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, 1996 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
- --------------------------------------------------------------------------------
(Name of small business issuer as specified in its charter)
Delaware 86-0410138
- --------------------------------------------------------------------------------
State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4114 East Wood Street, Phoenix, AZ 85040
- --------------------------------------------------------------------------------
(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 [ ]
[ ] Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB.
Issuer's revenues for its most recent fiscal year were $12,639,943.
As of February 28, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $19,008,000. The aggregate market value is
computed with reference to the average bid and asked prices. Shares of Common
Stock held by each officer and director and by each person who owns 10% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive.
As of February 28, 1997, 6,611,729 shares of Common Stock ($.01 par value) were
outstanding.
<PAGE>
ARIZONA INSTRUMENT CORPORATION
TABLE OF CONTENTS
PART I Page No.
Item 1 Description of Business ............................. 1
Item 2 Description of Property ............................. 11
Item 3 Legal Proceedings ................................... 11
Item 4 Submission of Matters to a Vote of Security Holders . 13
Executive Officers of the Registrant ................ 13
PART II
Item 5 Market for Common Equity and Related
Stockholder Matters ............................ 14
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 16
Item 7 Financial Statements ................................ 21
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... 40
PART III
Item 9 Directors, Executive Officers, Promoters,
and Control Persons; Compliance with
Section 16(a) of the Exchange Act............... 40
Item 10 Executive Compensation .............................. 40
Item 11 Security Ownership of Certain Beneficial Owners
and Management ................................. 40
Item 12 Certain Relationships and Related Transactions....... 40
PART IV
Item 13 Exhibits and Reports on Form 8-K..................... 40
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Portions of the Proxy Statement for the 1997 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
- -------
Arizona Instrument Corporation designs and manufactures precision
instruments used in quality control, industrial control and environmental
monitoring applications. AZI's wholly-owned subsidiary, Horizon Engineering and
Testing, Inc. ("Horizon") specializes in testing and engineering services for
the underground storage tank ("UST") market.
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"), a 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 UST leak detection systems. In
September 1992, the Company acquired Horizon, a company that specializes in
testing and engineering services for USTs. Horizon's testing services complement
AZI's monitoring systems. In June, 1994, the Company introduced the
ENCOMPASS(TM) product, its next generation of fuel management and leak detection
compliance systems.
Sales of the Company's ENCOMPASS and Soil Sentry products, as well as
similar products of the Company's competitors, have been slower than predicted
by industry analysts. Many UST 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 United States Environmental Protection
Agency ("EPA") regulations using a permanent method such as the ENCOMPASS and
Soil Sentry systems.
By December 1998, the law will require virtually all UST 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(TM) 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 June 1994, the Company introduced the ENCOMPASS product, an
all-inclusive, personal computer-based fuel management and environmental
compliance system that utilizes existing on-site personal computers to manage
fuel inventory and meet EPA leak detection requirements. Its open-architecture
system is compatible with other business software and runs in the computer's
background without interrupting other site activities and without need for
intervention. In the event of an alarm condition, the system automatically
notifies the operator. The ENCOMPASS system runs in a Windows-based environment.
In 1996, the Company expanded the ENCOMPASS system to include line leak
detection and continuous statistical tank testing products. The addition of
statistical inventory reconciliation ("SIR") to the ENCOMPASS system is
scheduled for 1997. This product will allow the tank owner to perform SIR
automatically at the site without needing to send the inventory information to a
service provider for analysis.
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.
The Liquid 330 provides leak detection for double-wall tanks and
piping. Many of the newer steel and fiberglass storage tanks being installed are
manufactured with a second outer wall, designed to contain leaking materials.
The Liquid 330 uses optical sensing probes to monitor the space between the two
walls, signaling an alarm in the event of a leak. This optical sensing
technology was sold to the Bindicator Company in January 1990 as part of the
liquid level control product line. In the sales agreement, the Company was
granted an exclusive royalty-free license of the technology allowing it to
manufacture and market the product to UST applications for a period of five
years. In 1992, the Company began offering groundwater probes for use with the
TLM-830 and Liquid 330 systems to monitor for leaking hydrocarbon product
floating on the site's groundwater.
<PAGE>
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.
AZI introduced the TLM-830 in February 1992. This versatile system
accommodates varying tank site needs by combining the TLM-800's inventory
monitoring technology with the leak detection capabilities of the Liquid 330.
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
United States. 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
a UST. Estimates of the total number of USTs 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 ENCOMPASS and Soil Sentry products.
Horizon
- -------
Services - Horizon uses the Tracer Tight(TM) tracer testing system for
USTs, which is licensed to Horizon by Tracer Research Corp. ("Tracer") of
Tucson, Arizona. The term of the current license agreement is five years,
expiring in October 1998. The license is nonexclusive and neither Horizon nor
other Tracer licensees have been assigned specific protected territories. The
license requires that all test samples taken by Horizon be submitted to Tracer
for analysis at prescribed fees. Currently, Horizon's business 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.
