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, 1997 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
----- -----
Transitional Small Business Disclosure Format (check one):
YES NO X
----- -----
As of July 20, 1997, 6,639,729 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, 1997 and December 31, 1996 II-3
Consolidated Statements of Operations
Three and six months ended June 30, 1997 and June 30, 1996 II-4
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and June 30, 1996 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-10
Item 4 Submission of Matters to a Vote of Security Holders II-10
Item 6 Exhibits and Reports on Form 8-K II-11
<PAGE>
II-3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 189,330 $ 597,931
Receivables, net 5,132,325 2,917,476
Inventories 2,597,970 2,049,982
Current portion of notes receivable related party 14,765 45,501
Prepaid expenses and other current assets 306,491 550,840
------------ ------------
Total current assets 8,240,881 6,161,730
PROPERTY, PLANT AND EQUIPMENT, NET 974,075 846,458
GOODWILL, NET 2,086,474 2,209,650
COVENANT NOT TO COMPETE, NET 72,917 102,084
DEFERRED INCOME TAXES 641,437 641,437
OTHER ASSETS 1,010,184 1,062,805
------------ ------------
TOTAL ASSETS $ 13,025,968 $ 11,024,164
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 900,000 $ 0
Accounts payable 2,072,864 771,679
Current portion of long-term debt and
capital lease obligations 416,454 794,268
Other accrued expenses 811,544 648,501
------------ ------------
Total current liabilities 4,200,862 2,214,448
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 169,817 378,010
SHAREHOLDERS' EQUITY
Common stock, .01 par value per share:
Authorized, 10,000,000 shares;
Issued, 6,725,894 and 6,677,680 shares 67,259 66,777
Preferred stock, $.01 par value per share:
Authorized, 1,000,000 shares
Additional paid-in capital 9,767,952 9,706,163
Deficit (957,471) (1,118,783)
------------ ------------
8,877,740 8,654,157
Less treasury stock, 86,165 shares at cost (222,451) (222,451)
------------ ------------
Total shareholders' equity 8,655,289 8,431,706
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,025,968 $ 11,024,164
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
II-4
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended, Six Months Ended,
06/30/97 06/30/96 06/30/97 06/30/96
--------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 4,407,936 $ 3,181,412 $ 7,986,130 $ 6,465,843
COST OF GOODS SOLD 2,259,891 1,404,355 3,889,434 2,880,253
--------------------------------------------------------
Gross Margin 2,148,045 1,777,057 4,096,696 3,585,590
EXPENSES
Marketing 1,046,937 787,212 1,916,194 1,561,037
General & administrative 578,490 557,915 1,154,120 1,119,833
Research and development 200,288 173,287 372,684 351,616
Amortization and depreciation 181,386 163,645 353,337 329,709
--------------------------------------------------------
Total Expenses 2,007,102 1,682,059 3,796,335 3,362,195
--------------------------------------------------------
OPERATING INCOME 140,943 94,998 300,361 223,395
--------------------------------------------------------
OTHER REVENUE (EXPENSE)
Interest income 0 4,061 0 7,236
Interest expense (28,798) (63,866) (56,745) (134,544)
Other income 9,490 1,004,347 7,696 1,024,053
--------------------------------------------------------
Total other revenue (expense) (19,308) 944,542 (49,049) 896,745
--------------------------------------------------------
INCOME BEFORE INCOME TAXES 121,635 1,039,540 251,312 1,120,140
INCOME TAXES 41,000 (418,000) 90,000 (416,000)
--------------------------------------------------------
NET INCOME $ 80,635 $ 1,457,540 $ 161,312 $ 1,536,140
========================================================
NET INCOME PER SHARE $ 0.01 $ 0.21 $ 0.02 $ 0.22
========================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON STOCK EQUIVALENTS 6,853,317 7,040,227 6,926,946 6,960,605
========================================================
</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,
06/30/97 6/30/96
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 161,312 $ 1,536,140
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 407,512 409,882
(Increase) decrease in accounts receivable (2,214,849) 336,048
Increase in inventory (547,988) (83,777)
Decrease (increase) in prepaid expenses and other
current assets 275,085 (81,731)
Decrease (Increase) in settlement receivable, net 0 (997,096)
Decrease (increase) in other assets 2,941 (26,774)
Decrease (Increase) in deferred income tax 0 (485,000
