UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 for the quarterly
period ended September 30, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission file number: 1-10184
ABATIX CORP.
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
75-1908110
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(I.R.S. Employer Identification No.)
8201 Eastpoint Drive, Suite 500, Dallas, Texas
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(Address of principal executive offices)
75227
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(Zip Code)
(214) 381-0322
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(Registrant's telephone number, including area code)
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 12 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Common stock outstanding at November 12, 2004 was 1,711,148.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
ABATIX CORP. AND SUBSIDIARY
Consolidated Balance Sheets
September 30,
2004 December 31,
Assets (Unaudited) 2003
------------- ------------
Current assets:
Cash $ 533,496 $ 176,078
Trade accounts receivable, net of allowance
for doubtful accounts of
$303,128 in 2004 and $277,830 in 2003 9,868,873 7,187,563
Inventories 7,039,214 5,954,414
Prepaid expenses and other assets 776,887 842,498
Refundable income taxes 169,317 204,894
Deferred income taxes 330,018 251,522
----------- -----------
Total current assets 18,717,805 14,616,969
Receivables from employees 5,070 --
Property and equipment, net 1,085,756 1,293,608
Deferred income taxes 356,591 350,748
Other assets 82,450 80,450
----------- -----------
$20,247,672 $16,341,775
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 6,543,511 $ 4,523,290
Accounts payable 4,059,448 2,510,319
Accrued compensation 249,407 117,849
Other accrued expenses 683,434 438,266
----------- ------------
Total current liabilities 11,535,800 7,589,724
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Stockholders' equity:
Preferred stock - $1 par value, 500,000
shares authorized; none issued -- --
Common stock - $ .001 par value, 5,000,000
shares authorized; 2,437,314
shares issued in 2004 and 2003 2,437 2,437
Additional paid-in capital 2,574,560 2,574,560
Retained earnings 8,392,217 8,432,396
Treasury stock at cost, 726,166
common shares in 2004 and 2003 (2,257,342) (2,257,342)
----------- -----------
Total stockholders' equity 8,711,872 8,752,051
Commitments and contingencies
----------- -----------
$20,247,672 $16,341,775
=========== ============
See accompanying notes to consolidated financial statements
2
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 14,408,758 $ 12,359,999 $ 38,845,084 $ 37,984,174
Cost of sales 10,453,408 8,813,862 28,334,197 26,923,331
------------ ------------ ------------ ------------
Gross profit 3,955,350 3,546,137 10,510,887 11,060,843
Selling, general and administrative expenses (3,438,832) (3,384,098) (10,369,524) (10,553,790)
------------ ------------ ------------ ------------
Operating profit 516,518 162,039 141,363 507,053
Other (expense) income:
Interest expense (67,528) (39,188) (166,759) (134,511)
Other (expense) income, net 222 (638) (626) 487
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 449,212 122,213 (26,022) 373,029
Income tax expense (166,600) (47,184) (14,157) (158,569)
------------ ------------ ------------ ------------
Net earnings (loss) $ 282,612 $ 75,029 $ (40,179) $ 214,460
============ ============ ============ ============
Basic and diluted earnings (loss) per common share
$ .17 $ .05 $ (.02) $ .13
============ ============ ============ ============
Basic and diluted weighted average shares
outstanding (note 2) 1,711,148 1,711,148 1,711,148 1,711,148
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
ABATIX CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
----------------------------
2004 2003
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Cash flows from operating activities:
Net (loss) earnings $ (40,179) $ 214,460
Adjustments to reconcile net (loss)
earnings to net cash provided by
operating activities:
Depreciation expense 355,553 314,646
Provision for losses on receivables 301,827 170,919
Provision for obsolescence of inventory 112,884 107,788
Deferred income taxes (84,339) (44,747)
Loss on disposal of assets 1,262 2,353
Changes in operating assets and liabilities:
Receivables (2,983,137) 261,539
Inventories (1,197,684) 19,583
Prepaid expenses and other current assets 65,611 (11,594)
Refundable income taxes 35,577 --
Other assets, primarily deposits (2,000) (3,708)
Accounts payable 1,549,129 (175,674)
Accrued expenses 376,726 (238,619)
------------ ------------
Net cash (used in) provided by
operating activities (1,508,770) 616,946
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Cash flows from investing activities:
Purchase of property and equipment (148,963) (451,234)
Advances to employees (7,920) (3,802)
Collection of advances to employees 2,850 4,806
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Net cash used in investing activities (154,033) (450,230)
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Cash flows from financing activities:
Borrowings on notes payable 12,335,289 10,832,677
Repayments on notes payable (10,315,068) (11,009,321)
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Net cash provided by (used in)
financing activities 2,020,221 (176,644)
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Net increase (decrease) in cash 357,418 (9,928)
Cash at beginning of period 176,078 19,642
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Cash at end of period $ 533,496 $ 9,714
============ ============
See accompanying notes to consolidated financial statements.