<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 to the owner.
In 1996, Horizon developed a program that provides the products and
services required by its tank testing customers choosing to convert to a
permanent method of leak detection. Offering ENCOMPASS as the compliance method,
Horizon also provides installation management of the system, cathodic
protection, interior tank lining, spill/overfill protection as well as other
services and products required to upgrade the site to meet federal and local
leak detection requirements.
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 on 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 current regulatory
requirements.
Recognizing that the domestic market for testing USTs is slowly
declining as UST owners choose to convert to permanent monitoring systems like
ENCOMPASS before the December 1998 deadline mandated by the EPA. In 1996,
Horizon expanded its services and product offering as described above.
Horizon's provides testing services in 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 ENCOMPASS and 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 431-X mercury vapor analyzer ("Jerome Mercury Analyzer")
quickly and accurately quantifies low levels of mercury in ambient air for
on-site environmental testing, clean-up and analysis. Using the Company's
gold-film sensing technology, the unit can be carried to sources of mercury, and
displays results in seconds with the push of a button. After spill clean-up, the
analyzer can be used to verify that no hazardous residue remains.
The Jerome 631-X hydrogen sulfide analyzer ("Jerome H2S Analyzer")
detects and measures low levels of ambient hydrogen sulfide ("H2S"). Using the
Company's gold-film sensing technology, the hand-held instrument quickly
quantifies H2S levels down to parts-per-
<PAGE>
billion, allowing corrective action to reduce complaints which arise at
noxious-odor levels. The simple-to-operate, push button unit is easily carried
to sources of H2S where it monitors gas levels to meet air quality standards.
In December 1995, the Company announced that it had 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 1997.
Markets and Applications - Mercury - The market for Jerome Mercury
Analyzer comprises customers in three major groups:
Industrial Hygiene - These applications involve workplace screening to
ensure employees are not subjected to unacceptable mercury risk. The United
States 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.
Industrial Process Quality Control - These customers test for mercury
in products where even trace amounts can have toxic effects, such as the
confined environments of submarines, engine rooms or spacecraft. Suppliers to
the National Aeronautics and Space Administration and the United States Navy are
required under procurement contracts to certify that certain equipment
components are mercury-free..
Mercury Dental Amalgam Screening - Mercury and silver dental amalgams
have become the subject of intense scrutiny and controversy. The Jerome Mercury
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 market 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 the Jerome H2S Analyzer for corrosion
control include wastewater treatment, oil and gas refining, and pulp and paper
processing.
<PAGE>
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 heating chamber 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 is 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
technology to detect moisture levels accurately down to .005% in as little as
two minutes. The MAX-2000 is programmable from an easy-to-use front panel menu
system, allowing the user to store test parameters for 30 different sample
materials. It features a real-time front panel display of moisture values, the
elapsing test time and drying-curve graph; a 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 of its new line of Computrac moisture analyzers with Alpha and Beta
production units completed in 1996. 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 for sale to customers in the first quarter of 1997.
The MAX-500 was introduced in 1996 as a lower priced, reduced feature
version of the MAX-1000 and MAX-2000. The MAX-500 is for customers who do not
need all the features or the resolution of the other Computrac moisture
analyzers.
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.
<PAGE>
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-, two- and five-year parts and labor warranties. For the year
ended December 31, 1996, warranty expense approximated 1.0% of net sales.
<PAGE>
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 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; Backlog
- ----------------------------
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. At December 31,
1996, backlog totaled approximately $320,000 compared to $730,000 at December
31, 1995.
The Company markets its instruments for export through a direct
international office in Singapore, as well as through foreign distributors in
Canada, Europe, the Middle East, the Far East, and Latin America.
<PAGE>
Industries Served - Customers
- -----------------------------
The specific industries served domestically by each product are
detailed in the specific Markets and Applications sections presented earlier.
Two ENCOMPASS customers represent approximately 14% of net sales in
1996. 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 17% of
total sales in 1996, 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 United States 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 contracts will last through January 1999.
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 products overlap the products of these competitors,
except that AZI believes that it is the only provider of an aspirated vapor
monitoring system.
Computrac - A number of companies have products which compete with
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 increases.
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 the same method as Horizon. Horizon is
potentially subject to competition from other licensees of this and other
methods.
<PAGE>
Research and Development
- ------------------------
Research and development expenses increased 19% in 1996 compared to
1995. Expenditures for research and development for the years ended December 31,
1996, 1995 and 1994 were $720,133, $605,627 and $374,538, respectively. This
represented 5.7% of sales in 1996, 4.6% in 1995 and 3.1% in 1994. The Company's
research and development expenditures for 1996 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 equipment lease
payments related to the research. The Research Agreement was terminated as of
December 31, 1990. The Company made the lease payments through November 1993.
The research performed under the Research Agreement is now being continued by
Company personnel. AZI completed development of a new gold film micro-sensor in
December 1995.
