategy. SG&A expenses at the Company's environmental consulting
business increased $46,388 due to higher overhead costs primarily associated
with the investment in development of a new office in Metro New York City.
The Company incurred higher interest expense of $42,847 in the 1997
Period, as compared to $32,359 in the 1996 Period due to a higher use of debt
in the 1997 Period. The $42,326 loss in the 1997 Period is a significant
improvement over the $365,664 loss reported for the 1996 Period. The
improvement is attributable to all aspects of the Company's business. The
Company's environmental consulting business continues to grow with the opening
of two new offices within the last two years. The Company's groundwater
remediation business made significant reductions in its overhead expenses
which has allowed the Company to better compensate for lower than originally
anticipated sales in that area.
Liquidity and Capital Resources
The Company provided $8,629 in cash from operating activities in the 1997
Period as compared to providing $151,434 in the 1996 Period. The primary
difference in the utilization of cash from operating activities was a $705,801
increase in accounts receivable in the 1997 Period as compared to a $695,804
decrease in the 1996 Period. Accounts payable increased by $761,015 in the
1997 Period as compared to a reduction of $305,655 in the 1996 Period. These
changes reflect a period of growing sales in the 1997 Period , as compared to
a period of declining sales in the 1996 Period. In addition, the Company
incurred a substantially lower loss of $42,326 in the 1997 Period as compared
to a loss of $365,664 in the 1996 Period.
Net cash used by investing activities in the 1997 Period was $3,973 as
compared to $29,346 net cash used in the 1996 Period. Capital expenditures,
which were primarily for computer equipment, were lower at $18,265 in the 1997
Period as compared to $27,290 in the 1996 Period. The 1997 Period included
$14,079 of cash received from the sale of assets.
Net cash provided by financing activities was $135,493 in the 1997 Period
as compared to $35,940 in the 1996 Period. During the 1997 Period, the
Company borrowed $200,000 on its line of credit in order to support a period
of investment in materials for increasing sales and ongoing operations. In
the 1996 Period, the Company paid down $78,000 on its line of credit and
raised $139,491 through the completion of a private placement of its common
stock and warrants which commenced in December 1995. The Company paid
$35,297 on the notes payable to directors in the 1997 Period and continued to
make scheduled payments on its debt in the 1997 Period and 1996 Period.
The Company's working capital decreased to ($143,416) at June 30, 1997
as compared to $31,530 at December 31, 1996. The change in working capital
was primarily the result of a reclassification from long-term debt to current
liabilities for $126,473 related to the notes payable to directors which
becomes due on March 31, 1998. The Company utilizes working capital to manage
accounts payable, fund ongoing operations and make scheduled payments on its
long-term debt.
Backlog at June 30, 1997 of $5,800,000 was lower than the level at
December 31, 1996 of $6,800,000, primarily as a result of a higher percent of
completion of construction management work. The Company believes that all of
the current backlog will be completed in 1997, although, no assurance of this
can be given. Much of the Company's backlog is subject to termination at will
and rescheduling without significant penalty.
On July 29, 1997, the Company signed a Loan Modification Agreement (the
"Agreement") to the Company's Credit Agreement with First Union National
Bank. The Agreement extended the Company's Credit Agreement to December 31,
1997. All other terms of the existing Credit Agreement remained unchanged.
The Company was not in default of any covenants of the Credit Agreement at
June 30, 1997. The Company had $328,000 of available borrowing at June 30,
1997.
On May 12, 1997, the Company entered into an agreement with George A.
Nolan and James G. Warburton, Directors of the Company and Officers of GRS, to
waive a total of $52,005 each in salary for the period January 1, 1997 through
September 30, 1997. The agreement requires aggregate payments of $61,770 to
be made on the notes payable to Messrs. Nolan and Warburton for the same
period. In the 1997 Period, Messrs. Nolan and Warburton waived a total of
$58,040 in salary and $3,900 in office expense reimbursement and received an
aggregate amount of $35,297 in payment on the notes payable to directors. The
Company also granted 15,000 incentive stock options each to George Nolan and
James Warburton pursuant to the Company's 1996 Stock Option Plan at an
exercise price of $1.50 per share with 5,000 additional options each which
would be granted upon audit if certain operating profits are met for the
fiscal year ended December 31, 1997.
The Company deems its present facilities and equipment adequate for its
immediate needs and it has no material commitments for capital expenditures.
The Company believes its present liquidity and cash flow are adequate for its
current needs. There can be no assurance, however, that additional financing,
whether from debt or equity, will be available to the Company when needed on
commercially reasonable terms, or at all.
The Company's management believes that inflation has not had a
significant impact on its business during the past three years.
The statements contained herein include forward looking statements that
involve a number of risks and uncertainties. In addition to the facts
discussed, among the other factors that could cause actual results to differ
materially are the following: business conditions and growth in the industry
and general economy; competitive factors, such as rival designs and prices;
inventory risks due to shifts in market demand; changes in sales mix; and the
risk factors listed from time to time in the Company's SEC reports.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 8, 1997
LEAK-X ENVIRONMENTAL CORPORATION
by: /s/ Joyce A. Rizzo
Joyce A. Rizzo
Chief Executive Officer
by: /s/ Eileen E. Bartoli
Eileen E. Bartoli
Chief Financial Officer
and Controller
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LEAK-X
ENVIRONMENTAL CORPORATION CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997, AND
THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 1997, AND THE ACCOMPANYING NOTES, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 296,766
<SECURITIES> 0
<RECEIVABLES> 2,124,658
<ALLOWANCES> 35,000
<INVENTORY> 339,426
<CURRENT-ASSETS> 3,422,645
<PP&E> 447,130
<DEPRECIATION> 275,062
<TOTAL-ASSETS> 5,335,154
<CURRENT-LIABILITIES> 3,566,061
<BONDS> 26,560
0
0
<COMMON> 1,220
<OTHER-SE> 1,741,313
<TOTAL-LIABILITY-AND-EQUITY> 5,335,154
<SALES> 4,422,495
<TOTAL-REVENUES> 4,422,495
<CGS> 3,273,750
<TOTAL-COSTS> 3,273,750
<OTHER-EXPENSES> 1,168,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,847
<INCOME-PRETAX> (40,646)
<INCOME-TAX> 1,680
<INCOME-CONTINUING> (42,326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,326)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
