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, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required)
For the transition period from _________ to __________.
Commission File Number: 0-12575
ARIZONA INSTRUMENT CORPORATION
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(Name of small business issuer as specified in its charter)
Delaware 86-0410138
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(State or other jurisdiction (IRS Employer or
incorporation of organization) Identification No.)
1912 West 4th Street, Tempe, AZ 85281
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(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. [X]
As of March 22, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $5,782,000. 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 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.
Issuer's revenues for its most recent fiscal year were $9,052,505.
As of March 22, 2000, 1,371,399 shares of Common Stock ($.01 par value) were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the Proxy Statement for the 2000 Annual Shareholders'
Meeting (to be filed).
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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 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
that 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. 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. 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 underground storage tank ("UST") leak
detection systems. In June 1994, the Company introduced the ENCOMPASS(TM)
product, its next generation of fuel management and leak detection compliance
systems. The Company sold the ENCOMPASS product line on April 30, 1999. In
September 1992, the Company acquired Horizon Engineering and Testing, Inc.
("Horizon"), as an AZI wholly-owned subsidiary, that specialized in testing and
engineering services for USTs; the Company discontinued Horizon's operations
during 1997.
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.
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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 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 in 1999 the Company
announced the Computrac 4000, an instrument designed to measure the moisture
content of edible oils, lubricating and cooling oils, and heavy fuels.
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.
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-billion, allowing corrective action to reduce
complaints that 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.
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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.
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 was 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
notified the operator. The ENCOMPASS system ran in a Windows-based environment.
Sales of the Company's Encompass and Soil Sentry products for 1998 failed
to meet expectations. The Company believes the slower sales were 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. In response to
the declining sales, the Company sold certain assets related to the Encompass
and Soil Sentry product lines to National Environmental Service, Co. ("NESCO")
pursuant to an Asset Purchase Agreement executed April 30, 1999.
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 1997, the
Company discontinued Horizon's operations.
PRODUCT RELIABILITY AND QUALITY CONTROL
The Company believes its products are highly reliable. The Company's
products have built-in self-test features that 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
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products have one- and two-year parts and labor warranties. For the year ended
December 31, 1999, 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 establishes 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. 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 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.
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 18% of
total sales in 1999, with no sales to any country exceeding 10% of net sales.
(See Note 8 to the Consolidated Financial Statements)
The Company's business with United States government agencies is effected
through one contract with the General Services Administration. The Jerome
products are available for purchase by federal agencies through this contract.
The contract does not provide for renegotiation of profits, except upon renewal
of such contract or termination at the election of the government. The contract
for the Jerome product line was renewed without substantial modifications. The
Company's products and services are not subject to government approval. The
Company is not aware of any pending government regulations that would materially
affect its business.
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COMPETITION
Computrac - A number of companies have products that 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
decreased 34.6% in 1999 compared to 1998. Expenditures for research and
development for the years ended December 31, 1999, 1998 and 1997 were $866,985,
$1,324,640, and $984,628, respectively. This represented 9.6% of sales in 1999,
9.6% of sales in 1998, and 6.5% of sales in 1997. The Company intends to develop
additional instrumentation products and services through OEM relationships and
the acquisition of related product lines or instrument companies. During
February of 1999, Mr. Walfred Raisanen resigned as Vice President of
Engineering. The Company then reorganized its Research and Development
departments.
PATENTS, LICENSES AND TRADEMARKS
The Company owns three patents directed to aspects of its Computrac
product, and two domestic and five foreign patents directed to aspects of its
Jerome product. 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.
EMPLOYEES
As of December 31, 1999, the Company had a total of 60 full 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.
Effective March 18, 1999, the Company's Board of Directors amended its
employment agreement with George G. Hays. Pursuant to that amendment, the term
of the employment contract was extended to March 31, 2001. The contract was
amended further to grant Mr. Hays his salary for the full term of the contract
in the event the Company sells all or substantially all of its assets or if a
change in control of the Company occurs.
MATERIAL PURCHASES, SALES AND STOCK CONVERSIONS
The Company's shareholders approved a 1 for 5 reverse split of outstanding
common stock at a special meeting on February 5, 1999. The Board of Directors
approved the transaction on February 8, 1999.
