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, 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 November 12, 1999 was 1,711,148 shares.
<PAGE>
<TABLE>
<CAPTION>
ABATIX CORP. AND SUBSIDIARY
Consolidated Balance Sheets
September 30,
1999 December 31, 1998
ASSETS (Unaudited)
----------------- ------------------
<S> <C> <C>
Current assets:
Cash $ 78,341 $ 223,997
Trade accounts receivable, net of allowance for doubtful accounts of
$591,962 in 1999 and $514,696 in 1998 7,358,606 5,701,314
Inventories 5,927,440 3,424,914
Prepaid expenses and other assets 214,712 424,865
Deferred income taxes 265,712 143,299
----------------- ------------------
Total current assets 13,844,811 9,918,389
Receivables from officers and employees 18,698 79,505
Property and equipment, net 540,845 450,991
Deferred income taxes 133,701 120,324
Intangible assets at cost, net of amortization of $58,285 1,054,380 -
Other assets 71,473 26,296
----------------- ------------------
$ 15,663,908 $ 10,595,505
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 5,760,311 $ 2,854,206
Accounts payable 2,607,181 958,656
Accrued compensation 280,531 181,071
Other accrued expenses 756,371 414,416
----------------- ------------------
Total current liabilities 9,404,394 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 5,770,921 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 6,259,514 6,187,156
Commitments and contingencies
----------------- ------------------
$ 15,663,908 $ 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 Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $ 11,817,224 $ 9,438,094 $ 32,957,550 $ 28,270,984
Cost of sales 8,581,380 6,756,806 23,910,411 20,357,211
----------------- ------------------ ------------------ -----------------
Gross profit 3,235,844 2,681,288 9,047,139 7,913,773
Selling, general and administrative expenses 2,806,949 2,171,946 7,924,724 6,364,242
----------------- ------------------ ------------------ -----------------
Operating profit 428,895 509,342 1,122,415 1,549,531
Other income (expense):
Interest expense (121,702) (69,062) (272,598) (189,623)
Other, net 7,301 4,750 23,688 16,039
----------------- ------------------ ------------------ -----------------
Earnings before income taxes 314,494 445,030 873,505 1,375,947
Income tax expense 120,866 158,069 354,885 525,605
------------------ ----------------- ------------------ -----------------
Net earnings $ 193,628 $ 286,961 $ 518,620 $ 850,342
================== ================= ================== =================
Basic earnings per common share $ .11 $ .15 $ .29 $ .44
================== ================= ================== =================
Diluted earnings per common share $ .11 $ .15 $ .29 $ .44
================== ================= ================== =================
Weighted average shares outstanding (note 2):
Basic 1,762,148 1,937,564 1,798,067 1,937,564
================= ================== ================== =================
Diluted 1,762,148 1,937,564 1,798,067 1,937,564
================= ================== ================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 518,620 $ 850,342
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 345,240 276,513
Deferred income taxes (135,790) (38,757)
Gain on sale of (19,609)
assets (3,310)
Changes in assets and liabilities:
Receivables (623,106) (1,009,460)
Inventories (918,366) (369,612)
Prepaid expenses and other assets 218,840 (10,001)
Accounts payable 608,071 83,139
Accrued expenses 269,592 253,463
------------------ -----------------
Net cash provided by operating activities 263,492 32,317
------------------ -----------------
Cash flows from investing activities:
Purchase of property and equipment (257,618) (127,053)
Proceeds from sale of property and equipment 28,000 8,500
Business acquisitions, net of cash acquired (note 5) (2,160,575) -
Advances to officers and employees (50,012) (29,085)
Collection of advances to officers and employees 35,157 25,145
Other assets (35,014) 3,100
------------------ -----------------
Net cash used in investing activities (2,440,062) (119,393)
------------------ -----------------
Cash flows from financing activities:
Purchase of treasury stock (442,477) -
Borrowings on notes payable to bank 17,154,620 27,361,433
Repayments on notes payable to bank (14,681,229) (27,471,187)
------------------ -----------------
Net cash provided by (used in) financing activities 2,030,914 (109,754)
------------------ -----------------
Net decrease in cash (145,656) (196,830)
Cash at beginning of period 223,997 304,947
------------------ -----------------
Cash at end of period $ 78,341 $ 108,117
================== =================
</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. and its wholly owned subsidiary, International Enviroguard Systems,
Inc. market and distribute personal protection and safety equipment and durable
and nondurable supplies 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, 1999, the Company operated nine sales and
distribution centers in five states. The Company, through IESI, imports
disposable protective clothing, 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 nine month
periods ended September 30, 1999 and 1998, there were no dilutive securities
outstanding.
