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, 1995
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 20, 1995 was 2,161,814 shares.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
1995 1994
------------- ------------
ASSETS
Current assets:
Cash $ 199,332 $ 150,727
Trade accounts receivable net of
allowance for doubtful accounts of $292,604
in 1995 and $163,233 in 1994 4,849,523 4,428,853
Inventories 2,836,544 2,398,252
Prepaid expenses and other current assets 149,583 210,585
Deferred income taxes 150,805 146,205
Net asset of discontinued operations - 91,249
------------ ------------
Total current assets 8,185,787 7,425,871
Receivables from officers and employees 64,979 58,685
Property and equipment, net 564,528 677,431
Other assets 25,617 21,936
------------ ------------
$ 8,840,911 $ 8,183,923
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 2,606,054 $ 2,919,718
Accounts payable 1,165,674 792,663
Net liability of discontinued operations 97,002 -
Other accrued expenses and current liabilities 741,739 496,701
------------ ------------
Total current liabilities 4,610,469 4,209,082
Deferred income taxes 38,390 74,005
------------ ------------
Total liabilities 4,648,859 4,283,087
------------ ------------
Stockholders' equity:
Preferred stock - $1 par value, 2,000,000
shares authorized; none issued - -
Common stock - $.001 par value, 20,000,000
shares authorized; issued 2,341,314 shares
in 1995 and 2,319,748 shares in 1994 2,341 2,320
Additional paid-in capital 2,305,143 2,279,653
Retained earnings 2,341,045 1,674,461
Less cost of 179,500 common shares in
treasury in 1995 and 26,500 common
shares in treasury in 1994 (456,477) (55,598)
------------ ------------
Total stockholders' equity 4,192,052 3,900,836
------------ ------------
Commitments
------------ ------------
$ 8,840,911 $ 8,183,923
============ ============
2
See accompanying notes to consolidated financial statements.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1995 1994 1995 1994
----------- ----------- ------------ ------------
Net sales $ 7,129,372 $ 6,981,679 $ 20,831,377 $ 19,911,239
Cost of sales 5,079,693 5,112,952 14,785,132 14,496,773
----------- ----------- ------------ ------------
Gross profit 2,049,679 1,868,727 6,046,245 5,414,466
Selling, general and
administrative expenses 1,618,609 1,475,714 4,660,178 4,495,287
Special charge 80,000 - 80,000 -
----------- ----------- ------------ ------------
Earnings from operations 351,070 393,013 1,306,067 919,179
Other income (expense):
Interest expense (74,847) (83,779) (204,573) (201,519)
Interest income
and other, net 11,779 17 22,215 7,507
----------- ----------- ------------ ------------
Earnings from continuing
operations before
income taxes 288,002 309,251 1,123,709 725,167
Income tax expense 97,780 123,700 457,125 290,066
----------- ----------- ------------ ------------
Earnings from
continuing operations 190,222 185,551 666,584 435,101
Discontinued operations:
Loss from discontinued
operations, net of tax
benefit of $18,496 and
$65,418 for the three
and nine months ended
September 30, 1994,
respectively - (25,970) - (119,384)
----------- ----------- ------------ ------------
Net earnings $ 190,222 $ 159,581 $ 666,584 $ 315,717
=========== =========== ============ ============
Earnings per common and common equivalent share:
Earnings from
continuing operations $ .09 $ .08 $ .30 $ .19
Loss from
discontinued operations - (.01) - (.05)
---------- ----------- ------------ ------------
Net earnings $ .09 $ .07 $ .30 $ .14
========== =========== ============ ============
Weighted average common
and common equivalent
shares outstanding 2,208,440 2,337,249 2,216,076 2,332,805
========== =========== ============ ============
See accompanying notes to consolidated financial statements.