In April 1999, the Company executed a letter of intent with NESCO to sell
the assets of AZI's Encompass and Soil Sentry product lines to NESCO. The
parties executed an Asset Purchase Agreement on April 30, 1999, pursuant to
which NESCO agreed to pay the Company $1,000,000 in exchange for the marketing,
licensing, distributing, developing, manufacturing, service and operations of
Encompass and Soil Sentry, and the monitoring services of their users. Because
of this sale, the Company has been able to redirect its attention to its
historic core businesses of moisture analysis and toxic gas analysis.
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On February 1, 2000, the Company entered into a letter of intent with
George G. Hays, its President and Chief Executive Officer, Harold D. Schwartz, a
member of the Company's Board of Directors, and G. James Hays, the father of
George G. Hays, for the acquisition of all of AZI's outstanding shares not owned
by them. This transaction was approved by a special committee of the Board of
Directors, which was formed in August 1999, and is subject to approval by the
Company's shareholders, satisfactory completion of a due diligence investigation
by Mr. Hays, receipt of a fairness opinion, and certain other customary
conditions. The Company anticipates that a shareholder vote and the closing of
the transaction (if approved by the shareholders) will likely occur in the
second quarter of 2000.
ITEM 2. DESCRIPTION OF PROPERTY
As the result of a roof collapse at the Company's headquarters, located at
4114 East Wood Street, Tempe, Arizona, in July 1999, during a monsoon storm, the
Company moved its facilities and entered into a lease agreement for
approximately 20,000 square feet at 1912 West 4th Street, Tempe, Arizona.
Although the disruption in operations caused by the roof collapse and move to
the new facilities adversely affected the Company's net sales, the Company does
not consider the effect to be material. All administration, sales, customer
service, engineering and manufacturing for the Company are in the new Tempe
facility. The lease on the new building expires in September 2004. The Company
believes that its facilities are modern, well-maintained and sufficient for its
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 agreed to a settlement of this matter in March 1999.
In February 1999, the Company received a letter from BP Oil Company ("BP")
demanding the return of approximately $1.9 million previously paid by BP to the
Company in prior years for the purchase of Encompass tank gauge systems, the
removal of Encompass systems from BP sites, and for the cancellation of any
outstanding invoices from AZI. This suit was settled for $35,000 in July 1999.
In February 2000, the Company received a demand in the amount of $100,000
from Maxey Energy Systems for alleged difficulties with Encompass/Soil Sentry
software and hardware. The Company is investigating the claim.
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 1999.
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 22, 2000, there were approximately 311 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.
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1999 HIGH LOW
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First Quarter 4.37 1.50
Second Quarter 2.87 1.75
Third Quarter 6.12 2.62
Fourth Quarter 5.84 3.00
1998 HIGH LOW
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First Quarter 7.03 4.21
Second Quarter 8.12 5.31
Third Quarter 5.78 2.81
Fourth Quarter 5.00 2.50
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 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. 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.
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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 1999
and 1998. See ITEM 7 FINANCIAL STATEMENTS.
Percentage of net Sales Percentage change
Year Ended December 31, over prior periods
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1999 vs
1999 1998 1998
----- ----- ----
NET SALES 100.0% 100.0% -34.1%
COST OF GOODS SOLD 35.9% 46.6% -49.2%
----- -----
Gross margin 64.1% 53.4% -21.0%
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EXPENSES
Marketing 25.4% 22.9% -26.8%
General & administrative 16.3% 12.6% -14.6%
Research & development 9.6% 9.6% -34.6%
Amortization & depreciation 5.3% 4.6% -23.9%
----- -----
Total Expenses 56.7% 49.7% -24.9%
----- -----
OPERATING INCOME (LOSS) 7.4% 3.7% 32.9%
----- -----
OTHER REVENUE (EXPENSE)
Interest income 1.4% 0.0% 693.5%
Interest expense -0.3% -0.8% -70.7%
Other 0.2% 0.5% -73.6%
----- -----
Total other income (expense) 1.3% -0.3% 456.3%
----- -----
INCOME 8.6% 3.4% 66.7%
----- -----
INCOME TAXES 4.4% 2.5% 16.3%
----- -----
NET INCOME 4.2% 0.9% 204.8%
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1999 vs. 1998
Net sales decreased by $4,684,476 or 34.1% to $9,052,505 in 1999 from
$13,736,981 in 1998. Sales decreased primarily due to reduced Encompass/Soil
Sentry system and installation revenues which resulted from the disposition of
the Soil Sentry/Encompass product line in April, 1999, and to a lesser extent a
decline in sales of Jerome instruments.