4
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, the
homeland security industry and, combined with tools and tool supplies, the
construction industry. Sales to the environmental industry include sales to
asbestos and lead abatement, restoration, including mold remediation, and
hazardous materials contractors. At September 30, 2004, the Company operates
seven sales and distribution centers in five states. In addition, the Company
currently operates a sales and distribution center in Tampa, Florida to serve
customers responding to the damage caused by the recent hurricanes. The
Company's wholly-owned subsidiary, International Enviroguard Systems, Inc.
("IESI") primarily imports disposable protective clothing products sold through
the Company's distribution channels and through other distributors.
Note 1 of the Notes to Consolidated Financial Statements included in the
Company's Form 10-K for the year ended December 31, 2003 contains a description
of the Company's critical accounting policies. Since December 31, 2003, there
have been no changes in our critical accounting policies and no significant
changes to our assumptions and estimates related to them.
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- and
nine-month periods ended September 30, 2004 and 2003, there were no dilutive
securities outstanding.
(3) Supplemental Information for Statements of Cash Flows
The Company paid interest of $159,648 and $137,617 for the nine months ended
September 30, 2004 and 2003, respectively, and income taxes of $33,110 and
$293,150 for the nine months ended September 30, 2004 and 2003, respectively.
5
(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 and, currently, the facility in Florida, principally engaged
in the sale and distribution of 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, 2003. 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.
Below is a reconciliation of (i) total segment profit (loss) to earnings (loss)
before income taxes on the Consolidated Statements of Operations, and (ii) total
segment assets to total assets on the Consolidated Balance Sheets. The sales
from external customers represent the net sales on the Consolidated Statements
of Operations.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Profit for reportable
segments $ 534,204 $ 158,649 $ 141,003 $ 533,814
Elimination of intersegment
profits (17,686) 3,390 360 (26,761)
--------- --------- --------- ---------
Operating profit $ 516,518 $ 162,039 $ 141,363 $ 507,053
========= ========= ========= =========
September 30, December 31,
2004 2003
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Total assets for reportable segments $ 20,354,917 $ 16,419,811
Elimination of intersegment assets (107,245) (78,036)
------------ ------------
Total assets $ 20,247,672 $ 16,341,775
============ ============
6
Summarized financial information concerning the Company's reportable segments is
shown in the following table. There are no significant noncash items.
