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, 1998
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, 1998 was 1,937,564 shares.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 1998
(Unaudited) December 31, 1997
----------------- -----------------
Assets
Current assets:
Cash $ 188,019 $ 304,947
Trade accounts receivable net of allowance for doubtful accounts of
$477,190 in 1998 and $495,092 in 1997 5,245,554 4,768,279
Inventories 3,869,166 3,538,355
Prepaid expenses and other assets 206,705 249,426
Deferred income taxes 142,586 142,466
----------------- -----------------
Total current assets 9,652,030 9,003,473
Receivables from officers and employees 74,178 73,729
Property and equipment, net 584,876 632,120
Deferred income taxes 125,759 115,531
Other assets 30,596 29,396
----------------- -----------------
$ 10,467,439 $ 9,854,249
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 2,327,606 $ 3,010,733
Accounts payable 2,226,437 1,230,107
Accrued compensation 174,915 107,272
Other accrued expenses 373,339 328,460
----------------- -----------------
Total current liabilities 5,102,297 4,676,572
----------------- -----------------
Stockholders' equity:
Preferred stock - $1 par value, 500,000 shares authorized; none issued - -
Common stock - $.001 par value, 5,000,000 shares authorized; issued
2,413,814 shares in 1998 and 1997 2,414 2,414
Additional paid-in capital 2,498,508 2,498,508
Retained earnings 4,272,357 4,084,892
Treasury stock at cost, 476,250 common shares in 1998 and 1997 (1,408,137) (1,408,137)
----------------- -----------------
Total stockholders' equity 5,365,142 5,177,677
Commitments and contingencies
----------------- -----------------
$ 10,467,439 $ 9,854,249
================= =================
See accompanying notes to consolidated financial statements.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
1998 1997
----------------- -----------------
Net sales $ 8,674,755 $ 8,469,872
Cost of sales 6,264,687 6,155,014
----------------- -----------------
Gross profit 2,410,068 2,314,858
Selling, general and administrative expenses 2,038,195 2,017,560
----------------- -----------------
Operating profit 371,873 297,298
Other income (expense):
Interest expense (54,489) (98,806)
Other, net 4,748 (5,073)
----------------- -----------------
Earnings before income taxes 322,132 193,419
Income tax expense 134,667 77,585
----------------- -----------------
Net earnings $ 187,465 $ 115,834
================= =================
Basic earnings per common share $ .10 $ .06
================= =================
Diluted earnings per common share $ .10 $ .06
================= =================
Weighted average shares outstanding (note 3):
Basic 1,937,564 1,986,508
================= =================
Diluted 1,937,564 1,991,255
================= =================
See accompanying notes to consolidated financial statements.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
1998 1997
----------------- -----------------
Cash flows from operating activities:
Net earnings $ 187,465 $ 115,834
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities:
Depreciation and amortization 92,086 93,901
Deferred income taxes (10,348) (11,154)
Changes in assets and liabilities:
Receivables (477,275) (784,894)
Inventories (330,811) (728,646)
Prepaid expenses and other assets 42,721 (24,200)
Accounts payable 996,330 794,083
Accrued expenses 112,522 140,033
----------------- -----------------
Net cash provided by (used in) operating activities 612,690 (405,043)
----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (44,842) (91,003)
Proceeds from sale of property and equipment - 382
Advances to officers and employees (10,578) (6,690)
Collection of advances to officers and employees 10,129 7,348
Other assets, primarily deposits (1,200) 5,212
----------------- -----------------
Net cash used in investing activities (46,491) (84,751)
----------------- -----------------
Cash flows from financing activities:
Purchase of treasury stock - (70,640)
Borrowings on notes payable to bank 7,917,350 8,043,164
Repayments on notes payable to bank (8,600,477) (7,769,681)
----------------- -----------------
Net cash (used in) provided by financing activities (683,127) 202,843
----------------- -----------------
Net decrease in cash (116,928) (286,951)
Cash at beginning of period 304,947 310,288
----------------- -----------------
Cash at end of period $ 188,019 $ 23,337
================= =================
Supplemental disclosure information
Cash paid during the period for: Interest $ 58,460 $ 90,435
Income taxes $ 67,121 $ 9,635
See accompanying notes to consolidated financial statements.
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 predominantly, based on revenues, to the asbestos abatement
industry. The Company also supplies these products to the industrial safety and
hazardous materials industries and, combined with tools and tool supplies, to
the construction industry. As of March 31, 1998, the Company operated eight
distribution centers in six states. The Company, through IESI, imports
disposable protective clothing products, some of which are sold through the
Abatix distribution channels.
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. Certain
amounts have been reclassified for consistency in presentation.
