Conformed
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 September 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 October 30, 1997 was 1,905,064 shares.
<PAGE>
<TABLE>
<CAPTION>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
September 30,
1997
ASSETS (Unaudited) December 31, 1996
----------------- -------------------
<S> <C> <C>
Current assets:
Cash $ 95,597 $ 310,288
Trade accounts receivable net of allowance for doubtful accounts of
$474,050 and $376,117 in 1996 (note 2) 5,502,363 5,295,849
Inventories 3,461,280 3,440,557
Refundable income taxes - 285,784
Prepaid expenses and other current assets 251,681 285,791
Deferred income taxes 149,965 103,723
----------------- -------------------
Total current assets 9,460,886 9,721,992
Receivables from officers and employees 73,984 76,347
Property and equipment, net 691,364 763,643
Deferred income taxes 107,737 80,168
Other assets 32,886 35,822
----------------- -------------------
$ 10,366,857 $ 10,677,972
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 3,353,685 $ 4,786,935
Accounts payable 1,008,445 920,153
Accrued compensation 132,413 106,090
Other accrued expenses and current liabilities 1,040,239 406,271
----------------- -------------------
Total current liabilities 5,534,782 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 3,830,228 3,243,786
Less cost of 476,250 common shares in treasury in 1997 and 392,750
common shares in treasury in 1996 (1,408,137) (1,195,247)
----------------- -------------------
Total stockholders' equity 4,832,075 4,458,523
----------------- -------------------
Commitments and contingencies (note 5)
----------------- -------------------
$ 10,366,857 $ 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 Nine Months Ended
September 30, September 30,
------------------------------------- --------------------------------------
1997 1996 1997 1996
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 9,201,579 $ 8,517,896 $ 27,066,829 $ 25,203,647
Cost of sales 6,689,819 6,111,665 19,680,803 18,158,129
----------------- ----------------- ------------------ ------------------
Gross profit 2,511,760 2,406,231 7,386,026 7,045,518
Selling, general and administrative expenses (2,061,627) (1,919,057) (6,141,769) (5,715,227)
Special credit (note 3) - - - 56,711
----------------- ----------------- ------------------ ------------------
Operating profit 450,133 487,174 1,244,257 1,387,002
Other income (expense):
Interest expense (101,995) (110,508) (311,527) (265,029)
Other, net 24,778 (4,164) 25,781 (3,026)
----------------- ----------------- ------------------ ------------------
Earnings from continuing operations
before income taxes 372,916 372,502 958,511 1,118,947
Income tax expense 140,672 148,127 372,069 415,323
----------------- ----------------- ------------------ ------------------
Earnings from continuing operations 232,244 224,375 586,442 703,624
Earnings from discontinued operations, net of
tax expense of $8,348 (note 3) - - 21,545
----------------- ----------------- ------------------ ------------------
Net earnings $ 232,244 $ 224,375 $ 586,442 $ 725,169
================= ================= ================== ==================
Earnings per common and common equivalent share:
Earnings from continuing operations $ .12 $ .11 $ .30 $ .33
Earnings from discontinued operations - - - .01
----------------- ----------------- ------------------ ------------------
Net earnings $ .12 $ .11 $ .30 $ .34
================= ================= ================== ==================
Weighted average common and common equivalent
shares outstanding 1,906,064 2,097,614 1,943,387 2,136,048
================= ================= ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 586,442 $ 725,169
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities:
Depreciation and amortization 286,644 281,767
Deferred income taxes (73,811) 6,870
Loss on disposal of assets 5,091 15,805
Changes in assets and liabilities:
Receivables (206,514) (1,735,560)
Inventories (20,723) (889,500)
Refundable income taxes 285,784 -
Prepaid expenses and other 34,110 (23,644)
Net asset/liability of discontinued operations (note 3) - (56,813)
Accounts payable 88,292 140,138
Other accrued expenses and current liabilities 660,291 (45,360)
------------------ -----------------
Net cash provided by (used in) operating activities 1,645,606 (1,581,128)
------------------ -----------------
Cash flows from investing activities:
Purchase of property and equipment (241,863) (402,143)
Proceeds from sale of property and equipment 22,407 41,206
Advances to officers and employees (20,581) (42,735)
Collection of advances to officers and employees 22,944 35,920
Other assets 2,936 (5,200)
------------------ -----------------
Net cash used in investing activities (214,157) (372,952)
------------------ -----------------
Cash flows from financing activities:
Exercise of stock options - 42,500
Purchase of treasury stock (note 4) (212,890) (485,173)
Net borrowings on notes payable to bank (1,433,250) 2,187,038
------------------ -----------------
Net cash (used in) provided by financing activities (1,646,140) 1,744,365
------------------ -----------------
Net decrease in cash (214,691) (209,715)
Cash at beginning of period 310,288 415,867
------------------ -----------------
Cash at end of period $ 95,597 $ 206,152
================== =================
SUPPLEMENTAL DISCLOSURE INFORMATION
Cash paid during the period for: Interest $ 310,159 $ 245,171
Income taxes $ 538,615 $ 517,531
</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 sorbent manufacturing business of IESI was discontinued in December
1994 (see note 3).
