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 March 31, 1997
Commission file number 1-10184
ABATIX ENVIRONMENTAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 75-1908110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
8311 Eastpoint Drive, Suite 400
Dallas, Texas 75227
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 381-1146
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 May 9, 1997 was 1,941,064 shares.
<PAGE>
<TABLE>
<CAPTION>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
March 31,
1997 December 31,
Assets (Unaudited) 1996
--------------- ---------------
<S> <C> <C>
Current assets:
Cash $ 23,337 $ 310,288
Trade accounts receivable net of allowance for doubtful accounts of
$412,104 in 1997 and $376,117 in 1996 (note 2) 6,080,743 5,295,849
Inventories 4,169,203 3,440,557
Refundable income taxes 285,784 285,784
Prepaid expenses and other assets 309,991 285,791
Deferred income taxes 106,971 103,723
--------------- ---------------
Total current assets 10,976,029 9,721,992
Receivables from officers and employees 75,689 76,347
Property and equipment, net 760,363 763,643
Deferred income taxes 88,074 80,168
Other assets 30,610 35,822
--------------- ---------------
$ 11,930,765 $ 10,677,972
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 5,060,418 $ 4,786,935
Accounts payable 1,344,975 920,153
Accrued compensation 129,244 106,090
Other accrued expenses 892,411 406,271
--------------- ---------------
Total current liabilities 7,427,048 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 3,359,620 3,243,786
Treasury stock at cost, 417,750 shares in 1997 and 392,750 in 1996
(1,265,887) (1,195,247)
--------------- ---------------
Total stockholders' equity 4,503,717 4,458,523
--------------- ---------------
Contingencies (note 5)
--------------- ---------------
$ 11,930,765 $ 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
March 31,
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Net sales $ 8,469,872 $ 7,657,556
Cost of sales (6,155,014) (5,498,199)
--------------- ---------------
Gross profit 2,314,858 2,159,357
Selling, general and administrative expenses (2,017,560) (1,790,771)
Special credit (note 3) - 56,711
--------------- ---------------
Operating profit 297,298 425,297
Other expense:
Interest expense (98,806) (64,902)
Other expense, net (5,073) (10,302)
--------------- ---------------
Earnings from continuing operations
before income taxes 93,419 350,093
Income tax expense (77,585) (142,359)
--------------- ---------------
Earnings from continuing operations 115,834 207,734
Earnings from discontinued operations, net of
tax expense of $8,348 (note 3) - 21,545
--------------- ---------------
Net earnings $ 115,834 $ 229,279
=============== ===============
Earnings per common and common equivalent share:
Earnings from continuing operations $ .06 $ .10
Earnings from discontinued operations
- .01
--------------- ---------------
Net earnings $ .06 $ .11
=============== ===============
Weighted average common and common equivalent
shares outstanding 1,991,255 2,169,257
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 115,834 $ 229,279
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation and amortization 93,901 86,657
Deferred income taxes (11,154) 40,232
Gain on disposal of assets - 3,833
Changes in assets and liabilities:
Receivables (784,894) (1,126,412)
Inventories (728,646) (489,872)
Prepaid expenses and other (24,200) 46,881
Net liability of discontinued operations (note 3) - (56,813)
Accounts payable 424,822 244,871
Income taxes payable - (41,926)
Accrued expenses 509,294 92,649
--------------- ---------------
Net cash used in operating activities (405,043) (970,621)
--------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (91,003) (98,485)
Proceeds from sale of property and equipment 382 28,013
Advances to officers and employees (6,690) (9,351)
Collection of advances to officers and employees 7,348 8,021
Other assets 5,212 (31,975)
--------------- ---------------
Net cash used in investing activities (84,751) (103,777)
--------------- ---------------
Cash flows from financing activities:
Exercise of stock options - 30,000
Purchase of treasury stock (note 4) (70,640) (310,020)
Net borrowings on notes payable to bank 273,483 981,310
--------------- ---------------
Net cash provided by financing activities 202,843 701,290
--------------- ---------------
Net decrease in cash (286,951) (373,108)
Cash at beginning of period 310,288 415,867
--------------- ---------------
Cash at end of period $ 23,337 $ 42,759
=============== ===============
Supplemental disclosure information
Cash paid during the period for: Interest $ 90,435 $ 62,316
Income taxes $ 9,635 $ 21,560
</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 March 31, 1997 and December 31, 1996,
9% and 16%, respectively, of the trade accounts receivable before allowances
were represented by these two customers. Currently, the Company is working
closely with its customers and anticipates payment of the entire balance. Sales
to these two companies represented less than 5% for the first quarter of 1997
and less than 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 has approved the repurchase of up to 476,500 shares.
Through May 9, 1997, the Company has purchased 440,250 shares, including 47,500
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 March 31, 1997 Compared to Three Month Period Ended
March 31, 1996.
Results of Operations
Net sales of $8,470,000 for the three months ended March 31, 1997, increased 11%
or $812,000 over the same period in 1996 due to the expanded sales force in
several locations.
Gross profit of 27% of sales for the three month period ended March 31, 1997,
decreased from 28% for the same period in 1996 because of increased competition
in certain markets.