Abatix IESI Totals
------------ ------------ ------------
Three months ended
September 30, 2004
- ------------------------------
Sales from external customers $ 13,719,320 $ 689,438 $ 14,408,758
Intersegment sales -- 181,791 181,791
Interest expense 67,528 -- 67,528
Depreciation expense 107,167 1,674 108,841
Segment profit 379,348 154,856 534,204
Capital expenditures 19,343 -- 19,343
Three months ended
September 30, 2003
- ------------------------------
Sales from external customers $ 11,852,509 $ 507,490 $ 12,359,999
Intersegment sales -- 157,084 157,084
Interest expense 39,188 -- 39,188
Depreciation expense 101,824 250 102,074
Segment profit 34,412 124,237 158,649
Capital expenditures 208,937 2,040 210,977
Nine months ended
September 30, 2004
- ------------------------------
Sales from external customers $ 36,975,471 $ 1,869,613 $ 38,845,084
Intersegment sales -- 393,983 393,983
Interest expense 166,759 -- 166,759
Depreciation expense 351,388 4,165 355,553
Segment (loss) profit (195,617) 336,620 141,003
Capital expenditures 148,963 -- 148,963
Nine months ended
September 30, 2003
- ------------------------------
Sales from external customers $ 36,543,383 $ 1,440,791 $ 37,984,174
Intersegment sales -- 492,907 492,907
Interest expense 134,511 -- 134,511
Depreciation expense 314,003 643 314,646
Segment profit 151,086 382,728 533,814
Capital expenditures 448,620 2,614 451,234
Segment Assets
- ------------------------------
September 30, 2004 $ 19,049,578 $ 1,305,339 $ 20,354,917
December 31, 2003 14,900,767 1,519,044 16,419,811
7
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, Nevada and Florida. 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, 2004 and
2003, no single customer accounted for more than 10% of net sales, although
sales to environmental contractors were approximately 45% and 48% of
consolidated net sales in those periods, respectively.
Although no vendor accounted for more than 10% of the Company's sales, two
product classes accounted for greater than 10% of sales for the first nine
months of 2004. The first product class accounted for 16% and 17% of net sales
in the first nine months of 2004 and 2003, respectively. A major component of
these products is petroleum. The recent increase in oil prices has translated to
increased costs to the Company for these products. In turn, the Company has
increased its selling price to its customers. 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 competitive price. The second
product class accounted for 12% and 11% of net sales in the first nine months of
2004 and 2003, respectively. A majority of these products are produced
internationally. Although political climates could impact our ability to obtain
and sell these products, sourcing of these products is available from many
countries and many vendors.
(5) Contingencies
The Company has been named in several class action lawsuits as detailed below.
These complaints generally allege that defendants violated the Securities and
Exchange Act of 1934 by allegedly making a series of materially false and
purportedly misleading statements concerning Abatix's business agreement with
the Goodwin Group LLC and, as a result, the price of the Abatix stock was
allegedly artificially inflated causing plaintiff and other members of the class
to allegedly suffer damages. The Company intends to vigorously defend itself
against these allegations.
o On April 26, 2004, the Company and certain of its officers and
directors were named as defendants in a lawsuit filed in the United
States District Court for the Northern District of Texas styled
Family Medicine Specialists and Howard Kalnitsky, and on Behalf of
All Others Similarly Situated, Plaintiffs v. Abatix Corp., Terry
Shaver, Frank Cinatl, IV and Gary Cox, Defendants (304CV-872 D).
o On April 30, 2004, the Company and certain of its officers and
directors were named as defendants in a lawsuit filed in the United
States District Court for the Northern District of Texas styled
David Maione, Individually And On Behalf of All Others Similarly
Situated, Plaintiff vs. Abatix Corp and Terry Shaver, Defendants
(304 CV0926-P).
o On May 5, 2004, the Company and certain of its officers and
directors were named as defendants in a lawsuit filed in the United
States District Court for the Northern District of Texas styled Eve
Gelman, individually and on behalf of all others similarly situated,
Plaintiff v. Abatix Corporation, Terry Shaver and Frank Cinatl
(4-04CV-341-A).
8
o On May 11, 2004, the Company and certain of its officers and
directors were named as defendants in a lawsuit filed in the United
States District Court for the Northern District of Texas styled
Vincent Teal, individually and on behalf of all others similarly
situated, Plaintiff v. Abatix Corp., Terry Shaver, Frank Cinatl, IV
and Gary Cox, Defendants (3-04CV-1002P).
o On May 21, 2004, the Company and an officer and director were named
as defendants in a lawsuit filed in the United States District Court
for the Eastern District of Texas styled John S. Rankin, On Behalf
of Himself and All Others Similarly Situated, Plaintiff, v. Abatix
Corp., and Terry Shaver Defendants (504CV 116).