(2) MAJOR VENDORS, CUSTOMERS AND CREDIT RISK
Although no vendor accounted for more than 6% of purchases in the periods ended
March 31, 1998 and 1997, one product class accounted for approximately 18% of
sales those periods. A major component of these products is petroleum. Increases
in oil prices or shortages in supply could significantly impact sales and the
Company's ability to supply its customers with certain products at a reasonable
price.
The Company's sales, substantially all of which are on an unsecured credit
basis, are to various customers from its distribution centers in Texas,
California, Arizona, Colorado, Washington and Nevada. The Company evaluates
credit risks on an individual basis before extending credit to its customers and
it believes the allowance for doubtful accounts adequately provides for loss on
uncollectible accounts.
(3) EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
common shares outstanding during each period, while diluted earnings per share
includes the effects of all dilutive securities. For the period ended March 31,
1998, there were no dilutive securities outstanding. The following table is a
reconciliation of the weighted average shares used for basic and diluted
earnings per share for the periods ended March 31, 1998 and 1997.
1998 1997
------------ ------------
Weighted average shares outstanding - basic 1,937,564 1,986,508
Dilutive stock options and warrants - 4,747
------------ ------------
Weighted average shares outstanding - diluted 1,937,564 1,991,255
============ ============
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, 1998 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 1997.
RESULTS OF OPERATIONS
Net sales of $8,675,000 for the three months ended March 31, 1998, increased 2%
or $205,000 over the same period in 1997 due to increased volume from an
expanded customer base and higher pricing. Gross profit of 28% of sales for the
three month period ended March 31, 1998, increased from 27% for the same period
in 1997.
Selling, general and administrative expenses of $2,038,000 for the three month
period ended March 31, 1998, was substantially the same as in 1997. Selling,
general and administrative expenses for the first quarter of 1998 and 1997 were
24% of sales.
Interest expense of $54,000 decreased 45% from 1997 interest expense of $99,000
as higher collections since March 31, 1997 reduced borrowings under 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 March 31, 1998 of $187,000 or $.10 per
share increased $71,000 from net earnings of $116,000 or $.06 per share for the
same period in 1997. The increase in net earnings is primarily due to higher
sales volume and lower interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations during the first three months of 1998 of
$613,000 resulted principally from the increase in accounts payable and accrued
expenses, the net earnings and the noncash charge for the depreciation and
amortization, partially offset by the growth in accounts receivable and
inventory. The growth in accounts payable, accrued expenses, accounts receivable
and inventory is consistent with historical patterns during the first quarter.
Cash requirements for non-operating activities during the first three months of
1998 resulted primarily from the working capital line of credit payments and the
purchase of property and equipment amounting to $45,000. The property and
equipment expenditures for 1998 have consisted primarily of computer equipment
and a delivery vehicle.
Cash flow from operations for the entire year of 1998 is expected to be
positive. Positive cash flow from operations is expected for 1998 because the
rate of revenue growth in 1998 is not expected to exceed the growth rate in 1997
by a level that would require significant net cash flows from operations.
Capital expenditures for 1998 are projected to approximate 1997 expenditures of
$286,000. The Company has no existing plans to expand geographically in 1998;
however, the Company will continue to search for geographic locations that would
complement the existing infrastructure. If another location were opened in the
current year, the Company would fund the startup expenses through its lines of
credit.
The Company is reviewing its business for potential Year 2000 issues. Although
the entire scope related to this issue is unknown at this time, the impact to
the Company's financial statements for compliance with Year 2000 problems is not
expected to be material. Anticipated cash requirements in 1998 for capital
expenditures, including those related to the Year 2000 issue, if any, will be
satisfied from operations and borrowings on the lines of credit, as required.
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, 1998, there are
advances outstanding under this credit facility of $2,233,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional
$3,267,000 as of April 30, 1998. 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,
1998 were $434,000. Both credit facilities are payable on demand and bear a
variable rate of interest computed at the prime rate plus one-quarter 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,
changes in interest rates, inability to pass on price increases to customers,
unavailability of products, strong competition and loss of key personnel. In
addition, many of the Company's products are petroleum based. Increases in oil
prices or shortages in supply could significantly impact the Company's business
and its ability to supply customers with certain products at a reasonable price.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
PART II
Other Information
Item 1. Legal Proceedings --
No change since reported in the Company's Form 10-K for the year ended
December 31, 1997.
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 27 - Financial Data Schedule for the three months ended
March 31, 1998 (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, 1998.
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 12, 1998 By: /s/ Frank J. Cinatl, IV
------------ -----------------------
Frank J. Cinatl, IV
Vice President and Chief
Financial Officer of Registrant
(Principal Accounting Officer)