SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995 Commission File Number
0-12575
Arizona Instrument Corporation
(Exact name of registrant as specified in its charter)
Delaware 86-0410138
(State of incorporation) (I.R.S. Employer identification
number)
4114 East Wood Street, Phoenix, Arizona 85040-1941
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (602) 470-1414
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 and 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
---- ----
As of October 20, 1995 6,261,398 shares of Common Stock ($0.01 par value) were
outstanding.
<PAGE>
ARIZONA INSTRUMENT CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets
September 30, 1995 and December 31, 1994 III-3
Consolidated Statements of Operations
Three and nine months ended September 30,
1995 and September 30, 1994 III-4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1995
and September 30, 1994 III-5
Notes to Consolidated Financial
Statements III-6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations III-7
II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K III-10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
III-3
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 1995 1994
----------------------------
CURRENT ASSETS
Cash and cash equivalents $ 379,079 $ 387,979
Receivables, net 3,686,227 3,862,258
Inventories 1,765,871 2,190,747
Current portion of notes receivable related party 6,000 6,000
Prepaid expenses and other current assets 262,142 283,819
----------------------------
Total current assets 6,099,319 6,730,803
PROPERTY, PLANT AND EQUIPMENT, NET 1,010,986 1,237,882
GOODWILL, NET 2,517,592 2,702,357
COVENANT NOT TO COMPETE, NET 175,000 218,750
OTHER ASSETS 981,875 1,027,416
NOTE RECEIVABLE RELATED PARTY 45,000 49,502
----------------------------
TOTAL ASSETS $10,829,772 $11,966,710
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 350,000 $ 1,625,000
Accounts payable 698,305 816,361
Current portion of long-term debt and
capital lease obligations 2,024,499 1,841,383
Other accrued expenses 823,243 745,747
----------------------------
Total current liabilities 3,896,047 5,028,491
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 820,493 1,199,621
SHAREHOLDERS' EQUITY
Common stock, .01 par value per share:
Authorized, 10,000,000 shares;
Issued, 6,347,563 and 6,195,484 shares 63,475 61,955
Preferred stock, $.01 par value per share:
Authorized, 1,000,000 shares
Additional paid-in capital 9,353,649 9,294,400
Deficit (3,081,441) (3,395,306)
----------------------------
6,335,683 5,961,049
Less treasury stock, 86,165 shares at cost (222,451) (222,451)
----------------------------
Total shareholders' equity 6,113,232 5,738,598
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,829,772 $11,966,710
============================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
III-4
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three months ended Nine months ended
9/30/95 9/30/94 9/30/95 9/30/94
--------------------- --------------------
<S> <C> <C> <C> <C>
NET SALES $ 3,518,412 $ 3,308,233 $ 9,469,456 $ 9,243,920
COST OF GOODS SOLD 1,468,608 1,802,925 4,129,939 4,554,723
------------------------- -------------------------
Gross Margin 2,049,804 1,505,308 5,339,517 4,689,197
------------------------- -------------------------
EXPENSES
Marketing 821,845 1,099,957 2,214,573 2,763,894
General & administrative 573,029 703,902 1,646,212 1,908,263
Research and development 153,508 136,232 447,369 259,524
Amortization and depreciation 157,985 157,669 434,868 443,305
Restructuring costs 863,837 863,837
------------------------- -------------------------
Total Expenses 1,706,367 2,961,597 4,743,022 6,238,823
------------------------- -------------------------
OPERATING INCOME (LOSS) 343,437 (1,456,289) 596,495 (1,549,626)
------------------------- -------------------------
OTHER REVENUE (EXPENSE)
Interest Income 4,620 324 13,995 3,140
Interest expense (114,150) (136,569) (387,216) (363,374)
Other income 21,066 2,801 99,591 36,121
------------------------- -------------------------
Total other expense (88,464) (133,444) (273,630) (324,113)
------------------------- -------------------------
INCOME (LOSS) BEFORE INCOME TAXES 254,973 (1,589,733) 322,865 (1,873,739)
INCOME TAXES 5,000 1,000 9,000 2,000
------------------------- -------------------------
NET INCOME (LOSS) $ 249,973 ($1,590,733) $ 313,865 ($1,875,739)
========================= =========================
NET INCOME (LOSS) PER SHARE $ 0.04 ($ 0.25) $ 0.05 ($ 0.30)
========================= =========================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON STOCK EQUIVALENTS 6,660,340 6,168,270 6,550,022 6,190,314
========================= =========================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
III-5
