SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 and 15(d)
of the Securities Exchange Act of 1934
For the quarter ended June 30, 1997
Commission file number 1-10184
ABATIX ENVIRONMENTAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 75-1908110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
8311 Eastpoint Drive, Suite 400
Dallas, Texas 75227
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 381-1146
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 requirements for the past 90 days.
Yes X No
Common stock outstanding at August 6, 1997 was 1,905,064 shares.
<PAGE>
<TABLE>
<CAPTION>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
June 30,
1997 December 31,
Assets (Unaudited) 1996
-------------- --------------
<S> <C> <C>
Current assets:
Cash $ 3,080 $ 310,288
Trade accounts receivable net of allowance for doubtful accounts of
$482,109 in 1997 and $376,117 in 1996 (note 2) 6,770,522 5,295,849
Inventories 3,693,304 3,440,557
Refundable income taxes 285,784 285,784
Prepaid expenses and other assets 259,930 285,791
Deferred income taxes 148,735 103,723
-------------- --------------
Total current assets 11,161,355 9,721,992
Receivables from officers and employees 76,594 76,347
Property and equipment, net 751,159 763,643
Deferred income taxes 96,858 80,168
Other assets 34,866 35,822
-------------- --------------
$ 12,120,832 $ 10,677,972
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 5,164,341 $ 4,786,935
Accounts payable 1,118,492 920,153
Accrued compensation 149,798 106,090
Other accrued expenses 1,077,584 406,271
-------------- --------------
Total current liabilities 7,510,215 6,219,449
-------------- --------------
Stockholders' equity (note 4):
Preferred stock - $1 par value, 500,000 shares authorized; none issued - -
Common stock - $.001 par value, 5,000,000 shares authorized; issued
2,381,314 shares in 1997 and 1996 2,381 2,381
Additional paid-in capital 2,407,603 2,407,603
Retained earnings 3,597,984 3,243,786
Treasury stock at cost, 471,250 shares in 1997 and 392,750 in 1996 (1,397,351) (1,195,247)
-------------- --------------
Total stockholders' equity 4,610,617 4,458,523
-------------- --------------
Contingencies (note 5)
-------------- --------------
$ 12,120,832 $ 10,677,972
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 9,395,378 $ 9,028,195 $ 17,865,250 $ 16,685,751
Cost of sales (6,835,970) (6,548,265) (12,990,984) (12,046,464)
-------------- -------------- -------------- --------------
Gross profit 2,559,408 2,479,930 4,874,266 4,639,287
Selling, general and administrative expenses (2,062,582) (2,005,399) (4,080,142) (3,796,170)
Special credit (note 3) - - - 56,711
-------------- -------------- -------------- --------------
Operating profit 496,826 474,531 794,124 899,828
Other income (expense):
Interest expense (110,726) (89,619) (209,532) (154,521)
Other income, net 6,076 11,440 1,003 1,138
-------------- -------------- -------------- --------------
Earnings from continuing operations
before income taxes 392,176 396,352 585,595 746,445
Income tax expense (153,812) (124,837) (231,397) (267,196)
-------------- -------------- -------------- --------------
Earnings from continuing operations 238,364 271,515 354,198 479,249
Earnings from discontinued operations, net of
tax expense of $8,348 (note 3) - - - 21,545
-------------- -------------- -------------- --------------
Net earnings $ 238,364 $ 271,515 $ 354,198 $ 500,794
============== ============== ============== ==============
Earnings per common and common equivalent share:
Earnings from continuing operations $ .12 $ .13 $ .18 $ .22
Earnings from discontinued operations - - - .01
-------------- -------------- -------------- --------------
Net earnings $ .12 $ .13 $ .18 $ .23
============== ============== ============== ==============
Weighted average common and common equivalent
shares outstanding 1,937,587 2,146,203 1,962,048 2,158,379
============== ============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 354,198 $ 500,794
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation and amortization 195,110 192,223
Deferred income taxes (61,702) 20,668
Loss (gain) on disposal of assets 1,194 (2,865)
Changes in assets and liabilities:
Receivables (1,474,673) (1,907,090)
Inventories (252,747) (1,079,130)
Prepaid expenses and other 25,861 9,365
