SCHEDULE 13e-3
(RULE 13e-100)
TRANSACTION STATEMENT UNDER SECTION 13(e) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 13e-3 THEREUNDER
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Rule 13e-3 Transaction Statement
under Section 13(e) of the Securities Exchange Act of 1934
(Amendment No. 1)
Arizona Instrument Corporation
(Name of the Issuer)
Arizona Instrument Corporation
AZI LLC
George G. Hays
G. James Hays
Harold D. Schwartz
(Name of Persons Filing Statement)
Common Stock, $.01 par value
(Title of Class of Securities)
040903205
(CUSIP Number of Class of Securities)
George G. Hays
Arizona Instrument Corporation
1912 West 4th Street, Tempe, AZ 85281
(602) 470-1414
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications on Behalf of Persons Filing Statement)
Copies to:
Steven P. Emerick, Esq. Roger V. Davidson, Esq.
Quarles & Brady LLP Ballard, Spahr, Andrews & Ingersoll, LLP
One East Camelback Road, Suite 400 1225 17th Street, Suite 2300
Phoenix, Arizona 85012-1649 Denver, Colorado 80202-5596
(602) 230-5500 (303) 299-7307
(602) 230-5598 (fax) (303) 296-3956 (fax)
This statement is filed in connection with (check the appropriate box):
[X] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
[ ] The filing of a registration statement under the Securities Act of
1933.
[ ] A tender offer.
[ ] None of the above.
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies: [X]
Check the following box if the filing is a final amendment reporting the
results of the transaction: [ ]
<PAGE>
CALCULATION OF FILING FEE
Transaction valuation* $6,923,381.93 Amount of filing fee $1,384.68
* For purposes of calculating the fee only. Assumes purchase of 1,371,399
shares of Common Stock, par value $.01 per share, of Arizona Instrument
Corporation at $5.00 per share and payment of $66,386.93 for in-the-money
unexercised options and other rights to purchase Common Stock of Arizona
Instrument Corporation.
[ ] Check the box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
Amount previously paid: $ 0
Form or registration No.:
Filing party:
Date filed:
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This Rule 13e-3 Transaction Statement on Schedule 13E-3 is being filed
jointly by Arizona Instrument Corporation, a Delaware corporation, AZI LLC, an
Arizona limited liability company, and George G. Hays, G. James Hays, and Harold
D. Schwartz, each an individual, pursuant to Section 13(e) of the Securities
Exchange Act of 1934, as amended, and Rule 13e-3 thereunder, in connection with
the proposed merger (the "Merger") of Arizona Instrument with and into AZI LLC
pursuant to an Agreement and Plan of Merger, dated as of March 31, 2000, by and
among AZI LLC, George G. Hays, Harold D. Schwartz and Arizona Instrument. AZI
LLC was formed by George G. Hays and affiliates of G. James Hays and Mr.
Schwartz in connection with the Merger.
In the Merger and pursuant to the terms and conditions set forth in the
Agreement and Plan of Merger, Arizona Instrument will merge with and into AZI
LLC, with AZI LLC as the surviving company (the "Surviving Company"). At the
effective time of the Merger, each issued and outstanding share of common stock,
par value $.01 per share, of Arizona Instrument (the "Shares") (other than
Shares held by (1) Arizona Instrument, (2) AZI LLC, or (3) stockholders who
perfect their rights under Delaware law to dissent from the Merger and seek an
appraisal of their Shares) will be converted into and become the right to
receive $5.00 per Share in cash, without interest. As a result of the Merger,
George G. Hays, Harold D. Schwartz and G. James Hays will beneficially own 100%
of the equity interests of the Surviving Company.
Concurrently with the filing of this Schedule 13E-3, Arizona Instrument is
filing a preliminary proxy statement (the "Proxy Statement") pursuant to which
the stockholders of Arizona Instrument will be given notice of the Merger. A
copy of the Proxy Statement is attached hereto as Exhibit (a)(3).
The information set forth in the Proxy Statement, including all schedules,
exhibits, appendices and annexes thereto, is hereby expressly incorporated
herein by reference and contains all information required in response to the
items of this Schedule 13E-3, except that it does not include all of the
exhibits listed below. The Proxy Statement will be completed and, if
appropriate, amended prior to the time it is first sent or given to Arizona
Instrument's shareholders. This Schedule 13E-3 will be amended to reflect such
completion or amendment of the Proxy Statement.
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<PAGE>
ITEM 16. EXHIBITS.
(a)(1) Letter to Shareholders.
(a)(2) Notice of Special Meeting of Shareholders.
(a)(3) Proxy Statement.
(a)(4) Form of Proxy.
(a)(5) Press Release issued by Arizona Instrument Corporation dated February
1, 2000.
(a)(6) Press Release issued by Arizona Instrument Corporation dated April 4,
2000.
(b)(1) Commitment letter agreement dated March 2, 2000, by and between AZI
LLC and Imperial Bank.
(b)(2) Commitment letter agreement dated March 21, 2000, by and between AZI
LLC and Arizona MultiBank Community Development Corporation.
(c)(1) Opinion of Peacock, Hislop, Staley & Given, Inc. dated as of March 28,
2000.
(c)(2) Fairness Opinion Presentation to the Special Committee of the Board of
Directors prepared by Peacock, Hislop, Staley & Given, Inc. on March
28, 2000.
(c)(3) Arizona Instrument Valuation Report dated as of June 30, 1999 and
prepared by Oxford Advisors.
(d)(1) Agreement and Plan of Merger, dated as of March 31, 2000, by and among
AZI LLC, George G. Hays, Harold D. Schwartz and Arizona Instrument
Corporation.
(d)(2) Amendment of employment agreement Dated March 8, 1999, by and Between
Arizona Instrument Corporation and George G. Hays.
(d)(3) Members Agreement dated March 21, 2000, between George G. Hays and
Chez & Schwartz Inc. Profit Sharing Plan dated December 19, 1973.
(d)(4) Members Agreement dated March 20, 2000, between George G. Hays and The
Hays Family Revocable Lifetime AB Trust dated October 14, 1998.
(f) Section 262 of the Delaware General Corporation Law.
4
<PAGE>
SIGNATURES
After due inquiry and to the best of each of the undersigned's knowledge
and belief, each of the undersigned certifies that the information set forth in
this statement is true, complete and correct.
Dated: May 17, 2000
Arizona Instrument Corporation
By: /s/ George G. Hays
------------------------------------
Name: George G. Hays
----------------------------------
Title: President
---------------------------------
AZI LLC
By: /s/ George G. Hays
------------------------------------
Name: George G. Hays
Title: Manager
/s/ George G. Hays
------------------------------------
George G. Hays
/s/ G. James Hays
------------------------------------
G. James Hays
/s/ Harold D. Schwartz
------------------------------------
Harold D. Schwartz
5
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
(a)(1) Letter to Shareholders(1).
(a)(2) Notice of Special Meeting of Shareholders(1).
(a)(3) Proxy Statement(2).
(a)(4) Form of Proxy(1).
(a)(5) Press Release issued by Arizona Instrument Corporation dated February
1, 2000.
(a)(6) Press Release issued by Arizona Instrument Corporation dated April 4,
2000.
(b)(1) Commitment letter agreement dated March 2, 2000, by and between AZI
LLC and Imperial Bank.
(b)(2) Commitment letter agreement dated March 21, 2000, by and between AZI
LLC and Arizona MultiBank Community Development Corporation.
(c)(1) Opinion of Peacock, Hislop, Staley & Given, Inc. dated as of March 28,
2000 (included as Annex B to the Proxy Statement filed as Exhibit
(a)(3)).
(c)(2) Fairness Opinion Presentation to the Special Committee of the Board of
Directors prepared by Peacock, Hislop, Staley & Given, Inc. on March
28, 2000.
(c)(3) Arizona Instrument Valuation Report dated as of June 30, 1999 and
prepared by Oxford Advisors.(2)
(d)(1) Agreement and Plan of Merger, dated as of March 31, 2000, by and among
AZI LLC, George G. Hays, Harold D. Schwartz and Arizona Instrument
Corporation (included as Annex A to the Proxy Statement filed as
Exhibit (a)(3)).
(d)(2) Amendment of employment agreement Dated March 8, 1999, by and Between
Arizona Instrument Corporation and George G. Hays, incorporated by
Reference from Form 10-QSB filed with the Commission by Arizona
Instrument Corporation on May 17, 1999.
(d)(3) Members Agreement dated March 21, 2000, between George G. Hays and
Chez & Schwartz Inc. Profit Sharing Plan dated December 19, 1973.
(d)(4) Members Agreement dated March 20, 2000, between George G. Hays and The
Hays Family Revocable Lifetime AB Trust dated October 14, 1998.
(f) Section 262 of the Delaware General Corporation Law (included as Annex
C to the Proxy Statement referenced as Exhibit (a)(3)).
- ----------
(1) Attached to Exhibit (a)(3) filed herewith.
(2) Filed herewith.
6
PRELIMINARY NOTICE AND PROXY STATEMENT
[LOGO]
1912 West 4th Street
Tempe, Arizona 85281
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 26, 2000
TO THE SHAREHOLDERS:
You are cordially invited to attend a Special Meeting of Shareholders of
Arizona Instrument Corporation to be held on Monday, June 26, 2000, at 9:00 a.m.
Mountain Standard Time, at Fiesta Inn, 2100 South Priest Drive, Tempe, Arizona
85282.
At the special meeting, you will be asked to consider and vote upon the
approval of the Agreement and Plan of Merger, dated as of March 31, 2000, by and
among AZI LLC, George G. Hays, Harold D. Schwartz and Arizona Instrument, as it
may be amended from time to time, providing for the merger (the "Merger") of
Arizona Instrument with and into AZI LLC, with AZI LLC as the "Surviving
Company." Pursuant to the proposed Merger, you will be entitled to receive $5.00
in cash, without interest, for each of your shares of common stock of Arizona
Instrument. AZI LLC, is and after the proposed Merger will be, controlled
principally by George G. Hays, President and Chairman of the Board of Directors
of Arizona Instrument, Harold D. Schwartz, director of Arizona Instrument, and
G. James Hays, father of George G. Hays. The accompanying proxy statement
explains the proposed Merger and provides specific information concerning the
special meeting. Please read these materials carefully.
Arizona Instrument's Board of Directors formed a Special Committee of
disinterested directors to mitigate any conflict of interest in evaluating this
Merger proposal and other proposals and indications of interest in Arizona
Instrument, and to negotiate the proposals, including the terms of the Agreement
and Plan of Merger with AZI LLC, and related agreements.
The Board of Directors of Arizona Instrument, acting on the unanimous
recommendation of the Special Committee, has approved the Agreement and Plan of
Merger and declared the Agreement and Plan of Merger advisable. The Special
Committee and the Board of Directors believe that the terms and provisions of
the Agreement and Plan of Merger and the proposed Merger are fair to, and in the
best interests of, Arizona Instrument's shareholders, other than AZI LLC and its
affiliates. Therefore, THE BOARD OF DIRECTORS, BASED ON THE RECOMMENDATION OF
THE SPECIAL COMMITTEE, RECOMMENDS THAT YOU VOTE IN FAVOR OF THE APPROVAL OF THE
AGREEMENT AND PLAN OF MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY. In
reaching its decision, the Board of Directors considered, among other things,
the written opinion of Peacock, Hislop, Staley & Given, Inc., the Special
Committee's financial advisor, that, as of March 28, 2000, the $5.00 per share
cash consideration to be received by Arizona Instrument's shareholders in the
proposed Merger was fair to Arizona Instrument's shareholders, other than AZI
LLC and its affiliates, from a financial point of view.
The proposed Merger is an important decision for Arizona Instrument and its
shareholders. The proposed Merger cannot occur unless, among other things, the
Agreement and Plan of Merger is approved by the affirmative vote of the holders
of a majority of all outstanding shares of common stock of Arizona Instrument.
On behalf of the Board of Directors, I urge you to consider the enclosed
materials carefully and, based on the recommendation of the Special Committee,
recommend you vote "FOR" approval of the Agreement and Plan of Merger and the
transactions contemplated thereby.
Sincerely,
S. Thomas Emerson, Ph.D.
Chairman of the Special Committee
of the Board of Directors
Phoenix, Arizona
May 30, 2000
- --------------------------------------------------------------------------------
IMPORTANT: It is important that your stockholdings be represented at this
meeting. Whether or not you expect to attend the meeting, please complete, date
and sign the enclosed Proxy and mail it promptly in the enclosed envelope to
assure representation of your shares. No postage need be affixed if mailed in
the United States. Failure to return an executed Proxy will constitute, in
effect, a vote against approval of the Agreement and Plan of Merger and the
transactions contemplated thereby.
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
1912 West 4th Street
Tempe, Arizona 85281
(602) 470-1414
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Date: June 26, 2000
Time: 9:00 a.m., Mountain Standard Time
Place: Fiesta Inn, 2100 South Priest Drive, Tempe, Arizona 85282
A special meeting of the shareholders of Arizona Instrument Corporation is
being held for the following purposes:
To consider and vote upon the Agreement and Plan of Merger, dated as of
March 31, 2000, by and among AZI LLC, George G. Hays, Harold D. Schwartz and
Arizona Instrument Corporation, as it may be amended from time to time, and the
transactions contemplated thereby, including the merger of Arizona Instrument
with and into AZI LLC, with AZI LLC as the surviving company and with
shareholders of Arizona Instrument (other than AZI LLC and its affiliates)
entitled to receive $5.00 in cash, without interest, for each share of Arizona
Instrument common stock.
To consider any other matters that may properly be brought before the
special meeting or any adjournment(s) or postponement(s) thereof.
Only shareholders of record on May 15, 2000, are entitled to notice of, and
to vote at, the special meeting. During the ten day period prior to the special
meeting, any shareholder may examine a list of Arizona Instrument's shareholders
of record, for any purpose related to the special meeting, during ordinary
business hours at the offices of Arizona Instrument: 1912 West 4th Street,
Tempe, Arizona 85281.
Shareholders of Arizona Instrument who do not vote in favor of the
Agreement and Plan of Merger will have the right to dissent and to seek
appraisal of the fair value of their shares if the Merger is completed and they
comply with the Delaware law procedures explained in the accompanying proxy
statement.
The Merger is described in the accompanying proxy statement, which you are
urged to read carefully. A copy of the Agreement and Plan of Merger is attached
as Annex A to the accompanying proxy statement.
By Order of the Board of Directors
Linda J. Shepherd
Secretary
Phoenix, Arizona
May 30, 2000
<PAGE>
[LOGO]
1912 West 4th Street
Tempe, Arizona 85281
PRELIMINARY PROXY STATEMENT
We are providing this proxy statement and accompanying proxy card to our
shareholders, in connection with the solicitation by our Board of Directors of
proxies to be used at the special meeting of shareholders to be held on June 26,
2000 at 9:00 a.m., Mountain Standard Time, at Fiesta Inn, 2100 South Priest
Drive, Tempe, Arizona 85282. This proxy statement and proxy are being mailed to
Arizona Instrument's shareholders beginning about May 30, 2000.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
SUMMARY TERM SHEET
The following summarizes the most material terms of our proposed Merger
with AZI LLC. This summary may not contain all the information that you should
consider before voting on the proposed Merger. You should read the entire proxy
statement and all of its annexes before voting on the proposed Merger.
* The Proposed Transaction. Arizona Instrument will merge with and into AZI
LLC, with AZI LLC as the Surviving Company. See "THE AGREEMENT AND PLAN OF
MERGER - The Merger; Merger Consideration."
* The Acquiring Parties. AZI LLC was formed to engage in the proposed Merger
by George G. Hays, our Chairman of the Board of Directors and President;
Harold D. Schwartz, one of our directors; and G. James Hays, father of
George G. Hays (collectively, the "Founders"). The Founders, except for G.
James Hays, are also our directors. George G. Hays is a member and the
Manager of AZI LLC. G. James Hays' affiliate, The Hays Family Revocable
Lifetime AB Trust dated October 14, 1998, is a member of AZI LLC. Harold D.
Schwartz's affiliate, Chez & Schwartz Inc. Profit Sharing Plan dated
December 19, 1973, is a Member of AZI LLC. See "THE PARTIES"; "DIRECTORS
AND MANAGEMENT - AZI LLC."
* What You Will Receive in the Merger. You as a shareholder of Arizona
Instrument will be entitled to receive $5.00 in cash, without interest, for
each of your shares of Arizona Instrument's common stock. If you are an
employee, officer or director and own stock options of Arizona Instrument
at the time of the Special Meeting, you will be entitled to receive, for
each stock option, cash in an amount equal to the excess, if any, of $5.00
over the option exercise price. See "THE AGREEMENT AND PLAN OF MERGER - The
Merger; Merger Consideration."
* The Special Meeting. A Special Meeting of Shareholders of Arizona
Instrument will be held at 9:00 a.m., Mountain Standard Time, on June 26,
2000, at Fiesta Inn, 2100 South Priest Drive, Tempe, Arizona 85282. At the
special meeting, you will be asked to consider and vote on a proposal to
approve the Agreement and Plan of Merger described in this proxy statement.
See "INFORMATION CONCERNING THE SPECIAL MEETING - Time, Place and Date";
"INFORMATION CONCERNING THE SPECIAL MEETING - Purpose of the Special
Meeting."
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<PAGE>
* Who Can Vote. Only holders of shares of Arizona Instrument common stock who
are holders at the close of business on the record date, May 15, 2000, will
be entitled to notice of, and to vote at, the special meeting. On the
record date, there were 1,371,399 shares of common stock outstanding and
entitled to vote, held by approximately 2,839 shareholders of record. Each
share of common stock is entitled to one vote per share. As of May 15 ,
2000, 1,371,399 votes were eligible to be cast at the special meeting. See
"INFORMATION CONCERNING THE SPECIAL MEETING - Record Date; Voting at the
Meeting; Quorum."
* Required Vote. Delaware law requires that the holders of a majority of the
voting power of all outstanding shares of Arizona Instrument common stock
vote to approve the Agreement and Plan of Merger. The Founders currently
own 49,188 shares of Arizona Instrument common stock in the aggregate,
representing approximately 4% of the outstanding shares of common stock as
of the record date. See "INFORMATION CONCERNING THE SPECIAL MEETING -
Required Vote."
* The Special Committee. Two of the Founders are two of the four members of
our Board of Directors and they have a conflict of interest in recommending
approval of the Agreement and Plan of Merger because they have a beneficial
interest in AZI LLC. If the Merger occurs, these two individuals will
beneficially own a majority of the membership units of AZI LLC, the
surviving company following the Merger and as a result will receive the
majority of the benefit of future earnings, growth and increased value of
the business of Arizona Instrument, while you will no longer receive any
such benefit. To counteract this conflict of interest, the Board of
Directors formed a Special Committee consisting of two disinterested
directors to evaluate and negotiate the terms of the Agreement and Plan of
Merger with AZI LLC. The Special Committee retained a financial advisor to
evaluate the fairness of the proposed transaction to shareholders from a
financial point of view. The Special Committee received an opinion from its
financial advisor, on which the Special Committee and the Board of
Directors relied, that as of the date of the opinion, assuming you are a
person other than AZI LLC or one of its affiliates, the $5.00 per share you
will receive in the proposed Merger is fair to you from a financial point
of view. See "SPECIAL FACTORS - Special Committee"; "SPECIAL FACTORS -
Board of Directors of Arizona Instrument."
* In the opinion of the Board of Directors, based upon the unanimous
recommendation of the Special Committee, the terms and provisions of the
Agreement and Plan of Merger and the proposed Merger are fair to and in the
best interests of Arizona Instrument's shareholders, other than AZI LLC and
its affiliates, and the Board of Directors has accordingly approved the
Agreement and Plan of Merger and declared it advisable. See "SPECIAL
FACTORS - Recommendation of the Special Committee and Board of Directors;
Fairness of the Merger."
* Conditions to the Merger. A number of conditions must be satisfied before
Arizona Instrument or AZI LLC is obligated to complete the Merger,
including, among others, the following:
* the Merger must be approved by a majority of the voting power held by
the shareholders of Arizona Instrument; and
* there must be no legal or judicial restraints or prohibitions
preventing completion of the Merger.
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<PAGE>
* It is a condition of Arizona Instrument's obligation to proceed with the
merger that all of AZI LLC's representations and warranties be true on the
closing date. It is a condition to AZI LLC's obligation to proceed with the
Merger that the merger financing be funded and that all of Arizona
Instrument's representations and warranties be true on the closing date.
The financing contemplated by AZI LLC for the merger is subject to certain
conditions, including the following:
* Negotiation, preparation and execution of loan documents with each of
the two lenders;
* Negotiation and execution of an intercreditor agreement between the
lenders; and
* No occurrence of a material adverse change in the business or
operations of Arizona Instrument. See "THE AGREEMENT AND PLAN OF
MERGER - Conditions."
* Termination of the Agreement and Plan of Merger. Arizona Instrument and AZI
LLC may agree at any time, including any time after the special meeting, to
terminate the Agreement and Plan of Merger. In addition, either Arizona
Instrument or AZI LLC may terminate the Agreement and Plan of Merger
without the agreement of the other party under certain circumstances. See
"THE AGREEMENT AND PLAN OF MERGER - Termination."
* Acquisition Proposals. In the Agreement and Plan of Merger, Arizona
Instrument agrees not to solicit or encourage any acquisition proposal for
Arizona Instrument's assets or common stock which, upon consummation, would
materially interfere with the Merger. In addition, Arizona Instrument
agrees not to engage in any discussions or provide access to information
about Arizona Instrument with respect to any such acquisition proposal
except under certain circumstances. Under the terms of the Agreement and
Plan of Merger, neither the Board of Directors nor the Special Committee is
permitted to engage in negotiations with respect to an acquisition
proposal, withdraw or modify its recommendation of the Merger and the
Agreement and Plan of Merger, or approve, declare advisable or recommend an
acquisition proposal other than the Merger, except under certain
circumstances. See "THE AGREEMENT AND PLAN OF MERGER - Acquisition
Proposals."
* Fees and Expenses. Under certain circumstances, Arizona Instrument will pay
AZI LLC a termination or "break up" fee equal to the out of pocket expenses
of AZI LLC incurred after January 31, 2000 in connection with the proposed
Merger, but not more than $100,000. See "THE AGREEMENT AND PLAN OF MERGER -
Fees and Expenses."
* Federal Income Tax Consequences. The cash you receive for your shares
generally will be taxable for U.S. federal income tax purposes. See
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER."
* Dissenters' Rights. Any shareholder who does not wish to accept $5.00 per
share cash consideration in the Merger has the right under Delaware law to
have his, her or its shares appraised by the Delaware Chancery Court. This
"right of appraisal" is subject to a number of restrictions and technical
requirements. Generally, in order to exercise appraisal rights, among other
things:
* you must NOT vote in favor of the Agreement and Plan of Merger; and
* you must make a written demand for appraisal in compliance with
Delaware law BEFORE the vote on the Agreement and Plan of Merger.
3
<PAGE>
* Merely voting against the Agreement and Plan of Merger will not preserve
your right of appraisal under Delaware law. Annex C to this proxy statement
contains the Delaware statute relating to your right of appraisal. Failure
to follow all of the steps required by this statute will result in the loss
of your right of appraisal. See "DISSENTERS' RIGHTS OF APPRAISAL"; ANNEX C.
SELECTED CONSOLIDATED FINANCIAL DATA OF ARIZONA INSTRUMENT
The following table sets forth selected consolidated financial data for
Arizona Instrument and its subsidiaries as of and for each of the two fiscal
years for the periods ended December 31, 1998 and 1999 and as of and for each of
the two fiscal quarters for the periods ended March 31, 1999 and March 31, 2000.
No separate financial information is provided for AZI LLC since it is a special
purpose entity formed in connection with the proposed Merger and has no
independent operations. No pro forma data giving effect to the proposed Merger
is provided because Arizona Instrument does not believe such information is
material to shareholders in evaluating the proposed Merger and Agreement and
Plan of Merger since (1) the proposed merger consideration is all cash and (2)
if the proposed Merger is completed, the common stock of Arizona Instrument
would cease to be publicly traded.
The financial information for Arizona Instrument as of and for each of the
two fiscal years for the periods ended December 31, 1998 and 1999, has been
derived from the consolidated financial statements of Arizona Instrument which
have been audited by McGladrey & Pullen L.L.P. and its predecessor in interest.
All such adjustments, except for acquisition transaction costs, are of a normal
recurring nature. The financial information for Arizona Instrument as of and for
each of the two fiscal quarters for the periods ended March 31, 1999 and March
31, 2000, has been derived from the unaudited consolidated financial statements
of Arizona Instrument. The following financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and the Consolidated Financial Statements of Arizona
Instrument and the notes thereto included in Arizona Instrument's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1999, which is attached to
this proxy statement, and should be read in conjunction with "Management's
Discussion and Financial Condition and Results of the Consolidated Financial
Statements of Arizona Instrument and the notes thereto included in Arizona
Instrument's Quarterly Report on Form 10-QSB for the fiscal quarter ended March
31, 2000, which is attached to this proxy statement.
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<TABLE>
<CAPTION>
As of and for the As of and for the
Fiscal Year Ending Fiscal Quarter Ending
---------------------------- ----------------------------
December 31, December 31, March 31, March 31,
1999 1998 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 9,052,505 $ 13,736,981 $ 2,018,123 $ 2,140,665
Cost of goods sold 3,252,610 6,397,475 696,662 768,524
------------ ------------ ------------ ------------
Gross Profit 5,799,895 7,339,506 1,321,461 1,372,141
OPERATING EXPENSES:
Selling & marketing 2,303,230 3,145,068 450,954 662,364
General & administrative 1,479,004 1,732,166 441,657 391,535
Research & development 866,985 1,324,640 178,671 297,955
Amortization & depreciation 483,556 635,777 114,952 140,039
Total expenses 5,132,775 6,837,651 1,186,234 1,491,893
------------ ------------ ------------ ------------
Operating income (loss) 667,120 501,855 135,227 (119,752)
Other revenues (expenses)
Interest income 131,241 16,539 39,928 --
Interest expense (30,651) (104,660) (1,184) (9,833)
Other 14,731 55,751 1,219 4,264
Total other income (expense) 115,321 (32,370) 39,963 (5,569)
------------ ------------ ------------ ------------
Income (loss) before
income taxes 782,441 469,485 175,190 (125,321)
Income tax expense (benefit) 400,000 344,000 87,595 --
------------ ------------ ------------ ------------
Net income $ 382,441 $ 125,485 $ 87,595 $ (125,321)
============ ============ ============ ============
DILUTED NET INCOME (LOSS) PER SHARE:
Net income per share-basic $ 0.28 $ 0.09 $ 0.06 $ (0.09)
Net income per share-diluted $ 0.28 $ 0.09 $ 0.06 $ (0.09)
Basic shares outstanding 1,362,792 1,352,805 1,370,273 1,361,300
Equivalent shares-stock options 16,788 -- 21,011 --
Diluted shares outstanding 1,379,580 1,352,805 1,391,284 1,361,300
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital (deficit) $ 5,092,467 $ 4,045,904 $ 5,305,184 $ 4,062,896
Total Assets $ 9,017,859 $ 9,778,955 $ 9,111,004 $ 9,133,159
Long-term debt
(including current portion) 0 0 0 0
Obligations under capital leases
(including current portion) $ 10,691 $ 24,896 $ 6,277 $ 21,931
Shareholders' equity $ 7,907,804 $ 7,492,441 $ 8,014,718 $ 7,398,839
OTHER DATA:
Book value per share $ 5.80 $ 5.53 $ 5.85 $ 5.44
Ratio of earnings to fixed
charges* $ 26.53 $ 5.49 $ 148.96 $ -11.74
------------ ------------ ------------ ------------
</TABLE>
- ----------
* For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes and
cumulative effect of accounting charges plus fixed charges. Fixed charges
consist of interest expense.
5
<PAGE>
THE PARTIES
Arizona Instrument
Arizona Instrument Corporation was incorporated in Delaware. Arizona
Instrument designs and manufactures precision instruments used in quality
control, industrial control and environmental monitoring applications.
For additional information concerning Arizona Instrument, see "WHERE YOU
CAN FIND MORE INFORMATION" and "AVAILABLE INFORMATION."
AZI LLC
AZI LLC ("AZI LLC") was organized in Arizona on March 7, 2000, by George G.
Hays in connection with the proposed Merger. AZI LLC has not been engaged in any
business activities other than those in connection with the Merger. The
principal office and business address of AZI LLC is c/o Mr. George G. Hays,
Manager, 1912 West 4th Street, Tempe, Arizona 85281. The telephone number of AZI
LLC is (602) 470-1414.
SPECIAL FACTORS
Background of the Merger
On September 25, 1998, Arizona Instrument held an informal meeting of its
Board of Directors to discuss strategy. The Board of Directors discussed several
strategic alternatives for increasing shareholder value, including new product
development, strategic alliances, acquisitions and divestitures. George G. Hays,
President of Arizona Instrument, was directed to further study the matter. In
addition, the Board of Directors discussed the ongoing decline in the Arizona
Instrument stock price and the delisting letter that Arizona Instrument received
from Nasdaq due to an insufficient bid price for the Arizona Instrument common
stock. Mr. Hays was directed to develop a strategy to prevent delisting.
In order to prevent delisting, Arizona Instrument effected a 1 for 5
reverse split of outstanding common stock. The stock split was approved by
Arizona Instrument's shareholders at a special meeting held February 5, 1999,
and became effective on February 16, 1999.
On February 16, 1999, Arizona Instrument announced that it had received a
letter from BP Oil Company demanding the return of approximately $1.9 million
previously paid by BP Oil Company to Arizona Instrument in prior years for the
purchase of Encompass tank gauge systems, the removal of Encompass systems from
BP Oil Company sites, and for the cancellation of any outstanding invoices from
Arizona Instrument. This letter was followed by a lawsuit that BP Oil Company
filed in March 1999, seeking approximately $2.0 million in actual damages plus
an additional several million dollars in incidental and consequential damages.
On February 26, 1999, the Board of Directors of Arizona Instrument met and
discussed the prospective future performance of the Encompass product line in
light of the BP Oil Company dispute. After considerable deliberation, the Board
of Directors concluded that the actions of BP Oil Company had severely damaged
Arizona Instrument's ability to conduct the Encompass business. The Board of
Directors recommended that Arizona Instrument investigate potential acquirers
for the Encompass and Soil Sentry product lines.
6
<PAGE>
On March 26, 1999, the Board of Directors of Arizona Instrument met and Mr.
Hays reported on the investigation of potential acquirers of the Encompass
product line. Due to the damage suffered by the BP Oil Company dispute, few
interested purchasers were identified. Conversations with credible investment
bankers confirmed the difficulty in marketing the product line due to the damage
caused by the BP Oil Company dispute. Mr. Hays presented two prospective
purchasers for the Encompass product line, USTMAN and NESCO. The Board of
Directors authorized Mr. Hays to negotiate the sale of the Encompass and Soil
Sentry assets to NESCO for approximately $1.0 million and a 5% royalty on sales
for two years. The Board of Directors recommended that the transaction be closed
as soon as possible with a target date of April 30. The transaction was closed
on substantially the authorized terms on April 30, 1999.
On May 7, 1999, the Board of Directors met and once more held a general
discussion regarding the future of Arizona Instrument, and possible types of
strategic alternatives which might be available to Arizona Instrument to
increase shareholder value. The Board of Directors discussed whether Arizona
Instrument should remain in its current form, due to its small size, lack of
growth, and the illiquidity of its shares, or whether Arizona Instrument should
investigate strategic alternatives to increase shareholder value such as a
merger, acquisition, sale of substantially all of Arizona Instrument's assets,
leveraged buyout or other business combination. The Board of Directors did not
analyze any specific alternative or the relative merits of the alternatives at
this meeting. The Board of Directors determined that it would be useful to
obtain a brief analysis of the enterprise value of Arizona Instrument to assist
it in its basic strategic alternatives analysis. Accordingly, the Board directed
Mr. Hays to obtain an appraisal of the Company from Oxford Advisors, an
independent appraiser. During this meeting, Mr. Hays expressed his potential
interest in acquiring Arizona Instrument, if financing could be arranged to
provide shareholders with a fair price.
During June and July 1999, Mr. Hays held preliminary discussions with
several prospective financing sources to determine the feasibility of financing
the acquisition of Arizona Instrument. During this period, Mr. Hays held several
discussions with Harold D. Schwartz, a member of Arizona Instrument's Board of
Directors, concerning Mr. Schwartz's interest in pursuing a buyout of Arizona
Instrument with Mr. Hays. In July 1999, Arizona Instrument settled the BP Oil
Company lawsuit.
On July 30, 1999, Arizona Instrument held a meeting of its Board of
Directors at which Mr. Ben Ederer of Oxford Advisors was present to discuss his
Valuation Report dated as of June 30, 1999. Mr. Ederer stated his opinion that,
subject to various assumptions and limitations, as of June 30, 1999, the
enterprise value of Arizona Instrument was $6,000,000 to $7,000,000 or $4.38 to
$5.10 per share of common stock, and the intrinsic value of the common stock was
$3.20 to $3.50. Intrinsic value was determined without regard to a control
premium and after a discount for lack of marketability .
Subsequent to the review of the valuation of Arizona Instrument, the Board
of Directors then discussed strategic alternatives for Arizona Instrument to
increase shareholder value. The Board of Directors discussed the possibility of
alternatives such as a merger, acquisition, sale of substantially all of Arizona
Instrument's assets, leveraged buyout or other business combination. During this
discussion, Mr. Hays indicated that he and Mr. Schwartz were interested in
acquiring Arizona Instrument and that the financing for such an acquisition was
likely to be obtained. After discussion, the Board of Directors resolved to
consider strategic alternatives for Arizona Instrument to increase shareholder
value, such as a merger, acquisition, sale of substantially all of Arizona
Instrument's assets, leveraged buyout or other business combination, either with
or without the involvement of members of management. The Board did not analyze
any specific strategic alternative or the relative merits of the alternatives
discussed.
7
<PAGE>
The Board of Directors then evaluated the advisability of issuing a press
release with respect to the decision by the Board of Directors to consider
strategic alternatives. The Board of Directors resolved to issue a press release
concerning strategic alternatives.
Based on advice of counsel, the Board of Directors then formed a Special
Committee composed of the disinterested directors, S. Thomas Emerson, Ph.D. and
Steven G. Zylstra to consider and act on all proposals regarding business
combination transactions involving Arizona Instrument to consider and act upon
any merger, acquisition, sale of assets, leveraged buyout or other business
combination involving Arizona Instrument. Subsequent to establishing a Special
Committee, the Board of Directors meeting was adjourned. The Board permitted
Messrs. Hays and Schwartz to participate in this meeting despite the fact that
they had expressed an interest in acquiring Arizona Instrument because the Board
was considering very generally the strategic alternatives that might be
available to Arizona Instrument and did not consider that their participation
was inappropriate or would compromise the deliberations of the disinterested
members of the Board. In addition, due to the limited administrative staff of
Arizona Instrument, the participation of Mr. Hays and his availability for
supplying corporate operating and other information to the Board was deemed to
be important.
On July 30, 1999, the Special Committee held its initial meeting, at which
Dr. Emerson was appointed Chairman, and Quarles & Brady LLP, counsel for Arizona
Instrument, was retained as counsel to the Special Committee. The Committee was
informed of its responsibilities by Mr. Moya of Quarles & Brady LLP. The Special
Committee determined to secure a fairness opinion for any potential transaction.
In addition, the Special Committee members agreed that they would ask Mr. Hays
for a report on the persons and entities that had been in contact with Arizona
Instrument and had expressed an interest in acquiring some or all of Arizona
Instrument or its assets.
On August 2, 1999, Arizona Instrument issued a press release indicating
that its Board of Directors had agreed to consider strategic alternatives for
Arizona Instrument in a move to increase shareholder value. The release
indicated that these alternatives could include a transaction such as a merger,
acquisition, sale of assets, or leveraged buyout, either with or without the
involvement of members of management. That same day, Mr. Hays sent the Special
Committee a report on the persons and entities that had been in contact with
Arizona Instrument during the recent past and had expressed an interest in
acquiring some or all of Arizona Instrument or its assets. This report
identified eight potentially interested parties. The discussions with these
parties had been limited to preliminary indications of interest only and, as
such, were very general. None of the parties had presented an offer or specific
proposal to Mr. Hays or the Board and none of the parties had discussed the
terms of any transaction in such a way that their suggested valuation of Arizona
Instrument could be ascertained. Three parties had expressed a potential
interest in acquiring the company but without any discussion of terms. One party
had expressed a potential interest in acquiring the company's Computrac product
line, but without any discussion of terms. Four parties expressed an interest in
acquiring control of the company without discussing specific terms, except that
one party suggested a transaction where control would be acquired for cash in an
unspecified amount from an unspecified source and one party suggested a
transaction where control would be acquired for cash in an unspecified amount
from a subordinated debenture offering by Arizona Instrument. Each of these
parties were sent information packages as discussed below.
8
<PAGE>
On August 16, 1999, the Special Committee held a meeting with its counsel.