Cost of goods sold decreased by $3,144,865 or 49.2% to $3,252,610 in 1999
from $6,397,475 in 1998. The decrease in Cost of goods sold was due to lower
Encompass/Soil Sentry system and installation costs which resulted from lower
sales. Cost of goods sold was 35.9% of sales in 1999 compared to 46.6% of sales
in 1998. Gross margin improved primarily to the change in product mix resulting
from the sale of the Encompass/Soil Sentry product line and to a lesser extent
the better utilization of manufacturing resources.
Operating expenses in 1999 decreased by $1,704,876 or 24.9% to $5,132,775
from $6,837,651 in 1998. The decrease in operating expenses for 1999 compared to
1998 was a result of decreased personnel expenses and other expenses which
resulted from the sale of the Encompass/Soil Sentry product line and to a lesser
extent the Company's continuing cost reduction effort. Operating expenses were
56.7% of sales in 1999, as compared to 49.7% of sales in 1998. Marketing
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expenses decreased by $841,838 or 26.8% to $2,303,230 from $3,145,068 in 1999.
Marketing expenses decreased primarily due to the sale of the Soil
Sentry/Encompass product line. Marketing expenses were 25.4% of sales in 1999 as
compared to 22.9% of sales in 1998. General and administrative expenses
decreased by $253,162 or 14.6% to $1,479,004 from $1,732,166 in 1998. General
and administrative expenses decreased in 1999 due to reductions in capital
leases, property maintenance, insurance and miscellaneous expenses. General and
administrative expenses were 16.3% of sales in 1999 as compared to 12.6% of
sales in 1998. Research and development expenses decreased by $457,655 or 34.6%
in 1999 to $866,985 from $1,324,640 in 1998. The decrease in research and
development expenses was primarily due to a reduction in expenses for personnel
associated with the Encompass/Soil Sentry product line. Research and development
expenses were 9.6% of sales in 1999 as compared to 9.6% of sales in 1998.
Amortization and depreciation expenses decreased by $152,221 or 23.9% to
$483,556 from $635,777 in 1998, as the Company reduced its purchases of
additional capital equipment.
Other income (expense) in 1999 increased by $147,691 or 456.3% to income of
$115,321 as compared to loss of $32,370 in 1998. Interest income increased by
$114,702 or 693.5% to $131,241 in 1999 from $16,539 in 1998, due to better cash
management and the investment of the proceeds of the sale of the Encompass/Soil
Sentry product line. Interest expense in 1999 decreased by $74,009 or 70.7% to
$30,651 from $104,660 in 1998, due to a decrease in average borrowings.
As a result income before taxes increased by $312,956 to $782,441 from
$469,485 incurred in 1998.
Income tax expense for 1999 was $400,000 as compared to $344,000 for 1998.
The effective income tax rates for 1999 and 1998 are greater than the statutory
federal and state rates due to nondeductible amortization and an increase in the
valuation allowance in 1998.
As a result, net income for 1999 was $382,441, an increase of $256,956 or
204.8% from $125,485 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1999 increased $1,046,563 or 25.8% to
$5,092,467 as compared to $4,045,904 of working capital at December 31 1998. The
current ratio at December 31, 1999 increased to 5.6 from the current ratio of
2.8 at December 31, 1998. The increase in working capital and the current ratio
were primarily due to the Company's positive cash generated from operations,
which included the Encompass sale.
At December 31, 1999, accounts receivable was $1,649,030, a decrease of
$1,263,600 from the $2,912,630 accounts receivable as of December 31, 1998.
Receivables decreased as a result of lower sales, and an increase in allowance
for doubtful accounts. The ratio of net sales to ending accounts receivable for
1999 was 5.5 as compared to 4.7 for 1998. This ratio increased primarily due to
better collection efforts. Inventory at December 31, 1999 was $688,236, a
decrease of $958,568 from the inventory of $1,646,804 as of December 31, 1998.
