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, 1996 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, 1996, 6,528,522 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, 1996 and December 31, 1995 3
Consolidated Statements of Income
Three and nine months ended September 30, 1996
and September 30, 1995 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and
September 30, 1995 5
Notes to Consolidated Financial
Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
II. OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 6 Exhibits and Reports on Form 8-K 11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
-------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $652,267 $486,382
Receivables, net 2,726,909 3,371,837
Inventories 1,962,817 1,793,770
Current portion of notes receivable related party 45,501 55,501
Prepaid expenses and other current assets 221,050 222,680
Settlement receivable, net 456,386
-------------------------------------------
Total current assets 6,064,930 5,930,170
PROPERTY, PLANT AND EQUIPMENT, NET 922,520 1,083,199
GOODWILL, NET 2,271,239 2,455,924
COVENANT NOT TO COMPETE, NET 116,667 160,417
DEFERRED INCOME TAXES 598,500 113,500
OTHER ASSETS 831,451 856,952
-------------------------------------------
TOTAL ASSETS $10,805,307 $10,600,162
===========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $250,000
Accounts payable $796,531 863,386
Current portion of long-term debt and
capital lease obligations 1,009,224 613,224
Other accrued expenses 512,989 871,136
-------------------------------------------
Total current liabilities 2,318,744 2,597,746
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 296,681 1,663,112
SHAREHOLDERS' EQUITY
Common stock, .01 par value per share:
Authorized, 10,000,000 shares;
Issued, 6,614,687 and 6,352,563 shares 66,147 63,526
Preferred stock, $.01 par value per share:
Authorized, 1,000,000 shares
Additional paid-in capital 9,623,941 9,360,950
Deficit (1,277,755) (2,862,721)
-------------------------------------------
8,412,333 6,561,755
Less treasury stock, 86,165 shares at cost (222,451) (222,451)
-------------------------------------------
Total shareholders' equity 8,189,882 6,339,304
-------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,805,307 $10,600,162
===========================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
4
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended Nine months ended
9/30/96 9/30/95 9/30/96 9/30/95
------------------------------- -----------------------------
<S> <C> <C> <C> <C>
NET SALES $3,000,978 $3,518,412 $9,466,821 $9,469,456
COST OF GOODS SOLD 1,365,016 1,468,608 4,245,269 4,129,939
------------------------------- -----------------------------
Gross Margin 1,635,962 2,049,804 5,221,552 5,339,517
------------------------------- -----------------------------
EXPENSES
Marketing 672,951 821,845 2,233,988 2,214,573
General & administrative 543,971 573,029 1,663,804 1,646,212
Research and development 176,676 153,508 528,292 447,369
Amortization and depreciation 160,278 157,985 489,987 434,868
------------------------------- -----------------------------
Total Expenses 1,553,876 1,706,367 4,916,071 4,743,022
------------------------------- -----------------------------
OPERATING INCOME 82,086 343,437 305,481 596,495
------------------------------- -----------------------------
OTHER REVENUE (EXPENSE)
Interest Income 3,942 4,620 11,178 13,995
Interest expense (55,200) (114,150) (189,744) (387,216)
Other income 28,998 21,066 1,053,051 99,591
------------------------------- -----------------------------
Total other revenue (expense) (22,260) (88,464) 874,485 (273,630)
------------------------------- -----------------------------
INCOME BEFORE INCOME TAXES 59,826 254,973 1,179,966 322,865
INCOME TAXES (BENEFIT) 11,000 5,000 (405,000) 9,000
------------------------------- -----------------------------
NET INCOME $48,826 $249,973 $1,584,966 $313,865
=============================== =============================
NET INCOME PER SHARE $0.01 $0.04 $0.23 $0.05
=============================== =============================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON STOCK EQUIVALENTS 7,008,020 6,660,340 6,967,740 6,550,022
=============================== =============================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
5
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
9/30/96 9/30/95
---------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $1,584,966 $313,865
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 598,945 571,631
Decrease in accounts receivable 644,928 176,031
(Increase) decrease in inventory (169,047) 424,876
Decrease in prepaid expenses and other
current assets 11,630 21,677
(Increase) in settlement receivable, net (456,386)
(Increase) decrease in other assets (49,100) 1,578
(Increase) in deferred income taxes (485,000)
(Decrease) in accounts payable and other
accrued expenses (425,002) (40,560)
---------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,255,934 1,469,098
---------------------------------------------
INVESTING ACTIVITIES