At that meeting, Mr. Hays was asked to discuss the list he provided to the
Committee on August 2 which identified the persons and entities that had been in
contact with Arizona Instrument and had expressed a potential interest in
acquiring some or all of Arizona Instrument or its assets. The Committee
determined that it would respond to previous expressions of interest in Arizona
Instrument, and, in addition, engage in a solicitation of potentially interested
parties. Mr. Zylstra agreed to create a list of potentially interested parties
based upon the recent market studies of Arizona Instrument's markets prepared by
an outside market research firm. Mr. Zylstra instructed Mr. Hays to send
information packages with respect to Arizona Instrument under Dr. Emerson's
signature to potentially interested parties on the list, together with a cover
letter inviting their response.
The Committee also discussed the advisability of hiring a financial advisor
and obtaining a fairness opinion. After discussion, the Committee agreed that
Dr. Emerson would contact two investment banks which the Committee believed had
expertise in this area, including Peacock, Hislop, Staley & Given, Inc., to
inquire as to the cost of a fairness opinion in connection with a proposed
business combination transaction involving Arizona Instrument, and would report
back to the Committee at the next meeting.
Dr. Emerson and Mr. Zylstra then formalized the mechanics of (a) responding
to persons and entities that would contact Arizona Instrument to express an
interest in acquiring some or all of Arizona Instrument or its assets, and (b)
soliciting such expressions of interest. The Committee then directed Quarles &
Brady LLP to prepare forms of a confidentiality agreement and cover letters to
be used in the strategic alternatives process.
On August 25, 1999, Mr. Zylstra delivered a list of potentially interested
parties to Mr. Hays, and instructed Mr. Hays to deliver solicitation packages to
them. Between August 30, 1999 and September 3, 1999, 52 solicitation packages
were sent under Dr. Emerson's signature to potentially interested parties.
On September 12, 1999, Arizona Instrument received a letter from Herbert W.
Morgan III, a shareholder of Arizona Instrument who recently had been actively
purchasing shares of common stock in the market, requesting a seat on Arizona
Instrument's Board of Directors. In addition, on September 12, 1999, the Special
Committee received a letter from Mr. Morgan proposing a significant
restructuring of Arizona Instrument, pursuant to which substantially all of the
company's operations would be disposed of and the proceeds used to make
investments in other operating companies. On September 14, the Board of
Directors of Arizona Instrument discussed Mr. Morgan's request for a seat on the
Board of Directors. On September 15, 1999, Arizona Instrument sent Mr. Morgan a
letter declining his request for a seat on the Board of Directors and requesting
specific information regarding his restructuring proposal.
On September 15, 1999, the Special Committee met and reviewed the responses
to the solicitation mailing earlier in the month. At this meeting, the Special
Committee reviewed the expressions of interest from 18 parties. The Special
Committee determined to pursue discussions concerning a strategic transaction
with five of these parties with whom the Committee believed Arizona Instrument
could possibly engage in a favorable transaction: the Hays group, Bacharach,
Inc., the Ohaus Corp. , OI Corporation and General Eastern Instrument. No
specific proposals had been received from any of these parties, but the parties
were judged by the Committee as potentially serious participants in a strategic
transaction. The Committee determined to request additional information from
seven parties, including Mr. Morgan, regarding their expressions of interest in
order to understand or better understand what type of transaction, if any, each
of them might be interested in pursuing. No specific proposals had been received
from any of these parties.
9
<PAGE>
The Committee determined to decline the indications of interest of the
remaining seven respondents; five because the other party either had no
understandable interest or was not deemed to be a responsible or credible
counterparty for a transaction; two because the Committee concluded that there
was no strategic product fit that could engender a meaningful transaction.
On September 24, 1999, Dr. Emerson and Mr. Hays meet with Mr. Morgan and
his associate, Donald J. Moore, to discuss Mr. Morgan's ideas for Arizona
Instrument. Dr. Emerson requested that Mr. Morgan deliver a specific proposal
for a strategic transaction to him for consideration by the Special Committee.
On October 1, 1999, Arizona Instrument sent follow up letters to the
interested parties selected by the Special Committee. To each of those parties
with whom the Committee determined to pursue discussions, the Committee sent a
form of confidentiality agreement and an invitation to commence discussions. To
each party from whom the Committee determined additional information was needed,
the Committee sent a letter requesting additional information.
On October 2, 1999, Mr. Morgan sent another letter to Arizona Instrument,
this time requesting three seats on Arizona Instrument's Board of Directors.
On October 7, 1999, Mr. Hays sent a letter to the Special Committee
withdrawing his interest in acquiring Arizona Instrument. In the letter Mr. Hays
stated that with the increase in stock price and interest expressed by other
parties, Arizona Instrument's initiative to increase shareholder value had been
an unqualified success.
On October 8, 1999, the Board of Directors accepted Mr. Hays' withdrawal of
interest in a strategic transaction with Arizona Instrument and disbanded the
Special Committee because there no longer was a proposed transaction involving
an interested party.
On October 13, 1999, Arizona Instrument sent Mr. Morgan a letter declining
his request for three seats on its Board of Directors and reminding Mr. Morgan
that Arizona Instrument had not received any details concerning Mr. Morgan's
proposed strategic transaction.
On October 18, 1999, Mr. Morgan sent a letter to all shareholders of
Arizona Instrument requesting their support in calling a special meeting of
shareholders to elect a new Board of Directors. Shortly after Mr. Morgan's
letter to shareholders seeking support for a shareholders' meeting, several
parties who had previously expressed an interest in a strategic transaction
deferred their expressions of interest.
On October 28, 1999, Mr. Morgan filed a Schedule 13d stating that he had
abandoned his effort to call a shareholders meeting.
During November and December 1999, Arizona Instrument reestablished
communication with potentially interested parties. Over the course of these
discussions, Arizona Instrument was able to generate one proposal from an
outside party, Mr. Jack Purdy, to enter into a transaction pursuant to which Mr.
Purdy would commence an all shares, all cash tender offer at a price of $5.40
per share. Mr. Purdy's wherewithal and intentions were undetermined.
On December 27, 1999, the Board of Directors met and concluded the
Strategic Alternatives process. The Board noted that no proposals were received
from any of the four parties previously identified by the Committee as potential
candidates for a transaction. Mr. Hays had withdrawn his indication of interest.
Bacharach and Ohaus had executed confidentiality agreements to obtain
information about the company, but each subsequently elected not to make any
proposal. OI Corp. refused to sign a confidentiality agreement with a standstill
10
<PAGE>
provision and did not pursue a transaction further. The Board also noted that no
proposals were received from the seven parties to whom the Committee sent
requests for additional information. Although certain of the parties responded
to the request for information and one signed a confidentiality agreement to
obtain information about Arizona Instrument, no proposals were received by the
Committee or the Board. Accordingly, the Board directed Mr. Hays to begin
discussions with Mr. Purdy . From December 28, 1999 through January 20, 2000,
Arizona Instrument made repeated phone calls and sent a letter to Mr. Purdy
expressing Arizona Instrument's interest in further discussions regarding the
proposal, but received no response.
On January 18, 2000, the Board of Directors met and indicated to Mr. Hays
that it would be receptive to a proposal from him to enter into a strategic
transaction with Arizona Instrument. By this time, the per share stock price of
Arizona Instrument had dropped down to approximately $3.72 from approximately
$5.50 during he discussions with Mr. Morgan. At this time, Mr. Hays discussed
his interest in acquiring Arizona Instrument with Harold D. Schwartz, a director
of Arizona Instrument, and G. James Hays, the father of George G. Hays.
On January 26, 2000, Arizona Instrument received a written proposal from
Lawrence Bain to acquire all outstanding common stock of Arizona Instrument at a
purchase price of $5.00 per share. On January 31, 2000, a group led by Mr. Hays
(which included Mr. Schwartz) presented a written proposal to Arizona Instrument
to acquire all outstanding common stock at a price of $5.00 per share.
Mr. Bain's proposal was on behalf of an entity to be formed and did not
specify the acquiring entity's source of equity or debt financing. The proposal
included no terms except the price, a three month exclusive due diligence period
and a $250,000 fee payable to Mr. Bain if Arizona Instrument engaged in any
discussions regarding a business combination during the three month due
diligence period or entered into a letter of intent or other agreement to engage
in a business combination within six months after the proposal, and such
transaction was actually consummated.
Mr. Hays' proposal was on behalf of an entity to be formed by George G.
Hays, Harold D. Schwartz and G. James Hays, and specified the lead lender in the
transaction, which was Arizona Instrument's primary bank. Mr. Hays' proposal
included a 30 day due diligence period and a fee payable to Mr. Hays should
Arizona Instrument violate an agreement not to solicit other proposals for a
business combination prior to the execution of a definitive acquisition
agreement. The specified fee payable would be equal to Mr. Hays' out of pocket
expenses, but not more than $100,000.
On January 31, 2000, the Board of Directors met to consider these two
offers to acquire all of the outstanding stock of Arizona Instrument. Since one
of the offers was from a group led by Mr. Hays, the Special Committee was
re-established to consider the proposals. The Board of Directors meeting was
adjourned and a meeting of the Special Committee was convened and considered the
two proposals to acquire Arizona Instrument at $5.00 per share. The counsel to
the Special Committee began by explaining the standard of care applicable to the
Special Committee in evaluating the offers to acquire all outstanding stock of
Arizona Instrument. The Committee members considered the merits of the two
offers. The Committee noted that the Bain proposal did not specify the structure
of the transaction or the identity of its equity or debt participants. There was
no indication of the ability of the Bain group to obtain the necessary financing
for the transaction or complete the transaction. The Committee also noted that
the Bain proposal included a provision that would require Arizona Instrument to
pay to Mr. Bain a fee of $250,000 under certain circumstances, including the
acceptance of a superior proposal. The Committee noted that the Hays proposal
identified the structure of the transactions as a merger/business combination
and that it identified the equity and principal debt participants in the
proposed transaction. In addition, the Committee noted that the Hays group had
11
<PAGE>
represented that it had made arrangements with its principal lender for
financing the transaction, and that the lender was Arizona Instrument's primary
bank. Finally, the Committee noted that the fee payable to Mr. Hays in the event
the company engaged in discussions with other parties regarding a business
combination was limited to Mr. Hays' out of pocket expenses, not to exceed
$100,000. The Committee considered this fee to be a very modest break-up fee
which would permit the Committee very broad discretion to continue discussions
with Mr. Bain or any other party who expressed an interest in engaging in a
transaction with Arizona Instrument at any time prior to the closing of the Hays
transaction. Finally, the Committee believed the Hays group was more likely than
Mr. Bain to complete a transaction with Arizona Instrument on the terms
proposed, because the Hays group was led by Arizona Instrument's president and
had already had favorable discussions with potential funding sources, including
Arizona Instrument's current bank. For these reasons, the Committee unanimously
elected to approve the Hays proposal and not Mr. Bain's proposal and recommend
acceptance of the proposal by the Board of Directors. This recommendation was
conditioned on Mr. Hays' acceptance of certain modifications to the proposal
which would permit the Committee to continue discussions with Mr. Bain or others
without incurring any breakup fee and further limit the break-up fee to out of
pocket expenses incurred after the date of the proposal.
The meeting of the Board of Directors was then reconvened. The Special
Committee reported to the entire Board of Directors its recommendation that the
Board of Directors approve the proposal from Mr. Hays subject to certain
modifications which Mr. Hays accepted. The Special Committee described its
analysis and evaluation of the alternative proposals and the reasons for its
recommendation. The Board of Directors unanimously accepted and adopted the
Special Committee's recommendation that the Board of Directors approve the
proposal presented by Mr. Hays.
On February 1, 2000, Arizona Instrument issued a press release indicating
that Arizona Instrument had entered into a letter of intent pursuant to which an
entity to be formed by Mr. Hays, Harold D. Schwartz, and G. James Hays would
acquire all of Arizona Instrument's outstanding shares not owned by them at a
price of $5.00 per share in cash. Also on that date, the Special Committee
retained the investment banking firm of Peacock, Hislop, Staley & Given, Inc. to
render an opinion as to the fairness of the Hays proposal from a financial point
of view.
Peacock Hislop was engaged by the Special Committee exclusively to consider
the fairness of the Hays transaction to the shareholders of Arizona Instrument
from a financial point of view and for no other purpose. Peacock Hislop did not
otherwise provide any opinions, appraisals or advice to the Special Committee or
the Board of Directors, including advice regarding alternative transaction
structures or the merits of other proposals.
On February 4, Dr. Emerson met with Mr. Bain, who delivered a revised
proposal to acquire all outstanding common stock of Arizona Instrument. This
letter was substantially identical to the previous proposal, except that the
purchase price had been increased from $5.00 in cash to $5.50 in cash. On
February 9, 2000, the Special Committee met to consider Mr. Bain's revised
proposal. In the meeting, the Special Committee determined that the proposal was
insufficiently precise to allow the Committee to further evaluate its merits or
reach a judgement as to whether or not Mr. Bain could complete the transaction
as proposed. In particular, the Committee noted that the proposal did not
identify the proposed structure, the equity or debt participants or any other
material terms of the transaction other than a break-up fee of $250,000. The
Committee determined that it would need additional information to properly
evaluate the proposed transaction and sent a letter to Mr. Bain requesting
additional information which would permit the Committee to evaluate both the
structure of the transaction and the likelihood that it could be consummated.
12
<PAGE>
On February 15, 2000, Dr. Emerson received a communication from Metrisa,
Inc., to whom the Committee previously had sent a request for additional
information regarding the status of the strategic alternatives process. In
response, Dr. Emerson requested a specific proposal from this party describing
the terms of a transaction. Subsequent to this request, several communications
occurred between Dr. Emerson and Metrisa, but no such proposal was received by
Dr. Emerson or the Special Committee.
On March 28, 2000, the Special Committee met to review the specific terms
of the acquisition agreement for the Merger and to receive the report from
Peacock, Hislop, Staley & Given, Inc., regarding the fairness of the proposed
Merger.
The Special Committee accepted the fairness opinion, but deferred on any
approval of the Merger until it determined whether Mr. Bain had any interest in
further discussions with Arizona Instrument. On March 30, 2000, Dr. Emerson was
informed by Mr. Bain that he had no continuing interest in making a proposal to
Arizona Instrument.
On March 31, 2000, the Special Committee met to discuss the outcome of Dr.
Emerson's contact with Mr. Bain and to consider the approval of the Merger and
the form of Agreement and Plan of Merger which had been previously presented to
the Special Committee. The Special Committee approved the Merger, the form of
the Agreement and Plan of Merger and the transactions contemplated thereby, and
declared that such transactions were advisable, fair to and in the best
interests of Arizona Instrument and its shareholders, and recommended that the
shareholders approve such transactions. The Special Committee unanimously
recommended such transactions to the Board of Directors.
On the same day, the Board of Directors met to receive and consider the
recommendations of the Special Committee. The Board of Directors approved the
Merger Agreement and all the transactions contemplated thereby, including the
merger, declared that such transactions were advisable, fair to, and in the best
interests of Arizona Instrument and its shareholders, and recommended that
shareholders of Arizona Instrument approve the Merger Agreement and Merger.
Recommendation of the Special Committee and Board of Directors; Fairness of the
Merger
On March 31, 2000, the Special Committee approved the Agreement and Plan of
Merger, determined that the merger of Arizona Instrument with and into AZI LLC,
with AZI LLC as the Surviving Company was advisable and that the terms and
provisions of the Agreement and Plan of Merger are fair to, and in the best
interests of, Arizona Instrument's shareholders (other than AZI LLC and its
affiliates). At that time, the Special Committee unanimously recommended to the
entire Board of Directors that it, among other things, approve and declare
advisable the Agreement and Plan of Merger.
At a meeting of the Board of Directors held immediately following the
Special Committee's meeting on March 31, 2000, the Board of Directors considered
the recommendations of the Special Committee. The Board of Directors concluded
that the terms and provisions of the Agreement and Plan of Merger are advisable
and fair to, and in the best interests of, Arizona Instrument's shareholders
(other than AZI LLC and its affiliates), approved the Agreement and Plan of
Merger, declared the Agreement and Plan of Merger advisable, and recommended
that the shareholders approve the Agreement and Plan of Merger and the
transactions contemplated thereby. Mr. Schwartz did not participate in this
meeting. Mr. Schwartz, however, did not dissent from the actions of the Board of
Directors and, as discussed below under "AZI LLC's Purpose and Reason for the
Merger," Mr. Schwartz believes that the Merger is fair to the shareholders of
Arizona Instrument.
13
<PAGE>
Special Committee
In approving and recommending that the Board of Directors approve the
Agreement and Plan of Merger and in declaring and recommending that the Board of
Directors declare the Agreement and Plan of Merger advisable and the
transactions contemplated thereby to be fair to and in the best interests of
Arizona Instrument's shareholders, the Special Committee considered the
following factors, each of which, in the opinion of the Special Committee,
supported its determination.
* Limitations As A Public Company. The Special Committee considered the fact
that Arizona Instrument's limited trading volume, institutional sponsorship
and public float, small market capitalization, and diminishing research
attention from market analysts, had adversely affected the trading markets
for, and the value of, Arizona Instrument's common stock. The Special
Committee also considered its discussions with Peacock Hislop with respect
to these market and trading considerations. The Special Committee concluded
that in the circumstances then existing, the $5.00 per share consideration
to be received by shareholders pursuant to the Agreement and Plan of Merger
was preferable to continuing to hold shares in the public company.
Accordingly, the Special Committee concluded that shareholder value was not
likely to be maximized if Arizona Instrument were to remain a public
company.
* Financial Performance And Future Prospects. The Special Committee
considered the inconsistent results of operations over a period of several
years and the recent disposition of a product line that previously had been
expected to be the principal component of the company's growth. The Special
Committee also considered the impact that these factors had and could have
on the value of Arizona Instrument's shares in the future and Arizona
Instrument's overall value as a going concern.
* Opinion Of Peacock Hislop. The Special Committee considered the financial
presentation of Peacock Hislop's oral opinion delivered at the March 28,
2000 meeting of the Special Committee (which was subsequently confirmed in
writing) to the effect that, as of the date of its opinion and based upon
and subject to the matters stated in its opinion, the $5.00 per share
Merger Consideration to be received by Arizona Instrument's shareholders in
the Merger was fair to Arizona Instrument's shareholders (other than AZI
LLC and its affiliates) from a financial point of view. THE FULL TEXT OF
PEACOCK HISLOP'S WRITTEN OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY PEACOCK
HISLOP, IS ATTACHED AS ANNEX B TO THIS PROXY STATEMENT AND IS INCORPORATED
HEREIN BY REFERENCE. SHAREHOLDERS ARE URGED TO, AND SHOULD, READ THE
OPINION OF PEACOCK HISLOP. The presentation of and the factors considered
by Peacock Hislop in its fairness opinion, as discussed under "SPECIAL
FACTORS--Opinion of Financial Advisor to the Special Committee," supported
the Special Committee's determination.
* Market Price And Premium. The Special Committee considered that (1) the
$5.00 per share to be received by Arizona Instrument's shareholders in the
Merger exceeded by 41% the volume-weighted average stock price for the 12
months prior to the public announcement of Mr. Hays' $5.00 per share
indication of interest letter, and (2) the Merger Consideration represented
a 21% premium to the stock price the day prior to the public announcement
of Arizona Instrument's pursuit of strategic alternatives, a 94% premium to
Arizona Instrument's estimated volume-weighted average stock price for the
six months prior to the public announcement of Arizona Instrument's pursuit
of strategic alternatives.
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* Negotiations With AZI LLC. The Special Committee considered the history of
negotiations with respect to the Agreement and Plan of Merger and the
transactions contemplated thereby as the product of arm's-length
negotiations between AZI LLC and the Special Committee. See "SPECIAL
FACTORS--Background of the Merger" and "THE AGREEMENT AND PLAN OF MERGER."
* Financing Commitments. The Special Committee considered the commitment
letters received by AZI LLC from Imperial Bank and Arizona MultiBank to
arrange, fund and administer certain of the financing for the Merger. The
Special Committee and its advisors reviewed the terms and conditions of,
and were satisfied with, such commitment letters.
* Comparison To Other Proposals. The Special Committee, together with its
advisors, evaluated the viability of the indications of interest received
by the Special Committee during its process and the relative strength of
the AZI LLC proposal when compared to all other proposals and concluded
that the AZI LLC proposal was stronger than each of the other proposals in
substantially all respects, including the viability and certainty of the
financing structure and Arizona Instrument's ability to negotiate
representations and warranties, covenants, conditions and other provisions
in the Agreement and Plan of Merger which are substantially more favorable
to Arizona Instrument's shareholders than those which would have been
available in a transaction with an unaffiliated third party. Accordingly,
the Special Committee believed that it was not likely that any party other
than AZI LLC and the Founders would propose and complete a transaction on
terms more favorable to Arizona Instrument's shareholders than the Merger.
The Hays proposal was the only proposal received by the Special Committee
which was sufficiently specific that it could be accepted. Although the
Committee engaged in discussions with multiple parties during the strategic
alternatives initiative, no specific proposal for a transaction was made by
any potentially interested party. [The most specific proposal received by
the Committee was made by Mr. Bain and was a single page document which did
not identify the structure, the participants or any other material details
except the cash purchase price and the size of the breakup fee.] Mr. Bain
did not respond to the Committee's request for additional information and
subsequently indicated that he had no continuing interest in acquiring
Arizona Instrument.
* Other Potential Buyers. The Special Committee believed that the length of
time between the public announcement of the fact that Arizona Instrument
was considering strategic alternatives and the date of the Agreement and
Plan of Merger provided a substantial amount of time within which to gauge
the current level of interest in Arizona Instrument and to permit potential
buyers to come forward. The Special Committee also considered the
provisions of the Agreement and Plan of Merger which legally and
practically permit Arizona Instrument to respond meaningfully to third
party proposals for alternative transactions. Specifically, the terms of
the Agreement and Plan of Merger authorize Arizona Instrument under certain
circumstances to (1) engage in negotiations with third parties who submit
in writing an acquisition proposal for a transaction which, among other
things, the Special Committee determines in good faith is as or more likely
to occur than the Merger and would be more favorable to the shareholders of
Arizona Instrument and (2) terminate the Agreement and Plan of Merger in
order to permit Arizona Instrument to enter into such a transaction with
only a modest break-up fee (AZI LLC'S out-of-pocket expenses incurred after
January 31, 2000, but not more than $100,000). See "--Negotiations with AZI
LLC," above and "THE AGREEMENT AND PLAN OF MERGER--Acquisition Proposals."
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* Special Committee Composition And Retention Of Advisors. The Special
Committee considered that it was composed of disinterested directors, none
of whom were employed by or affiliated with Arizona Instrument (except in
their capacities as directors) or would have any equity interest in the
Surviving Company. The Special Committee also considered that it had
retained its own financial advisor who assisted the Special Committee in
evaluating the fairness of the proposed transactions.
* Regulatory Approvals. The Special Committee considered that there are no
regulatory approvals required to consummate the Merger.
* Shareholder Approval. The Committee considered that the Merger was subject
to shareholder approval, although not approval by a majority of all
outstanding shares of Arizona Instrument common stock held by disinterested
shareholders. The Committee believed that it was unnecessary to require the
approval of a majority of disinterested shareholders because of the limited
amount of stock owned by the Founders. As of May 8, 2000, the Founders and
their affiliates together own, in the aggregate, less than 4% of the
outstanding common stock.
* Availability Of Dissenters' Rights. The Special Committee considered that
dissenters' rights of appraisal will be available to the holders of common
stock under Delaware law.
* Loss Of Equity Interest. The Special Committee considered the fact that if
the Agreement and Plan of Merger is approved, the holders of the common
stock will not participate in the future growth of Arizona Instrument.
Because of the risks and uncertainties associated with Arizona Instrument's
future prospects, the Special Committee concluded that the Merger was
preferable to enabling the holders of such stock to have a speculative
potential future return.
* Interests Of Certain Parties. The Special Committee also recognized that
the Founders would have an opportunity, subject to the risks of the
Surviving Company's business, to benefit from any increases in the value of
the Surviving Company following the Merger. The Special Committee
recognized that this represented a potential conflict between the interests
of the Founders and Arizona Instrument's other shareholders. However, the
Special Committee considered its assessment of the risks associated with
Arizona Instrument's future and recognized that under the terms of the
Agreement and Plan of Merger, the Founders would assume all business and
investment risks associated with the Surviving Company. The Special
Committee considered that the assumption of risk involved in the proposed
transaction mitigated the potential conflict of interest.
The foregoing discussion of the information and factors discussed by the
Special Committee is not meant to be exhaustive, but includes all material
factors considered by the Special Committee to support their decision to
recommend the approval of the Agreement and Plan of Merger and to determine that
the transactions contemplated thereby are fair to, and in the best interests of,
Arizona Instrument and the holders of Arizona Instrument's common stock (other
than AZI LLC and its affiliates). The Special Committee did not assign relative
weights or additional quantifiable values to the above factors; rather, the
Special Committee viewed its position and recommendations as being based on the
totality of the information presented to and considered by the members. Certain
factors which might be considered when evaluating a transaction similar to the
Merger were not considered by the Special Committee. These factors include
whether the Merger Consideration offered to the holders of Arizona Instrument's
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common stock (other than AZI LLC and its affiliates) constitutes fair value in
relation to (1) liquidation value or net book value, which factors were not
considered because these factors are not indicative of the value of Arizona
Instrument as a going concern, or (2) the prices paid by Arizona Instrument or
any of the Founders in connection with purchases of Arizona Instrument common
stock by any of such persons during the last two full fiscal years of Arizona
Instrument, which factor was not considered because no significant purchases of
such kind were made during the last two full fiscal years.
The Special Committee recognized that much of the planning, analysis and
valuation in connection with the strategic alternatives process, including the
proposed Merger, was based in part on the Management Projections. Consistent
with past practice and due to the limited administrative staff of Arizona
Instrument, these projections were prepared primarily by Mr. Hays, the President
of Arizona Instrument, who is an interested party in the Merger. The Special
Committee believed that projections were reasonable under the circumstances and
consistent with past forecasting by management. In addition, the Special
Committee noted that these same projections were provided to and used by Mr.
Hays in his discussions with potential funding sources for financing the Merger.
The Management Projections were used by management and the Board for internal
planning and operations in the ordinary course of Arizona Instrument's business.
Accordingly, the Special Committee believed it was reasonable the Committee and
its financial advisor to utilize the Management Projections in evaluating the
Merger.
Board of Directors of Arizona Instrument
The Board of Directors unanimously formed the Special Committee to act
solely on behalf of the unaffiliated shareholders of Arizona Instrument for
purposes of negotiating the Agreement and Plan of Merger. The Special Committee,
in turn, retained Peacock Hislop to prepare and deliver an opinion as to the
fairness of the Merger Consideration to Arizona Instrument's shareholders (other
than AZI LLC and its affiliates) from a financial point of view.
In reaching its determination referred to above, the Board of Directors
considered, relied upon and adopted the Special Committee's conclusions,
recommendations, unanimous approval of the Agreement and Plan of Merger,
declaration of the Agreement and Plan of Merger's advisability and Peacock
Hislop's opinion (which opinion expressly permitted reliance thereon by the
Board of Directors) that, as of the date of such opinion, based upon and subject
to various considerations, assumptions and limitations stated therein, the $5.00
per share in cash to be received by Arizona Instrument's shareholders in the
Merger was fair to such shareholders (other than AZI LLC and its affiliates)
from a financial point of view, and the related analyses presented by Peacock
Hislop.
In addition, Arizona Instrument undertook the transaction with AZI LLC at
this time as a result of (1) the Special Committee's consideration of the
factors outlined above relating to the limitations of Arizona Instrument as a
public company, the inconsistent results of Arizona Instrument's operations and
its recent financial performance and the impact of such performance on future
prospects and the long-standing concerns of the Board of Directors (including
the disinterested members comprising the Special Committee) regarding the
continuing depressed stock price of Arizona Instrument's common stock, (2) the
lack of investor interest in Arizona Instrument on the part of third parties and
(3) each of the other factors considered by the Special Committee and described
above.
The Board of Directors believes that sufficient procedural safeguards to
ensure fairness of the transaction and to permit the Special Committee to
effectively represent the interests of the holders of Arizona Instrument's
common stock, other than AZI LLC and its affiliates, were present. The Board of
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Directors reached this conclusion in view of (1) the unaffiliated status of the
members of the Special Committee whose sole purpose was to represent the
interests of the holders of Arizona Instrument's common stock (other than AZI
LLC and its affiliates); (2) retention by the Special Committee of independent
financial advisors; and (3) the fact that the Special Committee, even though
consisting of directors of Arizona Instrument and therefore not completely
unaffiliated with Arizona Instrument, is a mechanism well recognized under
Delaware law to provide for fairness in transactions of this type.
THE BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS ADVISABLE AND IS FAIR
TO, AND IN THE BEST INTERESTS OF, ARIZONA INSTRUMENTS AND THE HOLDERS OF COMMON
STOCK (OTHER THAN AZI LLC AND ITS AFFILIATES) AND, BASED UPON THE UNANIMOUS
RECOMMENDATION OF THE SPECIAL COMMITTEE, RECOMMENDS APPROVAL OF THE AGREEMENT
AND PLAN OF MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY TO ARIZONA
INSTRUMENT'S SHAREHOLDERS.
Opinion of Financial Advisor to the Special Committee
The Special Committee retained Peacock Hislop to act as financial advisor
to render an opinion as to the fairness of the proposed transaction, from a
financial point of view, to Arizona Instrument's public shareholders. Prior to
being engaged as the financial advisor to the Special Committee, Peacock Hislop
had no prior professional relationship with Arizona Instrument. Peacock Hislop
was selected by the Special Committee based on its experience as financial
advisor in the evaluation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bidding,
secondary distribution of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
Peacock Hislop did not compare the Hays proposal to any other offers or
indications of interest received by the Committee and thus did not determine
whether or not the Hays proposal was superior to any other proposals received by
the Committee. At the request of the Special Committee, on March 28, 2000,
Peacock Hislop rendered its oral opinion to the Special Committee and the Board
of Directors to the effect that, as of that date and subject to the assumptions
made, matters considered and limits of the review undertaken by Peacock Hislop
described in its opinion, the $5.00 merger consideration to be received by
Arizona Instrument shareholders other than AZI LLC or its affiliates pursuant to
the Merger was fair from a financial point of view to such shareholders. Peacock
Hislop subsequently confirmed this opinion in writing by letter dated March 28,
2000.
The full text of Peacock Hislop's written opinion is attached as Appendix B
to this proxy statement. We refer you to Peacock Hislop's opinion, and you
should consider it as part of this proxy statement since we are incorporating it
by this reference. The following description of Peacock Hislop's opinion is only
a summary of it, and you should read the full opinion for a complete
understanding of the opinion's assumptions, considerations and limitations.
Copies of the written opinion are also available for inspection and copying at
the principal executive offices of Arizona Instrument during regular business
hours by any interested shareholder of Arizona Instrument, or a representative
who has been so designated in writing, and may be inspected and copied, or
obtained by mail, by written request directed to: Corporate Secretary, Arizona
Instrument Corporation, 1912 West 4th Street, Tempe, Arizona 85281.
You should be aware that the Peacock Hislop opinion only advises the
Special Committee and the Board of Directors concerning the fairness from a
financial point of view of the merger consideration. The opinion does not
address the merits of our Board of Directors' decision to approve the Merger.
The opinion is not a recommendation to you that you vote for or against the
Merger or that you take any other action regarding the Merger.
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In preparing its opinion, Peacock Hislop, among other things:
* reviewed a draft of the Agreement and Plan of Merger;
* reviewed certain of our publicly available financial statements and
other business and financial information;
* reviewed certain of our internal financial statements, financial
forecasts and other data concerning Arizona Instrument prepared by our
management, which includes Mr. Hays (the "Management Projections");
* met with certain members of our management to discuss Arizona
Instrument's business, historical and projected financial results,
financial condition and future prospects;
* reviewed the historical stock price and trading volume for Arizona
Instrument common stock;
* compared our financial performance and the price and trading volume of
Arizona Instrument common stock with that of other publicly traded
companies in similar lines of business;
* compared the financial terms of the Merger with the financial terms of
certain other transactions that Peacock Hislop deemed comparable;
* prepared a discounted cash flow analysis and a leveraged acquisition
analysis of Arizona Instrument;
* made other studies and inquiries, and took into account other matters
and special factors that Peacock Hislop believed were relevant to
forming its opinion, including an assessment of general economic and
market conditions.
Peacock Hislop did not independently verify any of the information it
obtained for purposes of its opinion. Instead, Peacock Hislop assumed the
accuracy and completeness of all such information. Peacock Hislop relied upon
our management's information and forecasts concerning our prospects, including
the Management Projections, and assumed they were reasonably prepared on bases
reflecting the best currently available judgments and estimates of management as
to our likely future financial performance and that such forecasts, including
the Management Projections, will be realized at the times contemplated therein.
As to all legal matters, Peacock Hislop relied on the advice of counsel to the
Special Committee and has assumed that the Merger will be consummated in
accordance with the terms of the Agreement and Plan of Merger. Peacock Hislop
did not make an independent inspection, evaluation or appraisal of the assets or
liabilities of Arizona Instrument, nor did anyone furnish Peacock Hislop with
any such evaluation or appraisal. The Peacock Hislop opinion is based on market,
economic and other conditions as they existed and could be evaluated at the time
the opinion was given.
No limitations were imposed by Arizona Instrument, the Special Committee or
the Board of Directors on the procedures Peacock Hislop followed in rendering
its opinion. However, Peacock Hislop was not engaged or authorized to solicit
and did not solicit any other business combination transaction or strategic
transaction as an alternative to the Merger. The solicitation process was
conducted by the Special Committee. The Special Committee conducted its own
solicitation process in an effort to attract third parties' interest in
acquiring all or any part of Arizona Instrument, in which Peacock Hislop took no
part. The Special Committee informed Peacock Hislop that Mr. Hays' offer was the
only offer received that was deemed to be a legitimate firm offer susceptible of
acceptance by the Special Committee. Peacock Hislop was not asked to render, and
has not rendered, an opinion as to the fairness of the solicitation process
conducted by the Special Committee.
In addressing the fairness, from a financial point of view, of the merger
consideration to be received by the unaffiliated shareholders of Arizona
Instrument, Peacock Hislop employed a variety of generally recognized valuation
methodologies and performed those, which it believed were most appropriate for
developing its opinion. The preparation of a fairness opinion involves various
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determinations of the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances.
Therefore, such an opinion is not readily susceptible to partial analysis or
summary description. In arriving at its opinion, Peacock Hislop did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments about the significance and relevance of each
analysis and factor. Such analysis resulted in the calculation of ranges of
implied per share values for Arizona Instrument common stock.
Peacock Hislop believes that its analyses must be considered as a whole and
that selecting portions of its analyses, without considering all factors and
analyses, would create an incomplete view of the process underlying its opinion.
In performing its analyses, Peacock Hislop made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Arizona Instrument. The
analyses performed by Peacock Hislop do not purport to be an appraisal and are
not necessarily indicative of actual values, trading values or actual future
results that might be achieved, all of which may be significantly more or less
favorable than suggested by Peacock Hislop's analyses. No public company that
Peacock Hislop utilized as a comparison is identical or directly comparable to
Arizona Instrument, and none of the comparable transactions utilized as a
comparison is identical or directly comparable to the Merger. Accordingly, a
purely mathematical analysis based on such comparable companies or comparable
business combinations is not a meaningful method of using the relevant data;
rather, these analyses involve complex considerations and judgments concerning
differences in financial and operating characteristics and other factors that
could affect the transaction, public share trading or other values of the
companies that are being compared.
In connection with its analyses, Peacock Hislop utilized estimates and
forecasts of our future operating results contained in or derived from the Hays
Projections. Analyses based on forecasts of the future results are not
necessarily indicative of actual future results, which may be significantly more
or less favorable than the forecasts. The analyses are inherently subject to
uncertainty being based on numerous factors or events beyond the control of
Arizona Instrument. Therefore, future results or actual values may be materially
different from these forecasts or assumptions. The Peacock Hislop opinion was
one of many factors taken into consideration by the Special Committee in making
its determination to approve the Agreement and Plan of Merger. Consequently, the
analyses described below should not be viewed as determinative of the opinion of
either the Special Committee or the Board of Directors with respect to the value
of Arizona Instrument or whether the Special Committee or the Board of Directors
would have been willing to agree to different terms for the Merger.
The following is a brief summary of the material analyses performed by
Peacock Hislop in connection with rendering the Peacock Hislop opinion to the
Special Committee and the Board of Directors. The following summary includes
information presented in tabular form. In order to understand the financial
analyses performed by Peacock Hislop, the tables must be read together with the
accompanying text. The per share values presented in the analyses below did not
take into account all of the transaction expenses expected to be incurred in the
Merger. Also, for purposes of the financial analyses from which these per share
values are derived, Peacock Hislop assumed that we would be operated by a
management team with the perceived ability to achieve the financial results of
the Management Projections. The following analyses reflect substantially the
same methodologies used by Peacock Hislop in its presentations to the Special
Committee on March 28, 2000.
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Comparable Public Company Analysis
Peacock Hislop reviewed and compared the financial stock market performance
of Arizona Instrument and certain ratios and multiples of Arizona Instrument to
the financial and stock market performance and corresponding ratios and
multiples of nine publicly held companies in the analytical instruments industry
that Peacock Hislop believed were generally comparable to Arizona Instrument.