Net liability of discontinued operations (note 3) - (56,813)
Accounts payable 198,339 433,972
Accrued expenses 715,021 (191,413)
-------------- --------------
Net cash used in operating activities (299,399) (2,080,289)
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (195,526) (266,682)
Proceeds from sale of property and equipment 11,706 25,883
Advances to officers and employees (13,720) (24,474)
Collection of advances to officers and employees 13,473 26,193
Other assets 956 11,225
-------------- --------------
Net cash used in investing activities (183,111) (227,855)
-------------- --------------
Cash flows from financing activities:
Exercise of stock options - 36,251
Purchase of treasury stock (note 4) (202,104) (310,020)
Net borrowings on notes payable to bank 377,406 2,205,667
-------------- --------------
Net cash provided by financing activities 175,302 1,931,898
-------------- --------------
Net decrease in cash (307,208) (376,246)
Cash at beginning of period 310,288 415,867
-------------- --------------
Cash at end of period $ 3,080 $ 39,621
============== ==============
Supplemental disclosure information
Cash paid during the period for: Interest $ 199,545 $ 154,521
Income taxes $ 347,045 $ 387,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION, GENERAL AND BUSINESS
Abatix Environmental Corp. ("Abatix") and its wholly owned subsidiary,
International Enviroguard Systems, Inc. ("IESI"), collectively the "Company",
market and distribute personal protection and safety equipment and durable and
nondurable supplies to the asbestos and lead abatement, industrial safety,
hazardous materials, and construction tool industries. The Company, through
IESI, imports certain products sold primarily through the Company's distribution
system.
The accompanying consolidated financial statements are prepared in accordance
with the instructions to Form 10-Q, are unaudited and do not include all the
information and disclosures required by generally accepted accounting principles
for complete financial statements. All adjustments that, in the opinion of
management, are necessary for a fair presentation of the results of operations
for the interim periods have been made and are of a recurring nature unless
otherwise disclosed herein. The results of operations for such interim periods
are not necessarily indicative of results of operations for a full year.
(2) CONCENTRATIONS OF CREDIT RISK
Through an acquisition in the third quarter 1996, two of the Company's customers
in the asbestos abatement industry came under common ownership, although they
both remain separate legal entities. As of June 30, 1997 and December 31, 1996,
10% and 16%, respectively, of the trade accounts receivable before allowances
were represented by these two customers. One of these accounts is not current,
therefore, the Company is negotiating a formal payment plan. The Company
anticipates payment of the entire balance. Sales to these two companies
represents 3% for the first six months of 1997 and 4% of total sales for 1996.
(3) RESTRUCTURING
On December 15, 1994, the Company announced a formal plan to discontinue the
sorbent manufacturing business of IESI. The Company recorded an estimated loss
on disposal of IESI at December 31, 1994 of $139,487, net of taxes. This
estimated loss on disposal primarily included costs related to the leased
facility, the write-down of fixed assets and inventory to net realizable value
and the estimated loss from operations up to the expected disposal date. In the
third quarter of 1995, the Company incurred a special charge of $80,000 to
accrue for future lease commitments resulting from the closure of its
distribution center in Corpus Christi, Texas. The noncancelable lease was to
expire September 1999.
The Company's lease agreement on the building that was occupied by both the
operations of IESI and the Corpus Christi branch included an option 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. In March 1996, the Company reversed the
remaining reserves resulting in the special credit and the earnings from
discontinued operations.
(4) STOCKHOLDERS' EQUITY
The Board of Directors approved the repurchase of up to 476,500 shares. Through
August 6, 1997, the Company has purchased 476,250 shares, including 83,500
shares purchased in 1997.
