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, 1999
Commission file number 1-10184
ABATIX 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 10, 1999 was 1,762,148 shares.
<PAGE>
<TABLE>
<CAPTION>
ABATIX CORP. AND SUBSIDIARY
Consolidated Balance Sheets
June 30,
1999 December 31, 1998
ASSETS (Unaudited)
----------------- ------------------
<S> <C> <C>
Current assets:
Cash $ 54,202 $ 223,997
Trade accounts receivable, net of allowance for doubtful accounts of
$557,134 in 1999 and $514,696 in 1998 7,624,769 5,701,314
Inventories 5,576,537 3,424,914
Prepaid expenses and other assets 240,621 424,865
Deferred income taxes 190,735 143,299
----------------- ------------------
Total current assets 13,686,864 9,918,389
Receivables from officers and employees 17,536 79,505
Property and equipment, net 565,483 450,991
Deferred income taxes 94,880 120,324
Intangible assets at cost, net of amortization of $28,320 1,084,344 -
Other assets 42,510 26,296
----------------- ------------------
$ 15,491,617 $ 10,595,505
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 5,799,866 $ 2,854,206
Accounts payable 2,566,997 958,656
Accrued compensation 262,069 181,071
Other accrued expenses 796,799 414,416
----------------- ------------------
Total current liabilities 9,425,731 4,408,349
----------------- ------------------
Stockholders' equity:
Preferred stock - $1 par value, 500,000 shares authorized; none issued - -
Common stock - $.001 par value, 5,000,000 shares authorized; issued
2,437,314 and 2,413,814 shares in 1999 and 1998, respectively 2,437 2,414
Additional paid-in capital 2,574,560 2,498,508
Retained earnings 5,577,293 5,252,301
Treasury stock at cost, 675,166 and 517,700 common shares in 1999 and
1998, respectively (2,088,404) (1,566,067)
----------------- ------------------
Total stockholders' equity 6,065,886 6,187,156
Commitments and contingencies ----------------- ------------------
$ 15,491,617 $ 10,595,505
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $ 11,262,132 $ 10,158,135 $ 21,140,326 $ 18,832,890
Cost of sales 8,185,853 7,335,718 15,329,031 13,600,405
----------------- ------------------ ------------------ -----------------
Gross profit 3,076,279 2,822,417 5,811,295 5,232,485
Selling, general and administrative expenses 2,641,993 2,154,101 5,117,775 4,192,296
----------------- ------------------ ------------------ -----------------
Operating profit 434,286 668,316 693,520 1,040,189
Other income (expense):
Interest expense (82,854) (66,072) (150,896) (120,561)
Other, net 16,882 6,541 16,387 11,289
----------------- ------------------ ------------------ -----------------
Earnings before income taxes 368,314 608,785 559,011 930,917
Income tax expense 158,581 232,869 234,019 367,536
----------------- ------------------ ------------------ -----------------
Net earnings $ 209,733 $ 375,916 $ 324,992 $ 563,381
================= ================== ================== =================
Basic earnings per common share $ .12 $ .19 $ .18 $ .29
================= ================== ================== =================
Diluted earnings per common share $ .12 $ .19 $ .18 $ .29
================= ================== ================== =================
Weighted average shares outstanding (note 2):
Basic 1,762,148 1,937,564 1,816,027 1,937,564
================= ================== ================== =================
Diluted 1,762,148 1,937,564 1,816,027 1,937,564
================= ================== ================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
-------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 324,992 $ 563,381
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 226,471 185,750
Deferred income taxes (21,992) (41,531)
Gain on sale of assets (19,609) -
Changes in assets and liabilities:
Receivables (889,268) (1,724,827)
Inventories (567,463) (503,560)
Prepaid expenses and other assets 192,931 22,192
Accounts payable 567,887 830,274
Accrued expenses 291,558 293,584
------------------ -----------------
Net cash provided by (used in) operating activities 105,507 (374,737)
------------------ -----------------
Cash flows from investing activities:
Purchase of property and equipment (193,452) (94,616)
Proceeds from sale of property and equipment 28,000 -
Business acquisitions, net of cash acquired (note 5) (2,160,575) -
Advances to officers and employees (36,201) (18,985)
Collection of advances to officers and employees 22,508 17,514
Other assets (6,051) 1,900
------------------ -----------------
Net cash used in investing activities (2,345,771) (94,187)
------------------ -----------------
Cash flows from financing activities:
Purchase of treasury stock (442,477) -
Borrowings on notes payable to bank 14,261,093 17,732,467
Repayments on notes payable to bank (11,748,147) (17,390,051)
------------------ -----------------
Net cash (used in) provided by financing activities 2,070,469 342,416
------------------ -----------------
Net decrease in cash (169,795) (126,508)
Cash at beginning of period 223,997 304,947
------------------ -----------------
Cash at end of period $ 54,202 $ 178,439
================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ABATIX CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION, GENERAL AND BUSINESS
Abatix 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, 1999, the Company operated nine sales and
distribution centers in five 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.