The companies were CEM Corporation, O.I. Corporation, Mesa Laboratories, Sierra
Monitor Corporation, Metrisa Inc., Lifschultz Industries Inc., Transmation Inc.,
Intelligent Controls Inc., and MOCON, Inc. (collectively the "Comparable
Companies").
Among other analyses, Peacock Hislop calculated the total invested capital
(that is, equity market value, plus debt, less cash and equivalents, or "TIC")
as a multiple of the last twelve months' revenues, operating income (earnings
before interest and taxes or "EBIT" ), operating cash flow (that is, operating
income plus depreciation and amortization, or "EBITDA"), debt-free net income
and net income for each of the Comparable Companies. All multiples were
calculated using closing stock prices on February 23, 2000. A summary of the TIC
multiples generated from this analysis is shown in the following table:
TOTAL INVESTED CAPITAL MULTIPLES
Operating Operating Debt-Free Net
Revenues Income Cash Flow Net Income Income
-------- ------ --------- ---------- ------
Average Multiple Including
High and Low 1.0x 7.1x 7.0x 8.4x 8.5x
Median Multiple Including
High and Low 0.7x 8.1x 6.2x 7.5x 7.6x
Average Multiple Excluding
High and Low 0.9x 7.3x 6.2x 8.0x 8.2x
Median Multiple Excluding
High and Low 0.7x 8.1x 6.2x 6.1x 7.6x
Peacock Hislop selected the Comparable Companies because they have general
business, operating and financial characteristics similar to those of Arizona
Instrument. Peacock Hislop noted that no company used in the forgoing analysis
is identical or directly comparable to Arizona Instrument and that the multiples
shown in the forgoing table that are above the median multiples relate to
companies that have had higher internal growth rates and have a much larger
market capitalization than Arizona Instrument. Accordingly, Peacock Hislop
deemed the low multiples derived in the foregoing analysis to be most relevant.
Peacock Hislop calculated the implied equity value per share by applying
the multiples derived from the Comparable Companies (as illustrated in the table
above) to the same last twelve month ("LTM") financial data of Arizona
Instrument. The cash outstanding of $3,471,429 as of December 31, 1999, was then
added back and the resulting values divided by the numbers of shares outstanding
as of December 31, 1999. The following table presents the results of this
analysis:
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IMPLIED EQUITY PER SHARE VALUE OF ARIZONA INSTRUMENT COMMON STOCK
(INCLUDING CASH)
Operating Operating Debt-Free Net
Revenues Income Cash Flow Net Income Income
-------- ------ --------- ---------- ------
Average Multiple Including
High and Low $8.57 $6.49 $8.85 $5.35 $5.30
Median Multiple Including
High and Low $6.89 $7.05 $8.18 $5.07 $5.02
Average Multiple Excluding
High and Low $7.92 $6.59 $8.15 $5.24 $5.21
Median Multiple Excluding
High and Low $6.89 $7.05 $8.18 $4.60 $5.02
Comparable Transaction Analysis
Peacock Hislop reviewed and compared the publicly available financial data
related to twelve business combination transactions in the analytical
instruments industry that Peacock Hislop felt were generally comparable to the
Merger and that disclosed information sufficient to provide valuation guidance
(collectively, the "Comparable Transactions"). A list of Comparable Transactions
follows:
TRANSACTION DATA
Acquiror Name Target Name Date Effective
- ------------- ----------- --------------
Not Disclosed Advanced Electromagnetics 06/17/97
Not Disclosed Control Systems, Inc. 06/03/96
Not Disclosed Almor Instrument Company 04/27/95
Not Disclosed Sciteq Electronics Inc. 05/31/96
Not Disclosed General Analysis Corporation 02/01/99
Not Disclosed Phase Shift Technology 06/11/98
Axsys Technologies, Inc. Teletrac, Inc. 05/30/97
Helix Technology Corporation Granville-Phillips Company 04/16/98
Not Disclosed RLF Electronics, Inc. 05/11/99
Herley Industries, Inc. General Microwave Corporation 01/06/99
MTS Systems Corporation DSP Technology, Inc. 05/31/99
Hickok Inc. Waekon Industries, Inc. 02/17/98
Among other analyses, Peacock Hislop calculated enterprise values relative
to each of the Comparable Transaction companies' revenues, operating income and
operating cash flow. A summary of the enterprise value multiples generated from
this analysis is shown in the following table:
VALUE OF TRANSACTION MULTIPLES
Operating Operating
Revenues Income Cash Flow
-------- ------ ---------
Average Multiple Including High and Low 0.9x 6.1x 5.2x
Median Multiple Including High and Low 0.6x 5.3x 4.5x
Average Multiple Excluding High and Low 0.8x 6.0x 5.2x
Median Multiple Excluding High and Low 0.6x 5.3x 4.4x
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Peacock Hislop chose the Comparable Transactions because the target
companies have general business, operating and financial characteristics similar
to those of Arizona Instrument. However, Peacock Hislop noted that no company or
transaction used in the foregoing analysis is identical or directly comparable
to Arizona Instrument or the Merger and that the Comparable Transactions include
three transactions with very high valuation multiples in which the consideration
for the acquisitions was all stock and the transactions were accounted for using
the pooling of interests method to which Peacock Hislop applied a 30%
marketability discount (restricted stock). Peacock Hislop also noted that a
number of the acquired companies in the Comparable Transactions were
substantially larger than Arizona Instrument. Therefore, Peacock Hislop deemed
the low multiples derived in the foregoing analysis to be most relevant.
Peacock Hislop estimated Arizona Instrument's excess cash amounts to be
$2,900,000 or $2.12 per share ("Excess Cash") based on a historical analysis of
minimum cash requirements and management's estimated minimum cash needs in the
Management Projections.
Peacock Hislop calculated the implied equity value per share by applying
the multiples derived from the Comparable Transactions (as illustrated in the
table above) to the same last twelve month financial data of Arizona Instrument.
The estimated excess cash outstanding of $2,900,000 as of December 31, 1999, was
then added back and the resulting values were divided by the number of shares
outstanding as of December 31, 1999. The following table presents the results of
this analysis:
IMPLIED EQUITY PER SHARE VALUE OF ARIZONA INSTRUMENT COMMON STOCK
(INCLUDING EXCESS CASH)
Operating Operating
Revenues Income Cash Flow
-------- ------ ---------
Average Multiple Including High and Low $7.56 $5.51 $6.86
Median Multiple Including High and Low $5.78 $5.06 $6.22
Average Multiple Excluding High and Low $7.31 $5.46 $6.86
Median Multiple Excluding High and Low $5.78 $5.06 $6.08
Discounted Cash Flow Analysis
Peacock Hislop performed a discounted cash flow analysis of the projected
unlevered free cash flows of Arizona Instrument (defined as cash flow available
after changes in working capital, capital spending and tax obligations) for the
period of 2000 through 2004 and the terminal value for the years beyond the
projections based on a multiple of 2004 projected cash flow. Peacock Hislop
based its range of terminal value multiples on, among other things, its review
of the Comparable Companies and the Comparable Transactions. Peacock Hislop
based this analysis on the Management Projections, without any discounts or
adjustments to those projections, and a range of discount rates and terminal
values to determine the theoretical present value of the entire company. Peacock
Hislop arrived at a range of discount rates by calculating Arizona Instrument's
estimated weighted-average cost of capital ("WACC") using, among other things,
the estimated cost of capital and capital structures of companies in Arizona
Instrument's industry as determined according to Arizona Instrument's Standard
Industry Classification code by a recognized source. The WACC measures a
company's cost of debt and equity financing weighted by the percentage of debt
and percentage of equity in a company's target capital structure. The cost of
capital in the case of Arizona Instrument is only a function of its cost of
equity (since it has no debt), which was estimated using the Capital Asset
Pricing Model ("CAPM") a commonly used formula to estimate the cost of equity of
companies. Using the CAPM formula, the cost of equity (Ke) is calculated by
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adding an estimated risk-free rate of return (Rf) to the product of an estimated
market risk premium (RPm) and an estimated company beta (B) (company volatility
versus the market as a whole) plus a small company risk premium (RPs) and an
unsystematic risk premium (U) resulting in the following formula.
Ke = Rf + (RPm x B) + RPs + U
The risk-free rate of return of 6.64% is based on the yield of five-year
U.S. Treasury notes as of the date of the valuation. The five-year Treasury
notes yield was selected to match the time horizon of the projections and
reflect the relatively risk-free nature of the Treasury notes.
The market risk premium is based on the return of the S&P 500 stock index
over the last five years (1995-1999) subtracted by the risk-free rate of return
described above. The resulting market risk premium was 21.92%. The beta is a
measure of the volatility of a stock relative to the overall stock market, and
hence, a measure of the systematic risk of that stock which in the case of
Arizona Instrument is 0.40 based on Bloomberg's average of the Comparable
Companies' betas. A beta of 1.0 means that a stock would move up or down in
volatility in direct correlation to the market as a whole.
The small stock equity risk premium of 4.00% arises due to the fact that
even after adjusting for the systematic risk of small stocks with their beta,
these types of stocks demand higher rates of return to compensate for factors
such as illiquidity and lack of research coverage. The small stock equity risk
premium was based on a study of the returns of companies composing the Russell
2000 stock index. The study derived that the companies with the smallest market
capitalizations in the index suffered from significantly poorer market return
performance over the last 1, 3, 5 and 10 years (as of December 31, 1998)
compared to the larger market capitalizations in the index.
The unsystematic risk is the risk unique to a particular company. Peacock
Hislop felt that Arizona Instrument represented further risk on a stand-alone
basis. Some of the risks specific to Arizona Instrument are its niche markets,
the obsolescence risk of its products and its very small market capitalization,
which is still many times smaller than the mean market capitalization of the
smallest companies in the Russell 2000 study previously mentioned. A 2.00%
unsystematic risk premium was selected.
After plugging the various components in the CAPM formula, Peacock Hislop
estimated the WACC for Arizona Instrument to be 21.3%.
For each of the scenarios, the discounted cash flow analysis of Arizona
Instrument was determined by adding the present value, as of December 31, 1999,
of projected free cash flows through December 31, 2004, plus the estimated value
of Arizona Instrument as of December 31, 2004, using a range of terminal
multiples of EBIT in one case and EBITDA in the other.
The range of estimated values for Arizona Instrument at the end of the
five-year period was calculated by applying the calculated discount rates or
WACC ranging from 19.3% to 23.3% and terminal value multiples of estimated
operating cash flow in 2004 ranging from 6.0x to 8.0x, when based on EBIT
multiples, and 5.0x to 7.0x, when based on EBITDA multiples. The following table
presents a summary of the implied equity values per share of Arizona Instrument
common stock after adding back excess cash from this analysis:
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IMPLIED EQUITY PER SHARE VALUE OF ARIZONA INSTRUMENT COMMON STOCK
(INCLUDING EXCESS CASH)
EBIT TERMINAL MULTIPLE
Discount Rate: 19.3% 20.3% 21.3% 22.3% 23.3%
Terminal Multiple:
6x $ 5.00 $ 4.90 $ 4.80 $ 4.71 $ 4.62
7x $ 5.31 $ 5.19 $ 5.08 $ 4.98 $ 4.88
8x $ 5.61 $ 5.49 $ 5.37 $ 5.25 $ 5.14
IMPLIED EQUITY PER SHARE VALUE OF ARIZONA INSTRUMENT COMMON STOCK
(INCLUDING EXCESS CASH)
EBITDA TERMINAL MULTIPLE
Discount Rate: 19.3% 20.3% 21.3% 22.3% 23.3%
Terminal Multiple:
5x $ 5.48 $ 5.36 $ 5.24 $ 5.13 $ 5.03
6x $ 5.94 $ 5.80 $ 5.67 $ 5.54 $ 5.42
7x $ 6.41 $ 6.25 $ 6.10 $ 5.95 $ 5.81
Peacock Hislop calculated the theoretical implied equity per share value of
Arizona Instrument's common stock to range from $4.62 to $6.41.
Leveraged Recapitalization Analysis
Peacock Hislop performed a leveraged recapitalization analysis to determine
the potential implied equity value per share of Arizona Instrument Common Stock
that might be achieved in an acquisition of Arizona Instrument in a leveraged
recapitalization transaction based on current market conditions. In conducting
this analysis, Peacock Hislop utilized the Management Projections, without any
discounts or adjustments to those projections, and assumed that financing for
the Merger could be obtained in the high yield and bank finance markets in an
amount not in excess of a certain multiple of the EBITDA for the last twelve
months and equal to AZI LLC's proposed financing from its own lenders and that a
minimum internal rate of return ranging from 35% to 45% on equity invested
during a five-year period would be required by the acquirer. This analysis
resulted in an estimated implied equity value per share of Arizona Instrument
Common Stock on a leveraged recapitalization basis of approximately $5.50 to
$5.87.
The following table illustrates the internal rates of return derived from
different equity investments which would be a function of the total price paid
for Arizona Instrument, as Peacock Hislop assumed that Arizona Instrument's
borrowing capacity could not be extended beyond Hays' proposed financing
package. The terminal value in each scenario is 7.00 times EBIT which is in line
with the discounted cash flow EBIT assumptions.
Acquisition Price Equity Investment Terminal Value
Per share ('000s) ('000s) IRR
- ----------------- ------- ------- ------
$5.00 $ 500 $7,597 72.32%
$5.50 $1,186 $7,597 44.99%
$6.00 $1,871 $7,597 32.34%
$5.87 $1,693 $7,597 35.02%
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Other Analyses Performed And Factors Considered
Peacock Hislop reviewed Arizona Instrument's historical stock price and
volume, estimated trading volumes at different stock prices and the weighted
average stock price for different periods of time. Peacock Hislop also reviewed
the historical trading volume of the Comparable Companies. Peacock Hislop
compared the Merger consideration to Arizona Instrument's pre-merger stock price
and estimated volume-weighted average stock price and calculated the premium of
the merger consideration to each as follows:
* 38 percent premium to the stock price the day prior to the public
announcement of Mr. Hays' $5.00 per share indication of interest
letter.
* 41 percent premium of Arizona Instrument's estimated volume-weighted
average stock price for the 12 months prior to the public announcement
of Mr. Hays' $5.00 per share indication of interest letter.
* 21 percent premium to the stock price the day prior to the public
announcement of Arizona Instrument's pursuit of strategic
alternatives.
* 94 percent premium to Arizona Instrument's estimated volume-weighted
average stock price for the six months prior to the public
announcement of Arizona Instrument's pursuit of strategic
alternatives.
* 70 percent premium to Arizona Instrument's estimated volume-weighted
average stock price for the three months prior to the public
announcement of Arizona Instrument's pursuit of strategic
alternatives.
Peacock Hislop used estimated volume-weighted average stock prices in order
to consider the differences in daily trading volumes in Arizona Instrument's
stock in analyzing the historical prices of Arizona Instrument's stock.
In rendering its opinion, Peacock Hislop also discussed with Arizona
Instrument's management their expectations as to financial performance during,
and financial position near the end of, the fiscal quarter ending March 31,
2000. However, Peacock Hislop determined that management's expectations as to
the financial results for such quarter did not affect its conclusions, which
were based on analyses using published financial data through the quarter ended
December 31, 1999.
Peacock Hislop also considered a number of outside factors that could
substantially impact the value of Arizona Instrument. The most significant ones
were the potential environmental liability relating to a sold business line, the
tax benefits of capital gain treatment versus ordinary income from an
extraordinary dividend distribution to Arizona Instrument shareholders, the
product line obsolescence risk and the lack of third party interest in the
company.
Arizona Instrument retains significant exposure to potential environmental
liabilities due to its participation in providing products and services designed
to detect leaks in petroleum underground storage tanks. Even though the product
lines and services are no longer being manufactured or provided by Arizona
Instrument, due to the nature of environmental law and the agreement entered
into for the sale of this product line, Arizona Instrument retains
responsibility for any lawsuit involving a product sold or service performed
during the period when it was manufactured or provided by Arizona Instrument. In
the past, Arizona Instrument has had to defend and settle, at its cost, similar
environmental liabilities.
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<PAGE>
The potential exposure is not reflected in the financial statements of
Arizona Instrument. However, a lawsuit could mean substantial liability and
legal expenses for Arizona Instrument. A significant number of the systems sold
by Arizona Instrument are still in operation. Also, Arizona Instrument has
provided thousands of services that may subject it to environmental liability.
Because the environmental liability is not easily quantifiable, Peacock
Hislop believed that a third party buyer would most likely have negotiated an
indemnification for the exposure, secured by a holdback amount, to cover the
cost of future claims. Peacock Hislop felt it was safe to assume that some or
all of the holdback amount would have been used to cover environmental
liabilities with the remainder paid back to the shareholders. Peacock Hislop
considered that since a holdback was not a requirement of the AZI LLC offer,
there was no possibility for a shareholder to lose part of his or her merger
consideration to a holdback.
Peacock Hislop also considered that Arizona Instrument shareholders can
benefit from significant tax savings as a result of the sale of Arizona
Instrument's common stock as compared to the distribution of an extraordinary
cash dividend, because of the difference between capital gains tax treatment
versus ordinary income tax treatment.
If the excess cash, estimated at $2,900,000, was distributed as a cash
dividend equal to $2.12 per share, the amount received by a shareholder could be
taxable at a maximum marginal federal tax rate as high as approximately 40%.
Higher income tax brackets would likely be taxed in the 30% to 35% range.
Alternatively, the tax due from the sale of Arizona Instrument would be taxed at
a federal capital gain rate of 20% (assuming the shareholder had owned the stock
for at least one year). However, Peacock Hislop also considered that a
significant number of the shareholders have a cost basis in their Arizona
Instrument stock well over $5.00 per share. In this case, the savings to such a
shareholder would be the difference between paying no tax or even having tax
losses from the sale of Arizona Instrument stock versus paying ordinary income
tax on a dividend.
Peacock Hislop also considered that Arizona Instrument's product line
suffers from obsolescence. Peacock Hislop felt that statements from strategic
buyers that their lack of interest in Arizona Instrument stemmed from the risks
involved with Arizona Instrument's potentially obsolete product line justified a
discount to the valuation.
The multiples that were used in the Comparable Public Company method were
derived from companies that may have product lines that do not have similar
obsolescence characteristics. Some of these companies may have significantly
more growth prospects, and may be valued at multiples higher than may be
relevant for Arizona Instrument. Peacock Hislop adjusted slightly for this
within the Discounted Cash Flow method by selecting the low-end of the multiples
to be applied to the derivation of the terminal value. However, the Comparable
Public Company method utilizes the entire combination of multiples, and leads to
a higher value range, due to application of growth-effected multiples.
Finally, Peacock Hislop considered the lack of third party interest in
Arizona Instrument. The Special Committee solicited 52 parties it believed
represented the most likely interested parties in a strategic transaction with
the company. Although general discussions were had with a number of these
parties, no specific proposals were received except for the Bain and Metrisa
proposals discussed above under "SPECIAL FACTORS--Background of the Merger."
Neither of these proposals were pursued by the proposing parties.
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<PAGE>
After applying the above described valuation methodologies, Peacock Hislop
concluded that the value of Arizona Instrument, when valuing the Company as a
whole, was approximately $5.50 per share or $7,543,000 in total from a
quantitative standpoint. However, Peacock Hislop believes that the special
factors mentioned above represent significant risk in the valuation and, while
subjective and not quantifiable, should properly be valued at not less than
$0.50 per share. Based upon and subject to the foregoing, Peacock Hislop is of
the opinion that, as of March 28, 2000, the Merger Consideration is fair, from a
financial point of view, to the shareholders of Arizona Instrument (other than
AZI LLC and its affiliates).
The information above is a brief summary of the material financial analyses
presented by Peacock Hislop to Arizona Instrument's Special Committee on March
28, 2000. This summary does not purport to be a complete description of the
analyses performed by Peacock Hislop in connection with the rendering of the
Peacock Hislop opinion. The preparation of a fairness opinion is a complex
analytical process involving various qualitative judgments as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to particular circumstances and is not susceptible to partial
analysis or summary description. Peacock Hislop believes that its analyses must
be considered as a whole and that selecting portions of its analyses, without
considering all factors and analyses, would create an incomplete view of the
process underlying Peacock Hislop's opinion. In addition, Peacock Hislop
considered the significance and relevance of the results of every portion of its
analyses and did not assign relative weights to any portion of its analyses, so
that the ranges of valuations resulting from any particular analysis described
above should not be taken to be Peacock Hislop's view of the actual value of
Arizona Instrument.
Projections
As discussed above, management of Arizona Instrument, including Mr. Hays,
prepared the Management Projections with respect to Arizona Instrument's
financial performance over a five-year period ending December 31, 2004. The
Management Projections were provided to Mr. Hays' potential sources of funding
to finance the Merger. In addition, the Management Projections were provided to
Peacock Hislop. The Management Projections were also used by Peacock Hislop in
analyzing the value of Arizona Instrument. The following is a summary of the
Management Projections:
FISCAL YEAR ENDING DECEMBER 31,
(in 000's)
---------------------------------------------------
2000 2001 2002 2003 2004
------- ------- ------- ------- -------
Total Revenues $ 9,019 $ 9,526 $10,223 $11,098 $12,070
Costs of Goods Sold $ 3,344 $ 3,564 $ 3,828 $ 4,159 $ 4,527
Gross Profit $ 5,675 $ 5,962 $ 6,395 $ 6,939 $ 7,543
Operating Expenses $ 4,524 $ 4,770 $ 5,108 $ 5,333 $ 6,004
Operating Income $ 628 $ 670 $ 765 $ 885 $ 1,017
Pretax Income $ 645 $ 685 $ 780 $ 900 $ 1,032
Net Income $ 394 $ 418 $ 476 $ 549 $ 629
EBITDA $ 1,151 $ 1,192 $ 1,287 $ 1,406 $ 1,539
Capital Expenditures $ 300 $ 300 $ 300 $ 300 $ 300
Arizona Instrument does not as a matter of course make public any
projections as to the future performance or earnings, and the projections set
forth above are included in this proxy statement only because the information is
available to Mr. Hays. The Management Projections were not prepared with a view
to public disclosure or compliance with the published guidelines of the
Commission or the guidelines established by the American Institute of Certified
Public Accountants regarding projections or forecasts. These projections are
subjective in many respects and are thus susceptible to various interpretations
and periodic revision based on actual experience and business developments. They
28
<PAGE>
were based on a number of assumptions that are beyond the control of Arizona
Instrument, Mr. Hays or their respective financial advisors, including economic
forecasting (both general and specific to Arizona Instrument's business), which
is inherently uncertain and subjective. None of Arizona Instrument, Mr. Hays or
their respective financial advisors assumes any responsibility for the accuracy
of the Management Projections. The inclusion of these projections should not be
regarded as an indication that Arizona Instrument, Mr. Hays, Peacock Hislop or
any other person who received them considers them an accurate prediction of
future events. Neither Mr. Hays nor Arizona Instrument intends to update, revise
or correct the Management Projections if they become inaccurate (even in the
short term). Nevertheless, for the purpose of its fairness opinion, Peacock
Hislop assumed that the Management Projections would be realized at the times
contemplated therein.
Pursuant to its engagement letter with Peacock Hislop dated February 1,
2000, Arizona Instrument agreed to pay to Peacock Hislop an aggregate fee of
$50,000 for its services in connection with the fairness opinion. The engagement
letter also provides that Arizona Instrument will reimburse Peacock Hislop for
its reasonable travel, legal and other out-of-pocket expenses incurred in
connection with Peacock Hislop's role thereunder and will indemnify Peacock
Hislop and its affiliates from and against certain liabilities. These
liabilities include liabilities under the federal securities laws in connection
with the engagement of Peacock Hislop by the Special Committee. Peacock Hislop
will earn no other fees, contingent or otherwise, in connection with this
Merger.
The Special Committee retained Peacock Hislop on the basis of its
experience with mergers and acquisitions, financing and advising boards of
directors and shareholders regarding strategic alternatives. Peacock Hislop is
regularly engaged in the valuation of businesses and their securities in
connection with mergers, acquisitions, and private placements of securities.
Peacock Hislop is a privately owned investment banking firm, which has been an
NASD registered broker-dealer since 1990. In the ordinary course of its
business, Peacock Hislop may, from time to time, trade in the securities of
Arizona Instrument for its own account or the accounts of its customers and,
accordingly, may at any time hold long or short positions in our securities.
Valuation Report of Oxford Advisors
In May 1999, the Board retained Oxford Advisors, Phoenix, Arizona, to
provide an estimate of the enterprise value of Arizona Instrument. Prior to this
engagement, Oxford had no prior professional relationship with Arizona
Instrument. Oxford was selected by the Board on the basis of Oxford's expertise
in valuing both public and private businesses, including in the context of
public stock offerings, mergers and acquisitions and general business planning
purposes, and Oxford's ability to conduct the valuation in a short period of
time and for a reasonable price.
No limitations were imposed by Arizona Instrument or the Board of Directors
on the procedures Oxford followed in performing its valuation. Oxford was
instructed by the Board to estimate the enterprise value of Arizona Instrument
and the intrinsic value of its common stock.
Oxford was not asked to consider, and did not consider, the fairness of the
Merger to the shareholders of Arizona Instrument, or the merits or feasibility
of any particular business combination or other transaction involving Arizona
Instrument including the Merger.
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<PAGE>
In conducting its valuation, Oxford, among other things:
* met with members of Arizona Instrument management to discuss the
nature and outlook for our business and our management's projections;
* analyzed the reasonableness of management's projections;
* reviewed publicly available information about the industry in which we
operate;
* reviewed the historical stock price and trading volume information for
Arizona Instrument common stock;
* analyzed acquisition transactions involving companies in related
industries;
* performed other procedures that Oxford deemed relevant for purposes of
its valuation.
Oxford did not independently verify any of the information it obtained for
purposes of its valuation. Instead, Oxford assumed the accuracy and completeness
of all such information. Oxford relied on our management's projections and
forecasts concerning our prospects. These projections were substantially similar
to the Management Projections described above. In addition, Oxford assumed that
Arizona Instrument will be structured and operated in its current configuration
on a stand alone basis. Oxford did not consider any synergy that might be
achieved through merger, alliance or any other type of arrangement with a
strategic partner, nor did Oxford solicit any third party indication of interest
to acquire any or all of Arizona Instrument's common stock.
The Board of Directors and the Special Committee utilized the Oxford
valuation as one indication of the possible value of Arizona Instrument which
could be realized in a business combination or other strategic transaction. The
Oxford valuation was not performed in respect of, and did not address, any
particular transaction or type of transaction. Neither the Special Committee nor
the Board of Directors relied on this valuation in determining that the Merger
is fair to the shareholders of Arizona Instrument from a financial point of
view. The valuation report of Oxford is not a recommendation to shareholders to
vote for or against the Merger or that shareholders take any other action
regarding the Merger.
Enterprise Valuation
Oxford based its enterprise valuation on the discounted cash flow approach
because Oxford believed that it is comprehensive, straightforward and widely
accepted within the securities industry. Using this approach, Oxford discounted
Arizona Instrument's projected free cash flows through 2003 and a multiple of
the projected free cash flow for 2003, then added excess cash. The cash flows
were based on management's projections and were calculated as cash flow after
capital expenditures financed by equity capital, debt service, tax payments and
changes in working capital.
Projected free cash flows were determined by reference to the financial
projections provided by management of Arizona Instrument. These projections were
substantially similar to the Management Projections used by Peacock Hislop and
discussed above.
Oxford calculated Arizona Instrument's equity cost of capital to use as the
discount rate. This was determined to be 20.47% and was composed of factors for
the risk free rate of return, Arizona Instrument's risk premium and a small
company premium.
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Oxford determined that the appropriate multiple to be applied to the
projected 2003 cash flows was in the range of five to six. This was determined
by examining the market multiples for a group of eight publicly traded companies
which Oxford believed provided a sufficient level of comparability. The
comparable companies were the following:
* Badger Meter Company
* CEM Corporation
* Invivo Corporation
* Modern Controls Inc.
* Moore Products Co.
* OI Corporation
* TSI Inc.
Based on these calculations, Oxford determined that the enterprise value of
Arizona Instrument was $6.0 million to $7.0 million, or $4.38 to $5.10 per
share. Oxford stated that it believed the appropriate value for Arizona
Instrument was at the low end of the range because the discounted cash flow
approach takes into account the effects of the growth rate which in this case,
is substantially less than Arizona Instrument's cost of capital.
Intrinsic Value of Common Stock
Oxford estimated the intrinsic value of Arizona Instrument's common stock
by applying certain discounts for minority interest and lack of marketability
and illiquidity to the previously calculated enterprise value. As used by
Oxford, intrinsic value is the inherent value of a share of common stock trading
on the market.
Oxford calculated the control premium for companies with similar SIC codes
as Arizona Instrument to be approximately 17%. By applying this discount to the
previously calculated enterprise value of Arizona Instrument, Oxford estimated
that the non-controlling value per share of common stock was $4.00 per share.
Because the trading volume of Arizona Instrument common stock was deemed by
Oxford to be nominal, Oxford believed that a further discount was required to
properly reflect the intrinsic value of Arizona Instrument common stock. This
discount was determined based on several published studies which established
discounts for lack of marketability in the range of 23% to 45%, with a
particular concentration in a range of 30% to 35%. Because these studies related
to stock in which there was no public trading market, Oxford believed that a
discount below the lower end of the range would be appropriate for the Arizona
Instrument common stock. Accordingly, Oxford based its calculation on an
illiquidity discount factor in the range of 10% to 20%. At 10%, Oxford
calculated the intrinsic value of the common stock to be $3.60 per share. At
20%, Oxford calculated the intrinsic value of the common stock to be $3.20 per
share.
The intrinsic value of Arizona Instrument common stock is an estimate of
the price at which the common stock might be expected to trade in the market
over time, absent changes in circumstances. The price at which the common stock
may actually trade, however, is affected by many factors not reflected in the
intrinsic value analysis, such as the relative attractiveness of other
investments and market expectations regarding such matters as future performance
of the issuer and future economic conditions. Intrinsic value is not an
appropriate valuation measure to evaluate a transaction, such as the Merger,
which involves acquisition of control of an issuer, since it does not take into
account the value of the controlling interest.
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<PAGE>
The information above is a brief summary of the material financial analyses
preformed by Oxford for the Board of Directors. This summary does not purport to
be a complete description of the analyses performed by Oxford in connection with
its valuation. Copies of Oxford's report are available for inspection and
copying at the principal executive offices of Arizona Instrument during regular
business hours by any interested shareholder of Arizona Instrument, or a
representative who has been so designated in writing, and may be inspected and
copied, or obtained by mail, by written request directed to: Corporate
Secretary, Arizona Instrument Corporation, 1912 West 4th Street, Tempe, Arizona
85281. Arizona Instrument paid to Oxford Advisors an aggregate fee of $7,500 for
its services in connection to its valuation report.
AZI LLC's Purpose and Reason for the Merger
The purpose of AZI LLC and the Founders in proceeding with the Merger is to
acquire the entire equity interest of Arizona Instrument in a leveraged
transaction providing fair value to Arizona Instrument's unaffiliated
shareholders. The reasons for AZI LLC and the Founders to proceed with the
Merger include:
* Reasonable cost of the transaction. The Founders believe that the
proposed purchase price is attractive and will enable them to realize
an appropriate risk adjusted return on their investment.
* The Founders' belief that overall value can be enhanced by focusing on
stakeholders in the business rather than only shareholders. The
Founders intend to operate the business with a mission of increasing
value for all stakeholders, including customers, employees, vendors
and others, which will elevate the interests of these stakeholders to
the level of shareholders. While this method of operation can be
adverse to shareholders in the short term, the Founders believe that
overall value including that of shareholders will be enhanced over the
long term.
* Lack of investor interest in Arizona Instrument. The market for the
common stock of Arizona Instrument has suffered through a lack of
investor interest for several years. This lack of investor interest
has resulted in a declining stock price and a lack of liquidity. By
entering into this transaction at this time, AZI LLC will provide
valuable liquidity to shareholders of Arizona Instrument and thus the
transaction is expected to be approved by shareholders.
* Elimination of the expense burden of being a public company. The
expenses of being a public company include substantial legal and
accounting fees and expenses, regulatory compliance fees and expenses,
shareholder communications expenses, and corporate governance
expenses. These expenses are substantial relative to the earnings of
Arizona Instrument. By consummating the Merger, these expenses will be
eliminated.
* Ability to finance the transaction. AZI LLC has arranged for financing
for this transaction. The availability of financing for leveraged
acquisitions of small manufacturing companies is subject to market
conditions in the credit markets and other factors and financing may
not be available later on terms acceptable to AZI LLC or available at
all. The Founders decided to take advantage of the current
availability of such financing.
* Availability of and the need to retain a successful team of skilled
employees. The operation of Arizona Instrument as a private company
will enable the Founders to provide a more flexible and attractive set
of benefits, such as profit sharing, to its employees which the
Founders believe will enhance the company's ability to attract and
retain skilled employees.
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The transactions contemplated by the Agreement and Plan of Merger, however,
will involve a substantial risk to the Founders because of the large amount of
indebtedness to be incurred in connection with the consummation of the Merger.
The acquisition of the entire equity interest in Arizona Instrument was
structured as a cash merger in order to accomplish the acquisition in a single
step, without the necessity of financing separate purchases of shares in a
tender offer or in open market purchases. The transactions also were structured
so as not to disrupt contracts with third party providers such as lessors, phone
service companies and the like.
Each of the Founders and AZI LLC has concluded that the Merger, including
the merger consideration of $5.00 per share in cash and the terms and conditions
of the Agreement and Plan of Merger, are fair to the Arizona Instrument
shareholders (other than AZI LLC and its affiliates) based upon, among other
things, the following factors:
* the analyses, conclusions and recommendations of the Special Committee
and the Board of Directors, which analyses and conclusions are
expressly adopted by each of the Founders and AZI LLC;
* the Special Committee, consisting of disinterested directors who are
not affiliated with AZI LLC or the Founders, has unanimously approved
the Merger and recommended that the shareholders approve and adopt the
Agreement and Plan of Merger and the transactions contemplated
thereby;
* the merger consideration and the other terms and conditions of the
Agreement and Plan of Merger were the result of arm's-length, good
faith negotiations between the Special Committee and the Founders and
their respective advisors;
* Peacock Hislop issued an opinion to the Special Committee to the
effect that, as of the date of such opinion, based upon and subject to
various considerations, assumptions and limitations stated therein,
the$5.00 per share in cash to be received in the Merger was fair to
the Arizona Instrument shareholders (other than AZI LLC and its
affiliates) from a financial point of view; and
* the terms of the Agreement and Plan of Merger authorize Arizona
Instrument under certain circumstances to (1) engage in negotiations
with, and provide access to information about Arizona Instrument to,
third parties who submit in writing an acquisition proposal for a
transaction which, among other things, the Special Committee
determines would be more favorable to the shareholders of Arizona
Instrument than the Merger and (2) terminate the Agreement and Plan of
Merger in order to permit Arizona Instrument to enter into such
transaction.
Interests of Certain Persons in the Merger; Certain Relationships
In considering the recommendation of the Special Committee and the Board of
Directors with respect to the Merger, shareholders should be aware that certain
members of the Board of Directors and of Arizona Instrument's management have
interests that may present actual, potential, or the appearance of potential,
conflicts of interest in connection with the Merger. The Special Committee and
the Board of Directors were aware of these potential or actual conflicts of
interest and considered them along with other matters described under "Special
Factors -- Special Committee ."
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Retained Equity Interest
The Founders beneficially own an aggregate of 49,188 shares of common
stock, representing approximately 4% of the 1,371,399 total outstanding shares
of common stock. In addition, the Founders hold options to purchase an aggregate
of 66,000 shares of common stock at exercise prices ranging from $2.75 to $9.05
per share.
The Founders will, prior to the Effective Time, as defined herein,
contribute to AZI LLC certain cash amounts in consideration of the issuance of
membership units of AZI LLC. Upon consummation of the Merger, the Founders will
collectively beneficially own 100% of the outstanding membership units of the
Surviving Company. Such ownership will arise from the cancellation, upon the
consummation of the Merger, of all of the outstanding shares of common stock of
Arizona Instrument. Set forth below is a table showing the future equity
ownership of each of the Founders in the Surviving Company.
Percentage Ownership of Membership
Founder Units of Surviving Company
- ------- --------------------------
George G. Hays 60.0%
G. James Hays 7.5%
Harold D. Schwartz 32.5%
After consummation of the Merger, the Founders collectively will own 100%
of the net book value and net earnings of the Surviving Company. Set forth below
are tables which show the interests of the Founders in the net book value and
net earnings of Arizona Instrument in both percentage and dollar terms and their
interests immediately after consummation of the Merger in the net book value and
net earnings of the Surviving Company in both percentage and dollar terms.
Founder Interest in Net Book Value
-----------------------------------------------
Before Merger After Merger (1)
% $ % $
--- --------- ---- ---------
George G. Hays * $ 37,008 60.0 $ 844,682
G. James Hays * $ 2,306 7.5 $ 105,585
Harold D. Schwartz 3.1 $ 244,315 32.5 $ 457,536
(1) Calculated based on the net book value of Arizona Instrument as of December
31, 1999, adjusted to reflect the incurrence of $6,500,000 of Merger related
indebtedness, but not adjusted to reflect the reduction in book value due to
elimination of deferred tax assets and fees and expenses of the Merger.