(5) CONTINGENCIES
The Company was named as a defendant in two product liability lawsuits, one of
which also asserts wrongful death. The Company has requested in both cases (1)
indemnification under the manufacturer's product liability insurance and (2)
legal representation at the cost of the manufacturer. At this time, the Company
does not anticipate any material impact on its financial statements as a result
of either of these cases.
<PAGE>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 1997 COMPARED TO THREE MONTH PERIOD ENDED JUNE
30, 1996.
RESULTS OF OPERATIONS
Net sales of $9,395,000 for the three months ended June 30, 1997, increased 4%
or $367,000 over the same period in 1996 due to the expanding market share in
several locations.
Gross profit of 27% of sales for the three month period ended June 30, 1997, was
equal to 1996.
Selling, general and administrative expenses of $2,063,000 for the three month
period ended June 30, 1997, increased 3% or $57,000 over the same period in
1996. The increase is primarily attributable to higher payroll resulting from
increased sales and support personnel. Selling, general and administrative
expenses for both the second quarter of 1997 and 1996 were 22% of sales.
Interest expense of $111,000 increased 24% from 1996 interest expense of $90,000
because of increased borrowings primarily to fund the growth in accounts
receivable and inventory, the asset purchases in the second half of 1996 and the
first half of 1997, and the purchases of treasury stock. The Company's credit
facilities are variable rate notes tied to the Company's lending institution's
prime rate. Increases in the prime rate could negatively affect the Company's
earnings.
NET RESULTS
Net earnings for the three months ended June 30, 1997, of $238,000 or $.12 per
share decreased $33,000 from net earnings of $272,000 or $.13 per share for the
same period in 1996. The 12% decrease in net earnings primarily resulted from a
lower effective tax rate in 1996. This lower effective tax rate resulted from
the reconciliation of the 1995 tax return to the 1995 year-end tax accrual. The
higher interest expense and selling, general and administrative expenses were
offset by gross profit generated from higher sales.
SIX MONTH PERIOD ENDED JUNE 30, 1997 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30,
1996.
RESULTS OF OPERATIONS
Net sales of $17,865,000 for the six months ended June 30, 1997, increased 7% or
$1,179,000 over the same period in 1996 due to the expanding market share in
several locations.
Gross profit of 27% of sales for the six month period ended June 30, 1997,
decreased from 28% for the same period in 1996 due to increased competition from
low-priced competitors.
Selling, general and administrative expenses of $4,080,000 for the six month
period ended June 30, 1997, increased 7% or $284,000 over the same period in
1996. The increase is primarily attributable to higher payroll resulting from
increased sales and support personnel. Selling, general and administrative
expenses for both the first six months of 1997 and 1996 were 23% of sales. These
expenses are expected to remain in their current range for 1997.
See Note 2 to the consolidated financial statements for a discussion of the
special credit.
Interest expense of $210,000 increased 36% from 1996 interest expense of
$155,000 because of increased borrowings primarily to fund the growth in
accounts receivable and inventory, the asset purchases in the second half of
1996 and the first half of 1997, and the purchases of treasury stock. The
Company's credit facilities are variable rate notes tied to the Company's
lending institution's prime rate. Increases in the prime rate could negatively
affect the Company's earnings.
DISCONTINUED OPERATIONS
See Note 2 to the consolidated financial statements.
NET RESULTS
Net earnings for the six months ended June 30, 1997, of $354,000 or $.18 per
share decreased $147,000 from net earnings of $501,000 or $.23 per share for the
same period in 1996. The 29% decrease in net earnings resulted from the higher
selling, general and administrative and interest expenses and the lower gross
profit percentage, partially offset by the effects of higher revenues. The
special credit and earnings from discontinued operations recorded in 1996 also
contributed to the decline in net earnings.