3
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
SEPTEMBER 30,
1995 1994
------------ ------------
Cash flows from operating activities:
Net earnings $ 666,584 $ 315,717
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 250,042 223,457
Deferred income taxes, net (40,215) 1,948
Gain on disposal of assets (11,615) (2,875)
Changes in assets and liabilities:
Receivables (420,670) (2,013,866)
Inventories (438,292) (468,187)
Refundable income taxes - 236,236
Prepaid expenses and other 61,002 (22,996)
Net asset/liability of discontinued operations 147,807 25,228
Accounts payable 373,011 487,294
Other accrued expenses and current liabilities 249,757 184,102
------------ ------------
Net cash provided by (used in) operating activities 837,411 (1,033,942)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (135,014) (324,248)
Proceeds from sale of property and equipment 49,934 11,048
Advances to officers and employees (31,359) (25,147)
Collection of advances to officers and employees 25,065 7,468
Other net assets (3,681) (2,000)
------------ ------------
Net cash used in investing activities (95,055) (332,879)
------------ ------------
Cash flows from financing activities:
Exercise of stock options and warrants 25,511 117,505
Purchase of treasury stock (400,879) -
Net (repayments) borrowings
on notes payable to bank (313,664) 1,130,792
Principal payments on capital lease obligations (4,719) (130)
------------ ------------
Net cash (used in) provided
by financing activities (693,751) 1,248,167
------------ ------------
Net increase (decrease) in cash 48,605 (118,654)
Cash at beginning of period 150,727 172,186
------------ ------------
Cash at end of period $ 199,332 $ 53,532
============ ============
Supplemental disclosure information:
Cash paid during the period for: Interest $ 207,142 $ 208,211
Income taxes $ 430,123 $ 87,500
See accompanying notes to consolidted financial statements.
4
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 2).
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. Certain amounts have been
reclassified for consistency in presentation. The results of operations for
such interim periods are not necessarily indicative of results of operations
for a full year.
(2) DISCONTINUED OPERATIONS
In December 1994, the Company announced the discontinuance of the sorbent
manufacturing business of IESI, which was completed by September 30, 1995.
The remaining asset is the accounts receivable and the remaining liability is
the reserve related to the discontinuance. The balance of this reserve
exists primarily to cover the remaining costs associated with the facility
lease, which expires September 1999. Actual costs through September 30, 1995
approximated management's December 1994 estimates. Sales of sorbents were
$8,000 and $123,000 for the three months ended September 30, 1995 and 1994,
respectively, and $116,000 and $330,000 for the nine months ended
September 30, 1995 and 1994, respectively.
(3) STOCKHOLDERS' EQUITY
In February 1995, the Board of Directors of the Company approved a repurchase
of up to 110,000 shares of the Company's common stock. In May and July 1995,
the Company repurchased 13,000 and 50,000 shares of common stock,
respectively. Since November 1994, the Company has purchased 179,500 shares
for treasury stock.
Effective October 6, 1995, the Company amended its Certificate of
Incorporation, thereby reducing its authorized capital stock. The authorized
preferred stock has been reduced from 2,000,000 shares to 500,000 shares and
the authorized common stock has been reduced from 20,000,000 shares to
5,000,000 shares. This reduction in authorized capital stock will result in
franchise tax savings without impairing the Company's ability to raise
capital, if needed, through the equity markets.
5
(4) SPECIAL CHARGE
Effective September 1, 1995, the Company closed its sales/distribution center
in Corpus Christi, Texas. This branch office was opened June 1, 1994.
Associated with this closing, the Company recorded an $80,000 pretax charge
to operations. This charge primarily includes costs related to future lease
commitments.
The Company has an option to purchase the building it is currently leasing,
at a price believed to be favorable to the building's current market price.
The Company, through a real estate broker, is actively marketing this
property. If the property is sold or subleased to a third party, the Company
would be able to partially recover the charges associated with the future
lease commitments.
Sales for the Corpus Christi branch were $67,000 and $44,000 for the three
months ended September 30, 1995 and 1994, respectively, and $294,000 and
$59,000 for the nine months ended September 30, 1995 and 1994, respectively.
