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 June 30, 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 August 11, 1998 was 1,937,564 shares.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
June 30,
1998 December 31,
Assets (Unaudited) 1997
--------------- ---------------
Current assets:
Cash $ 178,439 $ 304,947
Trade accounts receivable net of allowance for doubtful accounts of
$501,004 in 1998 and $495,092 in 1997 6,493,106 4,768,279
Inventories 4,041,915 3,538,355
Prepaid expenses and other assets 227,234 249,426
Deferred income taxes 163,279 142,466
--------------- ---------------
Total current assets 11,103,973 9,003,473
Receivables from officers and employees 75,200 73,729
Property and equipment, net 540,986 632,120
Deferred income taxes 136,249 115,531
Other assets 27,496 29,396
--------------- ---------------
$ 11,883,904 $ 9,854,249
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 3,353,149 $ 3,010,733
Accounts payable 2,060,381 1,230,107
Accrued compensation 287,220 107,272
Other accrued expenses 442,096 328,460
--------------- ---------------
Total current liabilities 6,142,846 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 4,648,273 4,084,892
Treasury stock at cost, 476,250 common shares in 1998 and 1997 (1,408,137) (1,408,137)
--------------- ---------------
Total stockholders' equity 5,741,058 5,177,677
Commitments and contingencies
--------------- ---------------
$ 11,883,904 $ 9,854,249
=============== ===============
See accompanying notes to consolidated financial statements.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
Net sales $ 10,158,135 $ 9,395,378 $ 18,832,890 $ 17,865,250
Cost of sales 7,335,718 6,835,970 13,600,405 12,990,984
--------------- --------------- --------------- ---------------
Gross profit 2,822,417 2,559,408 5,232,485 4,874,266
Selling, general and administrative expenses 2,154,101 2,062,582 4,192,296 4,080,142
--------------- --------------- --------------- ---------------
Operating profit 668,316 496,826 1,040,189 794,124
Other income (expense):
Interest expense (66,072) (110,726) (120,561) (209,532)
Other, net 6,541 6,076 11,289 1,003
--------------- --------------- --------------- ---------------
Earnings before income taxes 608,785 392,176 930,917 585,595
Income tax expense 232,869 153,812 367,536 231,397
--------------- --------------- --------------- ---------------
Net earnings $ 375,916 $ 238,364 $ 563,381 $ 354,198
=============== =============== =============== ===============
Basic earnings per common share $ .19 $ .12 $ .29 $ .18
=============== =============== =============== ===============
Diluted earnings per common share $ .19 $ .12 $ .29 $ .18
=============== =============== =============== ===============
Weighted average shares outstanding (note 3):
Basic 1,937,564 1,937,587 1,937,564 1,962,048
=============== =============== =============== ===============
Diluted 1,937,564 1,937,587 1,937,564 1,962,048
=============== =============== =============== ===============
See accompanying notes to consolidated financial statements.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------------------------------
1998 1997
--------------- ---------------
Cash flows from operating activities:
Net earnings $ 563,381 $ 354,198
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation and amortization 185,750 195,110
Deferred income taxes (41,531) (61,702)
Loss on disposal of assets - 1,194
Changes in assets and liabilities:
Receivables (1,724,827) (1,474,673)
Inventories (503,560) (252,747)
Prepaid expenses and other assets 22,192 25,861
Accounts payable 830,274 817,988
Accrued expenses 293,584 95,372
--------------- ---------------
Net cash used in operating activities (374,737) (299,399)
--------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (94,616) (195,526)
Proceeds from sale of property and equipment - 11,706
Advances to officers and employees (18,985) (13,720)
Collection of advances to officers and employees 17,514 13,473
Other assets, primarily deposits 1,900 956
--------------- ---------------
Net cash used in investing activities (94,187) (183,111)
--------------- ---------------
Cash flows from financing activities:
Purchase of treasury stock - (202,104)
Borrowings on notes payable to bank 17,732,467 16,960,201
Repayments on notes payable to bank (17,390,051) (16,582,795)
--------------- ---------------
Net cash provided by financing activities 342,416 175,302
--------------- ---------------
Net decrease in cash (126,508) (307,208)
Cash at beginning of period 304,947 310,288
--------------- ---------------
Cash at end of period $ 178,439 $ 3,080
=============== ===============
Supplemental disclosure information
Cash paid during the period for: Interest $ 122,885 $ 199,545
Income taxes $ 370,621 $ 347,045
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 June 30, 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 7% of purchases in the six month
periods ended June 30, 1998 and 1997, one product class accounted for
approximately 19% 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 three and six month
periods ended June 30, 1998 and 1997, there were no dilutive securities
outstanding.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO THREE MONTH PERIOD ENDED
JUNE 30, 1997.