* Less than 1%
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Founder Interest in Net Earnings
-----------------------------------------------
Before Merger After Merger (1)
% $ % $
--- --------- ---- ---------
George G. Hays * $ 1,790 60.0 $ 31,876
G. James Hays * $ 112 7.5 $ 3,984
Harold D. Schwartz 3.1 $ 11,816 32.5 $ 17,266
(1) Calculated based on the net income of Arizona Instrument for the year ended
December 31, 1999, adjusted to reflect the expected annual interest expense of
$673,750 resulting from the Merger related indebtedness, assuming the same tax
rate.
* Less than 1%
None of the members of the Special Committee will contribute any cash or
shares of common stock or other equity interests in Arizona Instrument to AZI
LLC nor will any member of the Special Committee own any interest in AZI LLC or
the Surviving Company following the effective time of the Merger.
The value of Arizona Instrument stock and stock options held by members of
the Special Committee to be received upon consummation of the Merger is as
follows:
Number Number of
Name of Shares Value Stock Options Net Value
- ---- --------- ------- ------------- ---------
S. Thomas Emerson, Ph.D. 4,000 $20,000 9,500 $5,950
Steven G. Zylstra 120 $ 600 7,000 $5,059
Management of the Surviving Company
The Agreement and Plan of Merger provides that the current Manager of AZI
LLC shall be the Manager of the Surviving Company immediately after the Merger.
AZI LLC currently does not expect to enter into new employment or other
agreements with any person prior to the Merger, although agreements to which
Arizona Instrument is a party that are currently in effect will become
obligations of the Surviving Company. The Agreement and Plan of Merger provides
that the Surviving Company will, for a period of six years after the Effective
Time, maintain all rights to indemnification and limitations on liability in
favor of the former officers and directors of Arizona Instrument to the same
extent and upon the terms and conditions provided in Arizona Instrument's
certificate of incorporation, bylaws and indemnification agreements as in effect
on the date of the Agreement and Plan of Merger. The Agreement and Plan of
Merger also provides that the Surviving Company will maintain its existing, or
appropriate substitute, policies of directors' and officers' liability insurance
and fiduciary liability insurance for a period of six years after the Effective
Time, subject to certain limitations. See "The Agreement and Plan of
Merger--Covenants." The Agreement and Plan of Merger also provides that, for a
period of at least one year following the Effective Time, the Surviving Company
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will maintain employee benefit plans and arrangements, other than equity
incentive arrangements, which provide benefits substantially comparable in the
aggregate for each employee to the benefits provided by Arizona Instrument as of
March 31, 2000.
Management Employment Agreements
Effective January 1, 1998, the Company entered into an employment agreement
with George G. Hays pursuant to which Mr. Hays agreed to serve as President and
Chief Executive Officer. The agreement provides for a base annual salary of
$165,000, subject to merit increases, plus an annual incentive bonus of at least
30% of annual salary based on an incentive bonus plan administered by the Board
of Directors. Mr. Hays is also entitled to participate in any benefit
arrangements available to executive officers of the Company. Upon termination of
the employment agreement without cause, Mr. Hays is entitled to receive an
amount equal to the compensation due him over the balance of the term of the
employment agreement, and to participate in applicable benefit programs for the
balance of the term of the employment agreement. The agreement terminates on
March 31, 2000, and will automatically renew for additional one-year terms until
notice of non-renewal by the Company. This agreement replaces Mr. Hays' previous
employment agreement with the Company dated April 1, 1997, pursuant to which he
was employed as Vice President and Chief Financial Officer. The Company amended
and renewed Mr. Hays' employment agreement and extended it through March 31,
2001.
AZI LLC Member Agreements
George G. Hays and Chez & Schwartz Inc. Profit Sharing Plan dated December
19, 1973, an affiliate of Mr. Harold D. Schwartz, are parties to a Member
Agreement dated March 21, 2000 that prohibits the transfer of the membership
units owned by Mr. Hays and Chez & Schwartz, unless transferred pursuant to the
Member Agreement. The Member Agreement provides that upon the death of Mr.
Schwartz or 5 years from the date of the Member Agreement, Mr. Hays has the
right to purchase the membership units of AZI LLC owned by Chez & Schwartz for a
price determined by a specified formula and 5 years from the date of the Member
Agreement Chez & Schwartz has the right to require Mr. Hays to purchase the
membership units of AZI LLC owned by Chez & Schwartz for a price determined by a
specified formula. The Member Agreement also provides that if Mr. Hays proposes
to sell any of his membership units of AZI LLC, then Chez & Schwartz may
participate in Mr. Hays proposed sale and sell certain of its membership units
of AZI LLC on the same terms as Mr. Hays proposes to sell his membership units
of AZI LLC.
George G. Hays and The Hays Family Revocable Lifetime A B Trust dated
October 14, 1998, an affiliate of Mr. George Hays, are parties to a Member
Agreement dated March 20, 2000, that prohibits the transfer of the membership
units owned by Mr. George Hays and The Trust, unless transferred pursuant to the
Member Agreement. The Member Agreement provides that upon the death of both G.
James Hays and Doris Helen Hays or 5 years from the date of the Member
Agreement, Mr. George Hays has the right to purchase the membership units of AZI
LLC owned by The Trust for a price determined by a specified formula and 5 years
from the date of the Member Agreement The Trust has the right to require Mr.
George Hays to purchase the membership units of AZI LLC owned by The Trust for a
price determined by a specified formula. The Member Agreement also provides that
if Mr. George Hays proposes to sell any of his membership units of AZI LLC, then
The Trust may participate in Mr. George Hays proposed sale and sell certain of
its membership units of AZI LLC on the same terms and conditions as Mr. George
Hays proposes to sell his membership units of AZI LLC.
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Certain Effects of the Merger
If the Merger is consummated, the holders of Arizona Instrument's common
stock will no longer have any interest in the Surviving Company and, therefore,
will not benefit from any future earnings or growth of the Surviving Company or
from any increases in the value of the Surviving Company and will no longer bear
the risk of any decreases in value of the Surviving Company. Instead, each
shareholder, other than Arizona Instrument and its wholly-owned subsidiaries,
AZI LLC, and dissenting shareholders, will have the right to receive upon
consummation of the Merger $5.00 in cash for each share of common stock they
hold, without interest. The benefit to the holders of common stock of the
transaction is the payment of a premium, in cash, above the market value for
such stock prior to the announcement of the transaction. This cash payment
assures that all shareholders will receive the same amount for their shares,
rather than taking the risks associated with attempting to sell their shares in
the open market. The detriment to such holders is their inability to participate
as continuing equity owners in the possible future growth of the Surviving
Company. If the Merger is consummated, the Founders will hold the entire equity
interest in the Surviving Company and will therefore be the sole beneficiaries
of any future earnings or growth of the Surviving Company and any increases in
value of the Surviving Company. However, the Founders will bear the risk of any
decreases in value of the Surviving Company and the risks associated with (1)
the significant amount of debt to be incurred by the Surviving Company in
connection with the Merger and (2) the lack of liquidity in its investment in
the Surviving Company. See "Special Factors-- Recommendation of the Special
Committee and the Board of Directors; Fairness of the Merger-- Special
Committee."
The common stock is currently registered under the Securities Exchange Act
of 1934, as amended. As a result of the Merger, the common stock will be
delisted from the NASDAQ SmallCap Market, the registration of the common stock
under the Exchange Act will be terminated, Arizona Instrument will be relieved
of the obligation to comply with the proxy rules of Regulation 14A under Section
14 of the Exchange Act, and its officers, directors and beneficial owners of
more than 10% of the common stock will be relieved of the reporting requirements
and "short-swing" trading provisions under Section 16 of the Exchange Act.
Further, Arizona Instrument will no longer be subject to periodic reporting
requirements of the Exchange Act and will cease filing information with the SEC.
Accordingly, less information will be required to be made publicly available
than presently is the case.
Rather than being governed by the certificate of incorporation and bylaws
of Arizona Instrument, the Surviving Company will be governed by the articles of
organization and operating agreement of AZI LLC.
Plans for the Surviving Company after the Merger
Each of AZI LLC and the Founders expects that except as described in this
proxy statement, the business and operations of the Surviving Company will be
continued substantially as they are currently being conducted by Arizona
Instrument and its subsidiaries. However, the Founders expect that they may,
from time to time, evaluate and review the Surviving Company's businesses,
operations and properties and make such changes as are deemed appropriate.
Except as described in this proxy statement, none of the Founders, AZI LLC
or Arizona Instrument has any present plans or proposals involving Arizona
Instrument or its subsidiaries which relate to or would result in an
extraordinary corporate transaction such as a merger, reorganization,
liquidation, sale or transfer of a material amount of assets, or any material
change in the present dividend policy, indebtedness or capitalization, or any
other material change in Arizona Instrument's corporate structure or business.
However, the Founders and AZI LLC will review proposals or may propose the
acquisition or disposition of assets or other changes in the Surviving Company's
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business, structure, capitalization, management or distribution policy which
they consider to be in the best interests of the Surviving Company and its
members. None of Arizona Instrument, AZI LLC or the Founders have formulated any
specific plans regarding repayment of the indebtedness incurred in connection
with the Merger; however, such persons anticipate that such indebtedness will be
repaid primarily with or by means of cash from the operations of the business of
the Surviving Company, or such other means as the Surviving Company may
determine in its sole discretion and the bridge loan of up to $3,000,000 which
is part of AZI LLC's Senior Secured Credit Facility will be repaid immediately
after closing from Arizona Instrument's cash on hand.
Conduct of the Business of Arizona Instrument If the Merger Is Not Consummated
If the Merger is not consummated, the Board of Directors expects to seek to
retain Arizona Instrument's current management team, although there can be no
assurance it will be successful in doing so. There are no plans in such
circumstances to operate Arizona Instrument's business in a manner substantially
different than presently operated.
Accounting Treatment
The Merger will be accounted for in accordance with the purchase method of
accounting under U.S. generally accepted accounting principles.
Financing of the Merger
The maximum amount of funds required by AZI LLC to pay the aggregate Merger
Consideration due to shareholders and to pay cash to holders of stock options
and other rights to acquire Arizona Instrument common stock in exchange for the
cancellation of such options and other rights at the closing of the Merger
pursuant to the Agreement and Plan of Merger, assuming all shares of common
stock and stock options are converted into cash in the Merger in accordance with
the Agreement and Plan of Merger and there are no dissenting shareholders, is
expected to be approximately $6,963,381. Arizona Instrument and AZI LLC will
also require approximately $302,784 to pay other expenses and costs incurred by
Arizona Instrument and AZI LLC relating to the transactions and for other
general corporate purposes. The proceeds to pay the Merger Consideration and
related costs and expenses of the transaction will be obtained from the Senior
and Subordinated credit facilities described below and AZI LLC cash on hand. AZI
LLC does not currently have any plan or arrangement for refinancing or repaying
these borrowings, other than cash flow from operations, except that the Senior
Secured bridge loan facility in an amount up to $3,000,000 will be repaid
immediately after closing from Arizona Instrument's cash on hand.
Senior Secured Revolving Credit and Term and Bridge Loan Facility
On March 17, 2000, AZI LLC entered into and delivered to Arizona Instrument
a commitment letter (the "Senior Debt Commitment Letter") with Imperial Bank.
Pursuant to the Senior Debt Commitment Letter, but subject to the terms and
conditions set forth therein, Imperial Bank has agreed to help finance the
Merger by lending up to approximately $6,000,000 (collectively, the "Senior Debt
Facilities") to AZI LLC, including a revolving credit facility of up $750,000
(or up to $1,250,000 after the bridge loan is extinguished), a term loan
facility of $2,250,000 and a bridge loan facility of up to $3,000,000.
The proceeds of the Senior Debt Facilities will be used:
* to pay a portion of the merger consideration;
* to pay related transaction fees and expenses of the Merger; and
* for working capital and general corporate purposes.
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The Senior Debt Commitment Letter contemplates that the definitive credit
agreement governing the Senior Debt Facilities (the "Credit Agreement") will
contain terms and conditions, including, without limitation, the following:
* BORROWER. AZI LLC.
* GUARANTORS. All of AZI LLC's obligations under the Senior Debt
Facilities will be fully and unconditionally guaranteed by George G.
Hays.
* INTEREST RATE. Amounts outstanding under the revolving credit facility
will bear interest at a rate per annum equal to the prime rate plus
1.50%. Amounts outstanding under the term loan facility will bear
interest at a rate per annum equal to the prime rate plus 2.50%.
Amounts outstanding under the bridge loan facility will bear interest
at a rate per annum equal to the prime rate.
* TERM. Drawings under the revolving credit facility will mature 364
days from the Effective Time of the Merger. Borrowings under the term
loan facility will be amortized over 60 months from the Effective Time
of the Merger. Borrowings under the bridge loan will mature one week
from the Effective Time of the Merger.
* SECURITY. The Senior Debt Facilities will be secured by:
* a first priority perfected pledge of and security interest in all
of the equity interests of AZI LLC; and
* a first priority perfected security interest in all tangible and
intangible assets of AZI LLC.
* COVENANTS AND EVENTS OF DEFAULT. The Credit Agreement will contain
affirmative and negative covenants and events of default, in each case
which are customary for credit facilities of that size, type and
purpose. Such affirmative and negative covenants will, among other
matters, limit certain activities of AZI LLC and require it to satisfy
certain ongoing financial requirements. Such events of default will
include, among other matters, certain cross-defaults.
* ADDITIONAL REQUIRMENTS. The obligations of AZI LLC under the Credit
Agreement will be subject to usual and customary conditions for credit
facilities of the size, type and purpose contemplated by the Senior
Debt Facilities, including, without limitation, the following:
* a minimum of $1,000,000 in new equity or subordinated debt, of
which $500,000 must be equity;
* a subordination agreement with the subordinated debt provider
acceptable to Imperial Bank;
* no dividends or distributions without prior approval of Imperial
Bank;
* annual capital expenditures limitation of $400,000;
* George G. Hays to have and maintain majority ownership and
control of AZI LLC; and
* merger agreement satisfactory to Imperial Bank.
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The Credit Agreement will also contain other terms and conditions which are
customary in transactions of the type contemplated by the Senior Debt
Facilities.
Subordinated Credit Facility
On March 23, 2000, AZI LLC entered into and delivered to Arizona Instrument
a commitment letter (the "Subordinated Debt Commitment Letter") with Arizona
MultiBank. Pursuant to the Subordinated Debt Commitment Letter, but subject to
the conditions set forth therein, Arizona MultiBank has agreed to provide a
subordinated term loan of $500,000 (the "Subordinated Debt Facility"). The
proceeds of the Subordinated Debt Facility will be used to pay a portion of the
merger consideration.
The Subordinated Debt Commitment Letter contemplates that the definitive
agreements governing the Subordinated Debt Facility will contain terms and
conditions which are customary in transactions of the type contemplated by the
Subordinated Debt Commitment Letter and will contain certain other terms and
conditions, including, without limitation, the following:
* BORROWER. AZI LLC.
* GUARANTORS. All of AZI LLC's obligations under the Subordinated Debt
Facility will be fully and unconditionally guaranteed by George G.
Hays and Jeanine C. Hays.
* INTEREST RATE. Amounts outstanding under the Subordinated Debt
Facility will bear interest at a rate per annum equal to the prime
rate plus 4.25%. Also, a yield enhancement payment in the amount of an
accrued 2% on the principal balance will be paid annually when AZI LLC
has positive net income before taxes.
* TERM. Borrowings under the term loan facility will be amortized over
61 months from the Effective Time of the Merger.
* SECURITY. The Subordinated Debt Facility will be secured by a
perfected security interest, with priority second only to Imperial
Bank, in all tangible and intangible assets of AZI LLC.
* LIFE INSURANCE. AZI LLC shall maintain key person life insurance on
George G. Hays in the amount of $500,000, naming Arizona MultiBank as
the first beneficiary, to satisfy AZI LLC's obligations under the
Subordinated Debt Facility.
* OTHER PROVISIONS. The obligations of AZI LLC under the Subordinated
Debt Facility will be subject to usual and customary conditions for
credit facilities of the size, type and purpose contemplated by the
Subordinated Debt Facility, including, without limitation, the
following:
* George G. Hays shall maintain no less than 51% ownership interest
in AZI LLC;
* an intercreditor agreement between Arizona MultiBank and senior
lender with commercially reasonable terms for this type of
transaction;
* no distributions to members of AZI LLC without written consent of
Arizona MultiBank, except for tax liability purposes;
* annual capital expenditures limitation of $400,000; and
* compensation to George G. Hays not to exceed $200,000 per annum.
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Regulatory Requirements; Third Party Consents
Arizona Instrument does not believe that any material federal or state
regulatory approvals, filings or notices are required by Arizona Instrument in
connection with the Merger other than:
* such approvals, filings or notices required pursuant to federal and
state securities laws; and
* the filing of the certificate of merger with the Secretary of State of
the State of Delaware.
Based upon AZI LLC's currently anticipated capital structure, the parties
are not required to file a Premerger Notification under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), because AZI LLC
does not satisfy the "size of person" jurisdictional test of the HSR Act insofar
as AZI LLC is its "ultimate parent" and does not have a regularly prepared
balance sheet or assets of $10,000,000 or more, excluding the cash that will be
used to consummate the Merger and shares of common stock and stock options to be
contributed to AZI LLC by the Founders.
In connection with the Merger, Arizona Instrument must obtain the consent
of Imperial Bank, lender to Arizona Instrument. Arizona Instrument does not
believe any other material third party consents will be required by Arizona
Instrument in connection with the Merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a summary of the material federal income tax
consequences expected to affect shareholders whose shares of common stock are
converted to cash in the Merger. This summary does not purport to be a complete
analysis of all potential tax effects of the Merger. For example, the summary
does not consider the effect of any applicable state, local or foreign tax laws.
In addition, the summary does not address all aspects of federal income taxation
that may affect particular shareholders in light of their particular
circumstances and is not intended for shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
shareholders who hold their common stock as part of a hedge, straddle or
conversion transaction, shareholders who acquired their common stock pursuant to
the exercise of an employee stock option or otherwise as compensation, and
shareholders who are not citizens or residents of the United States or that are
foreign corporations, foreign partnerships or foreign estates or trusts as to
the United States) that may be subject to special federal income tax rules not
discussed below. The following summary also does not address holders of stock
options and, except as noted, does not address tax consequences to the Founders.
The following summary assumes that shareholders have held their common stock as
"capital assets" (generally, property held for investment) under the Internal
Revenue Code.
This summary is based on the current provisions of the Code, applicable
Treasury Regulations, judicial authority and administrative rulings and
practice. There can be no assurance that the Internal Revenue Service will not
take a contrary view. No ruling from the IRS has been or will be sought with
respect to any aspect of the transactions described herein. Future legislative,
judicial or administrative changes or interpretations could alter or modify the
statements and conclusions set forth herein, and any such changes or
interpretations could be retroactive and could affect the tax consequences to
shareholders. It cannot be predicted at this time whether any current proposed
tax legislation will be enacted or, if enacted, whether any tax law changes
contained therein would affect the tax consequences to shareholders.
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EACH SHAREHOLDER IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO
THE PARTICULAR TAX CONSEQUENCES TO IT OF THE TRANSACTIONS DESCRIBED HEREIN,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS,
AND OF CHANGES IN APPLICABLE TAX LAWS.
Treatment of Holders of Common Stock
The conversion of common stock in the Merger will be fully taxable to
shareholders. Accordingly, a shareholder who, pursuant to the Merger, converts
such holder's common stock into cash will recognize a gain or loss equal to the
difference between (1) the amount of cash received in the Merger and (2) such
shareholder's tax basis in the common stock. Generally, a shareholder's tax
basis in his common stock will be equal to such shareholder's costs therefor. In
the case of a shareholder who is an individual, such capital gain or loss will
be taxable at a maximum capital gains rate of 20% if the holder held the common
stock for more than one year at the time of the Merger.
For federal income tax purposes, the Surviving Company will be deemed to be
the source of a portion of the cash consideration issued in the Merger
(including the proceeds from debt used to fund the Merger that is assumed by the
Surviving Company in the Merger). Therefore, to the extent that cash received by
a shareholder is from such source, the receipt of cash in exchange for such
shareholder's common stock in the Merger will be treated as a redemption of
common stock for federal income tax purposes. If a shareholder's interest in
Arizona Instrument will terminate as a result of the Merger, taking into account
the constructive ownership rules of Section 318 of the Code, then the
shareholder will continue to receive sale or exchange treatment as described in
the preceding paragraph. If a shareholder's interest in the Surviving Company,
taking into account the constructive ownership rules of Section 318 of the Code,
is not terminated as a result of the Merger, then the shareholder will recognize
gain or loss as described above only if the deemed redemption is either "not
essentially equivalent to a dividend" or "substantially disproportionate" within
the meaning of Section 302 of the Code. Whether or not a shareholder qualifies
for sale or exchange treatment under these provisions depends on the
shareholder's individual facts and circumstances. Shareholders are urged to
consult their tax advisors with respect to the potential applicability of these
provisions.
Backup Withholding
A shareholder whose common stock is converted to cash pursuant to the
Merger may be subject to backup withholding at the rate of 31% with respect to
the gross proceeds from the conversion of such common stock unless such
shareholder (1) is a corporation or other exempt recipient and, when required,
establishes this exemption or (2) provides its correct taxpayer identification
number, certifies that it is not currently subject to backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
A shareholder who does not provide the Surviving Company with its correct
taxpayer identification number may be subject to penalties imposed by the IRS.
Any amount withheld under these rules will be creditable against the
shareholder's federal income tax liability.
The Surviving Company will report to shareholders and to the IRS the amount
of any reportable payments (including payments made to shareholders pursuant to
the Merger) and any amount withheld pursuant to the Merger.
EACH SHAREHOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE
PARTICULAR TAX CONSEQUENCES OF THE TRANSACTIONS DESCRIBED HEREIN, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAW.
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Fees and Expenses
Whether or not the Merger is consummated and except as otherwise provided
herein, all fees and expenses incurred in connection with the Merger will be
paid by the party incurring such fees and expenses, except that Arizona
Instrument will pay for all costs and expenses relating to the printing and
mailing of this proxy statement.
In addition, under the terms of the Agreement and Plan of Merger, Arizona
Instrument will reimburse AZI LLC for certain out of pocket costs, expenses and
fees, up to a maximum of $100,000, if the Agreement and Plan of Merger is
terminated under certain circumstances. See "The Agreement and Plan of
Merger--Fees and Expenses."
Estimated fees and expenses, rounded to the nearest thousand, to be
incurred by Arizona Instrument or AZI LLC in connection with the Merger, the
financing and related transactions are as follows:
Financing Fees $100,000
Special Committee's financial advisor's fees (1) $ 50,000
SEC filing fees $ 1,384
Legal and accounting fees and expenses $115,000
Printing and mailing expenses $ 11,400
Other expenses $ 25,000
--------
Total $302,784
========
- ----------
(1) See "SPECIAL FACTORS--Opinion of Financial Advisor to the Special
Committee."
To the extent not paid prior to the Effective Time by AZI LLC or Arizona
Instrument, all such fees and expenses will be paid by the Surviving Company if
the Merger is consummated. If the Merger is not consummated, each party will
bear its respective fees and expenses, except as otherwise provided in the
Agreement and Plan of Merger. See "THE AGREEMENT AND PLAN OF MERGER--Fees and
Expenses."
INFORMATION CONCERNING THE SPECIAL MEETING
Time, Place and Date
This proxy statement is furnished in connection with the solicitation by
the Board of Directors of proxies from the holders of shares of common stock,
par value $.01 per share, of Arizona Instrument for use at a Special Meeting of
Shareholders (the "Special Meeting") to be held at 9:00 a.m., Mountain Standard
Time, on June 26, 2000, at Fiesta Inn, 2100 South Priest Drive, Tempe, Arizona
85282, or at any adjournment(s) or postponement(s) thereof, pursuant to the
enclosed Notice of Special Meeting of Shareholders.
Purpose of the Special Meeting
At the Special Meeting, the shareholders of Arizona Instrument will be
asked to consider and vote upon the approval of the Agreement and Plan of Merger
and the transactions contemplated thereby. A copy of the Agreement and Plan of
Merger is attached to this proxy statement as Annex A. Pursuant to the Agreement
and Plan of Merger, each outstanding share of common stock (other than (1)
common stock held in the treasury of Arizona Instrument, (2) common stock held
by AZI LLC, or (3) common stock held by shareholders who perfect their rights
under Delaware law to dissent from the Merger and seek an appraisal of the fair
value of their shares, will be converted into the Merger Consideration.
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The Special Committee was appointed by the Board of Directors to, among
other things, review and evaluate the terms of the Merger and to make a
recommendation to the Board of Directors regarding the fairness of the Merger to
the holders of common stock. The Special Committee is composed of Dr. Emerson
(the Chairman) and Mr. Zylstra. Neither is an employee of Arizona Instrument and
none of the Special Committee members has or will have any continuing equity
interest in AZI LLC or the Surviving Company. The Special Committee concluded
that the terms and provisions of the Agreement and Plan of Merger and the Merger
are fair to and in the best interests of the holders of common stock (other than
AZI LLC and its affiliates), and unanimously recommended that the Board of
Directors approve and declare advisable the Agreement and Plan of Merger. At a
meeting held on March 31, 2000, acting on the unanimous recommendation of the
Special Committee, the Board of Directors approved the Agreement and Plan of
Merger, concluded that the terms and provisions of the Agreement and Plan of
Merger are advisable and that the Agreement and Plan of Merger and the
transactions contemplated thereby, including the Merger, are fair to, and in the
best interests of, the holders of common stock (other than AZI LLC and its
affiliates), and approved a recommendation that the shareholders of Arizona
Instrument approve the Agreement and Plan of Merger and the transactions
contemplated thereby. The Special Committee and the Board of Directors, in
reaching their respective decisions, considered a number of factors, including
the opinion of Peacock Hislop, the financial advisor to the Special Committee,
that, as of the date of such opinion and based upon and subject to various
considerations, assumptions and limitations stated therein, the $5.00 per share
cash consideration to be received by the shareholders of Arizona Instrument in
the Merger was fair to the shareholders of Arizona Instrument (other than AZI
LLC and its affiliates) from a financial point of view. A copy of Peacock
Hislop's opinion is attached as Annex B to this proxy statement. See "SPECIAL
FACTORS--Recommendation of the Special Committee and Board of Directors;
Fairness of the Merger" and "SPECIAL FACTORS--Opinion of Financial Advisor to
the Special Committee."
BASED ON THE UNANIMOUS RECOMMENDATION OF ITS SPECIAL COMMITTEE, THE BOARD
OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE AGREEMENT AND
PLAN OF MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Record Date; Voting at the Meeting; Quorum
Acting under authority granted to it by the Board of Directors, the Special
Committee has fixed the close of business on May 15, 2000, as the record date
(the "Record Date") for the Special Meeting. Only shareholders of record as of
the close of business on May 15, 2000, will be entitled to notice of and to vote
at the Special Meeting.
As of the close of business on the Record Date, Arizona Instrument had
outstanding 1,371,399 shares of common stock, held of record by approximately
2,839 registered holders as of April 12, 2000. Holders of the common stock are
entitled to one vote per share. The presence in person or by proxy of the
holders of not less than one-third of the voting power of the outstanding common
stock entitled to vote at the Special Meeting constitutes a quorum. Broker
non-votes and shares as to which a shareholder abstains will be included in
determining whether there is a quorum at the Special Meeting.
Required Vote
Under Delaware law, the Agreement and Plan of Merger must be approved by
the affirmative vote of the holders of a majority of the voting power of the
outstanding shares of common stock. The affirmative vote of approximately
685,700 shares of common stock will be necessary to satisfy this voting
requirement. Approval of the Agreement and Plan of Merger does not require the
affirmative vote of a majority of the outstanding shares of common stock held by
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persons other than AZI LLC or its affiliates. The Founders, each a director of
Arizona Instrument, currently own 49,188 shares of common stock in the
aggregate, representing approximately 4% of the outstanding shares of common
stock as of the Record Date. The Founders also collectively hold options to
acquire an aggregate of 66,000 shares of common stock, which stock options will
be converted into cash in the merger. See "Special Factors--Interests of Certain
Persons in the Merger; Certain Relationships."
Because Delaware law requires the Agreement and Plan of Merger to be
approved by the affirmative vote of the holders of a majority of the voting
power of the outstanding shares of common stock, failure to return an executed
proxy card or to vote in person at the Special Meeting or abstaining from the
vote will constitute, in effect, a vote against approval of the Agreement and
Plan of Merger and the transactions contemplated thereby for purposes of
Delaware law. Similarly, broker non-votes will have the same effect as a vote
against approval of the Agreement and Plan of Merger and the transactions
contemplated thereby.
Voting and Revocation of Proxies
The enclosed proxy card is solicited on behalf of the Board of Directors.
The giving of a proxy does not preclude the right to vote in person should any
shareholder giving the proxy so desire. Shareholders have an unconditional right
to revoke their proxy at any time prior to its exercise, either by filing with
Arizona Instrument's Secretary at Arizona Instrument's principal executive
offices a written revocation or a duly executed proxy bearing a later date or by
voting in person at the Special Meeting. Attendance at the Special Meeting
without casting a ballot will not, by itself, constitute revocation of a proxy.
Any written notice revoking a proxy should be sent to the transfer agent,
ChaseMellon Shareholder Services, 85 Challenger Road, Ridgefield Park, New
Jersey 07660.
Action to Be Taken at the Special Meeting
All shares of common stock represented at the Special Meeting by properly
executed proxies received prior to or at the Special Meeting, unless previously
revoked, will be voted at the Special Meeting in accordance with the
instructions on the proxies. Unless contrary instructions are indicated, proxies
will be voted "FOR" the approval of the Agreement and Plan of Merger and the
transactions contemplated thereby. As explained below in the section entitled
"Dissenters' Rights of Appraisal," a vote in favor of the Agreement and Plan of
Merger means that the shareholder owning those shares will not have the right to
dissent and seek appraisal of the fair value of such shareholder's shares.
Arizona Instrument does not know of any matters, other than as described in the
Notice of Special Meeting of Shareholders, which are to come before the Special
Meeting. If any other matters are properly presented at the Special Meeting for
action, including, among other things, consideration of a motion to adjourn such
meeting to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies or allowing additional time for the
satisfaction of conditions to the Merger), the persons named in the enclosed
proxy card and acting thereunder generally will have discretion to vote on such
matters in accordance with their best judgment. Notwithstanding the foregoing,
the persons named in the enclosed proxy card will not use their discretionary
authority to use proxies voting against the Merger to vote in favor of
adjournment or postponement of the Special Meeting. The Merger is also subject
to a number of additional conditions. See "THE AGREEMENT AND PLAN OF
MERGER--Conditions."
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Proxy Solicitation
The cost of preparing, assembling and mailing this proxy statement, the
Notice of Special Meeting of Shareholders and the enclosed proxy card will be
borne by Arizona Instrument. Arizona Instrument is requesting that banks,
brokers and other custodians, nominees and fiduciaries forward copies of the
proxy material to their principals and request authority for the execution of
proxies. Arizona Instrument may reimburse such persons for their expenses in so
doing. In addition to the solicitation of proxies by mail, the directors,
officers and employees of Arizona Instrument and its subsidiaries may, without
receiving any additional compensation, solicit proxies by telephone, telefax,
telegram or in person.
No person is authorized to give any information or make any representation
not contained in this proxy statement, and if given or made, such information or
representation should not be relied upon as having been authorized.
COMPANY SHAREHOLDERS SHOULD NOT SEND ANY CERTIFICATES REPRESENTING SHARES
OF COMMON STOCK WITH THEIR PROXY CARD. IF THE MERGER IS CONSUMMATED, THE
PROCEDURE FOR THE EXCHANGE OF CERTIFICATES REPRESENTING SHARES OF COMMON STOCK
WILL BE AS SET FORTH IN THIS PROXY STATEMENT. SEE "THE AGREEMENT AND PLAN OF
MERGER--THE EXCHANGE FUND; PAYMENT FOR SHARES OF COMMON STOCK" AND "THE
AGREEMENT AND PLAN OF MERGER--TRANSFERS OF COMMON STOCK."
THE AGREEMENT AND PLAN OF MERGER
The following is a summary of the material provisions of the Agreement and
Plan of Merger, a copy of which is attached as Annex A to this proxy statement.
Such summary is qualified in its entirety by reference to the full text of the
Agreement and Plan of Merger.
The Merger; Merger Consideration
The Agreement and Plan of Merger provides that the Merger will become
effective upon the filing of the articles of merger with the Corporation
Commission of the State of Arizona or at such other time as the parties may
agree and specify in the articles of merger (the "Effective Time"). If the
Merger is approved at the Special Meeting by the holders of a majority of all
outstanding shares of common stock, and the other conditions to the Merger are
satisfied or waived, it is currently anticipated that the Merger will become
effective as soon as practicable after the Special Meeting; however, there can
be no assurance as to the timing of the consummation of the Merger or that the
Merger will be consummated.
At the Effective Time, Arizona Instrument will be merged with and into AZI
LLC, the separate corporate existence of Arizona Instrument will cease and AZI
LLC will continue as the Surviving Company. In the Merger and at the Effective
Time:
* each share of common stock issued and outstanding immediately prior to
the Effective Time, other than common stock held by Arizona Instrument
or its wholly-owned subsidiaries, AZI LLC or Dissenting Shareholders,
will, by virtue of the Merger and without any action on the part of
the holder thereof, be converted into and become the right to receive
cash in the amount of $5.00;
* each share of common stock issued and outstanding immediately prior to
the Effective Time that is owned by Arizona Instrument or its
wholly-owned subsidiaries or AZI LLC will automatically be canceled,
retired and cease to exist and no payment will be made with respect
thereto;
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* each membership unit of AZI LLC outstanding immediately prior to the
Effective Time will remain outstanding and will not be modified and
will constitute the only outstanding membership units of the Surviving
Company;
* Dissenting Shareholders who do not vote to approve the Agreement and
Plan of Merger and who otherwise strictly comply with the provisions
of the Delaware General Corporation Law regarding statutory appraisal
rights have the right to seek a determination of the fair value of
their shares of common stock and payment in cash therefor in lieu of
the Merger Consideration. See "DISSENTERS' RIGHTS OF APPRAISAL;" and
* each certificate representing shares of common stock that has been
converted to cash under the terms of the Agreement and Plan of Merger
will, after the Effective Time, evidence only the right to receive,
upon the surrender of such certificate, cash in the amount of $5.00
per share.
Treatment of Certain Shares Held by the Founders
Shares of Arizona Instrument common stock held by each of the Founders will
be treated the same as all other shares of common stock in the Merger. Options
to acquire shares of common stock of Arizona Instrument held by the Founders
will be treated the same in the Merger as options held by other employees and
directors of Arizona Instrument.
The Exchange Fund; Payment for Shares of Common Stock
On or before the closing date of the Merger, AZI LLC will enter into an
agreement with a bank, trust company or other exchange agent selected by AZI LLC
and reasonably satisfactory to Arizona Instrument (the "Exchange Agent"). As of
the Effective Time, AZI LLC or the Surviving Company will deposit or cause to be
deposited with the Exchange Agent, cash in the amount equal to the aggregate
Merger Consideration, such amount being hereinafter referred to as the "Exchange
Fund", for the benefit of holders of shares of the common stock, other than
common stock held by dissenting shareholders and shares to be canceled without
consideration pursuant to the Agreement and Plan of Merger.
Within five business days following the Effective Time, the Exchange Agent
will mail to each record holder of a certificate or certificates, which
immediately prior to the Effective Time represented outstanding shares of common
stock that have been converted pursuant to the Agreement and Plan of Merger into
the right to receive Merger Consideration, a letter of transmittal and
instructions for use in surrendering certificates in exchange for the Merger
Consideration. No shareholder should surrender any certificates until the
shareholder receives the letter of transmittal and other materials for such
surrender. Upon surrender of a certificate for cancellation to the Exchange
Agent, together with a letter of transmittal, duly executed, and such other
customary documents as may be required pursuant to the instructions, the holder
of such certificate will be entitled to receive, in exchange therefore, the
Merger Consideration into which the number of shares of common stock previously
represented by such certificate(s) shall have been converted pursuant to the
Agreement and Plan of Merger, without any interest thereon, and the certificates
so surrendered will be canceled.
If payment of the Merger Consideration is to be made to a person other than
the person in whose name the certificate surrendered is registered, it will be a
condition of payment that the certificate so surrendered will be properly
endorsed, together with signature guarantees on such certificate, or otherwise
be in proper form for transfer and that the person requesting such payment pay
to the Exchange Agent any transfer or other taxes required by reason of the
payment of the Merger Consideration to a person other than the registered holder
thereof or establish to the satisfaction of the Exchange Agent that such tax has
been paid or is not applicable.
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SHAREHOLDERS SHOULD NOT SEND THEIR CERTIFICATES NOW AND SHOULD SEND THEM
ONLY PURSUANT TO INSTRUCTIONS SET FORTH IN THE LETTER OF TRANSMITTAL TO BE
MAILED TO SHAREHOLDERS PROMPTLY AFTER THE EFFECTIVE TIME. IN ALL CASES, THE
MERGER CONSIDERATION WILL BE PROVIDED ONLY IN ACCORDANCE WITH THE PROCEDURES SET
FORTH IN THIS PROXY STATEMENT AND SUCH LETTER OF TRANSMITTAL.
