SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
[ ] 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: (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-IKSB or any
amendment to this Form 10-KSB. [ ]
<PAGE>
As of March 23, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $2,667,519. 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 such 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.
Issuers revenues for its most recent fiscal year were $13,736,981.
As of March 23, 1999, 1,362,975 shares of Common Stock ($.01 par value adjusted
to reflect a 5 to 1 reverse stock split effective February 16, 1999) were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Portions of the Proxy Statement for the 1999 Annual
Shareholders' Meeting (to be filed).
2
<PAGE>
Unless the context indicates otherwise, the term "Company" or "AZI" refers to
Arizona Instrument Corporation and its wholly-owned subsidiaries.
Except for the historical information contained herein, the discussion in this
Form 10-KSB contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, and the Company intends
that such forward-looking statements be subject to the safe harbors created
thereby. The forward-looking statements include statements 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, positive responses to new developments, and availability and terms of
credit. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties, and on
assumptions that involve judgments with respect to, among other things, future
economic, competitive and market conditions, research and development results,
product introduction and delivery schedules, raw materials, market conditions,
stability of the regulatory environment, future business decisions and the
outcome of negotiations with its lender, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements, many of which are beyond the control of the Company,
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in forward-looking
information will be realized. Important factors which may cause actual results
to differ materially from those contemplated or implied by such forward-looking
statements are discussed in more detail in this form 10-KSB and the Company's
1998 Annual Report to Shareholders. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
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. The operations of AZI's wholly-owned subsidiary,
Horizon Engineering and Testing, Inc. ("Horizon"), which had specialized in
testing and engineering services for the underground storage tank ("UST")
market, were discontinued during 1997.
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 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 June 1994, the
Company introduced the ENCOMPASS(TM) product, its next generation
3
<PAGE>
of fuel management and leak detection compliance systems. In September 1992, the
Company acquired Horizon, a company that specialized in testing and engineering
services for USTs; however, the Company discontinued Horizon's operations during
1997.
On March 9, 1999, BP Oil Company filed suit in United States District
Court in the Northeast District of Ohio, alleging breach of contract and breach
of warranty by AZI in the sale of Encompass systems to BP Oil Company. BP Oil
Company seeks approximately $2.0 million in actual damages plus an additional
several million dollars in incidental and consequential damages. AZI intends to
vigorously defend this action. Unless a favorable result can be obtained for AZI
in this dispute, the defense and ultimate resolution of this action could have a
material adverse effect upon the Company.
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, a personal
computer-based fuel inventory reporting and environmental compliance system that
utilizes on-site personal computers to manage fuel inventory and meet EPA leak
detection requirements. The ENCOMPASS system is compatible with other business
software and runs in the computer's background without interrupting other site
activities. 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 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 a 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.
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
4
<PAGE>
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.
Sales of the Company's Encompass and Soil Sentry products for 1998
failed to meet industry analysts expectations. The Company believes the slower
sales are due to decisions by many UST operators to seek less expensive methods
of meeting regulatory requirements such as annual tank testing, combined with
monthly inventory reconciliation or statistical inventory reconciliation.
HORIZON
Services - Horizon was acquired in 1992 to facilitate the penetration
of the UST market by the Company's Soil Sentry products. Horizon provided tank
testing services using a tracer testing system for USTs, which was licensed to
Horizon by Tracer Research Corp. ("Tracer") of Tucson, Arizona.
In 1996, Horizon began offering a complete set of products and services
which were required by its tank testing customers choosing to convert to a
permanent method of leak detection. Offering ENCOMPASS as the leak detection
compliance method, Horizon also provided 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 had been engaged since 1990 in the business of
testing USTs for leakage using EPA-recognized testing methods. Due to its
declining market share in tank testing, and its inability to generate profits
from tank upgrades, Horizon's operations were discontinued in 1997.
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
5
<PAGE>
Company's gold-film sensing technology, the hand-held instrument quickly
quantifies H2S levels down to parts-per-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.
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.
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.
6
<PAGE>
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 3000 moisture analyzers with Alpha and Beta
production units completed in 1996. The Computrac 3000, targeted at the
worldwide titration market, requires no toxic reagents, is simple to use and
maintain, and offers excellent correlation and repeatability. The Computrac 3000
was released for sale to customers during 1997 and additional product
enhancements are under development.
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.
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, 1998, warranty expense approximated 2% of net sales.
In February 1996, the Company 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.
7
<PAGE>
MANUFACTURING AND SOURCES OF SUPPLY
The majority of the Company's manufacturing costs are for purchased
components. Certain components are then provided to outside companies for
subassembly, with final assembly and testing performed by the Company. While in
some cases, the Company relies on sole source vendors, secondary vendors are
generally available. Raw materials and component parts are supplied by vendors
to the Company pursuant to specifications set by AZI. The Company has initiated
a vendor qualification program, and believes that, if necessary, the raw
materials and components supplied by sole source vendors could be supplied by
such other vendors without a material disruption of the manufacturing process.
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. The dollar amount of unfilled orders at the beginning of any quarter
has not exceeded 15% of sales for that quarter.
The Company markets its instruments for export through its own sales
force, as well as through foreign distributors in Canada, Europe, the Middle
East, the Far East, and Latin America.
INDUSTRIES SERVED - CUSTOMERS
The specific industries served domestically by each product are
detailed in the specific Markets and Applications sections presented earlier.
A single customer, B.P. Oil Company, represented approximately 13% of
net sales in 1998. The Company is actively seeking to diversify sales of its
products 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 1998, with no sales to any country 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 expired in January 1999 and were renewed for 1
year. The Company's products and services are not subject to government
approval. The Company is not
8
<PAGE>
aware of any pending government regulations which would materially affect its
business.
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.
RESEARCH AND DEVELOPMENT
The Company believes that the development of new products, enhancements
for existing products, and the development of new applications for its existing
products are critical to its success. Research and development expenses
increased 35% in 1998 compared to 1997. Expenditures for research and
development for the years ended December 31, 1998, 1997 and 1996 were
$1,324,640, $984,628, and $720,133, respectively. This represented 9.6% of sales
in 1998, 6.5% of sales in 1997, and 6.8% of sales in 1996. The Company's
research and development expenditures for 1998 were channeled into the
development of new products in all three product lines. The Company also intends
to develop additional instrumentation products and services through OEM
relationships and the acquisition of related product lines or instrument
companies. During 1997, the Company reorganized its Engineering function, which
had the effect of increasing Research and Development expenses which were
previously accounted for in the Cost of Goods Sold.
