SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 (fee required)
For the fiscal year ended December 31, 1995 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required)
For the transition period from ___________ to __________
Commission File Number: 0-12575
ARIZONA INSTRUMENT CORPORATION
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(Name of small business issuer as specified in its charter)
Delaware 86-0410138
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State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4114 East Wood Street, Phoenix, AZ 85040
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (602) 470-1414
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.01
par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 February 29, 1996, the aggregate market value of the voting stock held by
non- affiliates of the registrant was $15,434,603. The aggregate market value is
computed with reference to the average bid and asked prices. Shares of Common
Stock held by each officer and director and by each person who owns 10% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive.
[ ] Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10KSB or
any amendment to this Form 10KSB.
As of February 29, 1996, 6,498,780 shares of Common Stock ($.01 par value) were
outstanding.
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ARIZONA INSTRUMENT CORPORATION
TABLE OF CONTENTS
PART I Page No.
Item 1 Description of Business ......................................... 1
Item 2 Description of Property ......................................... 9
Item 3 Legal Proceedings ............................................... 9
Item 4 Submission of Matters to a Vote of Security Holders ............. 11
Executive Officers of the Registrant ......................... 11
PART II
Item 5 Market for Common Equity and Related
Stockholder Matters ........................................ 12
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 14
Item 7 Financial Statements ............................................ 19
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ..................... 37
PART III
Item 9 Directors, Executive Officers, Promoters,
and Control Persons; Compliance with
Section 16(a) of the Exchange Act .......................... 37
Item 10 Executive Compensation .......................................... 37
Item 11 Security Ownership of Certain Beneficial Owners
and Management ............................................. 37
Item 12 Certain Relationships and Related Transactions .................. 37
PART IV
Item 13 Exhibits and Reports on Form 8-K ................................ 37
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Portions of the Proxy Statement for the 1996 Annual
Shareholders' Meeting (to be filed).
<PAGE>
Unless the context indicates otherwise, the term "Company" or "AZI" refers to
Arizona Instrument Corporation and its wholly-owned subsidiaries.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
AZI produces and markets measurement instruments and provides services
which improve the quality of products and protect the environment. The Company's
products incorporate a variety of proprietary technologies and are used in
quality control, environmental and industrial applications.
AZI completed its initial public stock offering on September 22, 1983
as Computrac Instruments, Inc. Later that year, the Company changed its name to
Quintel Corporation. In March 1987, to reflect new product offerings, the
Company was renamed Arizona Instrument Corporation.
AZI's initial product was the Computrac moisture analyzer for use in
process control industries, but the Company has successfully expanded into other
product areas. In December 1986, AZI acquired Jerome Instrument Corporation
("Jerome"), manufacturer of mercury and hydrogen sulfide gas analyzers.
In January 1988, AZI completed the acquisition of certain assets from
Genelco, Inc. ("Genelco") including the Soil Sentry line of underground storage
tank ("UST") leak detection systems. In June, 1994, the Company introduced the
ENCOMPASS product, its next generation of fuel management and leak detection
compliance system.
In September 1992, the Company acquired Horizon Engineering and
Testing, Inc. ("Horizon"), a company that specializes in testing and engineering
services for USTs. Horizon complements AZI's existing line of monitoring
systems. Sales of the Company's Soil Sentry products, as well as those of its
competitors, have been slower than predicted by industry analysts. Many
operators have chosen the less expensive, but temporary, regulatory option of
annual tank testing, combined with monthly inventory reconciliation, thus
delaying their move to more expensive permanent monitoring. The combination of
AZI and Horizon provides customers with periodic testing until they eventually
comply with U.S. Environmental Protection Agency ("EPA") regulations using a
permanent method such as the Soil Sentry systems.
By 1998, however, existing law will require virtually all underground
tank operators to move from the temporary, annual testing option to a monthly
service or permanent leak monitoring. The acquisition of Horizon and its tank
testing network has allowed the Company to compete in the current tank testing
market and to pursue strong business relationships in order to position the
Company's permanent monitoring products as the systems of choice when the
operators are ready to upgrade.
<PAGE>
ENCOMPASS and Soil Sentry Product Line
Products - ENCOMPASS and the Soil Sentry line of UST monitoring systems
include various products that allow UST operators with diverse site needs to
automate fuel management and comply with federal and local leak detection
regulations.
In 1994, the Company introduced the ENCOMPASS product, a PC-based fuel
management and compliance system. This new system takes advantage of a
customer's existing personal computer (PC) to reduce the cost of leak detection
compliance and to provide fuel management. Unlike conventional wall mounted
consoles, this new system eliminates the controller and takes advantage of the
power of the computer to process the data on a real time basis. It integrates a
unique software program with inventory probes, line leak detectors and liquid
sensing probes to accommodate the needs of varying sites and tank constructions.
The system runs in the computer's background, monitoring and collecting data
without interrupting other site activities and without need for attendant
intervention. In the event of an alarm, the operator is automatically notified.
It is an open-architecture system compatible with other site systems and
interfaces with off-the-shelf business software. The application software runs
in a Microsoft(TM) Windows environment.
The Soil Sentry Twelve-X, improved in 1993, combines aspirated and
dynamic vapor monitoring technologies to monitor both tanks and piping at sites
which have existing hydrocarbon contamination. It uses a unique aspirated vapor
technology to measure for the presence of leak-indicating hydrocarbon vapors in
the soil surrounding underground and aboveground tanks. Sampling points placed
at strategic locations throughout a site are connected with transport tubing to
a Twelve-X console. A pump inside the system console automatically draws air
samples from each sampling point, one at a time, back to the console for
analysis by the sensor. The microprocessor establishes a baseline contamination
level, then employs series of statistical tests and mathematical modeling to
differentiate between new leaks, spills, and existing background contamination
to eliminate false alarms. If thresholds are exceeded, an alarm is sounded.
Because the monitoring wells are located throughout the site, the user is able
to pinpoint the problem area quickly, greatly reducing costs to repair tanks
and/or piping and remediate the site.
In 1990, the Company introduced a product aimed at the underground
storage tank market, the TLM-800 tank level monitoring system. Using ultrasonic
probe technology, the system continuously measures product levels inside a UST,
providing an extensive range of automated inventory reports.
The TLM--830 was introduced in February 1992. This versatile system
accommodates varying tank site needs by combining the TLM-800's inventory
monitoring technology with leak detection capabilities.
<PAGE>
Many of the newer steel and fiberglass storage tanks being installed
are manufactured with a second outer wall, designed to contain leaking
materials. The TLM-830 uses optical sensing probes to monitor the space between
the two walls, signaling an alarm in the event of a leak. In 1992, the Company
began offering groundwater probes to monitor for leaking hydrocarbon product
floating on the site's groundwater.
Primary features of all ENCOMPASS and Soil Sentry products include the
ability to remotely access and control the system through a modem using a
personal computer.
Market and Applications - In 1984, Congress amended the Resource
Conservation and Recovery Act, requiring the implementation of strict
registration and monitoring regulations for all underground storage tanks in the
U.S. For the purpose of these regulations, the EPA has defined any storage tank
system with more than 10 percent of its total volume underground as UST.
Estimates of the total UST population affected by the federal regulations vary,
ranging from 1.8 to 2.1 million, with an average of 3.3 USTs per site.
The markets and applications for UST leak detection include: major oil
company service stations; major oil company production and storage facilities;
independent retail service stations; convenience stores that sell gasoline;
shipping and trucking firms; manufacturing and distribution firms with fleets;
airports; government and military sites equipped with underground storage tanks
and pipelines; and facilities with back-up power systems. All of these markets
contain applications appropriate for ENCOMPASS and Soil Sentry systems. In
addition, non-regulated fuel systems such as aboveground storage tanks can also
be monitored with the Soil Sentry products.
Horizon
Services - Horizon utilizes three methods for the testing of USTs. Its
primary method is the Tracer Tight(tm) tracer testing system, which is licensed
to Horizon by Tracer Research Corp. ("Tracer") in Tucson, Arizona. The term of
the current license agreement is five years, expiring October 1998. The license
is nonexclusive and neither Horizon nor other Tracer licensees have been
assigned specific protected territories. The license is requires that all test
samples taken by Horizon be submitted to Tracer for analysis at prescribed fees.
Horizon's business currently is substantially dependent on its license agreement
with Tracer, and its business can be materially adversely affected by various
circumstances regarding the license agreement, including termination or
nonrenewal of the license agreement or Tracer's failure to upgrade its
technology or adjust its pricing should such changes become necessary or
desirable in light of competitive conditions.
As different customers have varying technological preferences for UST
testing, Horizon also offers testing services utilizing the Leak Computer(tm),
manufactured by Hastech and a similar system developed by USTest. Both are
EPA-recognized volumetric testing methods. At present, the Tracer Tight method
accounts for approximately 90% of Horizon's testing business, and the Leak
Computer and the USTest methods for approximately 10%.
<PAGE>
SIRTIFY, a statistical inventory reconciliation package introduced in
1993, is a cost-effective tank management system that meets EPA requirements for
monthly monitoring of tanks and piping. Daily inventory information is collected
by the tank owner and submitted monthly to the Company for analysis.
Comprehensive management and compliance reports are provided.
Markets - Horizon has been engaged since 1990 in the business of
testing USTs for leakage using EPA-recognized testing methods. Under current
federal regulations, UST owners are required to monitor USTs o a permanent or
monthly basis or, alternatively, to test their tanks on a periodic basis.
Various methods have been developed for testing of USTs and most must be
performed on an annual basis in order to conform to regulatory requirements.
The domestic market for testing USTs is slowly declining as the UST
owners choose to convert to permanent monitoring systems like ENCOMPASS before
the EPA mandated deadline in December, 1998.
Horizon's territories in the testing business have included Arizona,
Utah, Idaho, Montana, Nevada, California, Washington and Oregon. The markets and
applications for Horizon's services are the same as those described above with
regard to the Company's Soil Sentry product line.
Jerome Product Line
Products: The first Jerome product was developed in 1976 as a portable
mercury detector for mining applications. The initial "mercury in soil" detector
spawned a line of hand-held, battery powered, field portable instruments capable
of detecting mercury vapor and hydrogen sulfide in minute quantities.
The Jerome Analyzers' excellent sensitivity is from the use of the
Company's gold film sensing technology. Mercury or H2S in air samples is
adsorbed by the gold film. The instrument relates the change in electric
resistance of the gold film to a measurement of the substance being detected and
displays the result within seconds.
In December 1995, the Company announced that it has completed
development of a proprietary gold film micro-sensor for the next generation of
the Company's Jerome line of toxic gas monitors. The new micro-sensor will
significantly extend sensor life and facilitate the Company's entry into new
markets in which continuous monitoring applications are required. The new Jerome
products are scheduled to be introduced in late 1996.
Markets and Applications -- Mercury. The market for Jerome mercury
detectors comprises customers in four major groups:
Industrial Hygiene - These applications involve workplace screening to
ensure employees are not subjected to unacceptable mercury risk. The U.S.
Occupational Safety and Health Administration requires industries such as
battery and caustic soda manufacturers, thermometer and fluorescent light
manufacturers, hospitals and laboratories to monitor for mercury.
<PAGE>
Industrial Process Quality Control - These customers test for mercury
in products where even trace amounts can have toxic effects, such as I the
confined environments of submarines, engine rooms or spacecraft. Suppliers to
the National Aeronautics and Space Administration and the U.S. Navy are required
under procurement contracts to certify that certain equipment components are
mercury-free.