RESULTS OF OPERATIONS
Net sales of $10,158,000 for the three months ended June 30, 1998, increased 8%
or $763,000 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 June 30, 1998, increased from 27% for the same period
in 1997.
Selling, general and administrative expenses of $2,154,000 for the three month
period ended June 30, 1998 increased 4% over the same period in 1997. Selling,
general and administrative expenses were 21% and 22% of sales for the second
quarter of 1998 and 1997, respectively.
Interest expense of $66,000 decreased 40% from 1997 interest expense of $111,000
as accelerated collections of accounts receivable reduced borrowings. 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 June 30, 1998 of $376,000 or $.19 per
share increased $138,000 from net earnings of $238,000 or $.12 per share for the
same period in 1997. The increase in net earnings is primarily due to higher
sales volume and lower interest expense.
SIX MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO SIX MONTH PERIOD ENDED
JUNE 30, 1997.
RESULTS OF OPERATIONS
Net sales of $18,833,000 for the six months ended June 30, 1998, increased 5% or
$968,000 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 six month
period ended June 30, 1998, increased from 27% for the same period in 1997.
Selling, general and administrative expenses of $4,192,000 for the six month
period ended June 30, 1998, increased 3% over the same period in 1997. Selling,
general and administrative expenses for the first six months of 1998 and 1997
were 22% and 23% of sales, respectively.
Interest expense of $121,000 decreased 42% from 1997 interest expense of
$210,000 as accelerated collections of accounts receivable reduced borrowings.
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 six months ended June 30, 1998 of $563,000 or $.29 per
share increased $209,000 from net earnings of $354,000 or $.18 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 used in operations during the first six months of 1998 of $375,000
resulted principally from the growth in accounts receivable and inventory,
partially offset by the increase in accounts payable and accrued expenses and
the net earnings. The growth in accounts payable, accrued expenses, accounts
receivable and inventory is consistent with historical patterns during the first
six months of the year.
Cash requirements for non-operating activities during the first six months of
1998 resulted primarily from the purchase of property and equipment amounting to
$95,000. The property and equipment expenditures for 1998 have consisted
primarily of computer equipment and delivery vehicles.
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 and will be funded through the Company's capital equipment line of
credit. 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's assessment of its potential Year 2000 issues is not complete. A
plan has been developed to determine and correct Year 2000 issues for both the
Company's information technology and non-information technology systems. In
addition, the Company will assess the Year 2000 readiness of third parties with
whom the Company has material relationships. To date, the Company has not
incurred significant costs and the total cost to complete this project is not
known at this time. It is anticipated that the cost to complete this project
will be funded through cash flow from operations or borrowing on the lines of
credit. The inability of the aforementioned third parties to complete their Year
2000 projects could cause delays in delivery of products, difficulties in the
payment for these products and difficulties in the collection of monies owed the
Company. After evaluation of the third party responses, the Company will prepare
a contingency plan to mitigate third party Year 2000 issues, if necessary.
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 August 11, 1998, there are
advances outstanding under this credit facility of $2,806,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional
$2,694,000 as of August 11, 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 August 11,
1998 were $437,000. Both credit facilities are payable on demand and bear a
variable rate of interest computed at prime.
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.
Unanticipated Year 2000 problems in the Company's information technology
systems, the inability of third parties to be compliant by December 31, 1999, or
unavailable financial or non-financial resources to remedy the Year 2000
problems could also cause actual results to differ materially.
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). The Company received notification this
lawsuit will be dismissed without prejudice in August 1998.
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
June 30, 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
June 30, 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: August 11, 1998 By: /s/ Frank J. Cinatl, IV
----------------- -----------------------
Frank J. Cinatl, IV
Vice President and Chief
Financial Officer of Registrant
(Principal Accounting Officer)