(3) SUPPLEMENTAL INFORMATION FOR STATEMENTS OF CASH FLOWS
Cash paid for interest was $248,680 and $191,605 for the nine months ended
September 30, 1999 and 1998, respectively. Cash paid for income taxes was
$503,015 and $533,766 for the nine months ended September 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.
<PAGE>
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.
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 are no other significant noncash items.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1999 Abatix IESI Totals
- ---------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Sales from external customers $11,367,835 $449,389 $11,817,224
Intersegment sales - 228,215 228,215
Interest revenue - - -
Interest expense 121,702 - 121,702
Depreciation and amortization 117,013 1,756 118,769
Segment profit 276,925 45,088 322,013
Segment assets 15,382,630 822,978 16,205,608
Capital expenditures 61,981 2,185 64,166
THREE MONTHS ENDED
SEPTEMBER 30, 1998
- ----------------------------------------
Sales from external customers $8,875,531 $562,563 $9,438,094
Intersegment sales - 182,965 182,965
Interest revenue 2,116 41 2,157
Interest expense 68,995 67 69,062
Depreciation and amortization 89,195 1,568 90,763
Segment profit 385,908 58,289 444,197
Segment assets 11,041,517 910,396 11,951,913
Capital expenditures 21,566 10,871 32,437
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999 Abatix IESI Totals
- ---------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Sales from external customers $31,126,981 $1,830,569 $32,957,550
Intersegment sales - 697,927 697,927
Interest revenue 574 - 574
Interest expense 272,598 - 272,598
Depreciation and amortization 339,900 5,340 345,240
Segment profit 645,024 247,330 892,354
Segment assets 15,382,630 822,978 16,205,608
Capital expenditures 253,366 4,252 257,618
NINE MONTHS ENDED
SEPTEMBER 30, 1998
- ----------------------------------------
Sales from external customers $26,608,865 $1,662,119 $28,270,984
Intersegment sales - 700,865 700,865
Interest revenue 13,076 57 13,133
Interest expense 189,556 67 189,623
Depreciation and amortization 273,391 3,122 276,513
Segment profit 1,154,538 229,047 1,383,585
Segment assets 11,041,517 910,396 11,951,913
Capital expenditures 115,519 11,534 127,053
</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 Nine Months Ended
September 30, September 30,
----------------------------------------- -----------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Profit for reportable segments $322,013 $444,197 $892,354 $1,383,585
Elimination of intersegment profits (7,519) 833 (18,849) (7,638)
------------------ ------------------ ------------------ ------------------
Earnings before income taxes $314,494 $445,030 $873,505 $1,375,947
================== ================== ================== ==================
Total assets for reportable segments $16,205,608 $11,951,913
Elimination of intersegment assets (541,700) (1,020,474)
------------------ ------------------
Total assets $15,663,908 $10,931,439
================== ==================
</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 nine months ended September 30, 1999 and
1998, no single customer accounted for more than 5% of net sales, although sales
to asbestos and lead abatement contractors were approximately 41% 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 8% of purchases, one product class
accounted for approximately 16% and 19% of net sales during the nine months
ended September 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, 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 identifiable 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.
On April 6, 1999, the Company closed its Denver facility. The Denver facility
had sales of $353,000 and $1,141,000 for the nine months ended September 30,
1999 and 1998, respectively. A portion of the Denver customers are now being
serviced from the Phoenix location. Expenses related to the shutdown of this
location were minimal.
<PAGE>
Effective June 1, 1999, the Company consummated an Asset Purchase Agreement with
North State Supply Co. of Phoenix, an 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 identifiable assets acquired was
approximately $1,800,000. The aggregate purchase price was settled with the
assumption of certain liabilities (approximately $700,000) and approximately
$2,100,000 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.