All of these lawsuits, other than the John S. Rankin lawsuit, have been
transferred to one Federal District Court in the Northern District of Texas,
Dallas Division. The Company has filed a motion to transfer the John S. Rankin
case to the Northern District of Texas, but the Court has not ruled on this
motion. Each of the cases listed above filed in the Northern District of Texas
have been consolidated into a single case. Upon transfer from the Eastern
District of Texas, the Company intends to request that the Court consolidate the
Rankin case as well.
On May 27, 2004, the officers and directors of Abatix Corp. were named as
defendants in a lawsuit filed in the District Court of Dallas County, Texas,
162nd Judicial District styled Daniel M. Johnson Plaintiff v. Terry Shaver;
Frank Cinatl IV; Gary L Cox; Donald N. Black; Eric A. Young; and A. David Cook;
Defendants v. Abatix Corp. Nominal Defendant (Cause No. 2004-04-4841), although
Plaintiff has dismissed A. David Cook from this case since Mr. Cook was not a
director of the Company at the time of the alleged actions. This suit is a
shareholder derivative action that alleges that all of the defendants breached
certain fiduciary duties and abused their control of Abatix. In that regard, the
plaintiff seeks contribution and indemnification. In addition, this petition
alleges that Donald Black, an outside board of director of Abatix, breached his
fiduciary duties by selling securities based on allegedly material, non-public
information and by allegedly misappropriation of information. Plaintiff has
agreed to abate this case; however, Plaintiff has the right to lift the
abatement and pursue these claims with 15 days notice.
The SEC Regional Office made inquiries to the Company pertaining to its
disclosure of an agreement with Goodwin Group LLC and the RapidCool(TM) line of
products. The Company fully responded to these inquiries, and received a letter
from the Staff of the SEC, written under the guidelines of Securities Act
Release No. 5310, stating that its investigation has been terminated and no
enforcement action has been recommended to the Commission.
The Company has notified its directors' and officers' and corporate liability
insurance carrier of the aforementioned issues and has requested coverage for
any and all attorney fees, expenses and any exposure incurred in connection with
these cases.
Other than the applicable policy deductible and the fees and expenses incurred
prior to provision of notice to the insurance carrier, the insurance company has
paid for the defense costs related to the SEC inquiry and the class action and
derivative lawsuits. At this time, it is not possible to
9
predict whether the Company will have any additional liability or to estimate
additional costs that may be incurred with such actions that may not be covered
by any applicable insurance policy.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company is a supplier of mainly safety related products and tools to workers
involved in the construction, manufacturing and homeland security markets. From
seven fully-stocked distribution facilities/sales offices in the western and
southwestern part of the United States and, currently, a facility in Florida to
serve customers responding to the recent hurricanes, the Company primarily
distributes commodity products to the local geographic areas surrounding its
facilities.
The following information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Form 10-K for the year ended December 31, 2003.
Other than historical and factual statements, the matters and items discussed in
this Quarterly Report on Form 10-Q are forward-looking statements that involve
risks and uncertainties. Actual results of the Company may differ materially
from the results discussed herein. Certain, but not all, factors that could
contribute to such differences are discussed throughout this report. We do not
undertake any obligation to publicly update forward-looking statements to
reflect events or circumstances after the date on which the statement is made or
to reflect the occurrence of unanticipated events, except as required by law or
regulation.