(2) 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, 1999 and 1998, there were no dilutive securities
outstanding.
(3) SUPPLEMENTAL INFORMATION FOR STATEMENTS OF CASH FLOWS
Cash paid for interest was $129,806 and $122,885 for the six months ended June
30, 1999 and 1998, respectively. Cash paid for income taxes was $345,089 and
$370,621 for the six months ended June 30, 1999 and 1998, respectively. In
January 1999, the Company received 22,766 shares of common stock from an officer
of the Company as payment for approximately $80,000 owed to the Company. These
shares are held as treasury shares.
(4) SEGMENT INFORMATION
Identification of operating segments is based principally upon differences in
the types and distribution channel of products. The Company's reportable
segments consist of Abatix and IESI. The Abatix operating segment includes seven
aggregated branches, principally engaged in distributing environmental, safety
and construction supplies to contractors and industrial manufacturing facilities
in the western half of the United States and the Company's corporate operations.
The IESI operating segment, which consists of the Company's wholly-owned
subsidiary, International Enviroguard Systems, Inc., is engaged in the wholesale
distribution of disposable clothing to companies similar to, and including,
Abatix. The IESI operating segment distributes products throughout the United
States.
<PAGE>
The accounting policies of the operating segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements included
in the Company's Form 10-K for the year ended December 31, 1998. The Company
evaluates the performance of its operating segments based on earnings before
income taxes and accounting changes, and after an allocation of corporate
expenses. Intersegment sales are at agreed upon pricing and intersegment profits
are eliminated in consolidation.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. There is no other significant noncash items.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1999 Abatix IESI Totals
- ---------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Sales from external customers $10,646,362 $615,770 $11,262,132
Intersegment sales - 233,073 233,073
Interest revenue - - -
Interest expense 82,854 - 82,854
Depreciation and amortization 118,334 1,760 120,094
Segment profit 273,190 96,182 369,372
Segment assets 15,312,472 846,648 16,159,120
Capital expenditures 103,953 2,066 106,019
THREE MONTHS ENDED
JUNE 30, 1998
- ----------------------------------------
Sales from external customers $9,558,407 $599,728 $10,158,135
Intersegment sales - 275,413 275,413
Interest revenue 5,050 - 5,050
Interest expense 66,072 - 66,072
Depreciation and amortization 92,805 859 93,664
Segment profit 523,920 84,439 608,359
Segment assets 11,782,034 1,059,660 12,841,694
Capital expenditures 49,251 523 49,774
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 Abatix IESI Totals
- ---------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Sales from external customers $19,759,146 $1,381,180 $21,140,326
Intersegment sales - 469,712 469,712
Interest revenue 574 - 574
Interest expense 150,896 - 150,896
Depreciation and amortization 222,887 3,584 226,471
Segment profit 368,099 202,242 570,341
Segment assets 15,319,479 846,648 16,166,127
Capital expenditures 191,386 2,066 193,452
SIX MONTHS ENDED
JUNE 30, 1998
- ----------------------------------------
Sales from external customers $17,733,334 $1,099,556 $18,832,890
Intersegment sales - 517,900 517,900
Interest revenue 10,960 16 10,976
Interest expense 120,561 - 120,561
Depreciation and amortization 184,196 1,554 185,750
Segment profit 768,630 170,758 939,388
Segment assets 11,782,034 1,059,660 12,841,694
Capital expenditures 93,953 663 94,616
</TABLE>
Below is a reconciliation of (i) total segment profit to earnings before income
taxes on the Consolidated Statements of Operations, and (ii) total segment
assets to total assets on the Consolidated Balance Sheets for all periods
presented. The sales from external customers represent the net sales on the
Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------- -----------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Profit for reportable segments $369,372 $608,359 $570,341 $939,388
Elimination of intersegment profits (1,058) 426 (11,330) (8,471)