Proceeds from the sale of assets 34,100
Gain on the sale of assets (33,375)
Purchases of capital equipment (135,955) (67,756)
---------------------------------------------
NET CASH (USED) BY INVESTING
ACTIVITIES (135,230) (67,756)
---------------------------------------------
FINANCING ACTIVITIES
Net (payments) under lines of credit (250,000) (1,275,000)
Issuance of common stock pursuant to earnout agreement 202,585
Issuance of common stock pursuant to stock
purchase plan 28,273 38,270
Stock issued for warrants 34,754 22,500
Payments of long-term debt and capital leases (970,431) (196,012)
---------------------------------------------
NET CASH (USED) BY FINANCING ACTIVITIES (954,819) (1,410,242)
---------------------------------------------
NET INCREASE (DECREASE) IN CASH & CASH
EQUIVALENTS 165,885 (8,900)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 486,382 387,979
---------------------------------------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $652,267 $379,079
=============================================
</TABLE>
Supplemental cash flow information:
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
6
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of September 30, 1996, the related
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1996 and 1995 and the cash flows for the nine month periods
ended September 30, 1996 and 1995 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, 1996 and the results of operations and cash flows for the
three-month and nine-month periods ended September 30, 1996 and September 30,
1995 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 1995 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,
1996 1995
Finished goods $ 699,298 $ 645,262
Components 1,263,519 1,148,508
--------------- -------------
$ 1,962,817 $ 1,793,770
=============== =============
3. INCOME TAXES
A $485,000 tax benefit was recognized in the second quarter of 1996 from
reducing the Company's deferred tax valuation allowance and recognizing a
deferred tax asset. The
<PAGE>
7
recognized deferred tax asset is based upon utilization of net operating loss
carryforwards and the reversal of certain temporary differences.
4. SETTLEMENT OF LITIGATION
Other revenue in second quarter of 1996 included $997,096 of income related to a
settlement the Company reached in June, 1996 with a state organization involving
a technology development contract. The Company also received exclusive rights to
the contested technology. The Company received $650,000 of the $1,000,000
settlement in September, 1996 and the $350,000 balance is due to the Company in
January, 1997.
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere herein. Historical results are not necessarily
indicative of trends in operating results for any future period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations:
Nine months ended September 30, 1996 and September 30, 1995
Net sales for the nine months ended September 30, 1996 were $9,466,821 compared
to $9,469,456 in the first nine months of 1995. The relatively flat sales
resulted primarily from the increase in sales of ENCOMPASS fuel management and
compliance leak detection systems and ENCOMPASS related installation being
offset by a decrease in sales of tank testing services and moisture analyzer
equipment.
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 $200,000 at the end of the third quarter of 1996 compared to
approximately $351,000 at the end of the third quarter of 1995. The decrease in
Horizon backlog is primarily due to a decrease in tank testing sales.
Cost of goods sold was 45% of net sales in the first nine months of 1996
compared to 44% for the same period in 1995. Cost of sales as a percent of net
sales increased primarily in the tank testing operations as a result of excess
capacity of tank testing technicians.
Overall, total expenses in the first nine months of 1996 increased $173,049 or
4%, from the same period in 1995. This was primarily the result of the increase
in research and development
<PAGE>
8
expenses.
Marketing expenses increased 1%, or $19,415 in the first nine months of 1996
compared to the same period in 1995. Marketing expenses increased primarily as a
result of the increase in sales and service related activity to support the
higher level of ENCOMPASS equipment and installations related sales volume.
General and administrative expenses increased $17,592 or 1%, in the first nine
months of 1996 compared to the same period in 1995. General and administrative
expenses increased primarily from increased administrative expenses to support
increased ENCOMPASS sales and installation activity.
Research and development expenses increased $80,923 or 18%, for the first nine
months of 1996 compared to the same period of 1995. The increase in research and
development expenses was primarily the result of a planned increase in research
and development personnel to support the new product development activities for
all the Company's various product lines. Research and development expenses are
anticipated to increase in 1996 compared to 1995.