This discussion and analysis of our results of operations and financial
condition is intended to provide investors with an understanding of the
Company's recent performance, its financial condition and its prospects. We will
discuss and provide our analysis of the following:
o Overview of 2004 Results
o Results of Operations and Related Information
o Liquidity and Capital Resources
o Business Outlook
10
Overview of 2004 Results
During the third quarter of 2004, the Company saw a continuation in sales growth
from the prior quarters.
o Net sales increased 17% for the third quarter and 2% for the first nine
months when compared to the same periods in 2003.
o The growth in revenues during the third quarter relates to increased
restoration sales related to the recent Florida hurricanes.
o The growth in revenues for the first nine months primarily relates
to increased sales to the homeland security market and the
industrial manufacturing market.
o Each quarter in 2003 showed a decline in sales from the previous
quarter of 6%, 1%, 3% and 12%. In contrast, the first three quarters
for 2004 have shown increases from the previous quarter of 10%, 4%
and 16%.
o Gross profit increased 12% for the third quarter, but declined 5% during
the first nine months when compared to the same periods in 2003.
o The increase in the third quarter gross profit resulted from
restoration sales in Florida related to the recent hurricanes.
o The decrease in the first nine months are a result of:
[_] Lower margin sales to the homeland security market.
[_] Increased competition in the environmental market.
o Selling, general and administrative costs showed a 2% increase for the
third quarter, but a 2% decline for the first nine month when compared to
the same periods in 2003.
o The increase in the third quarter is due to:
[_] Higher selling expenses related to the increased volume,
partially offset by
[_] Lower payroll costs (7%) due to lower staffing levels.
o The decrease in the first nine months resulted from:
[_] Lower labor costs (11%) due to lower staffing levels partially
offset by
[_] Increased legal costs in the second quarter of 2004 related to
the litigation.
11
Results of Operations and Related Information
Third Quarter of 2004 Compared With Third Quarter of 2003
Net Sales
Consolidated net sales increased 17% to $14,409,000 from 2003. The Abatix
operating segment net sales increased 16% to $13,719,000, while the IESI
operating segment net sales increased 36% to $689,000.
o The increase in sales at the Abatix operating segment was primarily due to
restoration sales in Florida as a result of recent hurricanes.
o To a lesser extent, spending increased in manufacturing facilities which
also had a positive impact on the Abatix operating segment sales.
o The increase in sales at the IESI operating segment was primarily due to
market penetration at a few key customers and those customers' ability to
capture market share from competitors' products.
Gross Profit
Consolidated gross profit of $3,955,000 increased 12% from 2003. Expressed as a
percentage of sales, gross profit was 27% and 29% in 2004 and 2003,
respectively.
o The increase in gross profit dollars is a result of large volume sales in
Florida related to the recent hurricanes.
o The decrease in the gross profit rate is a result of:
o Increased sales to homeland security customers which have been at
lower margins.
o Competitive pressures in the environmental market resulting in lower
margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $3,439,000 were $55,000 higher
than 2003. The significant changes in these costs are as follows:
o Increased selling and freight costs related to the increased volume.
o Increased legal costs related to the patent litigation.
o Lower payroll costs (7%) as a result of adjustments to staffing
levels since the third quarter of 2003.
Expressed as a percentage of sales, S,G&A expenses were 24% and 27%,
respectively, for 2004 and 2003.
12
Additional Statement of Operations Commentary
o Interest expense of $68,000 increased approximately $28,000 from 2003
primarily due to higher line of credit balances and higher interest rates.
o Net earnings of $283,000 or $.17 per share increased $208,000 from net
earnings of $75,000 or $.05 per share in 2003. The increase in net
earnings is primarily due to higher sales volume.
First Nine Months of 2004 Compared With First Nine Months of 2003
Net Sales
Consolidated net sales increased 2% to $38,845,000 from 2003. The Abatix
operating segment net sales increased 1% to $36,975,000, while the IESI
operating segment net sales increased 30% to $1,870,000.
o The increase in sales at the Abatix operating segment primarily occurred
in the homeland security market as Abatix was successful on several
governmental bids.
o The increase at the Abatix operating segment was also positively impacted
by increased spending from manufacturing facilities.
o Mostly offsetting the increases at the Abatix operating segment was a
decline in the environmental market. This decline was due to the decrease
in sales to restoration contractors during the first half of 2004,
partially offset by the positive impact on these sales due to the Florida
hurricanes in the third quarter of 2004.
o The increase in sales at the IESI operating segment was primarily due to
market penetration at a few key customers and those customers' ability to
capture market share from competitors' products.