------------------ ------------------ ------------------ ------------------
Earnings before income taxes $368,314 $608,785 $559,011 $930,917
================== ================== ================== ==================
Total assets for reportable segments $16,166,127 $12,841,694
Elimination of intersegment assets (674,510) (957,790)
------------------ ------------------
Total assets $15,491,617 $11,883,904
================== ==================
</TABLE>
<PAGE>
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, 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. During the six months ended June 30, 1999 and 1998, no
single customer accounted for more than 10 percent of net sales, although sales
to asbestos and lead abatement contractors was approximately 42% and 50% of
consolidated net sales in those periods, respectively. A reduction in future
spending on asbestos or lead abatement projects could significantly impact
sales.
Although no vendor accounted for more than 5% of purchases, one product class
accounted for approximately 16% and 19% of net sales during the six months ended
June 30, 1999 and 1998, respectively. 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.
(5) ACQUISITION AND DISPOSITION OF ASSETS
Effective January 1, 1999, the Company consummated an Asset Purchase Agreement
with Keliher Hardware Company ("Keliher"), a California corporation, pursuant to
which the Company assumed the operations of Keliher. Keliher, based in Los
Angeles, California, with a satellite facility in Long Beach, is a $3.5 million
industrial supply distributor, primarily for the construction and industrial
markets. The estimated fair value of the assets acquired was approximately
$1,000,000. The aggregate purchase price was settled with the assumption of
certain liabilities (approximately $900,000), the issuance of 23,500 shares of
the Company's $.001 par value common stock at a value of $3.375 per share and
$35,000 in cash. This acquisition has been accounted for using the purchase
method of accounting and, accordingly, results of Keliher's operations are
included in the Company's Consolidated financial statements since the
acquisition date. The purchase price exceeded the fair value of net assets
acquired by approximately $98,000, which is being amortized on a straight-line
basis over three years. The pro forma effects of this transaction as if it had
occurred at the beginning of 1998 are not significant.
On April 6, 1999, the Company closed its Denver facility. The Denver facility
had sales of approximately $15,000 and $316,000 for the quarter ended June 30,
1999 and 1998, respectively, and $353,000 and $707,000 for the six months ended
June 30, 1999 and 1998, respectively. The Denver customers are now being
serviced from the Phoenix location. Expenses related to the shutdown of this
location were minimal.
Effective June 1, 1999, the Company consummated an Asset Purchase Agreement with
North State Supply Co. of Phoenix ("North State"), a Arizona corporation,
pursuant to which the Company assumed the operations of North State, a $6
million construction supply distributor. The estimated fair value of the assets
acquired was approximately $1,800,000. The aggregate purchase price was settled
with the assumption of certain liabilities (approximately $700,000) and
approximately $2,150,000 in cash. This acquisition has been accounted for using
the purchase method of accounting and, accordingly, the results of North State's
operations are included in the Company's Consolidated financial statements since
the acquisition date. The excess of the purchase price over the fair value of
net assets acquired is being amortized on a straight-line basis over ten years.
<PAGE>
Pro forma results, as if the acquisition had occurred at the beginning of 1998,
are as follows:
For the six months ended June 30,
-----------------------------------------
1999 1998
------------------ ------------------
Pro forma net sales $ 23,651,731 $ 21,747,566
================== ==================
Pro forma net income $ 346,535 $ 588,124
================== ==================
Pro forma basic and diluted
earnings per share $ .19 $ .30
================== ==================
<PAGE>
ABATIX CORP. AND SUBSIDIARY
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO THREE MONTH PERIOD ENDED JUNE
30, 1998.