Other revenue increased $1,148,115 in the first nine months of 1996 as compared
to the same period in 1995. The increase was primarily the result of $997,096 of
other income the Company recognized in the second quarter related to a
settlement the Company reached in June, 1996 with a state organization involving
a technology development contract. The Company also received exclusive rights to
the contested technology. Other revenue also increased as a result of lower
interest expense resulting from decreased borrowing on the Company's bank lines
of credit and in long-term debt.
Income taxes decreased $414,000 in the first nine months of 1996 as compared to
the same period in 1995. The decrease was primarily the result of a $485,000 tax
benefit being recognized in the second quarter from reducing the Company's
deferred tax valuation allowance and recognizing a deferred tax asset. The
recognized deferred tax asset is based upon utilization of net operating loss
carryforwards and reversal of certain temporary differences.
Three months ended September 30, 1996 and September 30, 1995
Net sales for the third quarter ended September 30, 1996 decreased 15% to
$3,,000,978 from $3,518,412 in the third quarter of 1995. The decrease in sales
for the third quarter resulted primarily from the decrease in tank testing and
moisture analyzer sales.
Cost of goods sold was 45% of net sales in the third quarter of 1996 compared to
42% for the same period in 1995. Cost of sales as a percent of net sales
increased primarily in the tank testing operations as a result of excess
capacity of tank testing technicians.
<PAGE>
9
Overall, total expenses in the third quarter of 1996 decreased $152,491 or 9%,
from the same period in 1995. This was primarily the result of the $148,894
decrease in marketing expenses.
Marketing expenses decreased 18%, or $148,894 in the third quarter of 1996
compared to the same period in 1995. Marketing expenses decreased primarily as a
result of the decrease in variable selling expenses related to the decrease in
sales for the period.
General and administrative expenses decreased $29,058 or 5% in the third quarter
of 1996 compared to the same period in 1995. General and administrative expenses
decreased primarily in the tank testing operations as a result of reducing
personnel to respond to the declining sales.
Research and development expenses increased 15%, or $23,168 in the third quarter
of 1996 compared to the same period of 1995. The increase in research and
development expenses was primarily the result of a planned increase in research
and development personnel to support the new product development activities for
all the Company's various product lines. Research and development expenses are
anticipated to increase in 1996 compared to 1995.
Other expenses decreased $66,204 in the third quarter of 1996 compared to the
same period in 1995. The decrease in other expenses was primarily the result of
lower interest expense resulting from decreased borrowing on the Company's bank
lines of credit and long-term debt.
The Company has historically experienced and expects to continue to experience
quarterly fluctuations, potentially in a material amount, in its operating
results. A variety of factors influence the Company's operating results in a
particular period, including economic conditions in the industries served by the
Company, regulatory developments, the timing of significant orders, shipment
delays, specific features requested by the customers, the introduction of new
products by the Company and its competitors, market acceptance of new products
and enhancements of existing products, changes in the cost of materials,
disruptions in the sources of supply, seasonal variations of spending by
customers, the timing of the Company's expenditures in anticipation of future
orders and other factors, many of which are beyond the Company's control. In
addition, the Company sells a significant portion of its ENCOMPASS products to a
limited number of customers. While management believes that its relationships
with these customers are good, future orders under purchase agreements with
these customers are subject to change based on changing business conditions of
the customers. One large customer who was acquired during the second quarter of
1996, finished their re-evaluation of ENCOMPASS in October, 1996, and will to
continue to install ENCOMPASS in their convenience stores that distribute
gasoline.
Liquidity and Capital Resources:
Net working capital increased 12% to $3,746,186 in the first nine months of 1996
from $3,332,424 at December 31, 1995. The current ratio increased to 2.6 from
2.3. The increases in
<PAGE>
10
working capital and the current ratio were primarily due to the proceeds from
the settlement of the litigation.
The Company currently has two lines of credit available through Silicon Valley
Bank ("the Bank"), collateralized by accounts receivable, inventory, and
property, plant and equipment which provide for an aggregate maximum commitment
of $2,500,000 through March 15, 1997. Advances can be made against the lines
based on qualified levels of receivables and inventory. At October 20, 1996 an
aggregate amount of $1,593,836 was available under the lines of credit of which
none had been drawn. The Company was in compliance with all of the financial
covenants at September 30, 1996.