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
9/30/95 9/30/94
------------------------
OPERATING ACTIVITIES
NET INCOME (LOSS) $ 313,865 ($1,875,739)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
Depreciation and amortization 571,631 639,148
Decrease (increase) in accounts receivable 118,555 (442,619)
Provision for losses on receivables 57,476 76,200
Decrease (increase) in inventory 424,876 (21,603)
Provision for inventory obsolescence 50,000
Decrease in prepaid expenses and
other current assets 21,677 121,560
Decrease (increase) in other assets 1,578 (329,217)
(Decrease) increase in accounts payable and other
accrued expenses (40,560) 201,129
Non cash restructuring charges 747,995
------------------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 1,469,098 (833,146)
------------------------
INVESTING ACTIVITIES
Purchases of capital equipment (67,756) (346,641)
------------------------
NET CASH (USED) BY INVESTING
ACTIVITIES (67,756) (346,641)
------------------------
FINANCING ACTIVITIES
Net (payments) borrowings under lines of credit (1,275,000) 825,000
Proceeds from exercise of warrants 22,500
Sale of common stock, net proceeds (43,308)
Issuance of common stock pursuant to stock
purchase plan 38,270 44,267
Payments of long-term debt and capital leases (196,012) (30,488)
------------------------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (1,410,242) 795,471
------------------------
NET (DECREASE) IN CASH & CASH EQUIVALENTS (8,900) (384,316)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 387,979 494,760
------------------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 379,079 $ 110,444
========================
Supplemental cash flow information:
Property, plant and equipment acquired through
capital lease obligations $ 258,771
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
III-6
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of September 30, 1995, the consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 1995 and 1994 and the consolidated statements of cash flows for
the nine-month periods ending September 30, 1995 and 1994 have been prepared by
the Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position at September 30, 1995, the results of operations for the
three-month and nine-month periods ended September 30, 1995 and September 30,
1994 and the cash flows for the nine-month periods ended September 30, 1995 and
1994 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's 1994 Report on Form 10-KSB. The results of operations for the
interim periods are not necessarily indicative of the results to be obtained for
the entire year.
2. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1995 1994
Finished goods $ 611,920 $ 832,214
Components 1,153,951 1,358,533
----------- -----------
$ 1,765,871 $ 2,190,747
=========== ===========
<PAGE>
III-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations:
Nine months ended September 30, 1995 and September 30, 1994
Net sales for the nine months ended September 30, 1995 increased 2% to
$9,469,456 from $9,243,920 in the first nine months of 1994. The increase in
sales resulted primarily from the increase in domestic Computrac moisture
analyzer and ENCOMPASS fuel management and leak detection equipment sales more
than offsetting a decrease in tank testing sales. Tank testing sales decreased
primarily as a result of the reorganization in 1994 to redirect the sales focus
from the Eastern U.S. back to the Western U.S..
Historically, due to the relatively short time period between receipt of
customer equipment orders and shipments, the Company's backlog for equipment
orders has been quite low. However, backlog for Horizon tank testing services
was approximately $351,000 at the end of the third quarter of 1995 compared to
approximately $349,000 at the end of the third quarter of 1994.
Cost of goods sold was 44% of net sales in the first nine months of 1995
compared to 49% for the same period in 1994. Gross margin increased primarily
from higher utilization of the tank testing field technicians. Lower tank
testing sales in the first nine months of 1995 has been accomplished with
significantly fewer technicians and much higher productivity than in the same
period in 1994.
Overall, total expenses in the first nine months of 1995 decreased $1,495,801,
or 24%, from the same period in 1994. This was primarily the result of the
decrease in the one-time restructuring costs of $863,837 in the third quarter of
1994 to zero in 1995. The restructuring costs were related to formally
restructuring the Environmental Technology Group (ETG) and consisted primarily
of the write down of inventory, patents and related severance expenses. Total
expenses also decreased $811,372 in marketing and general and administrative
expenses primarily in the restructured tank testing operations.