Laboratories - One specific Jerome product is designed to measure
mercury concentrations in water or urine. These customers are typically
laboratories performing this service for industrial clients.
Mercury Dental Amalgam Screening - Mercury and silver dental amalgams
have become the subject of intense scrutiny and controversy. The Jerome analyzer
has been used in research on this topic, and the Company believes that it is
recognized in the dental and medical professions as the only portable instrument
that provides accurate mercury vapor readings at the required levels.
Markets and Applications -- Hydrogen Sulfide -- The Jerome H2S analyzer
allows industries to monitor H2S in low parts per billion levels for odor and
corrosion control.
Odor Control - Jerome H2S analyzers effectively quantify the noxious
odor of H2S given off from industrial processes in order to manage customer
complaints or potential litigation. The most common application is the
wastewater treatment industry.
Corrosion Control - Searching for and quantifying the presence of H2S
near costly industrial equipment is critical since H2S and its byproducts are
highly corrosive. Industries utilizing Jerome products for corrosion control
include wastewater treatment, oil and gas refining, and pulp and paper
processing.
Computrac Product Line
Products. AZI was founded on the Computrac line of moisture analyzers.
The Computrac moisture analyzers simplify and automate a tedious industrial
quality control procedure. Typically, a sample material is weighed, then dried
in an oven for several hours to drive off moisture. The sample is weighed again
and the initial moisture content of the sample is computed based on the loss of
water weight. Computrac instruments house a convection oven to dry the sample, a
precision balance to measure sample weight change and a microprocessor that uses
an algorithm to quickly extrapolate moisture content based on the rate of weight
loss. This technology was named the loss on drying or LOD technique.
Computrac instruments are rugged enough to be used on the factory floor
for quick batch analysis and accurate enough for precise laboratory testing.
They do not require a trained technician for operation. Thus, they can save
customers both time and money.
In 1994, the Company completed development of the Computrac MAX-2000
and MAX- 1000 Moisture Analyzers. The MAX-2000 uses the latest digital balance
technology to detect moisture levels accurately down to .005% in as little as
two minutes. The MAX-2000 is
<PAGE>
programmable from an easy-to-use front panel Menu system, allowing the user to
store test parameters for 30 different sample materials. It features real-time
front panel display of moisture values, elapsing test time and drying-curve
graph; statistical software package; and the ability to send test results to a
PC or printer.
In December 1995, the Company announced that it completed proof of
concept and soon will release alpha-test units of its new line of Computrac
moisture analyzers. The new product, targeted at the worldwide titration market,
requires no toxic reagents, is simple to use and maintain, and offers excellent
correlation and repeatability. The new Computrac product is scheduled to be
released in the fourth quarter of 1996.
Markets and Applications. The markets for Computrac instruments tend to
be niche applications in various industries. Three primary industries have
yielded the Company's historical sales: Foods -- measuring the moisture content
of cookie dough, cigarette tobacco, pasta and numerous other raw and finished
food products; Chemicals -- measuring moisture and total solids content of such
chemical products as adhesives, coatings, and paints; and Plastics -- measuring
the water content of resins used in molding or extrusion. Other applications
include pharmaceutical production and forestry management.
Product Reliability and Quality Control
The Company believes its products are highly reliable. The Company's
products have built-in self-test features which are designed to insure that the
instrument is functioning properly and will provide an accurate result. If any
of the self-tests indicate abnormal conditions, the operator is alerted by a
light, and a coded display indicates the type of malfunction. The Company's
products have one- and five-year parts and labor warranties. For the year ended
December 31, 1995, warranty expense approximated 0.6% of net sales.
In February 1996, the Company announced that it achieved ISO 9001
Quality System Certification. This certification is registered through SGS
International Certification Services, Inc., an ANSI-RAB accredited registrar.
The ISO 9001 certification defines models for quality assurance in every phase
of business operations including design, development, quality control, customer
service, production, installation and service. Certification to the worldwide
ISO 9001 standard, documents that the Company has in place policies, practices
and procedures to provide services using quality management systems in
compliance with International Organization of Standardization (ISO) model.
Manufacturing and Sources of Supply
The majority of the Company's manufacturing costs are for purchased
components. Certain of the components are then provided to outside companies for
subassembly, with final assembly and testing performed by the Company. Although
two vendors currently supply in excess of 45% of the raw materials used in
Jerome's instrumentation, secondary vendors are available. The raw materials and
component parts are supplied by the two vendors pursuant to specifications by
the Company. The Company has prequalified certain other vendors, and
<PAGE>
believes that, if necessary, the raw materials and components could be supplied
by such other vendors without disruption of the manufacturing process or other
adverse affect on the Company.
Marketing and Sales
The Company's marketing and sales strategy is to identify major markets
its products can serve, evaluate the sales potential of each market segment, and
conduct specialized promotional campaigns, market by market, to elicit sales
inquiries from prospective customers. The majority of the Company's promotion
budget is spent on trade advertising, public relations and exhibiting at
industry trade shows.
Inquiries are processed through an in-house inquiry handling system.
Sales representatives are trained to follow up on inquiries and qualify the
applicability of the Company's products to the prospect's need.
Historically, due to the relatively short time period between receipt
of customer orders and shipment of products, the Company's backlog has been
quite low. Since 1988, the dollar amount of unfilled orders at the beginning of
any quarter has not exceeded 15% of sales for that quarter. The Company had more
backlog at the end of 1995 than it historically has had due to open orders
related to tank testing services and ENCOMPASS installation. At December 31,
1995, backlog totaled approximately $730,000.
The Company markets its instruments for export through a direct
international office in Singapore, as well as through foreign distributors in
Europe, the Middle East and the Far East.
Industries Served: Customers
The specific industries served domestically by each product are
detailed in the specific Markets and Applications sections presented earlier.
A single ENCOMPASS customer represents approximately 10% of Net Sales.
The Company is actively seeking to diversify sales of this product to other
customers and anticipates that additional customers will be added in the next 12
months.
Most export sales are to foreign distributors. The Company is unable to
determine which industries are served by the export sales, but believes them to
be similar in pattern to domestic sales. Export sales were approximately 15% of
total sales in 1995, with no sales to any geographic region exceeding 10% of net
sales. (See Note I to the Consolidated Financial Statements.)
The Company's business with U.S. Government Agencies is effected
through two contracts with the General Services Administration. Both Jerome and
Soil Sentry products are available for purchase by federal agencies through
these contracts. None of the contracts provide for renegotiation of profits,
except upon renewal of such contract or termination at the election of the
government. The contacts will last through January 1999.
<PAGE>
Competition
ENCOMPASS and Soil Sentry - There are a number of suppliers of
permanent storage tank monitoring systems which compete with the ENCOMPASS and
Soil Sentry product line. These companies are nationwide in scope and many
operate in foreign markets. Channels of distribution for the competition include
direct account sales, distributors, and manufacturers' representatives. The
ENCOMPASS and Soil Sentry product overlaps these competitors, except that AZI
believes that it is the only provider of an aspirated vapor monitoring system.
Computrac - A number of competitors exist for Computrac moisture
analyzers. For applications where very low moisture levels are measured,
titrators provide the greatest competition. Many of these companies operate both
domestically and internationally.
Jerome - There is no significant competition for Jerome in applications
where low levels of hydrogen sulfide gas or mercury vapor need to be measured
with a hand-held ambient air analyzer. When a less sensitive instrument is
needed, the level of competition increased.
Horizon - Horizon has a number of competitors in the tank testing
business. One industry leader operates a nation-wide tank testing and
multi-service UST business. Several other competitors operate regionally as does
Horizon. There are many other local and regional UST service companies which
provide tank testing services utilizing one or more of the available volumetric
technologies which Horizon also uses. Horizon is potentially subject to
competition from other licensees of these various methods.
Research and Development
Research and development expenses increased 62% in 1995 compared to
1994. Expenditures for research and development for the fiscal years ended
December 31, 1995, 1994 and 1993 were $605,627, $374,538 and $427,279
respectively. This represented 4.6% of sales in 1995, 3.1% in 1994 and 3.0% in
1993. The Company's research and development expenditures for 1995 were
channeled into the development of possible new products in all three product
lines.
In August 1988, the Company entered into a Research Agreement (the
"Research Agreement") with Arizona State Research Institute ("ASRI"). AZI and
ASRI jointly performed work to improve current sensors and develop new sensor
technology. The Research Agreement required the Company to pay expenditures
which were set forth each contract year and to guarantee ASRI's lease payments
related to the research. The Research Agreement was terminated as of December
31, 1990. The Company has assumed the obligation of the future lease payments
through November 1993. The research performed under the Agreement is now being
continued by Company personnel. AZI completed development of a new gold film
microsensor in December, 1995.
During the years ended December 31, 1995, 1994 and 1993, the Company
has expensed approximately $0, $0, and $127,000 respectively, related to the
Research Agreement.
<PAGE>
The Company also intends to develop additional environmental and
electronic instrumentation products and services through internal research and
development, and acquisition (by purchase or license) of related product lines
or perhaps small instrument or service companies.
Patents and Licenses
The Company owns two patents directed to aspects of its Computrac
product, one patent directed to aspects of its Soil Sentry product, one patent
directed to its ENCOMPASS product and one domestic and five foreign patents
directed to aspects of its Jerome product. Two additional domestic Jerome
patents, one domestic ENCOMPASS patent and one Computrac patent are currently
pending. The Company does not believe that patents are a significant long-term
competitive factor in these businesses, and intends to rely more on its on-going
research and development, engineering, and customer service to maintain a
long-term competitive advantage in the market place.
The Company has not granted licenses under any of its patents and such
patents have not been challenged or upheld in court. There can be no assurance
that the validity of the patents will be upheld if challenged.
See "Horizon-Services," above, for information regarding an agreement
pursuant to which the Company licenses the technology utilized in its
tank-testing operation.
Employees
As of December 31, 1995, the Company had a total of 107 full time
employees and 7 part-time employees. The Company provides ongoing training to
its technical and sales personnel. None of the Company's employees are
represented by a union. Management believes that relations between the Company
and its employees are excellent.
ITEM 2. DESCRIPTION OF PROPERTY
In August, 1993, the Company leased approximately 35,000 square feet in
Phoenix, Arizona. The facility enabled the Company to consolidate all operations
from two formerly leased facilities and one owned facility. All administration,
sales, customer service, engineering and manufacturing for the Company are in
the Phoenix facility. The lease on the new building expires in August, 2003.
The Company believes that its facilities are modern, well-maintained
and adequate for current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company was a defendant in an action brought by Teledyne
Industries, Inc., filed on March 24, 1992 in the United States District Court,
Northern District of Texas. The complaint alleged that the Company's Soil Sentry
product line infringed a patent of which the plaintiff was
<PAGE>
the exclusive United States licensee. The suit was dismissed with prejudice by
order of the court on April 12, 1995.
On June 25, 1993, the State of Arizona Department of Revenue issued an
assessment against a subsidiary of the Company, Horizon Engineering and Testing,
Inc. ("Horizon"), with respect to delinquent state sales tax payments alleged to
have been due in connection with activities of a discontinued construction
operation of a predecessor corporation of Horizon. The amount of the assessment,
including interest and penalties, is approximately $627,000. Horizon is
reviewing the assessment and intends to seek a substantial reduction of the
assessment, though there can be no assurance that a reduction can be achieved.