Inventory decreased due the sale of the Soil Sentry/Encompass product line and
to a lesser extent better inventory management.
Cash and cash equivalents at December 31, 1999 were $3,471,429, an increase
of $2,372,583 from cash of $1,098,846 at December 31, 1998. Cash provided by
operating activities was $1,886,079 as compared to cash provided by operating
activities of $2,199,610 for 1998. Cash provided by operating activities was
used to repay debt and purchase capital equipment. The Company had no borrowings
from the line of credit at December 31, 1999, as compared to borrowings of
$300,000 as of December 31, 1998.
As of December 31, 1999 the Company was in compliance with its borrowing
agreement with Imperial Bank (the "Bank"). At December 31, 1999, 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, 1999, the Company had no outstanding debts
with this line of credit. The failure to maintain adequate credit facilities
would have a material adverse effect on the Company.
9
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
CONTENTS
Page
----
Independent auditor's report 11-12
Consolidated financial statements:
Balance sheet 13
Statements of operations 14
Statements of shareholders' equity 15
Statements of cash flows 16-17
Notes to financial statements 18-26
10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Arizona Instrument Corporation
Phoenix, Arizona
We have audited the consolidated balance sheet of Arizona Instrument
Corporation and subsidiaries as of December 31, 1999 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 1999 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, 1999, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Phoenix, Arizona
March 10, 2000
11
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Arizona Instrument Corporation
Phoenix, Arizona
We have audited the consolidated statement of operations, shareholders'
equity and cash flows of Arizona Instrument Corporation and subsidiaries as of
December 31, 1998. 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.
/s/ Toback CPAs, P.C.
Toback CPAs, P.C.
Phoenix, Arizona
March 10, 1999
12
<PAGE>
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
Current assets:
Cash and cash equivalents $ 3,471,429
Receivables, less allowance for doubtful
accounts of $186,000 1,649,030
Inventories:
Components 606,275
Finished goods 81,961
-----------
Total inventories 688,236
Deferred income taxes (Note 6) 358,000
Prepaid expenses and other current assets 35,827
-----------
Total current assets 6,202,522
Property, plant and equipment, net (Note 2) 793,971
Goodwill, net of accumulated amortization of $3,024,000 1,306,727
Deferred income taxes (Note 6) 379,500
Other assets 335,139
-----------
TOTAL ASSETS $ 9,017,859
===========
LlABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 191,798
Capital lease obligation (Note 9) 10,691
Other accrued expenses 907,566
-----------
Total current liabilities 1,110,055
Commitments and contingencies (Note 10)
Shareholders' equity: (Note 5) Common stock, .01
par value per share: Authorized, 10,000,000 shares;
Issued, 1,383,213 Outstanding, 1,363,514 shares 13,832
Preferred stock, $.01 par value per share:
Authorized, 1,000,000 shares --
Additional paid-in capital 9,978,131
Accumulated deficit (1,849,377)
-----------
8,142,586
Less treasury stock, 19,699 shares at cost (234,782)
-----------
Total shareholders' equity 7,907,804
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,017,859
===========
The accompanying notes are an integral
part of these consolidated financial statements.
