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, 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 November 9, 1998 was 1,937,564 shares.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
September 30,
1998 December 31, 1997
Assets (Unaudited)
----------------- -------------------
Current assets:
Cash $ 108,117 $ 304,947
Trade accounts receivable net of allowance for doubtful accounts of
$505,420 in 1998 and $495,092 in 1997 5,777,739 4,768,279
Inventories 3,907,967 3,538,355
Prepaid expenses and other assets 259,427 249,426
Deferred income taxes 178,331 142,466
----------------- -----------------
Total current assets 10,231,581 9,003,473
Receivables from officers and employees 77,669 73,729
Property and equipment, net 477,470 632,120
Deferred income taxes 118,423 115,531
Other assets 26,296 29,396
----------------- -----------------
$ 10,931,439 $ 9,854,249
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 2,900,979 $ 3,010,733
Accounts payable 1,313,246 1,230,107
Accrued compensation 280,677 107,272
Other accrued expenses 408,518 328,460
----------------- -----------------
Total current liabilities 4,903,420 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 4,935,234 4,084,892
Treasury stock at cost, 476,250 common shares in 1998 and 1997 (1,408,137) (1,408,137)
----------------- -----------------
Total stockholders' equity 6,028,019 5,177,677
Commitments and contingencies
----------------- -----------------
$ 10,931,439 $ 9,854,249
================= =================
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,
------------------------------------ ------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
Net sales $ 9,438,094 $ 9,201,579 $ 28,270,984 $ 27,066,829
Cost of sales 6,756,806 6,689,819 20,357,211 19,680,803
----------------- ----------------- ----------------- -----------------
Gross profit 2,681,288 2,511,760 7,913,773 7,386,026
Selling, general and administrative expenses 2,171,946 2,061,627 6,364,242 6,141,769
----------------- ----------------- ----------------- -----------------
Operating profit 509,342 450,133 1,549,531 1,244,257
Other income (expense):
Interest expense (69,062) (101,995) (189,623) (311,527)
Other, net 4,750 24,778 16,039 25,781
----------------- ----------------- ----------------- -----------------
Earnings before income taxes 445,030 372,916 1,375,947 958,511
Income tax expense 158,069 140,672 525,605 372,069
----------------- ----------------- ----------------- -----------------
Net earnings $ 286,961 $ 232,244 $ 850,342 $ 586,442
================= ================= ================= =================
Basic earnings per common share $ .15 $ .12 $ .44 $ .30
================= ================= ================= =================
Diluted earnings per common share $ .15 $ .12 $ .44 $ .30
================= ================= ================= =================
Weighted average shares outstanding (note 3):
Basic 1,937,564 1,906,064 1,937,564 1,943,387
================= ================= ================= =================
Diluted 1,937,564 1,906,064 1,937,564 1,943,387
================= ================= ================= =================
See accompanying notes to consolidated financial statements.
ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------------------------------
1998 1997
------------------ -----------------
Cash flows from operating activities:
Net earnings $ 850,342 $ 586,442
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 276,513 286,644
Deferred income taxes (38,757) (73,811)
(Gain) Loss on disposal of assets (3,310) 5,091
Changes in assets and liabilities:
Receivables (1,009,460) (206,514)
Inventories (369,612) (20,723)
Refundable income taxes - 285,784
Prepaid expenses and other assets (10,001) 34,110
Accounts payable 83,139 822,974
Accrued expenses 253,463 (74,391)
------------------ -----------------
Net cash provided by operating activities 32,317 1,645,606
------------------ -----------------
Cash flows from investing activities:
Purchase of property and equipment (127,053) (241,863)
Proceeds from sale of property and equipment 8,500 22,407
Advances to officers and employees (29,085) (20,581)
Collection of advances to officers and employees 25,145 22,944
Other assets, primarily deposits 3,100 2,936
------------------ -----------------
Net cash used in investing activities (119,393) (214,157)
------------------ -----------------
Cash flows from financing activities:
Purchase of treasury stock - (212,890)
Borrowings on notes payable to bank 27,361,433 26,694,366
Repayments on notes payable to bank (27,471,187) (28,127,616)
------------------ -----------------
Net cash used in financing activities (109,754) (1,646,140)
------------------ -----------------
Net decrease in cash (196,830) (214,691)
Cash at beginning of period 304,947 310,288
------------------ -----------------
Cash at end of period $ 108,117 $ 95,597
================== =================
Supplemental disclosure information
Cash paid during the period for: Interest $ 191,605 $ 310,159
Income taxes $ 533,766 $ 538,615
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 September 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 8% of purchases in the nine month
periods ended September 30, 1998 and 1997, one product class accounted for
approximately 19% of sales during 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. As
of September 30, 1998, approximately 7% and 5% of the trade accounts receivable
before allowances were represented by two customers. The Company anticipates
payment of the entire balance in the ordinary course of business. In addition,
the Company 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 nine month
periods ended September 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 September 30, 1998 Compared to Three Month Period Ended
September 30, 1997.