<PAGE>
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" ("Statement 128"). Statement 128 requires calculation of basic earnings
per share and diluted earnings per share which will replace primary earnings per
share and fully diluted earnings per share. Although diluted earnings per share
is similar to fully diluted earnings per share, basic earnings per share
excludes common stock equivalents from its calculation. Statement 128 is
effective for both interim and annual periods ending after December 15, 1997 and
requires restatement of all prior-period earnings per share data presented.
Management of the Company does not expect the adoption of Statement 128 will
have a material impact on the Company's earnings per share calculation.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("Statement 130"). Statement 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. Statement 130 is effective for interim and annual
periods beginning after December 15, 1997. Management of the Company does not
expect the adoption of Statement 130 to have a material impact on the Company's
financial statements since there are currently no items of comprehensive income
that are not currently reported in its Consolidated Statement of Operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("Statement 131"). Statement 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. Statement 131 is effective for periods beginning after December 15,
1997. Management of the Company is currently reviewing the applicability of
Statement 131, but does not believe it will have a material impact on its
disclosures.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the first six months of 1997 of $299,000
resulted principally from increases in accounts receivable and inventory,
partially offset by the net earnings and the increase in accrued expenses.
Although cash flow from operations at any given point in 1997 may be negative,
the entire year is expected to be break-even. Break-even cash flow from
operations is expected because the rate of revenue growth in 1997 is projected
to be lower than 1996, but at a level that will not generate significant net
cash flows from operations. The Company currently estimates revenue growth of 7
to 12% in 1997.
The Company's low cash balance at June 30, 1997, reflects its commitment to
minimize interest charges. Due to the nature of The Company's banking
relationship, funds are available through the working capital line of credit to
meet daily working capital requirements.
Cash requirements for non-operating activities during the first six months of
1997 were primarily for the purchase of property and equipment amounting to
$196,000 and the repurchase of the Company's common stock totaling $202,000. The
property and equipment expenditures for 1997 have consisted primarily of
computer equipment and delivery vehicles. Capital expenditures for 1997 are
projected to be below total 1996 expenditures of $611,000, a significant portion
of which was related to the new computer and telecommunications systems.
The Company currently has no plans to expand geographically in 1997; however,
the Company will continue to search for geographic locations that would
complement the existing infrastructure. If another location were to be opened in
1997, the Company would fund the startup expenses through its lines of credit.
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 lessor of 40
percent of eligible inventory or $1,500,000. As of August 6, 1997, there are
advances outstanding under this credit facility of $4,962,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional $538,000
as of August 6, 1997. 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 August 6, 1997 were
$188,000. Certain asset purchases during the fourth quarter 1996 and the first
quarter 1997 totaling $326,000 were funded through the Company's working capital
line of credit. The Company expects the lending institution to fund 80 percent
of the cost of these purchases from the Company's capital equipment credit
facility in August 1997. At the time of such funding, the capital equipment
facility will increase by approximately $260,000 with a corresponding reduction
on the working capital line of credit. Both credit facilities are payable on
demand and bear a variable rate of interest. During June 1997, the Company
negotiated a reduction in the interest rate to prime rate plus one-quarter of
one percent. Although the working capital line of credit is immediately impacted
by the lower interest rate, only future borrowings on the capital equipment
credit facility will be at the lower rate.
<PAGE>
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.
Except for the historical information contained herein, the matters set forth in
this Form 10-Q 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.
<PAGE>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
PART II
Other Information
Item 1. LEGAL PROCEEDINGS --
See Note 5 to the consolidated financial statements for a discussion of legal
proceedings.
Item 2. CHANGES IN SECURITIES -- None
Item 3. DEFAULTS UPON SENIOR SECURITIES -- None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- None
Item 5. OTHER INFORMATION -- None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits --
Exhibit 11 - Computation Re Per Share Earnings for the three and
six month periods ended June 30, 1997 and 1996.
Exhibit 27 - Financial Data Schedule for the three months ended
June 30, 1997 (filed with the Company's electronic filing only).