Litigation has been commenced in Superior Court, Maricopa County,
Arizona with respect to certain matters arising in connection with a technology
development agreement and related agreements entered into by the Company and
Arizona State Research Institute ("ASRI") in 1988 related to the Company's
Jerome product line and providing the Company with certain rights thereunder.
Notwithstanding such agreements, ASRI exclusively licensed relevant technology
to Senova Corporation ("Senova") in February 1993. The Company filed suit in
February 1996 against Senova, ASRI, the Arizona Board of Regents (the "Board")
and certain other defendants requesting a declaratory judgment confirming the
Company's right to the contested technology and seeking damages. Senova also
filed suit in January 1996 against ASRI, the Board, AZI and certain executive
officers of AZI seeking declaratory judgment confirming the validity of its
license agreement with ASRI and seeking damages. Certain other related actions
also have been filed. The Company intends to pursue the litigation vigorously.
The Company is not involved in any other legal proceedings, the result
of which the Company believes could have a material adverse effect upon the
Company.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in
the fourth quarter of 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding executive officers of
the Company.
Walfred R. Raisanen, age 60, has been the Chairman of the board of
Directors since the Company's inception in January 1981. From 1981 until 1986 he
was the President and Treasurer of the Company. Mr. Raisanen was re-elected
Treasurer in 1991 and also serves as Vice President of Research and Development.
From June 1976 until January 1981 he was President and a Director of Motorola
Process Control, Inc. a predecessor to the Company.
John P. Hudnall, age 45, came to the Company in 1985 as Chief Financial
Officer. He became President and Chief Executive Officer in 1986 and a Director
in 1988. Mr. Hudnall's background spans 20 years in industry, with positions in
production, sales, finance and systems, including a position as Chief Financial
Officer for Inter-Tel, Inc., an independent telephone company.
Scott Carter, age 41, joined the Company in 1992 as Vice President and
Chief Financial Officer. Mr. Carter is a CPA and has 17 years experience in
financial management and general management. Prior to his position at the
Company, Mr. Carter was Executive Vice President and Chief Financial Officer for
Rockford Corporation, a consumer electronics manufacturing company. Prior to
this, he was an accounting manager for Hewlett Packard Company.
Susan Berry, age 47, was named Secretary in early 1989. She has served
as Human Resources Manager for the Company since 1985. Prior to her position
with the Company, Ms.
Berry was in corporate administration for Inter-Tel, Inc.
Michael Grant, age 46, became Vice President of Manufacturing in 1993.
He started wth the Company in 1988, first serving as National Service Manager,
then as Director of Customer Service, and, for the last five years, as Director
of Operations. Mr. Grant has over 20 years of experience in manufacturing.
Executive officers are elected annually and serve at the discretion of
the Board of Directors.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the Nasdaq Small Cap Market. As of
February 28, 1996, there were approximately 400 shareholders of record. The high
and low prices set forth below are derived from the Nasdaq Monthly Statistical
Report prepared by the National Association of Securities Dealers, Inc.,
represent quotations by dealers, may not reflect applicable markups, markdowns
or commissions, and do not necessarily represent actual transactions.
Bid
----------------------------
1995 High Low
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First Quarter 1.19 .69
Second Quarter 1.69 .75
Third Quarter 2.75 1.25
Fourth Quarter 2.25 1.81
1994 High Low
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First Quarter $ 1.75 $ 1.50
Second Quarter 1.06 .94
Third Quarter 1.19 1.06
Fourth Quarter 1.13 .81
The Company has never paid a cash dividend and currently intends to
retain all earnings for use in its business. The declaration and payment of
dividends in the future will be determined by the Board of Directors in light of
conditions then existing, including the Company's earnings, financial condition,
capital requirements and other factors. Dividends are also restricted by the
Company's lines of credit agreements with Silicon Valley Bank. See Management's
Discussion and Analysis and Results of Operations.
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data for each of the five years in the period
ended December 31, 1995 have been derived from the Company's audited financial
statements, and should be read in conjunction with the financial statements and
related notes thereto and other financial information appearing elsewhere herein
and in Item 6. The selected financial data is not required by Form 10- KSB and
is included herein as an unnumbered item.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA:
Year Ended December 31, (1)
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1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 13,104,230 $ 12,105,818 $ 14,182,410 $ 10,862,419 $ 8,535,197
Cost of goods sold 5,644,945 5,859,033 6,624,607 4,534,819 3,190,692
Operating expenses 6,588,757 7,789,962 6,706,167 5,601,140 4,839,395
------------ ------------ ------------ ------------ ------------
Operating income (loss) 870,528 (1,543,177) 851,636 726,460 505,110
Interest Expense 449,816 507,573 542,499 511,375 552,426
Income tax expense 11,000 2,000 35,000 180,458 92,500
Extraordinary item
reduction of income tax
expense from utilization of
prior years' operating losses 172,922 88,891
Cumulative effect of a change
in accounting method 113,500
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 532,585 ($ 1,938,200) $ 408,279 $ 192,128 $ 9,916
============ ============ ============ ============ ============
Net income (loss) per share $.08 ($.31) $.09 $.07 $0
Weighted average number of
shares outstanding 6,584,860 6,186,816 4,373,191 2,909,613 2,384,684
BALANCE SHEET DATA:
Year Ended December 31, (1)
-----------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
Total assets $ 10,600.162 $ 11,966,710 $ 12,768,299 $ 11,369,361 $ 8,867,806
Working capital $ 3,332,424 $ 2,318,979 $ 4,439,421 $ 1,766,729 $ 2,017,714
Long-term debt, excluding
current portion $ 1,663,112 $ 1,816,288 $ 2,161,298 $ 1,961,515 $ 3,000,000
Total liabilities $ 4,260,858 $ 6,228,112 $ 5,092,459 $ 6,238,749 $ 5,134,411
Shareholders' equity $ 6,339,304 $ 5,738,598 $ 7,675,840 $ 5,130,612 $ 3,733,395
(1) Includes operations of Horizon acquired in September, 1992.
</TABLE>
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations:
- ---------------------
The following tables set forth items in the Company's Consolidated
Statements of Operations as a percent of total net sales for the years ended
December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Percent of net sales Percentage change
Year ended December 31, over prior periods
1995 vs. 1994 vs.
1995 1994 1993 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 8% -15%
Cost of goods sold 43.1% 48.4% 46.7% -4% -12%
------ ------ ------ ------ ------
Gross margin 56.9% 51.6% 53.3% 19% -17%
------ ------ ------ ------ ------
Expenses
Marketing 23.8% 29.4% 24.8% -12% 1%
General and administrative 17.3% 20.0% 15.7% -6% 9%
Research and development 4.6% 3.1% 3.0% 62% -12%
Amortization and depreciation 4.6% 4.8% 3.8% 3% 8%
Restructuring costs 0.0% 7.1% 0.0% -100% 100%
------ ------ ------ ------ ------
Total expenses 50.3% 64.3% 47.3% -15% 16%
------ ------ ------ ------ ------
Operating income (loss) 6.6% -12.7% 6.0% 156% -281%
------ ------ ------ ------ ------
Other revenue (expense)
Interest income .2% 0.1% 0.0% 136% 86%
Interest expense -3.4% -4.2% -3.8% -11% -6%
Other .8% 0.9% 0.1% -4% 573%
------ ------ ------ ------ ------
Total other expense -2.5% -3.2% -3.7% -17% -25%
------ ------ ------ ------ ------
Income (loss) before income taxes and cumulative
effect of change in accounting method 4.1% -16.0% 2.3% 128% -687%
Income taxes .1% 0.0% .2% 450% -94%
Cumulative effect of change in accounting method 0.0% 0.0% .8% 0% 0.0%
------ ------ ------ ------ ------
Net income (loss) 4.1% -16.0% 2.9% 127% -575%
====== ====== ====== ====== ======
</TABLE>
1995 vs. 1994
The Company reported net income of $532,585 in 1995 compared to a net
loss of $1,938,200 in 1994. The increase in net income compared to 1994 resulted
in part from the Company developing and implementing a formal plan in the third
quarter of 1994 to restructure the Environmental Technology Group (ETG). The
total one-time restructuring costs for 1994 were $863,837. Also, compared to
1994, sales in 1995 increased 8%, gross margin as a percent of sales increased
from 52% in 1994 to 57% in 1995 and Marketing and General and Administrative
expenses decreased $587,277.
Net sales for the year ended December 31, 1995 increased 8% to
$13,104,230 compared to $12,105,818 in 1994. The increase in sales resulted
primarily from increases in sales of the ENCOMPASS fuel management and
compliance systems, ENCOMPASS related installations and Computrac moisture
analyzers. These sales increases more than offset a decrease in tank testing
sales. Tank testing sales decreased primarily as a result of the reorganization
in 1994 to redirect the sales focus from the Eastern U.S. back to the Western
U.S. and a small decline in the domestic market for testing UST's.
<PAGE>
Cost of goods sold was 43% of sales in 1995 compared to 48% of sales in
1994. Gross margin increased primarily due to higher utilization of the tank
testing field technicians. Lower tank testing sales for 1995 has been
accomplished with significantly fewer technicians and much higher productivity
compared to 1994. Gross margin also improved in 1995 as a result of a higher mix
of sales of the ENCOMPASS systems in the ENCOMPASS and Soil Sentry product line.
Overall expenses in 1995 decreased $1,201,205 or 15% below 1994. The
decrease was primarily the result of the $863,837 decrease in costs related to
ETG restructuring in the third quarter of 1994 which was zero in 1995. The
restructuring costs were related to formally restructuring the Environmental
Technology Group (ETG) and consisted primarily of the write down of inventory,
patents and related severance expenses. Total expenses also decreased a total of
$587,277 in marketing and general and administrative expense primarily in the
restructured tank testing operations.
Marketing expenses decreased $440,228 or 12% in 1995 compared to 1994.
The decrease in marketing expenses was primarily a result of the decrease in
tank testing sales personnel in the Eastern United States which the Company
anticipates will be permanent.
General and administrative expenses decreased $147,049, or 6% in 1995
compared to 1994. General and administrative expenses decreased primarily as a
result of decreased administrative personnel and expenses in the tank testing
operations. Some of this tank testing personnel have been reassigned to manage
the installation of ENCOMPASS systems.
Research and development expenses increased $231,089, or 62% in 1995
compared to 1994. The increase in research and development expenses was
primarily the result of capitalizing some final stage development costs for the
ENCOMPASS product in 1994. There were no similar final stage development costs
in 1995. Research and development expenses are anticipated to continue at this
higher level for 1996.
Amortization and depreciation expenses increased $18,820, or 3% in 1995
compared to 1994.
Interest expense decreased $57,757, or 11% in 1995 compared to 1994 due
to a decrease in the average outstanding debt.
1994 vs. 1993
The Company reported a net loss of $1,938,200 in 1994 compared to net
income of $408,279 in 1993. The decrease in net income compared to 1993 resulted
in part from the Company developing and implementing a formal plan in the third
quarter of 1994 to restructure the Environmental Technology Group (ETG). The
total one-time restructuring costs for 1994 were $863,837. Also, compared to
1993, sales in 1994 decreased in the U.S. military subcontract with Jacobs
Engineering and the Soil Sentry product line.