Eighteen months after the Effective Time, the Exchange Agent will deliver
to the Surviving Company or otherwise at the direction of the Surviving Company
any portion of the Exchange Fund that remains undistributed to or unclaimed by
the holders of certificates (including the proceeds of any investments thereof),
and any holders of certificates who have not theretofore complied with the
above-described procedures to receive payment of the Merger Consideration may
look only to the Surviving Company for payment of the Merger Consideration to
which they are entitled.
Transfers of Common Stock and Rights Under Stock Purchase Plan
After the Effective Time, the stock transfer books of Arizona Instrument
will be closed, and there will be no further transfers of Certificates on the
records of Arizona Instrument or its transfer agent. If, after the Effective
Time, certificates are presented to the Exchange Agent or the Surviving Company,
they will be canceled and exchanged for the Merger Consideration as provided
above and pursuant to the terms of the Agreement and Plan of Merger (subject to
applicable law in the case of dissenting shareholders).
Treatment of Stock Options
It is currently anticipated that at the Effective Time, each unexercised
option to acquire common stock will be canceled. See "Interests of Certain
Persons in the Merger; Certain Relationships." Each holder of an exercisable
stock option(including options which vest as a result of the transactions
contemplated by the Agreement and Plan of Merger) who is an employee, officer or
director of Arizona Instrument at the Effective Time will receive, in
consideration of such cancellation, as soon as practicable after the Effective
Time, a cash payment equal to the product of (1) the excess, if any, of the
Merger Consideration over the per share exercise price of such stock option,
multiplied by (2) the aggregate number of shares of common stock then subject to
such stock option, subject to any required withholding of taxes (the "Stock
Option Consideration"). At the Effective Time, all such stock options, will be
converted into, and will thereafter only represent the right to receive, the
Stock Option Consideration. Exercisable stock options held by persons other than
employees, officers and directors of Arizona Instrument which are not exercised
prior to the Effective Time, will be canceled and no payment will be made in
respect thereof.
It is currently anticipated that the participants in the Arizona Instrument
1985 Stock Purchase Plan will be permitted to continue payroll withholding
pursuant to their current instructions in accordance with the provisions of the
Plan, except that the last business day before the Effective Time will be deemed
the final date of the deductive period for purposes of the Plan. At the
Effective Time, AZI LLC will pay to each participant the excess, if any, of the
Merger Consideration over the purchase price as established by the Plan, and all
withheld funds will be returned to the participants.
Conditions
The respective obligations of AZI LLC and Arizona Instrument to consummate
the Merger are subject to the following conditions, among others:
* the approval of the Agreement and Plan of Merger by the affirmative
vote of the holders of a majority of all outstanding shares of common
stock; and
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* the absence of any governmental action or order which makes the Merger
illegal or otherwise prohibits consummation of the Merger.
The obligation of AZI LLC to effect the Merger is subject to the following
additional conditions:
* the representations and warranties of Arizona Instrument must be true
and correct as of the Effective Time as though made on and as of the
Effective Time, except where, among other things, the failure to be
true and correct, individually or in the aggregate, would not have a
material adverse effect on Arizona Instrument (without giving effect
to qualifications as to materiality contained within such
representations and warranties) or would not prevent completion of the
Merger by September 30, 2000, or under certain circumstances by
December 31, 2000 (the "Outside Date");
* Arizona Instrument must have performed or complied with all of its
obligations and covenants under the Agreement and Plan of Merger at or
prior to the Effective Time, except where the failure to so perform or
comply would not have a material adverse effect on Arizona Instrument
or would not prevent consummation of the Merger by the Outside Date;
and
* the funding of the debt and equity financings being provided by
Imperial Bank, Arizona MultiBank and the Founders must have occurred.
The funding of these financings is subject to a number of material
conditions independent of those in the Agreement and Plan of Merger.
The obligations of Arizona Instrument to effect the Merger are also subject
to the following additional conditions:
* the representations and warranties of AZI LLC and the Founders must be
true and correct as of the Effective Time as though made on and as of
the Effective Time, except where, among other things, the failure to
be true and correct, individually or in the aggregate, would not have
a material adverse effect on AZI LLC (without giving effect to
qualifications as to materiality contained within such representations
and warranties) or would not prevent completion of the Merger by the
Outside Date; and
* AZI LLC and the Founders must have performed or complied with all of
their respective obligations and covenants under the Agreement and
Plan of Merger at or prior to the Effective Time, except where the
failure to so perform or comply would not have a material adverse
effect on AZI LLC or would not prevent consummation of the Merger by
the Outside Date.
Representations and Warranties
The Agreement and Plan of Merger contains limited representations and
warranties of AZI LLC, the Founders and Arizona Instrument.
The representations of AZI LLC and the Founders relate to, among other
things:
* AZI LLC's organization and qualification to do business,
capitalization, ownership, and authority to enter into the Agreement
and Plan of Merger;
* the absence of a conflict of the Agreement and Plan of Merger, and the
transactions contemplated thereby, with laws applicable to, and
material agreements of, AZI LLC;
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* the consents and filings required with respect to the Agreement and
Plan of Merger and the transactions contemplated thereby;
* the availability of financing;
* the accuracy of the information provided by AZI LLC for inclusion in
this proxy statement and in filings to be made with the SEC with
respect to the Merger;
* the requirement for approval of the Agreement and Plan of Merger by
the members of AZI LLC;
* the brokers used by AZI LLC;
* the historical business activities of AZI LLC;
* the effect and applicability of state anti-takeover laws; and
* the knowledge of the Founders as to the accuracy of the
representations of Arizona Instrument.
The representations of Arizona Instrument relate to, among other things:
* the organization and qualification to do business of Arizona
Instrument and its subsidiaries;
* the capitalization and indebtedness of Arizona Instrument and its
subsidiaries;
* Arizona Instrument's authority to enter into the Agreement and Plan of
Merger;
* the absence of a conflict of the Agreement and Plan of Merger and the
transactions contemplated thereby with laws applicable to and material
agreements of Arizona Instrument and its subsidiaries;
* the consents and filings required with respect to the Agreement and
Plan of Merger and the transactions contemplated thereby;
* reports, financial statements and other filings made with the SEC; *
the compliance with law and accuracy of the proxy statement and
filings made with the SEC with respect to the proposed Merger;
* the absence of changes in the business of Arizona Instrument;
* the required vote of the shareholders of Arizona Instrument with
respect to the Merger;
* the status of all existing discussions or negotiations with any
parties conducted before the date of the Agreement and Plan of Merger;
* the brokers used by Arizona Instrument;
* the action of the Board approving the Agreement and Plan of Merger and
the transactions contemplated thereby;
* the opinion of Peacock, Hislop, Staley & Given, Inc.;
* the status of material contracts of Arizona Instrument;
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* compliance with environmental laws and liabilities for remediation;
* compliance of employee benefit plans with applicable law;
* pending or threatened litigation; and
* certain income tax matters.
Most of Arizona Instrument's representations and warranties are qualified
by any facts, circumstances, conditions or events actually known to the Founders
that would cause such representations or warranties to be untrue or incorrect in
any material respect (without giving effect to qualifications as to materiality
contained in such representations or warranties) as of March 31, 2000.
Covenants
Arizona Instrument has agreed to operate, and cause each of its
subsidiaries to operate, their respective businesses in the ordinary and usual
course prior to the Effective Time. In this regard, Arizona Instrument has
agreed that it will not, without the consent of AZI LLC (which consent may not
be unreasonably withheld or delayed), take certain types of actions or engage in
certain types of transactions. Specifically, Arizona Instrument has agreed that
prior to the Effective Time, it will not, and will not permit any of its
subsidiaries to, among other things:
* declare or pay dividends (other than dividends by its subsidiaries in
the ordinary course of business consistent with past practice);
* split, combine or reclassify their respective capital stock;
* repurchase, redeem or acquire any of their respective capital stock;
* issue, sell, grant, pledge or otherwise encumber any of their
respective securities (other than issuance of common stock upon
exercise of Arizona Instrument stock options that were issued in the
ordinary course or issuance of stock options or other awards in the
ordinary course pursuant to Arizona Instrument benefit plans) or
accelerate the vesting of or the lapsing of restrictions with respect
to restricted stock;
* amend their respective certificates of incorporation or bylaws;
* incur additional indebtedness (subject to certain ordinary course
allowances);
* increase the compensation payable to or materially modify the benefits
provided to employees;
* take any action that could reasonably be expected to result in any of
the conditions to the Merger not being satisfied;
* enter into non-competition agreements;
* merge or sell substantially all of their assets;
* enter into or amend material employment, consulting or severance
agreements;
* change their method of accounting;
* acquire substantially all of the assets of any other person; or
* make material capital expenditures or commitments.
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AZI LLC has agreed that it will not, without the consent of Arizona
Instrument (which consent may not be unreasonably withheld or delayed), take
certain types of actions or engage in certain types of transactions.
Specifically, AZI LLC agreed that prior to the Effective Time, it will not,
among other things:
* amend its organizational documents in any way that would delay the
timely consummation of the Merger or prevent the consummation of the
Merger by the Outside Date;
* change its capital structure in a manner that would materially delay
the timely consummation of the Merger or prevent the consummation of
the Merger by the Outside Date; or
* take any action that could reasonably be expected to result in any of
the conditions to the Merger not being satisfied.
In addition, AZI LLC and the Founders agreed to use their best efforts to
consummate financing on terms consistent with the commitment letters; to keep
the commitment letters in effect until the Effective Time; to maintain certain
employee benefits for one year following the Effective Time; to maintain
provisions in the organizational documents of the Surviving Company regarding
the indemnification of directors and officers following the Effective Time; and
to continue in force Arizona Instrument's directors and officers liability
insurance for six years following the Effective Time.
AZI LLC and Arizona Instrument have made further agreements regarding,
among other things:
* advising each other of representations or warranties contained in the
Agreement and Plan of Merger becoming untrue, of their respective
failure to comply with or satisfy covenants, conditions or agreements
contained in the Agreement and Plan of Merger and of any change, event
or circumstance that could reasonably be expected to have a material
adverse effect on such party or on its ability to consummate the
proposed Merger by the Outside Date; and
* cooperating in the preparation of required governmental filings, in
obtaining required permits and regulatory approvals and in the release
of public announcements, and granting access to information and
maintaining confidentiality.
Acquisition Proposals
The Agreement and Plan of Merger provides that, at any time prior to the
Effective Time (unless AZI LLC consents in writing), Arizona Instrument and the
Special Committee will not, and Arizona Instrument will use its reasonable best
efforts to cause its and the Special Committee's representatives not to, either
directly or indirectly, initiate, or solicit the making, submission or
announcement of any Acquisition Proposal. "Acquisition Proposal" means any
offer, indication of interest or proposal relating to a transaction involving
the acquisition of stock or assets of Arizona Instrument which would, upon
consummation, materially and adversely affect the ability of the parties to
consummate the transactions contemplated by the Agreement and Plan of Merger.
"Acquisition Proposal" does not include any offer, indication of interest or
proposal made by AZI LLC or any of the Founders or any of them jointly with any
other person.
In addition, Arizona Instrument and the Special Committee will not, and
Arizona Instrument will use its reasonable best efforts to cause its and the
Special Committee's representatives not to, either directly or indirectly,
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engage in discussions with, furnish or provide any non-public information to, or
afford access to the properties, books, records and representatives of Arizona
Instrument to, any person with respect to any Acquisition Proposal unless the
Special Committee determines in good faith that the Acquisition Proposal is
reasonably likely to lead to a Superior Proposal (as defined below), such person
has entered into an appropriate confidentiality agreement and Arizona Instrument
has notified AZI LLC of the initial receipt of such proposal and the terms of
the proposal. Arizona Instrument is not required to disclose to AZI LLC the
identity of any person making an Acquisition Proposal.
In addition, Arizona Instrument, the Board of Directors or the Special
Committee may withdraw or modify its recommendation of, or refrain from
recommending, the Merger and the Agreement and Plan of Merger, approve any
Acquisition Proposal, declare any Acquisition Proposal advisable, recommend an
Acquisition to Arizona Instrument's shareholders or enter into a definitive
acquisition agreement in respect of an Acquisition Proposal if, prior to taking
such actions the Special Committee determines in good faith that such
Acquisition Proposal is a Superior Proposal. A "Superior Proposal" is an
Acquisition Proposal which:
* is at least as likely as the Merger to be consummated;
* is accompanied by evidence of cash on hand or readily available under
existing lines of credit or written commitments for financing
sufficient to fund its consummation; and
* would, if consummated, result in a transaction more favorable to
Arizona Instrument's shareholders from a financial point of view than
the transactions contemplated by the Agreement and Plan of Merger.
Finally, Arizona Instrument, its Board of Directors or the Special
Committee may take such actions as required by the rules promulgated under the
Exchange Act with regard to tender offers received by Arizona Instrument.
Termination
The Agreement and Plan of Merger may be terminated at any time prior to the
Effective Time, whether before or after the approval of the proposed Merger by
the shareholders of Arizona Instrument, by the mutual written consent of Arizona
Instrument and AZI LLC, or by either or AZI LLC if:
* any permanent injunction, judgment, order, decree, ruling or other
action of any governmental entity prohibiting the consummation of the
Merger has become final and nonappealable;
* the Merger has not been consummated by the Outside Date (provided that
such termination will not be available to any party whose material
breach of any representation, warranty, covenant or agreement under
the Agreement and Plan of Merger has been the cause of or resulted in
the failure of the Merger to occur on or before such date);
* the required Arizona Instrument shareholder approval is not obtained
(provided that, this right to terminate will not be available to AZI
LLC if AZI LLC and the Founders shall not have voted in favor of the
approval of the Agreement and Plan of Merger and the Merger); or
* Arizona Instrument's Board of Directors, based upon the recommendation
of the Special Committee, determines to accept a Superior Proposal.
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Arizona Instrument may also terminate the Agreement and Plan of Merger at
any time prior to the Effective Time, whether before or after the approval of
the proposed Merger by the shareholders, upon a breach by AZI LLC of any
representation, warranty, covenant or obligation set forth in the Agreement and
Plan of Merger which would have a material adverse effect on AZI LLC (without
giving effect to qualifications as to materiality contained within such
representations and warranties), which breach is not or cannot be materially
cured by the Outside Date.
AZI LLC may also terminate the Agreement and Plan of Merger at any time
prior to the Effective Time, whether before or after the approval of the
proposed Merger by the shareholders of Arizona Instrument:
* if the Arizona Instrument Board of Directors, based upon the
recommendation of the Special Committee:
* withdraws or adversely modifies its recommendation of the
Agreement and Plan of Merger;
* recommends to the shareholders of Arizona Instrument that they
approve an Acquisition Proposal other than the proposed Merger;
* fails to include the Board of Directors's recommendation in favor
of the Agreement and Plan of Merger or the fairness opinion of
Peacock, Hislop, Staley & Given, Inc. in this proxy statement; or
* fails to mail this proxy statement within the time periods set
forth in the Agreement and Plan of Merger or has postponed or,
without obtaining the required shareholder vote, adjourned the
shareholder meeting, in each case, when an Acquisition Proposal
from a person other than AZI LLC was publicly pending or known to
the Special Committee;
* if an Acquisition Proposal made as a tender offer or exchange offer is
commenced and the Arizona Instrument Board of Directors shall not have
timely recommended rejection of such offer;
* upon a breach by Arizona Instrument of any representation, warranty,
covenant or obligation set forth in the Agreement and Plan of Merger,
which would result in the funding of the debt and equity financings
being provided by Imperial Bank and Arizona MultiBank and the Founders
not occurring or the proceeds thereof not being immediately available
at the Effective Time or which would have a material adverse effect on
Arizona Instrument (without giving effect to qualifications as to
materiality contained within such representations and warranties),
which breach is not or cannot be materially cured by the Outside Date;
or
* if, despite the exercise of best efforts by AZI LLC and the Founders,
the funding of the financing for the completion of the Merger does not
occur by the Outside Date by reason of any failure of any condition to
the definitive financing documents or upon the exercise by any party
to the definitive financing documents (other than AZI LLC or any of
the Founders) of any right to terminate the definitive financing
documents.
Fees and Expenses
Whether or not the Merger is consummated and except as otherwise provided
in the Agreement and Plan of Merger, all fees and expenses incurred in
connection with the Merger will be paid by the party incurring such fees and
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expenses, except that (1) Arizona Instrument will pay for all costs and expenses
relating to the printing, filing and mailing of this proxy statement and (2) if
the Merger is consummated, the Surviving Company will pay any real property
transfer tax imposed on the holders of shares of capital stock of Arizona
Instrument resulting from the Merger.
Under the terms of the Agreement and Plan of Merger, Arizona Instrument
will reimburse AZI LLC for its out-of-pocket expenses incurred after January 31,
2000 in connection with the Merger, up to maximum of $100,000 (the "Costs and
Expenses") within two business days after the termination of the Agreement and
Plan of Merger if:
* the Agreement and Plan of Merger is terminated by Arizona Instrument
or AZI LLC because the required shareholder approval is not obtained
and on or within the five business days prior to the shareholders
meeting at which such approval was sought, a publicly announced
Acquisition Proposal from a person other than AZI LLC was pending;
* the Agreement and Plan of Merger is terminated by Arizona Instrument
or AZI LLC because the Arizona Instrument Board of Directors, based on
the recommendation of the Special Committee, resolved to accept a
Superior Proposal;
* the Agreement and Plan of Merger is terminated by AZI LLC because the
Arizona Instrument Board of Directors, based on the recommendation of
the Special Committee:
* withdraws or adversely modifies its recommendation of the Agreement
and Plan of Merger;
* recommends to the shareholders of Arizona Instruments that they
approve another Acquisition Proposal;
* fails to include a recommendation in favor of the Agreement and Plan
of Merger or the fairness opinion of Peacock, Hislop, Staley & Givens,
Inc. in this proxy statement while an Acquisition Proposal from a
person other than AZI LLC was publicly pending or known to the Special
Committee; or
* fails to mail a proxy statement within the time periods set forth in
the Agreement and Plan of Merger or has postponed or, without
obtaining the required shareholder vote, adjourned the shareholder
meeting, in each case, when an Acquisition Proposal from a person
other than AZI LLC is publicly pending or known to the Special
Committee;
* the Agreement and Plan of Merger is terminated by AZI LLC because the
Arizona Instrument Board of Directors fails to timely recommend
rejection of an Acquisition Proposal made as a tender offer or
exchange offer; or
* Arizona Instrument willfully and materially breaches its covenants,
obligations, representations or warranties with regard to Acquisition
Proposals set forth in the Agreement and Plan of Merger.
Amendment/Waiver
Before or after approval of the Agreement and Plan of Merger by the
shareholders, the Agreement and Plan of Merger may be amended by the written
agreement of the parties thereto at any time prior to the Effective Time if such
amendment is approved on behalf of Arizona Instrument by the Special Committee,
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and on behalf of AZI LLC by its managers; provided that, after any such
shareholder approval has been obtained, no amendment may be made that under
applicable law or Nasdaq rules requires the approval of the shareholders Arizona
Instrument if such approval has not been obtained.
At any time prior to the Effective Time, Arizona Instrument and AZI LLC may
agree in writing to extend the time for performance of any of the obligations or
other acts of the other parties to the Agreement and Plan of Merger, waive any
inaccuracies in the representations and warranties contained in the Agreement
and Plan of Merger or in any document delivered pursuant to the Agreement and
Plan of Merger, or waive compliance with any agreements or conditions contained
in the Agreement and Plan of Merger.
DISSENTERS' RIGHTS OF APPRAISAL
Under Section 262 of the Delaware General Corporation Law ("DGCL"), any
holder of common stock who does not wish to accept the Merger Consideration may
dissent from the Merger and elect to have the fair value of such shareholder's
shares of common stock, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, judicially determined and paid to
such shareholder in cash, together with a fair rate of interest, if any,
provided that such shareholder complies with the provisions of Section 262.
The following discussion is not a complete statement of the law pertaining
to appraisal rights under the DGCL, and is qualified in its entirety by the full
text of Section 262, which is provided in its entirety as Annex C to this proxy
statement. All references in Section 262 and in this summary to a "shareholder"
are to the record holder of the shares of common stock as to which appraisal
rights are asserted. A person having a beneficial interest in shares of common
stock held of record in the name of another person, such as a broker or nominee,
must act promptly to cause the record holder to follow properly the steps
summarized below and in timely manner to perfect appraisal rights.
Under Section 262, where a proposed merger is to be submitted for approval
at a meeting of shareholders, as in the case of the Special Meeting, the
corporation, not less than 20 days prior to the meeting, must notify each of its
shareholders entitled to appraisal rights that such appraisal rights are
available and include in such notice a copy of Section 262. This proxy statement
will constitute such notice to the holders of common stock and the applicable
statutory provisions of the DGCL are attached to this proxy statement as Annex
C. Any shareholder who wishes to exercise such appraisal rights or who wishes to
preserve the right to do so should review carefully the following discussion and
Annex C to this proxy statement. FAILURE TO COMPLY WITH THE PROCEDURES SPECIFIED
IN SECTION 262 TIMELY AND PROPERLY WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
Moreover, because of the complexity of the procedures for exercising the right
to seek appraisal of the common stock, Arizona Instrument believes that
shareholders who consider exercising such rights should seek the advice of
counsel.
Any holder of common stock wishing to exercise the right to dissent from
the Merger and demand appraisal under Section 262 of the DGCL must satisfy each
of the following conditions:
* deliver to Arizona Instrument a written demand for appraisal of such
shareholder's shares before the vote on the Agreement and Plan of
Merger at the Special Meeting, which demand will be sufficient if it
reasonably informs Arizona Instrument of the identity of the
shareholder and that the shareholder intends thereby to demand the
appraisal of such holder's shares;
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* not vote the holder's shares of common stock in favor of the Agreement
and Plan of Merger; a proxy which does not contain voting instructions
will, unless revoked, be voted in favor of the Agreement and Plan of
Merger. Therefore, a shareholder who votes by proxy and who wishes to
exercise appraisal rights must vote against the Agreement and Plan of
Merger or abstain from voting on the Agreement and Plan of Merger; and
* continuously hold such shares from the date of making the demand
through the Effective Time. A shareholder who is the record holder of
shares of common stock on the date the written demand for appraisal is
made but who thereafter transfers such shares prior to the Effective
Time will lose any right to appraisal in respect of such shares.
Neither voting (in person or by proxy) against, abstaining from voting on,
or failing to vote on the proposal to approve the Agreement and Plan of Merger
will constitute a written demand for appraisal within the meaning of Section
262. The written demand for appraisal must be in addition to and separate from
any such proxy or vote.
Only a holder of record of shares of common stock issued and outstanding
immediately prior to the Effective Time is entitled to assert appraisal rights
for the shares of common stock registered in that holder's name. A demand for
appraisal should be executed by or on behalf of the shareholder of record, fully
and correctly, as such shareholder's name appears on such stock certificates,
should specify the shareholder's name and mailing address, the number of shares
of common stock owned and that such shareholder intends thereby to demand
appraisal of such shareholder's common stock. If the shares are owned of record
in a fiduciary capacity, such as by a trustee, guardian or custodian, execution
of the demand should be made in that capacity. If the shares are owned of record
by more than one person as in a joint tenancy or tenancy in common, the demand
should be executed by or on behalf of all owners. An authorized agent, including
one or more joint owners, may execute a demand for appraisal on behalf of a
shareholder; however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, the agent is acting
as agent for such owner or owners. A record holder such as a broker who holds
shares as nominee for several beneficial owners may exercise appraisal rights
with respect to the shares held for one or more beneficial owners while not
exercising such rights with respect to the shares held for one or more other
beneficial owners; in such case, the written demand should set forth the number
of shares as to which appraisal is sought, and where no number of shares is
expressly mentioned the demand will be presumed to cover all shares held in the
name of the record owner. Shareholders who hold their shares in brokerage
accounts or other nominee forms and who wish to exercise appraisal rights are
urged to consult with their brokers to determine and appropriate procedures for
the making of a demand for appraisal by such nominee.
A shareholder who elects to exercise appraisal rights pursuant to Section
262 should mail or deliver a written demand to: Arizona Instrument Corporation,
1912 West 4th Street, Tempe, Arizona 85281, Linda J. Shepherd, Secretary.
Within ten days after the Effective Time, the Surviving Company must send a
notice as to the effectiveness of the Merger to each former shareholder of
Arizona Instrument who has made a written demand for appraisal in accordance
with Section 262 and who has not voted in favor of the Agreement and Plan of
Merger. Within 120 days after the Effective Time, but not thereafter, either the
Surviving Company or any dissenting shareholder who has complied with the
requirements of Section 262 may file a petition in the Delaware Chancery Court
demanding a determination of the value of the shares of common stock held by all
dissenting shareholders. Arizona Instrument is under no obligation to and has no
present intent to file a petition for appraisal, and shareholders seeking to
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exercise appraisal rights should not assume that the Surviving Company will file
such a petition or that the Surviving Company will initiate any negotiations
with respect to the fair value of such shares. Accordingly, shareholders who
desire to have their shares appraised should initiate any petitions necessary
for the perfection of their appraisal rights within the time periods and in the
manner prescribed in Section 262. Inasmuch as Arizona Instrument has no
obligation to file such a petition, the failure of a shareholder to do so within
the period specified could nullify such shareholder's previous written demand
for appraisal. In any event, at any time within 60 days after the Effective Time
(or at any time thereafter with the written consent of Arizona Instrument), any
shareholder who has demanded appraisal has the right to withdraw the demand and
to accept payment of the Merger Consideration.
Within 120 days after the Effective Time, any shareholder who has complied
with the provisions of Section 262 to that point in time will be entitled to
receive from the Surviving Company, upon written request, a statement setting
forth the aggregate number of shares not voted in favor of the Agreement and
Plan of Merger and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. The Surviving
Company must mail such statement to the shareholder within 10 days of receipt of
such request or within 10 days after expiration of the period for delivery of
demands for appraisals under Section 262, whichever is later.
A shareholder timely filing a petition for appraisal with the Court of
Chancery must deliver a copy to the Surviving Company, which will then be
obligated within 20 days to provide the Delaware Court of Chancery with a duly
verified list containing the names and addresses of all shareholders who have
demanded appraisal of their shares. After notice to such shareholders, the
Delaware Court of Chancery is empowered to conduct a hearing on the petition to
determine which shareholders are entitled to appraisal rights. The Delaware
Court of Chancery may require shareholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to submit their
certificates to the Register in Chancery for notation thereon of the pendency of
the appraisal proceedings, and if any shareholder fails to comply with the
requirement, the Delaware Court of Chancery may dismiss the proceedings as to
that shareholder.
After determining the shareholders entitled to an appraisal, the Delaware
Court of Chancery will appraise the "fair value" of their shares, exclusive of
any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. The costs of the action may be
determined by the Delaware Chancery Court and taxed upon the parties as the
Delaware Chancery Court deems equitable. Upon application of a dissenting
shareholder, the Delaware Chancery Court may also order that all or a portion of
the expenses incurred by any shareholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, be charged pro rata against the value of all of
the shares entitled to appraisal. SHAREHOLDERS CONSIDERING SEEKING APPRAISAL
SHOULD BE AWARE THAT THE FAIR VALUE OF THEIR SHARES AS DETERMINED UNDER SECTION
262 COULD BE MORE THAN, THE SAME AS OR LESS THAN THE MERGER CONSIDERATION THEY
WOULD RECEIVE PURSUANT TO THE AGREEMENT AND PLAN OF MERGER IF THEY DID NOT SEEK
APPRAISAL OF THEIR SHARES. SHAREHOLDERS SHOULD ALSO BE AWARE THAT INVESTMENT
BANKING OPINIONS ARE NOT OPINIONS AS TO FAIR VALUE UNDER SECTION 262.
In determining fair value and, if applicable, a fair rate of interest, the
Delaware Chancery Court is to take into account all relevant factors. In
Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that
could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods that are generally
considered acceptable in the financial community and otherwise admissible in
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court" should be considered, and that "fair price obviously requires
consideration of all relevant factors involving the value of a company." The
Delaware Supreme Court stated that, in making this determination of fair value,
the court must consider market value, asset value, dividends, earnings
prospects, the nature of the enterprise and any other facts that could be
ascertained as of the date of the merger that throw any light on future
prospects of the merged corporation. In Weinberger, the Delaware Supreme Court
stated that "elements of future value, including the nature of the enterprise,
that are known or susceptible of proof as of the date of the merger and not the
product of speculation, may be considered." Section 262 provides that fair value
is to be "exclusive of any element of value arising from the accomplishment or
expectation of the merger."
Any shareholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to vote the shares
subject to such demand for any purpose or be entitled to the payment of
dividends or other distributions on those shares (except dividends or other
distributions payable to holders of record of shares as of a record date prior
to the Effective Time).
Any shareholder may withdraw its demand for appraisal and accept the Merger
Consideration by delivering to the Surviving Company a written withdrawal of
such shareholder's demands for appraisal, except that (1) any such attempt to
withdraw made more than 60 days after the Effective Time will require written
approval of the Surviving Company and (2) no appraisal proceeding in the
Delaware Chancery Court shall be dismissed as to any shareholder without the
approval of the Delaware Chancery Court, and such approval may be conditioned
upon such terms as the Delaware Chancery Court deems just. If the Surviving
Company does not approve a shareholder's request to withdraw a demand for
appraisal when such approval is required, or if the Delaware Chancery Court does
not approve the dismissal of an appraisal proceeding, the shareholder would be
entitled to receive only the appraised value determined in any such appraisal
proceeding, which value could be lower than the value of the Merger
Consideration.
FAILURE TO COMPLY STRICTLY WITH ALL OF THE PROCEDURES SET FORTH IN SECTION
262 OF THE DGCL WILL RESULT IN THE LOSS OF A SHAREHOLDER'S STATUTORY APPRAISAL
RIGHTS. CONSEQUENTLY, ANY SHAREHOLDER WISHING TO EXERCISE APPRAISAL RIGHTS IS
URGED TO CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
MARKET FOR THE COMMON STOCK
Common Stock Market Price Information; Dividend Information
Arizona Instrument's common stock is traded on the NASDAQ SmallCap Market
under the symbol "AZIC." The following table shows, for the quarters indicated,
the per share high and low closing sale prices of the common stock on the NASDAQ
SmallCap Market based on published financial sources. Arizona Instrument has not
paid any dividends on its common stock since its initial public offering in
September, 1983. The information in the table has been adjusted to reflect the
1-for-5 reverse stock split effective February 16, 1999.
High Low
-------- --------
FISCAL YEAR ENDING DECEMBER 31, 1998
First Quarter $ 7 1/32 $ 4 7/32
Second Quarter 8 1/8 5 5/16
Third Quarter 5 25/32 2 13/16
Fourth Quarter 5 2 1/2
FISCAL YEAR ENDING DECEMBER 31, 1999
First Quarter 4 3/8 1 1/2
Second Quarter 2 7/8 1 3/4
Third Quarter 6 1/8 2 5/8
Fourth Quarter 5 27/32 3
FISCAL YEAR ENDING DECEMBER 31, 2000
First Quarter 4 27/32 3
59
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On January 31, 2000, the last full trading day prior to the public
announcement by a third party of an indication of interest in Arizona
Instrument, the high and low sales prices of the common stock on the NASDAQ
SmallCap Market were $3.69 and $3.63, respectively, and the closing sale price
was $3.63. On April 3, 2000, the last full trading day prior to the day on which
the execution of the Agreement and Plan of Merger was publicly announced, the
closing sale price for the common stock on the NASDAQ SmallCap Market was $4.56.
On April 12, 2000, the closing price for the common stock on the NASDAQ SmallCap
Market was $4.75. The market price for common stock is subject to fluctuation
and shareholders are urged to obtain current market quotations.
Common Stock Purchase Information
Except for the following information regarding purchases of common stock,
none of Arizona Instrument, its executive officers or directors, AZI LLC or any
of the Founders have engaged in any transaction with respect to the common stock
within the past two years. The information in the table below has been adjusted
to reflect the 1-for-5 reverse stock split effective February 16, 1999:
Number of Price Average Price for
Name Date Shares Acquired Per Share the Quarter
---- -------- --------------- --------- -----------------
Harold D. Schwartz 07/08/98 200 $ 9.06 $ 4.30
08/10/98 2,000 4.38 4.30
04/13/99 1,400 1.94 2.31
04/14/99 5,000 2.00 2.31
04/15/99 5,000 2.13 2.31
George G. Hays 01/15/99 2,651 3.11 5.88
01/19/00 3,367 2.45 7.84
Linda J. Shepherd 08/01/98 80 4.02 4.30
01/15/99 116 3.11 5.88
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 12, 2000,
except as otherwise indicated, concerning the beneficial ownership of Arizona
Instrument's common stock by (1) each person or group known by Arizona
Instrument to beneficially own more than 5% of the outstanding shares of common
stock; (2) each director of Arizona Instrument; (3) Arizona Instrument's Chief
Executive Officer and the one other executive officer of Arizona Instrument; and
(4) all of Arizona Instrument's directors and executive officers as a group.
Shares of Common Stock Beneficially Owned (1)
Number Percent of
Name and Address (2) of Shares Common Stock
- -------------------- --------- ------------
George G. Hays (3) 66,418 4.6%
S. Thomas Emerson (3) 13,500 1.0%
Harold D. Schwartz (3) 48,370 3.5%
Steven G. Zylstra (3) 7,120 0.5%
Herbert W. Morgan, III (2) 111,439 8.1%
Linda K. Shepherd (3) 4,196 0.3%
All directors and executive
officers as a group (5 persons) (3) 139,604 9.6%
- ----------
* Less than one percent
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(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. In accordance with SEC rules, shares that may be acquired upon
exercise of stock options that are currently exercisable or that become
exercisable within 60 days of the date of the table are deemed beneficially
owned by the optionee. Except as indicated by the footnote, and subject to
community property laws where applicable, the persons or entities named in
the table above have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them.
(2) The address of each of the beneficial owners identified is c/o Arizona
Instrument Corporation, 1912 West 4th Street, Tempe, Arizona 85281, except
the address for Herbert W. Morgan, III is 6037 East Jenan Drive,
Scottsdale, Arizona 85254.
(3) Includes shares issuable upon exercise of options that are currently
exercisable or become exercisable within 60 days of April 12, 2000, as
applicable for each of the following individuals:
Hays 60,000 shares
Emerson 9,500 shares
Schwartz 6,000 shares
Zylstra 7,000 shares
Shepherd 4,000 shares
DIRECTORS AND MANAGEMENT
Set forth below are the name and business address of each director and
executive officer of Arizona Instrument and AZI LLC, the present principal
occupation or employment of each such person, and the name, principal business
and address of the corporation or other organization in which such occupation or
employment of each such person is conducted. Also set forth below are the
material occupations, positions, offices and employment of each such person and
the name, principal business and address of any corporation or other
organization in which any material occupation, position, office or employment of
each such person was held during the last five years. Messrs. Emerson, George G.
Hays, Schwartz and Zylstra are directors of Arizona Instrument. Each person
listed below is a citizen of the United States. None of the people listed below
have been convicted in a criminal proceeding during the past five years,
excluding traffic violations or similar misdemeanors. None of the people listed
below have been a party to any judicial or administrative proceeding during the
past five years, except for matters that were dismissed without sanction or
settlement, that resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibiting, activities subject to, federal
or state securities laws, or a finding of any violation of federal or state
securities.
Arizona Instrument
Name and Business Address Principal Occupations
- ------------------------- ---------------------
S. Thomas Emerson, Ph.D. Director of the Donald H. Jones Center for
1912 West Fourth Street Entrepreneurship of Carnegie Mellon University,
Tempe, Arizona 85281 located at 5000 Forbes Avenue, Pittsburgh,
(602) 470-1414 Pennsylvania 15213. From January 1999 to May
Age: 59 2000, Dr. Emerson served as President and CEO of
Arizona Technology Incubator, located at 1435
North Hayden Road, Scottsdale, Arizona 85257, a
partnership that mentors promising young
technology companies. Dr. Emerson was chairman of
Xantel Corporation, located at 3710 East
University Drive, Phoenix, Arizona 85034, a
private company engaged in computer
communications, from August 1992 to January 1998.
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Name and Business Address Principal Occupations
- ------------------------- ---------------------
George G. Hays Chairman of the Board of Directors, President and
1912 West Fourth Street Chief Executive Officer of Arizona Instrument. Mr.
Tempe, Arizona 85281 Hays joined Arizona Instrument in March 1997, as
(602) 470-1414 Vice President of Finance, Chief Financial Officer
Age: 45 and Vice President of Manufacturing of Arizona
Instrument. In November 1997, Mr. Hays was elected
President and Chief Executive Officer of Arizona
Instrument. In January 1998, Mr. Hays was elected
Chairman of the Board of Directors. Prior to
joining Arizona Instrument, Mr. Hays was President
and founder of Hays Financial Group, Inc., located
at 6227 East Sunnyside Drive, Scottsdale, Arizona
85254, an investment banking firm since 1986. Mr.
Hays is still President of Hays Financial Group,
Inc.