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.
9
<PAGE>
EMPLOYEES
As of December 31, 1998, the Company had a total of 73 full time
employees and 2 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. 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 in excess of its current needs. The Company is
seeking to reduce its occupancy expenses.
ITEM 3. LEGAL PROCEEDINGS
On March 9, 1999, BP Oil Company filed suit in United States District
Court in the Northeast District of Ohio, alleging breach of contract and breach
of warranty by AZI in the sale of Encompass systems to BP Oil Company. BP Oil
Company seeks approximately $2.0 million in actual damages plus an additional
several million dollars in incidental and consequential damages. AZI intends to
vigorously defend this action. Unless a favorable result can be obtained for
AZI, the defense and ultimate resolution of this action will have a material
adverse effect upon the Company.
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 agreed to a settlement of this matter in March 1999.
From time to time, the Company is involved in routine litigation that
is incidental to its business. The Company is not currently involved in any
other legal proceedings, the result of which the Company believes would have a
material adverse effect upon the Company.
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 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding executive officers of
the Company.
George G. Hays, age 43, is the President, Chief Executive Officer and
Chairman of the Board of Directors. Mr. Hays joined the Company in 1997 as Vice
President of Finance, Chief Financial Officer, and Vice President of
Manufacturing. In November 1997, Mr. Hays was elected President and Chief
Executive Officer for the Company. In January 1998, Mr. Hays was elected
Chairman of the Board of Directors. Prior to his position with the
10
<PAGE>
Company, Mr. Hays was president and founder of Hays Financial Group, Inc., an
investment banking firm, since 1986.
Linda Shepherd, age 47, is the Controller, Chief Accounting Officer,
and Corporate Secretary of the Company. Ms. Shepherd has been an accountant for
the Company since 1984. In mid 1997, Ms. Shepherd became the Controller and
Chief Accounting Officer of the Company, and in mid 1998, Ms. Shepherd assumed
the position of Corporate Secretary. Prior to joining AZI, Ms. Shepherd was an
accountant for a local trucking firm.
Executive officers are elected annually and serve at the discretion of
the Board of Directors.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq Small Cap Market. As of
March 23, 1999, there were approximately 400 shareholders of record of the
Company's common stock, its only class of common equity. The high and low sales
prices set forth below are derived from information provided by The Nasdaq Stock
Market.
1998 HIGH LOW
---- ---- ---
First Quarter 1.41 0.84
Second Quarter 1.63 1.06
Third Quarter 1.16 0.56
Fourth Quarter 1.00 0.50
1997 HIGH LOW
---- ---- ---
First Quarter 3.13 2.18
Second Quarter 2.50 1.50
Third Quarter 1.88 1.47
Fourth Quarter 1.72 0.84
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 the Company's bank. See "Management's
Discussion and Analysis or Plan of Operation."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Except for the historical information contained herein, the discussion
in this Form 10-KSB contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, and the Company
intends that such forward-looking statements be subject to the safe harbors
created thereby. The forward-looking statements include statements 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
11
<PAGE>
supplies, acquisition of related product lines or companies positive responses
to new developments, and availability and terms of credit. The forward-looking
statements included herein are based on current expectations that involve a
number of risks and uncertainties, and on assumptions that involve judgments
with respect to, among other things, future economic, competitive and market
conditions, research and development results, product introduction and delivery
schedules, raw materials, market conditions, stability of the regulatory
environment, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements, many of which are beyond the control of the Company,
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in forward-looking
information will be realized. Important factors which may cause actual results
to differ materially from those contemplated or implied by such forward-looking
statements are discussed in more detail in this Form 10-KSB and the Company's
1998 Annual Report to Shareholders. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth items in the Company's Consolidated Statements of
Operations as a percent of total net sales for the years ended December 31 1998,
1997 and 1996. See ITEM 7 FINANCIAL STATEMENTS.
Percentage of net Sales Percentage change
Year Ended December 31, over prior periods
------------------------- ------------------
1998 vs 1997 vs
1998 1997 1996 1997 1996
---- ---- ---- ---- ----
NET SALES 100.0% 100.0% 100.0% -9.8% 42.8%
COST OF GOODS SOLD 46.6% 51.8% 41.4% -18.9% 78.8%
----- ----- -----
Gross margin 53.4% 48.2% 58.6% -0.1% 17.5%
----- ----- -----
EXPENSES
Marketing 22.9% 25.5% 26.1% -19.0% 39.4%
General & administrative 12.6% 17.9% 15.8% -36.3% 61.6%
Research & development 9.6% 6.5% 6.8% 34.5% 36.7%
Amortization & depreciation 4.6% 4.0% 5.4% 5.6% 5.5%
----- ----- -----
Total Expenses 49.7% 53.9% 54.1% -16.5% 42.2%
----- ----- -----
OPERATING INCOME (LOSS) 3.7% (5.7)% 4.5% -159.6% -271.0%
----- ----- -----
OTHER REVENUE (EXPENSE)
Interest income 0.0% 0.1% 0.2% -100.0% -33.3%
Interest expense (0.8)% (0.9)% (1.9)% -24.3% -31.2%
Settlement of litigation 0.0% 0.0% 9.4% 0.0% -100.0%
Other 0.5% 0.0% 0.6% -3,648.8% -103.2%
----- ----- -----
Total other income (expense) (0.3)% (0.8)% 8.3% -74.2% -114.2%
----- ----- -----
INCOME (LOSS) BEFORE INCOME
TAXES 3.4% (6.5)% 12.8% -148.5% -170.4%
INCOME TAXES (BENEFIT) 2.5% (2.4)% (4.1)% -194.0% -17.0%
----- ----- -----
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS 0.9% (4.1)% 16.9% -120.9% -133.1%
----- ----- -----
GAIN (LOSS) FROM
DISCONTINUED OPERATIONS 0.0% (4.2)% (0.6)% -100.0% -788.7%
----- ----- -----
NET INCOME 0.9% (8.3)% 16.3% -110.1% -171.0%
===== ===== =====
13
<PAGE>
1998 vs. 1997
Net sales decreased by $1,495,338 or 9.8% to $13,736,981 in 1998 from
$15,232,319 in 1997. Sales decreased primarily due to lower Encompass
installation and service revenues, which were partially offset by increases in
sales of Computrac and Jerome instruments.