Consolidated net sales for the three months ended June 30, 1999, increased 11
percent to $11,262,000 from $10,158,000 in 1998. The Abatix operating segment
net sales grew 11 percent to $10,646,000 in 1999 and the IESI operating segment
net sales increased 3 percent to $616,000 in 1999. The increase in consolidated
net sales resulted from efforts to further expand and diversify the customer
base, including from the acquisition of North State, effective June 1, 1999, and
the acquisition of Keliher, effective January 1, 1999. These acquisitions
provide a larger, more diversified customer base and increased product lines
that are primarily applicable to the entire Abatix customer base. The increase
in net sales is also a result of the stable economic conditions in certain
geographic regions serviced by the Company's facilities. Partially offsetting
the increase in revenues are declines in revenues from oil related and
industrial services industries.
The Denver facility, which was closed on April 6, 1999, had sales of
approximately $15,000 and $316,000 for the three months ended June 30, 1999 and
1998, respectively. The Denver customers are now being serviced from the Phoenix
location. The Company did not incur any significant charges related to the
shutdown of its Denver facility.
Gross profit in the second quarter of 1999 of $3,076,000 increased 9 percent
from gross profit in 1998 of $2,822,000 due to increased sales volume. As
expected, margins varied from location to location due to sales mix and local
market conditions. However, the Company's gross profit margins, expressed as a
percentage of sales, were approximately 27 percent for 1999 and 28 percent for
1998. Although overall margins are expected to remain at the 27 - 28 percent
range in 1999, competitive pressures could negatively impact any and all efforts
by the Company to maintain or improve product margins.
Selling, general and administrative expenses for the second quarter of 1999 of
$2,642,000 increased 23 percent over 1998 expenses of $2,154,000. The increase
was attributable primarily to the inclusion of North State and Keliher costs.
Selling, general and administrative expenses were 23 percent of sales for 1999
and 21 percent of sales for 1998. As a percent of sales, these expenses are
higher in 1999 due to the higher operating cost structure of Keliher, the costs
to integrate the operations of North State, and the costs associated with the
implementation of marketing programs aimed at improving our internal growth
rate. The integration activities related to the acquisitions of Keliher and
North State will continue into the second half of 1999. Abatix anticipates rent
expense to increase during the next twelve months on leases expiring in 1999 due
to higher rental rates and Abatix's need for larger facilities to accommodate
anticipated growth. The higher rental rates demanded by property owners are a
result of improved real estate conditions. Due to the higher rent expense, the
costs to integrate the acquisitions, and the costs of the marketing programs,
selling, general and administrative expenses are expected to be in the 23
percent range for the year ended December 31, 1999.
<PAGE>
Interest expense of $83,000 increased $17,000 from 1998 interest expense of
$66,000 primarily due to the higher debt levels from the acquisitions of North
State and Keliher. The Company's credit facilities are variable rate notes tied
to the Company's lending institution's prime rate. The prime rate increased .25%
on August 1, 1999. Further increases in the prime rate could negatively affect
the Company's earnings.
Net earnings for the three months ended June 30, 1999 of $210,000 or $.12 per
share decreased $166,000 from net earnings of $376,000 or $.19 per share for the
same period in 1998. The decrease in net earnings is primarily due to higher
general and administrative and acquisition integration costs, partially offset
by higher sales volume.
SIX MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30,
1998.
Consolidated net sales for the first six months ended June 30, 1999, increased
12 percent to $21,140,000 from $18,833,000 in 1998. The Abatix operating segment
net sales grew 11 percent to $19,759,000 in 1999 and the IESI operating segment
net sales increased 26 percent to $1,381,000 in 1999. The increase in
consolidated net sales resulted from efforts to further expand and diversify the
customer base, including the acquisition of Keliher effective January 1, 1999
and the acquisition of North State effective June 1, 1999. These acquisitions
provide a larger, more diversified customer base and increased product lines
that are primarily applicable to the entire Abatix customer base. The increase
in net sales is also a result of the stable economic conditions in certain
geographic regions serviced by the Company's facilities. Partially offsetting
the increase in revenues are declines in revenues from oil related and
industrial services industries.