Harold D. Schwartz President of Chez & Schwartz, Incorporated,
1912 West Fourth Street located at 161 East Chicago Avenue, Chicago,
Tempe, Arizona 85281 Illinois 60611, a marketing and sales consulting
(602) 470-1414 firm, since 1973. Mr. Schwartz currently serves on
Age: 74 the Board of Directors of Cobra Electronics
Corporation, a public company.
Steven G. Zylstra President and CEO of Pittsburgh Technology
2000 Technology Drive Council, a technical trade association and
Pittsburg, Pennsylvania 15219 President and CEO of Southwestern Pennsylvania
(412) 687-0200 Industrial Resource Center, an economic
Age: 46 development entity. From 1995 to 2000, Mr. Zylstra
served as Director of Business Development for
Simula Technologies, Inc., initially a division
of, and subsequently a subsidiary of Simula
Government Products, Inc., located at 10016 South
51st Street, Phoenix, Arizona 85044. Simula
specializes in the development and production of
high-tech transportation seating and safety
systems, composite technologies, and ballistic
armor systems.
Linda K. Shepherd Controller, Chief Accounting Officer, and
1912 West Fourth Street Secretary. Ms. Shepherd has been an accountant for
Tempe, Arizona 85281 Arizona Instrument since 1984. In mid 1997, Ms.
(602) 470-1414 Shepherd became the Controller and Chief
Age: 48 Accounting Officer of Arizona Instrument, and in
mid 1998, assumed the position of Corporate
Secretary for Arizona Instrument.
AZI LLC
Mr. George G. Hays is the Manager and a Member, and Mr. Schwartz's
affiliate, Chez & Schwartz, Inc. Profit Sharing Plan dated December 19, 1973, is
a Member, of AZI LLC. All information concerning the current business address,
present principal occupation or employment and five-year employment history for
each of Messrs. Hays and Schwartz is the same as the information set forth
above.
Name and Business Address Principal Occupations
- ------------------------- ---------------------
G. James Hays Member of AZI LLC. Retired private investor for
1912 West Fourth Street the past five years.
Tempe, Arizona 85281
(602) 470-1414
Age: 77
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains or incorporates by reference certain
forward-looking statements and information relating to Arizona Instrument that
are based on the beliefs of management as well as assumptions made by and
information currently available to Arizona Instrument. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance, and underlying assumptions and other statements
that are other than statements of historical facts, including statements
regarding the completion of the proposed Merger. When used in this document, the
words "anticipate," "believe," "estimate," "expect," "plan," "intend,"
"project," "predict," "may," and "should" and similar expressions, are intended
to identify forward-looking statements. Such statements reflect the current view
of Arizona Instrument with respect to future events, including the completion of
the proposed Merger, and are subject to numerous risks, uncertainties and
assumptions. Many factors could cause the actual results, performance or
achievements of Arizona Instrument to be materially different from any future
results, performance or achievements that may be expressed or implied by such
forward-looking statements, including, among others:
* litigation and claims in respect of Arizona Instrument's former
Encompass product line and other product liability matters;
* delays in receiving required regulatory and other approvals;
* any inability of AZI LLC to obtain funding necessary to consummate the
proposed Merger;
* the failure of shareholders to approve the Agreement and Plan of
Merger;
* inability to attract and retain qualified personnel;
* deterioration of general economic or market conditions;
* changes in business strategy;
* lack of availability of financing on acceptable terms to fund future
growth;
* competitive conditions in Arizona Instrument's markets; and
* various other factors, both referenced and not referenced in this
proxy statement.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected, planned or
intended. Arizona Instrument does not intend, or assume any obligation, to
update these forward-looking statements to reflect actual results, changes in
assumptions or changes in the factors affecting such forward-looking statements.
INDEPENDENT AUDITORS
The firm of McGladrey & Pullen, L.L.P. has served as Arizona Instrument's
independent auditors since January, 2000. The financial statements of Arizona
Instrument for each of the years in the two year period ended December 31, 1999,
included in Arizona Instrument's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1999, attached to this proxy statement, have been
audited by McGladrey & Pullen, L.L.P. or its precesessor in interest, Toback
CPAs, P.C., independent auditors, as stated in their reports appearing therein.
It is expected that representatives of McGladrey & Pullen, L.L.P. will be
present at the Special Meeting, both to respond to appropriate questions of
shareholders of Arizona Instrument and to make a statement if they so desire.
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SHAREHOLDER PROPOSALS
If the Merger is consummated, there will be no public shareholders of
Arizona Instrument and no public participation in any future meetings of
shareholders of Arizona Instrument. However, if the Merger is not consummated,
Arizona Instrument's public shareholders will continue to be entitled to attend
and participate in Company shareholders' meetings. Pursuant to Rule 14a-8 under
the Exchange Act promulgated by the SEC, any shareholder of Arizona Instrument
who wishes to present a proposal at the next Annual Meeting of Shareholders of
Arizona Instrument (in the event the Merger is not consummated), and who wishes
to have such proposal included in Arizona Instrument's proxy statement for that
meeting, must have delivered a copy of such proposal to Arizona Instrument at
1912 West 4th Street, Tempe, Arizona 85281, Attention: Corporate Secretary, so
that it was received no later than March 11, 2000. In order for proposals by
shareholders not submitted in accordance with Rule 14a-8 to have been timely
within the meaning of Rule 14a-4(c) under the Exchange Act, such proposal must
have been submitted so that it was received no later than May 25, 2000.
WHERE YOU CAN FIND MORE INFORMATION
The SEC allows Arizona Instrument to "incorporate by reference" information
into this proxy statement, which means that Arizona Instrument can disclose
important information by referring you to another document filed separately with
the SEC. The following documents previously filed by Arizona Instrument with the
SEC are incorporated by reference in this Proxy Statement and are deemed to be a
part hereof:
Arizona Instrument's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1999.
Specifically, the information set forth in the following sections of the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1999, is incorporated by reference in this proxy statement and deemed to be a
part hereof:
Item 1: Description of Business;
Item 5: Market for Common Equity and Related Stockholder Matters;
Item 6: Management's Discussion and Analysis or Plan of Operation;
Item 7: Financial Statements; and
Item 8: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Arizona Instrument's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1999, is attached to this proxy statement. Any statement contained
in a document incorporated by reference herein shall be deemed to be modified or
superseded for all purposes to the extent that a statement contained in this
proxy statement modifies or replaces such statement. The forward looking
statements made in the incorporated documents are not protected by the safe
harbor for forward looking statements.
Arizona Instrument's Quarterly Report on Form 10-QSB for the fiscal quarter
ended March 31, 2000.
Specifically, the information set forth in the following sections of the
Company's Quarterly Report on Form 10-QSB for the fiscal year ended March 31,
2000, is incorporated by reference in this proxy statement and deemed to be a
part hereof:
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Item 1: Financial Statements; and
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Arizona Instrument's Quarterly Report on Form 10-QSB for the fiscal quarter
ended March 31, 2000, is attached to this proxy statement. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for all purposes to the extent that a statement contained
in this proxy statement modifies or replaces such statement. The forward looking
statements made in the incorporated documents are not protected by the safe
harbor for forward looking statements.
Arizona Instrument undertakes to provide by first class mail, without
charge and within one business day of receipt of any written or oral request, to
any person to whom a copy of this proxy statement has been delivered, a copy of
any or all of the documents referred to above that have been incorporated by
reference in this proxy statement, other than exhibits to such documents (unless
such exhibits are specifically incorporated by reference therein). Requests for
such copies should be directed to Corporate Secretary, Arizona Instrument
Corporation, 1912 West 4th Street, Tempe, Arizona 85281; telephone number: (602)
470-1414.
OTHER BUSINESS
The Board of Directors does not know of any other matters to be presented
for action at the Special Meeting other than as set forth in this proxy
statement. If any other business should properly come before the Special
Meeting, the persons named in the enclosed proxy card intend to vote thereon in
accordance with their best judgment on the matter.
AVAILABLE INFORMATION
No person is authorized to give any information or to make any
representations, other than as contained in this proxy statement, in connection
with the Agreement and Plan of Merger or the Merger, and, if given or made, such
information or representations may not be relied upon as having been authorized
by Arizona Instrument or AZI LLC. The delivery of this proxy statement shall
not, under any circumstances, create any implication that there has been no
change in the information set forth herein or in the affairs of Arizona
Instrument since the date hereof.
Because the Merger is a "going private" transaction, AZI LLC, the Founders
and Arizona Instrument have filed with the SEC a Rule 13e-3 Transaction
Statement on Schedule 13E-3 under the Exchange Act with respect to the Merger.
This proxy statement does not contain all of the information set forth in the
Schedule 13E-3 and the exhibits thereto. Copies of the Schedule 13E-3 and the
exhibits thereto are available for inspection and copying at the principal
executive offices of Arizona Instrument during regular business hours by any
interested shareholder of Arizona Instrument, or a representative who has been
so designated in writing, and may be inspected and copied, or obtained by mail,
by written request directed to Corporate Secretary, Arizona Instrument
Corporation, 1912 West 4th Street, Tempe, Arizona 85281, or from the SEC as
described below.
Arizona Instrument is currently subject to the information requirements of
the Exchange Act and in accordance therewith files periodic reports, proxy
statements and other information with the SEC relating to its business,
financial and other matters. Copies of such reports, proxy statements and other
information, as well as the Schedule 13E-3 and the exhibits thereto, may be
copied (at prescribed rates) at the public reference facilities maintained by
the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 and at the following Regional Offices of the SEC: 500 West Madison Street,
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Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center, Suite 1300,
New York, New York 10048. For further information concerning the SEC's public
reference rooms, you may call the SEC at 1-800-SEC-0330. Some of this
information may also be accessed on the World Wide Web through the SEC's
Internet address at "http://www.sec.gov" Arizona Instrument's common stock is
listed on the NASDAQ SmallCap Market (ticker symbol: AZIC), and materials may
also be inspected at its offices, 1735 K Street, N.W., Washington, D.C. 20006.
By Order of the Board of Directors
Linda J. Shepherd
SECRETARY
Phoenix, Arizona
____________, 2000
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ANNEX A
AGREEMENT AND PLAN OF MERGER
by and among
AZI LLC,
an Arizona limited liability company
GEORGE G. HAYS
HAROLD D. SCHWARTZ
and
ARIZONA INSTRUMENT CORP.,
a Delaware corporation.
DATED AS OF MARCH 31, 2000
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1. THE MERGER........................................................ 1
1.1 The Merger............................................................ 1
1.2 Closing............................................................... 1
1.3 Effective Time........................................................ 2
1.4 Effects of the Merger................................................. 2
1.5 Articles of Organization.............................................. 2
1.6 Operating Agreement................................................... 2
1.7 Directors............................................................. 2
1.8 Effect on Capital Stock............................................... 2
1.9 Dissenting Shares..................................................... 3
1.10 Stock Options......................................................... 4
1.11 Stock Purchase Plan................................................... 4
ARTICLE 2. EXCHANGE OF CERTIFICATES.......................................... 4
2.1 Exchange Fund......................................................... 4
2.2 Exchange Procedures................................................... 5
2.3 No Further Ownership Rights In Company Common Stock. ................ 6
2.4 Termination of Exchange Fund; Unclaimed Funds......................... 6
2.5 No Liability.......................................................... 6
2.6 Lost Certificates..................................................... 6
2.7 Withholding Rights.................................................... 6
ARTICLE 3. REPRESENTATIONS AND WARRANTIES.................................... 7
3.1 Representations and Warranties of the Company......................... 7
3.2 Representations and Warranties of Acquirer and the Principals......... 13
ARTICLE 4. COVENANTS RELATING TO CONDUCT OF BUSINESS......................... 16
4.1 Covenants of the Company.............................................. 16
4.2 Covenants of Acquirer and Principals.................................. 18
4.3 Advice of Changes; Government Filings................................. 19
ARTICLE 5. ADDITIONAL AGREEMENTS............................................. 20
5.1 Stockholders Meeting; Preparation of Disclosure Documents............. 20
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5.2 Access to Information; Confidentiality................................ 21
5.3 Approval and Consents; Cooperation.................................... 23
5.4 Financing............................................................. 23
5.5 Acquisition Proposals................................................. 24
5.6 Employee Benefits; Company Plans...................................... 25
5.7 Fees and Expenses..................................................... 26
5.8 Indemnification; Directors' and Officers' Insurance................... 26
5.9 Public Announcements.................................................. 26
5.10 Takeover Statutes..................................................... 26
5.11 Further Assurances.................................................... 27
5.12 Actions by Principals Pending the Closing............................. 27
ARTICLE 6. CONDITIONS PRECEDENT.............................................. 27
6.1 Conditions to Each Party's Obligation to Effect the Merger............ 27
6.2 Conditions to the Obligation of Acquirer to Effect the Merger......... 27
6.3 Conditions to the Obligation of the Company to Effect the Merger...... 28
ARTICLE 7. TERMINATION AND AMENDMENT......................................... 29
7.1 Termination........................................................... 29
7.2 Effect of Termination; Termination Fee and Reimbursement of Expenses.. 31
7.3 Amendment............................................................. 32
7.4 Extension; Waiver..................................................... 32
7.5 Procedure for Termination, Amendment, Extension or Waiver............. 32
ARTICLE 8. GENERAL PROVISIONS................................................ 33
8.1 Non-Survival of Representations, Warranties, Covenants and Agreements. 33
8.2 Notices............................................................... 33
8.3 Interpretation........................................................ 34
8.4 Counterparts.......................................................... 34
8.5 Entire Agreement; No Third Party Beneficiaries........................ 35
8.6 Governing Law......................................................... 35
8.7 Waiver of Jury Trial.................................................. 35
8.8 Severability.......................................................... 35
8.9 Assignment............................................................ 36
8.10 Enforcement........................................................... 36
8.11 Definitions........................................................... 36
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Exhibits
A. Company Stock Ownership and Acquirer Membership Interests of Principals and
G. James Hays
B. Articles of Organization of the Surviving Company
C. Financing Commitments
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GLOSSARY OF DEFINED TERMS
DEFINED LOCATION OF
TERM DEFINITION
- ---- ----------
Acquirer................................................................Preamble
Acquirer Parties....................................................Section 8.11
Acquisition Proposal..............................................Section 5.5(a)
Affiliate...........................................................Section 8.11
Agreement...............................................................Preamble
ALLCA................................................................Section 1.1
Arizona Articles of Merger...........................................Section 1.3
Arizona Corporation Commission.......................................Section 1.3
Business Day........................................................Section 8.11
Closing..............................................................Section 1.2
Closing Date.........................................................Section 1.2
Code.................................................................Section 2.7
Commitments.......................................................Section 3.2(d)
Company.................................................................Preamble
Company Board...........................................................Recitals
Company Common Stock...........................................Section 3.1(b)(i)
Company Disclosure Schedule..........................................Section 3.1
Company Incentive Plans.............................................Section 1.11
Company Stock Options...............................................Section 1.10
Company Stock Purchase Plan.........................................Section 1.11
Confidential Information............................................Section 8.11
Definitive Financing Agreements......................................Section 5.4
Delaware Certificate of Merger.......................................Section 1.3
Delaware Secretary of State..........................................Section 1.3
DGCL.................................................................Section 1.1
Dissenting Shares....................................................Section 1.9
Dissenting Stockholder...............................................Section 1.9
Effective Time.......................................................Section 1.3
Employee Benefit Plan...............................................Section 8.11
Employee Pension Benefit Plan.......................................Section 8.11
Employee Welfare Benefit Plan.......................................Section 8.11
Environmental Laws..................................................Section 8.11
ERISA...............................................................Section 8.11
Exchange Act.................................................Section 3.1(c)(iii)
Exchange Agent.......................................................Section 2.1
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Exchange Fund........................................................Section 2.1
Expenses............................................................Section 8.11
Financing.........................................................Section 3.2(d)
GAAP..............................................................Section 3.1(d)
Governmental Entity..........................................Section 3.1(c)(iii)
Hazardous Materials.................................................Section 8.11
Income Tax..........................................................Section 8.11
Income Tax Return...................................................Section 8.11
Indemnified Parties..................................................Section 5.8
Law.................................................................Section 8.11
Liens........................................................Section 3.1(b)(iii)
Material Adverse Effect.............................................Section 8.11
Merger...............................................................Section 1.1
Merger Consideration..............................................Section 1.8(c)
Nasdaq.......................................................Section 3.1(c)(iii)
Organizational Documents............................................Section 8.11
Other Party.........................................................Section 8.11
Outside Date......................................................Section 7.1(b)
Peacock, Hislop...................................................Section 3.1(j)
Permitted Recipients......................................................5.2(b)
Person..............................................................Section 8.11
Principals..............................................................Preamble
Proxy Statement..............................................Section 3.1(c)(iii)
Reports...........................................................Section 3.1(d)
Representatives.....................................................Section 8.11
Required Company Vote.............................................Section 3.1(g)
Required Regulatory Approvals........................................Section 5.3
Schedule 13E-3...............................................Section 3.1(c)(iii)
SEC..........................................................Section 3.1(c)(iii)
Special Committee.......................................................Recitals
Stockholders Meeting..............................................Section 5.1(a)
Subsidiary......................................................... Section 8.11
Superior Proposal.................................................Section 5.5(c)
Surviving Company....................................................Section 1.1
Termination Fee...................................................Section 7.2(b)
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THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of March 31,
2000, is by and among AZI LLC, an Arizona limited liability company
("ACQUIRER"), George G. Hays and Harold D. Schwartz (the "PRINCIPALS"), and
Arizona Instrument Corp., a Delaware corporation (the "COMPANY").
WITNESSETH:
A. The members of Acquirer and the Board of Directors of the Company have
approved and adopted this Agreement and the transactions contemplated hereby,
including the Merger, subject to the terms and conditions set forth in this
Agreement.
B. The Board of Directors of the Company (the "COMPANY BOARD"), based upon
the recommendation of a special committee of independent directors thereof (the
"SPECIAL COMMITTEE"), has determined that this Agreement and the transactions
contemplated hereby, including the Merger, are advisable and are fair to and in
the best interests of the Company's stockholders.
C. Acquirer, the Principals and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger as set forth in
this Agreement.
Therefore, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and for
other good and valuable consideration, the parties hereto, intending to be
legally bound hereby, agree as follows:
ARTICLE 1.
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the General Corporation Law of the State
of Delaware (the "DGCL") and the Limited Liability Company Act of the State of
Arizona (the "ALLCA"), the Company shall be merged with and into Acquirer (the
"MERGER") at the Effective Time. Upon the Effective Time, the separate corporate
existence of the Company shall cease and Acquirer shall continue as the
Surviving Company (the "SURVIVING COMPANY") in accordance with the ALLCA.
1.2 Closing. Unless this Agreement shall have been terminated pursuant to
Section 7.1, the closing of the Merger (the "CLOSING") will take place no later
than the second Business Day after satisfaction or waiver (as permitted by this
Agreement and applicable law) of the conditions (excluding conditions that, by
their terms, cannot be satisfied until the Closing Date) set forth in Article 6
(the "CLOSING DATE"), unless another time or date is agreed to in writing by the
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parties hereto. The Closing shall be held at the offices of Quarles & Brady LLP,
One East Camelback Road, Suite 400, Phoenix, Arizona 85012, unless another place
is agreed to in writing by the parties hereto.
1.3 Effective Time. Upon the Closing, the parties shall (i) file with the
Secretary of State of the State of Delaware (the "DELAWARE SECRETARY OF STATE")
a certificate of merger or other appropriate documents (in any such case, the
"DELAWARE CERTIFICATE OF MERGER"), executed in accordance with the relevant
provisions of the DGCL, (ii) file with the Corporation Commission of the State
of Arizona (the "ARIZONA CORPORATION COMMISSION") articles of merger or other
appropriate documents (in any such case, the "ARIZONA ARTICLES OF MERGER"),
executed in accordance with the relevant provisions of the ALLCA and (iii) shall
make all other filings, recordings or publications required under the DGCL and
the ALLCA in connection with the Merger. The Merger shall become effective upon
the filing of the Arizona Articles of Merger with the Arizona Corporation
Commission, or at such later time as the parties may agree and specify in the
Arizona Articles of Merger (the date and time the Merger becomes effective being
herein referred to as the "EFFECTIVE TIME").
1.4 Effects of the Merger. At and after the Effective Time, the Merger will
have the effects set forth in the ALLCA and the DGCL. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all the
properties, rights, privileges, powers and franchises of the Company and
Acquirer shall vest in the Surviving Company, and all debts, liabilities and
duties of the Company and Acquirer shall become the debts, liabilities and
duties of the Surviving Company.
1.5 Articles of Organization. The articles of organization of Acquirer in
effect immediately prior to the Effective Time shall be the articles of
organization of the Surviving Company from and after the Effective Time, until
thereafter amended as provided therein or by applicable law.
1.6 Operating Agreement. The operating agreement of Acquirer as in effect
immediately prior to the Effective Time shall be the operating agreement of the
Surviving Company from and after the Effective Time, until thereafter amended as
provided therein or by applicable law.
1.7 Directors. The managers of Acquirer at the Effective Time shall be the
managers of the Surviving Company from and after the Effective Time, until the
earlier of their death, resignation, removal or otherwise ceasing to be a
manager or until their respective successors are duly elected and qualified, as
the case may be.
1.8 Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of the Company, Acquirer or any holder
of any Company Common Stock or Acquirer membership units:
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(a) Acquirer Membership Units. Each outstanding membership unit of
Acquirer immediately prior to the Effective Time shall remain outstanding and
shall not be modified.
(b) Cancellation of Certain Stock. Each share of Company Common Stock
issued and outstanding immediately prior to the Effective Time that is owned by
the Company or any wholly-owned Subsidiary of the Company or by Acquirer
(including shares of Company Common Stock contributed to Acquirer by certain
stockholders of the Company prior to the Effective Time) shall automatically be
canceled and retired and shall cease to exist, and no cash or other
consideration shall be delivered or deliverable in exchange therefor.
(c) Conversion of Company Common Stock. Each share of Company Common
Stock issued and outstanding immediately prior to the Effective Time (other than
shares canceled pursuant to Section 1.8(b) and Dissenting Shares) shall be
converted into and become the right to receive $5.00 in cash, without interest
thereon (the "MERGER CONSIDERATION").
(d) Cancellation and Retirement of Company Common Stock. As of the
Effective Time, all shares of Company Common Stock issued and outstanding
immediately prior to the Effective Time shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each holder
of a certificate representing any such shares of Company Common Stock shall
cease to have any rights with respect thereto, except the right to receive the
Merger Consideration, upon surrender of such certificate(s) in accordance with
Article 2.
1.9 Dissenting Shares.Notwithstanding anything in this Agreement to the
contrary, including, without limitation, Section 1.8, shares of Company Common
Stock issued and outstanding immediately prior to the Effective Time and held by
a holder who has not voted in favor of the Merger or otherwise consented thereto
in writing and who has the right to demand, and properly demands, an appraisal
of such holder's shares in accordance with Section 262 of the DGCL or any
successor provision (such holder being herein referred to as a "DISSENTING
STOCKHOLDER" and such shares being herein referred to as "DISSENTING SHARES"),
shall not be converted into or represent the right to receive the Merger
Consideration, unless such Dissenting Stockholder fails to perfect or otherwise
loses or withdraws any such right to appraisal. With respect to any Dissenting
Shares, a Dissenting Stockholder shall have solely the appraisal rights provided
under Section 262 of the DGCL, provided such Dissenting Stockholder complies
with the provisions thereof. If, after the Effective Time, such Dissenting
Stockholder fails to perfect or otherwise loses or withdraws any such right to
appraisal, each Dissenting Share held by such Dissenting Stockholder shall be
treated as if such share had been converted into, as of the Effective Time, the
right to receive, without any interest thereon, the Merger Consideration. The
Company shall give Acquirer prompt notice of any demand for appraisal of shares
of Company Common Stock received by the Company, and Acquirer shall have the
right to participate in and approve (which approval shall not be unreasonably
withheld or delayed) all negotiations and proceedings with respect to any such
demand. The Company shall not, except with the prior written consent of
Acquirer, make any payment with respect to, or settle or offer to settle, any
such demand.
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1.10 Stock Options. Other than Company Stock Options as to which the holder
thereof has agreed in writing with the Company and Acquirer prior to the
Effective Time to elect different treatment in the Merger than as provided in
this Section 1.10, each outstanding and unexercised option to purchase shares of
Company Common Stock (collectively, the "COMPANY STOCK OPTIONS") issued under
the Company's 1991 Option Plan, as amended through the date hereof, whether
vested or unvested, shall terminate and be canceled. Each employee, officer or
director of Arizona Instrument who holds exercisable Company Stock Options
(including options which, by their terms, become exercisable as a result of the
transactions contemplated hereby) shall be entitled to receive, in consideration
therefor, a cash payment on the Closing Date equal to the product of (i) the
excess, if any, of the Merger Consideration over the per share exercise price of
such Company Stock Option, multiplied by (ii) the aggregate number of shares of
Company Common Stock then subject to such Company Stock Option. Such cash
payment shall be net of any required withholding taxes.
1.11 Stock Purchase Plan. All participants in the Company's Stock
Purchase Plan of 1985, as amended (the "COMPANY STOCK PURCHASE PLAN" and,
together with the Company's 1991 Stock Option Plan, the "COMPANY INCENTIVE
PLANS") shall be permitted to continue to withhold pursuant to their current
instructions to the trustee in accordance with the provisions of such Plan
except that the last business day of the last payroll period before the
Effective Time shall be deemed to be the final date of the deduction period for
the purpose of the Plan. At the Effective Time, the Acquirer shall pay to each
participant the difference between the purchase price as established by the Plan
and $5.00 per share of Company Common Stock and the funds in the withholding
pool shall be returned to the employee.
ARTICLE 2.
EXCHANGE OF CERTIFICATES
2.1 Exchange Fund. As of the Effective Time, Acquirer or the Surviving
Company shall deposit, or shall cause to be deposited, with a bank, trust
company or other exchange agent reasonably satisfactory to the Company appointed
to act as exchange agent (the "EXCHANGE AGENT") for the benefit of the holders
of shares of Company Common Stock, cash in an aggregate amount equal to the
product of (i) the number of shares of Company Common Stock outstanding
immediately prior to the Effective Time (other than shares to be canceled
pursuant to Section 1.8(b) and Dissenting Shares), multiplied by (ii) the Merger
Consideration (the "EXCHANGE FUND"). The Exchange Agent shall invest all cash in
the Exchange Fund as directed by the Surviving Company, provided all such
investments shall be marketable U.S. government securities backed by the full
faith and credit of the U.S. government. Interest and other income with respect
to the Exchange Fund shall accrue for the account of, and shall be promptly paid
to, the Surviving Company.
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(a) Exchange of Certificates. As soon as reasonably practicable after
the Effective Time, each holder of an outstanding certificate or certificates
which prior thereto represented shares of Company Common Stock shall, upon
surrender to the Exchange Agent of such certificate(s) and acceptance thereof by
the Exchange Agent (together with the letter of transmittal described in Section
2.2(b), duly executed, and such other documents as may reasonably be required by
the Exchange Agent), be entitled to receive the amount of the Merger
Consideration into which the number of shares of Company Common Stock previously
represented by such certificate(s) so surrendered shall have been converted
pursuant to this Agreement. After the Effective Time, there shall be no further
transfer on the records of the Company or its transfer agent of certificates
representing shares of Company Common Stock which have been converted pursuant
to this Agreement into the right to receive the Merger Consideration, and if
such certificates are presented for transfer, they shall be canceled against
delivery of the Merger Consideration. If the Merger Consideration is to be
delivered to any person other than the person in whose name the certificate(s)
representing shares of Company Common Stock surrendered for exchange is
registered, it shall be a condition of such exchange that the certificate(s) so
surrendered shall be properly endorsed with the signature guaranteed or
otherwise in proper form for transfer, and that the person requesting such
exchange shall pay to the Exchange Agent any transfer or other taxes required by
reason of the payment of the Merger Consideration to a person other than the
registered holder thereof, or shall establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.2(a), each certificate which,
prior to the Effective Time, represented outstanding shares of Company Common
Stock (other than shares canceled pursuant to Section 1.8(b), and Dissenting
Shares) shall be deemed at any time after the Effective Time to represent only
the right to receive upon such surrender the Merger Consideration in accordance
with Section 1.8. No interest will be paid or will accrue on any cash payable as
Merger Consideration to any holder of shares of Company Common Stock.
(b) Letter of Transmittal. Promptly following the Effective Time (but
no later than five (5) Business Days thereafter), the Exchange Agent shall mail
to each holder of record of a certificate or certificates which immediately
prior to the Effective Time represented outstanding shares of Company Common
Stock, other than shares to be canceled or retired in accordance with Section
1.8(b)) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the certificate(s) shall pass, only upon
delivery thereof to the Exchange Agent and shall be in such form and have such
other provisions as the Surviving Company may reasonably specify) and
instructions for use in effecting the surrender of such certificate(s) in
exchange for the Merger Consideration.
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2.3 No Further Ownership Rights In Company Common Stock. The Merger
Consideration paid upon the surrender for exchange of certificates representing
shares of Company Common Stock in accordance with the terms of Article 1 and
this Article 2 shall be deemed to have been issued and paid in full satisfaction
of all rights pertaining to the shares of Company Common Stock theretofore
represented by such certificates, and no holder of shares of Company Common
Stock shall thereby have any equity interest in the Surviving Company.
2.4 Termination of Exchange Fund; Unclaimed Funds. Any portion of the
Exchange Fund that remains undistributed to or unclaimed by the holders of
certificates representing shares of Company Common Stock for eighteen (18)
months after the Effective Time shall be delivered to the Surviving Company or
otherwise at the direction of the Surviving Company, upon demand, and any
holders of such certificates who have not theretofore complied with this Article
2 shall thereafter look only to the Surviving Company for the Merger
Consideration to which such holders are entitled pursuant to this Agreement
(subject to applicable abandoned property, escheat or other similar laws) and
only as general creditors thereof for payment of their claim for the Merger
Consideration.
2.5 No Liability. None of Acquirer, the Company, the Surviving Company or
the Exchange Agent shall be liable to any person in respect of any cash, shares,
dividends or distribution payable from the Exchange Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or other similar
law. If any certificates representing shares of Company Common Stock shall not
have been surrendered prior to eighteen months after the Effective Time (or
immediately prior to any earlier date on which the Merger Consideration in
respect of such certificate would become the property of or otherwise escheat to
any Governmental Entity), any such cash, shares, dividends or distributions
shall, to the extent permitted by applicable law, become the property of the
Surviving Company, free and clear of all claims or interest of any person
previously entitled thereto.
2.6 Lost Certificates. If any certificate representing shares of Company
Common Stock has been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming such certificate to be lost, stolen or
destroyed and, if required by the Company, the posting by such person of a bond
in such reasonable amount as the Company may direct as indemnity against any
claim that may be made against the Company with respect to such certificate, the
Exchange Agent will deliver in exchange for such lost, stolen or destroyed
certificate the applicable Merger Consideration with respect to the shares of
Company Common Stock formerly represented thereby.
2.7 Withholding Rights. The Surviving Company or the Exchange Agent, as
applicable, shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of shares of Company
Common Stock such amounts as the Surviving Company or the Exchange Agent, as the
case may be, may be required to deduct and withhold with respect to the making
of such payment under the Internal Revenue Code of 1986, as amended (the
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<PAGE>
"CODE"), or any provision of state, local or foreign tax law, including, without
limitation, withholdings required in connection with payments under Section
1.10. To the extent withheld by the Surviving Company or the Exchange Agent,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of shares of Company Common Stock in respect of
which such deduction and withholding was made.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. Except as otherwise set
forth in the Disclosure Schedule delivered by the Company to Acquirer at or
prior to the execution of this Agreement (the "COMPANY DISCLOSURE SCHEDULE"),
the Company represents and warrants to Acquirer as set forth in this Section
3.1:
(a) Organization, Standing and Power. Each of the Company and its
Subsidiaries has been duly organized and is validly existing and in good
standing under the laws of its respective state of incorporation and has the
corporate power and authority to carry on its business as presently being
conducted and to own, operate and lease its properties. Each of the Company and
its Subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, except where the failure to be so qualified or licensed, either
individually or in the aggregate, would not have a Material Adverse Effect on
the Company or would not prevent the consummation of the Merger by the Outside
Date. The copies of the Organizational Documents of each of the Company and its
Subsidiaries which were previously furnished to Acquirer are true, complete and
correct copies of such documents. The Subsidiaries set forth in Section 3.1(a)
of the Company Disclosure Schedule constitute all of the Company's Subsidiaries.
(b) Capital Structure
(i) As of the date of this Agreement, the authorized capital
stock of the Company consists of (A) 10,000,000 shares of Common
Stock, par value $.01 per share, (the "COMPANY COMMON STOCK") of which
1,371,399 shares are outstanding, and no shares are held in the
Company's treasury, and (B) 1,000,000 shares of Preferred Stock, par
value $.01 per share, of which no shares are outstanding.
(ii) All issued and outstanding shares of capital stock of the
Company and its Subsidiaries are duly authorized, validly issued,
fully paid and nonassessable, and no class of capital stock is
entitled to preemptive rights.
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(iii) All of the issued and outstanding shares of capital stock
of each of the Company's Subsidiaries are owned directly or indirectly
by the Company and are owned free and clear of any liens, claims,
encumbrances, restrictions, preemptive rights or any other claims of
any third party ("LIENS"), except for Liens which, individually or in
the aggregate, would not have a Material Adverse Effect on the Company
or would not prevent the consummation of the Merger by the Outside
Date.
(iv) As of the date of this Agreement, (A) no bonds, notes,
debentures or other indebtedness of the Company having the right to
vote on any matters on which stockholders may vote are issued and
outstanding, (B) other than the outstanding Company Stock Options
representing in the aggregate the right to purchase up to 162,152
shares of Company Common Stock, there are no securities, options,
warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which the Company is a party or by which
the Company is bound obligating the Company to issue, deliver or sell
or cause to be issued, delivered or sold, additional shares of capital
stock or other voting securities of the Company or obligating the
Company to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement, arrangement or
undertaking, and (C) there are no outstanding obligations of the
Company to repurchase, redeem or otherwise acquire any shares of
capital stock of the Company.
(c) Authority; No Conflicts
(i) The Company has all requisite corporate power and authority
to enter into this Agreement and, subject to the adoption of this
Agreement by the requisite vote of the holders of Company Common
Stock, to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of the Company, subject in the
case of the consummation of the Merger to the adoption of this
Agreement by the holders of Company Common Stock. This Agreement has
been duly executed and delivered by the Company and constitutes a
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws relating to or affecting
creditors rights generally or by general equity principles (regardless
of whether such enforceability is considered in a proceeding in equity
or at law).
(ii) The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby and compliance
with the provisions hereof will not, (A) violate any provision of the
Organizational Documents of the Company or its Subsidiaries, (B)
subject to obtaining or making the consents, approvals, orders,
authorizations, registrations, declarations and filings referred to in
Section 3.1(c)(iii) below, conflict with or result in any violation of
any statute, law, ordinance, rule or regulation of any state or the
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United States or any political subdivision thereof or therein
applicable to the Company or any judgment, order, decree,
determination or award currently in effect, which, individually or in
the aggregate, would have a Material Adverse Effect on the Company or
would prevent the consummation of the Merger by the Outside Date, or
(C) except as set forth in Section 3.1(c)(ii) of the Company
Disclosure Schedule, violate, conflict with, constitute a breach or
default under or give rise to a right of termination under any
contract, loan or credit agreement, note, mortgage, bond, indenture,
lease, benefit plan or other agreement, obligation, instrument,
permit, concession, franchise or license to which the Company is a
party or by which any of its properties or assets is bound or subject,
which, individually or in the aggregate, would have a Material Adverse
Effect on the Company or would prevent the consummation of the Merger
by the Outside Date.
(iii) No consent, approval, order or authorization of or
registration, declaration or filing with, any supranational, national,
state, municipal or local government, any instrumentality,
subdivision, court, administrative agency or commission or other
authority thereof, or any quasi-governmental authority or any private
body exercising any regulatory, taxing or other governmental authority
(a "GOVERNMENTAL ENTITY"), which has not been received or made, is
required by or with respect to the Company or any Subsidiary in
connection with the execution and delivery of this Agreement by the
Company or the consummation by the Company of the transactions
contemplated hereby, except for (A) the filing with the Securities and
Exchange Commission (the "SEC") of a proxy statement in connection
with the Stockholders Meeting (such proxy statement, including any
preliminary version thereof, in either case, as amended, modified or
supplemented from time to time, the "PROXY STATEMENT"), (B) the filing
with the SEC of a Rule 13e-3 Transaction Statement on Schedule 13E-3
(the "SCHEDULE 13E-3") under the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), (C) state securities or "blue sky" laws,
(D) any other filings or reports required under the Exchange Act or
the rules and regulations promulgated thereunder in connection with
the transactions contemplated by this Agreement, (E) the filing and
recordation of appropriate merger or other documents under the DGCL,
(F) compliance with the rules and regulations of The Nasdaq Stock
Market ("NASDAQ"), (G) antitrust or other competition laws of other
jurisdictions, and (H) such consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of
which to make or obtain could not reasonably be expected to have a
Material Adverse Effect on the Company or to prevent the consummation
of the Merger by the Outside Date.