Increase (Decrease) in accounts payable and other
accrued expenses 1,464,228 (498,428)
--------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (451,759) 109,264
--------------------------
INVESTING ACTIVITIES
Proceeds from the sale of assets 0 23,700
Gain on the sale of assets 0 (23,200)
Purchases of capital equipment (333,106) (75,042)
--------------------------
NET CASH USED IN INVESTING
ACTIVITIES (333,106) (74,542)
--------------------------
FINANCING ACTIVITIES
Net borrowing (payments) under lines of credit 900,000 (100,000)
Issuance of common stock pursuant to earnout agreement 0 202,585
Issuance of common stock pursuant to stock
purchase plan 36,511 28,273
Stock issued pursuant to option exercises 25,760 28,000
Payments of long-term debt and capital leases (586,007) (320,811)
--------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 376,264 (161,953)
--------------------------
NET DECREASE IN CASH & CASH
EQUIVALENTS (408,601) (127,231)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 597,931 486,382
--------------------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 189,330 $ 359,151
==========================
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, 1997, the consolidated statements
of operations and cash flows for the three-month and six-month periods ended
June 30, 1997 and 1996 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, 1997
and the results of operations and cash flows for the three-month and six-month
periods ended June 30, 1997 and June 30, 1996 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 1996 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.
The Financial Accounting Standards Board recently issued SFAS No. 130 on
"Reporting Comprehensive Income" and SFAS No. 131 on "Disclosures about Segments
of an Enterprise and Related Information." The "Reporting Comprehensive Income"
standard is effective for fiscal years beginning after December 15, 1997. This
standard changes the reporting of certain items currently reported in the common
stock equity section of the balance sheet. The "Disclosure about Segments of an
Enterprise and Related Information" standard is also effective for fiscal years
beginning after December 15, 1997. This standard requires that public companies
report certain information about operating segments in their financial
statements. It also establishes related disclosures about products and services,
geographic areas, and major customers. The Company is currently evaluating what
impact these standards will have on its financial statements.
2. INVENTORIES
Inventories consist of the following:
June 30, 1997 December 31, 1996
---------------------------------
Finished Goods $ 1,325,798 $ 680,975
Components 1,272,172 1,369,007
---------------------------------
$ 2,597,970 $ 2,049,982
=================================
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 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.
<PAGE>
II-7
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, 1997 and June 30, 1996
Net sales for the six months ended June 30, 1997 were $7,986,130, an increase of
$1,520,287 or 24% from the $6,465,843 generated for the same period of 1996.
This increase was due to increased sales of the Company's instruments which more
than offset declines in tank testing revenues.
Cost of goods sold for the six months ended June 30, 1997 was $3,889,434, an
increase of $1,009,181 or 35% from the $2,880,253 incurred for the same period
of 1996. The increase in cost of goods sold was due to the additional costs of
goods associated with increased sales and to a reduction in gross profit margin
due to a change in product mix. The gross profit margin for the six months ended
June 30, 1997 was 51.3% as compared to a gross profit margin of 55.5% for the
same period of 1996. As a result gross profits for the for the six months ended
June 30, 1997 were $4,096,696 an increase of $511,106 or 14% as compared to the
$3,585,590 of gross profits achieved for the same period of 1996.
Operating expenses for the six months ended June 30, 1997 were $3,796,335, an
increase of $434,140 or 13% as compared to operating expenses of $3,362,195 for
the same period of 1996. Marketing expenses for the six months ended June 30,
1997 were $1,916,194, an increase of $355,157 or 23% as compared to the
$1,561,037 for the same period in 1996. Increased marketing expenses were due to
increased personnel expenses as well as a higher level of activity required to
support the Company's domestic and international sales and marketing functions.