The Denver facility, which was closed on April 6, 1999, had sales of
approximately $353,000 and $707,000 for the six months ended June 30, 1999 and
1998, respectively. The Denver customers are now being serviced from the Phoenix
location. The Company did not incur any significant charges related to the
shutdown of its Denver facility.
Gross profit in the first six months of 1999 of $5,811,000 increased 11 percent
from gross profit in 1998 of $5,232,000 due to increased sales volume. As
expected, margins varied from location to location due to sales mix and local
market conditions. However, the Company's gross profit margins, expressed as a
percentage of sales, were approximately 27 percent for 1999 and 28 percent for
1998. Although overall margins are expected to remain at the 27 - 28 percent
range in 1999, competitive pressures could negatively impact any and all efforts
by the Company to maintain or improve product margins.
<PAGE>
Selling, general and administrative expenses for the first six months of 1999 of
$5,118,000 increased 22 percent over 1998 expenses of $4,192,000. The increase
was attributable primarily to the inclusion of Keliher and North State costs.
Selling, general and administrative expenses were 24 percent of sales for 1999
and 22 percent of sales for 1998. As a percent of sales, these expenses are
higher in 1999 due to the higher operating cost structure of Keliher, the costs
to integrate the operations of North State, and the costs associated with the
implementation of marketing programs aimed at improving our internal growth
rate. The integration activities related to the acquisitions of Keliher and
North State will continue into the second half of 1999. Abatix anticipates rent
expense to increase during the next twelve months on leases expiring in 1999 due
to higher rental rates and Abatix's need for larger facilities to accommodate
anticipated growth. The higher rental rates demanded by property owners are a
result of improved real estate conditions. Due to the higher rent expense, the
costs to integrate the acquisitions, and the costs of the marketing programs,
selling, general and administrative expenses are expected to be in the 23
percent range for the year ended December 31, 1999.
Interest expense of $151,000 increased $30,000 from 1998 interest expense of
$121,000 primarily due to the higher debt levels from the acquisitions of North
State and Keliher. The Company's credit facilities are variable rate notes tied
to the Company's lending institution's prime rate. The prime rate increased .25%
on August 1, 1999. Further increases in the prime rate could negatively affect
the Company's earnings.
Net earnings for the first six months ended June 30, 1999 of $325,000 or $.18
per share decreased $238,000 from net earnings of $563,000 or $.29 per share for
the same period in 1998. The decrease in net earnings is primarily due to higher
general and administrative and acquisition integration costs, partially offset
by higher sales volume.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements historically result from the growth
of its accounts receivable and inventories associated with increases in sales
volume and/or the addition of new locations, which are only partially offset by
increased accounts payable and accrued expenses. Net cash provided by operations
during the first six months of 1999 of $106,000 resulted principally from the
normal seasonal increase in accounts payable and accrued expenses and the net
earnings adjusted for non-cash charges, partially offset by the normal seasonal
increase in accounts receivable and inventory.
Cash requirements for non-operating activities during the first six months of
1999 resulted primarily from the notes payable to bank payments, the repurchase
of the Company's common stock totaling $442,000 and the purchases of property
and equipment amounting to $193,000. The working capital line of credit
borrowings, net of payments, occurred as a result of the acquisition of North
State, increases in accounts receivable and inventory, the purchase of treasury
stock and capital expenditures. The capital expenditures in 1999 were primarily
computer and networking equipment and delivery vehicles.
<PAGE>
The Company purchased 134,700 shares of common stock for approximately $442,000
since January 1, 1999, all of which was purchased during the first quarter of
1999. The Company has a commitment to purchase 51,000 shares from a stockholder
at market prices. This transaction will be consummated in the third quarter of
1999. The Board of Directors has no plans to authorize further purchases.
Cash flow from operations for the entire year of 1999 is expected to be
break-even, although at any given point, it may be negative. Break-even cash
flow from operations is expected because the rate of revenue growth in 1999 is
projected to be higher than 1998, but not at a level that will require
significant net cash flows from sources other than operations.