During the years ended December 31, 1996, 1995 and 1994, the Company
has not expensed any funds related to the Research Agreement.
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, Licenses and Trademarks
- --------------------------------
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.
The Company has trademarked its ENCOMPASS(TM) product.
See "Horizon-Services," above, for information regarding an agreement
pursuant to which the Company licenses the technology utilized in its
tank-testing operation.
<PAGE>
Employees
- ---------
As of December 31, 1996, the Company had a total of 97 full time
employees and 6 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
The Company currently leases 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 this building expires in August 2003.
The Company believes that its facilities are modern, well-maintained
and adequate for current needs.
ITEM 3. LEGAL PROCEEDINGS
On March 7, 1997, the Company was served with a summons and first
amended complaint which was filed in the United States District Court for the
District of Idaho on February 28, 1997 by United Co-op, Inc. and Idaho Petroleum
Clean Water Trust Fund. The complaint alleges breach of contractual promises and
breach of warranties in a commercial transaction for tank and line tightness
services. The Company has filed for an extension until April 18, 1997 to reply.
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 on a patent of which the plaintiff was 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. During 1996, Horizon reached
a settlement with the State of Arizona.
Litigation commenced in Superior Court, Maricopa County, Arizona in
1996 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
<PAGE>
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 parties reached a
settlement in June, 1996 under which the Company would receive $1,000,000 in
cash and certain free education rights, in addition to exclusive rights to the
contested technology. The Company has received full payment of this settlement
as of January 30, 1997.
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 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding executive officers of
the Company.
Walfred R. Raisanen, age 61, 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.
Prior to his position with the Company, he was President and a Director of
Motorola Process Control, Inc. a predecessor to the Company.
John P. Hudnall, age 46, 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.
George G. Hays, age 41, joined the Company in 1997 as Vice President of
Finance, Chief Financial Officer, and Vice President of Manufacturing. Prior to
his position with the Company, Mr. Hays was president and founder of Hays
Financial Group, Inc., an investment banking firm, since 1986.
Susan Berry, age 48, 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 47, became Vice President, Service in 1996. Prior to
that, he was Vice President of Manufacturing since 1993. He started with 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.
Allen Porter, age 39, was named Vice President of Marketing in 1996.
Mr. Porter has been with the Company since 1985, working in sales, sales
management and product management. Prior to his position with the Company, he
was program director for an Arizona-based behavioral health agency.
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, 1997, there were approximately 400 shareholders of record of the
Company's common stock, its only class of common equity. 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
-----------------
1996 High Low
-------- ----- ----
First Quarter 2.71 2.51
Second Quarter 3.42 3.11
Third Quarter 2.84 2.64
Fourth Quarter 2.63. 2.38
1995 High Low
-------- ----- ----
First Quarter $1.19 $.69
Second Quarter 1.69 .75
Third Quarter 2.75 1.25
Fourth Quarter 2.25 1.81
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 of Financial Condition and Results of Operations."
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data for each of the five years in the period
ended December 31, 1996 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.
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
Year Ended December 31, (1)
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 12,639,943 $ 13,104,230 $ 12,105,818 $ 14,182,410 $ 10,862,419
Cost of goods sold 5,556,172 5,644,945 5,859,033 6,624,607 4,534,819
Operating expenses 6,690,522 6,588,757 7,789,962 6,706,167 5,601,140
------------ ------------ ------------ ------------ ------------
Operating income (loss) 393,249 870,528 (1,543,177) 851,636 726,460
Interest Expense 224,637 449,816 507,573 542,499 511,375
Other Income 90,230
Settlement of Litigation 997,096
Income tax (benefit) expense (488,000) 11,000 2,000 35,000 180,458
Extraordinary item
reduction of income tax
expense from utilization of
prior years' operating losses 172,922
Cumulative effect of a change
in accounting method 113,500
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,743,938 $ 532,585 ($ 1,938,200) $ 408,279 $ 192,128
============ ============ ============ ============ ============
Net income (loss) per share $ .25 $ .08 ($ .31) $ .09 $ .07
Weighted average number of
shares outstanding 6,951,811 6,584,860 6,186,816 4,373,191 2,909,613
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
December 31, (1)
--------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Total assets $11,024,164 $10,600.162 $11,966,710 $ 12,768,299 $11,369,361
Working capital $ 3,950,096 $ 3,332,424 $ 2,318,979 $ 4,439,421 $ 1,766,729
Long-term debt, excluding
current portion $ 378,010 $ 1,663,112 $ 1,816,288 $ 2,161,298 $ 1,961,515
Total liabilities $ 2,592,458 $ 4,260,858 $ 6,228,112 $ 5,092,459 $ 6,238,749
Shareholders' equity $ 8,431,706 $ 6,339,304 $ 5,738,598 $ 7,675,840 $ 5,130,612
</TABLE>
(1) Includes operations of Horizon acquired in September, 1992.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained herein regarding management's anticipation of
the Company's future market position, development of additional products,
product introduction and delivery dates, reliability of products, adequate
sources of supplies, acquisition of related product lines or companies, and
positive responses to new developments, constitute "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Management's anticipation is based upon assumptions regarding levels of
competition, research and development results, product introduction and delivery
schedules, raw material markets, the markets in which the Company operates, and
stability of the regulatory environment. Any of these assumptions could prove
inaccurate, and therefore there can be no assurance that the forward-looking
information will prove to be accurate.
