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, 1999 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)
1912 West 4th Street, Tempe, Arizona 85281-2491
(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 filled 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 November 1, 1999 1,363,514 shares of Common Stock ($0.01 par value) were
outstanding.
<PAGE>
ARIZONA INSTRUMENT CORPORATION
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Three and nine months ended September 30, 1999
and September 30,1998 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and
September 30, 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 11
2
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,190,862 $ 1,098,846
Receivables, net 1,271,929 2,912,630
Inventories 1,096,798 1,646,804
Deferred Income Tax 625,000 625,000
Prepaid expenses and other current assets 70,255 37,182
----------- -----------
Total current assets 6,254,844 6,320,462
PROPERTY, PLANT AND EQUIPMENT, net 708,642 861,808
GOODWILL, net of accumulated amortization 1,353,419 1,493,494
DEFERRED INCOME TAXES 465,000 465,000
OTHER ASSETS 345,392 638,191
----------- -----------
TOTAL ASSETS $ 9,127,297 9,778,955
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ -- $ 300,000
Accounts payable 163,269 277,743
Current portion of long-term debt and
capital lease obligations 12,940 12,940
Other accrued expenses 1,173,640 1,683,875
----------- -----------
Total current liabilities 1,349,849 2,274,558
----------- -----------
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS - less current portions 1,880 11,956
SHAREHOLDERS' EQUITY
Common stock, .01 par value per share:
Authorized, 10,000,000 shares;
Issued, 1,383,213 and 1,372,504 shares 69,147 68,625
Preferred stock, $.01 par value per share:
Authorized, 1,000,000 shares
Additional paid-in capital 9,922,823 9,890,416
Deficit (1,981,620) (2,231,818)
----------- -----------
8,010,350 7,727,223
Less treasury stock, 19,699 shares at cost (234,782) (234,782)
----------- -----------
Total shareholders' equity 7,775,568 7,492,441
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,127,297 9,778,955
=========== ===========
See Notes to Consolidated Financial Statements
3
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
Sept 30, 1999 Sept 30, 1998 Sept 30, 1999 Sept 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 2,084,819 $ 2,297,245 $ 6,112,192 $ 6,454,593
COST OF GOODS SOLD 690,907 851,128 2,130,011 2,440,566
----------- ----------- ----------- -----------
Gross margin 1,393,912 1,446,117 3,982,181 4,014,027
----------- ----------- ----------- -----------
EXPENSES
Marketing 486,404 473,621 1,529,737 1,494,913
General & administrative 352,237 468,918 1,139,702 1,466,718
Research & development 169,503 222,193 555,879 654,757
Amortization & depreciation 120,443 154,044 374,548 487,164
----------- ----------- ----------- -----------
Total Expenses 1,128,587 1,318,776 3,599,866 4,103,552
----------- ----------- ----------- -----------
OPERATING INCOME(LOSS) 265,325 127,341 382,315 (89,525)
----------- ----------- ----------- -----------
OTHER REVENUE (EXPENSE)
Interest income 35,249 -- 64,572 --
Interest expense (1,869) (16,619) (29,265) (86,707)
Other 34,811 7,924 47,331 65,934
----------- ----------- ----------- -----------
Total other (expense) 68,191 (8,695) 82,638 (20,773)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX FROM
CONTINUING OPERATIONS 333,516 118,646 464,953 (110,298)
INCOME TAXES (BENEFIT) 112,962 36,899 159,071 (39,266)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 220,554 81,747 305,882 (71,032)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET -- 83,935 (64,724) 556,181
----------- ----------- ----------- -----------
NET INCOME $ 220,554 $ 165,682 $ 241,158 $ 485,149
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE - BASIC:
FROM CONTINUING OPERATIONS $ 0.16 $ 0.06 $ 0.22 $ (0.05)
=========== =========== =========== ===========
NET INCOME (LOSS) INCOME PER SHARE - BASIC:
FROM DISCONTINUED OPERATIONS $ -- $ 0.06 $ (0.05) $ 0.41
=========== =========== =========== ===========
