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 June 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 July 20, 1995 6,179,991 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
June 30, 1995 and December 31, 1994
Consolidated Statements of Operations
Three and six months ended June 30, 1995
and June 30, 1994
Consolidated Statements of Cash Flows
Three and six months ended June 30, 1995
and June 30, 1994
Notes to Consolidated Financial
Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations
II. OTHER INFORMATION
Item 1 Legal Proceedings
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1995 1994
------------------------
CURRENT ASSETS
Cash and cash equivalents $ 352,044 $ 387,979
Receivables, net 3,845,721 3,862,258
Inventories 1,880,913 2,190,747
Current portion of notes receivable related 6,000 6,000
Prepaid expenses and other current assets 266,150 283,819
----------- -----------
Total current assets 6,350,828 6,730,803
PROPERTY, PLANT AND EQUIPMENT, NET 1,096,369 1,237,882
GOODWILL, NET 2,579,180 2,702,357
COVENANT NOT TO COMPETE, NET 189,583 218,750
OTHER ASSETS 1,009,273 1,027,416
NOTE RECEIVABLE RELATED PARTY 45,000 49,502
----------- -----------
TOTAL ASSETS $11,270,233 $11,966,710
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 1,000,000 $ 1,625,000
Accounts payable 637,826 816,361
Current portion of long-term debt and
capital lease obligations 2,020,265 1,841,383
Other accrued expenses 885,741 745,747
----------- -----------
Total current liabilities 4,543,832 5,028,491
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 884,389 1,199,621
SHAREHOLDERS' EQUITY
Common stock, .01 par value per share:
Authorized, 10,000,000 shares;
Issued, 6,266,156 and 6,195,484 shares 62,661 61,955
Preferred stock, $.01 par value per share:
Authorized, 1,000,000 shares
Additional paid-in capital 9,333,216 9,294,400
Deficit (3,331,414) (3,395,306)
----------- -----------
6,064,463 5,961,049
Less treasury stock, 86,165 shares at cost (222,451) (222,451)
----------- -----------
Total shareholders' equity 5,842,012 5,738,598
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,270,233 $11,966,710
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three months ended Six months ended
6/30/95 6/30/94 6/30/95 6/30/94
---------------------- ----------------------
<S> <C> <C> <C> <C>
NET SALES $ 3,123,952 $ 3,136,701 $ 5,951,044 $ 5,935,687
COST OF GOODS SOLD 1,338,056 1,489,104 2,661,331 2,751,798
----------- ----------- ----------- -----------
Gross Margin 1,785,896 1,647,597 3,289,713 3,183,889
----------- ----------- ----------- -----------
EXPENSES
Marketing 721,896 920,368 1,392,728 1,663,937
General & administrative 560,208 604,734 1,073,183 1,204,361
Research and development 142,304 83,897 293,861 123,292
Amortization and depreciation 139,286 150,378 276,883 285,636
----------- ----------- ----------- -----------
Total Expenses 1,563,694 1,759,377 3,036,655 3,277,226
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 222,202 (111,780) 253,058 (93,337)
----------- ----------- ----------- -----------
OTHER REVENUE (EXPENSE)
Interest Income 4,545 2,816 9,375 2,816
Interest expense (133,686) (119,284) (273,066) (226,805)
Other income 50,035 30,569 78,525 33,320
----------- ----------- ----------- -----------
Total other expense (79,106) (85,899) (185,166) (190,669)
INCOME (LOSS) BEFORE INCOME TAXES 143,096 (197,679) 67,892 (284,006)
INCOME TAXES 3,000 0 4,000 1,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 140,096 ($197,679) $63,892 ($285,006)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE $ 0.02 ($0.04) $0.01 ($0.05)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON STOCK EQUIVALENTS 6,466,126 6,165,979 6,407,151 6,206,302
=========== =========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
6/30/95 6/30/94
-----------------------
OPERATING ACTIVITIES
NET INCOME (LOSS) $ 63,892 ($285,006)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
Depreciation and amortization 370,295 410,885
Decrease (increase) in accounts receivable 16,537 (29,230)
Decrease (increase) in inventory 309,834 (296,169)
Decrease (increase) in prepaid expenses and
other current assets 17,669 (162,617)
Decrease (increase) in other assets 2,749 (315,585)
(Decrease) increase in accounts payable and other
accrued expenses (38,541) 41,703
-------- --------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 742,435 (636,019)
--------- ---------
INVESTING ACTIVITIES
Purchases of capital equipment (56,542) (158,934)
--------- ---------
NET CASH (USED) BY INVESTING
ACTIVITIES (56,542) (158,934)
--------- ---------
FINANCING ACTIVITIES
Net (payments) borrowings under lines of cre (625,000) 550,000
Stock issued for warrants 22,501
Sale of common stock, net proceeds (43,308)
Issuance of common stock pursuant to stock
purchase plan 17,021 20412
Payments of long-term debt and capital lease (136,350) (55,153)
--------- ---------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (721,828) 471,951
--------- ---------
NET (DECREASE) IN CASH & CASH EQUIVALENTS (35,935) (323,002)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 387,979 494,760
--------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 352,044 $ 171,758
========= =========
Supplemental cash flow information:
Property, plant and equipment acquired through
capital lease obligations $ 198,963
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of June 30, 1995 and the consolidated
statements of operations and cash flows for the three-month and six-month
periods ended June 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
June 30, 1995 and the results of operations and cash flows for the three-month
and six-month periods ended June 30, 1995 and June 30, 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:
June 30, December 31,
1995 1994
--------- -----------
Finished goods $ 733,428 $ 832,214
Components 1,147,485 1,358,533
---------- ----------
$1,880,913 $2,190,747
========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations:
Six months ended June 30, 1995 and June 30, 1994
Net sales for the six months ended June 30, 1995 increased less than 1% to
$5,951,044 from $5,935,687 in the first six months of 1994. The increase in
sales resulted primarily from the increase in domestic equipment sales due to
new product introductions 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 $596,000 at the end of the second quarter of 1995 compared to $705,000 at
the end of the second quarter of 1994. The decrease in backlog resulted
primarily from the decrease in tank testing sales in the Eastern U.S..