Results of Operations:
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, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Percent of net sales Percentage change
Year ended December 31, over prior periods
1996 vs. 1995 vs.
1996 1995 1994 1995 1994
------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% -4% 8%
Cost of goods sold 44.0% 43.1% 48.4% -2% -4%
------ ------ ------ ------ ----
Gross margin 56.0% 56.9% 51.6% -5% 19%
------ ------ ------ ------ ----
Expenses
Marketing 24.5% 23.8% 29.4% -1% -12%
General and administrative 17.3% 17.3% 20.0% -3% -6%
Research and development 5.7% 4.6% 3.1% 19% 62%
Amortization and depreciation 5.4% 4.6% 4.8% 15% 3%
Restructuring costs 0.0% 0.0% 7.1% 0% -100%
------ ------ ------ ------ ----
Total expenses 52.9% 50.3% 64.3% 2% -15%
------ ------ ------ ------ ----
Operating income (loss) 3.1% 6.6% -12.7% -55% 156%
------ ------ ------ ------ ----
Other revenue (expense)
Interest income 0.2% .2% 0.1% 0% 136%
Interest expense -1.8% -3.4% -4.2% -50% -11%
Other 8.4% .8% 0.9% 956% -4%
------ ------ ------ ------ ----
Total other revenue (expense) 6.8% -2.5% -3.2% -364% -17%
------ ------ ------ ------ ----
Income (loss) before income taxes 9.9% 4.1% -16.0% 131% 128%
Income tax (benefit) expense -3.9% .1% 0.0% -4536% 450%
------ ------ ------ ------ ----
Net income (loss) 13.8% 4.1% -16.0% 227% 127%
====== ====== ====== ====== ====
</TABLE>
Fiscal 1996 vs. Fiscal 1995
- ---------------------------
Net income increased 227% to $1,743,938 in 1996 from $532,585 in 1995.
The increase in net income resulted in part from $997,096 of other income the
Company recognized during 1996 related to a settlement the Company reached with
a state organization involving a
<PAGE>
technology contract. Net income also increased as a result of a $488,000 tax
benefit recognized in 1996 from reducing the Company's deferred tax valuation
allowance and recognizing a deferred tax asset.
Net sales decreased 4% to $12,639,943 in 1996 from $13,104,230 in 1995.
Sales decreased primarily in tank testing services and in Computrac moisture
analyzers. These sales decreases were offset to a large extent by increases in
sales of the ENCOMPASS fuel management and compliance systems, ENCOMPASS related
installations.
Cost of goods sold was 44% of sales in 1996 compared to 43% of sales in
1995. Gross margin decreased primarily due to lower utilization of the tank
testing field technicians. Gross margin also decreased as a result of a lower
mix of sales of the Computrac moisture analyzer sales.
Overall expenses in 1996 increased $101,765 or 2% above 1995. The
increase was primarily the result of the $114,506 increase in research and
development expenses.
Marketing expenses decreased $24,970 or 1% in 1996 compared to 1995.
The decrease in marketing expenses was primarily a result of the decrease in
tank testing sales personnel.
General and administrative expenses decreased $78,169, or 3% in 1996
compared to 1995. 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 $114,506, or 19% in 1996
compared to 1995. The increase in research and development expenses was
primarily the result of a planned increase in research and development personnel
to support the new product activities for all the Company's various product
lines.
Amortization and depreciation expenses increased $90,398, or 15% in
1996 compared to 1995 due to the purchase of additional capital equipment,
including computer equipment.
Interest expense decreased $225,179, or 50% in 1996 compared to 1995
due to a decrease in the average outstanding debt.
Fiscal 1995 vs. Fiscal 1994
- ---------------------------
The Company reported net income of $532,585 in 1995 compared to a net
loss of $1,938,200 in 1994, an increase of 127%. 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.
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
<PAGE>
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.
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 was 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.
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.
Liquidity and Capital Resources:
- --------------------------------
Working capital increased 19% to $3,947,282 at December 31, 1996
compared to $3,332,424 at December 31, 1995. The current ratio increased to 2.78
in 1996 from 2.28 in
<PAGE>
1995. The increase in working capital and the current ratio was primarily due to
increased cash flow from operations.
At December 31, 1996 as compared to December 31, 1995, accounts
receivable decreased $454,361, primarily as a result of improvements in credit
and collection policies and procedures. Inventory at December 31, 1996 increased
$256,212 compared to December 31, 1995, primarily as a result of increased
inventory for two new products scheduled for introduction in the first quarter
of 1997.
