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 Quarterly Period Ended March 31, 1998 Commission File Number
0-12575
Arizona Instrument Corporation
(Exact name of small business issuer as specified in its charter)
Delaware 86-0410138
(State or other jurisciction of incorporation (I.R.S. Employer identification
or organization) number)
4114 East Wood Street, Phoenix, Arizona 85040-1941
(Address of principal executive offices)
(602) 470-1414
(Issuer's telephone number)
Check whether the issuer(1) filed all reports required to be filed by Section 13
or 15(d) of the Securities and Exchange Act of 1934 during the past 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 April 27, 1998, 6,819,582 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
March 31, 1998 and December 31, 1997 I-3
Consolidated Statements of Operations
Three months ended March 31, 1998 and
March 31, 1997 I-4
Consolidated Statements of Cash Flows
Three months ended March 31, 1998
and March 31, 1997 I-5
Notes to Consolidated Financial
Statements I-6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations I-7
II. OTHER INFORMATION
Item 1 Legal Proceedings I-9
Item 6 Exhibits and Reports on Form 8-K I-10
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------
March 31, 1998 December 31, 1997
-------------------------------------
<S> <C> <C>
ASSETS
-------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 740,958 $ 143,173
Receivables, net 3,185,204 3,990,192
Inventories 2,208,048 2,556,993
Prepaid expenses and other current assets 48,420 49,942
-------------------------------------
Total current assets 6,182,630 6,740,300
PROPERTY, PLANT AND EQUIPMENT, net 965,029 975,180
GOODWILL, net of accumulated amortization 1,633,570 1,680,261
DEFERRED INCOME TAXES 1,361,186 1,431,237
OTHER ASSETS 740,659 764,738
-------------------------------------
TOTAL ASSETS $ 10,883,074 $ 11,591,716
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
CURRENT LIABILITIES
Lines of credit $ 1,000,000 $ 1,066,000
Accounts payable 517,114 1,342,539
Current portion of long-term debt and
capital lease obligations 212,063 284,801
Other accrued expenses 1,606,971 1,489,976
-------------------------------------
Total current liabilities 3,336,148 4,183,316
-------------------------------------
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS - less current portions 62,568 93,444
SHAREHOLDERS' EQUITY Common stock, .01 par value per share:
Authorized, 10,000,000 shares;
Issued, 6,614,687 and 6,352,563 shares 68,156 66,747
Preferred stock, $.01 par value per share:
Authorized, 1,000,000 shares
Additional paid-in capital 9,858,366 9,826,964
Deficit (2,219,713) (2,357,304)
-------------------------------------
7,706,809 7,537,407
Less treasury stock, 86,165 shares at cost (222,451) (222,451)
-------------------------------------
Total shareholders' equity 7,484,358 7,314,956
=====================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,883,074 $ 11,591,716
=====================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------
Three Months Ended
------------------
March 31, 1998 March 31, 1997
-------------- --------------
NET SALES $ 3,817,396 $ 3,219,880
COST OF GOODS SOLD 1,763,262 1,384,953
----------- -----------
Gross margin 2,054,134 1,834,927
----------- -----------
EXPENSES
Marketing 772,746 812,091
General & administrative 618,206 512,712
Research & development 333,794 172,396
Amortization & depreciation 99,521 104,487
----------- -----------
Total Expenses 1,824,267 1,601,686
----------- -----------
OPERATING INCOME 229,868 233,241
----------- -----------
OTHER REVENUE (EXPENSE)
Interest income -- --
Interest expense (31,727) (24,997)
Other 4,979 (4,794)
----------- -----------
Total other income (expense) (26,748) (29,791)
----------- -----------
INCOME BEFORE INCOME TAXES FROM
CONTINUING OPERATIONS 203,120 203,450
INCOME TAXES 70,050 80,890
----------- -----------
INCOME FROM CONTINUING OPERATIONS 133,070 122,560
LOSS FROM DISCONTINUED OPERATIONS, NET -- (41,883)
----------- -----------
NET INCOME $ 133,070 $ 80,677
=========== ===========
NET INCOME PER SHARE -BASIC: $ 0.02 $ 0.02
=========== ===========
FROM CONTINUING OPERATIONS
NET INCOME PER SHARE - BASIC: -- (0.01)
=========== ===========
FROM DISCONTINUED OPERATIONS
NET INCOME PER SHARE - BASIC $ 0.02 $ 0.01
=========== ===========
NET INCOME PER SHARE - DILUTED: $ 0.02 $ 0.02
=========== ===========
FROM CONTINUING OPERATIONS
NET INCOME PER SHARE - DILUTED: -- (0.01)
=========== ===========
FROM DISCONTINUED OPERATIONS
NET INCOME PER SHARE - DILUTED $ 0.02 $ 0.01
=========== ===========
BASIC SHARES OUTSTANDING 6,715,318 6,617,129
EQUIVALENT SHARES - STOCK OPTIONS 130,000 438,022
----------- -----------
DILUTED SHARES OUTSTANDING 6,845,318 7,055,151
=========== ===========
See Notes to Consolidated Financial Statements
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
OPERATING ACTIVITIES:
Net income $ 133,070 $ 80,677
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 179,257 198,929
(Increase) decrease in receivables 804,988 (729,331)