NET INCOME (LOSS) INCOME PER SHARE - BASIC $ 0.16 $ 0.12 $ 0.18 $ 0.36
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE - DILUTED:
FROM CONTINUING OPERATIONS $ 0.16 $ 0.06 $ 0.22 $ (0.05)
=========== =========== =========== ===========
NET INCOME (LOSS) INCOME PER SHARE - DILUTED:
FROM DISCONTINUED OPERATIONS $ -- $ 0.06 $ (0.05) $ 0.41
=========== =========== =========== ===========
NET INCOME(LOSS) PER SHARE - DILUTED $ 0.16 $ 0.12 $ 0.17 $ 0.36
=========== =========== =========== ===========
BASIC SHARES OUTSTANDING (WEIGHTED AVERAGE) 1,363,241 1,367,239 1,362,549 1,347,457
EQUIVALENT SHARES - STOCK OPTIONS 32,142 -- 32,141 --
----------- ----------- ----------- -----------
DILUTED SHARES OUTSTANDING 1,395,383 1,367,239 1,394,690 1,347,457
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
Arizona Instrument Corporation and Subsidiaries
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
Sept 30, 1999 Sept 30, 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 241,158 $ 485,149
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 403,349 515,632
Decrease in receivables 1,640,701 929,240
(Increase) decrease in inventories (326,766) 705,803
Increase in prepaid expenses and other current assets (41,223) (24,261)
Decrease in other assets 155,239 48,999
Decrease in deferred income taxes -- 268,267
Decrease in accounts payable and other accrued expenses (624,709) (776,475)
Gain on sale of assets (22,503) --
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,425,246 2,152,354
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Soil Sentry/ Encompass product line 1,061,531 --
Purchases of capital equipment (117,614) (214,672)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 943,917 (214,672)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under line of credit (300,000) (266,000)
Issuance of common stock pursuant to stock purchase plan 32,929 29,819
Purchase of treasury stock -- (12,331)
Payments of long-term debt and capital leases (10,076) (350,309)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (277,147) (598,821)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,092,016 1,338,861
CASH AND CASH EQUIVALENTS, beginning of period 1,098,846 143,173
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,190,862 $ 1,482,034
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest expense 29,264 89,814
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of September 30, 1999, the consolidated
statements of operations and cash flows for the three-month and nine-month
periods ended September 30, 1999 and 1998 have been prepared by the Company
without audit. In the opinion of management, all adjustments necessary to
present fairly the financial position at September 30, 1999 and the results of
operations and cash flows for the three-month and nine-month periods ended
September 30, 1999 and September 30, 1998 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 1998 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" standards is also effective for the 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.
2. INVENTORIES
Inventories consist of the following
September 30, December 31,
1999 1998
---------- ----------
Finished Goods $ 580,314 $ 480,515
Components 516,484 1,166,289
---------- ----------
$1,096,798 $1,646,804
========== ==========
6
<PAGE>
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.
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. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998.
Net sales for the nine months ended September 30, 1999 were $6,112,192, a
decrease of $342,401 or 5.3% from the $6,454,593 generated for the same period
of 1998. This decrease was due to decreased international sales and a decrease
of non-recurring sales of miscellaneous tank testing revenue.
Cost of goods sold for the nine months ended September 30, 1999 was $2,130,011,
a decrease of $310,555 or 12.7% from the $2,440,566 incurred for the same period
of 1998. The decrease in cost of goods sold was due to improved manufacturing
efficiencies and, to a lesser extent, the costs of goods associated with
decreased sales.