(b) Reports on Form 8-K --
There were no reports on Form 8-K filed for the three months ended
June 30, 1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned as both a duly authorized officer and as the principal financial and
accounting officer by the Registrant.
ABATIX ENVIRONMENTAL CORP.
(Registrant)
Date: August 6, 1997 By: /s/ Frank J. Cinatl, IV
--------------- -----------------------
Frank J. Cinatl, IV
Vice President and Chief Financial
Officer of Registrant
(Principal Accounting Officer)
<TABLE>
<CAPTION>
EXHIBIT 11
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Computation Re Per Share Earnings
Three months ended June 30, Six months ended June 30,
------------------------------ ------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Average shares outstanding:
Primary:
Common shares outstanding, beginning of period 1,963,564 2,088,964 1,988,564 2,159,214
Weighted average number of shares issued - 1,444 - 7,833
Weighted average number of shares acquired (25,977) - (26,516) (58,735)
Dilutive stock options and warrants, based on the
treasury stock method using average market prices - 55,795 - 50,067
-------------- -------------- -------------- --------------
Total 1,937,587 2,146,203 1,962,048 2,158,379
============== ============== ============== ==============
Fully Diluted:
Common shares outstanding, beginning of period 1,963,564 2,088,964 1,988,564 2,159,214
Weighted average number of shares issued - 1,444 - 7,833
Weighted average number of shares acquired (25,977) - (26,516) (58,735)
Dilutive stock options and warrants, based on the treasury
stock method using the market price at the end of the
period if higher than the average market prices - 60,194 - 61,167
-------------- -------------- -------------- --------------
Total 1,937,587 2,150,602 1,962,048 2,169,479
============== ============== ============== ==============
Earnings:
Earnings from continuing operations $ 238,364 $ 271,515 $ 354,198 $ 479,249
Earnings from discontinued operations - - - 21,545
-------------- -------------- -------------- --------------
Net earnings $ 238,364 $ 271,515 $ 354,198 $ 500,794
============== ============== ============== ==============
Primary earnings per common and common equivalent share:
Earnings from continuing operations $ .12 $ .13 $ .18 $ .22
Earnings from discontinued operations - - - .01
-------------- -------------- -------------- --------------
Net earnings $ .12 $ .13 $ .18 $ .23
============== ============== ============== ==============
Fully diluted earnings per common and common equivalent share:
Earnings from continuing operations $ .12 $ .13 $ .18 $ .22
Earnings from discontinued operations - - - .01
-------------- -------------- -------------- --------------
Net earnings $ .12 $ .13 $ .18 $ .23
============== ============== ============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997, AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,080
<SECURITIES> 0
<RECEIVABLES> 7,252,631
<ALLOWANCES> (482,109)
<INVENTORY> 3,693,304
<CURRENT-ASSETS> 11,161,355<F1>
<PP&E> 2,124,551
<DEPRECIATION> 1,373,392
<TOTAL-ASSETS> 12,120,832
<CURRENT-LIABILITIES> 7,510,215
<BONDS> 0
0
0
<COMMON> 2,381
<OTHER-SE> 4,608,236<F2>
<TOTAL-LIABILITY-AND-EQUITY> 4,610,617
<SALES> 9,395,378
<TOTAL-REVENUES> 9,395,378
<CGS> 6,835,970
<TOTAL-COSTS> 6,835,970
<OTHER-EXPENSES> 2,062,582
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,650<F3>
<INCOME-PRETAX> 392,176
<INCOME-TAX> 153,812
<INCOME-CONTINUING> 238,364
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238,364
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
<FN>
<F1> AMOUNT REPRESENTS TOTAL CURRENT ASSETS.
<F2> INCLUDES THE COST OF 471,250 OF COMMON SHARES IN TREASURY OF $1,397,351.
<F3> INCLUDES INTEREST EXPENSE OF $110,726 AND OTHER INCOME OF $6,076.
</FN>
</TABLE>