Cost of goods sold decreased by $1,488,032 or 18.9% to $6,397,475 in
1998 from $7,885,507 in 1997. Cost of goods sold was 46.6% of sales in 1998
compared to 51.8% of sales in 1997. Gross margin increased primarily due to the
substantially larger portion of sales represented by higher margin instrument
products, and due to better utilization of manufacturing resources.
Operating expenses in 1998 decreased by $1,351,282 or 16.5% to
$6,837,651 from $8,188,933 in 1997. The decrease in operating expenses for 1998
compared to 1997 was a result of decreased personnel expenses and other expenses
achieved in the Company's cost reduction effort. As a result, operating expenses
were 49.7% of sales in 1998, as compared to 53.9% of sales in 1997. Marketing
expenses decreased by $736,916 or 19.0% to $3,145,068 from $3,881,984 in 1997.
Marketing expenses decreased primarily due to a reduction in promotional
activities and the implementation of cost controls. Marketing expenses were
22.9% of sales in 1998 as compared to 25.5% of sales in 1997. General and
administrative expenses decreased by $988,083 or 36.3% to $1,732,166 from
$2,720,249 in 1997. General and administrative expenses were 12.6% of sales in
1998 as compared to 17.9% of sales in 1997. General and administrative expenses
decreased in 1998 due to personnel reductions and other expense reductions
including a decrease in severance packages to terminated employees, and the
nonrecurrence of expenses associated with shutting down of the Company's office
in Singapore. Research and development expenses increased by $340,012 or 34.5%
in 1998 to $1,324,640 from $984,628 in 1997. 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. Research and development expenses were 9.6% of
sales in 1998 as compared to 6.5% of sales in 1997. Amortization and
depreciation expenses increased by $33,705 or 5.6% to $635,777 from $602,072 in
1997, due to the purchase of additional capital equipment, including
demonstration units of the Company's own instruments as well as computer
equipment.
Other expense in 1998 decreased by $93,230 or 74.2.% to $32,370 as
compared to $125,600 in 1997. The decrease in this expense was due to lower
interest expense and a gain on the sale of assets which occurred in 1998.
Interest expense in 1998 decreased by $33,654 or 24.3% to $104,660 from $138,314
in 1997,due to a decrease in average borrowings and a lower interest rates.
As a result income from continuing operations before taxes increased by
$1,437,206 to $469,485 from a loss before taxes of $967,721 incurred in 1997.
14
<PAGE>
Income tax expense for 1998 was $344,000 as compared to a benefit of
$366,000 for 1997, which was generated due to the Company's loss in 1997.
As a result, income from continuing operations for 1998 was a $125,485, an
increase of $727,206 from the loss from continuing operations of $601,721
suffered in 1997.
The Company had no gain or loss from discontinued operations in 1998.
Loss from discontinued operations for 1997 was $636,799 as the Company
discontinued its tank testing business which was performed through its Horizon
Engineering and Testing, Inc. subsidiary.
As a result, net income for 1998 increased by $1,364,005 to $125,485 as
compared to a net loss in 1997 of $1,238,520.
1997 vs. 1996
Net sales increased by $4,568,830 or 42.8% to $15,232,319 in 1997 from
$10,663,489 in 1996. Sales increased primarily due to increased sales of
Encompass installations, Encompass systems, and Computrac instruments. Net sales
of Jerome instruments declined slightly, while sales generated from customer
service activities were unchanged.
Cost of goods sold increased by $3,474,626 or 78.8% to $7,885,507 in
1997 from $4,410,881 in 1996. Cost of goods sold was 51.8% of sales in 1997
compared to 41.4% of sales in 1996. Gross margin decreased primarily due to the
substantially larger portion of sales represented by low margin Encompass
installations, and to a lesser extent, a price reduction in the Computrac
product line and increases in material costs.
Operating expenses in 1997 increased by $2,428,791 or 42.2% to
$8,188,933 from $5,760,142 in 1996. The percentage increase in operating
expenses for 1997 over 1996 was in line with sales growth. Operating expenses
were 53.8% of sales in 1997, as compared to 54.0% of sales in 1996. Marketing
expenses increased by $1,096,572 or 39.4% to $3,881,984 from $2,785,412 in 1996.
Marketing expenses increased primarily due to increased activities necessary to
support the growth in sales, and were 25.5% of sales in 1997 as compared to
26.1% of sales in 1996. General and administrative expenses increased by
$1,036,512 or 61.6% to $2,720,249 from $1,683,737 in 1996. General and
administrative expenses were 17.9% of sales in 1997 as compared to 15.8% of
sales in 1996. General and administrative expenses increased in 1997 due to the
costs associated with efforts taken to improve profitability, providing
severance packages to terminated employees, the writing off of bad debt,
increased reserves for bad debt and other contingencies, shutting down of the
Company's office in Singapore, and increased personnel expenses. Research and
development expenses increased by $264,495 or 36.7% in 1997 to $984,628 from
$720,133 in 1996. 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. Research and development expenses were 6.5% of sales in 1997 as compared
to 6.8% of sales in 1996. Amortization and depreciation expenses increased by
$31,212 or 5.5% to $602,072 from $570,860 in 1996, due to the purchase of
additional capital equipment, including demonstration units of the Company's own
instruments as well as computer equipment.
Other expense in 1997 decreased by $1,007,722 or 114.2.% to an expense
of $125,600 as compared to income of $882,122 in 1996. The decrease in other
expense was due primarily to other expenses of $997,096 recognized in 1996
related to the settlement of litigation, which did not recur in 1997. Interest
expense in 1997 decreased by $62,713 or 31.2% to $138,314 from $201,027 in
1996,due to a decrease in average borrowings.
15
<PAGE>
As a result income from continuing operations before taxes decreased by
$2,342,309 or 170.4% to a loss of $967,721 from income before taxes of
$1,374,589 for 1996.
Income taxes from continuing operations for 1997 were a benefit of
$366,000 which approximated the statutory rate. For 1996, the Company realized
an income tax benefit from continuing operations of $441,000 as a result of
reducing the Company's deferred tax valuation allowance and recognizing a
deferred tax asset.
