SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 and 15(d)
of the Securities Exchange Act of 1934
For the quarter ended March 31, 2000
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)
8201 Eastpoint Drive, Suite 500
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 May 11, 2000 was 1,711,148.
<PAGE>
<TABLE>
<CAPTION>
ABATIX CORP. AND SUBSIDIARY
Consolidated Balance Sheets
March 31,
2000
(Unaudited) December 31, 1999
----------------- -----------------
Assets
------
<S> <C> <C>
Current assets:
Cash $ 173,793 $ 106,793
Trade accounts receivable, net of allowance for doubtful accounts of
$589,004 in 2000 and $616,678 in 1999 6,955,673 7,028,271
Inventories 5,776,172 5,393,355
Prepaid expenses and other assets 351,654 368,583
Refundable income taxes 117,573 87,986
Deferred income taxes 168,235 235,505
----------------- -----------------
Total current assets 13,543,100 13,220,493
Receivables from officers and employees 2,136 7,750
Property and equipment, net 734,874 629,796
Deferred income taxes 160,632 144,916
Goodwill, net of accumulated amortization of $131,131in 2000 and $91,751 in
1999 1,095,500 1,134,880
Other assets 65,548 66,973
----------------- -----------------
$ 15,601,790 $ 15,204,808
================= =================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable to bank $ 6,002,475 $ 5,825,721
Accounts payable 2,863,866 2,604,587
Accrued compensation 222,647 198,127
Other accrued expenses 427,081 542,959
----------------- -----------------
Total current liabilities 9,516,069 9,171,394
----------------- -----------------
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 shares in 2000 and 1999 2,437 2,437
Additional paid-in capital 2,574,560 2,574,560
Retained earnings 5,766,066 5,713,759
Treasury stock at cost, 726,166 common shares in 2000
and 1999 (2,257,342) (2,257,342)
----------------- -----------------
Total stockholders' equity 6,085,721 6,033,414
Commitments
----------------- -----------------
$ 15,601,790 $ 15,204,808
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Net sales $ 11,264,502 $ 9,878,194
Cost of sales 8,191,890 7,143,178
----------------- -----------------
Gross profit 3,072,612 2,735,016
Selling, general and administrative expenses 2,840,168 2,475,782
----------------- -----------------
Operating profit 232,444 259,234
Other income (expense):
Interest expense (133,233) (68,042)
Other, net (11,300) (495)
----------------- -----------------
Earnings before income taxes 87,911 190,697
Income tax expense 35,604 75,438
----------------- -----------------
Net earnings $ 52,307 $ 115,259
================= =================
Basic and diluted earnings per common share $ .03 $ .06
================= =================
Basic and diluted weighted average shares
outstanding (note 2) 1,711,148 1,869,907
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
2000 1999
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 52,307 $ 115,259
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 135,969 106,377
Deferred income taxes 51,555 (12,506)
Changes in assets and liabilities, net of business acquisitions:
Receivables 72,598 (3,988)
Inventories (382,817) (437,086)
Refundable income taxes (29,587) -
Prepaid expenses and other assets 16,927 87,765
Accounts payable 259,279 63,432
Accrued expenses (91,358) (37,247)
------------------ -----------------
Net cash provided by (used in) operating activities 84,873 (117,994)
------------------ -----------------
Cash flows from investing activities:
Purchase of property and equipment (202,117) (87,433)
Proceeds from sale of property and equipment 450 -
Business acquisitions, net of cash acquired (note 5) - (38,960)
Advances to officers and employees (10,432) (8,981)
Collection of advances to officers and employees 16,046 9,116
Other assets, primarily deposits 1,425 (21,848)
------------------ -----------------
Net cash used in investing activities (194,628) (148,106)
------------------ -----------------
Cash flows from financing activities:
Purchase of treasury stock - (442,656)
Borrowings on notes payable to bank 2,947,717 9,639,832
Repayments on notes payable to bank (2,770,962) (9,097,946)
------------------ -----------------
Net cash provided by financing activities 176,755 99,230
------------------ -----------------
Net increase (decrease) in cash 67,000 (166,870)
Cash at beginning of period 106,793 223,997
------------------ -----------------
Cash at end of period $ 173,793 $ 57,127
================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ABATIX CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation, General and Business
Abatix Corp. ("Abatix") and subsidiary, (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. At March 31, 2000, the Company operated seven sales and
distribution centers in five states. The Company's wholly-owned subsidiary,
International Enviroguard Systems, Inc. ("IESI"), a Delaware corporation,
imports disposable protective clothing products sold through the Company's
distribution channels and through other distributors.
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 potential common shares. For the
three-month periods ended March 31, 2000 and 1999, there were no dilutive
securities outstanding. Basic earnings per share and diluted earnings per share
amounts were equal for the three months ended March 31, 2000 and 1999.
