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 March 31, 1996
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 April 30, 1996 was 2,088,964 shares.
1
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
March 31,
1996
(Unaudited) December 31, 1995
----------------- -------------------
ASSETS
Current assets:
Cash $ 42,759 $ 415,867
Trade accounts receivable net of allowance for doubtful accounts of
$377,941 in 1996 and $336,486 in 1995 5,497,007 4,370,595
Inventories 3,578,148 3,088,276
Prepaid expenses and other current assets 173,154 218,187
Deferred income taxes 87,510 136,719
----------------- -------------------
Total current assets 9,378,578 8,229,644
Receivables from officers and employees 70,059 70,577
Property and equipment, net 573,042 593,060
Deferred income taxes 48,634 39,657
Other assets 75,968 43,993
----------------- -------------------
$ 10,146,281 $ 8,976,931
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 3,613,138 $ 2,631,828
Accounts payable 1,276,352 1,031,481
Net liability of discontinued operations (note 2) - 56,813
Other accrued expenses and current liabilities 989,754 939,031
----------------- -------------------
Total current liabilities 5,879,244 4,659,153
----------------- -------------------
Stockholders' equity (note 3):
Preferred stock - $1 par value, 500,000 shares authorized; none issued - -
Common stock - $.001 par value, 5,000,000 shares authorized; issued
2,376,314 shares in 1996 and 2,366,314 shares in 1995 2,376 2,366
Additional paid-in capital 2,395,108 2,365,118
Retained earnings 2,717,117 2,487,838
Less cost of 287,350 common shares in treasury in 1996 and 207,100
common shares in treasury in 1995 (847,564) (537,544)
----------------- -------------------
Total stockholders' equity 4,267,037 4,317,778
----------------- -------------------
Commitments and contingencies (note 4)
----------------- -------------------
$ 10,146,281 $ 8,976,931
================= ===================
See accompanying notes to consolidated financial statements.
2
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
-------------------------------------
1996 1995
------------------ -----------------
Net sales $ 7,657,556 $ 5,989,434
Cost of sales 5,498,199 4,286,951
------------------ -----------------
Gross profit 2,159,357 1,702,483
Selling, general and administrative expenses (1,790,771) (1,431,227)
Special credit (note 2) 56,711 -
------------------ -----------------
Operating profit 425,297 271,256
Other income (expense):
Interest expense (64,902) (65,205)
Other (expense) income, net (10,302) 4,318
------------------ -----------------
Earnings from continuing operations
before income taxes 350,093 210,369
Income tax expense 142,359 95,495
------------------ -----------------
Earnings from continuing operations 207,734 114,874
Earnings from discontinued operations, net of
tax expense of $8,348 for the three months
ended March 31, 1996 (note 2) 21,545 -
------------------ -----------------
Net earnings $ 229,279 $ 114,874
================== =================
Earnings per common and common equivalent share:
Earnings from continuing operations $ .10 $ .05
Earnings from discontinued operations .01 -
------------------ -----------------
Net earnings $ .11 $ .05
================== =================
Weighted average common and common equivalent
shares outstanding 2,169,257 2,283,878
================== =================
See accompanying notes to consolidated financial statements.
3
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
-------------------------------------
1996 1995
------------------ -----------------
Cash flows from operating activities:
Net earnings $ 229,279 $ 114,874
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities:
Depreciation and amortization 86,657 80,147
Deferred income taxes, net 40,232 8,618
Loss (gain) on disposal of assets 3,833 (3,194)
Changes in assets and liabilities:
Receivables (1,126,412) 270,876
Inventories (489,872) (326,512)
Prepaid expenses and other 46,881 88,398
Net asset/liability of discontinued operations (note 2) (56,813) 66,079
Accounts payable 244,871 94,660
Income taxes payable (41,926) 78,494
Other accrued expenses and current liabilities 92,649 (66,659)
------------------ -----------------
Net cash (used in) provided by operating activities (970,621) 405,781
------------------ -----------------
Cash flows from investing activities:
Purchase of property and equipment (98,485) (23,297)
Proceeds from sale of property and equipment 28,013 18,500
Advances to officers and employees (9,351) (20,895)
Collection of advances to officers and employees 8,021 14,069
Other assets, primarily deposits (31,975) -
------------------ -----------------
Net cash used in investing activities (103,777) (11,623)
------------------ -----------------
Cash flows from financing activities:
Exercise of stock options 30,000 25,511
Purchase of treasury stock (note 3) (310,020) (225,000)
Net borrowings (repayments) on notes payable to bank 981,310 (56,504)
Principal payments on capital lease obligations - (4,719)
------------------ -----------------
Net cash provided by (used in) financing activities 701,290 (260,712)
------------------ -----------------
Net (decrease) increase in cash (373,108) 133,446
Cash at beginning of period 415,867 150,727
------------------ -----------------
Cash at end of period $ 42,759 $ 284,173
================== =================
Supplemental disclosure information:
Cash paid during the period for: Interest $ 62,316 $ 64,964
Income taxes $ 21,560 $ -
See accompanying notes to consolidated 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) 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 writedown of fixed assets and inventory to net realizable value
and the estimated loss from operations up to the expected disposal date. As of
December 31, 1995, the balance of this reserve exists primarily to cover the
remaining costs associated with the facility lease, which expires September
1999. Actual costs through March 31, 1996 approximated management's December
1994 estimates. Sales for the discontinued operations of IESI were $74,000 for
the first quarter 1995.