13
<PAGE>
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---------- -----------
Net sales $9,052,505 $13,736,981
Cost of goods sold 3,252,610 6,397,475
---------- -----------
Gross profit 5,799,895 7,339,506
---------- -----------
Operating expenses
Selling & marketing 2,303,230 3,145,068
General & administrative 1,479,004 1,732,166
Research & development 866,985 1,324,640
Amortization & depreciation 483,556 635,777
---------- -----------
Total expenses 5,132,775 6,837,651
---------- -----------
Operating income 667,120 501,855
---------- -----------
Other revenue (expense)
Interest income 131,241 16,539
Interest expense (30,651) (104,660)
Other 14,731 55,751
---------- -----------
Total other income (expense) 115,321 (32,370)
---------- -----------
Income before income taxes 782,441 469,485
Income tax expense (Note 6) 400,000 344,000
---------- -----------
Net income $ 382,441 $ 125,485
========== ===========
Net income per share - basic 0.28 0.09
---------- -----------
Net income per share - diluted 0.28 0.09
---------- -----------
Basic shares outstanding 1,362,792 1,352,805
Equivalent shares - stock options 16,788 --
---------- -----------
Diluted shares outstanding 1,379,580 1,352,805
========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
14
<PAGE>
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional
------------------- Paid-in Accumulated Treasury
Shares Amount Capital Deficit Stock Total
------ ------ ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,354,939 $13,549 $9,881,161 $(2,357,303) $(222,451) $ 7,314,956
Issuance of stock pursuant to:
Stock purchase plan 16,766 168 60,483 -- -- 60,651
Exercise of stock options 800 8 3,672 -- -- 3,680
Purchase of treasury stock -- -- -- -- (12,331) (12,331)
Net income -- -- -- 125,485 -- 125,485
---------- ------- ---------- ----------- --------- -----------
Balance, December 31, 1998 1,372,505 $13,725 $9,945,316 $(2,231,818) $(234,782) $ 7,492,441
========== ======= ========== =========== ========= ===========
Issuance of stock pursuant to:
Stock purchase plan 10,736 107 32,815 -- -- 32,922
Fractional shares retired (28) -- -- -- -- --
Net income -- -- -- 382,441 -- 382,441
---------- ------- ---------- ----------- --------- -----------
Balance, December 31, 1999 1,383,213 $13,832 $9,978,131 $(1,849,377) $(234,782) $ 7,907,804
========== ======= ========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
15
<PAGE>
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---------- -----------
Cash flows from operating activities:
Net income $ 382,441 $ 125,485
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 520,453 668,189
Gain on sale of product line (Note 10) (25,235) --
(Gain) loss on sale or abandonment of property,
plant and equipment 23,714 (27,572)
Provision for doubtful accounts 109,031 271,609
Decrease in receivables 1,154,569 805,953
Decrease in inventories 81,796 845,658
(Increase) decrease in other current assets (6,795) 12,760
Decrease in deferred tax asset 352,500 341,000
Decrease in other assets 155,859 27,425
Decrease in accounts payable (85,945) (1,064,796)
(Decrease) increase in accrued expenses (776,309) 193,899
---------- -----------
Net cash provided by operating activities 1,886,079 2,199,610
---------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment
and other assets (304,927) (206,663)
Proceeds from sale of property, plant and
equipment and other assets 11,183 30,075
Proceeds from sale of Soil Sentry/Encompass
Product line (Note 10) 1,061,531 --
Net cash provided by (used in) investing
activities 767,787 (176,588)
---------- -----------
The accompanying notes are an integral
part of these consolidated financial statements.
16
<PAGE>
ARIZONA INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
Cash flows from financing activities:
Payments of long-term debt and capital leases $ (14,205) $ (353,349)
Net payments under bank lines of credit (300,000) (766,000)
Proceeds from stock issued for options -- 3,680
Purchase of treasury stock -- (12,331)
Issuance of common stock pursuant to stock
purchase plan 32,922 60,651
----------- -----------
Net cash used in financing activities (281,283) (1,067,349)
----------- -----------
Net increase in cash and cash equivalents 2,372,583 955,673
Cash and cash equivalents, beginning of year 1,098,846 143,173
----------- -----------
Cash and cash equivalents, end of year $ 3,471,429 $ 1,098,846
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Transfer of inventories to property, plant and
equipment to be used as demonstration units $ 19,633 $ 64,530
Interest paid 30,651 75,733
Income taxes paid 37,660 --
The accompanying notes are an integral
part of these consolidated financial statements.
17
<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 and
the Jerome line of toxic gas detection instruments primarily used to detect
mercury and hydrogen sulfide. The Company also had a line of computer-based
fuel management and compliance leak detection instruments for monitoring
underground storage tanks. The Company sold the assets and rights to this
product line during 1999 (see Note 10). 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.
Concentrations of credit risk:
The Company periodically holds cash deposits in excess of federally insured
limits.
Revenue recognition:
Sales of instruments are recognized at the time shipments are made.
Inventories:
Inventories are stated at the lower of cost or market using the first-in,
first-out method.
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.
18
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies, continued:
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.
Income per share:
Basic earnings per share (EPS) is computed as net income 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.
Research and development:
Research and development costs are charged to expense as incurred.