As a result, income from continuing operations for 1997 was a loss of
$601,721, a decrease of $2,417,310 or 133.1% from the income from continuing
operations of $1,815,589 generated for 1996.
Loss from discontinued operations for 1997 was $636,799 as the Company
discontinued its tank testing business which was performed through its Horizon
Engineering and Testing, Inc. subsidiary. The loss from discontinued operations
in 1996 was $71,652. The increased loss in 1997 of $565,147 as compared to 1996
was due primarily to expenses associated in shutting down the tank testing
business and the write off of intangible assets associated with the purchase of
Horizon in 1992.
As a result, net income decreased by $2,982,457 or 171.0% to a net loss
of $1,238,520 in 1997 from net income of $1,743,937 in 1996.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1998 increased $911,921 or 29.1% to
$4,045,904 as compared to $3,133,983 of working capital at December 31 1997. The
current ratio at December 31, 1998 increased to 2.8 from the current ratio of
1.7 at December 31, 1997. The increase in working capital and the current ratio
was primarily due to the Company's positive cash generated from operations.
At December 31, 1998, accounts receivable was $2,912,630, a decrease of
$1,077,562 from the $3,990,192 accounts receivable as of December 31, 1997.
Receivables decreased as a result of lower sales, more successful collection
efforts, and an increase in allowance for doubtful accounts. The ratio of net
sales to ending accounts receivable for 1998 was 4.7 as compared to 3.8 for
1997. This ratio decreased primarily due to a lower portion of sales being
shipped during the last part of 1998 as compared to 1997. Inventory at December
31, 1998 was $1,646,804, a decrease of $910,188 from the inventory of $3,990,192
as of December 31, 1997. Inventory decreased due to significantly better
inventory management.
Cash and cash equivalents at December 31, 1998 were $1,098,846, an
increase of $955,673 from cash of $143,173 at December 31, 1997. Cash provided
by operating activities was $2,199,610 as compared to cash used by operating
activities of $283,093 for 1997. Cash provided by operating activities was used
to repay debt and purchase capital equipment. The Company reduced its borrowing
under line of credit by $766,000 to $300,000 at December 31, 1998 as compared to
borrowings of $1,066,000 as of December 31, 1997.
As of December 31, 1998, the Company was in compliance with its
borrowing agreement with Imperial Bank (the "Bank"). At December 31, 1998, the
Company had a line of credit with the Bank for $2,000,000 which was
collateralized by the Company's assets. At December 31, 1998, the Company had
$300,000 outstanding under this lines of credit. The failure to maintain
adequate credit facilities would have a material adverse effect on the Company.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 problem. As the year 2000
approaches, such systems may be unable to accurately process certain date-based
information.
The Company's current line of products are year 2000 compliant and uses
a four digit year data field. However, earlier products in the field do not use
the four digit data field. The Company is developing software which would make
the earlier products year 2000 compliant.
The Company has identified some internal accounting applications that
will require modification to address the Year 2000 problem. The Company has
purchased and is in the process of installing an upgrade of the accounting
programs that is year 2000 compliant. Internal and external resources will be
used to make the required modifications in both the products and the accounting
application and test these modifications. The Company plans on completing the
modifications and testing of these modifications by mid 1999.
The total cost to the Company of these Year 2000 problem related
activities is not anticipated to be material. These costs and the date on which
the Company plans to complete the modifications and testing to solve the Year
2000 problem are based upon management's estimates. However, there can be no
assurance that these estimates will be achieved and the costs of solving the
Year 2000 problem could differ significantly from management's estimates.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
CONTENTS
Page
----
Independent auditor's report 1
Consolidated financial statements:
Balance sheets 2
Statements of operations 3
Statements of shareholders' equity 4
Statements of cash flows 5 - 6
Notes to financial statements 7 - 18
<PAGE>
Board of Directors
Arizona Instrument Corporation
Phoenix, Arizona
INDEPENDENT AUDITOR'S REPORT
We have audited the consolidated balance sheet of Arizona Instrument
Corporation and subsidiaries as of December 31, 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Arizona Instrument Corporation and subsidiaries as of December 31, 1998, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
TOBACK CPAs P.C.
Phoenix, Arizona
March 10, 1999
INDEPENDENT AUDITORS' REPORT
Board of Directors
Arizona Instrument Corporation
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of Arizona
Instrument Corporation and subsidiaries (the "Company") as of December 31, 1997,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
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 the Company as of December 31, 1997
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Deliotte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 15, 1998
<PAGE>
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
------------ ------------
Current assets:
Cash and cash equivalents $ 1,098,846 $ 143,173
Receivables, less allowance for doubtful
accounts of $469,000 and $279,000 2,912,630 3,990,192
Inventories:
Components 1,166,289 1,974,553
Finished goods 480,515 582,439
------------ ------------
Total inventories 1,646,804 2,556,992
Deferred income taxes (Note 8) 625,000 577,000
Prepaid expenses and other current assets 37,182 49,942
------------ ------------
Total current assets 6,320,462 7,317,299
Property, plant and equipment, net (Note 2) 861,808 975,180
Goodwill, net of accumulated amortization
(Note 12) of $2,837,422 and $2,650,655 1,493,494 1,680,261
Deferred income taxes (Note 8) 465,000 854,000
Other Assets 638,191 764,976
------------ ------------
TOTAL ASSETS $ 9,778,955 $ 11,591,716
============ ============
LlABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit (Note 4) $ 300,000 $ 1,066,000
Accounts payable 277,743 1,342,539
Current portion of long-term debt and
capital lease obligations (Note 5) 12,940 284,801
Other accrued expenses (Note 3) 1,683,875 1,489,976
------------ ------------
Total current liabilities 2,274,558 4,183,316
Long-term debt and capital lease obligations
- less current portions (Note 5) 11,956 93,444
Commitments and contingencies (Note 11)
Shareholders' equity: (Note 7)
Common stock, .01 par value per share:
Authorized, 10,000,000 shares;
Issued, 6,862,523 and 6,774,696 shares
Outstanding, 6,764,027 and 6,688,531 shares 68,625 67,747
Preferred stock, $.01 par value per share:
Authorized, 1,000,000 shares -- --
Additional paid-in capital 9,890,416 9,826,963
Accumulated deficit (2,231,818) (2,357,303)
------------ ------------
7,727,223 7,537,407
Less treasury stock, 98,496 and 86,165
shares at cost (234,782) (222,451)
------------ ------------
Total shareholders' equity 7,492,441 7,314,956
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 9,778,955 $ 11,591,716
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE>
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
Net sales $13,736,981 $15,232,319 $10,663,489
Cost of goods sold 6,397,475 7,885,507 4,410,881
----------- ----------- -----------
Gross profit 7,339,506 7,346,812 6,252,608
----------- ----------- -----------
Operating expenses
Selling & marketing 3,145,068 3,881,984 2,785,412
General & administrative 1,732,166 2,720,249 1,683,737
Research & development 1,324,640 984,628 720,133
Amortization & depreciation 635,777 602,072 570,860
----------- ----------- -----------
Total expenses 6,837,651 8,188,933 5,760,142
----------- ----------- -----------
Operating income (loss) 501,855 (842,121) 492,466
----------- ----------- -----------
Other revenue (expense)
Interest income 16,539 14,751 22,124
Interest expense (104,660) (138,314) (201,027)
Settlement of litigation (Note 11) -- -- 997,096
Other 55,751 (2,037) 63,930
----------- ----------- -----------
Total other income (expense) (32,370) (125,600) 882,123
----------- ----------- -----------
Income (loss) from continuing
operations before income taxes 469,485 (967,721) 1,374,589
Income tax expense (benefit) (Note 8) 344,000 (366,000) (441,000)
----------- ----------- -----------
Net income (loss) from continuing
operations 125,485 (601,721) 1,815,589
----------- ----------- -----------
Loss from discontinued operations,
net of income tax benefit of $0,
$388,000, and $47,000 -- (636,799) (71,652)
----------- ----------- -----------
Net income (loss) $ 125,485 $(1,238,520) $ 1,743,937
=========== =========== ===========
Net income (loss) per share - basic:
From continuing operations $ 0.02 $ (0.09) $ 0.28
From discontinued operations -- (0.10) (0.01)
----------- ----------- -----------
Net income (loss) per share 0.02 (0.19) 0.27
----------- ----------- -----------
Net income (loss) per share - diluted:
From contining operations 0.02 (0.09) 0.26
From discontinued operations -- (0.10) (0.01)
----------- ----------- -----------
Net income (loss) per share $ 0.02 $ (0.19) $ 0.25
=========== =========== ===========
Basic shares outstanding 6,764,027 6,647,689 6,507,112
Equivalent shares - stock options -- -- 444,699
----------- ----------- -----------
Diluted shares outstanding 6,764,027 6,647,689 6,951,811
=========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Common Stock paid-in Accumulated Treasury
Shares Amount capital deficit stock Total
------ ------ ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 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 6,667,680 66,777 9,706,163 (1,118,783) (222,451) 8,431,706
Issuance of stock pursuant to:
Stock purchase plan 43,756 437 72,367 -- -- 72,804
Exercise of stock options 53,260 533 48,433 -- -- 48,966
Net loss -- -- -- (1,238,520) -- (1,238,520)
--------- ------- ---------- ----------- --------- -----------
Balance, December 31, 1997 6,774,696 67,747 9,826,963 (2,357,303) (222,451) 7,314,956
Issuance of stock pursuant to:
Stock purchase plan 83,827 838 59,813 -- -- 60,651
Exercise of stock options 4,000 40 3,640 -- -- 3,680
Purchase of treasury stock -- -- -- -- (12,331) (12,331)
Net income -- -- -- 125,485 -- 125,485
--------- ------- ---------- ----------- --------- -----------
Balance, December 31, 1998 6,862,523 $68,625 $9,890,416 $(2,231,818) $(234,782) $ 7,492,441
========= ======= ========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 125,485 $(1,238,520) $ 1,743,937
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 668,189 1,167,514 804,495
Gain on sale or abandonment of property,
plant and equipment (27,572) -- (34,570)
Provision for doubtful accounts 271,609 113,855 (25,289)
(Increase) decrease in receivables 805,953 (1,186,571) 479,650
(Increase) decrease in inventories 845,658 (507,011) (256,212)
Decrease in other current assets 12,760 546,400 46,257
Increase in settlement receivable -- -- (364,419)
(Increase) decrease in deferred tax asset 341,000 (789,800) (518,000)
(Increase) decrease in other assets 27,425 198,707 (330,412)
(Decrease) increase in accounts payable (1,064,796) 570,860 (91,707)
(Decrease) incrase in accrued expenses 193,899 841,474 (222,635)
----------- ----------- -----------
Net cash provided by (used in)
operating activites 2,199,610 (283,092) 1,231,095
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment
and other assets (206,663) (565,405) (207,354)
Proceeds from sale of property, plant and
equipment and other assets 30,075 -- 77,897
----------- ----------- -----------
Net cash used in investing activities (176,588) (565,405) (129,457)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Payments of long-term debt and capital leases $ (353,349) $ (794,031) $(1,104,058)
Net (payments) borrowings under bank lines of
credit (766,000) 1,066,000 (250,000)
Proceeds received on notes receivable -- -- 15,506
Proceeds from stock issued for warrants and options 3,680 -- 88,265
Sale of common stock, net proceeds -- 48,966 --
Issuance of common stock for earnout
agreement -- -- 202,585
Purchase of treasury stock (12,331) -- --
Issuance of common stock pursuant to stock
purchase plan 60,651 72,804 57,613
----------- ---------- -----------
Net cash (used in) provided by financing
activities (1,067,349) 393,739 (990,089)
----------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents 955,673 (454,758) 111,549
Cash and cash equivalents, beginning of year 143,173 597,931 486,382
----------- ---------- -----------
Cash and cash equivalents, end of year $ 1,098,846 $ 143,173 $ 597,931
=========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Transfer of inventories to property, plant and
equipment to be used as demonstration units $ 64,530 $ 315,354 $ 57,057
Interest paid 75,733 153,736 126,172
Income taxes paid -- 90,000 5,025
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies:
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 (USTs) and the Jerome line of toxic gas detection
instruments primarily used to detect mercury and hydrogen sulfide. The
Company also provided tank testing and related services for the
underground storage tank market through its subsidiary, Horizon
Engineering and Testing, Inc. In 1997, the Company discontinued the
operations of Horizon Engineering and Testing, Inc (see Note 12). The
Company sells in the United States and also in international markets.