Cash and cash equivalents increased $111,549 in 1996, to end the year
at $597,931. Cash provided by operating activities was $1,231,095 in 1996. 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 offset partly by increases in the settlement receivable
and deferred tax asset. Cash used by investing activities was $129,457 in 1996.
Cash used by financing activities was $990,089 in 1996, 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 $2,500,000 through March 15, 1997. At December 31, 1996, the Company had $0
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 1.5% (9.75% at
December 31, 1996.) 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, 1996, the Company had $0 outstanding under its international line
of credit for $1,000,000. Borrowings under this line of credit are at the Bank's
prime rate of interest plus 1.0% (9.25% at December 31, 1996). Subsequent to
December 31, 1996, the lines of credit were renewed through March 15, 1998 for
an aggregate commitment of $2,500,000. The domestic line was renewed for
$1,500,000 at an interest rate of prime plus .75%. The international line was
renewed for $1,000,000 at an interest of rate of prime plus .75%. 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, 1996.
On April 14, 1995, the Company entered into an a Subordinated Loan
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. Semiannual interest payments
were made on April 30, 1996 and October 31, 1996.
On November 17, 1995, the Company entered into a Loan Agreement with
the Bank. Pursuant to the Loan Agreement, the Bank holds a note in the principal
amount of $395,353 at an interest rate of prime plus 2% (10.25% at December 31,
1996) 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 28
monthly principal payments of $13,633 and one final payment of $13,629 in
addition to monthly interest payments from January 7, 1997 through May 7, 1999.
<PAGE>
The note is cross-collateralized with the Company's bank lines of credit with
accounts receivable, inventory, and property, plant and equipment. 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 ....................................... 23
Consolidated Balance Sheets ........................................ 24
Consolidated Statements of Operations .............................. 25
Consolidated Statements of Shareholders' Equity .................... 26
Consolidated Statements of Cash Flows .............................. 27
Notes to Consolidated Financial Statements ......................... 29
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
1996 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, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 7, 1997
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
-----------
CURRENT ASSETS:
Cash and cash equivalents $ 597,931 $ 486,382
Receivables, less allowance for doubtful
accounts of $165,000 and $191,000 2,917,476 3,371,837
Inventories:
Components 1,369,007 1,148,508
Finished Goods 680,975 645,262
----------- -----------
2,049,982 1,793,770
Current portion of notes receivable related party 45,501 55,501
Prepaid expenses and other current assets 550,840 222,680
----------- -----------
Total current assets 6,161,730 5,930,170
PROPERTY, PLANT AND EQUIPMENT, net 846,458 1,083,199
GOODWILL, net of accumulated amortization
of $2,121,266 and $1,874,912 2,209,650 2,455,924
COVENANT NOT TO COMPETE, net of accumulated
amortization of $247,917 and $189,583 102,084 160,417
DEFERRED TAX ASSET 641,437 113,500
OTHER ASSETS 1,062,805 856,952
----------- -----------
TOTAL $11,024,164 $10,600,162
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Lines of credit $ 0 $ 250,000
Accounts payable 771,679 863,386
Accrued salaries and commissions 251,273 374,838
Accrued interest 27,652 14,713
Other accrued expenses 369,576 481,585
Current portion of long-term debt and
capital lease obligations 794,268 613,224
----------- -----------
Total current liabilites 2,214,448 2,597,746
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS - less current portion 378,010 1,663,112
COMMITMENTS AND CONTINGENCIES (Note J)
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value:
Authorized, 10,000,000 shares;
Issued, 6,677,680 and 6,352,563 shares 66,777 63,526
Preferred Stock, $.01 par value
Authorized, 1,000,000 shares
Additional paid-in capital 9,706,163 9,360,950
Deficit (1,118,783) (2,862,721)
----------- -----------
8,654,157 6,561,755
Less treasury stock, 86,165 shares at cost (222,451) (222,451)
----------- -----------
Total shareholders' equity 8,431,706 6,339,304
----------- -----------
TOTAL $11,024,164 $10,600,162
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 12,639,943 $ 13,104,230 $ 12,105,818
COST OF GOODS SOLD 5,556,172 5,644,945 5,859,033
------------ ------------ ------------
Gross margin 7,083,771 7,459,285 6,246,785
------------ ------------ ------------
EXPENSES
Marketing 3,091,134 3,116,104 3,556,332
General & administrative 2,190,472 2,268,641 2,415,690
Research & development 720,133 605,627 374,538
Amortization & depreciation 688,783 598,385 579,565
Restructuring costs 0 0 863,837
------------ ------------ ------------
Total Expenses 6,690,522 6,588,757 7,789,962
------------ ------------ ------------
OPERATING INCOME (LOSS) 393,249 870,528 (1,543,177)
------------ ------------ ------------
OTHER REVENUE (EXPENSE)
Interest income 22,124 22,039 9,320
Interest expense (224,637) (449,816) (507,573)
Settlement of litigation (Note J) 997,096
Other 68,106 100,834 105,230