Net sales for the year ended December 31, 1994 decreased 15% from
$14,182,410 in
<PAGE>
1993 to $12,105,818 in 1994. The decrease in sales resulted primarily from the
decrease in construction related sales under the Company's U.S. military
subcontract with Jacobs Engineering. The subcontract construction work was
completed in 1993 and approximately $1,030,000 of construction sales were
recorded in 1993 compared to none in 1994. Sales in the Soil Sentry product line
decreased as a result of the unsettled political situation in Korea during much
of 1994 and a transition in the domestic market sales focus as part of the
restructuring to newer, more profitable products. Computrac sales increased
compared to 1993 as a result of the new MAX-1000 and MAX-2000 products
introduced in 1994.
During the third quarter of 1994 the Company developed and implemented
a formal plan to restructure the Environmental Technology Group (ETG). Because
of competitive market conditions in the Eastern U.S., the Company was not
successful in profitably developing tank testing in these territories. Also, the
Company changed focus in the ENCOMPASS and Soil Sentry product line by reducing
the number of products offered and focusing on newer, more profitable products.
The plan for restructuring involved closing down the tank testing sales and
service operations in the Eastern U.S., writing off certain Soil Sentry
inventory and the related Patent and reducing related corporate staffing
expenses by approximately 10%. The total restructuring costs for 1994 were
$863,837.
Cost of goods sold was 48% of sales in 1994 compared by 47% of sales in
1993. The increase was due primarily to the under utilization of the tank
testing field technicians in the Eastern U.S. and the under-absorbed
manufacturing overhead expenses related to the decrease in Soil Sentry sales.
Overall expenses in 1994 increased $1,083,795, or 16% above 1993. The
increase was primarily the result of the costs related to ETG restructuring in
the third quarter of 1994. .
Marketing expenses increased $39,254, or 1% in 1994 compared to 1993.
The increase in marketing expenses was primarily a result of additional
Computrac sales and marketing expenses in 1994.
General and administrative expenses increased $192,659, or 9% in 1994
compared to 1993. General and administrative expenses increased primarily from
increased health insurance costs, tank testing administrative personnel and
increases in the reserve for bad debts.
Research and development expenses decreased $52,741, or 12% in 1994
compared to 1993. The decrease in research and development expenses was
primarily the result of the completion of the MAX-1000/MAX-2000 product
development projects.
Amortization and depreciation expenses increased $40,786, or 8% in 1994
compared to 1993. Amortization expenses increased primarily because of the
amortization of new capital leases for sales demonstration products related to
the new Computrac MAX-2000 and MAX- 1000 products.
Interest expense decreased $34,926, or 6% in 1994 compared to 1993 due
to a decrease
<PAGE>
in the average outstanding debt. Other revenue (expense) increased $89,588 in
1994 compared to 1993 due to gains on the sale of older Computrac demonstration
products.
Liquidity and Capital Resources:
Working capital increased 96% to $3,332,424 at December 31, 1995
compared to $1,702,312 at December 31, 1994. The current ratio increased to 2.28
in 1995 from 1.34 in 1994. The increase in working capital and the current ratio
was primarily due to increased cash flow from operations.
At December 31, 1995 as compared to December 31, 1994, accounts
receivable decreased $486,164, primarily as a result of improvements in credit
and collection policies and procedures. Inventory at December 31, 1995 decreased
$296,388 compared to December 31, 1994, primarily as a result of improvements in
materials management and the introduction of newer, easier to manufacture
products.
Cash and cash equivalents increased $98,403 in 1994, to end the year at
$486,382. Cash provided by operating activities was $2,241,741 in 1995. The
sources of cash for operating activities was primarily a result of the net
income plus non-cash charges (depreciation and amortization) and the decreases
in accounts receivable and inventory. Cash used by investing activities was
$25,970 in 1995. Cash used by financing activities was $2,117,368 in 1995, which
was primarily used to reduce borrowing under the bank lines of credit and to
make payments on long-term debt and capital leases.
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 $2,750,000 through March 15, 1996. At December 31, 1995, the Company had
$150,000 outstanding under its domestic line of credit for $1,500,000.
Borrowings under this line of credit are at the bank's prime rate of interest
plus 2.0% (10.5% at December 31, 1995.) The second line of credit is an
international credit line and is 90% guaranteed by the Export-Import Bank of the
United States. At December 31, 1995, the Company had $100,000 outstanding under
its international line of credit for $1,250,000. Borrowings under this line of
credit are at the bank's prime rate of interest plus 1.5% (10.0% at December 31,
1995). Subsequent to December 31, 1995, the lines of credit were renewed through
March 15, 1997 for an aggregate commitment of $2,500,000. The domestic line was
renewed for $1,500,000 at an interest rate of prime plus 1.5%. The international
line was renewed for $1,000,000 at an interest of rate of prime plus 1.0%. In
connection with originally obtaining these lines of credit in 1991, the Company
issued a warrant to the bank to purchase 43,011 shares of the Company's common
stock at an exercise price of $2.25 through December 15, 1996. The lines of
credit contain certain covenants, including minimum net income levels and
certain financial ratios. The Company was in compliance with all bank covenants
at December 31, 1995.
In November, 1995, the Company prepaid the remaining principal balance
($1,162,083) of its 12% subordinated convertible note payable to Bridge Capital
Investors II ("Bridge"). In
<PAGE>
connection with the prepayment, Bridge waived all rights to receive any
additional warrants under its loan agreement with the Company. The Company had
also made scheduled principal payments of $375,000 and $616,667 principal
payments on April 30, 1995 and October 31, 1995, respectively.
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 to Bridge. Semi-annual interest payments are to be made
on April 30, 1996 and October 31, 1996.
On November 17, 1995, the Company entered into an agreement with
Silicon Valley Bank ("the Bank"). Pursuant to the Loan Agreement, the Bank holds
a Note in the principal amount of $1,220,238 at an interest rate of prime plus
2% (10.75% at December 31, 1995) and a warrant to purchase up to 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 with accounts
receivable, inventory, and property, plant and equipment. The Company has agreed
to not use $400,000 of its available bank lines of credit until this Note is
fully repaid. The Note contains certain covenants, including minimum net income
levels and certain financial ratios. On a quarterly basis, half of any excess
cash flow that the Company generates is required to be used to prepay any
remaining principal balance due on this Note. Excess cash flow is defined as net
income plus non-cash expenses less capital expenditures, scheduled principal
payments and increases in net working capital.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
I N D E X
Page No.
Independent Auditors' Report ......................................... 21
Consolidated Balance Sheets .......................................... 22
Consolidated Statements of Operations ................................ 23
Consolidated Statements of Shareholders' Equity ...................... 24
Consolidated Statements of Cash Flows ................................ 25
Notes to Consolidated Financial Statements ........................... 27
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
1995 Consolidated Financial Statements and Independent
Auditors Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Arizona Instrument Corporation:
We have audited the accompanying consolidated balance sheets of Arizona
Instrument Corporation and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Arizona Instrument Corporation and
subsidiaries as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 13, 1996, except for Note C, as to which the date is March 26, 1996
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31,
----------------------------
1995 1994
ASSETS ------------ ------------
------
CURRENT ASSETS:
Cash and cash equivalents $ 486,382 $ 387,979
Receivables, less allowance for doubtful
accounts of $191,000 and $187,000 3,371,837 3,862,258
Inventories:
Components 1,148,508 1,358,533
Finished Goods 645,262 832,214
------------ ------------
1,793,770 2,190,747
Current portion of notes receivable related party 55,501 6,000
Prepaid expenses and other current assets 222,680 283,819
------------ ------------
Total current assets 5,930,170 6,730,803
PROPERTY, PLANT AND EQUIPMENT, net 1,083,199 1,237,882
GOODWILL, net of accumulated amortization
of $1,874,912 and $1,628,559 2,455,924 2,702,357
COVENANT NOT TO COMPETE, net of accumulated
amortization of $189,583 and $131,250 160,417 218,750
NOTES RECEIVABLE RELATED PARTY 0 49,502
OTHER ASSETS 970,452 1,027,416
------------ ------------
TOTAL $10,600,162 $ 11,966,710
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Lines of credit $250,000 $1,625,000
Accounts payable 863,386 816,361
Accrued salaries and commissions 374,838 300,856
Accrued interest 14,713 98,787
Other accrued expenses 481,585 346,104
Current portion of long-term debt and
capital lease obligations 613,224 1,841,383
------------ ------------
Total current liabilites 2,597,746 5,028,491
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS - less current portion 1,663,112 1,199,621
COMMITMENTS AND CONTINGENCIES (Note J)
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value:
Authorized, 10,000,000 shares;
Issued, 6,352,563 and 6,195,484 shares 63,526 61,955
Preferred Stock, $.01 par value
Authorized, 1,000,000 shares
Additional paid-in capital 9,360,950 9,294,400
Deficit (2,862,721) (3,395,306)
------------ ------------
6,561,755 5,961,049
Less treasury stock, 86,165 shares at cost (222,451) (222,451)
------------ ------------
Total shareholders' equity 6,339,304 5,738,598
------------ ------------
TOTAL $10,600,162 $11,966,710
============ ============
See Notes to Consolidated Financial Statements
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year Ended December 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
NET SALES $13,104,230 $12,105,818 $14,182,410
COSTS OF GOODS SOLD 5,644,945 5,859,033 6,624,607
----------- ----------- -----------
Gross margin 7,459,285 6,246,785 7,557,803
----------- ----------- -----------
EXPENSES
Marketing 3,116,104 3,556,332 3,517,078
General & administrative 2,268,641 2,415,690 2,223,031
Research & development 605,627 374,538 427,279
Amortization & depreciation 598,385 579,565 538,779
Restructuring costs 0 863,837 0
----------- ----------- -----------
Total Expenses 6,588,757 7,789,962 6,706,167
----------- ----------- -----------
OPERATING INCOME (LOSS) 870,528 (1,543,177) 851,636
----------- ----------- -----------
OTHER REVENUE (EXPENSE)
Interest income 22,039 9,320 5,000
Interest expense (449,816) (507,573) (542,499)
Other 100,834 105,230 15,642
----------- ----------- -----------
Total other expense (326,943) (393,023) (521,857)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING METHOD 543,585 (1,936,200) 329,779
INCOME TAXES 11,000 2,000 35,000
----------- ----------- -----------
INCOME (LOSS) BEFORE CUMMULATIVE EFFECT
OF CHANGE IN ACCOUNTING METHOD 532,585 (1,938,200) 294,779
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD 0 0 113,500
NET INCOME (LOSS) $ 532,585 ($1,938,200) $ 408,279
=========== =========== ===========
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING METHOD PER SHARE $ 0.08 ($ 0.31) $ 0.07
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD PER SHARE $ 0.00 $ 0.00 $ 0.02
----------- ----------- -----------
NET INCOME (LOSS) PER SHARE $ 0.08 ($ 0.31) $ 0.09
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON STOCK EQUIVALENTS 6,584,860 6,186,816 4,373,191
=========== =========== ===========
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
<CAPTION>
Additional (Deficit)
Common Stock paid-in retained Treasury
Shares Amount capital earnings stock TOTAL
--------- --------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 4,009,906 $ 40,099 $7,018,350 ($1,865,385) ($ 62,452) $ 5,130,612
Issuance of stock pursuant to:
Stock purchase plan 25,452 255 38,936 39,191
Horizon purchase fees (37,742) (378) 13,862 13,484
Exercise of warrants 65,000 650 48,100 48,750
Stock private placement 2,090,000 20,900 2,174,623 2,195,523
Purchase of treasury stock (159,999) (159,999)
Net Income 408,279 408,279
--------- --------- ---------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1993 6,152,616 $ 61,526 $ 9,293,871 ($1,457,106) ($ 222,451) $ 7,675,840
