Back to GetFilings.com

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, 2003

Commission file number 1-10184

ABATIX CORP.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

75-1908110
(I.R.S. Employer Identification number)

8201 Eastpoint Drive, Suite 500 Dallas, Texas 75227
(Address of principal executive offices)

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 July 30, 2003 was 1,711,148.

ABATIX CORP. AND SUBSIDIARY

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

ABATIX CORP. AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

See accompanying notes to consolidated financial statements.

ABATIX CORP. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to consolidated financial statements.

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 to the environmental industry, the industrial safety industry and, combined with tools and tool supplies, the construction industry. Sales to the environmental industry include sales to asbestos and lead abatement, mold remediation and hazardous materials contractors. At June 30, 2003, the Company operated seven sales and distribution centers in five states. The Company’s wholly-owned subsidiary, International Enviroguard Systems, Inc. (“IESI”) 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.

In the first quarter of 2002, the Company implemented Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“Statement”) No. 142 “Goodwill and Other Intangible Assets.” Statement No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for annual impairment testing of existing goodwill and other intangibles. Upon adoption of Statement No. 142, the Company ceased amortizing goodwill and performed an impairment review of its goodwill balance. Based on the review performed, the Company recorded an impairment charge for the full amount of $819,841, net of an income tax benefit of $327,900. The following table shows the Company’s net earnings excluding the goodwill impairment in 2002.

(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 and six-month periods ended June 30, 2003 and 2002, there were no potentially dilutive securities outstanding.

(3)    Supplemental Information for Statements of Cash Flows

The Company paid interest of $94,090 and $114,649 in the six months ended June 30, 2003 and 2002, respectively, and income taxes of $293,150 and $347,502 in the six months ended June 30, 2003 and 2002, respectively.

(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 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, 2002. The Company evaluates the performance of its operating segments based on operating profit after a charge for the carrying value of inventory and accounts receivable. 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.

Below is a reconciliation of (i) total segment profit to operating profits 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.

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, 2003 and 2002, no single customer accounted for more than 10 percent of net sales, although sales to environmental contractors were approximately 40 percent and 55 percent of consolidated net sales in those periods, respectively. A reduction in spending on environmental projects could significantly impact sales.

Although no vendor accounted for more than 10 percent of purchases, one product class accounted for more than 10 percent of sales. This product class accounted for approximately 10 percent and 14 percent of net sales during the six months ended June 30, 2003 and 2002, 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.

ABATIX CORP. AND SUBSIDIARY

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Three Month Period Ended June 30, 2003 Compared to Three Month Period Ended June 30, 2002.

Consolidated net sales for the three months ended June 30, 2003, decreased 20 percent to $12,774,000 from $15,944,000 in 2002. The Abatix operating segment net sales decreased 20 percent to $12,308,000 in 2003 and the IESI operating segment net sales decreased 14 percent to $466,000 in 2003. The reduction of Abatix revenues is primarily attributable to the reduction of sales to mold remediation contractors in 2003. This slowdown is primarily due to the change in insurance laws, which has had a negative impact on mold related jobs. Based on this information, the Company anticipates a decline in year over year sales for 2003 to this industry.

Gross profit in the second quarter of 2003 of $3,731,000 decreased 20 percent from gross profit in 2002 of $4,642,000 due to decreased sales volume. The Company’s gross profit margins, expressed as a percentage of sales, were approximately 29 percent for 2003 and 2002.

Selling, general and administrative expenses for the second three months of 2003 of $3,641,000 decreased 8 percent over 2002 expenses of $3,946,000. These expenses decreased due to lower commission and bonus expense as a result of lower sales. These expenses were 29 percent and 25 percent of sales for 2003 and 2002, respectively. The Company made changes which will lower these expenses in the third and fourth quarters and will continue to look for ways to adjust these expenses back in line with sales.

Interest expense of $49,000 decreased approximately $4,000 from 2002 interest expense of $53,000 primarily due to lower line of credit balances. The Company’s credit facilities are variable rate notes tied to the Company’s lending institution’s prime rate. Increases in the prime rate could negatively affect the Company’s earnings.

