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, 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 July 20, 1996, 6,521,180 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, 1996 and December 31, 1995 II-3
Consolidated Statements of Operations
Three and six months ended June 30, 1996 and
June 30, 1995 II-4
Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and
June 30, 1995 II-5
Notes to Consolidated Financial
Statements II-6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations II-7
II. OTHER INFORMATION
Item 1 Legal Proceedings II-11
Item 4 Submission of Matters to a Vote of Security Holders II-11
Item 6 Exhibits and Reports on Form 8-K II-12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
II-3
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 359,151 $ 486,382
Receivables, net 3,035,789 3,371,837
Inventories 1,877,547 1,793,770
Current portion of notes receivable related party 45,501 55,501
Prepaid expenses and other current assets 314,412 222,680
Settlement receivable, net 997,096
------------- ------------
Total current assets 6,629,496 5,930,170
PROPERTY, PLANT AND EQUIPMENT, NET 949,883 1,083,199
GOODWILL, NET 2,332,827 2,455,924
COVENANT NOT TO COMPETE, NET 131,250 160,417
DEFERRED INCOME TAXES 598,500 113,500
OTHER ASSETS 833,965 856,952
------------- ------------
TOTAL ASSETS $ 11,475,921 $ 10,600,162
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 150,000 $ 250,000
Accounts payable 751,251 863,386
Current portion of long-term debt and
capital lease obligations 1,002,224 613,224
Other accrued expenses 484,843 871,136
------------- ------------
Total current liabilities 2,388,318 2,597,746
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 953,301 1,663,112
SHAREHOLDERS' EQUITY
Common stock, .01 par value per share:
Authorized, 10,000,000 shares;
Issued, 6,607,345 and 6,352,563 shares 66,073 63,526
Preferred stock, $.01 par value per share:
Authorized, 1,000,000 shares
Additional paid-in capital 9,617,261 9,360,950
Deficit (1,326,581) (2,862,721)
------------- ------------
8,356,753 6,561,755
Less treasury stock, 86,165 shares at cost (222,451) (222,451)
------------- ------------
Total shareholders' equity 8,134,302 6,339,304
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,475,,921 $ 10,600,162
============= ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
II-4
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
6/30/96 6/30/95 6/30/96 6/30/95
-------------------------- ----------------------------
<S> <C> <C> <C> <C>
NET SALES $ 3,181,412 $ 3,123,952 $ 6,465,843 $ 5,951,044
COST OF GOODS SOLD 1,404,355 1,338,056 2,880,253 2,661,331
----------- ----------- ----------- -----------
Gross Margin 1,777,057 1,785,896 3,585,590 3,289,713
----------- ----------- ----------- -----------
EXPENSES
Marketing 787,212 721,896 1,561,037 1,392,728
General & administrative 557,915 560,208 1,119,833 1,073,183
Research and development 173,287 142,304 351,616 293,861
Amortization and depreciation 163,645 139,286 329,709 276,883
----------- ----------- ----------- -----------
Total Expenses 1,682,059 1,563,694 3,362,195 3,036,655
----------- ----------- ----------- -----------
OPERATING INCOME 94,998 222,202 223,395 253,058
----------- ----------- ----------- -----------
OTHER REVENUE (EXPENSE)
Interest Income 4,061 4,545 7,236 9,375
Interest expense (63,866) (133,686) (134,544) (273,066)
Other income (expense) 1,004,347 50,035 1,024,053 78,525
----------- ----------- ----------- -----------
Total other revenue (expense) 944,542 (79,106) 896,745 (185,166)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,039,540 143,096 1,120,140 67,892
INCOME TAXES (BENEFIT) (418,000) 3,000 (416,000) 4,000
----------- ----------- ----------- -----------
NET INCOME $ 1,457,540 $ 140,096 $ 1,536,140 $ 63,892
=========== =========== =========== ===========
NET INCOME PER SHARE $ 0.21 $ 0.02 $ 0.22 $ 0.01
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON STOCK EQUIVALENTS 7,040,227 6,466,126 6,960,605 6,407,151
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
II-5
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
6/30/96 6/30/95
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 1,536,140 $ 63,892
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 409,882 370,295
Decrease in accounts receivable 336,048 16,537
(Increase) decrease in inventory (83,777) 309,834
(Increase) decrease in prepaid expenses and
other current assets (81,731) 17,669
(Increase) in settlement receivable, net (997,096)
(Increase) decrease in other assets (26,774) 2,749
(Increase) in deferred income taxes (485,000)
(Decrease) in accounts payable and other
accrued expenses (498,428) (38,541)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 109,264 742,435
----------- -----------
INVESTING ACTIVITIES
Proceeds from the sale of assets 23,700
Gain on the sale of assets (23,200)
Purchases of capital equipment (75,042) (56,542)