Issuance of stock pursuant to:
Stock purchase plan 38,702 387 43,838 44,225
Stock private placement fees (43,309) (43,309)
Exercise of warrants 4,166 42 42
Net loss (1,938,200) (1,938,200)
--------- --------- ---------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1994 6,195,484 $ 61,955 $9,294,400 ($3,395,306) ($ 222,451) $ 5,738,598
Issuance of stock pursuant to:
Stock purchase plan 46,476 465 37,806 38,271
Exercise of warrants 105,603 1,056 21,444 22,500
Exercise of stock options 5,000 50 7,300 7,350
Net Income 532,585 532,585
--------- --------- ---------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1995 6,352,563 $ 63,526 $9,360,950 ($2,862,721) ($ 222,451) $ 6,339,304
========= ========= ========== ========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 532,585 ($1,938,200) $ 408,279
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 779,577 812,501 802,280
Gain on sale or abandonment of property,
plant and equipment (62,294) (93,552) (7,391)
Provision for losses on receivables 4,257 10,882 9,017
Restructuring charges 747,995
Provision for inventory obsolesence 89,965
Change in operating assets and liabilities:
Decrease (increase) in receivables 486,164 177,576 (785,832)
Decrease (increase) in inventories 296,388 (389,816) (71,628)
Decrease (increase) in other current assets 11,639 129,779 (289,383)
Decrease (increase) in other assets 21,011 (302,051) (394,443)
Increase (decrease) in accounts payable 47,025 (73,205) (27,514)
Increase (decrease) in accrued expenses 125,389 (20,939) (64,434)
---------- ---------- ----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 2,241,741 (849,065) (421,049)
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant and
and equipment and other assets (106,523) (64,639) (472,765)
Proceeds from sale of property, plant and
and equipment and other assets 80,553 136,264
---------- ---------- ----------
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES (25,970) 71,625 (472,765)
---------- ---------- ----------
Continued
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Borrowings of long-term debt 1,625,000 414,001
Payments of long-term debt and capital leases (2,441,192) (156,201) (922,965)
Net (payments) borrowings under bank
lines of credit (1,375,000) 825,000 (545,378)
Proceeds recevied on notes receivable 5,703 902
Stock issued for warrants 29,850 42 48,750
Sale of common stock, net proceeds (43,309) 2,209,007
Purchase of treasury stock (159,999)
Issuance of common stock pursuant
to stock purchase plan 38,271 44,225 39,191
---------- ---------- ----------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (2,117,368) 670,659 1,082,607
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 98,403 (106,781) 188,793
CASH AND CASH EQUIVALENTS,
beginning of year 387,979 494,760 305,967
---------- ---------- ----------
CASH AND CASH EQUIVALENTS
end of year $ 486,382 $ 387,979 $ 494,760
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Transfer of inventories to property, plant and
equipment to be used as demonstration units 100,589 115,239 18,346
Property, plant and equipment acquired through
capital lease obligations 51,524 550,998 436,343
Note receivable acquired for asset sale 170,000
Note payable due for asset sale 10,000
Interest paid 502,759 477,039 415,362
Income taxes paid 4,669 9,270 38,030
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED DECEMBER 31, 1995
-----------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated financial statements include the accounts of Arizona Instrument
Corporation and its wholly-owned subsidiaries (collectively, the "Company"). All
material intercompany profits, transactions and balances have been eliminated
upon consolidation.
Description of business. Arizona Instrument Corporation designs, manufactures
and markets the Computrac line of automated microprocessor controlled analytical
instruments used to measure the moisture content of various materials, the
ENCOMPASS and Soil Sentry line of computer-based fuel management and compliance
leak detection instruments for monitoring underground storage tanks (UST's) and
the Jerome line of toxic gas detection instruments primarily used to detect
mercury and hydrogen sulfide. The Company also provides tank testing and related
services for the underground storage tank market. The Company sells in the
United States and also international markets.
Sales of instruments are recognized once the shipment is made. Sales of
underground storage tank (UST) services are recognized based on the percentage
of completion.
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property, plant and equipment are recorded at cost. Depreciation is provided by
the straight-line method over the estimated useful lives of the various classes
of assets. Equipment and furniture/fixtures are estimated to have 5 and 7 year
useful lives, respectively. Leasehold improvements are amortized over the
shorter of the estimated useful life or the period of the lease. Equipment under
capital leases are generally amortized over the estimated lives of the related
equipment.
Goodwill is the cost of investments in purchased companies in excess of the fair
value of net assets of the businesses acquired. Goodwill is amortized on a
straight-line basis over 20 years for the Jerome Goodwill and over 10 years for
the Horizon Goodwill. The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 121 during 1995. SFAS No. 121
establishes the accounting standard for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used for long-lived assets and certain identifiable intangibles to be
disposed of. The Company will adopt SFAS No. 121 effective January 1, 1996.
Management of the Company does not believe that adoption of SFAS No. 121 will
have a material effect on the financial position or results of operations of the
Company.
<PAGE>
Covenant not to compete resulted as part of the Horizon acquisition in 1992 and
is being amortized on a straight line basis.
Debt issue costs are amortized using the interest method over the term of the
related debt.
Stock based compensation. In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123 "Accounting for Stock Based Compensation". The Company
has determined that it will not change to the fair value method and will
continue to use Accounting Principles Board Opinion No. 25 for measurement and
recognition of employee stock based compensation. SFAS No. 123 will require
additional disclosures in the 1996 financial statements.
Income (Loss) per share is computed using the weighted average number of common
shares outstanding during each year after giving effect to stock options and
warrants considered to be dilutive common stock equivalents.
Statements of cash flows - For purposes of the consolidated statements of cash
flows, cash and cash equivalents represent cash in bank and money market funds.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from these estimates.
B. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consists of the following:
1995 1994
----------- -----------
Leasehold improvements $ 154,807 $ 154,807
Furniture, fixtures and equipment 3,887,422 3,756,333
Automobiles 123,111 123,111
----------- -----------
Less accumulated depreciation
and amortization 4,165,340 4,034,251
(3,082,141) (2,796,369)
----------- -----------
$ 1,083,199 $ 1,237,882
=========== ===========
C. BANK LINES OF CREDIT
At December 31, 1995, the Company had two lines of credit available (one for
domestic operations and one for international operations) collateralized by
accounts receivable, inventory, and property, plant and equipment which provided
for an aggregate maximum commitment of
<PAGE>
$2,750,000 through March 15, 1996. At December 31, 1995, the Company had
$150,000 outstanding under its domestic line of credit at the bank's prime rate
of interest plus 2.0% (10.5% at December 31, 1995). The Company also had
$100,000 outstanding under the international line of credit at December 31,
1995. Borrowings under this line of credit are at the bank's prime rate of
interest plus 1.5% (10.0% at December 31, 1995). Subsequent to December 31,
1995, the lines of credit were renewed through March 15, 1997 for an aggregate
commitment of $2,500,000. The domestic line was renewed for $1,500,000 at an
interest rate of prime plus 1.5% and the international line was renewed for
$1,000,000 at an interest rate of prime plus 1.0%. In connection with obtaining
these lines of credit in a prior year, the Company issued a warrant to the bank
to purchase 43,011 shares of the Company's common stock at an exercise price of
$2.25. These warrants expire at December 15, 1996. The lines of credit contain
certain covenants, including minimum net income levels and certain financial
ratios. The Company was in compliance with all bank covenants at December 31,
1995.
D. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at December 31 consist of the
following:
1995 1994
---------- ----------
Convertible subordinated note, interest at 12%
payable quarterly, paid off in 1995 $ 0 $2,176,250
Capital lease obligations (Note J) 670,170 836,541
Notes payable 375,000 0
Notes payable to Bank 1,231,166 28,213
---------- ----------
Total Debt and Capital Leases 2,276,336 3,041,004
Less current position 613,224 1,841,383
---------- ----------
Long-Term Portion of Debt and Capital Leases $1,663,112 $1,199,621
========== ==========
In November, 1995, the Company prepaid the remaining principal balance
($1,184,583) of its 12% subordinated convertible note payable to Bridge Capital
Investors II ("Bridge"). In connection with the prepayment, Bridge waived all
rights to receive any additional warrants under its loan agreement with the
Company. The Company also made scheduled principal payments of $375,000 and
$616,667 on April 30, 1995 and October 31, 1995, respectively.
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 to Bridge. Semi-annual interest payments are to be made on April 30,
1996 and October 31, 1996.
<PAGE>
On November 17, 1995, the Company entered into an agreement with a bank
("Bank"). Pursuant to the Loan Agreement, the Bank holds a Note in the principal
amount of $1,220,238 at an interest rate of prime plus 2% (10.75% at December
31, 1995) and a warrant to purchase up to 62,500 unregistered 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 with accounts receivable,
inventory, and property, plant and equipment. The Company has agreed to not use
$400,000 of its available bank lines of credit until this Note is fully repaid.
The Note contains certain covenants, including minimum net income levels and
certain financial ratios. On a quarterly basis, half of any excess cash flow
that the Company generates, is required to be used to prepay any remaining
principal balance due on this Note. Excess cash flow is defined as net income
plus non-cash expenses less capital expenditures, scheduled principal payments
and increases in net working capital. At December 31, 1995 the Company was in
agreement with all covenants of this agreement.
Long-term debt and capital lease obligations at December 31, 1995 are payable as
follows:
1996 $ 613,224
1997 1,010,908
1998 478,627
1999 161,749
2000 11,828
----------
$2,276,336
==========
E. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard ("SFAS") No. 107 "Disclosures About
Fair Value of Financial Instruments" was adopted for the year ending December
31, 1995. SFAS No. 107 requires disclosure of the estimated fair value of
certain financial instruments. The Company has estimated the fair value of its
financial instruments using available market data. However, considerable
judgement is required in interpreting market data to develop estimates of fair
value. The use of different market assumptions or methodologies may have a
material effect on the estimates of fair values. The carrying values of cash,
receivables, lines of credit, accounts payable, accrued expenses, and long term
debt and capital lease obligations approximate fair values due to the short-term
maturities or market rates of interest.
F. SHAREHOLDERS' EQUITY
In July 1983, the Company adopted an Incentive Stock Option Plan ("ISOP")
pursuant to which the Company could, for a period of 10 years, grant options to
purchase up to 100,000 shares of the Company's Common Stock. ISOP options may be
granted to employees of the Company or any subsidiary. The exercise price of all
options must be at least the fair market value of the Company's common stock on
the date of grant and the options must be exercised within 10 years
<PAGE>
from the date of grant. In 1984, non-qualified stock options were granted to an
officer and a former director. The exercise price of the options is equal to the
fair market value of the Company's Common Stock on the date of grant.
In March 1985, the Company adopted a Stock Option Plan ("SOP") under which the
Company could, for a period of ten years, grant options to purchase up to
250,000 shares of the Company's Common Stock. SOP options may be granted to
employees, officers or directors of the Company or any subsidiary. The exercise
price of options must be at least the fair market value of the Company's Common
Stock on the date of grant and the options must be exercised within 11 years
from the date of grant.