Gross Profit
Consolidated gross profit of $10,511,000 decreased 5% from 2003. Expressed as a
percentage of sales, gross profit was 27% and 29% in 2004 and 2003,
respectively.
o The decline in gross profit dollars is a result of lower sales volume to
the restoration market and lower margin sales to the homeland security
market.
o The decrease in the gross profit rate is a result of:
o Increased sales to homeland security customers which have been at
lower margins.
o Competitive pressures in the environmental market resulting in lower
margins.
13
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $10,370,000 decreased 2% over
2003. The significant changes in these costs are as follows:
o Lower payroll costs (11%) as a result of adjustments to staffing levels
since the third quarter of 2003.
o Increased legal costs related to the litigation.
Expressed as a percentage of sales, S,G&A expenses were 27% and 28% for 2004 and
2003, respectively.
Additional Statement of Operations Commentary
o Interest expense of $167,000 increased approximately $32,000 from 2003
primarily due to higher line of credit balances.
o Net loss of $40,000 or $.02 per share decreased $254,000 from net earnings
of $214,000 or $.13 per share in 2003. The decrease in net earnings is
primarily due to the lower margins in 2004.
Liquidity and Capital Resources
Cash used in operations for the first nine months of 2004 of $1,509,000 compared
to cash provided by operations in 2003 of $617,000.
o Sales in the third quarter of 2004 were approximately 16% higher than the
second quarter of 2004 causing a 37% increase in accounts receivable since
year end.
o The 18% increase in inventory is primarily due to stocking the Florida
sales and distribution center in anticipation of future restoration sales.
o These uses of cash were funded primarily from borrowings on the Company's
working capital line of credit and increases in accounts payable.
Cash requirements for non-operating activities during the first nine months of
2004 decreased by $296,000 to $154,000 when compared to 2003. These requirements
were primarily the purchase of computer hardware and software and leasehold
improvements. Purchases of fixed assets for the remainder of 2004 are estimated
to be less than $75,000 and will include primarily replacement of computers.
14
The Company has an $8,000,000 working capital line of credit and a $500,000
capital equipment credit facility.
o Based on the borrowing formula calculated as of September 30, 2004, the
Company had the capacity to borrow up to the maximum of $8,000,000 on its
working capital line.
o As of November 5, 2004, there are advances of $6,268,000 outstanding on
the working capital credit facility.
o As of November 5, 2004 there are advances of $49,000 outstanding on the
capital equipment credit facility.
o Both credit facilities are payable on demand and bear a variable rate of
interest tied to the prime rate.
There have been no significant changes to the Company's contractual obligations
reported in the Form 10-K for the year ended December 31, 2003, except as
follows.
o The Company extended two of its operating leases and has a short-term
lease in Florida resulting in contractual obligations of $1,179,000,
$706,000, 390,000, $127,000, $117,000 and $68,000 in 2005, 2006, 2007,
2008, 2009 and 2010 respectively. The total of these obligations for
operating leases are $2,587,000.
o The changes in the Company's working capital line of credit discussed
above.
o The contractual obligation for the computer system has been satisfied.
o The Company's open purchase orders in the normal course of business are
approximately $1,251,000 as of November 5, 2004. The increase since
December 31, 2003 relates primarily for the replenishment of equipment and
related supplies that were sold for the clean-up in Florida.
Management believes the Company's current credit facilities, together with any
cash provided by operations, will be sufficient for its capital and liquidity
requirements for the next twelve months.
Business Outlook
Our goal for 2004 is to produce revenue growth, exclusive of the impact of the
higher sales because of mold remediation in 2003 and the non-recurring revenues
in Florida in 2004, as it is vital to our long-term success.
o We are not anticipating a significant improvement in the industrial
manufacturing and constructions markets for the remainder of 2004;
however, the Company should benefit as the general economy and, in
particular, the construction market, recovers.
o The homeland security segment is expected to continue to grow in 2004. The
growth in this market to date has been with the public sector and
generally is at lower margins than the remainder of the Company's markets.