19
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Property, plant and equipment:
Property, plant and equipment at December 31, 1999 consists of the
following:
Leasehold improvements 176,455
Furniture, fixtures and equipment 4,394,732
Automobiles 28,237
-----------
4,599,424
Less accumulated depreciation
and amortization (3,805,453)
-----------
$ 793,971
===========
3. 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% (8.5% at December 31,
1999). The line of credit contains certain covenants. The Company did not
have any borrowings against this line at December 31, 1999. The line of
credit expires June 2000.
4. Estimated fair value of financial instruments:
Statement of Financial Accounting Standard ("SFAS"). 107 "Disclosures About
Fair Value of Financial Instruments" 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, and lines of credit approximate fair values
due to the short-term maturities or market rates of interest.
5. 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 50,000 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.
20
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Shareholders' equity, continued:
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 90,000 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 60,000 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 current stock options
granted have a vesting period ranging from six (6) months to five (5) years
from the date of grant.
The following is a summary of stock option activity:
Weighted
Average
Exercise
Number Price
of Shares Per Share
--------- ---------
Outstanding January 1, 1997 158,542 $ 6.45
Granted 19,500 9.55
Canceled (36,448) 4.80
Exercised (10,652) 4.95
-------- -----
Outstanding December 31, 1997 130,942 $ 7.50
Granted 69,000 5.00
Canceled (34,900) 8.75
Exercised (800) 4.60
-------- -----
Outstanding December 31, 1998 164,242 $ 6.25
Granted 41,000 2.29
Canceled (23,289) 8.75
Exercised -- 0.00
-------- -----
Outstanding December 31, 1999 181,953 5.02
======== =====
At December 31, 1999, and 1998, approximately 110,000 and 74,000 options
were exercisable, respectively. At December 31, 1999, there are
approximately 48,000 stock options available for grant.
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/99 Life Price at 12/31/99 Price
------ ----------- ---- ----- ----------- -----
$ 2.12 to 2.75 38,000 8.8 $ 2.17 -- $ --
3.75 to 5.30 107,353 6.1 $ 4.80 82,082 $ 4.61
6.10 to 9.05 26,600 7.3 $ 7.91 18,520 $ 8.70
10.00 to 12.50 8,000 .7 $11.18 8,000 $11.18
15.63 to 20.94 2,000 1.1 $18.20 2,000 $18.28
------- -------
181,953 110,602
======= =======
21
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Shareholders' equity, continued:
In January 1985, the Company adopted an Employee Stock Purchase Plan which
provides for the sale of up to 40,000 shares of common stock to qualifying
employees of the Company. In May, 1996 and again in July 1999, the Board of
Directors amended this Plan to increase the shares reserved for issuance by
40,000 and 65,000 shares , respectively. 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, 1999 and 1998 a total of 10,736 and 16,766 shares of common
stock have been purchased at average prices of $3.20 and $3.60 per share,
respectively. As of December 31, 1999 approximately 65,000 shares were
available under this plan.
The estimated fair value of options granted during 1999 was $.99 per share,
while the estimated fair value of options granted during 1998 was $1.50 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:
1999 1998
-------- --------
Net income
As reported $382,441 $125,485
Pro forma 361,964 87,793
Basic and diluted earnings per share
As reported $ .28 $ .09
Pro forma .26 .06
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 58%, risk free interest rate of 5.40% and
expected lives of 3 years from vest date.
On November 17, 1995, the Company entered into a loan agreement with a bank
("Bank"). The Bank held a Note and a warrant to purchase up to 12,500
unregistered shares of the Company's Common Stock at an exercise price of
$10.40 per share. The note was repaid in full during 1998. The warrants
expire in November 2000.
On February 8, 1999, the Company approved a one-for-five reverse stock
split of its issued and outstanding common stock. The reverse stock split
has been retroactively reflected in the accompanying financial statements.