Marketing expenses decreased 20%, or $549,321 in the first nine months of 1995
compared to the same period in 1994. Marketing expenses decreased primarily as a
result of the decrease in tank testing sales personnel in the Eastern United
States which the Company anticipates will be permanent.
<PAGE>
III-8
General and administrative expenses decreased $262,051, or 14%, in the first
nine months of 1995 compared to the same period in 1994. General and
administrative expenses decreased primarily from decreased administrative
personnel and expenses in the tank testing operations.
Research and development expenses increased $187,845, or 72%, in the first nine
months of 1995 compared to the same period of 1994. The increase in research and
development expenses was primarily the result of capitalizing some final stage
development costs for the new ENCOMPASS product in 1994. There were no similar
final stage development costs capitalized in 1995.
Other expenses decreased $50,483 or 16%, in the first nine months of 1995 as
compared to the same period in 1994. The decrease was primarily the result of
the interest expense on borrowings on the bank lines of credit being offset by
increased gains on the sale of demonstration moisture analyzer products being
phased out.
Three months ended September 30, 1995 and September 30, 1994
Net sales for the three months ended September 30, 1995 increased 6% to
$3,518,412 from $3,308,233 for the three months ended September 30, 1994. The
increase in sales resulted primarily from the increase in domestic Computrac and
ENCOMPASS equipment sales more than offsetting a decrease in tank testing sales.
Cost of goods sold was 42% of net sales in the third quarter of 1995 compared to
54% for the same period in 1994. Gross margin increased primarily from higher
utilization of the tank testing field technicians. Lower tank testing sales in
the third quarter of 1995 has been accomplished with significantly fewer
technicians and much higher productivity than in the same period in 1994.
Overall, total expenses in the third quarter of 1995 decreased $1,255,230 or
42%, from the same period in 1994. This was primarily the result of the decrease
in the one-time restructuring costs of $863,837 in the third quarter of 1994 to
zero in 1995. Total expenses also decreased $408,985 in marketing and general
and administrative expenses primarily in the restructured tank testing
operations.
Marketing expenses decreased 25%, or $278,112 in the third quarter of 1995
compared to the same period in 1994. Marketing expenses decreased primarily as a
result of the decrease in tank testing sales personnel in the Eastern United
States which the Company anticipates will be permanent.
General and administrative expenses decreased $130,873, or 19%, in the third
quarter of 1995 compared to the same period in 1994. General and administrative
expenses decreased primarily from
<PAGE>
III-9
decreased administrative personnel and expenses in the tank testing
operations.
Research and development expenses increased $17,276, or 13%, in the third
quarter of 1995 compared to the same period of 1994. The increase in research
and development expenses was primarily the result of capitalizing some final
stage development costs for the new ENCOMPASS product in 1994. There were no
similar final stage development costs capitalized in 1995.
Other expenses decreased $44,980 or 34%, in the third quarter of 1995 as
compared to the same period in 1994. The decrease was primarily the result of
lower interest expense on decreased borrowings on the bank lines of credit and
increased gains on the sale of demonstration moisture analyzer products being
phased out.
Liquidity and Capital Resources:
Net working capital increased 29% to $2,203,272 in the first nine months of 1995
from $1,702,312 at December 31, 1994. The current ratio increased from 1.6 to
1.4. The increases in working capital and the current ratio were primarily due
to increased cash flow from operations, reducing inventory and reducing
borrowing under the bank lines of credit.
The Company currently has two lines of credit available, collateralized by
accounts receivable, inventory, and property, plant and equipment which provide
for an aggregate maximum commitment of $2,750,000 through March 15, 1996.
Advances can be made against the lines based on qualified levels of receivables
and inventory. At October 20, 1995 an aggregate of $2,310,676 was available
under the lines of credit of which $250,000 had been drawn leaving $2,060,676.
The Company was in compliance with all of the financial covenants at September
30, 1995.