We are hopeful the private sector will spend more money on homeland
security products as general economic conditions improve.
o The impact from the Florida market will continue in the fourth quarter,
although it is expected to decline each month as clean-up projects are
completed. The impact beyond the fourth quarter 2004 is not expected to be
significant.
15
o New locations and acquisitions are also critical for the long-term growth
of the Company; however, we do not anticipate any new locations or
acquisitions in 2004 or in the first quarter 2005.
Overall margins for 2004 are anticipated to remain at their current levels.
o We are utilizing tools in our new computer system in an effort to enhance
margins.
o We are evaluating the consolidation of certain vendors to gain access to
better pricing.
o We are evaluating alternative sourcing vehicles to enhance our purchasing
process.
o However, further competitive pressures or changes in the customer or
product mix could negatively impact any and all efforts by the Company to
maintain or improve product margins.
The Company will need to further reduce costs to stay competitive and return to
profitability.
o We intend to continue evaluating costs, including labor related costs,
rent and freight which make up approximately 75% of our selling, general
and administrative costs, to ensure our cost structure is in line with our
revenue stream and supports our business model.
o Unless revenues improve significantly and are sustainable, S,G&A expenses
are estimated to remain in their current range for 2004.
o The Company's credit facilities are variable rate notes tied to the
lending institution's prime rate. Increases in the prime rate could
negatively affect the Company's earnings.
In the event the Company pursues acquisitions or a more aggressive growth
strategy it will most likely be unable to use its common stock as a currency or
as a source of funds. Therefore, the Company might need to negotiate with other
parties to secure funds to achieve those plans.
Cash flow from operations for the entire year of 2004 is expected to be
negative. The Company's accounts receivable collection days have increased
slightly in the past eighteen months. These increases are primarily a result of
the sharp decline in sales to restoration contractors. The Company has taken
steps to protect our interests in certain receivables and believes its allowance
for bad debts is sufficient to cover any anticipated losses. In addition, the
Company's inventory turns have slowed over the past eighteen months as a result
of the decline in sales to restoration contractors and as a result of the
increase in inventory to support a customer. Sales to this customer have been
slow to materialize.
Information Concerning Forward-Looking Statements
Except for the historical information contained herein, the matters and comments
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, but not limited to, the following: continued recovery of the
general economy and the construction market; war, terrorism or similar events,
or lack thereof, and their impact on homeland security sales; the long-term
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; strong or increased
16
competition; changing customer or product mix; ability to implement sustainable
cost reduction and containment programs; or negative effects from investor
issues. 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 competitive 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, 2003.
Item 4. Controls and Procedures
a. 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.
b. 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.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -
The Company has been named in several class action lawsuits as detailed
below. These complaints generally allege that defendants violated the
Securities and Exchange Act of 1934 by allegedly making a series of
materially false and purportedly misleading statements concerning Abatix's
business agreement with the Goodwin Group LLC and, as a result, the price
of the Abatix stock was allegedly artificially inflated causing plaintiff
and other members of the class to allegedly suffer damages. The Company
intends to vigorously defend itself against these allegations.
o On April 26, 2004, the Company and certain of its officers and directors
were named as defendants in a lawsuit filed in the United States District
Court for the Northern District of Texas styled Family Medicine
Specialists and Howard Kalnitsky, and on Behalf of All Others Similarly
Situated, Plaintiffs v. Abatix Corp., Terry Shaver, Frank Cinatl, IV and
Gary Cox, Defendants (304CV-872 D).
o On April 30, 2004, the Company and certain of its officers and directors
were named as defendants in a lawsuit filed in the United States District
Court for the Northern District of Texas styled David Maione, Individually
And On Behalf of All Others Similarly Situated, Plaintiff vs. Abatix Corp
and Terry Shaver, Defendants (304 CV0926-P).