22
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Income taxes:
The provision for income taxes for the years ended December 31, consists of
the following:
1999 1998
-------- --------
Current expense $ 47,500 $ 3,000
Deferred expense 352,500 341,000
-------- --------
$400,000 $344,000
======== ========
The provision for income taxes as shown in the accompanying consolidated
statements of operations differs from the amounts computed by applying the
federal statutory income tax rates to income before income taxes. A
reconciliation of the provision (benefit) for income taxes and the amounts
that would be computed using the statutory federal income tax rates for the
years ended December 31, 1999 is set forth below:
1999 1998
--------- --------
Provision computed at
Federal statutory rates $ 265,000 $160,000
State taxes 40,000 28,000
Permanent differences 95,000 97,000
Other -- 9,000
Change in valuation allowance -- 50,000
--------- --------
$ 400,000 $344,000
========= ========
Permanent differences include amortization of goodwill and increase in life
insurance cash surrender value net of life insurance premiums.
23
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Income taxes, continued:
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) tax credit carryforwards. Management estimates that it is more
likely than not that the Company will not use 100% of its future deductible
amounts or tax credits. As such, management has provided an allowance of
$50,000 to offset its deferred tax assets. The tax effects of significant
items comprising the Company's net deferred tax asset as of December 31,
1999 are as follows:
Current deferred tax assets:
Accrued expenses not currently deductible $ 173,000
Reserves not currently deductible 155,000
Unearned income 54,000
---------
382,000
Valuation allowance (24,000)
---------
Net current deferred tax assets $ 358,000
=========
Non-current deferred tax assets (liabilities):
Intangible assets 195,500
Difference between book and tax basis
of property, plant and equipment (61,500)
Tax credit carryforwards 271,500
---------
405,500
Valuation allowance (26,000)
---------
Net non-current deferred tax assets $ 379,500
=========
At December 31, 1999, the Company had tax credit carryforwards of
approximately $272,000 available to reduce future federal taxable income.
These tax credits expire as follows:
12/31/02 $ 58,000
12/31/03 109,000
12/31/04 36,000
12/31/09 37,000
Indefinite 32,000
---------
$ 272,000
=========
7. 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. Contribution expense was approximately $15,000 and
$3,500 for the years ended December 31, 1999 and 1998, respectively.
8. Foreign sales:
Export sales, primarily to Canada, England and Japan for the year ended
December 31, 1999, were approximately $1,595,000 and export sales primarily
to Canada, Korea and Sweden were approximately $2,320,000 for the year
ended December 31, 1998.
24
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Commitments and contingencies:
Lease commitments:
Certain office facilities and equipment are held under capital and
operating leases. These leases expire in periods through 2004 and include
renewal options. Equipment under capital leases included in property and
equipment total $1,281,374 (less accumulated amortization of $1,275,751) at
December 31, 1999.
At December 31, 1999, 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
------ ------
2000 $13,000 $144,000
2001 -- 147,000
2002 -- 149,000
2003 -- 154,000
2004 -- 103,000
------- --------
Total minimum lease payments $13,000 $697,000
========
Less amount representing interest (2,000)
-------
Net present value of future minimum lease
payments $11,000
=======
Rent expense for operating leases was approximately $204,000 and $275,000
for the years ended December 31, 1999 and 1998, respectively.
Employment contract:
The Company has entered into an employment agreement with a key member of
management. The contract requires severance pay equal to the remaining
compensation through the term of the contract, which is through March 31,
2001. The total approximate amount of the contract is $200,000.
25
<PAGE>
ARIZONA INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Commitments and contingencies, continued:
Litigation:
From time to time, the Company may become a defendant as the result of
claims filed alleging breach of contractual promises or warranties. 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 of the Company.
10. Sale of product line:
During 1999, the Company entered into an asset purchase agreement with
National Environmental Services Company (NESCO), an unrelated party. NESCO
purchased certain assets of the Company for a purchase price of
approximately $1,061,000. The net book value of the assets sold was
appoximately $1,036,000 resulting in a gain of approximately $25,000. Sales
related to this product line were approximately $260,000 and $2,950,000 for
the years ended December 31, 1999 and 1998, respectively.
11. Subsequent event:
On February 1, 2000, the Company entered into a letter of intent pursuant
to which, a company to be formed by the President of the Company and a
member of the Company's Board of Directors, would acquire all of the
Company's outstanding shares not owned by them at a price of $5.00 per
share in cash. The transaction is subject to authorization by the Company's
shareholders.