Net earnings for the three months ended June 30, 2003, of $23,000, or $.01 per share, decreased $374,000 from net earnings of $397,000, or $.23 per share, for the same period in 2002. The decrease in net earnings is primarily due to decreased sales volume, partially offset by lower general and administrative expenses.

Six Month Period Ended June 30, 2003 Compared to Six Month Period Ended June 30, 2002.

Consolidated net sales for the six months ended June 30, 2003, decreased 14 percent to $25,624,000 from $29,894,000 in 2002. The Abatix operating segment net sales decreased 15 percent to $24,691,000 in 2003 and the IESI operating segment net sales decreased 8 percent to $933,000 in 2003. The reduction of Abatix revenues is primarily attributable to the reduction of sales to mold remediation contractors in 2003. This slowdown is primarily due to the change in insurance laws, which has had a negative impact on mold related jobs. Based on this information, the Company anticipates a decline in year over year sales for 2003 to this industry.

Gross profit in the first six months of 2003 of $7,515,000 decreased 13 percent from gross profit in 2002 of $8,666,000 due to decreased sales volume. The Company’s gross profit margins, expressed as a percentage of sales, were approximately 29 percent for 2002 and 2003. Although overall margins are expected to remain at their current levels in 2003, 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 six months of 2003 of $7,170,000 decreased 5 percent over 2002 expenses of $7,567,000. These expenses decreased due to lower commission and bonus expense as a result of lower sales. These expenses were 28 percent of sales for 2003 and 25 percent of sales for 2002. The Company made changes which will lower these expenses in the third and fourth quarters and will continue to look for ways to adjust these expenses back in line with sales. Selling, general and administrative expenses are expected to be approximately 27 percent of sales for the year ended December 31, 2003.

Interest expense of $95,000 decreased $15,000 from 2002 interest expense of $110,000, primarily due to lower line of credit balances The Company’s credit facilities are variable rate notes tied to the Company’s lending institution’s prime rate. Increases in the prime rate could negatively affect the Company’s earnings.

Net earnings for the six months ended June 30, 2003, of $139,000 or $.08 per share, increased $19,000 from net earnings of $120,000, or $.07 per share, for the same period in 2002. The increase in net earnings is primarily due to the implementation of FASB Statement No. 142 in 2002. See Note 1 for more information.

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 six months of 2003 of $742,000 resulted from the decrease in prepaid expenses and other current assets, as well as the decrease in accounts receivable and inventories. Cash flow from operations for the entire year of 2003 is expected to remain positive, although at any given point, it may be negative.

Cash used in non-operating activities during the first six months of 2003 resulted primarily from payments of notes payable to the bank. In addition, the Company purchased $240,000 of fixed assets primarily consisting of initial payments for the installation of the new enterprise software system. The implementation of the new enterprise software system will require a significant capital outlay estimated at $200,000 for the remainder of 2003. It will enable the Company to achieve more streamlined operations, improve customer service, and lower transaction costs.

The Company maintains an $8,000,000 working capital line of credit at a commercial lending institution. 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 July 28, 2003, there are advances outstanding under this credit facility of $4,449,000. Based on the borrowing formula, the Company had the capacity to borrow an additional $3,551,000 as of July 28, 2003. 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 July 28, 2002, were $108,000. Both credit facilities are payable on demand and bear a variable rate of interest computed at the prime rate less 25 basis points.

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 release are forward looking and involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: the continued long-term impact of the September 11, 2001 tragic events on the domestic preparedness market, continued low levels of spending for construction projects, the impact of insurance coverage on mold remediation, adverse weather conditions, inability to hire and train quality people or retain current personnel, changes in interest rates and strong or increased competition. 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.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes from the information previously reported under Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

Item 4.  Controls and Procedures

1. Within the 90-day period prior to the date of this report, the Company evaluated, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer conclude that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's Exchange Act filings.
   
   
2. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

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 - (31)(1) - Certification of Chief Executive Officer

                                     (31)(2) - Certification of Chief Financial Officer

                                     (32)(1) - Certification of Chief Executive Officer and Chief Financial Officer

              (b) Reports on Form 8-K - First quarter earnings release, filed May 7, 2003.

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.