(Increase) decrease in inventories 348,945 4,227
Decrease in prepaid expenses and other
current assets 4,521 290,240
(Increase) decrease in other assets 761 29,898
Decrease (Increase) in deferred income tax 70,051 0
(Decrease) increase in accounts payable
and other accrued expenses (708,428) 114,035
--------- ---------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 833,165 (11,325)
--------- ---------
INVESTING ACTIVITIES:
Proceeds from the sale of assets 0 0
Gain on the sale of assets 0 0
Purchases of capital equipment (97,574) (131,306)
--------- ---------
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES (97,574) (131,306)
--------- ---------
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
-------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
FINANCING ACTIVITIES:
Net borrowing (payment) under lines of credit (66,000) 150,000
Issuance of common stock pursuant to
stock purchase plan 31,811 36,512
Stock issued pursuant to option exercises 0 11,960
Payments of long-term debt and capital leases (103,617) (479,485)
--------- ---------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (137,806) (281,014)
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 597,785 (423,645)
CASH AND CASH EQUIVALENTS,
beginning of period 143,173 597,931
--------- ---------
CASH AND CASH EQUIVALENTS
end of period $ 740,958 $ 174,286
========= =========
Supplemental cash flow information:
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
I-6
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 1998, and the consolidated
statements of operations and cash flows for the three-month periods ended March
31, 1998 and 1997 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 March 31,
1998 and the results of operations and cash flows for the three-month periods
ended March 31, 1998 and March 31, 1997 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 1997 Report on Form 10-KSB, as amended. 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:
March 31, 1998 December 31, 1997
----------------- --------------------
Finished goods $ 397,264 $ 582,439
Components 1,810,784 1,974,554
================= ====================
Total $ 2,208,048 $ 2,556,993
================= ====================
3. NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income", in the quarter ended March 31, 1998.
Comprehensive income is the same as net income for the quarter.
<PAGE>
I-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 OR PLAN OF OPERATION
The statements contained herein regarding management's anticipation of the
amount of the Company's income taxes, strength of its relationships with its
customers, its ability to obtain new borrowing arrangements, and its ability to
satisfy cash requirements of current operations, and others, constitute
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Management's anticipation is based upon
assumption regarding levels of competition, research and development results,
product introduction and delivery schedules, raw material markets, the markets
in which the Company operates, stability of the regulatory environment and
ability to qualify for credit. Any of these assumptions could prove inaccurate,
and therefore there can be no assurance that the forward-looking information
will prove to be accurate.
Results of Operations:
Three months ended March 31, 1998 and March 31, 1997
Net sales for the three months ended March 31, 1998 increased 18.6% or $597,516
to $3,817,396 from $3,219,880 generated for the first three months of 1997. This
increase was primarily due to increased installation revenues related to the
Company's ENCOMPASS systems, and, to a lesser extent increased equipment sales.
Cost of goods sold for the three months ended March 31, 1998 was $1,763,262, an
increase of $378,309 or 27.3% from the $1,384,953 incurred for the first three
months of 1997. The increase in cost of goods sold was primarily due to the
costs of goods associated with increased sales, and to a change in product mix.
Operating expenses for the first quarter of 1998 were $1,824,267, an increase of
$222,581 or 13.9% as compared to operating expenses of $1,601,686 for the first
quarter of 1997. Marketing expenses for the first quarter of 1998 were $772,746,
a decrease of 4.8% or $39,345 compared to the same period in 1997. Decreased
marketing expenses were due to expense reductions associated with the Company's
turnaround program. General and administrative expenses for the first quarter of
1998 were $618,206, an increase of 20.6% or $105,493 as compared to
<PAGE>
expenses of $512,712 for the first quarter of 1997. This increase was due to
increased bad debt and occupancy expenses which more than offset savings from
the Company's turnaround program. Research and development expenses for the
first quarter of 1998 were $333,794, an increase of 93.6% or $161,398 compared
to the $172,396 of research and development expenses incurred in the first
quarter of 1997. This increase was due to the expansion of responsibilities of
the research and development group, as well as increased personnel expenses.