In April 1991, the Company adopted the 1991 Stock Option Plan ("OP") under which
the Company may, for a period of ten years, grant incentive stock options and
nonstatutory stock options to purchase up to 450,000 shares of the Company's
Common Stock. Additionally, each year, the number of shares of stock that may be
issued is increased automatically by 1% on January 1 if certain conditions are
met. Stock options may be granted to employees, directors and other persons
whose participation is deemed to be in the Company's best interest, but only
employees may be granted incentive stock options. Incentive stock options
granted under the plan have a maximum term of ten years and nonstatutory options
may have a maximum term of twenty years. The exercise price for an incentive
stock option must be at least the fair market value of the Company's common
stock on the date of grant. The exercise price for a nonstatutory option may be
any amount above the par value of the Company's Common Stock determined in good
faith.
The following is a summary of stock option activity:
Average
Number Price
of Shares Per Share
--------- -------
Outstanding December 31, 1992 280,285 $ 3.51
Granted 328,860 2.40
Canceled (213,500) 3.62
--------- -------
Outstanding December 31, 1993 395,645 2.53
Granted 57,719 2.20
Canceled (75,480) 3.00
--------- -------
Outstanding December 31, 1994 377,884 2.39
Granted 678,903 .92
Canceled (332,884) 2.39
Exercised (5,000) 1.47
--------- -------
Outstanding December 31, 1995 718,903 $ 1.00
========= =======
<PAGE>
In January 1985, the Company adopted an Employee Stock Purchase Plan which
provides for the sale of up to 200,000 shares of common stock to qualifying
employees of the Company. The purchase price of the stock is 85% of the lesser
of the fair market value at the beginning or the end of the offering period,
January and July of each year. During the years ended December 31, 1995, 1994
and 1993 a total of 46,476, 38,702 and 25,452 shares of common stock have been
purchased at average prices of $.82, $1.14 and $1.54 per share, respectively. As
of December 31, 1995, a total of 21,900 shares were available under this plan.
Stock Private Placement
At November 30, 1993 the Company completed a private placement of 2,090,000
shares of common stock raising gross proceeds of $2,612,550 and net proceeds
after fees and expenses of $2,195,523. The proceeds were used to reduce debt, to
obtain certain European product certifications, and for new product development.
The Company also utilized $159,999 of the net proceeds to redeem 73,845 shares
of its common stock held primarily by Mr. Quinn Johnson, a director and
executive officer of the Company. On November 30, 1993, the Company issued a
warrant to purchase up to 209,000 shares at an exercise price of $1.25 per share
to the placement agent in connection with the private placement of the Company's
stock.
A shelf registration statement covering 3,781,000 shares of common stock issued
in the private placement described above, in a 1992 private placement and in
connection with the Horizon acquisition was declared effective by the Securities
and Exchange Commission on February 11, 1994.
G. INCOME TAXES
The provision for income taxes for the years ended December 31, consists of the
following:
1995 1994 1993
-------- -------- --------
Federal:
Current $ 2,250 $ 0 $ 17,800
Deferred
State: 8,750 2,000 17,200
-------- -------- --------
$ 11,000 $ 2,000 $ 35,000
======== ======== ========
The provision for income taxes as shown in the accompanying consolidated
statements of operations differs from the amounts computed by applying the
federal statutory income tax rates to income before income taxes. A
reconciliation of the provision for income taxes and the amounts that would be
computed using the statutory federal income tax rates for the years ended
December 31 is set forth below:
<PAGE>
1995 1994 1993
--------- -------- --------
Provision (benefit) computed at
federal statutory rates $ 185,000 ($658,988) $138,815
State taxes 9,000 2,000 4,410
Goodwill 63,000 63,500 63,500
Life Insurance 9,000 9,600 13,136
Other 57,000 3,000 1,677
Benefit of loss carryforward 0 0 15,242
Change in valuation allowance (312,000) 582,888 (201,780)
--------- -------- --------
$ 11,000 $ 2,000 $ 35,000
========= ======== ========
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes", effective January 1, 1993. The cumulative effect
of adopting SFAS No. 109 on the Company's financial statements was to increase
income $113,500 for 1993.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and tax credit carryforwards. The tax effects of significant items comprising
the Company's net deferred tax asset as of December 31 are as follows:
1995 1994
--------- ---------
Deferred tax assets:
Current
Reserves not currently deductible $ 114,000 $ 369,000
Long Term
Other intangibles 70.000 49,000
Operating loss carryforwards 398,000 671,500
Tax credit carryforwards 324,000
Difference between book and tax basis of property 151,500 323,000
-------- ---------
Total deferred tax assets 1,057,500 1,412,500
Deferred tax liabilities:
Long Term
Difference between book and tax basis of property 42,500
---------
Total deferred tax liabilities 42,500
Valuation allowance (944,000) (1,256,500)
--------- ---------
Net deferred tax asset $ 113,500 $ 113,500
========= =========
The Company has evaluated its past earnings history and trends, sales backlog
and budgets and determined that it is more likely than not that most of the
deferred tax assets will not be realized. As a result, a valuation allowance of
$944,000 has been recorded on the deferred tax assets. The Company will continue
to review this valuation allowance on a quarterly basis and make adjustments as
appropriate.
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $1,000,000 available to reduce federal taxable income. These net
operating losses begin to expire in 2005.
<PAGE>
H. PROFIT SHARING PLAN
Full time employees with greater than six months of service are eligible to
participate in the Company's 401K profit sharing retirement plan adopted in 1981
whereby, at the Board of Directors' discretion, contributions are made on an
annual basis. No contributions have been made in any of the three years ended
December 31, 1995.
I. SALES
Export sales, primarily to Canada, Korea and Sweden were approximately
$1,950,000, $2,220,000 and $3,212,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
The Company has a concentration of sales from a newly released product to a
single customer that makes up approximately 10% of Net Sales. The potential for
a negative financial impact could result from a partial or total loss of the
business relationship with this customer. Management believes that the
relationship between the Company and this customer was good at December 31,
1995. Management is actively seeking to diversify sales of this new product to a
number of other customers, and anticipate that additional customers will be
added during the next twelve months.
J. COMMITMENTS AND CONTINGENCIES
Leases
Certain office facilities and equipment are held under capital and operating
leases. These leases expire in periods through 2003 and include renewal options.
Capital leases included in Property and Equipment total $1,361,193 and
$1,343,228 (net of accumulated amortization of $765,429 and $533,650) as of
December 31, 1995 and 1994, respectively.
At December 31, 1995, future minimum lease payments under such leases having
non- cancelable terms in excess of one year are summarized as follows:
Capital leases Operating leases
---------- ----------
1996 $ 333,878 $ 302,004
1997 312,092 284,839
1998 134,140 294,920
1999 17,316 317,835
2000 12,988 317,604
Thereafter 0 873,411
---------- ----------
Total minimum lease payments $ 810,414 $2,390,613
---------- ==========
Less amount representing interest 140,243
----------
Net present value of future minimum
Lease payments $ 670,170
==========
Rent expense for operating leases was approximately $360,000, $335,000 and
$301,000 for the years
<PAGE>
ended December 31, 1995, 1994 and 1993, respectively.
Genelco Earnout Agreement
In connection with the Company's purchase of Genelco, Inc. on January 30, 1988,
the Company entered into a potential $700,000 earnout agreement based on future
sales. The agreement was modified on December 31, 1992 for a remaining earnout
of $202,585 to be compensated with 208,421 shares of unregistered common stock
in 1996. Through December 31, 1991, $155,669 has been earned under the prior
earnout agreement. Under the modified agreement, the expense was $33,764,
$35,801 and $27,233 for the years ended December 31, 1995, 1994 and 1993,
respectively. The earnout period under the modified agreement will be completed
on December 31, 1997.
Litigation
Litigation has been commenced in Superior Court, Maricopa County, Arizona with
respect to certain matters arising in connection with a technology development
agreement and related agreements entered into by the Company and a state
organization in 1988 related to the Company's Jerome product line and providing
the Company with certain rights thereunder. The Company believes, not
withstanding such agreements, the state organization exclusively licensed
relevant technology to another firm in February 1993. The Company filed suit in
February 1996 against this firm and , the state organization and certain other
defendants requesting a declaratory judgement, confirming the Company's right to
the contested technology and seeking damages. The firm also filed suit in
January 1996 against the state organization, AZI and certain executive officers
of AZI seeking declaratory judgement confirming the validity of its license
agreement with the state organization and seeking damages. Certain other related
actions also have been filed. The Company intends to pursue the litigation
vigorously. Management of the Company believes that the ultimate resolution of
these matters will not have a material effect on the financial position of the
Company.
K. RESTRUCTURING COSTS
During the third quarter of 1994 the Company developed and implemented a formal
plan to restructure the Environmental Technology Group (ETG). Because of
competitive market conditions in the Eastern US, the Company had not been
successful in profitably developing tank testing in these territories. Also, the
Company changed focus in the Soil Sentry product line by reducing the number of
products offered and focusing on newer, more profitable products. The plan for
restructuring involved closing down the tank testing sales and service
operations in the Eastern US, writing off certain Soil Sentry inventory and the
related patent and reducing related corporate staffing expenses by approximately
10%. The total restructuring costs for 1994 were $863,837 which consisted of the
following:
Write down of inventory $ 405,373
Write down of patent 342,622
---------
Total non-cash restructuring costs 747,995
Total cash severance costs 115,842
---------
Total restructuring costs $ 863,837
=========
<PAGE>
The restructuring was completed in 1994 and there were no additional
restructuring related expenses in 1995.
L. RELATED PARTY TRANSACTIONS
During September 1993, the Company loaned $45,000 to one of its officers. The
loan is collateralized by a pledge of 15,000 shares of common stock of the
Company and the cash value of a life insurance policy. The note bears interest
at 10% per annum and is due August 1996. During April 1994, the Company loaned
approximately $10,000 to another officer. The note bears interest at 10% and is
due April, 1996.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no Form 8-K filed within 24 months prior to the date the
most recent financial statements reporting a change of accountants or reporting
disagreements on any matter of accounting principle or financial statement
disclosure
PART III
ITEMS 9 THROUGH 12.
Within 120 days after the close of the fiscal year, the Company intends
to file with the Securities and Exchange Commission a definitive proxy statement
pursuant to Regulation 14A which will involve the election of directors. The
answers to Items 9 through 12 are incorporated by reference pursuant to General
Instruction E(3).
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Financial Statements. The following is a list of the consolidated financial
statements of Arizona Instrument Corporation and its subsidiaries included in
Item 8 of Part II.
Independent auditors' report.
Consolidated balance sheets - December 31, 1995 and 1994.
Consolidated statements of operations - Years ended December 31, 1995, 1994 and
1993
Consolidated statements of shareholders' equity - Years ended December 31, 1995,
1994 and 1993
Consolidated statements of cash flows - Years ended December 31, 1995, 1994 and
1993
Notes to consolidated financial statements
<PAGE>
(a) The following exhibits are incorporated by reference or are filed with this
Form 10-KSB.
3.1 Certificate of Incorporation of Registrant as amended through June 30,
1994: Incorporated by reference from Form 10-Q filed in August
3.2 By-laws of Registrant as amended through June 30, 1994: Incorporated by
reference from Form 10-Q filed in August 1994.
10.1 United States Patent No. 4,165,633 issued August 28, 1979: Incorporated
by reference from Form S-18 filed on July 27, 1983.
10.2* 1983 Incentive Stock Option Plan of Registrant: Incorporated by
reference from Form S-18 filed on July 17, 1983.
10.3* 1985 Stock Option Plan: Incorporated by reference from Form 10K filed
in March 1986.
10.4* 1991 Stock Option Plan: Incorporated by reference from Form 10K filed
in March 1992.