General and administrative expenses for the six months ended June 30, 1997 were
$1,154,120, an increase of $34,287 or 3% as compared to $1,119,833 for the same
period of 1996, due primarily to increased personnel related expenses. Research
and development expenses for the six months ended June 30, 1997 were $372,684,
an increase of $21,068 or 6% compared to the $351,616 of research and
development expenses incurred in the comparable period of 1996. This increase
was due primarily to an increase in personnel related costs. As a result
operating income for the six months ended June 30, 1997 grew to $300,361, an
increase of $76,966 or 34% from the operating income of $223,395 earned by the
Company for the same period of 1996.
Other expenses for the first six months of 1997 were $49,049, an increase of
$945,794 from the $896,745 in income realized for the same period of 1996. This
increase in other expenses was due primarily to the absence of income from the
settlement of litigation which occurred in 1996,
<PAGE>
II-8
but did not recur in 1997.
As a result of these changes, income before taxes for the six months ended June
30, 1997 was $251,312, a decrease of $868,828 or 78% from the $1,120,140
recorded for the same period of 1996. Provision for income taxes increased to
$90,000 for the six months ended June 30, 1997 as compared to a tax benefit of
$416,000 for the same period of 1996, when the Company recognized the benefits
of its net operating losses from previous years. The Company expects its
provision for income taxes to approximate the amount computed at the statutory
rate for 1997. As a result, net income for the first six months of 1997 was
$161,312, a decrease of $1,374,828 or 89% over the net income of $1,536,140
achieved for the same period of 1996.
Three months ended June 30, 1997 and June 30, 1996
Net sales for the three months ended June 30, 1997 were $4,407,936, an increase
of $1,226,524 or 39% from the $3,181,412 generated for the second quarter of
1996. This increase was due to increased sales of the Company's instruments
which more than offset declines in tank testing revenues.
Cost of goods sold for the three months ended June 30, 1997 was $2,259,891 an
increase of $855,536 or 61% from the $1,404,355 incurred for the second quarter
of 1996. The increase in cost of goods sold was due to the additional costs of
goods associated with increased sales and to a reduction in gross profit margin
due to a change in product mix. The gross profit margin for the second quarter
of 1997 was 48.7% as compared to the gross profit margin of 55.7% for the second
quarter of 1996. As a result gross profit for the second quarter of 1997 was
$2,148,045 an increase of $370,988 or 21% as compared to the $1,777,057 of gross
profit achieved for the second quarter of 1996.
Operating expenses for the second quarter of 1997 were $2,007,102, an increase
of $325,043 or 19% as compared to operating expenses of $1,682,059 for the
second quarter of 1996. Marketing expenses for the second quarter of 1997 were
$1,046,937, an increase of $259,725 or 33% over the same period in 1996.
Increased marketing expenses were due to increased personnel expenses as well as
a higher level of activity required to support the Company's domestic and
international sales and marketing functions. General and administrative expenses
for the second quarter of 1997 were $578,490, an increase of $20,575 or 4% as
compared to 557,915 for the second quarter of 1996, due primarily to increased
personnel related expenses. Research and development expenses for the second
quarter of 1997 were $200,288, an increase of $27,001 or 16% compared to the
$173,287 of research and development expenses incurred in the second quarter of
1996. This increase was due primarily to an increase in personnel related costs.
As a result operating income for the second quarter of 1997 grew to $140,943 an
increase of $45,945 or 48% from the operating income of $94,998 earned by the
Company for the second quarter of 1996.
Other expenses for the second quarter of 1997 were $19,308, an increase of
$963,850 from the $944,542 in income realized for the second quarter of 1996.
This increase in other expenses was
<PAGE>
II-9
due primarily to the absence of income from the settlement of litigation which
occurred in 1996, but did not recur in 1997.