(3) Supplemental Information for Statements of Cash Flows
The Company paid interest of $127,360 and $59,193 in the three months ended
March 31, 2000 and 1999, respectively, and income taxes of $13,636 and $84,439
in the three months ended March 31, 2000 and 1999, respectively. In 1999, the
Company issued stock for a business acquisition at a value of $76,075 and
received stock from an officer to repay debt in the amount of $79,681.
(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
5
<PAGE>
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 protective 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, 1999. 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>
Abatix IESI Totals
---------------- ----------------- -----------------
March 31, 2000
- ----------------------------------------
<S> <C> <C> <C>
Sales from external customers $ 10,614,108 $ 650,394 $ 11,264,502
Intersegment sales - 201,203 201,203
Interest income 27 - 27
Interest expense 133,233 - 133,233
Depreciation and amortization 94,760 1,829 96,589
Segment profit 40,051 51,862 91,913
Segment assets 15,421,368 649,636 16,071,004
Capital expenditures 200,579 1,538 202,117
March 31, 1999
- ----------------------------------------
Sales from external customers $ 9,112,784 $ 765,410 $ 9,878,194
Intersegment sales - 236,639 236,639
Interest income 574 - 574
Interest expense 68,042 - 68,042
Depreciation and amortization 104,553 1,824 106,377
Segment profit 94,909 106,060 200,969
Segment assets 11,830,038 923,296 12,753,334
Capital expenditures 87,433 - 87,433
</TABLE>
6
<PAGE>
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>
March 31,
------------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Profit for reportable segments $ 91,913 $ 200,969
Elimination of intersegment profits (4,002) (10,272)
------------------- -------------------
Earnings before income taxes $ 87,911 $ 190,697
=================== ===================
Total assets for reportable segments $ 16,071,004 $ 12,753,334
Elimination of intersegment assets (469,214) (931,205)
------------------- -------------------
Total assets $ 15,601,790 $ 11,822,129
=================== ===================
</TABLE>
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 three months ended March 31, 2000 and 1999,
no single customer accounted for more than 10 percent of net sales, although
sales to asbestos and lead abatement contractors were approximately 31 percent
and 40 percent of consolidated net sales in those periods, respectively. A
reduction in spending on asbestos or lead abatement projects could significantly
impact sales.
Although no vendor accounted for more than 8 percent of purchases, one product
class accounted for approximately 14 percent and 15 percent of net sales during
the three months ended March 31, 2000 and 1999, respectively. A major component
of these products is petroleum. Further 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, is an industrial supply distributor, primarily for the construction
and industrial markets. The estimated fair value of the assets acquired was
approximately $975,000. 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 excess of the purchase price over the fair value of net
assets acquired is being amortized on a straight-line basis over three years.
7
<PAGE>
On April 6, 1999, the Company closed its Denver distribution and sales center.
The Denver facility had sales of $338,000 for the three months ended March 31,
1999. Expenses related to the closing of this location were not material.
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 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 $785,000) 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.
Unaudited pro forma results, as if the North State acquisition had occurred at
the beginning of 1999, are as follows:
For the three
months ended
March 31,
1999
------------------
Net sales $ 11,311,227
==================
Net income $ 127,909
==================
Basic and diluted earnings per share $ .07
==================
8
<PAGE>
ABATIX CORP. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 2000 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 1999.
Consolidated net sales for the three months ended March 31, 2000, increased 14
percent to $11,265,000 from $9,878,000 in 1999. The Abatix operating segment net
sales grew 16 percent to $10,614,000 in 2000 and the IESI operating segment net
sales decreased 15 percent to $650,000 in 2000. The increase in consolidated net
sales resulted from efforts to further expand and diversify the customer base,
including the acquisition of North State, a construction supply distributor.
This acquisition provides a larger customer base and the ability to cross sell
products to both North State and Abatix customers. The increase in net sales is
also a result of the stable economic conditions in the geographic regions
serviced by the Company's facilities. These economic conditions, if maintained,
should provide the ability for the Company to internally grow its revenues for
the remainder of 2000.
On April 6, 1999, the Company closed its Denver facility and will now serve the
Denver market primarily from its Phoenix location. The Denver facility had sales
of approximately $338,000 and for the three months ended March 31, 1999.
Gross profit in the first quarter of 2000 of $3,073,000 increased 12 percent
from gross profit in 1999 of $2,735,000 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 2000 and 28 percent for
1999. Although overall margins are expected to remain at their current levels in
2000, 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 first three months of 2000
of $2,840,000 increased 15 percent over 1999 expenses of $2,476,000. The
increase was attributable primarily to the inclusion of North State costs and
increased rent due to larger facilities and higher rent rates for three
distribution centers and the corporate offices. Selling, general and
administrative expenses were 25 percent of sales for 2000 and for 1999. Leases
on three facilities were renegotiated at the end of 1999. Rental rates are
higher with the new leases as a result of improved real estate conditions.
Selling, general and administrative expenses are expected to be in the 23 to 24
percent range for the year ended December 31, 2000.