Principles of consolidation:
The 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.
Reclassifications:
Certain financial statement reclassifications have been made to the
previous years financial statements to conform with the presentation of
the December 31, 1998 financial statements.
Concentrations of credit risk:
The Company periodically holds cash deposits in excess of federally insured
limits.
Revenue recognition:
Sales of instruments are recognized once the shipment is made.
Inventories:
Inventories are stated at the lower of cost or market using the first-in,
first-out method.
7
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies, continued:
Property, plant and equipment, amortization and depreciation:
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 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 and amortization:
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 (see Note 12).
Income (loss) per share:
Basic earnings per share (EPS) is computed as net income (loss) divided by
the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur
from common shares issuable through stock options, warrants, and other
convertible securities and includes shares issuable upon exercise of
stock options when dilutive.
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 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.
8
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies, continued:
Research and development:
Research and development costs are charged to expense as incurred.
2. Property, plant and equipment:
Property, plant and equipment at December 31 consists of the following:
1998 1997
----------- -----------
Leasehold improvements $ 169,654 $ 169,654
Furniture, fixtures and equipment 4,687,973 4,452,959
Automobiles 99,358 99,358
----------- -----------
4,956,985 4,721,971
Less accumulated depreciation
and amortization (4,095,177) (3,746,791)
----------- -----------
$ 861,808 $ 975,180
=========== ===========
3. Other accrued expenses at December 31, consist of the following:
1998 1997
---------- ----------
Legal accrual $ 315,230 $ 209,709
Warranty reserve 264,509 167,705
Unearned income on maintenance
agreements 148,472 189,953
Accrued rent 122,608 150,208
Accrued vacation 116,396 143,749
Accrued severance pay 95,591 312,150
Other accruals 621,069 316,502
---------- ----------
$1,683,875 $1,489,976
========== ==========
4. Bank lines of credit:
The Company has a revolving line of credit which provides for borrowings up
to $2,000,000, based on eligible accounts receivable. The line of
credit is collateralized by Company assets. Borrowings extended under
the revolving line of credit bear interest at prime plus 1.5% (9% at
December 31, 1998). The line of credit contains certain covenants. The
Company was in compliance with these covenants at December 31, 1998.
The line of credit, if not renewed, expires June 1999.
9
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Bank lines of credit, continued:
At December 31, 1997, 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
$3,500,000 through March 15, 1998. At December 31, 1997, the Company
had $996,000 outstanding under its domestic line of credit at the
bank's prime rate of interest plus 1.5% (10% at December 31, 1997). The
Company also had $70,000 outstanding under the international line of
credit at December 31, 1997. Borrowings under this line of credit were
at the bank's prime rate of interest plus 1.0% (9.5% at December 31,
1997). The lines of credit contained certain covenants, including
minimum net income levels and certain financial ratios.
5. Long-term debt and capital lease obligations:
Long-term debt and capital lease obligations at December 31, consist of the
following:
1998 1997
--------- ---------
Capital lease obligation (Note 11) $ 24,896 $ 146,487
Notes payable to the bank -- 231,758
--------- ---------
Total debt and capital leases 24,896 378,245
Less current portion (12,940) (284,801)
--------- ---------
Long-term portion of debt and
capital leases $ 11,956 $ 93,444
========= =========
On November 17, 1995, the Company entered into a loan agreement with a
bank ("Bank"). The Bank held a Note in the principal amount of $231,758
at an interest rate of prime plus 2% (10.5% at December 31, 1997) 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 note was
repaid in full during 1998.
10
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Estimated fair value of financial instruments:
Statement of Financial Accounting Standard ("SFAS"). 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.
7. Shareholders' equity:
In March 1985, the Company adopted a Stock Option Plan ("SOP") under which
the Company could, for a period of ten years, grant options to purchase
up to 250,000 shares of the Company's common stock. SOP options may be
granted to employees, officers or directors of the Company or any
subsidiary. The exercise price of options must be at least the fair
market value of the Company's common stock on the date of grant and the
options must be exercised within 11 years from the date of grant.
In April 1991, the Company adopted the 1991 Stock Option Plan ("OP") under
which the Company may, for a period of ten years, grant incentive stock
options and nonstatutory stock options to purchase up to 450,000 shares
of the Company's common stock. 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.
11
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Shareholders' equity, continued:
The following is a summary of stock option activity:
Weighted
average
exercise
Number price
of shares per share
--------- ---------
Outstanding January 1, 1996 718,903 $ 1.00
Granted 145,000 2.57
Canceled (17,850) 0.92
Exercised (53,342) 0.96
-------- --------
Outstanding December 31, 1996 792,711 $ 1.29
Granted 97,500 1.91
Canceled (182,240) 0.96
Exercised (53,260) 0.99
-------- --------
Outstanding December 31, 1997 654,711 $ 1.50
Granted 345,000 1.00
Canceled (174,500) 1.75
Exercised (4,000) 0.92
-------- --------
Outstanding December 31, 1998 821,211 1.25
======== ========
At December 31, 1998, and 1997, approximately 370,000 and 225,000 options
were exercisable, respectively.
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. 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, 1998, 1997 and 1996 a total of 83,827, 43,756 and 40,637
shares of common stock have been purchased at average prices of $.72,
$1.66 and $1.42 per share, respectively. As of December 31, 1998
approximately 54,000 shares were available under this plan.
12
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Shareholders' equity, continued:
The estimated fair value of options granted during 1998 was $.30 per share,
while the estimated fair value of options granted during 1997 was $.57
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 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 would have been as follows:
1998 1997 1996
--------- --------- ---------
Net income (loss)
As reported $125,485 $(1,238,520) $1,743,937
Pro forma 62,665 (1,266,730) 1,671,943
Earnings (loss) per share
As reported $ .02 $ (0.19) $ 0.25
Pro forma .01 (0.19) 0.24
The fair values of options granted under the Company's stock option plans
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 5.4% and expected lives of 3 years from vest date.