Capital requirements for 1999 are expected to be higher than in 1998 primarily
due to the development of an e-commerce site on the internet and to invest in
other technology solutions to improve customer service. In addition, the
Company's acquisition strategy, which will increase breadth of products and the
standard of service to the customer, could require higher capital expenditures.
The Company maintains a $6,500,000 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 $1,750,000. As of August 10, 1999, there are
advances outstanding under this credit facility of $5,383,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional
$1,117,000 as of August 10, 1999. 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 10,
1999 were $300,000. Both credit facilities are payable on demand and bear a
variable rate of interest computed at the prime rate.
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.
<PAGE>
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. In addition, the Company has begun testing and remediation efforts of
the personal computers and software used by the employees for day to day
operational tasks. The anticipated completion date for the assessment,
implementation and testing phases of the information technology systems is
August 31, 1999. The Company will not begin its assessment of the
non-information technology systems until the late in the third quarter of 1999,
and anticipates completion by December 31, 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
September 15, 1999. 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.
To date, the Company has incurred less than $50,000 in costs related to this
project. The total cost to complete this project is not known at this time, but
is not expected to exceed $200,000. 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 successfully 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 to the Company.
Except for the historical information contained herein, the matters set forth in
this release are forward looking and involve a number of risks and
uncertainties. Among the factors that could impact the Company's ability to
continue a successful acquisition strategy are: general economic conditions,
adequate capital resources, and retention of key personnel. Other 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, increases in oil prices or
shortages in oil supply could significantly impact the Company's petroleum based
products and its ability to supply those products at a reasonable price. In
addition, 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
<PAGE>
ABATIX CORP. AND SUBSIDIARY
PART II
Other Information
Item 1. LEGAL PROCEEDINGS --
In December 1998, the Company was named as a defendant in a lawsuit
filed in the District Court of Harris County, Texas (Asbestos Handlers,
Inc. ("AHI") vs. Abatix Environmental Corp., et al). The lawsuit
alleges the Company and other defendants together participated in the
conversion and unauthorized sale of AHI inventory totaling $27,756. The
plaintiff seeks actual damages, exemplary damages, interest and
attorney's fees. The Company purchased the inventory in good faith and
believes that the manager of AHI's Houston facility was representing
AHI's interests. Management intends to vigorously defend against this
claim.
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, 1999 (filed with the Company's electronic filing only).
(b) Reports on Form 8-K -
(i) Item 2. Acquisition of North State Supply Co. of Phoenix
filed on June 15, 1999.
(ii) Item 5. Change the name of the corporation to Abatix Corp.
filed on June 15, 1999.
<PAGE>
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 CORP.
(Registrant)
Date: AUGUST 12, 1999 By: /S/ FRANK J. CINATL, IV
------------------ --------------------------
Frank J. Cinatl, IV
Vice President and Chief Financial
Officer of Registrant
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT June 30, 1999, AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 54,202
<SECURITIES> 0
<RECEIVABLES> 8,181,903
<ALLOWANCES> (557,134)
<INVENTORY> 5,576,537
<CURRENT-ASSETS> 13,686,864<F1>
<PP&E> 2,518,952
<DEPRECIATION> 1,953,469
<TOTAL-ASSETS> 15,686,617
<CURRENT-LIABILITIES> 9,425,731
<BONDS> 0
0
0
<COMMON> 2,438
<OTHER-SE> 6,063,449<F2>
<TOTAL-LIABILITY-AND-EQUITY> 15,491,617
<SALES> 21,140,326
<TOTAL-REVENUES> 21,140,326
<CGS> 15,329,031
<TOTAL-COSTS> 15,329,031
<OTHER-EXPENSES> 5,117,775
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134,509<F3>
<INCOME-PRETAX> 559,011
<INCOME-TAX> 234,019
<INCOME-CONTINUING> 324,992
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 324,992
<EPS-BASIC> .18
<EPS-DILUTED> .18
<FN>
<F1> AMOUNT REPRESENTS TOTAL CURRENT ASSETS.
<F2> INCLUDES 675,166 OF COMMON SHARES IN TREASURY AT A COST OF $2,088,404.
<F3> INCLUDES INTEREST EXPENSE OF $150,896 AND OTHER INCOME OF $16,387.
</FN>
</TABLE>