----------- -----------
NET CASH (USED) BY INVESTING
ACTIVITIES (74,542) (56,542)
----------- -----------
FINANCING ACTIVITIES
Net (payments) under lines of credit (100,000) (625,000)
Issuance of common stock pursuant to earnout agreement 202,585
Issuance of common stock pursuant to stock
purchase plan 28,273 17,021
Stock issued for warrants 28,000 22,501
Payments of long-term debt and capital leases (320,811) (136,350)
----------- -----------
NET CASH (USED) BY FINANCING ACTIVITIES (161,953) (721,828)
----------- -----------
NET (DECREASE) IN CASH & CASH EQUIVALENTS (127,231) (35,935)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 486,382 387,979
----------- -----------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 359,151 $ 352,044
=========== ===========
Supplemental cash flow information:
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
II-6
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of June 30, 1996, the consolidated statements
of operations and cash flows for the three-month and six-month periods ended
June 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 June 30, 1996
and the results of operations and cash flows for the three-month and six-month
periods ended June 30, 1996 and June 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:
June 30, December 31,
1996 1995
Finished goods $ 611,764 $ 645,262
Components 1,265,783 1,148,508
------------- -------------
$ 1,877,547 $ 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>
II-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 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 in the Jerome toxic gas monitors product line.
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:
Six months ended June 30, 1996 and June 30, 1995
Net sales for the six months ended June 30, 1996 increased 9% to $6,465,843 from
$5,951,044 in the first six months of 1995. The increase in sales resulted
primarily from the increase in ENCOMPASS fuel management and compliance leak
detection systems and ENCOMPASS related installation sales.
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 $295,000 at the end of the second quarter of 1996 compared to $596,000 at
the end of the second 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 six months of 1996 compared
to 45% for the same period in 1995.
Overall, total expenses in the first six months of 1996 increased $325,540 or
11%, from the same period in 1995. This was primarily the result of the $168,309
increase in marketing expenses to support the higher sales and installations of
the ENCOMPASS systems and the $57,755 increase in research and development
expenses.
<PAGE>
II-8
Marketing expenses increased 12%, or $168,309 in the first six 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.
Marketing expenses are anticipated to increase in 1996 compared to 1995.
General and administrative expenses increased $46,650 or 4%, in the first six
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 $57,755 or 20%, for the first six
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 $1,081,911 in the first six 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 in the Jerome product line. Other revenue also
increased as a result of lower interest expense on decreased borrowing on the
Company's bank lines of credit and in long-term debt.
Income taxes decreased $420,000 in the first six 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 June 30, 1996 and June 30, 1995
Net sales for the second quarter ended June 30, 1996 increased 2% to $3,181,412
from $3,123,952 in the second quarter of 1995. The increase in sales resulted
primarily from the increase in ENCOMPASS fuel management and compliance leak
detection systems and ENCOMPASS related installation sales.
Cost of goods sold was 44% of net sales in the second quarter of 1996 compared
to 43% for the same period in 1995.
Overall, total expenses in the second quarter of 1996 increased $118,365 or 8%,
from the same
<PAGE>
II-9
period in 1995. This was primarily the result of the $65,316 increase in
marketing expenses to support the higher sales and installations of the
ENCOMPASS systems and the $30,983 increase in research and development expenses.
Marketing expenses increased 9%, or $65,316 in the second quarter 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.
Marketing expenses are anticipated to increase in 1996 compared to 1995.
General and administrative expenses decreased $2,293 or in the second quarter of
1996 compared to the same period in 1995.
Research and development expenses increased $30,983 or 22%, in the second
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 revenue increased $1,023,648 in the second quarter 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 in the Jerome product line. Other revenue also
increased as a result of lower interest expense on decreased borrowing on the
Company's bank lines of credit and long-term debt.