Other expenses for the first quarter of 1998 were $26,748, a decrease of 10.2%
or $3,043 from the $29,791 in other expenses incurred for the first quarter of
1997. This decrease was due primarily to an increase in other income for the
first quarter of 1998, as compared to the first quarter of 1997, which more than
offset an increase in interest expense.
As a result of these changes from continuing operations, income before taxes for
the first quarter of 1998 was $203,120, approximately equal to $203,450 recorded
for the first quarter of 1997. Provision for income taxes for the first quarter
of 1998 was $70,050 as compared to $80,890 for the first quarter of 1997. The
Company expects its provision for income taxes to approximate the amount
computed at the statutory rate for 1998. As a result, income from continuing
operations for the first quarter of 1998 was $133,070, a small improvement over
the income from continuing operations of $122,560 achieved for the first quarter
of 1997.
The Company discontinued its tank testing business in 1997. For the first
quarter of 1998, the Company had no gain or loss from discontinued operations,
while the loss from discontinued operations for the first quarter of 1997 was
$41,883. As a result, net income for the first quarter of 1998 was $133,070 an
increase of $52,392 or 64.9% from net income of $80,677 generated for the first
quarter of 1997.
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 strong, future orders under purchase agreements with
these customers are subject to change based on changing business conditions of
the customers.
Liquidity and Capital Resources:
Working capital at March 31, 1998 was $2,846,482, an increase of $289,498, or
11.3%, from the working capital of $2,556,984 as of December 31, 1997. Working
capital increased due to an increase in cash and a decrease in accounts payable
which more than offset a reduction in
<PAGE>
receivables and inventory. As a result, the Company's current ratio as of March
31, 1998 increased to 1.9 from a current ratio of 1.6 as of December 31, 1997.
As of December 31, 1997, the Company was operating under a forbearance agreement
with Silicon Valley Bank (the "Bank"), as a result of the breach of certain
financial covenants by the Company during 1997. This forbearance agreement
expired in February 1998. At December 31, 1997, the Company had lines of credit
with the Bank aggregating $3,500,000 which were collateralized by accounts
receivable, inventory and property, plant and equipment. These lines of credit
expired on March 15, 1998. At March 31, 1998, the Company had $1,000,000
outstanding under these lines of credit. Of these borrowings, $1,000,000 was at
the Bank's prime rate of interest plus 1.5% (8.5% at March 31, 1998). As part of
this credit facility the Company was able to borrow at prime plus 1.0% (8.5% at
March 31, 1998) to support international receivables 90% guaranteed by the
Export-Import Bank of the United States. The Company is currently negotiating
with a bank to establish a new line of credit. Although there can be no
assurance that a new line of credit will be made available to it, the Company
believes that it will be successful in securing new borrowing arrangements. The
failure to establish and maintain adequate borrowing arrangements would have a
material adverse effect on the Company.
The Company believes that cash generated from ongoing operations and its
borrowing capability 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
Information is incorporated by reference from the Company's Report on Form
10-KSB, as amended, for the year ended December 31, 1997.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
2.7 Financial Data Schedule
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.
(b) The following Form 8-K was filed by Registrant during the
quarter ended March 31, 1998:
Form 8-K filed January 29, 1998 reporting under Item 5 that on
January 14, 1998, Quinn Johnson, Richard Long, Patricia
Onderdonk and Stanley Weiss resigned from the Board of
Directors and Harold D. Schwartz was appointed to the Board of
Directors of Registrant.
<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
May 14, 1998 /s/George G. Hays
- ---------------------------------- ------------------------------------
Date George G. Hays, President and
Chief Executive Officer
(Principal executive officer)
May 14, 1998 /s/Linda J. Shepherd
- ---------------------------------- ------------------------------------
Date Linda J. Shepherd, Controller
(Principal accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTRD FROM THE CONSOLIDATED
FINANCIAL STATEMENTS AND ITS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 724904
<NAME> ARIZONA INSTRUMENT CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 740,958
<SECURITIES> 0
<RECEIVABLES> 3,506,572
<ALLOWANCES> 321,368
<INVENTORY> 2,208,048
<CURRENT-ASSETS> 6,182,630
<PP&E> 3,538,172
<DEPRECIATION> 2,651,485
<TOTAL-ASSETS> 10,883,074
<CURRENT-LIABILITIES> 3,336,148
<BONDS> 62,569
68,156
0
<COMMON> 0
<OTHER-SE> 7,416,202
<TOTAL-LIABILITY-AND-EQUITY> 10,883,074
<SALES> 3,817,396
<TOTAL-REVENUES> 3,822,375
<CGS> 1,763,262
<TOTAL-COSTS> 1,824,267
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,727
<INCOME-PRETAX> 203,120
<INCOME-TAX> 70,050
<INCOME-CONTINUING> 133,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,070
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