The Corpus Christi branch had operating losses of $31,000 and $12,000 for the
third quarters 1995 and 1994, respectively, and operating losses of $56,000
and $16,000 for the nine months ended September 30, 1995 and 1994,
respectively.
6
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, 1995 COMPARED TO THREE MONTH PERIOD
ENDED SEPTEMBER 30, 1994.
RESULTS OF CONTINUING OPERATIONS
Net sales of $7,129,000 for the three months ended September 30, 1995,
increased 2% or $148,000 over the same period in 1994.
Gross profit of 29% of sales for the three month period ended September 30,
1995, increased from 27% for the same period in 1994. This increase is
primarily attributable to improved pricing as a result of enhanced customer
service.
Selling, general and administrative expenses of $1,619,000 for the three
month period ended September 30, 1995, increased 10% or $143,000 over the
same period in 1994. The increase was attributable to higher selling
expenses resulting from increased gross profit. Selling, general and
administrative expenses for 1995 were 23% of sales compared to 21% of sales
for 1994.
The company recorded a pretax special charge of $80,000 in the three month
period ended September 30, 1995 to account for the costs associated with
closing the Corpus Christi, Texas sales/distribution facility. The charge
primarily includes estimated costs related to future lease commitments.
Interest expense of $75,000 decreased 11% from 1994 expense of $84,000. This
decrease is primarily due to a decrease in borrowings, partially offset by an
increase in the interest rate. 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. In late
September, the Company negotiated a one-half of one percent reduction in its
borrowing rate on all of its credit facilities. Interest income and other,
net of $12,000 consists primarily of gains on the sale of assets.
DISCONTINUED OPERATIONS
See Note 2 to the consolidated financial statements.
7
NET RESULTS
Net earnings for the three months ended September 30, 1995 of $190,000 or
$.09 per share increased $30,000 from net earnings of $160,000 or $.07 per
share for the same period in 1994. The 19% increase in net earnings is
primarily due to higher sales and product margins, partially offset by the
impact of the special charge and higher selling, general and administrative
expenses.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1994.
RESULTS OF CONTINUING OPERATIONS
Net sales from continuing operations for the nine months ended September 30,
1995 increased 5% or $920,000 to $20,831,000 from $19,911,000 in 1994. The
increase is primarily a result of increased market share in several markets,
partially offset by less demand for asbestos abatement products in certain
locations.
The Company intends to continue serving the asbestos abatement market and to
continue diversifying revenues in all markets with hazardous material
remediation, industrial product and construction tool sales. Efforts to
further expand and diversify revenues without sacrificing product margins
should provide the foundation for continuing profitability in 1995 and 1996.
Gross profit for the nine month period ended September 30, 1995 increased
from 27% to 29% over 1994. This increase is primarily attributable to
improved sales pricing as a result of enhanced customer service.
Selling, general and administrative expenses of $4,660,000 for the nine month
period ended September 30, 1995, increased 4% or $165,000 over the same
period in 1994. The increase was attributable to higher selling expenses
resulting from increased gross profit. Selling, general and administrative
expenses for 1995 were 22% of sales compared to 23% of sales for 1994. These
expenses are estimated to increase slightly in the fourth quarter of 1995
primarily because revenues from the Las Vegas location (scheduled to open in
mid-November) are expected to lag behind the start-up expenses.
The Company recorded a special charge of $80,000 in the third quarter 1995 to
account for the costs associated with closing the Corpus Christi branch.
Interest expense of $205,000 increased slightly over 1994 expense of
$202,000. The increases in prime rate in early 1995 have been mostly offset
by a decrease in borrowings. In late September, the Company negotiated a
one-half of one percent reduction in its borrowing rate on all of its credit
facilities. Interest income and other, net of $22,000 consists primarily of
gains on the sale of assets.