Income taxes decreased $421,000 in the second quarter 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.
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
<PAGE>
II-10
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 was acquired during the second quarter of 1996 and consequently
future purchases of ENCOMPASS by this customer are currently being re-evaluated
by the new parent company.
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.
Liquidity and Capital Resources:
Net working capital increased 27% to $4,241,178 in the first half of 1996 from
$3,332,424 at December 31, 1995. The current ratio increased to 2.8 from 2.3.
The increases in working capital and the current ratio were primarily due to the
increase in the settlement receivable.
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 July 20, 1996 an
aggregate of $1,836,841 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 June 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. Semi-annual interest payments are to be made on April 30, 1996 and
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 in the principal amount of
$1,041,667 at an interest rate of prime plus 2% and a warrant to purchase 62,500
shares of the Company's Common Stock at an exercise price of $2.08 per share.
The Company is required to pay 42 monthly principal payments of $29,762 in
addition to monthly interest payments from December 7, 1995 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 June 30, 1996. On a quarterly basis, half of any
excess cash flow that the Company
<PAGE>
II-11
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 though equity or debt financing, or
from other sources of financing, as may be required.
PART II. OTHER INFORMATION
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 have agreed to a settlement under which the Company
will receive $1,000,000 as well as exclusive rights to the contested technology.
Item 4 Submission of Matters to a Vote of Security Holders
a) The 1996 Annual Meeting of Stockholders of the Company (the "Meeting")
was held on June 27, 1996.
b) At the Meeting Mr. Quinn Johnson and Mr. S. Thomas Emerson were
re-elected to three-year terms as directors of the Company. Continuing
directors include John P. Hudnall, Walfred R. Raisanen, Richard Long,
Patricia Onderdonk and Stanley H. Weiss.
c) Following is a brief description of the matters voted upon at the
Meeting and the results of the voting.
(1) Election of Quinn Johnson to the Board of Directors: 5,292,154
votes for, 392,799 votes withheld.
(2) Election of S. Thomas Emerson to the Board of Directors: 5,620,454
votes for, 64,499 votes withheld.
(3) Proposal to approve an amendment of the Company's Employee Stock
Purchase
<PAGE>
II-12
Plan to increase the number of shares available thereunder by 200,000
shares: 2,912,872 votes for, 171,577 votes against, 48,033 votes
abstained, 0 not voted.
(4) Approval of an amendment of the Company's Employee Stock Purchase
Plan to permit participation of senior officers: 4,677,982 votes for,
212,647 votes against, 56,573 votes abstained, 0 not voted.
(5) Proposal to approve an amendment of the Company's 1991 Stock
Purchase Plan to increase the number of shares available thereunder by
300,000 shares: 2,204,691 votes for, 870,108 votes against, 56,983
votes abstained, 0 not voted.
(6) Ratification of the appointment of Deloitte and Touche as the
independent auditors of the Company for the year ending December 31,
1996: 5,616,040 votes for, 32,554 votes against, 36,359 votes
abstained, 0 not voted.
Item 6 Exhibits and Reports on Form 8-K
(b) There were no reports on Form 8-K for the
quarter ended June 30, 1996
<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
August 14, 1996 /s/ John P. Hudnall
- ----------------- -------------------------------
Date John P. Hudnall, President, CEO
(Authorized officer)
August 14, 1996 /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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 359,151
<SECURITIES> 0
<RECEIVABLES> 3,189,617
<ALLOWANCES> 153,828
<INVENTORY> 1,877,547
<CURRENT-ASSETS> 6,629,496
<PP&E> 2,828,886
<DEPRECIATION> 2,362,728
<TOTAL-ASSETS> 11,475,921
<CURRENT-LIABILITIES> 2,388,318
<BONDS> 953,301
0
0
<COMMON> 66,073
<OTHER-SE> 8,068,229
<TOTAL-LIABILITY-AND-EQUITY> 11,475,921
<SALES> 6,465,843
<TOTAL-REVENUES> 6,465,843
<CGS> 2,880,253
<TOTAL-COSTS> 3,362,195
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134,544
<INCOME-PRETAX> 1,120,140
<INCOME-TAX> (416,000)
<INCOME-CONTINUING> 1,536,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,536,140
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