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) Concentration 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 December 31, 1996, 16% of the trade
accounts receivable before allowances were represented by these two customers.
During the third quarter 1997, these customers paid their accounts current. As
of September 30, 1997, these two customers represent less than 1% of the trade
accounts receivable before allowances. Sales to these two companies were
negligible in the third quarter 1997 and represented 2% of total sales for the
first nine months of 1997. Sales to these two companies represents 8% of total
sales for the third quarter 1996 and 3% of total sales for the first nine months
of 1996.
(3) Restructuring
On December 15, 1994, the Company announced a formal plan to discontinue the
sorbent manufacturing business of IESI. 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 and the Company
reversed the remaining reserves resulting in the special credit and the earnings
from discontinued operations.
<PAGE>
(4) Stockholders' Equity
The Board of Directors has approved the repurchase of up to 476,500 shares.
Through October 30, 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 SEPTEMBER 30, 1997 COMPARED TO THREE MONTH PERIOD ENDED
SEPTEMBER 30, 1996.
RESULTS OF OPERATIONS
Net sales of $9,202,000 for the three months ended September 30, 1997, increased
8% or $684,000 over the same period in 1996 due to increased volume and an
expanded customer base.
Gross profit of 27% of sales for the three month period ended September 30,
1997, decreased from 28% for the same period in 1996 because of increased
competition in certain markets.
Selling, general and administrative expenses of $2,062,000 for the three month
period ended September 30, 1997, increased 7% or $143,000 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 third quarter of 1997 were 22% of sales approximately one
percent lower than third quarter 1996.
Interest expense of $102,000 decreased 8% from 1996 interest expense of $111,000
as higher collections and lower inventory levels reduced the Company's lines of
credit. 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 September 30, 1997 of $232,000 or $.12
per share increased $8,000 from net earnings of $224,000 or $.11 per share for
the same period in 1996. The increase in net earnings is primarily due to higher
sales volume and other income and lower interest expense, partially offset by
lower selling prices. Other income increased due to interest income related to
the collection of a past due receivable.
<PAGE>
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1996.
RESULTS OF CONTINUING OPERATIONS
Net sales of $27,067,000 for the nine months ended September 30, 1997, increased
7% or $1,863,000 over the same period in 1996 due to market share expansion in
several locations.
Gross profit of 27% of sales for the nine month period ended September 30, 1997,
decreased from gross profit of 28% of sales for the same period in 1996. This
decline is due to increased competition from low-priced competitors.
Selling, general and administrative expenses of $6,142,000 for the nine month
period ended September 30, 1997, increased 7% or $427,000 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 nine months of 1997 and 1996 were 23% of sales.
These expenses are expected to remain in their current range for 1997.
See Note 3 to the consolidated financial statements for a discussion of the
special credit.
Interest expense of $312,000 was 18% higher than 1996 interest expense because
of an increased level of borrowings primarily to fund the accounts receivable
growth during the first six months of 1997. Trade accounts receivable has
decreased 19% since June 30, 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 3 to the consolidated financial statements.
NET RESULTS
Net earnings for the nine months ended September 30, 1997 of $586,000 or $.30
per share decreased $139,000 from net earnings of $725,000 or $.34 per share for
the same period in 1996. The 19% decrease in net earnings resulted from lower
selling prices and higher interest expense, partially offset by higher sales
volume and other income. Other income increased due to interest income related
to the collection of a past due receivable. The special credit and earnings from
discontinued operations recorded in 1996 also contributed to the decline in net
earnings.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
<PAGE>
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. 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 provided by operations during the first nine months of 1997 of
$1,646,000 resulted principally from the increase in accrued expenses, the net
earnings and noncash charge for the depreciation and amortization and the income
tax refund, partially offset by the growth in accounts receivable.