Operating expenses for the nine months ended September 30, 1999 were $3,599,866,
a decrease of $503,686 or 12.3% as compared to operating expenses of $4,103,552
for the same period of 1998. Marketing expenses for the nine months ended
September 30, 1999 were $1,529,737, an increase of $34,824 or 2.3% as compared
to the $1,494,913 for the same period in 1998. Increased marketing expenses were
due to a higher level of marketing activity required to support the Company's
domestic and international operations. General and administrative expenses for
the nine months ended September 30, 1999 were $1,139,702, a decrease of $327,016
or 22.3% as compared to $1,466,718 for the same period of 1998, due primarily to
reduction in capital leases, property maintenance, insurance costs and other
miscellaneous expenses. Research and development expenses for the nine months
ended September 30, 1999 were $555,879, a decrease of $98,878 or 15.1% compared
to the $654,757 of research and development expenses incurred in the comparable
period of 1998. This decrease was due primarily to a decrease in personnel
related costs. As a result, operating income for the nine months ended September
30, 1999 grew to $382,315, an increase of $471,840 from the operating loss of
$89,525 incurred by the Company for the same period of 1998.
7
<PAGE>
Other income for the first nine months of 1999 was $82,638, an increase of
$103,411 from the $20,773 in expense realized for the same period of 1998. This
was due primarily to an increase in interest income.
As a result of these changes, income before taxes from continuing operations for
the nine months ended September 30, 1999 was $464,953, an increase of $575,252
from the loss of $110,298 recorded for the same period of 1998. Provision for
income taxes increased to $159,071 for the nine months ended September 30, 1999
as compared to a tax benefit of $39,266 for the same period of 1998. The Company
expects its provision for income taxes to approximate the amount computed at the
statutory rate for 1999. As a result, net income from continuing operations for
the first nine months of 1999 was $305,882, an increase of $376,915 over the net
loss from continuing operations of $71,032 incurred in the same period of 1998.
The Company sold its Soil Sentry/Encompass product line in April 1999. For the
first nine months of 1999, the Company had a loss from discontinued operations
of $64,724, while the gain from discontinued operations for the first nine
months of 1998 was $556,181. As a result, net income for the first nine months
of 1999 was $241,158, a decrease of $243,990 or 50.3% from net income of
$485,149 generated for the first nine months of 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Net sales for the three months ended September 30, 1999 were $2,084,819, a
decrease of $212,426 or 9.3% from the $2,297,245 in net sales generated for the
third quarter of 1998. This decrease was a result of the moving of our
facilities.
Cost of goods sold for the three months ended September 30, 1999 were $690,907,
a decrease of $160,221 or 18.8% from the $851,128 incurred for the third quarter
of 1998. The decrease in cost of goods sold was due to our continued efforts to
improving manufacturing efficiencies.
Operating expenses for the third quarter of 1999 were $1,128,587, a decrease of
$190,189 or 14.4% as compared to operating expenses of $1,318,776 for the third
quarter of 1998. Marketing expenses for the third quarter of 1999 were $486,404,
an increase of $12,783 or 2.7% over the same period in 1998, due to increased
trade show attendance in the third quarter. General and administrative expenses
for the third quarter of 1999 were $352,237, a decrease of $116,681 or 24.9% as
compared to $468,916 for the third quarter of 1998, due primarily to a reduction
in capital leases, insurance costs and other miscellaneous expenses. Research
and development expenses for the third quarter of 1999 were $169,503, a decrease
of $52,690 or 23.7% compared to the $222,193 of research and development
expenses incurred in the third quarter of 1998. This decrease was due primarily
to a decrease in personnel related costs. As a result, operating income for the
third quarter of 1999 grew to $265,325, an increase of $137,984 from the
operating income of $127,341 incurred by the Company for the third quarter of
1998.
8
<PAGE>
Other income for the third quarter of 1999 was $68,191, an increase of $76,886
from the $8,695 in expense realized for the third quarter of 1998. The increase
in income was due to an increase in interest income and a decrease in interest
expense related to the line of credit.
As a result of these changes, income from continuing operations before taxes for
the third quarter of 1999 was $333,516, an increase of $214,870 from the income
of $118,646 recorded for the third quarter of 1998. Provision for income taxes
increased to $112,962 for the third quarter of 1999 as compared to $36,899 for
the third quarter of 1998. The Company expects its provision for income taxes to
approximate the amount computed at the statutory rate for 1999. As a result, net
income from continuing operations for the third quarter was $220,554, an
increase of $138,807 over the net income from continuing operations of $81,747
for the third quarter or 1998.