Pro forma results, as if the Keliher and North State acquisitions had occurred
at the beginning of 1998, are as follows:
For the nine months ended
September 30,
---------------------------------------
1999 1998
------------------ ----------------
Pro forma net sales $ 35,468,955 $ 35,711,786
================== ================
Pro forma net income $ 540,621 $ 822,719
================== ================
Pro forma basic and diluted
earnings per share $ .30 $ .42
================== ================
<PAGE>
ABATIX CORP. AND SUBSIDIARY
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTH PERIOD ENDED
SEPTEMBER 30, 1998.
Consolidated net sales for the three months ended September 30, 1999, increased
25% to $11,817,000 from $9,438,000 in 1998. The Abatix operating segment net
sales grew 28% to $11,368,000 in 1999 and the IESI operating segment net sales
decreased 20% to $449,000 in 1999. The increase in consolidated net sales
resulted predominantly from expansion and diversification of the customer base
through the acquisition of North State, effective June 1, 1999, and the
acquisition of Keliher, effective January 1, 1999. These acquisitions not only
provide a larger, more diversified customer base but also provide additional
product lines which complement Abatix' core business and are appropriate for the
entire Abatix customer base. Stable economic conditions in certain geographic
areas within the Company's distribution and service markets also contributed to
the increase in revenue. However, the increase in revenue is partially offset by
declines in oil related industrial service revenues.
Gross profit improved 21% to $3,236,000 in the third quarter of 1999 as compared
to $2,681,000 gross profit for the same period in the prior year 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% for
1999 and 28% for 1998. The decline in gross profit margin is mainly attributable
to product mix. Although overall margins are expected to remain at the 27% - 28%
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 were $2,807,000 for the third
quarter of 1999, representing a 29% increase over third quarter 1998 expenses of
$2,172,000. The increase was due to the inclusion of North State and Keliher
costs as well as costs incurred, including facilities, payroll, travel, and
marketing costs, in preparation for expected growth. Selling, general and
administrative expenses were 24% of sales for 1999 and 23% of sales for 1998. As
a percent of sales, these expenses are higher in 1999 due to the higher
operating cost structure of Keliher, expenses related to the integration of
North State's operations, and the costs associated with marketing initiatives to
improve our internal growth rate. Rent expense will increase during the next
twelve months as leases were renegotiated in 1999 at higher rental rates, with
certain leases including more space to accommodate anticipated growth. Improved
real estate conditions have allowed property owners to increase rental rates. As
a result of higher rent expense, increased health care costs, costs to integrate
acquisitions, and costs related to the marketing initiatives, selling, general
and administrative expenses are expected to be in the 23% - 24% range for the
year ended December 31, 1999.
<PAGE>
Interest expense of $122,000 increased by $53,000 or 76% from 1998 interest
expense of $69,000 primarily due to the higher debt levels from the acquisition
of North State. 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 September 30, 1999 of $194,000 or $.11
per share decreased 32% from net earnings of $287,000 or $.15 per share for the
same period in 1998. The decrease in net earnings is attributable to the gross
profit margin decline, increased general and administrative expenses, including
acquisition integration costs, and higher interest expense.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1998.
Consolidated net sales for the nine months ended September 30, 1999, increased
17% to $32,958,000 as compared to $28,271,000 in 1998. The Abatix operating
segment net sales grew 17% to $31,127,000 in 1999, and the IESI operating
segment net sales increased 10% to $1,831,000. The increase in consolidated net
sales resulted predominantly from expansion and diversification of the customer
base through the acquisition of North State, effective June 1, 1999, and the
acquisition of Keliher, effective January 1, 1999. These acquisitions not only
provide a larger, more diversified customer base but also provide additional
product lines which complement Abatix' core business and are appropriate for the
entire Abatix customer base. Stable economic conditions in certain geographic
areas within the Company's distribution and service markets also contributed to
the increase in revenue. However, the increase in revenue is partially offset by
declines in oil related and industrial service revenues.