Selling, general and administrative expenses of $2,018,000 for the three month
period ended March 31, 1997, increased 13% or $227,000 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 the first three months of 1997 were 24% of sales, approximately one
percent higher than 1996. 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 $99,000 increased 52% from 1996 interest expense of $65,000
because of increased borrowings primarily to fund the growth in accounts
receivable and inventory and the asset purchases in the second half of 1996 and
the first quarter of 1997. 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 three months ended March 31, 1997, of $116,000 or $.06 per
share decreased $113,000 from net earnings of $229,000 or $.11 per share for the
same period in 1996. The 49% decrease in net earnings is primarily due to higher
selling, general and administrative expenses and lower gross profit margins. 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 issued Statement of
Financial Accounting Standards 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.
Liquidity and Capital Resources
Net cash used in operations during the first quarter of 1997 of $405,000
resulted principally from increases in accounts receivable and inventory,
partially offset by the net earnings, noncash charges and the increase in
accrued expenses and accounts payable. 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 10 to 15% in 1997.
Cash requirements for non-operating activities during the first three months of
1997 were primarily for the purchase of property and equipment amounting to
$91,000 and the repurchase of the Company's common stock totaling $71,000. The
property and equipment expenditures for 1997 have consisted primarily of
furniture and fixtures and delivery vehicles. Capital expenditures for 1997 are
projected to 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 April 30, 1997, there are
advances outstanding under this credit facility of $5,048,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional $452,000
as of April 30, 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 April 30, 1997 were
$170,000. 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. In May 1997, the Company requested the lending institution fund
80 percent of the cost of these purchases from the Company's capital equipment
credit facility. At the time of such funding, the capital equipment facility
will increase by approximately $260,000 with a corresponding payment on the
working capital line of credit. Both credit facilities are payable on demand and
bear a variable rate of interest computed at the prime rate plus one-half of one
percent.
Management believes, that based on its equity position, the Company's current
credit facilities can be expanded during the next twelve months, if necessary,
and that these facilities, together with cash provided by operations, will be
sufficient for its capital and liquidity requirements for the next twelve
months.
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,
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 --
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 also named as a third party defendant in a
wrongful death/product liability lawsuit filed in the District Court of the
State of Texas for the County of Bexar (Maribel Flores vs. Olmos Environmental
Services, Inc., Nutec Industrial Chemical, Inc. and Walter J. Lyssy, Case No.
96-CI-12845). In both lawsuits, the Company has requested (1) indemnification
under the manufacturer's 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 these cases.
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 month
periods ended March 31, 1997 and 1996.
Exhibit 27 - Financial Data Schedule for the three months ended
March 31, 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
March 31, 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: May 9, 1997 By: /s/ Frank J. Cinatl, IV
Frank J. Cinatl, IV
Vice President and Chief Financial
Officer of Registrant
(Principal Accounting Officer)
<TABLE>
<CAPTION>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Computation Re Per Share Earnings
Three Months Ended March 31,
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Average shares outstanding:
Primary:
Common shares outstanding, beginning of period 1,988,564 2,159,214
Weighted average number of shares issued - 4,222
Weighted average number of shares acquired (2,056) (37,219)
Dilutive stock options and warrants, based on the treasury
stock method using average market prices 4,747 43,040
--------------- ---------------
Total 1,991,255 2,169,257
=============== ===============
Fully Diluted:
Common shares outstanding, beginning of period 1,988,564 2,159,214
Weighted average number of shares issued - 4,222
Weighted average number of shares acquired (2,056) (37,219)
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 price 4,747 43,040
--------------- ---------------
Total 1,991,255 2,169,257
=============== ===============
Earnings:
Earnings from continuing operations $ 115,834 $ 207,734
Earnings from discontinued operations - 21,545
--------------- ---------------
Net earnings $ 115,834 $ 229,279
=============== ===============
Primary earnings per common and common equivalent share:
Earnings from continuing operations $ .06 $ .10
Earnings from discontinued operations - .01
--------------- ---------------
Net earnings $ .06 $ .11
=============== ===============
Fully diluted earnings per common and common equivalent share:
Earnings from continuing operations $ .06 $ .10
Earnings from discontinued operations - .01
--------------- ---------------
Net earnings $ .06 $ .11
=============== ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1997, AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 23,337
<SECURITIES> 0
<RECEIVABLES> 6,492,847
<ALLOWANCES> (412,104)
<INVENTORY> 4,169,203
<CURRENT-ASSETS> 10,976,029<F1>
<PP&E> 2,062,474
<DEPRECIATION> 1,302,111
<TOTAL-ASSETS> 11,930,765
<CURRENT-LIABILITIES> 7,427,048
<BONDS> 0
0
0
<COMMON> 2,381
<OTHER-SE> 4,501,336<F2>
<TOTAL-LIABILITY-AND-EQUITY> 4,503,717
<SALES> 8,469,872
<TOTAL-REVENUES> 8,469,872
<CGS> 6,155,014
<TOTAL-COSTS> 6,155,014
<OTHER-EXPENSES> 2,017,560
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103,879<F3>
<INCOME-PRETAX> 193,419
<INCOME-TAX> 77,585
<INCOME-CONTINUING> 115,834
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,834
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
<FN>
<F1> AMOUNT REPRESENTS TOTAL CURRENT ASSETS.
<F2> INCLUDES THE COST OF 417,750 OF COMMON SHARES IN TREASURY OF $1,265,887.
<F3> INCLUDES INTEREST EXPENSE OF $98,806 AND OTHER EXPENSE OF $5,073.
</FN>
</TABLE>