(d) Reports and Financial Statements. Since January 1, 1999, the
Company has filed all required reports, schedules, forms, statements and other
documents required to be filed by it with the SEC (collectively, the "REPORTS").
None of the Company's Subsidiaries is required to file any form, report or other
document with the SEC. Each of the financial statements and the related
schedules and notes thereto included in the Reports (or incorporated therein by
reference) present fairly, in all material respects, the consolidated financial
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position and consolidated results of operations and cash flows of the Company
and its Subsidiaries as of the respective dates or for the respective periods
set forth therein, all in conformity with generally accepted accounting
principles ("GAAP") (except, in the case of interim unaudited financial
statements, as permitted by Form 10-Q) consistently applied during the periods
involved except as otherwise noted therein, and subject, in the case of interim
unaudited financial statements, to normal and recurring year-end adjustments
that have not been and are not reasonably expected to be material in amount, and
such financial statements complied as to form as of their respective dates in
all material respects with the Securities Act, the Exchange Act and the rules
and regulations promulgated thereunder. Each Report was prepared in accordance
with the requirements of the Securities Act, the Exchange Act and the rules and
regulations promulgated thereunder and did not, on the date of effectiveness in
the case of any registration statement under the Securities Act, on the date of
mailing in the case of any proxy statement under the Exchange Act and on the
date of filing in the case of any other Report (and, if amended or superseded by
a filing prior to the date of this Agreement or of the Closing Date, then on the
date of such filing), contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(e) Disclosure Documents. The Proxy Statement and the Schedule 13E-3
will comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations promulgated thereunder. None of the
information supplied or to be supplied by the Company for inclusion or
incorporation by reference in (i) the Proxy Statement, at the date such Proxy
Statement is first mailed to the Company's stockholders or at the time of the
Stockholders Meeting, or (ii) the Schedule 13E-3, at the time of filing with the
SEC (and at any time such Proxy Statement or Schedule 13E-3 is amended or
supplemented), will contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. Notwithstanding the foregoing provisions of this Section
3.1(e), no representation or warranty is made by the Company with respect to
statements made or incorporated by reference in the Proxy Statement or the
Schedule 13E-3 based on information supplied in writing by Acquirer, the
Principals or any of their representatives specifically for inclusion or
corporation by reference therein.
(f) Absence of Certain Changes of Events. Except as may be disclosed
in the Reports, (i) since December 31, 1999 through the date of this Agreement,
each of the Company and its Subsidiaries has conducted their respective
businesses in the ordinary course consistent with their past practices and have
not incurred any material liability, except in the ordinary course of their
respective businesses consistent with their past practices; and (ii) since
December 31, 1999 through the date of this Agreement, there has not been any
change in the business, financial condition or results of operations of the
Company and its Subsidiaries taken as a whole that has had a Material Adverse
Effect on the Company.
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(g) Vote Required. Assuming the accuracy of the representation set
forth in Section 3.2(i), the affirmative vote of the holders of a majority of
the outstanding shares of Company Common Stock (the "REQUIRED COMPANY VOTE") is
the only vote of the holders of any class or series of the Company's capital
stock necessary to approve this Agreement and the transactions contemplated
hereby.
(h) Brokers or Finders. No agent, broker, investment banker, financial
advisor or other firm or person, the fees of which will be paid by the Company,
is or will be entitled to any broker's, financial advisory or finder's fee or
any other similar commission or fee in connection with any of the transactions
contemplated by this Agreement, based upon arrangements made by or on behalf of
the Company, except the fees payable to Peacock, Hislop, Staley & Given, Inc.
pursuant to the engagement letter dated February 1, 2000 (a copy of which has
been delivered to Acquirer) whose fees and expenses shall remain the sole
responsibility of the Company and the Surviving Company in accordance therewith,
and shall be paid upon consummation of the Merger.
(i) Company Action. As of the date hereof, the Company Board, based
upon the recommendation of the Special Committee, at a meeting thereof duly
called and held has (i) approved the acquisition by Acquirer and the Principals
of shares of Company Common Stock pursuant to the Merger and approved and
adopted and declared advisable this Agreement and the transactions contemplated
hereby, including the Merger, (ii) determined that this Agreement and the
transactions contemplated hereby, including the Merger, are fair to and in the
best interests of the Company's stockholders, and (iii) resolved to declare
advisable and recommend approval of this Agreement and the transactions
contemplated hereby, including the Merger, by the Company's stockholders.
(j) Fairness Opinion. As of the date hereof, the Special Committee has
received the written opinion of Peacock, Hislop, Staley & Given, Inc., financial
advisor to the Special Committee ("PEACOCK, HISLOP"), dated March 28, 2000, to
the effect that, subject to the qualifications and limitations stated therein,
the consideration to be received by the holders of shares of Company Common
Stock (other than Acquirer) in the Merger is fair to such holders from a
financial point of view. The Special Committee has furnished an accurate and
complete copy of such written opinion to Acquirer.
(k) Contracts. All material contracts of the Company are in full force
and effect and enforceable against each party thereto. There does not exist
under any Contract any event of default or event or condition that, after notice
or lapse of time or both, would constitute a violation, breach or event of
default thereunder on the part of the Company or, to the knowledge of the
Company, any other party thereto, except for such events or conditions that,
individually and in the aggregate, (i) have not had or resulted in, and will not
have or result in, a Material Adverse Effect on the Company and (ii) have not
and will not materially impair the ability of the Company to perform its
obligations hereunder.
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(l) Environmental Matters. The Company is in conformance with all
applicable Environmental Laws, and there are no past or present (or, to the
Company's knowledge, future) events, conditions, circumstances, activities,
practices, incidents, actions, omissions or plans (i) which may interfere with
or prevent compliance or continued compliance with Environmental Laws or with
any order issued, entered, promulgated or approved thereunder, or (ii) which may
subject the Company to damages, penalties, injunctive relief, or cleanup costs
under any Environmental Laws or pursuant to any third-party claim, or which
require or are likely to require reporting, cleanup, removal, remedial action,
or other response pursuant to Environmental Laws or a third party claim, in each
case except to the extent that any of the foregoing would not, individually or
in the aggregate, result in a Material Adverse Effect on the Company.
(m) Employee Benefit Plans. Each Employee Benefit Plan is and at all
times has been in material compliance with all applicable Laws (including
ERISA). The Company is not contributing to, and has not contributed to, any
multi-employer plan, as defined in ERISA. Any past Employee Benefit Plan that
has been terminated was done so in full compliance with all applicable Laws, and
there is no basis for further liability or obligation of the Company pursuant to
any and all past Employee Benefit Plans. No Employee Benefit Plan provides or
has any obligation to provide (or contribute to the cost of) post-retirement
welfare benefits with respect to current or former employees of the Company,
including without limitation, post-retirement medical, dental, life insurance,
severance, or any similar benefit, whether provided on an insured or
self-insured basis. The Company has performed all of its material obligations
under all Employee Benefit Plans, and has made appropriate entries in its
financial records and statements for all obligations and liabilities under each
Employee Benefit Plan.
(n) Litigation. There is no pending or, to the Company's knowledge,
threatened litigation, Environmental Claim, arbitration, proceeding,
governmental investigation or inquiry involving the Company which, if adversely
determined, would result in a Material Adverse Effect on the Company. There are
no actions, suits or proceedings pending or, to the knowledge of the Company,
proposed or threatened, by any Person or Governmental Authority which question
the legality, validity, or propriety of the transactions contemplated by this
Agreement.
(o) Tax Matters.
(i) The Company has filed all Income Tax Returns that it was
required to file, and has paid or made provision to pay all Income
Taxes shown thereon as owing, except where the failure to file Income
Tax Returns or to pay Income Taxes would not have a Material Adverse
Effect on the Company.
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(ii) The Company has not waived any statute of limitations in
respect of Income Taxes or agreed to any extension of time with
respect to an Income Tax assessment or deficiency.
(iii) The Company is not a party to any Income Tax allocation or
sharing agreement.
Each of the representations and warranties in this Section 3.1 (other than
those set forth in Sections 3.1(g), (i) and (j)) is qualified by, and the
Company Disclosure Schedule shall be deemed to disclose in qualification
thereof, any facts, circumstances, conditions or events actually known to or by
the Principals or any of the persons set forth in Section 3.1 of the Company
Disclosure Schedule.
3.2 Representations and Warranties of Acquirer and the Principals. Acquirer
and the Principals, jointly and severally, represent and warrant to the Company
as follows:
(a) Organization, Standing and Power. Acquirer has been duly organized
and is validly existing and in good standing under the laws of its jurisdiction
of incorporation and has the power and authority to carry on its business as
presently being conducted and to own, operate and lease its properties. Acquirer
is duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, except where the
failure to be so qualified or licensed, either individually or in the aggregate,
would not have a Material Adverse Effect on Acquirer or would not prevent the
consummation of the Merger by the Outside Date. The copies of the Organizational
Documents of Acquirer which were previously furnished to the Company are true,
complete and correct copies of such documents.
(b) Capital Structure. As of the date hereof, none of the issued and
outstanding membership units of Acquirer are owned by any person other than the
Principals and G. James Hays. As of the date hereof, (A) Acquirer owns no shares
of Company Common Stock, (B) the Principals and G. James Hays own the number of
shares of Company Common Stock set forth opposite their names on Exhibit A, and
(C) the Principals own the number of Acquirer membership units set forth
opposite their names on Exhibit A.
(c) Authority; No Conflicts
(i) Acquirer has all requisite limited liability company power
and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary limited liability company
action on the part of Acquirer. This Agreement has been duly executed
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and delivered by Acquirer and constitutes a valid and binding
agreement of Acquirer, enforceable against it in accordance with its
terms, except as such enforceability may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors rights
generally, or by general equity principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(ii) The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby and compliance
with the provisions hereof will not, (A) violate any provision of the
Organizational Documents of Acquirer, (B) subject to obtaining or
making the consents, approvals, orders, authorizations, registrations,
declarations and filings referred to in Section 3.2(c)(iii) below,
conflict with or result in any violation of or constitute a default
(with or without notice or lapse of time, or both) under any statute,
law, ordinance, rule or regulation of any state or the United States
or any political subdivision thereof or therein or any judgment,
order, decree, determination or award currently in effect, which,
individually or in the aggregate, would have a Material Adverse Effect
on Acquirer or would prevent the consummation of the Merger by the
Outside Date, or (C) violate, conflict with, constitute a breach or
default under or give rise to a right of termination under any
contract, loan or credit agreement, note, mortgage, bond, indenture,
lease (other than required consents of landlords), benefit plan or
other agreement , obligation, instrument, permit, concession,
franchise or license to which Acquirer is a party or by which any of
its properties or assets is bound or subject, which, individually or
in the aggregate, would have a Material Adverse Effect on Acquirer or
would prevent the consummation of the Merger by the Outside Date.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity,
which has not been received or made, is required by or with respect to
Acquirer in connection with the execution and delivery of this
Agreement by Acquirer or the consummation by Acquirer of the
transactions contemplated hereby, except for (A) state securities or
"blue sky" laws, (B) any filings or reports required under the
Exchange Act or the rules and regulations promulgated thereunder in
connection with the transactions contemplated by this Agreement, (C)
the filing and recordation of appropriate merger or other documents
under the ALLCA and DGCL, (D) antitrust or other competition laws of
other jurisdictions and (E) such consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of
which to make or obtain could not reasonably be expected to have a
Material Adverse Effect on Acquirer or to prevent the consummation of
the Merger by the Outside Date.
(d) Financing. Acquirer has cash on hand or has received fully
executed written commitments, copies of which are attached as Exhibit C hereto,
from the persons indicated thereon (collectively, the "COMMITMENTS") to provide,
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in the aggregate, monies sufficient to fund the consummation of the transactions
contemplated by this Agreement, including the Merger and the payments required
under Section 1.10 in respect of Company Stock Options, and satisfy all other
costs and expenses arising in connection therewith (the "FINANCING"). The
Commitments have been accepted by Acquirer and the fees due upon acceptance of
such Commitments have been paid in full. As of the date hereof, the Commitments
have not been amended or modified from those attached as Exhibit C and there is
no breach or default existing, or with notice or the passage of time may exist,
under the Commitments. Acquirer has no reason to believe that any of the matters
set forth in the Company Disclosure Schedule will result in the failure of any
of the conditions precedent to the consummation of the Financing contemplated
hereby stated in each of the Commitments.
(e) Disclosure Documents. None of the information supplied or to be
supplied by Acquirer for inclusion or incorporation by reference in (A) the
Proxy Statement, at the date such Proxy Statement is first mailed to the
Company's stockholders or at the time of the Stockholders Meeting, or (B) the
Schedule 13E-3, at the time of filing with the SEC (and at any time such Proxy
Statement or Schedule 13E-3 is amended or supplemented), will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
(f) No Vote Required. No vote of the members of Acquirer is necessary
to approve this Agreement and the transactions contemplated hereby other than
those obtained by Acquirer as of the date hereof.
(g) Brokers or Finders. No agent, broker, investment banker, financial
advisor or other firm or person is or will be entitled to any broker's,
financial advisory or finder's fee or any other similar commission or fee in
connection with any of the transactions contemplated by this Agreement, based
upon arrangements made by or on behalf of Acquirer.
(h) No Business Activities. Acquirer is not a party to any material
agreement nor has it conducted any activities other than in connection with its
organization, the preparation, negotiation and execution of this Agreement and
the Commitments, the procurement of the Financing and the consummation of the
transactions contemplated hereby. Except for its ownership of the shares of
Company Common Stock set forth in Section 3.2(b), Acquirer does not own,
directly or indirectly, any capital stock or other ownership interest in any
person and Acquirer has no Subsidiaries.
(i) State Takeover Laws.
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(i) The actions of the Company Board set forth in Section
3.1(i)(i) are sufficient to render inapplicable to the Merger the
provisions of Section 203 of the DGCL.
(ii) The actions of the Company Board set forth in Section
3.1(i)(i) are sufficient to render inapplicable to the merger the
provisions of Section 10-2701 of the Arizona Business Corporation Law.
(j) No Conflicting Knowledge. Each of the Principals has reviewed the
representations and warranties of the Company set forth in Section 3.1 hereof
and to his actual knowledge (i) such representations and warranties (to the
extent supplemented or modified by the Company Disclosure Schedule) are true and
correct in all material respects and (ii) such representations and warranties
that are by their terms qualified as to materiality by the term "Material
Adverse Effect" or similar terms are true and correct.
ARTICLE 4.
COVENANTS RELATING TO CONDUCT OF BUSINESS
During the period from the date of this Agreement and continuing until the
Effective Time (except as expressly contemplated or permitted by this Agreement
or to the extent that Acquirer shall otherwise consent in writing, which consent
shall not be unreasonably withheld or delayed):
(a) Ordinary Course. The Company shall operate, and shall cause each
of its Subsidiaries to operate, their respective businesses in the ordinary
course of business in all material respects, in substantially the same manner as
heretofore conducted, and shall use all reasonable efforts to preserve intact
their present lines of business, maintain their rights and preserve their
relationships with customers, suppliers and others having business dealings with
them; provided, however, that no action by the Company or its Subsidiaries with
respect to matters specifically addressed by any other provision of this Section
4.1 shall be deemed a breach of this Section 4.1(a) unless such action would
constitute a breach of one or more of such other provisions.
(b) Dividends; Changes in Capital Stock. The Company shall not, and
shall not permit any of its Subsidiaries to, and shall not propose to, (i)
declare, set aside or pay any dividends on or make any other distributions
(whether cash, stock or property) in respect of any of its capital stock, except
dividends by the Company's Subsidiaries in the ordinary course of business
consistent with past practice, (ii) split, combine or reclassify any of its
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or (iii) repurchase, redeem or otherwise acquire any shares of
its capital stock or any securities convertible into or exercisable for any
shares of its capital stock.
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(c) Issuance of Securities. The Company shall not and shall cause its
Subsidiaries not to issue, sell, grant, pledge or otherwise encumber, or
authorize or propose the issuance, grant, sale or encumbrance of, any shares of
its capital stock of any class, any other voting securities or any securities
convertible into or exercisable for, or any rights, warrants or options to
acquire, any such shares, voting securities or convertible securities, or
accelerate the vesting of, or the lapsing of restrictions with respect to, or
enter into any agreement with respect to any of the foregoing, other than the
issuance of Company Common Stock upon the exercise of Company Stock Options
issued in the ordinary course of business consistent with past practice in
accordance with the terms of the Company Incentive Plans as in effect on the
date of this Agreement.
(d) Organization Documents. Except to the extent required to comply
with their respective obligations hereunder or as required by law, the Company
and its Subsidiaries shall not amend or propose to amend their respective
Organizational Documents.
(e) Extraordinary Transactions. The Company shall not (i) merge,
amalgamate or consolidate with any other person in any transaction or (ii) sell
all or substantially all of its assets.
(f) Indebtedness. The Company shall not, and shall not permit its
Subsidiaries to, (i) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person or issue or sell any debt securities or
warrants or rights to acquire any debt securities of the Company or its
Subsidiaries or guarantee any debt securities of another person other than
indebtedness of the Company or its Subsidiaries to the Company or its
Subsidiaries and other than (A) in the ordinary course of business consistent
with past practice, or (B) capital lease arrangements in the ordinary course of
business; (ii) make any loans, advances or capital contributions to, or
investments in, any other person, other than by the Company or its Subsidiaries
to or in the Company or its Subsidiaries or routine advances to employees; or
(iii) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
in the case of clauses (ii) or (iii) above, loans, advances, capital
contributions, investments, payments, discharges or satisfactions entered into,
incurred or committed to in the ordinary course of business consistent with past
practice.
(g) Employee Salaries and Benefit Plans. Except as set forth in the
Company Disclosure Schedule, the Company shall not, and shall not permit its
Subsidiaries to, (i) increase the compensation payable or to become payable to
any of its executive officers or employees, or (ii) take any action with respect
to the grant of or make any material modification, any deferred compensation,
retirement, severance or termination pay, or stay, bonus or other incentive
arrangement (other than pursuant to employment agreements, the Company Incentive
Plan or other benefit plans and policies in effect on the date of this
Agreement), except, in either such case, any such increases or grants made in
the ordinary course of business consistent with past practice.
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(h) Employment and Other Agreements. Except as set forth in the
Company Disclosure Schedule, the Company shall not enter into or amend any
employment, consulting, severance or similar agreement with any person which
would result in a Material Adverse Effect on the Company.
(i) Other Actions. Except as otherwise permitted by Section 5.5, the
Company shall not, and shall not permit its Subsidiaries to, take any action
that could reasonably be expected to result in any of the conditions to the
Merger set forth in Article 6 not being satisfied.
(j) Accounting Methods; Income Tax Elections. Except as disclosed in
the Reports filed prior to the date of this Agreement and in Section 4.1(j) of
the Company Disclosure Schedule, or as required by a Governmental Entity or a
change in GAAP as concurred in by the Company's independent auditors, the
Company shall not change its methods of accounting in effect at December 31,
1999. The Company shall not, without the prior approval of Acquirer (which
approval shall not be unreasonably withheld or delayed), (i) change its fiscal
year, or (ii) make any material tax election or settle or compromise any
federal, state, local or foreign tax liability, other than in the ordinary
course of business consistent with past practice.
(k) Certain Agreements. The Company shall not, and shall not permit
any of its Subsidiaries to, enter into any agreement or arrangement that limits
or otherwise restricts the Company or any of its Subsidiaries or any of their
respective Affiliates or any successor thereto or that could, after the Closing,
limit or restrict the Surviving Company or any of its Affiliates or any
successor thereto from engaging or competing in any line of business or in any
geographic area, except as set forth in Section 4.1(k) of the Company Disclosure
Schedule.
(l) Capital Expenditures. The Company shall not (i) acquire all or
substantially all of the business or assets of any other person, or (ii) make
any capital expenditures or commitments, except those involving payment of
aggregate consideration not exceeding the amount budgeted by the Company for
such acquisitions and/or capital expenditures for the fiscal year ending
December 31, 2000 (less any such amounts expended through the date hereof) plus
an additional $300,000.
(m) Commitments. The Company shall not commit or agree to take any of
the actions specified in this Section 4.1.
4.2 Covenants of Acquirer and Principals. During the period from the date
of this Agreement and continuing until the Effective Time (except as expressly
contemplated or permitted by this Agreement or to the extent that the Company
otherwise consents in writing, which consent shall not be unreasonably withheld
or delayed):
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(a) Organizational Documents. Except to the extent required to comply
with their respective obligations hereunder or as required by law, Acquirer
shall not amend or propose to amend its Organizational Documents in any way
which would materially delay the timely consummation of the Merger or prevent
the consummation of the Merger by the Outside Date.
(b) Changes in Capital Structure. Acquirer shall not change its
capital structure in a manner which would materially delay the timely
consummation of the Merger or prevent the consummation of the Merger by the
Outside Date.
(c) Other Actions. Neither Acquirer nor the Principals shall take any
action that could reasonably be expected to result in any of the conditions to
the Merger set forth in Article 6 not being satisfied.
4.3 Advice of Changes; Government Filings. Each party hereto shall (a)
confer on a regular and frequent basis with the other party, (b) report (to the
extent permitted by law, regulation and any applicable confidentiality
agreement) to the other on operational matters, and (c) promptly advise the
other orally and in writing of (i) any representation or warranty made by it
contained in this Agreement that is qualified as to materiality becoming untrue
or any such representation or warranty that is not so qualified becoming untrue
in any material respect, (ii) the failure by it (A) to comply with or satisfy in
any respect any covenant, condition or agreement required to be complied with or
satisfied by it under this Agreement that is qualified as to materiality or (B)
to comply with or satisfy in any material respect any covenant, condition or
agreement required to be complied with or satisfied by it under this Agreement
that is not so qualified as to materiality, or (iii) any change, event or
circumstance that has had or could reasonably be expected to have a Material
Adverse Effect on such party or materially adversely affect its ability to
consummate the Merger by the Outside Date; provided, however, that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement. The Company shall file all reports required to be filed by
it with the SEC (and all other Governmental Entities) between the date of this
Agreement and the Effective Time and shall (to the extent permitted by law or
regulation or any applicable confidentiality agreement) deliver to the other
party copies of all such reports promptly after the same are filed. Subject to
applicable laws relating to the exchange of information, each of the Company and
Acquirer shall have the right to review in advance and approve (which approval
shall not be unreasonably withheld or delayed), and to the extent practicable
each will consult with the other with respect to, all the information relating
to the other party, which appears in any filings, announcements or publications
made with, or written materials submitted to, any Governmental Entity in
connection with the transactions contemplated by this Agreement. In exercising
the foregoing right, each of the parties hereto agrees to act reasonably and as
promptly as practicable. Each party agrees that, to the extent practicable, it
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will consult with the other party with respect to the obtaining of all permits,
consents, approvals and authorizations of all third parties and Governmental
Entities necessary or advisable to consummate the transactions contemplated by
this Agreement and each party will keep the other party apprised of the status
of matters relating to completion of the transactions contemplated hereby.
ARTICLE 5.
ADDITIONAL AGREEMENTS
5.1 Stockholders Meeting; Preparation of Disclosure Documents.
(a) Except as otherwise provided in Section 5.5, the Company shall, as
soon as practicable following the date of this Agreement, duly call, give notice
of, convene and hold a meeting of its stockholders (the "STOCKHOLDERS MEETING")
for the purpose of adopting this Agreement and the transactions contemplated
hereby, including the Merger, by obtaining the Required Company Vote. Except as
otherwise provided in Section 5.5, the Company Board, based upon the
recommendation of the Special Committee, shall declare the advisability of, and
recommend to its stockholders the approval and adoption of, this Agreement and
the transactions contemplated hereby, including the Merger, shall include such
recommendation in the Proxy Statement and shall take all lawful action to
solicit such approval and adoption.
(b) As soon as practicable following the date of this Agreement, the
Company and Acquirer shall jointly prepare, and the Company shall file with the
SEC, the Proxy Statement and the Schedule 13E-3. Acquirer will cooperate with
the Company in connection with the preparation and filing with the SEC of the
Proxy Statement and the Schedule 13E-3, including, but not limited to,
furnishing the Company upon request with any and all information regarding
Acquirer, the Principals or their respective Affiliates, the plans of such
persons for the Surviving Company after the Effective Time, information
regarding the Financing and all other matters and information as may be required
to be set forth therein under the Exchange Act or the rules and regulations
promulgated thereunder. The Company shall use reasonable best efforts (i) to
respond to the comments of the SEC concerning the Proxy Statement or the
Schedule 13E-3 as promptly as practicable, and (ii) to cause the final Proxy
Statement to be mailed to the Company's stockholders not later than 10 business
days after clearance from the SEC. The Company shall pay the filing fees for the
Proxy Statement and the Schedule 13E-3. Acquirer shall be given a reasonable
opportunity to review and approve (which approval shall not be unreasonably
withheld or delayed) all filings with the SEC and all mailings to the Company's
stockholders in connection with the Merger prior to the filing or mailing
thereof. The Company and Acquirer each agree to correct any information provided
by such party for use in the Proxy Statement or the Schedule 13E-3 which becomes
false or misleading. The Company shall cause the fairness opinion of Peacock,
Hislop referred to in Section 3.1(j) to be included as an exhibit to the Proxy
Statement and the Schedule 13E-3.
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(c) Each party shall notify the other party promptly of (i) the
receipt of any notices, comments or other communications from the SEC or any
other Governmental Authority, and (ii) any requests by the SEC for amendments or
supplements to the Proxy Statement or the Schedule 13E-3 or for additional
information, and will promptly provide the other party with copies of all
correspondence between such party or its representatives on the one hand and the
SEC or members of its staff on the other hand with respect to the Proxy
Statement or the Schedule 13E-3.
(d) If, at any time prior to the Stockholders Meeting, any event
should occur relating to the Company or its Subsidiaries which should be set
forth in an amendment of, or a supplement to, the Proxy Statement or the
Schedule 13E-3, the Company will promptly inform Acquirer. If, at any time prior
to the Stockholders Meeting, any event should occur relating to Acquirer or
relating to the plans of Acquirer for the Surviving Company after the Effective
Time or the Financing, which should be set forth in an amendment of, or a
supplement to, the Proxy Statement or the Schedule 13E-3, Acquirer will promptly
inform the Company. In any such case, the Company or Acquirer, as the case may
be, with the cooperation of the other party, shall, upon learning of such event,
promptly prepare, file and, if required, mail such amendment or supplement to
the Company's stockholders; provided that, prior to such filing or mailing, the
parties shall approve (which approval, with respect to either party, shall not
be unreasonably withheld or delayed) the form and content of such amendment or
supplement.
5.2 Access to Information; Confidentiality.
(a) From and after the date hereof until the Effective Time, upon
reasonable notice, each of the Company and Acquirer shall (and shall cause their
respective Subsidiaries, if any, to the extent permitted by the Organizational
Documents or other pertinent agreements of such entity, to) afford to the
officers, employees, accountants, counsel, financial advisors and other
representatives of the other party reasonable access during normal business
hours, to all its properties, books, contracts, commitments and records and its
officers, employees, representatives and lenders and, during such period, each
of the Company and Acquirer shall (and shall cause its Subsidiaries, if any, to
the extent permitted by the Organizational Documents or other pertinent
agreements of such entity, to) furnish promptly to the other party (a) a copy of
each report, schedule, registration statement and other document filed,
published, announced or received by it during such period pursuant to the
requirements of Federal or state securities laws, as applicable (other than
reports or documents which such party is not permitted to disclose under
applicable law), and (b) consistent with its legal obligations, all other
information concerning its business, properties and personnel as the other party
may reasonably request; PROVIDED, HOWEVER, each of the Company and Acquirer may
restrict the foregoing access to the extent that (i) a Governmental Entity
requires such party or any of its Subsidiaries to restrict access to any
properties or information reasonably related to any such contract on the basis
of applicable laws and regulations, or (ii) any law, treaty, rule or regulation
of any Governmental Entity applicable to such party or any of its Subsidiaries
requires such party or any of its Subsidiaries to restrict access to any
properties or information.
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(b) Each of the Acquirer and the Principals shall use the Confidential
Information solely for the purpose of evaluating the transactions contemplated
hereby or any modification of such transactions and for no other purpose. Each
of Acquirer, and the Principals, on behalf of themselves and all other Acquirer
Parties, agrees to keep all Confidential Information confidential and shall not,
without the prior written consent of Company, disclose any Confidential
Information to any third party, in whole or in part. Each of Acquirer and the
Principals shall not disclose the Confidential Information to any other Acquirer
Party except those who have an actual need to know the Confidential Information
for the purpose of evaluating the transactions contemplated hereby, who are
informed of the confidential nature of the Confidential Information and who
agree to be bound by this Section 5.2(b) ("PERMITTED RECIPIENTS"). Each of
Acquirer and the Principals shall be responsible for any breach of any provision
of this Section 5.2(b) by its Permitted Recipients. Upon the Company's request,
each Acquirer Party shall: (i) destroy or, at the Company's option, return to
the Company all Confidential Information which is in tangible form, including
any copies thereof, and destroy all Confidential Information provided on
computer disks or tape or in other digital format and all abstracts and
summaries of Confidential Information and references thereto which may have been
prepared by any Acquirer Party; and (b) certify to the Company that all
Confidential Information has been returned or destroyed as requested by the
Company.
In the event that any Acquirer Party becomes legally compelled to disclose
any Confidential Information, Acquirer shall provide the Company with prompt
notice, if lawful, so that the Company may seek a protective order or other
appropriate remedy and/or waive compliance with the provisions of this Section
5.2(b). In the event such protective order or other remedy is not obtained, or
the Company waives compliance with the provisions of this Section 5.2(b),
Acquirer shall furnish or permit to be furnished only that portion of the
Confidential Information which Acquirer is advised by its counsel is legally
required to be furnished, and Acquirer shall use its best efforts to obtain
assurances that such Confidential Information shall be treated confidentially by
the recipient thereof.
Acquirer acknowledges and agrees that any breach or threatened breach of
the terms of this Section 5.2(b) regarding the treatment of Confidential
Information may result in irreparable damage to the Company for which there may
be no adequate remedy at law. Therefore, each of Acquirer and the Principals
agrees that in the event of any breach of this Section 5.2(b) by it or any other
Acquirer Party or by any third party to whom any Acquirer Party makes
Confidential Information available, the Company shall be entitled, in addition
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to any other rights and remedies available to it, to specific enforcement of the
terms of this Section 5.2(b) and/or injunctive relief requiring the immediate
return of all Confidential Information in the possession of any Acquirer Party
or any such third party and enjoining all Acquirer Parties and any parties to
which any Acquirer Party has made Confidential Information available from using
Confidential Information in violation of this Section 5.2(b), in either case
without the necessity of showing or proving that any actual damages have been
sustained. Company shall be entitled to recover from Acquirer and the Principals
the costs of litigation, including reasonable attorneys' fees, incurred by it in
any successful legal or equitable action taken by it to enforce the provisions
of this Section 5.2(b).
5.3 Approval and Consents; Cooperation. Each of the Company and Acquirer
shall cooperate with each other and use (and shall cause their respective
Subsidiaries, if any, to use) their respective reasonable best efforts to take
or cause to be taken all actions, and do or cause to be done all things,
necessary, proper or advisable on their part to consummate and make effective
the Merger and the other transactions contemplated by this Agreement (including
the procurement of the Financing and the satisfaction of the conditions set
forth in Article 6) as soon as practicable, including (i) preparing and filing
as promptly as practicable all documentation to effect all applications,
notices, petitions, filings, tax ruling requests and other documents and to
obtain as promptly as practicable all consents, waivers, licenses, orders,
registrations, approvals, permits, tax rulings and authorizations necessary to
be obtained from any third party and/or any Governmental Entity in order to
consummate the Merger or any of the other transactions contemplated by this
Agreement, other than those as to which the failure to so prepare and file such
documentation would not have a Material Adverse Effect on any of the Company or
Acquirer as the case may be, or would not prevent the consummation of the Merger
by the Outside Date (the "REQUIRED REGULATORY APPROVALS") and (ii) taking all
reasonable steps as may be necessary to obtain all such Required Regulatory
Approvals. The Company and Acquirer each shall, upon request by the other,
furnish the other with all information concerning itself, its Subsidiaries,
directors, officers and stockholders and such other matters as may reasonably be
necessary or advisable in connection with the Proxy Statement, the Schedule
13E-3 or any Required Regulatory Approvals or other statement, filing, tax
ruling request, notice or application made by or on behalf of the Company,
Acquirer or any of their respective Subsidiaries to any third party and/or any
Governmental Entity in connection with the Merger or the other transactions
contemplated by this Agreement.
5.4 Financing. Acquirer and each Principal shall use its or his best
efforts (i) to consummate the Financing on terms consistent with the Commitments
or such other financing or terms as shall be mutually and reasonably
satisfactory to the Company and Acquirer on or before the Closing Date, and (ii)
to execute and deliver definitive agreements with respect to the Financing upon
the terms provided in the Commitments or such other financing or terms as shall
be mutually and reasonably satisfactory to the Company and Acquirer (the
"DEFINITIVE FINANCING AGREEMENTS") on or before the Closing Date; provided that
best efforts of Acquirer and each Principal as used in this Section 5.4 shall in
no event require Acquirer and the Principals to agree to financing terms
materially more adverse to Acquirer than those provided for in the Commitments.
For purposes of this Section 5.4, an increase of 1 1/2 percentage points or more
in the effective interest rates of the Financing compared to the rates in effect
on the date hereof, shall be deemed a material adverse change from the financing
terms provided for in the Commitments. Acquirer and each Principal shall use its
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or his best efforts to keep the Commitments in effect until the earlier of the
Closing Date or the termination of this Agreement (which shall include, but not
be limited to, obtaining any necessary extensions of the Commitments through
such date) and to satisfy on or before the Closing Date all requirements of the
Commitments and the Definitive Financing Agreements which are conditions to
closing the transactions constituting the Financing and to drawing the cash
proceeds thereunder.
5.5 Acquisition Proposals. During the period from the date of this
Agreement and continuing until the Effective Time (except as expressly
contemplated or permitted by this Agreement or to the extent that Acquirer shall
otherwise consent in writing, which consent shall not be unreasonably withheld
or delayed):
(a) The Company agrees that the directors constituting the Special
Committee shall not, and the Company shall use its reasonable best efforts to
cause the Company's other Representatives and the Special Committee's
Representatives not to, directly or indirectly, initiate, or solicit the making,
submission or announcement of any Acquisition Proposal. As used herein, the term
"ACQUISITION PROPOSAL" means and includes any offer, indication of interest or
proposal (other than by Acquirer or any of the Principals or any of them jointly
with any other person) relating to a transaction involving the acquisition of
stock or assets of the Company which would upon the consummation thereof
materially and adversely affect the ability of the parties to consummate the
transactions contemplated hereby, including the Merger.
(b) The Company agrees that the directors constituting the Special
Committee shall not, and the Company shall use its reasonable best efforts to
cause the Company's other Representatives and the Special Committee's
Representatives not to, directly or indirectly, engage in discussions or
negotiations, furnish or provide any non-public information or data or afford
access to the properties, books, records and Representatives of the Company to
any Person with respect to any Acquisition Proposal. Notwithstanding the
foregoing, the Company, the Company Board or the Special Committee may (or may
direct any Representative of the Company or the Special Committee to) (i) engage
in discussions or negotiations regarding an Acquisition Proposal, (ii) furnish
or provide non-public information, or (iii) afford access to the properties,
books, records and Representatives of the Company, with or to any Person that
has made and has pending a written Acquisition Proposal which the Special
Committee has determined in good faith is reasonably likely to lead to a
Superior Proposal; provided that, prior to taking any action described in any of
the foregoing clauses (i), (ii) or (iii), such Person has entered into a
confidentiality agreement for the benefit of the Company on substantially the
same terms as set forth in Section 5.2 hereof or on terms more favorable to the
Company. The Company shall promptly notify Acquirer of the Company's first
receipt of a written Acquisition Proposal and of the material terms and
conditions thereof. Notwithstanding anything to the contrary in this Agreement,
the Company shall not be required to disclose to Acquirer the identity of the
Person making any such Acquisition Proposal and shall have no duty to notify or
update Acquirer on the status of discussions or negotiations (including the
status of such Acquisition Proposal or any amendments or proposed amendments
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thereto) between the Company and such Person. Furthermore, nothing contained in
this Agreement shall prevent or otherwise restrict the Company, the Company
Board or the Special Committee from complying with Rule 14e-2 and Rule 14d-9
promulgated under the Exchange Act with regard to an Acquisition Proposal.
(c) Subject to Section 7.1 hereof, at any time prior to the approval
of this Agreement by the stockholders of the Company, the Company Board or the
Special Committee may (i) withdraw or modify its recommendation of, or refrain
from recommending, the Merger and this Agreement, (ii) approve any Superior
Proposal or declare a Superior Proposal advisable or recommend a Superior
Proposal to the Company's stockholders or (iii) cause the Company to enter into
any definitive acquisition agreement with respect to a Superior Proposal. A
"SUPERIOR PROPOSAL" shall mean an Acquisition Proposal which the Special
Committee determines in good faith, after consultation with and giving due
consideration to the advice of its legal and financial advisors, (x) is at least
as likely as the Merger to be consummated, taking into account all legal,
financial, regulatory, tax and other aspects of such Acquisition Proposal and
the conditions and contingencies thereof, (y) is one as to which there has been
provided evidence of cash on hand or readily available financing under existing
lines of credit or written commitments sufficient to fund the consummation of
such Acquisition Proposal, and (z) would, if consummated, result in a
transaction more favorable to the Company's stockholders from a financial point
of view than the transactions contemplated by this Agreement.