26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 28, 2000, the Company was notified that McGladrey & Pullen, LLP
had acquired the attest assets of the Company's independent auditors, Toback
CPAs P.C. ("Toback") and that Toback would no longer be the Company's auditor.
McGladrey & Pullen, LLP was appointed as the Company's new auditor. The
Company's Board of Directors approved this appointment.
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 an amendment to this filing
that will contain information that is responsive to Items 9 through 12.
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 sheet - December 31, 1999
Consolidated statements of operations - Years ended
December 31, 1999 and 1998
Consolidated statements of shareholders' equity -
Years ended December 31, 1999 and 1998
Consolidated statements of cash flows - Years ended
December 31, 1999 and 1998
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 Amended and Restated Certificate of Incorporation of
Registrant, incorporated by reference from Registrant's Form 10QSB
filed on May 17, 1999 (the "May 1999 10QSB").
3.2 Bylaws of Registrant, as amended. Incorporated by reference from
the June 1996 8-A.
27
<PAGE>
10.1* Registrant's 1991 Stock Option Plan. Incorporated by reference
from Registrant's Form S-8 filed on June 28, 1996.
10.2 Registrant's 1991 Employee Stock Purchase Plan. Incorporated by
reference from Registrant's Form S-8 filed on August 5, 1996.
10.3 Loan and Security Agreement dated June 30, 1998 between Registrant
and Imperial Bank. Incorporated by reference from Registrant's
Form 10QSB for the quarter ended June 30, 1998.
10.4 Asset Purchase Agreement dated April 30, 1999, between Registrant
and National Environmental Service, Co. Incorporated by reference
from Registrant's Form 10QSB for the quarter ended March 31, 1999,
filed May 17, 1999.
10.5* 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.
10.6* Employment Agreement between Registrant and George G. Hays dated
January 1, 1998. Incorporated by reference from Registrant's 1997
Form 10KSB filed March 31, 1998.
10.7* Amended Employment Agreement between Registrant and George G. Hays
dated May 13, 1999. Incorporated by reference from Registrant's
10QSB for the quarter ended March 31, 1999, filed on May 17, 1999.
16.1 Letter on change in certifying accountant from Toback CPAs, P.C.
to McGladrey & Pullen, L.L.P. Incorporated by reference from
Registrant's Form 8K for period ended January 31, 2000, filed
February 8, 2000.
21.1 Subsidiaries of Registrant. Incorporated by reference from
Registrant's Form 10KSB filed March 31, 1999.
27.1 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) The following Form 8-K was filed by Registrant after the year end
Covered by this Form 10-KSB.
Form 8-K filed February 8, 2000, reporting under Item 4 that McGladrey &
Pullen, L.L.P. had acquired the attest assets of the Registrant's independent
auditors Toback CPAs, P.C. and that Toback CPAs would no longer be the auditor
of the Registrant. McGladrey & Pullen, L.L.P. was appointed as the Registrant's
new auditor.
27
<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 30, 2000 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, 2000
- ---------------------- (Principal Executive Officer)
George G. Hays
/s/ S. Thomas Emerson Director March 30, 2000
- ----------------------
S. Thomas Emerson
/s/ Steven Zylstra Director March 30, 2000
- ----------------------
Steven Zylstra
/s/ Harold Schwartz Director March 30, 2000
- ----------------------
Harold Schwartz
28
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,471,429
<SECURITIES> 0
<RECEIVABLES> 1,835,185
<ALLOWANCES> 186,155
<INVENTORY> 688,236
<CURRENT-ASSETS> 6,202,522
<PP&E> 793,971
<DEPRECIATION> 296,405
<TOTAL-ASSETS> 9,017,859
<CURRENT-LIABILITIES> 1,110,055
<BONDS> 10,691
0
0
<COMMON> 13,832
<OTHER-SE> 7,893,972
<TOTAL-LIABILITY-AND-EQUITY> 9,017,859
<SALES> 9,052,505
<TOTAL-REVENUES> 9,183,746
<CGS> 3,252,610
<TOTAL-COSTS> 5,132,775
<OTHER-EXPENSES> 14,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,651
<INCOME-PRETAX> 782,441
<INCOME-TAX> 400,000
<INCOME-CONTINUING> 382,441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 382,441
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.28
</TABLE>