8. Income taxes:
The provision for income taxes for the years ended December 31, consists of
the following:
1998 1997 1996
--------- --------- ---------
Current expense $ 3,000 $ 35,800 $ 30,000
Deferred expense (benefit) 341,000 (789,800) (518,000)
--------- --------- ---------
$ 344,000 $(754,000) $(488,000)
========= ========= =========
13
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Income taxes, continued:
The provision for income taxes as shown in the accompanying consolidated
statements of operations differs from the amounts computed by applying
the federal statutory income tax rates to income before income taxes. A
reconciliation of the provision (benefit) 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:
1998 1997 1996
--------- --------- ---------
Provision (benefit) computed at
Federal statutory rates $ 160,000 $(678,000) $ 427,000
State taxes 28,000 (120,000) (15,500)
Permanent differences 97,000 63,000 63,500
Other 9,000 (19,000) (19,000)
Change in valuation allowance 50,000 -- (944,000)
--------- --------- ---------
$ 344,000 $(754,000) $(488,000)
========= ========= =========
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:
1998 1997
--------- ---------
Current deferred tax assets:
Accrued expenses not currently deductible $ 311,000 $ 353,000
Reserves not currently deductible 255,000 148,000
Unearned income 59,000 76,000
--------- ---------
Net current deferred tax assets $ 625,000 $ 577,000
========= =========
Non-current deferred tax assets (liabilities):
Intangible assets 221,000 246,000
Capitalized product costs (58,000) (97,000)
Difference between book and tax basis
of property (66,000) (50,000)
Net operating loss carryforwards 71,000 381,000
Tax credit carryforwards 347,000 374,000
--------- ---------
515,000 854,000
Valuation allowance (50,000) --
--------- ---------
Net non-current deferred tax assets $ 465,000 $ 854,000
========= =========
14
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Income taxes, continued:
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $200,000 available to reduce federal taxable income.
These net operating losses begin to expire in 2012.
At December 31, 1998, the Company had tax credit carryforwards of
approximately $347,000 available to reduce federal taxable income.
These tax credits expire between the years 2000 and 2009.
9. 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. Contributions made in any of
the three years ended December 31, 1998 have not been material.
10. Sales:
Export sales, primarily to Canada, Korea and Sweden were approximately
$2,320,000, $2,120,000 and $2,191,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
The Company has a concentration of sales of a product to seven customers
that make up approximately 28% of net sales during 1998. The potential
for a negative financial impact could result from a partial or total
loss of the business relationships with these customers (see Note 15).
11. Commitments and contingencies:
Lease commitments:
Certain office facilities and equipment are held under capital and
operating leases. These leases expire in periods through 2003 and
include renewal options. Equipment under capital leases included in
property and equipment total $1,281,374 and $1,281,374 (less
accumulated amortization of $1,264,124 and $1,160,190) at December 31,
1998 and 1997, respectively.
15
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Commitments and contingencies, continued:
At December 31, 1998, the approximate future minimum lease payments under
such leases having non-cancelable terms in excess of one year are
summarized as follows:
Capital Operating
leases leases
---------- ----------
1999 $ 20,000 $ 283,000
2000 19,000 283,000
2001 -- 283,000
2002 -- 283,000
2003 -- 165,000
Thereafter -- --
---------- ----------
Total minimum lease payments $ 39,000 $1,297,000
========== ==========
Less amount representing interest (14,000)
----------
Net present value of future minimum lease
payments $ 25,000
==========
Rent expense for operating leases was approximately $275,000, $290,000 and
$325,000 for the years ended December 31, 1998, 1997 and 1996,
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 $33,765 and $33,764 for the years
ended December 31, 1997 and 1996, respectively. In March 1996 the
Company issued 208,424 shares of unregistered common stock under the
modified agreement. The earnout period under the modified agreement was
completed on December 31, 1997.
16
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Commitments and contingencies, continued:
Litigation:
In a prior year, litigation was 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,
the Company and certain executive officers of the Company 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.
From time to time, the Company may become 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 any such
claim cannot be determined at this time, management of the Company does
not believe that the ultimate disposition of these claims will have a
material effect on the financial position or results of operations or
cash flows of the Company.
12. Discontinued operations:
In August 1997, the Company adopted a plan to discontinue the operations of
Horizon Engineering and Testing, Inc. ("Horizon"). The disposition of
Horizon was substantially completed by December 31, 1997. Net assets of
the discontinued operation at December 31, 1998 and 1997 were $0. The
loss from discontinued operations for 1997 (before income tax benefit)
includes a write-off of goodwill and other intangibles of $444,705 and
a loss from operations of $580,713. The final disposal of Horizon did
not have a material effect on the Company's operations during 1998.
17
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Related Party Transactions:
During September 1993, the Company loaned $45,000 to one of its officers.
The loan was 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 $35,000. The note bears interest at 10% per
annum and the remaining balance was due December, 1997. During April
1994, the Company loaned approximately $10,000 to another officer. The
note bears interest at 10% and was due December, 1997. These loans have
been repaid.
14. Impact of year 2000 issue (unaudited):
The Company has conducted a review of its computer systems to identify
computer programs that could be affected by the Year 2000 issue, and
has developed a remediation plan to resolve the problem.
The issue is whether the computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail.
Management does not believe the cost of further remediation will be
material to the company's financial statements.
15. Subsequent events:
Litigation:
On March 9, 1999, a significant customer, claiming breach of contract and
breach of warranty, sued the Company. The customer seeks approximately
$2,000,000 in actual damages plus an additional several million dollars
in incidental and consequential damages. The Company intends to
vigorously defend this action. However, if a favorable result can not
be obtained, the cost of defense and the ultimate resolution of this
action could have a materially adverse effect on the Company. At the
present stage of this lawsuit, it is not possible to evaluate the
likelihood of an unfavorable outcome or the amount or a range of
potential loss, if any, which may be experienced by the Company.
Accordingly, no provision for any liability that may result from this
litigation has been made in the financial statements as of December 31,
1998. Sales to this customer during 1998 were approximately $1,650,000.
Reverse stock split:
Subsequent to year end December 31, 1998, the Company approved a
one-for-five reverse stock split of its outstanding common stock.
18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On June 22, 1998 Arizona Instrument Corporation (the "Registrant")
dismissed Deloitte & Touche LLP, which was previously engaged as the
Registrant's principal independent accountant to audit its financial statements.