Cost of goods sold was 45% of net sales in the first six months of 1995 compared
to 46% 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 six months of 1995 has been accomplished with significantly fewer
technicians and much higher productivity than in the same period in 1994. Cost
of goods sold is anticipated to decrease in the second half of 1995 as tank
testing sales and utilization increase further.
Overall, total expenses in the first six months of 1995 decreased $240,571, or
7%, from the same period in 1994. This was primarily the result of the $402,387
decrease in marketing and general and administrative expenses related to the
1994 restructuring being partially offset by the $170,569 increase in research
and development expenses.
Marketing expenses decreased 16%, or $271,209 in the first six 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.
General and administrative expenses decreased $131,178, or 11%, in the first six
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 $170,569 or 138%, for the first six
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 $5,503 or 3%, in the first six months of 1995 as
compared to the same period in 1994. The decrease was primarily the result of
higher interest expense on increased borrowing on the bank lines of credit being
offset by gains on the sale of demonstration moisture analyzer products being
phased out.
Three months ended June 30, 1995 and June 30, 1994
Net sales for the three months ended June 30, 1995 decreased less than 1% to
$3,123,952 from $3,136,701 for the three months ended June 30, 1994. The slight
decrease in sales resulted primarily from the increase in domestic equipment
sales more than offsetting a decrease in tank testing sales.
Cost of goods sold was 43% of net sales in the second quarter of 1995 compared
to 47% 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 second 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 second quarter of 1995 decreased $195,683, or
11%, from the same period in 1994. This was primarily the result of the $242,998
decrease in marketing and general and administrative expenses related to the
1994 restructuring being partially offset by the $58,407 increase in research
and development expenses.
Marketing expenses decreased 22%, or $198,472 in the second 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 $44,526, or 7%, in the second
quarter 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 $58,407, or 70%, in the second
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 $6,793 or 8%, in the second quarter of 1995 as compared
to the same period in 1994. The decrease was primarily the result of higher
interest expense on increased borrowing on the bank lines of credit offset by
gains on the sale of demonstration moisture analyzer products being phased out.
Liquidity and Capital Resources:
Net working capital increased 6% to $1,806,996 in the first six months of 1995
from $1,702,312 at December 31, 1994. The current ratio increased from 1.3 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 July 21, 1995 an aggregate of $2,435,139 was available under
the lines of credit of which $900,000 had been drawn leaving $1,535,139. The
Company was in compliance with all of the financial covenants at June 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.
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 June
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 1. Legal Proceedings
The Company was a defendant in an action brought by Teledyne Industries, Inc.,
filed on March 24, 1992 in the United States District Court, Northern District
of Texas. The suit was dismissed with prejudice by order of the Court on April
12, 1995.
Item 5. Other Information
Effective May 5, 1995, the exercise prices of substantially all employee options
outstanding under the Company's various option plans were reduced to $.92 per
share, equalling the fair market value of the Company's Common Stock as of the
date of the repricing. Exercise prices of options prior to the repricing ranged
from $2.44 to $1.75. The replacement options vest 20% per year over a five year
period and expire on May 5, 2005.
On May 5, 1995 options to acquire 357,064 shares of the Company's Common Stock
at a per-share price of $.92 were granted to various key employees of the
Company. The options vest 20% per year over a five year period and expire on May
5, 2005. Also, under the formula grant provision of the Company's 1991 Stock
Option Plan, options for 2,500 shares exercisable at $.91 per share were granted
to each of five non-employee directors effective January 1, 1995.
Item 6 Exhibits and Reports on Form 8-K
(b) There were no reports on Form 8-K for the
quarter ended June 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
July 31, 1995 /s/ John P. Hudnall
- ----------------------- -------------------------------------
Date John P. Hudnall, President, CEO
(Authorized officer)
July 31, 1995 /s/ Scott M. Carter
- ----------------------- -------------------------------------
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 352,044
<SECURITIES> 0
<RECEIVABLES> 4,023,951
<ALLOWANCES> 178,230
<INVENTORY> 1,880,913
<CURRENT-ASSETS> 6,350,828
<PP&E> 3,420,930
<DEPRECIATION> 2,324,561
<TOTAL-ASSETS> 11,270,233
<CURRENT-LIABILITIES> 4,543,832
<BONDS> 381,536
<COMMON> 62,661
0
0
<OTHER-SE> 5,779,351
<TOTAL-LIABILITY-AND-EQUITY> 11,270,233
<SALES> 5,951,044
<TOTAL-REVENUES> 5,951,044
<CGS> 2,661,331
<TOTAL-COSTS> 3,036,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 273,066
<INCOME-PRETAX> 67,892
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 63,892
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,892
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