8
DISCONTINUED OPERATIONS
See Note 2 to the consolidated financial statements.
NET RESULTS
Net earnings for the nine months ended September 30, 1995 of $667,000 or $.30
per share increased $351,000 from net earnings of $316,000 or $.14 per share
for the same period in 1994. The 111% increase in net earnings is primarily
due to increased sales and product margins and the elimination of the
negative impact of the discontinued operations on 1995 results, partially
offset by higher income taxes, higher selling, general and administrative
expenses and the special charge.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations during the nine months ended September 30,
1995 of $837,000 resulted principally from the net earnings and the increases
in the Company's payables and accrued expenses, partially offset by the
increase in receivables and inventories.
The Company's historical seasonal patterns result in higher sales in the
second and third quarters of each year and lower sales in the first and
fourth quarters. Considering these sales patterns, the Company generally
requires external cash resources in the latter half of the first quarter
through the middle of the third quarter to fund and sustain the growth in
revenues. The latter part of the third quarter through the first part of the
first quarter typically represents the collection cycle. Several factors are
expected to result in less demand on cash flow from operations in 1995. The
rate of revenue growth in 1995 has been and is expected to be lower than the
growth experienced in 1994 resulting in less demand on cash; the Company
increased the credit department personnel in January and August 1995 which
has improved the collection cycle; and the Company will not have to fund the
operating losses at IESI in 1995. In addition capital expenditures are
anticipated to be lower than 1994 purchases.
The Company maintains a $4,100,000 working capital line of credit at a
commercial lending institution that allows the Company to borrow up to 80% of
the book value of eligible trade receivables plus the lessor of 25% of
eligible inventory or $500,000. As of September 30, 1995 and October 20,
1995, the Company had borrowed $2,371,000 and $1,934,000, respectively, on
this credit facility and had the capacity to borrow an additional $1,729,000
and $2,120,000, respectively. The Company also maintains a $350,000 capital
equipment credit facility providing for borrowings at 80% of cost on
purchases. There are advances outstanding under this credit facility of
$235,000 at September 30, 1995. Both credit facilities are payable on
demand. The Company negotiated a one-half of one percent reduction in its
borrowing rate on both of its credit facilities in September 1995.
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.
9
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
PART II
Other Information
Item 1. LEGAL PROCEEDINGS -- None
Item 2. CHANGES IN SECURITIES -- None
Item 3. DEFAULTS UPON SENIOR SECURITIES -- None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- In September
1995, the Company mailed to each of its registered shareholders a copy of an
information statement informing them that the Company was applying to the
State of Delaware for a reduction in its authorized capital. Effective
October 6, 1995, the Company's Certificate of Incorporation with the State of
Delaware was changed to reduce the Company's authorized preferred stock from
2,000,000 shares to 500,000 shares and to reduce the Company's authorized
common stock from 20,000,000 shares to 5,000,000 shares. Since the Company
had a written consent from shareholders owning 51.6% of the then outstanding
common stock, this action did not require a vote by all of the Company's
shareholders.
Item 5. OTHER INFORMATION -- None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits --
Exhibit 3(i) (a) Certificate of Incorporation (filed with the Company's
electronic filing only)
Exhibit (3)(i) (b) Amendment of Certificate of Incorporation (filed with the
Company's electronic filing only)
Exhibit (3)(i) (c) Amendment of Certificate of Incorporation (filed with the
Company's electronic filing only)
Exhibit (3)(ii) By-Laws (filed with the Company's electronic filing only)
Exhibit 11 Computation Re Per Share Earnings for the three and nine month
periods ended September 30, 1995 and 1994.
Exhibit 27 Financial Data Schedule for the nine months ended September 30,
1995 (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, 1995.
10
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: NOVEMBER 9, 1995 By: /S/ FRANK J. CINATL, IV
---------------- -------------------------
Frank J. Cinatl, IV
Vice President and Principal Financial
and Accounting Officer of Registrant
11