o On May 5, 2004, the Company and certain of its officers and directors
were named as defendants in a lawsuit filed in the United States District
Court for the Northern District of Texas styled Eve Gelman, individually
and on behalf of all others similarly situated, Plaintiff v. Abatix
Corporation, Terry Shaver and Frank Cinatl (4-04CV-341-A).
o On May 11, 2004, the Company and certain of its officers and directors
were named as defendants in a lawsuit filed in the United States District
Court for the Northern District of Texas styled Vincent Teal, individually
and on behalf of all others similarly situated, Plaintiff v. Abatix Corp.,
Terry Shaver, Frank Cinatl, IV and Gary Cox, Defendants (3-04CV-1002P).
o On May 21, 2004, the Company and an officer and director were named as
defendants in a lawsuit filed in the United States District Court for the
Eastern District of Texas styled John S. Rankin, On Behalf of Himself and
All Others Similarly Situated, Plaintiff, v. Abatix Corp., and Terry
Shaver Defendants (504CV 116).
All of these lawsuits, other than the John S. Rankin lawsuit, have been
transferred to one Federal District Court in the Northern District of
Texas, Dallas Division. The Company has filed a motion to transfer the
John S. Rankin case to the Northern District of Texas, but the Court has
not ruled on this motion. Each of the cases listed above filed in the
Northern District of Texas have been consolidated into a single case. Upon
transfer from the Eastern District of Texas, the Company intends to
request that the Court consolidate the Rankin case as well.
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On May 27, 2004, the officers and directors of Abatix Corp. were named as
defendants in a lawsuit filed in the District Court of Dallas County,
Texas, 162nd Judicial District styled Daniel M. Johnson Plaintiff v. Terry
Shaver; Frank Cinatl IV; Gary L Cox; Donald N. Black; Eric A. Young; and
A. David Cook; Defendants v. Abatix Corp. Nominal Defendant (Cause No.
2004-04-4841), although Plaintiff has dismissed A. David Cook from this
case since Mr. Cook was not a director of the Company at the time of the
alleged actions. This suit is a shareholder derivative action that alleges
that all of the defendants breached certain fiduciary duties and abused
their control of Abatix. In that regard, the plaintiff seeks contribution
and indemnification. In addition, this petition alleges that Donald Black,
an outside board of director of Abatix, breached his fiduciary duties by
selling securities based on allegedly material, non-public information and
by allegedly misappropriation of information. Plaintiff has agreed to
abate this case; however, Plaintiff has the right to lift the abatement
and pursue these claims with 15 days notice.
The SEC Regional Office made inquiries to the Company pertaining to its
disclosure of an agreement with Goodwin Group LLC and the RapidCool(TM)
line of products. The Company fully responded to these inquiries, and
received a letter from the Staff of the SEC, written under the guidelines
of Securities Act Release No. 5310, stating that its investigation has
been terminated and no enforcement action has been recommended to the
Commission.
The Company has notified its directors' and officers' and corporate
liability insurance carrier of the aforementioned issues and has requested
coverage for any and all attorney fees, expenses and any exposure incurred
in connection with these cases.
Other than the applicable policy deductible and the fees and expenses
incurred prior to provision of notice to the insurance carrier, the
insurance company has paid for the defense costs related to the SEC
inquiry and the class action and derivative lawsuits. At this time, it is
not possible to predict whether the Company will have any additional
liability or to estimate additional costs that may be incurred with such
actions that may not be covered by any applicable insurance policy.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - 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 -
(31)(a) - Certification of Chief Executive Officer
(31)(b) - Certification of Chief Financial Officer
(32)(a) - Certification of Chief Executive Officer
(32)(b) - Certification of Chief Financial Officer
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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 thereunto duly authorized.
ABATIX CORP.
(Registrant)
Date: November 11, 2004 By: /s/ Frank J. Cinatl, IV
-----------------------
Frank J. Cinatl, IV
Vice President and Chief Financial
Officer of Registrant
(Principal Accounting Officer)
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