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 expires
September 1999. Sales and operating losses for the Corpus Christi branch were
$75,000 and $6,000, respectively, for the first quarter 1995.
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.
(3) STOCKHOLDERS' EQUITY
In accordance with the Company's stock option plan, an employee exercised
options totaling 10,000 shares during the first quarter of 1996.
During the first quarter of 1996, the Company purchased 80,250 shares of its
stock. The Board of Directors has approved the repurchase of up to 326,500
5
shares, of which 287,350 shares have been purchased through March 31, 1996.
(4) CONTINGENCIES
The Company was named as a defendant in a product liability lawsuit. The Company
has requested and received (1) indemnification under the manufacturer's product
liability insurance and (2) legal representation at the cost of the
manufacturer. As of April 30, 1996, no depositions have been taken, therefore
management is not able to assess the merit of the defendant's case. However, the
Company does not anticipate any material impact on its financial statements as a
result of this litigation.
10
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, 1996 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 1995.
RESULTS OF CONTINUING OPERATIONS
Net sales of $7,658,000 for the three months ended March 31, 1996, increased 28%
or $1,668,000 over the same period in 1995.
Gross profit of 28% of sales for the three month period ended March 31, 1996,
was unchanged from the same period in 1995.
Selling, general and administrative expenses of $1,791,000 for the three month
period ended March 31, 1996, increased 25% or $360,000 over the same period in
1995. The increase was primarily attributable to higher administrative expenses
due to the opening of Las Vegas and the expansion in Phoenix and Houston. The
increase in selling expenses resulting from increased sales and gross profit.
Selling, general and administrative expenses for the first three months of 1996
were 23% of sales compared to 24% of sales for 1995. These expenses are expected
to remain in their current range for 1996.
The special credit resulted from the Company exercising its option to purchase
its leased facility in Corpus Christi, Texas, and simultaneously selling the
facility to a third party. The sale of this facility resulted in a reversal of
previously accrued lease obligations. See Note 2 to the consolidated financial
statements.
Interest expense of $65,000 approximated 1995 expense. 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. Other expense net, of $10,000 consists primarily of losses on asset
sales.
DISCONTINUED OPERATIONS
See Note 2 to the consolidated financial statements.
NET RESULTS
Net earnings for the three months ended March 31, 1996 of $229,000 or $.11 per
share increased $114,000 from net earnings of $115,000 or $.05 per share for the
same period in 1995. The 99% increase in net earnings is due to higher sales and
the reversal of previously recorded reserves (see Note 2 to the consolidated
financial statements), partially offset by the higher selling, general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the first quarter 1996 of $971,000 resulted
principally from increases in accounts receivable and inventory, partially
offset by the net earnings, noncash charges and the increase in accounts
payable. Although cash flow from operations at any given point in 1996 may be
negative, the entire year is expected to be positive. Several factors contribute
to this expectation. The rate of revenue growth in 1996 is expected to be higher
than 1995, but at a level that can be funded by cash flow from operations. The
Company currently estimates revenue growth of 15 to 20% in 1996. Growth beyond
12
that range may require borrowing on the working capital line of credit. Also,
the Company will not have to fund the operating losses at the Corpus Christi
branch in 1996.
Cash requirements for non-operating activities during the first quarter 1996
were for the purchases of property and equipment amounting to $98,000 and the
repurchases of the Company's common stock totaling $310,000. The equipment
purchases in 1996 were primarily computer and telecommunications equipment. The
Company repurchased its common stock because of the Board of Directors' belief
that it was in the best interest of the stockholders and was funded by
borrowings on the Company's working capital line of credit.
The capital expenditures for the remainder of 1996 are expected to be similar to
1995, as the Company will continue to replace delivery vehicles as needed. In
addition, the Company is committed to investing in technology to improve the
productivity of employees and to enhance the level of customer service. This
commitment will require an investment in additional computer hardware and
software and additional telecommunications equipment, which will be funded by
the Company's capital equipment line of credit. The current equipment line of
credit may not be sufficient to fund this investment in technology and the
normal capital expenditures of delivery vehicles and office furniture and
equipment. The Company anticipates an increase in its equipment line of credit
in the near term sufficient to cover its 1996 anticipated capital expenditures.
The Company currently has no plans to expand geographically in 1996, however,
the Company will continue to search for geographic locations that would
complement the existing infrastructure. If another location were to be opened in
1996, the Company would fund the startup expenses through its lines of credit.
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
percent of the book value of eligible trade receivables plus the lessor of 25
percent of eligible inventory or $500,000. As of April 30, 1996, there are
advances outstanding under this credit facility of $3,667,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional $433,000
as of April 30, 1996. The Company also maintains a $350,000 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, 1996 were
$219,000. Both credit facilities are payable on demand and bear a variable
interest 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.
13
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 has requested and received (1) indemnification under
the manufacturer's product liability insurance and (2) legal representation at
the cost of the manufacturer. As of April 30, 1996, no depositions have been
taken, therefore management is not able to assess the merit of the plaintiff's
case. However, the Company does not anticipate any material impact on its
financial statements as a result of this litigation.
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
period ended March 31, 1996 and 1995.
Exhibit 27 Financial Data Schedule for the three months ended
March 31, 1996 (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, 1996.
14
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: April 30, 1996 By: /s/ Frank J. Cinatl, IV
Frank J. Cinatl, IV
Vice President and Chief Financial
Officer of Registrant
(Principal Accounting Officer)