10.5 Amended and restated Silicon Valley Bank, Export-Import Guaranteed
Business Loan Agreement, February 1993. Incorporated by reference from
Form 10-KSB filed in March 1993.
10.6 Loan Modification Agreement with Silicon Valley Bank dated March 15,
1994 to renew the lines of credit through March 15, 1995. Incorporated
by reference from Form 10-QSB filed in March 1994.
10.7 Amended and restated Silicon Valley Bank Domestic and Export Loan
Agreements, dated March 15, 1995 through March 15, 1996.
10.8 Warrant Purchase Agreement dated as of December 15, 1991 between
Arizona Instrument Corporation and Silicon Valley Bank: Incorporated by
reference from Form 10K filed in March 1992.
10.9* Employment Agreement dated September 30, 1992 between Horizon
Acquisition Co. And Quinn Johnson. Incorporated by reference from Form
8-K dated September 30, 1992.
10.10 Noncompete Agreement dated September 30, 1992 between Horizon
Acquisition Co. and Quinn Johnson. Incorporated by reference from Form
8-K dated September 30, 1992.
10.11* Employment Agreement between Walfred R. Raisanen and Arizona Instrument
Corporation dated November 5, 1992. Incorporated by reference from
<PAGE>
Form ESB filed in March 1993.
10.12* Employment Agreement between the Company and John P. Hudnall dated June
3, 1993. Incorporated by reference from Form 10-QSB filed August 1993.
10.13 Lease Agreement between the Company and Wood Street Limited Partnership
dated September 1, 1993. Incorporated by reference from Form 10-QSB
filed August 1993.
10.14 Amended and Restated License Agreement between the Company and Tracer
Research Corporation dated October 27, 1993. Incorporated by reference
from Form 10-QSB filed November 1993.
10.15 Warrant Agreement between the Company and Cruttenden & Co., Inc. dated
November 30, 1993. Incorporated by reference from Report on Form 10-QSB
dated November 30, 1993.
10.16 Amendment No. 7 to the Purchase Agreement between Arizona Instrument
Corporation and Bridge Capital Investors II, dated July 1, 1994.
10.17 Amendment No. 8 to the Purchase Agreement between Arizona Instrument
Corporation and Bridge Capital Investors II, dated March 30, 1995.
10.18 Promissory Note between Arizona Instrument Corporation and Classic
Syndicate, Inc., dated April 15, 1996.
10.19 Loan Modification Agreement between Arizona Instrument Corporation and
Silicon Valley Bank related to a new Promissory Note, dated November 7,
1995.
10.20 Promissory Note between Arizona Instrument Corporation and Silicon
Valley Bank, dated November 7, 1995.
10.21 Agreement between Arizona Instrument Corporation and Bridge Capital
Investors II, regarding the terms for prepayment of the Bridge Note,
dated November 27, 1995.
22.1 Subsidiaries: Quintel International, Inc., incorporated under the
Companies Act of 1982 of Barbados, W.I.; Computrac International, Inc.,
an Arizona Corporation, Horizon Engineering and Testing Inc., an
Arizona Corporation, each of which is wholly owned by Arizona
Instrument Corporation.
24.1 Accountants' Consent
(b) There were no reports on Form 8-K for the year ended December 31, 1995.
* Management Contract or compensatory plan or arrangement.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 29, 1996 By: /s/ John P. Hudnall
-------------------
John P. Hudnall, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- -------------------------- ------------------------------- --------------
/s/ Walfred R. Raisanen Chairman of the Board of March 29, 1996
- -------------------------- --------------
Walfred R. Raisanen Directors
/s/ John P. Hudnall President and Director (Princi- March 29, 1996
- -------------------------- --------------
John P. Hudnall pal Executive Officer)
/s/ Scott M. Carter Chief-Financial-Officer March 29, 1996
- -------------------------- --------------
Scott M. Carter (Principal Financial and
Accounting Officer)
/s/ Quinn Johnson Director March 29, 1996
- -------------------------- --------------
Quinn Johnson
/s/ Richard Long Director March 29, 1996
- -------------------------- --------------
Richard Long
/s/ S. Thomas Emerson Director March 29, 1996
- -------------------------- --------------
S. Thomas Emerson
/s/ Patricia Onderdonk Director March 29, 1996
- -------------------------- --------------
Patricia Onderdonk
/s/ Stanley H. Weiss Director March 29, 1996
- -------------------------- --------------
Stanley H. Weiss
PROMISSORY NOTE
$375,000.00 April 15, 1995
Concord, California
FOR VALUE RECEIVED, the undersigned, ARIZONA INSTRUMENT CORPORATION, a
Delaware corporation (the "Borrower"), hereby promises to pay to the order of
CLASSIC SYNDICATE, INC., an Illinois corporation, its successors or assigns (the
"Lender"), the principal sum of Three Hundred Seventy-Five Thousand Dollars
($375,000.00) and all interest accrued thereon. The Borrower hereby promises
that the funds loaned hereunder shall be used exclusively for the payment of
Borrower's April 30, 1995 installment obligation to Bridge Capital Investors II.
Interest shall accrue from the effective date hereof on the outstanding
principal balance until all of the principal and interest due hereunder have
been paid. Such interest shall be calculated at a rate of ten percent (10%) per
annum. Should such amount of interest be deemed to be usurious under any
applicable laws, rules or regulations, then the amount of interest charged
hereunder shall be adjusted to the highest rate which is not usurious. Interest
shall be calculated on the basis of a 360-day year and a twelve 30-day months.
Semiannual payments shall be made on October 30, 1995, April 30, 1996,
and October 30, 1996 each in an amount equal to all of the interest accrued
through the due date of such payment. All of the outstanding principal and all
remaining accrued and unpaid interest is due and payable in full no later than
April 30, 1997. Borrower shall have the right to prepay at any time, without
penalty, all or any portion of the principal and/or accrued interest, provided
that any partial payments shall be deemed applicable first to accrued interest
and then to the outstanding principal.
If any payments of principal or interest on this note shall become due
on a Saturday, Sunday or a public holiday under the laws of the State of
California, such payment shall be made on the next succeeding business day and
such extension of time shall in such case be included in computing interest in
connection with such payment.
Payments of both principal and interest are to be made at such place as
the Lender shall designate to the Borrower, in lawful money of the United States
of America, in immediately available funds.
This note is issued pursuant to, is entitled to the benefits of, and is
subject to the terms of, a Subordinated Loan Agreement dated as of April 14,
1996 by and between Borrower and Lender (the "Subordinated Loan Agreement"),
providing for, among other things, the acceleration of the indebtedness
evidenced by this note upon the happening of certain events of default and the
subordination of this note to certain other indebtedness of Borrower.
<PAGE>
This note shall be governed by and construed in accordance with the
laws of the State of California.
ARIZONA INSTRUMENT CORPORATION
-------------------------------------
Name:________________________________
(Corporate Seal) Title:_________________________________
Attest:
- --------------------------------
Name:___________________________
Title:____________________________
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of November 7, 1995, by
and between Arizona Instrument Corporation ("Borrower') whose address is 4114
East Wood Road, Phoenix, AZ, 85040, and Silicon Valley Bank ("Bank") whose
address is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other
documents, an Amended and Restated Loan and Security Agreement (Domestic Loan )
(the "Domestic Loan Agreement") and a Second Amended and Restated Loan and
Security Agreement (Export Loan ) (the "Export Loan Agreement"), both dated
March 15, 1995, as such agreements may be amended from time to time,
(collectively, the "Loan Agreement"). The Domestic Loan Agreement provided for,
among other things, a revolving line of credit in the original amount of One
Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00) (the "Committed
Line"). The Export Loan Agreement provided for, among other things, a revolving
line of credit in the principal amount of One Million Two Hundred Fifty Thousand
and 00/100 Dollars ($1,250,000.00) (the "Export Committed Line"). Concurrently
herewith, Borrower shall execute a Promissory Note, in the original principal
amount of One Million Two Hundred Fifty Thousand and 00/100 Dollars
($1,250,000.00) (the "Term Loan"). Defined terms used but not otherwise defined
shall have the same meaning as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES: Repayment of the Indebtedness is
secured by the Collateral as described in the Loan Agreement and a Collateral
Assignment, Patent Mortgage and Security Agreement. Additionally, repayment of
the Export ~Committed Line is guaranteed by the Export-Import Bank of the United
States (the "Guarantor') pursuant to a Guarantee Agreement (the "Guaranty").
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing payment of the Indebtedness shall be referred
to as the "Security Documents." Hereinafter, the Security Documents, together
with all other documents evidencing or securing the Indebtedness shall be
referred to as the "Existing Loan Documents."
<PAGE>
3. DESCRIPTION OF CHANGE IN TERMS:
A. Modification(s) to the Loan Agreement.
1. Section 6.9 entitled "Debt-Net Worth Ratio" is hereby amended, in
its entirety, to read as follows:
Debt-Net Worth Ratio. Borrower shall maintain, on a quarterly basis,
beginning as of the quarter ending December 31, 1995, a ratio of Total
Liabilities less Subordinated Debt to Tangible Net Worth plus
Subordinated Debt of not more than 2.00 to 1.00.
2. Section 6.10 entitled "Tangible Net Worth" is hereby amended, in its
entirety, to read as follows:
Tangible Net Worth. Borrower shall maintain, on a quarterly basis,
beginning with the quarter ending December 31, 1995, a Tangible Net
Worth of not less than Two Million Five Hundred Thousand and 00/100
Dollars ($2,500,000.00).
3. The Section 6.11 entitled "Profitability" is hereby amended, in its
entirety, to read as follows:
Profitability. Borrower shall be profitable, after taxes, on a
quarterly basis, beginning with the quarter ending December 31, 1995.
4. The following Section is hereby incorporated into the Loan
Agreement:
6.14 Debt Service. Borrower shall maintain, on a rolling 12 month
basis, a Debt Service ratio of 1.40 to 1.00, to be tested by Bank on a
quarterly basis.
5.The following definition is hereby added into the Loan Agreement:
"Debt Service" means earnings for the previous 12 months before income
taxes, depreciation and amortization divided by current maturities of
long term debt.
6.The first sentence of the section 2.1 entitled "Advances" in hereby
amended to read as follows:
Subject to the terms and conditions of the Loan Agreement, Bank agrees
to make Advances to Borrower in an aggregate amount not to exceed the
lesser of Committed Line or the Borrowing Base minus an aggregate
reserve amount of at least $400,000.00 under the Committed Line and
Export Committed Line ("Reserve"). Such Reserve shall be only for the
duration of the Term Loan.
<PAGE>
B. Modification to Export Loan Agreement.
1. The second paragraph of the Section 6.3 entitled "Financial
Statements, Reports, Certificates" is hereby amended in parts to read
within ten (10) days after the last day of each month (rather each
quarter).
4. CONSISTENT CHANGES. The Existing Loan Documents are amended wherever to
reflect the above-described changes.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any amounts
under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and ~pledgor signing below)
understands and agrees that in modifying the existing Indebtedness, Bank is
relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. ~Bank's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Bank to make any future modifications to the
Indebtedness. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of the Indebtedness. It is the intention of Bank and Borrower to
retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Bank in writing. No maker, endorser,
or guarantor will be released by virtue of this Loan Modification Agreement. The
terms of this Paragraph apply not only to this Loan Modification Agreement, but
also to all subsequent loan modification agreements.