------------ ------------ ------------
Total other income (expense) 862,689 (326,943) (393,023)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 1,255,938 543,585 (1,936,200)
INCOME TAXES (BENEFIT) (488,000) 11,000 2,000
------------ ------------ ------------
NET INCOME (LOSS) $ 1,743,938 $ 532,585 ($ 1,938,200)
============ ============ ============
NET INCOME (LOSS) PER SHARE $ 0.25 $ 0.08 ($ 0.31)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON STOCK EQUIVALENTS 6,951,811 6,584,860 6,186,816
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<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, 1994 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
Issuance of stock pursuant to:
Stock purchase plan 40,637 406 57,207 57,613
Exercise of warrants 22,714 227 27,773 28,000
Earnout agreement 208,424 2,084 200,501 202,585
Exercise of stock options 53,342 534 59,732 60,266
Net Income 1,743,938 1,743,938
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 6,677,680 $ 66,777 $ 9,706,163 ($1,118,783) ($ 222,451) $ 8,431,706
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,743,938 $ 532,585 ($1,938,200)
Adjustments to reconcile net income to net cash
provided (used) by operating
activities:
Depreciation and amortization 804,495 779,577 812,501
Gain on sale or abandonment of property,
plant and equipment (34,570) (62,294) (93,552)
Provision for losses on receivables (25,289) 4,257 10,882
Restructuring charges 747,995
Provision for inventory obsolesence 89,965
Change in operating assets and liabilities:
Decrease in receivables 479,650 486,164 177,576
(Increase) decrease in inventories (256,212) 296,388 (389,816)
Decrease in other current assets 46,257 11,639 129,779
(Increase) in settlement receivable (364,419)
(Increase) in deferred tax asset (527,937)
(Increase) decrease in other assets (320,476) 21,011 (302,051)
(Decrease) increase in accounts payable (91,707) 47,025 (73,205)
(Decrease) increase in accrued expenses (222,635) 125,389 (20,939)
----------- ----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 1,231,095 2,241,741 (849,065)
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and
and equipment and other assets (207,354) (106,523) (64,639)
Proceeds from sale of property, plant and
and equipment and other assets 77,897 80,553 136,264
----------- ----------- -----------
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES (129,457) (25,970) 71,625
----------- ----------- -----------
</TABLE>
Continued
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Continued)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Borrowings of long-term debt 1,625,000
Payments of long-term debt and capital leases (1,104,058) (2,441,192) (156,201)
Net (payments) borrowings under bank
lines of credit (250,000) (1,375,000) 825,000
Proceeds received on notes receivable 15,506 5,703 902
Stock issued for warrants 79,114 29,850 42
Sale of common stock, net proceeds (43,309)
Issuance of common stock for earnout agreement 202,585
Issuance of common stock pursuant
to stock purchase plan 66,764 38,271 44,225
----------- ----------- -----------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (990,089) (2,117,368) 670,659
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 111,549 98,403 (106,781)
CASH AND CASH EQUIVALENTS,
beginning of year 486,382 387,979 494,760
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
end of year $ 597,931 $ 486,382 $ 387,979
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Transfer of inventories to property, plant and
equipment to be used as demonstration units $ 57,057 $ 100,589 $ 115,239
Property, plant and equipment acquired through
capital lease obligations 51,524 550,998
Note receivable acquired for asset sale 170,000
Note payable due for asset sale 10,000
Interest paid 126,172 502,759 477,039
Income taxes paid 5,025 4,669 9,270
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED DECEMBER 31, 1996
-----------------------------------
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 adopted SFAS No. 121 effective January 1, 1996.
<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 additional
disclosures have been included 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 affect 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:
1996 1995
----------- -----------
Leasehold improvements $ 157,604 $ 154,807
Furniture, fixtures and equipment 3,936,984 3,887,422
Automobiles 99,359 123,111
----------- -----------
4,193,947 4,165,340
Less accumulated depreciation
and amortization (3,347,489) (3,082,141)
----------- -----------
$ 846,458 $ 1,083,199
=========== ===========
C. BANK LINES OF CREDIT
--------------------
At December 31, 1996, 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>
$2,500,000 through March 15, 1997. At December 31, 1996, the Company had $0
outstanding under its domestic line of credit at the bank's prime rate of
interest plus 1.5% (9.75% at December 31, 1996). The Company also had $0
outstanding under the international line of credit at December 31, 1996.
Borrowings under this line of credit are at the bank's prime rate of interest
plus 1.0% (9.25% at December 31, 1996). Subsequent to December 31, 1996, the
lines of credit were renewed through March 15, 1998 for an aggregate commitment
of $2,500,000. The domestic line was renewed for $1,500,000 at an interest rate
of prime plus .75% and the international line was renewed for $1,000,000 at an
interest rate of prime plus .75%. 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, 1996.
D. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
--------------------------------------------
Long-term debt and capital lease obligations at December 31 consist of the
following:
1996 1995
---------- ----------
Capital lease obligations (Note J) $ 398,557 $ 670,170
Notes payable 375,000 375,000
Notes payable to Bank 398,721 1,231,166
---------- ----------
Total Debt and Capital Leases 1,172,278 2,276,336
Less current position 794,268 613,224
---------- ----------
Long-Term Portion of Debt and Capital Leases $ 378,010 $1,663,112
========== ==========
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 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 $395,353 at an interest rate of prime plus 2% (10.25% at December 31,
1996) 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 28 monthly principal payments of $13,633 and one final payment
of $13,629 in addition to monthly interest payments from January 7, 1997 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 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
<PAGE>
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, 1996 the Company was in
agreement with all covenants of this agreement.
Long-term debt and capital lease obligations at December 31, 1996 are payable as
follows:
1997 $ 794,268
1998 285,079
1999 81,104
2000 11,827
---- ----------
$1,172,278
==========
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 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.
<PAGE>
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. In May, 1996 the Board of Directors amended this Plan to increase
the shares reserved for issuance by 300,000 shares. 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:
Weighted
Average
Exercise
Number Price
of Shares Per Share
--------- ---------
Outstanding January 1, 1994 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
Granted 145,000 2.57
Canceled (17,850) .92
Exercised (53,342) .96
-------- --------
Outstanding December 31, 1996 792,711 $ 1.29
======== ========
At December 31, 1996, 141,544 options were exercisable. At December 31, 1995,
52,500 options were exercisable.
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. In May, 1996 the Board of Directors amended this Plan
to increase the shares reserved for issuance by 200,000 shares.
<PAGE>
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, 1996, 1995 and 1994 a total of 40,637,
46,476 and 38,702 shares of common stock have been purchased at average prices
of $1.42, $.82 and $1.14 per share, respectively. As of December 31, 1996, a
total of 181,263 shares were available under this plan.
The estimated fair value of options granted during 1996 was $1.15 per share,
while the estimated fair value of options granted during 1995 was $0.42 per
share. The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option and purchase plans.
Accordingly, no compensation cost has been recognized for its fixed stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's net income
and earnings per share for the years ended December 31, 1996 and December 31,
1995 would have been reduced to the pro forma amounts indicated below:
1996 1995
------------- -----------
Net income to common shareholders
As reported $ 1,743,938 $ 532,585
Pro forma $ 1,671,943 $ 485,340
Net income per common and common equivalent share
As reported $ 0.25 $ 0.08
Pro forma $ 0.24 $ 0.07
The fair values of options granted under the Company's fixed stock option plans
during 1995 and 1996 were estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used: no
dividend yield, expected volatility of 35%, risk free interest rate of 6.4%, and
expected lives of 3 years from vest date.
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.
<PAGE>
G. INCOME TAXES
------------
The (benefit) provision for income taxes for the years ended December 31,
consists of the following:
1996 1995 1994
--------- --------- ---------
Federal:
Current $ 20,500 $ 2,250 $ 0
Deferred (493,000)
State:
Current 9,500 8,750 2,000
Deferred (25,000)
--------- --------- ---------
$(488,000) $ 11,000 $ 2,000
========= ========= =========
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 (benefit) 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:
1996 1995 1994
--------- --------- ---------
Provision (benefit) computed at
federal statutory rates $ 427,000 $ 185,000 ($658,988)
State taxes (15,500) 9,000 2,000
Goodwill 63,500 63,000 63,500
Other (19,000) 66,000 12,600
Change in valuation allowance (944,000) (312,000) 582,888
--------- --------- ---------
($488,000) $ 11,000 $ 2,000
========= ========= =========
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:
<PAGE>
1996 1995
---------- ----------
Deferred tax assets:
Current
Reserves not currently deductible $ 216,000 $ 114,000
Operating loss carryforwards 123,000
Long Term 70,000
Other intangibles 398,000
Operating loss carryforwards 324,000
Tax credit carryforwards 380,000
Difference between book and tax basis of property 4,000 151,500
---------- ----------
Total deferred tax assets 723,000 1,057,500
Deferred tax liabilities:
Long Term
Other intangibles (43,000)
Other (39,500)
---------- ----------
Total deferred tax liabilities (82,500)
Valuation allowance (944,000)
---------- ----------
Net deferred tax asset $ 640,500 $ 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 its deferred tax
assets will be realized.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $361,000 available to reduce federal taxable income. These net
operating losses begin to expire in 2005.
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, 1996.
I. SALES
-----
Export sales, primarily to Canada, Korea and Sweden were approximately
$2,191,000, $1,950,000 and $2,220,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
The Company has a concentration of sales from a product to two customers that
makes up approximately 14% of net sales. The potential for a negative financial
impact could result from a partial or total loss of the business relationship
with these customers. Management believes that the relationships between the
Company and these customers were good at December 31, 1996. Management is
actively seeking to
<PAGE>
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 $1,281,374 and
$1,361,193 (net of accumulated amortization of $945,105 and $765,429) as of
December 31, 1996 and 1995, respectively.