On July 6, 1989, the Company entered into an agreement with Bridge Capital
Investors II ("Bridge"). Pursuant to the Note Agreement as amended through March
30, 1995, Bridge holds 12% convertible subordinated notes (the "Note") in the
principal amount of $1,778,750 with a maturity date of June 30, 1996. As a
result of common stock issued in conjunction with the acquisition of Horizon on
September 30, 1992 and related financing and other transactions, the Note is now
convertible into 643,495 shares of common stock at $2.76 per share. The Company
is required to pay principal of $616,667 on June 30, 1995 and December 31, 1995
and a final payment of $545,416 on June 30, 1996. The Company has a four-month
extension on the June 30, 1995 principal payment. For the payment due June 30,
1995 the Company is taking advantage of the extension until October 30, 1995.
Interest on the unpaid principal amount of the Note is due and payable on the
last day of each calendar quarter.
<PAGE>
III-10
The Note Agreement requires that the Company maintain net worth after December
31, 1994 of $5,500,000. The Company was in compliance with this covenant at
September 30, 1995. The Note Agreement further provides that the Company shall
have the right to prepay the notes at any time if prepayment is accompanied by
the issuance of warrants to purchase common stock at the rate of 200,000
warrants for each $1,000,000 of principal which is prepaid. If issued, the
exercise price of such warrants would equal the lower of the conversion price of
the notes or the average market price of the common stock for the thirty days
prior to prepayment. The Note Agreement also provides that the interest rate on
the notes shall increase to 16% upon future defaults, if any. Bridge has the
right to accelerate payment of the entire indebtedness upon a default in
principal payments. As long as $300,000 of principal under the Note remains
outstanding, the Company may not declare or pay cash dividends on its common
stock unless, after giving effect to any such action, the amount expended by the
Company will not exceed 50% of the cumulative consolidated net income of the
Company accrued from the date of the Agreement.
The remaining scheduled principal payments on the Bridge Note in 1995 total
$1,233,334. The Company is seeking to refinance the Bridge Note during 1995,
although there can be no assurances of such. The Company has prepared cash flow
projections that are based on budgeted sales and expenses, which management
believes are reasonable based on historical trends. These projections are
susceptible to variances in customer order rates, accounts receivable collection
days and inventory turns. The cash flow forecasts indicate that the Company will
be able to meet its obligations even if the refinancing does not occur. The
Company believes that it will be able to compensate for any unanticipated cash
flow deficiencies through advances on the bank lines of credit and reduced
discretionary expenses.
On April 14, 1995, the Company entered into an agreement with Classic Syndicate,
Inc. ("Classic"). Pursuant to the Subordinated Loan Agreement, Classic holds a
10% Note in the principal amount of $375,000 with a maturity date of April 30,
1997. The funds were to be used exclusively for the April 30, 1995 principal
payment to Bridge. Semiannual interest payments are to be made on October 30,
1995, April 30, 1996 and October 30, 1996.
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(b) There were no reports on Form 8-K for the
quarter ended September 30, 1995
<PAGE>
SIGNATURES
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.
ARIZONA INSTRUMENT CORPORATION
October 27, 1995 /S/ John P. Hudnall, President, CEO
- --------------------- ---------------------------------------
Date John P. Hudnall, President, CEO
(Authorized officer)
October 27, 1995 /S/ Scott M. Carter, Vice President, CFO
- -------------------- -----------------------------------------
Date Scott M. Carter, Vice President, CFO
(Principal financial officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000724904
<NAME> ARIZONA INSTRUMENT CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 379,079
<SECURITIES> 0
<RECEIVABLES> 3,876,846
<ALLOWANCES> 190,619
<INVENTORY> 1,765,871
<CURRENT-ASSETS> 6,099,319
<PP&E> 3,368,002
<DEPRECIATION> 2,357,016
<TOTAL-ASSETS> 10,829,772
<CURRENT-LIABILITIES> 3,896,047
<BONDS> 381,618
<COMMON> 63,475
0
0
<OTHER-SE> 6,049,757
<TOTAL-LIABILITY-AND-EQUITY> 10,829,772
<SALES> 9,469,456
<TOTAL-REVENUES> 9,469,456
<CGS> 4,129,939
<TOTAL-COSTS> 4,743,022
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 387,216
<INCOME-PRETAX> 322,865
<INCOME-TAX> 9,000
<INCOME-CONTINUING> 313,865
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 313,865
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