The Company sold its Soil Sentry/Encompass product line in April 1999. For the
third quarter of 1999, the Company did not have income from discontinued
operations, while income from discontinued operations for the third quarter of
1998 was $83,935. As a result, net income for the third quarter of 1999 was
$220,554, an increase of $54,872, or 33.1% from net income of $165,682 generated
for the third quarter of 1998.
The Company has historically experienced and expects to continue to experience
quarterly fluctuations, potentially in 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, 1998, as well as those factors discussed elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1999 was $4,904,996, an increase of $859,092
from the working capital of $4,045,904 as of December 31, 1998. Working capital
increased due to an increase in cash and a decrease in accounts payable which
more than offset a reduction in receivables and inventories. The Company's
current ratio as of September 30, 1999 increased to 4.6 from a current ratio of
2.8 as of December 31, 1998.
9
<PAGE>
The Company currently has a line of credit available through a bank,
collateralized by accounts receivable. The amount available which under this
line is a maximum commitment of $2,000,000 which is available through December
31, 1999. At September 30, 1999, no dollars had been borrowed under this line of
credit.
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.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
2-digit year is commonly referred to as the Year 2000 problem. As the year 2000
approaches, such systems may be unable to accurately process certain date-based
information.
The Company has identified some applications that will require modification to
address the Year 2000 problem. Internal and external resources will be used to
make the required modifications and test these modifications. As of September
30, 1999, we believe that we are Y2K compliant. The Company completed the
modifications and tested them in November 1999 with favorable results.
The total cost to the Company of these Year 2000 problem-related activities is
not anticipated to be material. These costs and the date on which the Company
plans to complete the modifications and testing to solve the Year 2000 problem
are based upon management's estimates. However, there can be no assurance that
these estimates will be achieved and the costs of solving the Year 2000 problem
could differ significantly from management's estimates.
10
<PAGE>
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, 1998.
ITEM 5. OTHER INFORMATION
On July 14, 1999, part of the roof of the building at the Company's headquarters
at 4114 East Wood Street in Tempe, Arizona collapsed during a monsoon storm. The
Company is now operating from a new facility at 1912 West 4th Street, Tempe,
Arizona 85281. Although the disruption in operations caused by the roof collapse
and move into new facilities had an adverse effect on the Company's net sales,
the Company does not consider the effect to be material.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1.1 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.
1.2 Bylaws of Registrant. Incorporated by reference from the Form 8-A
filed on June 26, 1996.
27 Financial Data Schedule*
* Filed herewith
(b) Reports on Fom 8-K
No Form 8-K was filed by the registrant during the quarter ended
September 30, 1999.
11
<PAGE>
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.
November 13, 1999 /s/ George G. Hays
- ------------------- ----------------------------------------
Date George G. Hays, President, CEO
(Authorized officer)
November 13, 1999 /s/ Linda J. Shepherd
- ------------------- ----------------------------------------
Date Controller
(Principal accounting officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,190,862
<SECURITIES> 0
<RECEIVABLES> 1,504,735
<ALLOWANCES> 232,806
<INVENTORY> 1,096,798
<CURRENT-ASSETS> 6,254,844
<PP&E> 4,704,930
<DEPRECIATION> 3,996,288
<TOTAL-ASSETS> 9,127,297
<CURRENT-LIABILITIES> 1,349,849
<BONDS> 1,880
0
0
<COMMON> 69,147
<OTHER-SE> 7,706,421
<TOTAL-LIABILITY-AND-EQUITY> 9,127,297
<SALES> 6,112,192
<TOTAL-REVENUES> 494,218
<CGS> 2,130,011
<TOTAL-COSTS> 3,599,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,265
<INCOME-PRETAX> 464,953
<INCOME-TAX> 159,071
<INCOME-CONTINUING> 305,882
<DISCONTINUED> (64,724)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 241,158
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.17
</TABLE>