The Denver facility, which was closed on April 6, 1999, had sales of
approximately $353,000 and $1,141,000 for the nine months ended September 30,
1999 and 1998, respectively. A portion of 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 improved 14% to $9,047,000 in the third quarter of 1999 as compared
to $7,914,000 gross profit for the same period in the prior year primarily 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 margin, expressed as a percentage of sales, was approximately 27%
in 1999 and 28% in 1998. Although overall margins are expected to remain at the
27% - 28% 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 were $7,925,000 for the nine months
ended September 30, 1999, representing a 25% increase over the same period in
1998. The increase was due to the inclusion of North State and Keliher costs, as
well as costs incurred, including facilities, payroll, travel, and marketing
costs, in preparation for expected growth. Selling, general and administrative
expenses were 24% of sales for 1999 and 23% of sales for 1998. As a percent of
sales, these expenses are higher in 1999 due to the higher operating cost
structure of Keliher, expenses related to the integration of North State's
operations, and the costs associated with marketing initiatives to improve our
internal growth rate. Rent expense will increase during the next twelve months
as leases were renegotiated in 1999 at higher rental rates, with certain leases
including more space to accommodate anticipated growth. Improved real estate
conditions have allowed property owners to increase rental rates. As a result of
higher rent expense, increased health care costs, costs to integrate
acquisitions, and costs related to the marketing initiatives, selling, general
and administrative expenses are expected to be in the 23% - 24% range for the
year ended December 31, 1999.
Interest expense of $273,000 increased by $83,000 or 44% from 1998 interest
expense of $190,000 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 nine months ended September 30, 1999 of $519,000 or $.29
per share decreased 39% from net earnings of $850,000 or $.44 per share for the
same period in 1998. The decrease in net earnings is attributable to the
increased general and administrative and acquisition integration costs, and
higher interest expense.
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
of $263,000 for the nine months ended September 30, 1999 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. The normal seasonal
increase in accounts receivable and inventory is greater due to the growth in
sales as a result of the additional business acquired from North State and
Keliher.
Cash requirements for non-operating activities during the nine month period
ended September 30,1999 resulted primarily from the notes payable to bank
payments of $14,681,000, the repurchase of the Company's common stock totaling
$442,000 and the purchases of property and equipment amounting to $258,000. 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>
As of September 30, 1999, the Company purchased 134,700 shares of common stock
since January 1, 1999 for approximately $442,000, all of which was purchased
during the first quarter of 1999. On October 19, 1999 the Company purchased an
additional 51,000 shares from a stockholder. 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% of
the book value of eligible trade receivables plus the lesser of 40% of eligible
inventory or $2,000,000. As of November 12 , 1999, there are advances
outstanding under this credit facility of $4,974,000. Based on the borrowing
formula, the Company had the capacity to borrow an additional $1,526,000 as of
November 12, 1999. The Company also maintains a $550,000 capital equipment
credit facility providing for borrowings at 80% of cost on purchases. The
advances outstanding under this credit facility as of November 12, 1999 were
$280,000. 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 has completed assessing the impact of Year 2000 issues on its
information technology systems, and is completing remediation and testing
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 implementation
and testing phases of the information technology systems is December 15, 1999.
The Company is finalizing remediation efforts of the non-information technology
systems, and anticipates completion by December 31, 1999. In addition, the
Company is evaluating responses from third parties, with which the Company has
material relationships, confirming in writing their plans for Year 2000
compliance. The Company is finalizing a contingency plan to minimize Year 2000
issues.
To date, the Company has incurred less than $150,000 in costs related to this
project. The total cost to complete this project 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, lack of acceptance of our proposed e-commerce solution, 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
September 30, 1999 (filed with the Company's electronic filing
only).
(b) Reports on Form 8-K -- None
.
<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: NOVEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 78,341
<SECURITIES> 0
<RECEIVABLES> 7,950,568
<ALLOWANCES> (591,962)
<INVENTORY> 5,927,440
<CURRENT-ASSETS> 13,844,811<F1>
<PP&E> 2,583,120
<DEPRECIATION> 2,042,275
<TOTAL-ASSETS> 15,663,908
<CURRENT-LIABILITIES> 9,404,394
<BONDS> 0
0
0
<COMMON> 2,437
<OTHER-SE> 6,257,077<F2>
<TOTAL-LIABILITY-AND-EQUITY> 15,663,908
<SALES> 32,967,550
<TOTAL-REVENUES> 32,957,550
<CGS> 23,910,411
<TOTAL-COSTS> 23,910,411
<OTHER-EXPENSES> 7,924,724
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 248,910<F3>
<INCOME-PRETAX> 873,505
<INCOME-TAX> 354,885
<INCOME-CONTINUING> 518,620
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 518,620
<EPS-BASIC> .29
<EPS-DILUTED> .29
<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 $272,598 AND OTHER INCOME OF $23,688.
</FN>
</TABLE>