Results of Operations
Net sales of $9,438,000 for the three months ended September 30, 1998, increased
3% or $236,000 over the same period in 1997 due to increased volume from an
expanded customer. Gross profit of 28% of sales for the three month period ended
September 30, 1998, increased from 27% for the same period in 1997 due to
improved pricing on purchases.
Selling, general and administrative expenses of $2,172,000 for the three month
period ended September 30, 1998 increased 5% over the same period in 1997.
Selling, general and administrative expenses were 23% and 22% of sales for the
third quarter of 1998 and 1997, respectively.
Interest expense of $69,000 decreased 32% from 1997 interest expense of $102,000
as lower average accounts receivable balances in 1998 resulted in 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 September 30, 1998 of $287,000 or $.15
per share increased $55,000 from net earnings of $232,000 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.
Nine Month Period Ended September 30, 1998 Compared to Nine Month Period Ended
September 30, 1997.
Results of Operations
Net sales of $28,271,000 for the nine months ended September 30, 1998, increased
4% or $1,204,000 over the same period in 1997 due to increased volume from an
expanded customer base. Gross profit of 28% of sales for the nine month period
ended September 30, 1998, increased from 27% for the same period in 1997 due to
improved pricing on purchases.
Selling, general and administrative expenses of $6,364,000 for the nine month
period ended September 30, 1998, increased 4% over the same period in 1997.
Selling, general and administrative expenses for the first nine months of 1998
and 1997 were 23% of sales for both periods.
Interest expense of $190,000 decreased 39% from 1997 interest expense of
$312,000 as lower average accounts receivable balances in 1998 resulted in
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 nine months ended September 30, 1998 of $850,000 or $.44
per share increased $264,000 from net earnings of $586,000 or $.30 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 nine months of 1998 of $32,000
resulted principally from the net earnings, the noncash charge for depreciation
and amortization, and the increase in accrued expenses and accounts payable,
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 through the third quarter.
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
and, therefore, would not require significant working capital.
Cash requirements for non-operating activities during the first nine months of
1998 resulted primarily from the working capital line of credit payments and the
purchase of property and equipment amounting to $127,000. The property and
equipment expenditures for 1998 have consisted primarily of computer equipment
and delivery vehicles. Capital expenditures for 1998 are not expected to exceed
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 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 lesser of 40
percent of eligible inventory or $1,500,000. As of November 2, 1998, there are
advances outstanding under this credit facility of $2,205,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional
$3,295,000 as of November 2, 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 November 2,
1998 were $388,000. 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.
Year 2000 Compliance
The Company relies on information technology, such as computer and
telecommunications hardware and software systems, in every aspect of its
business. In addition, the Company relies on non-information system technology,
such as facsimile machines, photocopiers, and similar equipment that typically
includes embedded technology such as microcontrollers, to function effectively
on a day to day basis. A plan has been developed to assess the impact of the
Year 2000 issues on the Company's operations and to replace or repair all
critical information technology and non-information technology systems that are
not Year 2000 compliant.
The Company is currently assessing the impact of Year 2000 issues on its
information technology systems, and has begun remediation efforts in certain
areas, principally in the application software used for the day to day
operations of the Company. This software package also integrates the accounting
system. The anticipated completion date for the assessment, implementation and
testing phases of the information technology systems is April 30, 1999. The
Company will not begin its assessment of the non-information technology systems
until 1999, but anticipates completion by June 30, 1999. In addition, the
Company has begun requesting that third parties, with which the Company has
material relationships, confirm in writing their plans for Year 2000 compliance.
The Company anticipates response from these business partners no later than
January 31, 1999. At that time, necessary action, if any, will be taken to
minimize the impact to the Company's operations of third parties Year 2000
non-compliance.
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 the cost to
complete this project will be funded through cash flow from operations or
borrowings on the lines of credit. The inability of the Company or the
aforementioned third parties to complete their Year 2000 projects could prevent
delivery of products to customers, receipt of products from suppliers, payment
for these products and collection of monies owed the Company. After testing the
information technology systems and non-information technology systems and
evaluation of the third party responses, the Company will prepare, if necessary,
a contingency plan to minimize Year 2000 issues.
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 was 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
September 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
September 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: November 9, 1998 By: /s/ Frank J. Cinatl, IV
----------------- -----------------------
Frank J. Cinatl, IV
Vice President and Chief Financial
Officer of Registrant
(Principal Accounting Officer)