Cash requirements for non-operating activities during the first nine months of
1997 were for the purchase of property and equipment amounting to $242,000 and
the repurchase of the Company's common stock totaling $213,000. 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; however, the
Company will continue to search for geographic locations that would complement
the existing infrastructure. If another location were to be opened, 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 October 29, 1997, there are
<PAGE>
advances outstanding under this credit facility of $2,312,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional
$3,188,000 as of October 29, 1997. The Company also maintains a $550,000 capital
equipment credit facility providing for borrowings at 80 percent of cost of
purchases. The advances outstanding under this credit facility as of October 29,
1997 were $488,000. 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 facility will be at the
lower 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.
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 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
nine month periods ended September 30, 1997 and 1996.
Exhibit 27 - Financial Data Schedule for the three months ended
September 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
September 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: October 30, 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
September 30, Nine months ended September 30,
----------------------------- -------------------------------
1997 1996 1997 1996
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Average shares outstanding:
Primary:
Common shares outstanding, beginning of period 1,910,064 2,091,464 1,988,564 2,159,214
Weighted average number of shares issued - 1,806 - 9,991
Weighted average number of shares acquired (4,000) (25,382) (45,177) (74,367)
Dilutive stock options and warrants, based on the
treasury stock method using average market prices - 29,726 - 41,210
------------- ------------- -------------- --------------
Total 1,906,064 2,097,614 1,943,387 2,136,048
============= ============= ============== ==============
Fully Diluted:
Common shares outstanding, beginning of period 1,910,064 2,091,464 1,988,564 2,159,214
Weighted average number of shares issued - 1,806 - 9,991
Weighted average number of shares acquired (4,000) (25,382) (45,177) (74,367)
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 - 29,726 - 41,210
------------- ------------- -------------- --------------
Total 1,906,064 2,097,614 1,943,387 2,136,048
============= ============= ============== ==============
Earnings:
Earnings from continuing operations $ 232,244 $ 224,375 $ 586,442 $ 703,624
Earnings from discontinued operations - - - 21,545
------------- ------------- -------------- --------------
Net earnings $ 232,244 $ 224,375 $ 586,442 $ 725,169
============= ============= ============== ==============
Primary earnings per common and common equivalent share:
Earnings from continuing operations $ .12 $ .11 $ .30 $ .33
Earnings from discontinued operations - - - .01
------------- ------------- -------------- --------------
Net earnings $ .12 $ .11 $ .30 $ .34
============= ============= ============== ==============
Fully diluted earnings per common and common equivalent share:
Earnings from continuing operations $ .12 $ .11 $ .30 $ .33
Earnings from discontinued operations - - - .01
------------- ------------- -------------- --------------
Net earnings $ .12 $ .11 $ .30 $ .34
============= ============= ============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997, AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 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> SEP-30-1997
<CASH> 95,597
<SECURITIES> 0
<RECEIVABLES> 5,976,413
<ALLOWANCES> (474,050)
<INVENTORY> 3,461,280
<CURRENT-ASSETS> 9,460,886<F1>
<PP&E> 2,129,606
<DEPRECIATION> 1,438,242
<TOTAL-ASSETS> 10,366,857
<CURRENT-LIABILITIES> 5,534,782
<BONDS> 0
0
0
<COMMON> 2,381
<OTHER-SE> 4,829,694<F2>
<TOTAL-LIABILITY-AND-EQUITY> 4,832,075
<SALES> 9,201,579
<TOTAL-REVENUES> 9,201,579
<CGS> 6,689,819
<TOTAL-COSTS> 6,689,819
<OTHER-EXPENSES> 2,061,627
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,217<F3>
<INCOME-PRETAX> 372,916
<INCOME-TAX> 140,672
<INCOME-CONTINUING> 232,244
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 232,244
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
<FN>
<F1> AMOUNT REPRESENTS TOTAL CURRENT ASSETS.
<F2> INCLUDES THE COST OF 476,250 OF COMMON SHARES IN TREASURY OF $1,408,137.
<F3> INCLUDES INTEREST EXPENSE OF $101,995 AND OTHER INCOME OF $24,778.
</FN>
</TABLE>
