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, 2002 and 2001, no single customer accounted for more than 10 percent of net sales, although sales to environmental contractors were approximately 52 percent and 39 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, three product classes accounted for greater than 10 percent of sales for the first quarter of 2002. One product class accounted for approximately 13 percent of net sales during the three months ended March 31, 2002 and 2001. 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. Another product class accounted for 12 percent of sales during the three months ended March 31, 2002 and March 31, 2001, respectively. These products are purchased from Asia, however there are several non-Asian sources for the product line. The last product class accounts for 12 percent and 4 percent of net sales during the three months ended March 31, 2002 and March 31, 2001, respectively. The sales of this product line are cyclical in nature.
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Three Month Period Ended March 31, 2002 Compared to Three Month Period Ended March 31, 2001.
Consolidated net sales for the three months ended March 31, 2002, increased 15 percent to $13,951,000 from $12,133,000 in 2001. The Abatix operating segment net sales grew 16 percent to $13,480,000 in 2002 and the IESI operating segment net sales increased 1 percent to $470,000 in 2002. The increase in revenue from 2001 is primarily attributable to the spreading awareness of toxic molds in homes and buildings throughout the U.S.
Gross profit in the first quarter of 2002 of $4,023,000 increased 19 percent from gross profit in 2001 of $3,387,000 primarily due to increased sales volume. The Company’s gross profit margins, expressed as a percentage of sales, were approximately 29 percent for 2002 and 28 percent for 2001. Although overall margins are expected to remain at their current levels in 2002, 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 2002 of $3,622,000 increased 24 percent from 2001 expenses of $2,930,000. These expenses increased due to higher labor costs partly in anticipation of continued growth. Selling, general and administrative expenses were 26 percent of sales for 2002 and 24 percent of sales for 2001. Selling, general and administrative expenses are expected to be in the 25 to 26 percent range for the year ended December 31, 2002.
Interest expense of $57,000 decreased $35,000 from 2001 interest expense of $92,000 primarily due to lower interest rates. 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.
The net loss for the three months ended March 31, 2002 of $227,000 or $.16 per share decreased $473,000 from net earnings of $196,000 or $.11 per share for the same period in 2001. The decrease in net earnings from 2001 is due to the implementation of FASB Statement No. 142.
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 2002 of $980,000 resulted principally from an increase in accounts payable and net earnings adjusted for non cash charges, partially offset by an increase in accounts receivable. The increase in accounts payable is a result of the increased stocking levels necessary to handle the increased revenues in the first quarter and to prepare for the normal increase in business activity during the summer months. The increase in accounts receivable is a result of an increase in first quarter 2002 sales as compared to first quarter 2001. Cash flow from operations for the entire year of 2002 is expected to be positive, although at any given point, it may be negative.
Cash used in non-operating activities during the first three months of 2002 resulted primarily from payments of notes payable to the bank. In addition, the Company purchased $163,000 of fixed assets consisting of autos, computers and furniture.
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 April 29, 2002, there are advances outstanding under this credit facility of $4,583,000. Based on the borrowing formula, the Company had the capacity to borrow an additional $3,417,000 as of April 29, 2002. 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 April 29, 2002 were $52,000. Both credit facilities are payable on demand and bear a variable rate of interest computed at the prime rate.
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 long term impact of the September 11, 2001, tragic events on the commercial construction and domestic preparedness markets, the long term impact of insurance coverage on mold remediation jobs, adverse weather conditions, inability to hire and train quality people, changes in interest rates and strong competition. In addition, further 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.
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 - None
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 13, 2002 | By: /s/Frank J. Cinatl, IV |
| | Frank J. Cinatl, IV
|
| | Vice President and Chief Financial
|
| | Officer of Registrant
|
| | Principal Accounting Officer) |