Interest expense of $133,000 increased $65,000 from 1999 interest expense of
$68,000 primarily due to the additional borrowings used to finance the
acquisition of North State and higher interest rates. The Company's credit
facilities are variable rate notes tied to the Company's lending institution's
prime rate. Additional increases in the prime rate could negatively affect the
Company's earnings.
9
<PAGE>
Net earnings for the three months ended March 31, 2000 of $52,000 or $.03 per
share decreased $63,000 from net earnings of $115,000 or $.06 per share for the
same period in 1999. The decrease in net earnings is primarily due to increased
interest expense and higher general and administrative costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements historically result from the growth
of its accounts receivable and inventories, partially offset by increased
accounts payable and accrued expenses, associated with increases in sales
volume. Net cash provided by operations during the first three months of 2000 of
$85,000 resulted principally from an increase in accounts payable and net
earnings adjusted for non cash charges, partially offset by an increase in
inventories. The increase in accounts payable and inventories are a result of
the increased stocking levels necessary to prepare for the normal increase in
business activity during the summer months.
Cash requirements for non-operating activities during the first three months of
2000 resulted primarily from repayments of notes payable to the bank and the
purchases of property and equipment amounting to $202,000. The working capital
line of credit borrowings, net of payments, occurred primarily as a result of
increases in inventory and the purchase of fixed assets. The equipment purchases
in 2000 were primarily office furniture and fixtures, warehouse equipment, and a
delivery vehicle.
Cash flow from operations for the entire year of 2000 is expected to be
positive, although at any given point, it may be negative. The development of
the Company's e-commerce solution, which is expected to be tested beginning in
mid-2000, will require a significant capital outlay. This solution, which could
cost a total of $250,000 to implement, market and maintain in 2000, is expected
to provide customers a more efficient method of doing business with Abatix and
could provide some cost savings in the future, as well as expand the customer
base.
In early May 2000, the Company increased its working capital line of credit at a
commercial lending institution from $6,500,000 to $7,000,000 to help fund
additional capital requirements resulting from the development of its e-commerce
site. The working capital line of credit agreement 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 $2,000,000. As of May 10, 2000, there are
advances outstanding under this credit facility of $6,276,000. Based on the
borrowing formula, the Company had the capacity to borrow an additional $724,000
as of May 10, 2000. 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 May 10, 2000 were
$165,000. Both credit facilities are payable on demand and bear a variable rate
of interest computed at the prime rate.
10
<PAGE>
Management believes the Company's current credit facilities, together with cash
provided by operations, will be sufficient for its capital and liquidity
requirements for the next twelve months. In the event the Company pursues
additional acquisitions and is unable to use its common stock as payment, the
Company would need to negotiate with a lender to secure additional borrowings to
be used to acquire another company's assets.
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. 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 and strong competition. Furthermore, 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 could cause actual results to differ materially.
11
<PAGE>
ABATIX CORP. AND SUBSIDIARY
PART II
Other Information
Item 1. Legal Proceedings -- None
Item 2. Changes in Securities -- None
Item 3. Defaults upon Senior Securities -- None
Item 4. Submission of Matters to a Vote of Security Holders -- None
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits --
Exhibit 27 - Financial Data Schedule for the three months ended
March 31, 2000 (filed with the Company's electronic filing
only).
(b) Reports on Form 8-K --
A Form 8-K was filed on February 2, 2000 to announce the
resignation of a member of the Board of Directors.
12
<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: May 11, 2000 By: /s/ Frank J. Cinatl, IV
--------------- ----------------------------------
Frank J. Cinatl, IV
Vice President and Chief Financial
Officer of Registrant
(Principal Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000, AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 173,793
<SECURITIES> 0
<RECEIVABLES> 7,544,677
<ALLOWANCES> (589,004)
<INVENTORY> 5,776,172
<CURRENT-ASSETS> 13,543,100<F1>
<PP&E> 2,960,030
<DEPRECIATION> 2,225,156
<TOTAL-ASSETS> 15,601,790
<CURRENT-LIABILITIES> 9,516,069
<BONDS> 0
0
0
<COMMON> 2,437
<OTHER-SE> 6,083,284<F2>
<TOTAL-LIABILITY-AND-EQUITY> 15,601,790
<SALES> 11,264,502
<TOTAL-REVENUES> 11,264,502
<CGS> 8,191,890
<TOTAL-COSTS> 8,191,890
<OTHER-EXPENSES> 2,840,168
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144,533<F3>
<INCOME-PRETAX> 87,911
<INCOME-TAX> 35,604
<INCOME-CONTINUING> 52,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,307
<EPS-BASIC> .03
<EPS-DILUTED> .03
<FN>
<F1> AMOUNT REPRESENTS TOTAL CURRENT ASSETS.
<F2> INCLUDES 726,166 OF COMMON SHARES IN TREASURY AT A COST OF $2,257,342.
<F3> INCLUDES INTEREST EXPENSE OF $133,233 AND OTHER EXPENSE OF $11,300.
</FN>
</TABLE>