Deloitte & Touche LLP's report on the Registrant's financial statements for
either of the past two years did not contain an adverse opinion or disclaimer of
opinion, and was not qualified or modified in any manner. The decision to change
accountants was recommended by the Registrant's Board of Directors. During the
Registrant's two most recent fiscal years, and the subsequent quarters preceding
such dismissal, there were no disagreements or reportable events with the former
accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope of procedure.
On June 23, 1998, the Registrant engaged Toback CPAs as its new
principal independent accountant to audit its financial statements. During the
Registrant's two most recent fiscal years, the Registrant (or someone on its
behalf) did not consult with Toback CPAs regarding any of the matters set forth
in Item 304(a)(2) of Regulation S-K.
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 7 of Part II.
Independent auditors' reports
Consolidated balance sheets - December 31, 1998 and 1997
Consolidated statements of operations - Years ended December 31, 1998, 1997 and
1996
Consolidated statements of shareholders' equity - Years ended December 31, 1998,
1997 and 1996
Consolidated statements of cash flows - Years ended December 31, 1998, 1997 and
1996
Notes to consolidated financial statements
(a) The following exhibits are incorporated by reference or are filed
with this Form 10-KSB, as indicated.
3.1 Composite of Certificate of Incorporation of Registrant, as amended
through July 5, 1994. Incorporated by reference from Registrant's Form
8-A filed on June 26, 1996 (the "June 1996 8-A").
18
<PAGE>
3.2 Bylaws of Registrant, as amended. Incorporated by reference from the June
1996 8-A.
10.1* Registrant's 1985 Stock Option Plan. Incorporated by reference from
Registrant's Form 10-KSB for the year ended December 31, 1995 filed in
March 1996.
10.2* Registrant's 1985 Stock Purchase Plan. Incorporated by reference from
Registrant's Form S-8 filed on August 5, 1996.
10.3* Registrant's 1991 Stock Option Plan. Incorporated by reference from
Registrant's Form S-8 filed on June 28, 1996.
10.4 Amended and Restated Export-Import Guaranteed Business Loan Agreement
between Registrant and Silicon Valley Bank dated February 1993.
Incorporated by reference From Registrant's Form 10-KSB for the year
ended December 31, 1992, filed in March 1993 (the "1992 10-KSB").
10.5 Warrant Purchase Agreement between Registrant and Silicon Valley Bank
dated December 14, 1991. Incorporated by reference from the 1992 10-KSB.
10.6 Loan Modification Agreement between Registrant and Silicon Valley Bank
dated November 7, 1995. Incorporated by reference to Registrant's Form
10-KSB for the Year ended December 31, 1995 filed on March 29, 1996 (the
"1995 10-KSB").
10.7 Promissory Note between Registrant and Silicon Valley Bank dated November
7, 1995. Incorporated by reference to the 1995 10-KSB.
10.8 Loan Modification Agreement between Registrant and Silicon Valley Bank
dated March 24, 1997. Incorporated by reference to the 1997 10-KSB.
10.9 Promissory Note between Registrant and Classic Syndicate, Inc. dated
April 15, 1996. Incorporated by reference to the 1995 10-KSB.
10.10 Warrant Agreement between Registrant and Cruttenden & Co., Inc. dated
November 30, 1993. Incorporated by reference from Registrant's Form
10-QSB for the quarter ended September 30, 1993 filed on November 30,
1993 (the "September 1993 10-QSB").
10.11 Lease Agreement between Registrant and Wood Street Limited Partnership
dated September 1, 1993. Incorporated by reference from the September
1993 10-QSB.
10.12* Employment Agreement between Registrant and Walfred R. Raisanen dated
November 5, 1992. Incorporated by reference to the 1992 10-KSB.
10.13* Employment Agreement between Registrant and George G. Hays dated April 1,
1997. Incorporated by reference from Registrant's Form 10-QSB for the
quarter Ended March 31, 1997 filed on May 15, 1997.
10.14* Employment Agreement between Registrant and George G. Hays dated January
1, 1998. Incorporated by reference to the 1997 10-KSB.
10.15 Loan and Security Agreement between Registrant and Imperial Bank dated as
of June 30, 1998. Incorporated by reference to the Registrant's Form
10-QSB for the quarter ended June 30, 1998.
16.0 Correspondence from Deloitte & Touche LLP regarding change in certifying
accountant. Incorporated by reference to the Registrant's Form 8-K filed
July 7, 1998.
21.1 Subsidiaries of Registrant. Filed herewith.
19
<PAGE>
27. Financial Data Schedule. Filed herewith.
- ----------
* Management contract of compensatory plan or arrangement required to be
filed pursuant to Item 13(a) of Form 10-KSB.
(b) There was no Form 8-K filed by Registrant during the last quarter of
the period Covered by this Form 10-KSB.
20
<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 31, 1999 By: /s/ George G. Hays
------------------ -----------------------------
George G. Hays,
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ George G. Hays President and Chairman of the Board March 30, 1999
- ----------------------- (Principal Executive Officer)
George G. Hays
/s/ S. Thomas Emerson Director March 30, 1999
- -----------------------
S. Thomas Emerson
/s/ Steven Zylstra Director March 30, 1999
- -----------------------
Steven Zylstra
/s/ Harold Schwartz Director March 30, 1999
- -----------------------
Harold Schwartz
21
NONE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS AND ITS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<CIK> 724904
<NAME> ARIZONA INSTRUMENT CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,098,846
<SECURITIES> 0
<RECEIVABLES> 3,381,630
<ALLOWANCES> 469,000
<INVENTORY> 1,646,804
<CURRENT-ASSETS> 6,320,462
<PP&E> 4,956,985
<DEPRECIATION> 4,095,177
<TOTAL-ASSETS> 9,778,955
<CURRENT-LIABILITIES> 2,274,558
<BONDS> 11,956
0
0
<COMMON> 68,625
<OTHER-SE> 7,423,816
<TOTAL-LIABILITY-AND-EQUITY> 9,778,955
<SALES> 13,736,981
<TOTAL-REVENUES> 13,809,271
<CGS> 6,397,475
<TOTAL-COSTS> 6,837,651
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,660
<INCOME-PRETAX> 469,485
<INCOME-TAX> 344,000
<INCOME-CONTINUING> 125,485
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,485
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