At December 31, 1996, future minimum lease payments under such leases having
non- cancelable terms in excess of one year are summarized as follows:
Capital lease Operating leases
-------------------- ----------------
1997 $ 287,750 $ 335,731
1998 134,140 333,422
1999 17,316 338,991
2000 12,987 328,182
2001 0 317,604
Thereafter 0 873,411
-------------------- ----------------
Total minimum lease payments 452,193 $ 2,527,341
================
Less amount representing interest 53,636
Net present value of future minimum --------------------
Lease payments $ 398,557
====================
Rent expense for operating leases was approximately $325,000, $360,000 and
$335,000 for the years ended December 31, 1996, 1995 and 1994, 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,
$33,764 and $35,801 for the years ended December 31, 1996, 1995 and 1994,
respectively. In March, 1996 the Company issued 208,421 shares of unregistered
common stock under the modified agreement. The earnout period under the modified
agreement will be completed on December 31, 1997.
Litigation
- ----------
<PAGE>
Litigation had 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 believed, 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. The parties reached a
settlement in June, 1996 under which the Company would receive $1,000,000 and
certain free education rights, in addition to exclusive rights to the contested
technology. The Company has received full payment of this settlement as of
January 30, 1997.
Subsequent to December 31, 1996, the Company became a defendant as the result of
a claim filed by a customer alleging breach of contractual promises and
warranties in a commercial transaction. While the outcome of this claim cannot
be determined at this time, management of the Company does not believe that the
ultimate disposition of this claim will have a material effect on the financial
position or result of operations 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
========
The restructuring was completed in 1994 and there were no additional
restructuring related expenses in 1995 or 1996.
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. During 1996, a $10,000
principal payment was made on this loan leaving a remaining balance of
<PAGE>
$35,000. The note bears interest at 10% per annum and the remaining balance is
due December, 1997. During April 1994, the Company loaned approximately $10,000
to another officer. The note bears interest at 10% and is due December, 1997.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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, 1996 and 1995.
Consolidated statements of operations - Years ended December 31, 1996, 1995 and
1994
Consolidated statements of shareholders' equity - Years ended December 31, 1996,
1995 and 1994
Consolidated statements of cash flows - Years ended December 31, 1996, 1995 and
1994
Notes to consolidated financial statements
(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:
<PAGE>
Incorporated by reference from Form 10-Q filed in August 1994.
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 Form
ESB filed in March 1993.
10.12* Employment Agreement between the Company and John P. Hudnall dated
<PAGE>
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 (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) There were no reports on Form 8-K for the year ended December 31, 1996
* 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 28, 1997 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.
<TABLE>
<CAPTION>
Signature Capacity Date
- ----------------------- -------------------------------- --------------
<S> <C> <C>
/s/ Walfred R. Raisanen Chairman of the Board of March 28, 1997
- ----------------------- --------------
Walfred R. Raisanen Directors
/s/ John P. Hudnall President and Director (Princi- March 28, 1997
- ----------------------- --------------
John P. Hudnall pal Executive Officer)
/s/ George G. Hays Chief Financial Officer March 28, 1997
- ----------------------- --------------
George G. Hays (Principal Financial and
Accounting Officer)
/s/ Quinn Johnson Director March 28, 1997
- ----------------------- --------------
Quinn Johnson
/s/ Richard Long Director March 28, 1997
- ----------------------- --------------
Richard Long
/s/ S. Thomas Emerson Director March 28, 1997
- ----------------------- --------------
S. Thomas Emerson
/s/ Patricia Onderdonk Director March 28, 1997
- ----------------------- --------------
Patricia Onderdonk
/s/ Stanley H. Weiss Director March 28, 1997
- ----------------------- --------------
Stanley H. Weiss
/s/ Steven Zylstra Director March 28, 1997
- ----------------------- --------------
Steven Zylstra
</TABLE>
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 7, 1997,
appearing in this Annual Report on Form 10-KSB of Arizona Instrument Corporation
for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 26, 1997
<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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 597,931
<SECURITIES> 0
<RECEIVABLES> 3,082,476
<ALLOWANCES> 165,000
<INVENTORY> 2,049,982
<CURRENT-ASSETS> 6,161,730
<PP&E> 2,912,573
<DEPRECIATION> 2,402,384
<TOTAL-ASSETS> 11,024,164
<CURRENT-LIABILITIES> 2,211,634
<BONDS> 380,824
0
0
<COMMON> 66,777
<OTHER-SE> 8,364,929
<TOTAL-LIABILITY-AND-EQUITY> 11,024,164
<SALES> 12,639,943
<TOTAL-REVENUES> 12,639,943
<CGS> 5,556,172
<TOTAL-COSTS> 6,690,522
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224,637
<INCOME-PRETAX> 1,255,938
<INCOME-TAX> (488,000)
<INCOME-CONTINUING> 1,743,938
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,743,938
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