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 on a Subordinated Note to Bridge Capital which was completely paid off
in 1995. The final interest payment is to be made on October 31, 1996.
On November 17, 1995, the Company entered into a second agreement with the Bank.
Pursuant to the Loan Agreement, the Bank holds a Note with the remaining
principal amount of $452,380 at September 30, 1996. The interest rate on the
Note is prime plus 2% and the Bank holds a related warrant to purchase 62,500
shares of the Company's Common Stock at an exercise price of $2.08 per share.
Following a prepayment of $500,000 the Company paid on the Note in September,
1996, the Company is required to pay 30 remaining monthly principal payments of
$13,633 and one final payment of $13,749 in addition to monthly interest
payments from November 7, 1996 through May 7, 1999. The Note is
cross-collateralized with the Company's bank lines of credit until the Note is
fully repaid. The Note contains certain covenants, including minimum net income
levels and certain financial ratios. The Company was in compliance with all
these covenants at September 30, 1996. On a quarterly basis, half of any excess
cash flow that the Company generates is required to be used to prepay any
remaining principal balance due on this Note. Excess cash flow is defined as net
income plus non-cash expenses less capital expenditures, scheduled principal
payments and increases in net working capital.
The Company believes that cash generated from ongoing operations and the
borrowing arrangements described above will satisfy the anticipated cash
requirements of the Company's current operations over the next 12 months, though
there can be no assurance that this will be the case. The Company's ability to
continue funding its planned operations beyond the next 12 months is dependent
upon its ability to generate sufficient cash flow to meet its obligations on a
timely basis, or to obtain additional funds through equity or debt financing, or
from other sources of financing, as may be required.
<PAGE>
11
PART II. OTHER INFORMATION
Except for the historical information contained herein, the discussion in this
Report contains or may contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this Management's Discussion
and Analysis, the Company's Prospectus dated February 18, 1994 or the Company's
Report on Form 10-KSB for the year ended December 31, 1995, as well as those
factors discussed elsewhere herein.
Item 1 Legal Proceedings
Information is incorporated by reference from the Company's Report on Form
10-KSB for the year ended December 31, 1995. With regard to litigation reported
therein involving the Company, another firm, a state organization and certain
other parties, the parties reached a settlement in June 1996 under which the
Company would receive $1,000,000 in addition to exclusive rights to the
contested technology. The Company received $650,000 of this settlement in
September 1996 and is scheduled to receive the $350,000 balance in January,
1997.
Item 6 Exhibits and Reports on Form 8-K
(a)
27) Financial Data Schedule
(b) There were no reports on Form 8-K for the
quarter ended September 30, 1996
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARIZONA INSTRUMENT CORPORATION
11/5/96 /s/ John P. Hudnall
________ _______________________________________
Date John P. Hudnall, President, CEO
(Authorized officer)
11/5/96 /s/ Scott M. Carter
________ _______________________________________
Date Scott M. Carter, Vice President, CFO
(Principal financial officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS IN THE COMPANY'S 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
</LEGEND>
<CIK> 0000724904
<NAME> ARIZONA INSTRUMENT CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 652,267
<SECURITIES> 0
<RECEIVABLES> 2,883,732
<ALLOWANCES> 156,823
<INVENTORY> 1,962,817
<CURRENT-ASSETS> 6,064,930
<PP&E> 4,244,848
<DEPRECIATION> 3,322,328
<TOTAL-ASSETS> 10,805,307
<CURRENT-LIABILITIES> 2,318,744
<BONDS> 296,681
66,147
0
<COMMON> 0
<OTHER-SE> 8,123,735
<TOTAL-LIABILITY-AND-EQUITY> 10,805,307
<SALES> 9,466,821
<TOTAL-REVENUES> 9,466,821
<CGS> 4,245,269
<TOTAL-COSTS> 4,916,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189,744
<INCOME-PRETAX> 1,179,966
<INCOME-TAX> (405,000)
<INCOME-CONTINUING> 1,584,966
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,584,966
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