<PAGE>
7. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrowers agreement to:
1 .Execute a Warrant to Purchase Stock ("Warrant") in favor of Bank to
purchase shares of Borrowers Common Stock equal to five percent (5.0%)
of total commitment divided by an exercise price equal to the average
market price of the common stock for the thirty (30) days prior to the
Warrant issue date. Such Warrant shall expire in five (5) years and
shall be subject to Registration Right and Antidilution provisions.
Such Warrant shall be in form and substance acceptable to Bank.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER:
ARIZONA INSTRUMENT CORPORATION SILICON VALLEY BANK
By:_______________________________ By:____________________________
Name:____________________________ Name:_________________________
Title:_____________________________ Title:__________________________
PROMISSORY NOTE
Borrower: ARIZONA INSTRUMENT CORPORATION Lender: Silicon Valley Bank
4144 East Wood Street Embarcadero/National Accounts
Phoenix, AZ 85040 1731 Embarcadero, Suite 220
Palo, CA 94303
Principal Amount: $1,250,000.00
Initial Rate: 10.750%
Date of Note: November 7, 1995
PROMISE TO PAY. ARIZONA INSTRUMENT CORPORATION ("Borrower") promises to pay to
Silicon Valley Bank ("Lender"), or order, in lawful money of the United States
of America, the principal amount of One Million Two Hundred Fifty Thousand &
00/100 Dollars ($1,250,000.00), together with Interest on the unpaid principal
balance from November 7, 1995, until paid In full.
PAYMENT. Subject to any payment changes resulting from changes In the Index,
Borrower will pay this loan in 41 principal payments of $29,761.91 each and one
final principal and Interest payment of $30,028.31. Borrowees first principal
payment is due December 7,1995, and all subsequent principal payments are due on
the same day of each month after that. In addition, Borrower will pay regular
monthly payments of all accrued unpaid Interest due as of each payment date.
Borrowees first interest payment is due December 7, 1995, and all subsequent
Interest payments are due on the same day of each month after that. Borrower's
final payment due May 7, 1999, will be for all principal and accrued Interest
not yet paid. Interest on this Note is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lendees address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is Lenders Prime Rate (the
"Index). This is the rate Lender charges, or would charge, on 90-day unsecured
loans to the most creditworthy corporate customers. This rate may or may not be
the lowest rate available from Lender at any given time. Lender will tell
Borrower the current Index rate upon Borrowees request. Borrower understands
that Lender may make loans based on other rates as well. The interest rate
change will not occur more often than each time the prime rate is adjusted by
Silicon Valley Bank. The Index currently Is 8.750% per annum. The Interest rate
to be applied to the unpaid principal balance of this Note will be at a rate of
2.000 percentage points over the Index, resulting In an Initial rate of 10.750%
per annum. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges
are earned fully as of the date of the loan and will not be subject to refund
upon early payment (whether voluntary or as a result of default), except as
otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrowers obligation to continue to make payments under the payment schedule.
Rather, they will reduce the principal balance due and may result in Borrower
making fewer payments.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender and has not been removed, cured, discharged or rescinded within
ten (10) days. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person, in an amount in excess of Two Hundred
Thousand Dollars ($200,000.00), that may materially affect any of Borrowers
property or Borrowees ability to repay this Note or perform Borrowees
obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or fumished to Lender by Borrower or on
Borrowers behalf is false or misleading in any material respect either now or at
the time made or furnished. (e) Borrower becomes insolvent or an insolvency
proceeding is commenced against Borrower and is not dismissed or stayed within
thirty (30) days (provided that no advances will be made prior to the dismissal
of such insolvency proceeding), a receiver is appointed for any part of
Borrowers property, Borrower makes an assignment for the benefit of creditors,
or any proceeding is commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrowers
property on or in which Lender has a lien or security interest. This includes a
gamishment of any of Borrowees accounts with Lender. (g) Any of the events
described in this default section occurs with respect to any guarantor of this
Note. (h) A material adverse change occurs in Borrowees financial condition, or
Lender believes the prospect of payment or performance of the Indebtedness is
impaired.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrowees failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, do one or both of the following: (a) increase the variable interest rate on
this Note to 7.000 percentage points over the Index, and (b) add any unpaid
accrued interest to principal and such sum will bear interest therefrom until
paid at the rate provided in this Note (including any increased rate). Lender
may hire or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject to any limits
under applicable law, Lendees attorneys' fees and Lenders legal expenses whether
or not there is a lawsuit, including attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated postjudgment collection services.
Borrower also will pay any court costs, in addition to all other sums provided
by law. This Note has been delivered to Lender and accepted by Lender in the
State of California. If there Is a lawsuit Borrower agrees upon Lender's request
to submit to the jurisdiction of the courts of Santa Clara County, the State of
California. Lender and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Borrower against
the other. (Initial Here ) This Note shall be governed by and construed In
accordance with the laws of the State of California.
REQUEST TO DEBIT ACCOUNTS. Borrower will regularly deposit all funds received
from its business activities in accounts maintained by Borrower at Silicon
Valley Bank. Borrower hereby requests and authorizes Lender to debit any of
Borrowees accounts with Lender, specifically, without limitation, Account Number
for payments of principal and interest due on the loan and any other obligations
owing by Borrower to Lender.
Lender will notify Borrower of all debits which Lender makes against Borrowers
accounts. Any such debts against Borrowees accounts in no way shall be deemed a
set-off.
LOAN AND SECURITY AGREEMENT. This Note is subject to and shall be governed by
all the terms and conditions of the Amended and Restated Loan and Security
Agreement (Domestic Loan) dated March 15, 1995, between Lender and Borrower, as
the same may be amended from time to time, which Amended and Restated Loan and
Security Agreement (Domestic Loan) is incorporated herein by this reference.
LOAN FEE. This Note is subject to a loan fee in the amount of Ten Thousand and
00/1 00 Dollars ($1 0,000.00) plus all out-of-pocket expenses.
ADDITIONAL PAYMENTS. Notwithstanding anything to the contrary contained in the
paragraph entitled "Payment", repayment of this Note shall be accelerated to the
extent Borrower generates excess cash flow. Excess cash flow is defined as the
residual proceeds from the following calculation: Quarterly net income plus
depreciation and non cash charges; less capital expenditures, scheduled
principal payments on all indebtedness and aggregate increase in net working
capital. This calculation will be performed quartely. Such additional payments
shall be due 45 days after close of each fiscal quarter at a rate of fifty
percent (50%) of the excess cash flow calculation ("Additional Payments').
Additional Payments shall be credited to this Note as payment schedule in the
inverse order of maturity (i.e. to the backened of this Note repayment
schedule).
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lendees security interest
in the collateral; and take any other action deemed necessary by Lender without
the consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER HAS READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES
TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE
NOTE.
BORROWER:
ARIZONA INSTRUMENT CORPORATION
By:__________________________
Name:________________________
Title:_________________________
AGREEMENT
By this Agreement made and entered into as of November 27, 1995,
ARIZONA INSTRUMENT CORPORATION, a Delaware corporation ("AZI"), and BRIDGE
CAPITAL INVESTORS II, a New York limited partnership ("Bridge"), confirm and
agree as follows:
1. AZI and Bridge are parties to the following documents:
a. Purchase Agreement dated as of July 6, 1989 as
amended by the Amendments defined below (the
"Purchase Agreement").
b. Warrant to purchase up to 115,000 shares of common
stock of AZI, dated as of July 6, 1989, in favor of
Bridge, as amended by the Amendments (the "Warrant").
c. AZI's ten percent (10%) Convertible Subordinated Note
due 1996 in the original principal amount of
$3,000,000 in favor of Bridge, as amended by the
Amendments (the "Note").
d. Amendment No. 1, dated as of March 30, 1990;
Amendment No. 2, dated as of March 28, 1991;
Amendment No. 3, dated as of April 8, 1992; Amendment
No. 4, dated as of September 2, 1992; Amendment No.
5, dated as of July 16, 1993; Amendment No. 6, dated
as of November 30, 1993; Amendment No. 7, dated as of
July 1, 1994; and Amendment No. 8, dated as of March
30, 1995 (collectively the "Amendments").
The Purchase Agreement, the Warrant, the Note and the Amendments are herein
collectively called the "Existing Agreements."
2. The outstanding principal balance of the Note is $1,162,083.00.
Bridge agrees to accept that amount, plus interest on that amount at the rate of
twelve percent (12%) per annum from October 1, 1995 through the date payment is
received (such principal and interest herein called the "Final Payment"), in
full payment and satisfaction of the Note, provided that the Final Payment is
received on or before November 28, 1995. By accepting the Final Payment as full
payment and satisfaction of the Note, Bridge waives all other amounts otherwise
due under the Note, including any penalty interest as a result of AZI utilizing
the four-month extension for the December 31, 1994 payment which was made on
April 30, 1995, and the four-month extension for the June 30, 1995 payment which
was made on October 31, 1995.
3. All existing warrant rights under the Warrant and/or the Purchase
Agreement have been exercised. Bridge waives all rights under the Purchase
Agreement and/or the Warrant to receive any additional warrants as a result of
the prepayment of the Note, provided that the Final Payment is received on or
before November 28, 1995.
<PAGE>
4. Upon receipt by Bridge of the Final Payment as provided herein, the
parties shall have no further rights or obligations under the Existing
Agreements and Bridge shall (I) mark the Note "PAID" and immediately deliver the
original Note to AZI and (ii) mark the Warrant "CANCELED" and immediately
deliver the original Warrant to AZI.
5. The parties shall execute such additional documents and do such
other acts as may be reasonably necessary to fully implement the intent of this
Agreement.
6. This Agreement shall be governed by and construed according to the
laws of the State of Arizona.
7. This Agreement shall be binding upon, and shall inure to the benefit
of, the parties hereto and their successors and assigns.
IN WITNESS WHEREOF, these presents are executed as of the date first
written above.
ARIZONA INSTRUMENT CORPORATION
By:_________________________________
Its__________________________________
BRIDGE CAPITAL INVESTORS II
By: Bridge Associates, General Partner
By:__________________________________
Its___________________________________
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Arizona Instrument Corporation's
Registration Statement No. 33-73614 on Form S-3 and Registration Statement Nos.
33-2712, 33-2713 and 2-99078 on Form S-8 of our report dated March 13, 1996,
except for Note C, as to which the date is March 26, 1996, appearing in this
Annual Report on Form 10-KSB of Arizona Instrument Corporation for the year
ended December 31, 1995.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 26, 1996
<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> 724904
<NAME> ARIZONA INSTRUMENT CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 486,382
<SECURITIES> 0
<RECEIVABLES> 3,562,608
<ALLOWANCES> 190,771
<INVENTORY> 1,793,770
<CURRENT-ASSETS> 5,930,170
<PP&E> 2,804,147
<DEPRECIATION> 2,316,713
<TOTAL-ASSETS> 10,600,162
<CURRENT-LIABILITIES> 2,597,746
<BONDS> 1,124,464
0
0
<COMMON> 63,526
<OTHER-SE> 6,275,778
<TOTAL-LIABILITY-AND-EQUITY> 10,600,162
<SALES> 13,104,230
<TOTAL-REVENUES> 13,104,230
<CGS> 5,644,945
<TOTAL-COSTS> 6,588,757
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 449,816
<INCOME-PRETAX> 543,585
<INCOME-TAX> 11,000
<INCOME-CONTINUING> 532,585
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 532,585
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