As a result of these changes, income before taxes for the second quarter of 1997
was $121,636, an decrease of $917,905 or 88% from the $1,039,540 recorded for
the second quarter of 1996. Provision for income taxes increased to $41,000 for
the second quarter of 1997 as compared to a tax benefit of $418,000 for the
second quarter of 1996, when the Company recognized the benefits of its net
operating losses from previous years. The Company expects its provision for
income taxes to approximate the amount computed at the statutory rate for 1997.
As a result, net income for the second quarter was $80,635, a decrease of
$1,376,905 or 94% over the net income of $1,457,540 achieved for the second
quarter of 1996.
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.
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, and the Company's Report on Form 10-KSB for the year ended
December 31, 1996, as well as those factors discussed elsewhere herein.
Liquidity and Capital Resources
Working capital at June 30, 1997 was $4,040,019, an increase of $92,737 from the
working capital of $3,947,282 as of December 31, 1996. Working capital increased
due to an increase in receivables and inventory which more than offset a
reduction in cash, an increase in short term borrowings, and an increase in
accounts payable. The Company's current ratio as of June 30, 1997 decreased to
2.0 from a current ratio of 2.8 as of December 31, 1996.
The Company currently has two lines of credit available through a bank,
collateralized by accounts receivable, inventory, and property, plant and
equipment. The amount available which under these facilities was increased in
July 1997 by $1,000,000 to an aggregate maximum commitment of $3,500,00 which is
available through March 15, 1998. At June 30, 1997, $900,000 had been borrowed
under these lines of credit.
<PAGE>
II-10
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, 1996.
Item 4 Submission of Matters to a Vote of Security Holders
a) The 1997 Annual Meeting of Stockholders of the Company (the
"Meeting") was held on June 27, 1997.
b) At the Meeting John P. Hudnall, Walfred R. Raisanen, and Steven
G. Zylstra were elected to three-year terms as directors of the
Company. Continuing directors include Dr. S. Thomas Emerson, Quinn
Johnson, 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 John P. Hudnall to the Board of Directors:
5,727,896 votes for, 139,858 votes withheld.
(2) Election of Walfred R. Raisanen to the Board of Directors:
5,346,222 votes for, 521,532 votes withheld.
(3) Election of Steven G. Zylstra to the Board of Directors:
5,741,046 votes for, 126,708 votes withheld.
(4) Ratification of the appointment of Deloitte and Touche as
the independent auditors of the Company for the year ending
December 31, 1997: 5,823,714 votes for, 24,040 votes against,
20,000 votes abstained.
<PAGE>
II-11
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Composite Certificate of Incorporation of Registrant as amended through
July 5, 1994. Incorporated by reference from the Form 8-A filed on June
26, 1996.
3.2 Bylaws of Registrant. Incorporated by reference from the Form 8-A filed
on June 26, 1996.
27 Financial Data Schedule
(b) There were no reports on Form 8-K for the
quarter ended June 30, 1997
<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 12, 1997 /s/ John P. Hudnall
- --------------- -------------------
Date John P. Hudnall, President, CEO
(Authorized officer)
August 12, 1997 /s/ George G. Hays
- --------------- ------------------
Date 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 189,330
<SECURITIES> 0
<RECEIVABLES> 5,294,498
<ALLOWANCES> 162,173
<INVENTORY> 2,597,970
<CURRENT-ASSETS> 8,240,881
<PP&E> 3,287,791
<DEPRECIATION> 2,480,137
<TOTAL-ASSETS> 13,025,968
<CURRENT-LIABILITIES> 4,200,862
<BONDS> 169,817
0
0
<COMMON> 67,259
<OTHER-SE> 8,588,030
<TOTAL-LIABILITY-AND-EQUITY> 11,024,164
<SALES> 7,986,130
<TOTAL-REVENUES> 7,986,130
<CGS> 3,889,434
<TOTAL-COSTS> 3,796,335
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,756
<INCOME-PRETAX> 251,312
<INCOME-TAX> 90,000
<INCOME-CONTINUING> 161,312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 161,312
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