(d) The Company represents and warrants that, as of the date hereof,
it has ceased and has caused to be terminated all existing discussions or
negotiations with any parties conducted heretofore in respect of any Acquisition
Proposal.
5.6 Employee Benefits; Company Plans.
(a) Subject to Sections 5.6(b) and 5.6 (c) below, for a period of at
least one (1) year immediately following the Closing Date, Acquirer shall or
shall cause the Surviving Company to maintain in effect employee benefit plans
and arrangements (not including equity incentive arrangements) which provide
benefits which have a value which is substantially comparable, in the aggregate,
to the benefits provided by the Company as of the date hereof.
(b) Unless otherwise agreed to in writing by the employee party
thereto, Acquirer shall cause the Surviving Company to honor all written
employment, bonus, severance and termination plans and agreements of employees
of the Company and its Subsidiaries in effect on or prior to the date of this
Agreement in accordance with their terms, including, without limitation, the
treatment of the transactions contemplated hereby as a "change of control"
thereunder.
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5.7 Fees and Expenses. All Expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such Expenses, except (a) if the Merger is consummated, the Surviving
Company shall pay, or cause to be paid, any real property transfer tax imposed
on any holder of shares of capital stock of the Company resulting from the
Merger, (b) the Expenses incurred in connection with the printing, filing and
mailing to stockholders of the Proxy Statement and the solicitation of
stockholder approvals shall be paid by the Company, and (c) as provided in
Section 7.2.
5.8 Indemnification; Directors' and Officers' Insurance. The Surviving
Company shall cause to be maintained in effect (a) for a period of six (6) years
after the Effective Time, the provisions regarding indemnification of current or
former officers and directors (the "INDEMNIFIED PARTIES") contained in the
Organizational Documents of the Company or its Subsidiaries and in any
agreements between an Indemnified Party and the Company or its Subsidiaries as
of the date hereof, and (b) for a period of six (6) years, the current policies
of directors' and officers' liability insurance and fiduciary liability
insurance maintained by the Company (provided that the Surviving Company may
substitute therefor policies with an insurer of equal claims paying ratings and
of at least the same coverage and amounts containing terms and conditions which
are, in the aggregate, no less advantageous to the insured) with respect to
claims arising from facts or events that occurred on or before the Effective
Time. This covenant is intended to be for the benefit of, and shall be
enforceable by, each of the Indemnified Parties and their respective heirs and
legal representatives.
5.9 Public Announcements. From and after the date hereof until the
Effective Time, the Company and Acquirer shall use all reasonable best efforts
to develop a joint communications plan and each party shall use all reasonable
best efforts (i) to ensure that all press releases and other public statements
with respect to the transactions contemplated hereby shall be consistent with
such joint communications plan, and (ii) unless otherwise required by applicable
law or by obligations pursuant to any listing agreement with or rules of Nasdaq
or any securities exchange, to consult with each other before issuing any press
release or otherwise making any public statement with respect to this Agreement
or the transactions contemplated hereby.
5.10 Takeover Statutes. The Company and the Company Board or any duly
authorized committee thereof, including the Special Committee, subject to its
fiduciary duties, shall grant such approvals and take such actions as are
necessary to render Section 203 of the DGCL and any other applicable takeover
statute inapplicable to the Merger and the other transactions contemplated
hereby, so that the Merger and the other transactions contemplated hereby may be
consummated as promptly as practicable on the terms contemplated hereby and
thereby and shall otherwise act to eliminate or minimize the effects of any such
takeover statute on the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby.
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5.11 Further Assurances. The proper officers of the Company and Acquirer
shall take any reasonably necessary actions if, at any time after the Effective
Time, any further action is reasonably necessary to carry out the purposes of
this Agreement.
5.12 Actions by Principals Pending the Closing. Each of the Principals
covenants and agrees that, prior to the Effective Time, he will not do or fail
to do or cause any Person to do or fail to do any act that will cause the
Company to breach any of its representations and warranties set forth in Section
3.1 hereof.
ARTICLE 6.
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of the Company and Acquirer to effect the Merger are
subject to the satisfaction or waiver on or prior to the Closing Date of the
following conditions:
(a) Stockholder Approval. The Company shall have obtained all
approvals of holders of shares of capital stock of the Company necessary to
approve this Agreement and all the transactions contemplated hereby, including
the Merger, under the DGCL.
(b) No Injunctions or Restrains, Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by a court or
other Governmental Entity of competent jurisdiction shall be in effect and have
the effect of making the Merger illegal or otherwise prohibiting consummation of
the Merger; provided, however, the party invoking this condition shall use its
reasonable best efforts to have any such order or injunction vacated. The
provisions of this Section 6.1(b) shall not be available to any party whose
failure to fulfill its obligations pursuant to Section 5.3 shall have been the
cause of, or shall have resulted in, such order or injunction.
6.2 Conditions to the Obligation of Acquirer to Effect the Merger. In
addition to the conditions set forth in Section 6.1, the obligations of Acquirer
to effect the Merger are further subject to the satisfaction or waiver by
Acquirer, on or prior to the Closing Date, of the following conditions:
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement shall be true and correct as of the
date of this Agreement and as of the Closing Date as though made on and as of
the Closing Date, except to the extent (i) any inaccuracies in such
representations or warranties, individually or in the aggregate, would not have
a Material Adverse Effect on the Company (provided that, solely for purposes of
this Section 6.2(a), any representation or warranty of the Company that is
qualified by materiality or Material Adverse Effect shall be read as if such
language were not present) or would not prevent the consummation of the Merger
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by the Outside Date, or (ii) such representations and warranties speak as of an
earlier date. Acquirer shall have received an officer's certificate executed on
behalf of the Company to such effect, provided that such a signatory shall not
have any personal liability in connection therewith, and provided, further, that
notwithstanding the foregoing, Acquirer will remain obligated to effect the
Merger despite such breach by the Company to the extent that the circumstances
that resulted in such breach also resulted in a breach by the Principals of
their representations and warranties set forth in Section 3.2(j) hereof, or
their covenants set forth in Section 5.12 hereof.
(b) Performance of Obligations and Covenants. The Company shall have
performed or complied with all of its obligations and covenants required to be
performed by the Company under this Agreement at or prior to the Closing Date,
except where the failure to so perform or comply would not have a Material
Adverse Effect on the Company or would not prevent the consummation of the
Merger by the Outside Date. Acquirer shall have received an officer's
certificate executed on behalf of the Company to such effect, provided that such
a signatory shall not have any personal liability in connection therewith, and
provided, further, that notwithstanding the foregoing, Acquirer will remain
obligated to effect the Merger despite such breach by the Company to the extent
that the circumstances that resulted in such breach also resulted in a breach by
the Principals of their representations and warranties set forth in Section
3.2(j) hereof, or their covenants set forth in Section 5.12 hereof.
(c) Financing. The funding of the financing under the Definitive
Financing Agreements shall have occurred or the proceeds thereof shall be
immediately available.
6.3 Conditions to the Obligation of the Company to Effect the Merger. In
addition to the conditions set forth in Section 6.1, the obligation of the
Company to effect the Merger is further subject to the satisfaction or waiver by
the Company, on or prior to the Closing Date, of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Acquirer and the Principals set forth in this Agreement shall be true and
correct as of the date of this Agreement and as of the Closing Date as though
made on and as of the Closing Date, except to the extent (i) any inaccuracies in
such representations or warranties, individually or in the aggregate, would not
have a Material Adverse Effect on Acquirer (provided that, solely for purposes
of this Section 6.3(a), any representation or warranty of Acquirer or the
Principals that is qualified by materiality or Material Adverse Effect shall be
read as if such language were not present) or would not prevent the consummation
of the Merger by the Outside Date, or (ii) such representations and warranties
speak as of an earlier date. The Company shall have received an officer's
certificate executed on behalf of Acquirer and a certificate executed by the
Principals to such effect.
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(b) Performance of Obligations and Covenants. Acquirer and the
Principals shall have performed or complied with all of their respective
obligations and covenants required to be performed by them under this Agreement
at or prior to the Closing Date, except where the failure to so perform or
comply would not have a Material Adverse Effect on Acquirer or would not prevent
the consummation of the Merger by the Outside Date. The Company shall have
received an officer's certificate executed on behalf of Acquirer and a
certificate executed by the Principals to such effect.
ARTICLE 7.
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after any approval of the matters presented in
connection with the Merger by the stockholders of the Company:
(a) By mutual written consent of the Company and Acquirer;
(b) By either the Company or Acquirer if the Merger shall not have
been consummated by the date which is six months after the date of this
Agreement (the "OUTSIDE DATE"); provided, however, the right to terminate this
Agreement under this Section 7.1(b) shall not be available to any party whose
material breach of any representation, warranty, covenant or agreement under
this Agreement has been the cause of, or resulted in, the failure of the Merger
to occur on or before the Outside Date; provided, further, that if on the
Outside Date any conditions to Closing set forth in Section 6.1(b) have not been
fulfilled, but all other conditions to Closing have been fulfilled or are
capable of being fulfilled by the Outside Date, then the Outside Date shall be
extended to the date which is nine months after the date of this Agreement;
(c) By either the Company or Acquirer if any Governmental Entity shall
have issued any judgment, injunction, order, decree or ruling or taken any other
action permanently restraining, enjoining or prohibiting Acquirer or the Company
from consummating the transactions contemplated by this Agreement, including the
Merger, and such judgment, injunction, order, decree, ruling or other action
shall have become final and nonappealable;
(d) By either the Company or Acquirer if any approval by the
stockholders of the Company required for the consummation of the Merger and the
other transactions contemplated hereby shall not have been obtained at the
Stockholders Meeting or any adjournment thereof by reason of the failure to
obtain the Required Company Vote; provided that, the right to terminate this
Agreement under this Section 7.1(d) shall not be available to Acquirer, if
Acquirer or any of the Principals shall have failed to vote their shares of
Company Common Stock (or otherwise consented in writing with respect thereto) in
favor of the Merger at the Stockholders Meeting;
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(e) By the Company or Acquirer, if, prior to the Effective Time, the
Company Board, based upon the recommendation of the Special Committee, has
resolved to accept a Superior Proposal;
(f) By Acquirer if, prior to the Effective Time, (i) the Company
Board, based upon the recommendation of the Special Committee, shall have
withdrawn or adversely modified its recommendation of this Agreement and the
Merger; (ii) the Company Board, based upon the recommendation of the Special
Committee, shall have recommended to the stockholders of the Company that they
approve an Acquisition Proposal other than the transactions contemplated by this
Agreement, including the Merger; (iii) an Acquisition Proposal made as a tender
offer or exchange offer is commenced and the Company Board, based on the
recommendation of the Special Committee, shall not have recommended rejection of
such tender offer or exchange offer by the date required for such recommendation
under Rule 14e-2 promulgated under the Exchange Act; (iv) the Company, based on
the recommendation of the Special Committee, fails to include in the Proxy
Statement (x) the Company Board's recommendation to the Company's stockholders
to approve and adopt this Agreement and the transactions contemplated hereby,
including the Merger, or (y) the fairness opinion of Peacock, Hislop referred to
in Section 3.1(j) (subject to such modifications thereto as do not adversely
modify the opinion of Peacock, Hislop as to the fairness of the consideration to
be received in the Merger from a financial point of view); (v) the Company,
based upon the recommendation of the Special Committee, has failed to mail the
Proxy Statement in accordance with Section 5.1(b)(ii) or has postponed or,
without having obtained the Required Company Vote, adjourned the Stockholders
Meeting (unless such failure to mail, postponement or adjournment, as the case
may be, was necessitated by applicable law) in each case at a time when an
Acquisition Proposal was publicly pending or was known to the Special Committee;
or (vi) the Company has resolved to take any of the actions specified in clause
(i) or (ii) or (v) above;
(g) By Acquirer if, prior to the Effective Time, there shall be a
breach in any representation, warranty, covenant or agreement on the part of the
Company set forth in this Agreement which would result in a failure of any of
the conditions set forth in Section 6.2, which breach cannot be or shall not
have been cured in all material respects on or before the Outside Date;
(h) By the Company if, prior to the Effective Time, there shall be a
breach in any representation, warranty, covenant or agreement on the part of
Acquirer set forth in this Agreement which would result in a failure of any of
the conditions set forth in Section 6.3, which breach cannot be or shall not
have been cured in all material respects on or before the Outside Date; or
(i) By Acquirer if the condition set forth in Section 6.2(c) shall not
have been satisfied by the Outside Date by reason of the failure of any
condition to closing set forth in the Definitive Financing Agreements or upon
the exercise by any party to the Definitive Financing Agreements (other than
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Acquirer or any of the Principals) of any right to terminate the Definitive
Financing Agreements; provided, however, the right to terminate this Agreement
under this Section 7.1(i) shall not be available if Acquirer or any Principal
shall have breached its or his obligations under Section 5.4.
7.2 Effect of Termination; Termination Fee and Reimbursement of Expenses.
(a) In the event of termination of this Agreement by either the
Company or Acquirer as provided in Section 7.1, this Agreement shall forthwith
become void and have no effect and there shall be no liability or obligation on
the part of the Company, Acquirer, the Principals or their respective
Representatives and Affiliates and all rights and obligations of the parties
hereto shall cease, except (i) with respect to Section 3.1(h) (Brokers and
Finders), Section 3.2(g) (Brokers and Finders), Section 5.2 (Access to
Information; Confidentiality), Section 5.7 (Fees and Expenses), this Section 7.2
(Effect of Termination; Termination Fee and Reimbursement of Expenses) and
Article 8, and (ii) with respect to any liabilities or damages incurred or
suffered by a party as a result of the willful breach by the other party of any
of its covenants or other agreements set forth in this Agreement. No termination
of this Agreement at a time when any amounts are then due Acquirer pursuant to
Section 7.2(b) or Section 7.2(c) shall be effective until such amounts are paid.
(b) If:
(i) (A) this Agreement is terminated by the Company or Acquirer
pursuant to Section 7.1(d), and (B) a public announcement or
public disclosure of any Acquisition Proposal was made prior to
the date of the Stockholders Meeting and was publicly pending on
or within the five (5) Business Days prior to the date of the
Stockholders Meeting; or
(ii) this Agreement is terminated by the Company or Acquirer
pursuant to Section 7.1(e); or
(iii) this Agreement is terminated by Acquirer pursuant to
Section 7.1(f) (except that if this Agreement is terminated
pursuant to clause (iv) thereof no Termination Fee shall be
payable unless an Acquisition Proposal was publicly pending or
was known to the Special Committee at the time the Company
Board's recommendation or the fairness opinion of Peacock,
Hislop, as the case may be, was not included in the Proxy
Statement); or
(iv) the Company willfully and materially breaches the provisions
of Section 5.5;
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then the Company shall pay Acquirer a cash termination payment equal
to the out-of- pocket expenses of Acquirer and the Principals incurred on or
after January 31, 2000 in connection with the transactions contemplated hereby,
but not to exceed $100,000 (the "TERMINATION FEE"), which amount shall be
payable by wire transfer of immediately available funds no later than two (2)
Business Days after such termination. Except as provided in Section 8.10, the
Termination Fee (provided the same shall be promptly paid) shall be the
exclusive remedy of Acquirer as a result of (x) the termination of this
Agreement by the Company or Acquirer pursuant to Section 7.1(d) or Section
7.1(e) or by Acquirer pursuant to Section 7.1(f), or (y) the Company's breach of
the provisions of Section 5.5.
7.3 Amendment. This Agreement may be amended by the parties hereto at any
time before or after any required approval of the matters presented in
connection with the Merger by the stockholders of the Company; provided,
however, after any such approval, no amendment shall be made which by law or in
accordance with the rules of Nasdaq requires further approval by such
stockholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time, the parties
hereto may, to the extent permitted by applicable law, (a) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (b) waive any inaccuracies in the representations and warranties
contained in this Agreement or in any document delivered pursuant hereto, or (c)
subject to Section 7.3, waive compliance with any of the agreements or
conditions contained in this Agreement. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party. No delay or failure on the
part of any party hereto in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any party
hereto of any right, power or privilege hereunder operate as a waiver of any
other right, power or privilege hereunder, nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder. Unless otherwise provided, the rights and remedies herein provided
are cumulative and are not exclusive of any rights or remedies which the parties
hereto may otherwise have at law or in equity.
7.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 7.1, an amendment of this
Agreement pursuant to Section 7.3, an extension or waiver pursuant to Section
7.4 or any other approval or consent required or permitted to be given pursuant
to this Agreement or the exercise of any rights or satisfaction of any
obligations of the parties hereunder shall, in order to be effective and in
addition to the requirements of applicable law, require (a) in the case of the
Company, the action of the Special Committee or (b) in the case of Acquirer, the
action by the managers thereof.
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ARTICLE 8.
GENERAL PROVISIONS
8.1 Non-Survival of Representations, Warranties, Covenants and Agreements.
None of the representations, warranties, covenants and other agreements set
forth in this Agreement or in any instrument delivered pursuant to this
Agreement, including any rights arising out of any breach of such
representations, warranties, covenants and other agreements, shall survive the
Effective Time, except for those covenants and agreements contained herein and
therein which by their terms apply or are to be performed in whole or in part
after the Effective Time and this Article 8. EACH PARTY HERETO AGREES THAT,
EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, NONE
OF THE COMPANY, ACQUIRER OR PRINCIPALS MAKES ANY OTHER REPRESENTATIONS OR
WARRANTIES, AND EACH PARTY HEREBY DISCLAIMS ANY OTHER REPRESENTATIONS AND
WARRANTIES MADE BY ITSELF OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
FINANCIAL AND LEGAL ADVISORS OR OTHER REPRESENTATIVES, WITH RESPECT TO THE
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE DOCUMENTS AND THE INSTRUMENTS
REFERRED TO HEREIN, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY,
NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE OTHER PARTY OR THE OTHER
PARTY'S REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION WITH RESPECT
TO ANY ONE OR MORE OF THE FOREGOING.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed duly given (a) on the date of delivery if delivered
personally, (b) on the first Business Day following the date of dispatch if
delivered by a nationally recognized next-day courier service, (c) on the fifth
Business Day following the date of mailing if delivered by registered or
certified mail, return receipt requested, postage prepaid or (d) if sent by
facsimile transmission, when transmitted and confirmation of such transmission
is received. All notices hereunder shall be delivered as set forth below, or
pursuant to such other instructions as may be designated in writing by the party
to receive such notice:
(a) if to Acquirer, to:
AZI LLC
1912 West Fourth Street
Tempe, Arizona 85281
Attn: George G. Hays
Phone: 602-470-1414
Fax: 602-281-1716
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with a copy to:
Ballard, Spahr, Andrews & Ingersoll
1225 17th Street, Suite 2300
Denver, Colorado 80202
Attn: Roger Davidson
Phone: 303-292-2400
Fax: 303-296-3956
(b) if to the Company, to:
Arizona Instrument Corp.
1912 West Fourth Street
Tempe, Arizona 85281
Attn: Special Committee of the Board of Directors
Phone: 602-470-1414
Fax: 602-281-1716
with a copy to:
Quarles & Brady LLP
One East Camelback, Suite 400
Phoenix, AZ 85012
Attn: Steven P. Emerick
Phone: 602-230-5517
Fax: 602/230-5598
8.3 Interpretation. When a reference is made in this Agreement to a Section
or Exhibit, such reference shall be to a Section of or Exhibit to this Agreement
unless otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation." The parties have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties and no presumption or burden
or proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement. Any reference to any
federal, state, local or foreign statute or law shall be deemed also to refer to
all rules and regulations promulgated thereunder, unless the context requires
otherwise.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that both
parties need not sign the same counterpart.
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<PAGE>
8.5 Entire Agreement; No Third Party Beneficiaries.
(a) This Agreement and the other agreements referred to herein
constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof.
(b) This Agreement is not intended to nor shall anything in this
Agreement confer upon any person, other than the parties hereto, any right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement,
other than Section 5.8.
8.6 Governing Law. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA, WITHOUT REGARD TO THE LAWS
THAT MIGHT BE APPLICABLE UNDER CONFLICTS OF LAWS PRINCIPLES.
8.7 Waiver of Jury Trial. EACH OF THE PARTIES HERETO ACKNOWLEDGES AND
AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO
INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LEGAL ACTION OR PROCEEDING DIRECTLY OR INDIRECTLY
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY AND FOR ANY COUNTERCLAIM THEREIN. EACH PARTY ACKNOWLEDGES THAT (i) NO
REPRESENTATIVE OF SUCH PARTY HAS BEEN AUTHORIZED BY SUCH PARTY TO REPRESENT OR,
TO THE KNOWLEDGE OF SUCH PARTY, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION SEEK TO ENFORCE THE FOREGOING
WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS
WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS
BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE PROVISIONS
OF THIS SECTION 8.7.
8.8 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any law or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible. Any provision of this Agreement held invalid or
35
<PAGE>
unenforceable only in part, degree or in certain jurisdictions will remain in
full force and effect to the extent not held invalid or unenforceable. To the
extent permitted by applicable law, each party waives any provision of law which
renders any provision of this Agreement invalid, illegal or unenforceable in any
respect.
8.9 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto, in whole
or in part (whether by operation of law or otherwise), without the prior written
consent of the other party, and any attempt to make any such assignment without
such consent shall be null and void. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
8.10 Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to specific performance of
the terms and provisions of this Agreement (without requirement to post a bond,
if applicable), this being in addition to any other remedy to which the parties
are entitled at law or in equity.
8.11 Definitions. As used in this Agreement, the following terms shall have
the following definitions:
"AFFILIATE" shall have the meaning ascribed to such terms under Rule 12b-2
of the General Rules and Regulations under the Exchange Act.
"BUSINESS DAY" means any day on which banks are not required or authorized
to close in the City of New York.
"CONFIDENTIAL INFORMATION" means information in whatever form provided by
or on behalf of Company to Acquirer or the Principals or its or their directors,
officers, employees, agents, lenders, investors or advisors ("ACQUIRER PARTIES")
in connection with the evaluation by Acquirer or the Principals of the
transactions contemplated herein, including, without limitation, information
relating to the financial condition of the Company and its business strategies,
pricing, customers, technology, programs, costs, employee compensation,
marketing plans, developmental plans, computer programs, computer systems,
processes, inventions, developments and trade secrets of every kind and nature.
However, Confidential Information does not include any information which (a) was
or becomes generally available to the public other than as a result of an
unauthorized disclosure by a Acquirer Party, (b) was or becomes available to any
Acquirer Party on a nonconfidential basis from a source other than the Company
or its advisors, provided that the disclosure by such source does not violate
any confidentiality obligation or duty of such source to the Company or (c) was
within such Acquirer Party's possession prior to its being furnished by or on
behalf of Company, provided that the disclosure by the original source of such
information did not violate any confidentiality obligation or duty of such
source to the Company.
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"EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or
arrangement which is an Employee Pension Benefit Plan (including any
multiemployer plan), or (d) Employee Welfare Benefit Plan.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA ss.3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA ss.3(1).
"ENVIRONMENTAL LAWS": all Laws relating to the environment or the use,
disposal, existence or release of any Hazardous Materials, including but not
limited to any and all Laws concerning, affecting, controlling, or in any way
relating to, whether in whole or in part, noise levels, ground vibrations, air
pollutants, water pollutants, process waste water, or Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXPENSES" means and includes all out-of-pocket costs and expenses
(including, without limitation, all fees and expenses of counsel, accountants,
banks, investment bankers, experts and consultants to a party hereto and its
Affiliates) incurred by a party or on its behalf, whenever incurred, in
connection with or related to the authorization, preparation, negotiation,
execution and performance of this Agreement and the transactions contemplated
hereby and the Financing.
"HAZARDOUS MATERIALS": any waste, hazardous waste, pollutant, contaminant,
or hazardous or toxic substance as specified, listed, identified, or defined in
(i) the Resource Conservation and Recovery Act, 42 U.S.C.A.ss.6901, et seq., and
the rules, regulations and orders promulgated thereunder; (ii) CERCLA; (iii) the
Clean Water Act, 33 U.S.C. 1251, et seq., and the rules, regulations and orders
promulgated thereunder; (iv) the Clean Air Act, 42 U.S.C. 7401 et seq., and the
rules, regulations and orders promulgated thereunder; (v) the Toxic Substances
Control Act, 15 U.S.C. 2601, et seq., and the rules, regulations and orders
promulgated thereunder; (vi) the Hazardous Materials Transportation Act, 49
U.S.C. 1801, et seq., and the rules, regulations and orders promulgated
thereunder; and (vii) the Occupational Safety and Health Act, 29 U.S.C. 651 et
seq., and the rules, regulations, and orders promulgated thereunder.
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"INCOME TAX" means any federal, state, local, or foreign income tax,
including any interest, penalty, or addition thereto, whether disputed or not.
"INCOME TAX RETURN" means any return, declaration, report, claim for
refund, or information return or statement relating to Income Taxes, including
any schedule or attachment thereto.
"LAW": all provisions of any federal, state, foreign, local or other law,
ordinance, rule, regulation, or governmental requirement or restriction of any
kind, including any rules, regulations, and orders promulgated thereunder, and
any final orders, decrees, consents, or judgments of any regulatory agency or
court.
"MATERIAL ADVERSE EFFECT" means, with respect to any entity, any adverse
change, circumstance or effect that, individually or in the aggregate with all
other adverse changes, circumstances and effects, is or is reasonably likely to
be materially adverse to the business, operations, assets, liabilities,
condition (financial or otherwise) or results of operations of such entity and
its Subsidiaries taken as a whole.
"ORGANIZATIONAL DOCUMENTS" means, with respect to any entity, the
certificate of incorporation, bylaws or other governing documents of such
entity.
"OTHER PARTY" means, with respect to the Company, Acquirer and, with
respect to Acquirer, the Company.
"PERSON" means an individual, corporation, partnership, limited liability
company, joint venture, association, trust, unincorporated organization, "group"
(as defined in the Exchange Act) or other entity.
"PRINCIPALS" means George G. Hays and Harold D. Schwartz.
"REPRESENTATIVES" means, collectively, the directors, officers, employees,
agents and other representatives (including any investment bankers, financial
advisors, attorneys or accountants) of any person.
"SUBSIDIARY" when used with respect to any party means any corporation or
other organization, whether incorporated or unincorporated, (i) of which such
party or any other Subsidiary of such party is a general partner (excluding
partnerships, the general partnership interests of which held by such party or
any Subsidiary of such party do not have a majority of the voting and economic
interests in such partnership), or (ii) at least a majority of the securities or
other interests of which having by their terms ordinary voting power to elect a
majority of the board of directors or others performing similar functions with
respect to such corporation or other organization is directly or indirectly
owned or controlled by such party or by any one or more of its Subsidiaries, or
by such party and one or more of its Subsidiaries.
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<PAGE>
IN WITNESS WHEREOF, Acquirer and the Company have caused this Agreement to
be signed by their respective officers thereunto duly authorized, and the
Principals have executed this Agreement, in each case as of the date first
written above.
AZI LLC, an Arizona limited liability
company
By: /s/ George G. Hays
------------------------------------
Title: Manager
ARIZONA INSTRUMENT CORP., a Delaware
corporation
By: /s/ S. Thomas Emerson
------------------------------------
Title: Chairman, Special Committee
of the Board of Directors
/s/ George G. Hays
----------------------------------------
George G. Hays
/s/ Harold D. Schwartz
----------------------------------------
Harold D. Schwartz
40
<PAGE>
ANNEX B
FAIRNESS OPINION LETTER
OPINION OF PEACOCK, HISLOP, STALEY & GIVEN, INC.
March 28, 2000
Special Committee of the Board of Directors
Board of Directors
Arizona Instrument Corporation
1912 West 4th Street
Tempe, AZ 85281
Gentlemen:
We understand that Arizona Instrument Corporation (the "Company" or "AZIC") and
AZI LLC ("Newco.") formed on March 7, 2000, and owned by George G. Hays, Harold
D. Schwartz and G. James Hays (the "Acquiror") propose to enter into an
Agreement and Plan of Merger (the "Agreement") which provides for the merger
(the "Merger") of the Company with and into Newco. Under the terms set forth in
the Agreement at the effective time of the Merger (the "Effective Time"), each
share of common stock, $0.01 par value, of the Company ("Company Stock") issued
and outstanding immediately prior to the Effective Time, other than any shares
of Company Stock held in the treasury of the Company and shares of Company Stock
owned by the Acquiror, if any, which will be canceled pursuant to the Agreement,
will be converted into the right to receive an amount equal to $5.00 in cash,
without interest (the "Merger Consideration"). The terms and conditions of the
Merger are set out more fully in the Agreement. We note that the Merger has not
yet been consummated and that our opinion is as of the date hereof.
You have requested our opinion as to the fairness of the Merger Consideration
from a financial point of view to the holders of Company Stock other than the
Acquiror, Mr. Hays and their respective affiliates (the "Unaffiliated
Shareholders").
Peacock, Hislop, Staley & Given, Inc. ("Peacock Hislop"), as part of its
investment banking business, is engaged in the evaluation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bidding, secondary distribution of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
In conducting our investigation and analysis and in arriving at our opinion
herein, we have reviewed such information and taken into account such financial
and economic factors as we have deemed relevant under the circumstances. In that
context, we have among other things: (i) reviewed certain internal information,
primarily financial in nature, including projections concerning the business and
operations of the Company furnished to us for purposes of our analysis, as well
as publicly available information, including, but not limited to, the Company's
recent filings with the Securities and Exchange Commission; (ii) reviewed the
draft Agreement in the form presented to the Company's Special Committee of the
Board of Directors; (iii) compared the historical market prices and trading
activity of AZIC Common Stock with those of certain other publicly traded
companies we deemed relevant; (iv) compared the financial position and operating
results of the Company with those of other publicly traded companies we deemed
relevant; (v) compared the proposed financial terms of the Merger with the
financial terms of certain other business combination transactions that we
deemed relevant; and (vi) prepared a discounted cash flow analysis and a
leveraged acquisition analysis of the Company. We have held discussions with
members of the Company's senior management concerning the Company's historical
and current financial condition and operating results, as well as the future
prospects of the Company. We have also considered other information such as
financial studies and market reports, analyses and investigations and financial,
economic and market criteria which we deemed relevant for the preparation of
this opinion.
<PAGE>
Arizona Instrument Corporation
March 28, 2000
Page 2
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of all of the financial and other information that was publicly
available or provided to us by or on behalf of the Company and have not been
engaged to independently verify any such information. We have assumed, with your
consent, (i) that all material assets and liabilities (contingent or otherwise,
known or unknown) of the Company are as set forth in the Company's financial
statements and/or have been disclosed to us, specifically pending litigation and
environmental liabilities, and (ii) that the Merger will be consummated in
accordance with the terms of the Agreement without any amendment thereto or
waiver by the Company of any condition to their respective obligations. We have
also assumed that the financial forecasts examined by us were reasonably
prepared on bases reflecting the best available estimates and good faith
judgements of the Company's senior management as to the future performance of
the Company and that such forecasts will be realized at the times contemplated
therein.
Furthermore, we have not undertaken nor obtained an independent evaluation or
appraisal of any of the assets or liabilities, contingent or otherwise, of the
Company, nor have we made a physical inspection of the properties or facilities
of AZIC. Our opinion necessarily is based upon economic monetary and market
conditions as they exist and can be evaluated on the date hereof, and does not
predict or take into account any changes which may occur, or information, which
may become available, after the date hereof.
Our opinion has been prepared at the request and for the information of the
Special Committee of the Board of Directors of the Company, and shall not be
used for any other purpose or disclosed to any other party without the prior
written consent of Peacock Hislop; provided, however, that this letter may be
reproduced in full in the Proxy Statement- to be provided to the shareholders of
AZIC in connection with the Merger and may be filed with the Securities and
Exchange Commission in connection with the related Transaction Statement on
Schedule 13e-3.
The Company's Special Committee of the Board of Directors conducted a
solicitation process, which we took no part in, to attract the interest of third
parties in acquiring all or any part of AZIC. We have been informed that Mr.
Hays' offer was the only offer received that was deemed to be an acceptable firm
offer by the Special Committee. We have not been asked to, and are not,
rendering an opinion as to the fairness of the solicitation process conducted by
the Special Committee.
This opinion does not address the relative merits of the Merger and any other
potential transactions or business strategies considered by the Company's
Special Committee of the Board of Directors, and does not constitute a
recommendation to any shareholder of the Company as to how any such shareholder
should vote with respect to the Merger. We have not been requested to, and did
not: (i) participate in the structuring or negotiating of the Merger and the
Merger Agreement; or (ii) solicit third party indications of interest in
acquiring all or any part of AZIC. Peacock Hislop will receive a fee for
rendering this opinion. At no time in the past, have we provided investment
banking services to the Company, and we will earn no other fees, contingent or
otherwise, in connection with this Merger. The Company has agreed to indemnify
us for certain liabilities that may arise out of the rendering of this opinion.
In the ordinary course of our business, we may, from time to time, trade the
securities of the Company for our own account or the accounts of our customers
and, accordingly, may at any time hold long or short positions in its
securities.
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Merger Consideration is fair, from a financial point of view,
to the Unaffiliated Shareholders of AZIC.
Very truly yours,
PEACOCK, HISLOP, STALEY & GIVEN, INC.
BF/kb
<PAGE>
ANNEX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
RELATING TO DISSENTERS' RIGHTS
262 APPRAISAL RIGHTS.
(a) Any shareholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d)
of this section with respect to such shares, who continuously holds
such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who
has neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to Section 228 of this title
shall be entitled to an appraisal by the Court of Chancery of the fair
value of the shareholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this
section, the word "shareholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership
interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or
fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to Section 251 (other than a
merger effected pursuant to Section 251(g) of this title), Section
252, Section 254, Section 257, Section 258, Section 263 or Section 264
of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at
the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting of shareholders to
act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or
(ii) held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger
if the merger did not require for its approval the vote of the
shareholders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of
any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of
merger or consolidation pursuant to Sections 251, 252, 254, 257,
258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in
respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository
receipts at the effective date of the merger or
consolidation will be either listed on a national securities
exchange or designated as a national market system security
on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by
more than 2,000 holders;
<PAGE>
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b.
of this paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this
title is not owned by the parent corporation immediately prior to
the merger, appraisal rights shall be available for the shares of
the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares
of any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate
of incorporation contains such a provision, the procedures of this
section, including those set forth in subsections (d) and (e) of this
section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval
at a meeting of shareholders, the corporation, not less than 20
days prior to the meeting, shall notify each of its shareholders
who was such on the record date for such meeting with respect to
shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each
shareholder electing to demand the appraisal of such
shareholder's shares shall deliver to the corporation, before the
taking of the vote on the merger or consolidation, a written
demand for appraisal of such shareholder's shares. Such demand
will be sufficient if it reasonably informs the corporation of
the identity of the shareholder and that the shareholder intends
thereby to demand the appraisal of such shareholder's shares. A
proxy or vote against the merger or consolidation shall not
constitute such a demand. A shareholder electing to take such
action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger
or consolidation, the surviving or resulting corporation shall
notify each shareholder of each constituent corporation who has
complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation,
either before the effective date of the merger or consolidation
or within ten days thereafter, shall notify each of the holders
of any class or series of stock of such constituent corporation
who are entitled to appraisal rights of the approval of the
merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy
of this section; provided that, if the notice is given on or
after the effective date of the merger or consolidation, such
notice shall be given by the surviving or resulting corporation
to all such holders of any class or series of stock of a
constituent corporation that are entitled to appraisal rights.
Such notice may, and, if given on or after the effective date of
the merger or consolidation, shall, also notify such shareholders
of the effective date of the merger or consolidation. Any
shareholder entitled to appraisal rights may, within 20 days
after the date of mailing of such notice, demand in writing from
the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the shareholder and
<PAGE>
that the shareholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify shareholders
of the effective date of the merger or consolidation, either (i)
each such constituent corporation shall send a second notice
before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of
such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice,
such second notice need only be sent to each shareholder who is
entitled to appraisal rights and who has demanded appraisal of
such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the shareholders entitled to receive
either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given
on or after the effective date of the merger or consolidation,
the record date shall be such effective date. If no record date
is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any
shareholder who has complied with subsections (a) and (d) hereof and
who is otherwise entitled to appraisal rights, may file a petition in
the Court of Chancery demanding a determination of the value of the
stock of all such shareholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or
consolidation, any shareholder shall have the right to withdraw such
shareholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any shareholder who has complied
with the requirements of subsections (a) and (d) hereof, upon written
request, shall be entitled to receive from the corporation surviving
the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger
or consolidation and with respect to which demands for appraisal have
been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the shareholder within 10 days
after such shareholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days
after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a shareholder, service of a
copy thereof shall be made upon the surviving or resulting
corporation, which shall within 20 days after such service file in the
office of the Register in Chancery in which the petition was filed a
duly verified list containing the names and addresses of all
shareholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed
by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed
for the hearing of such petition by registered or certified mail to
the surviving or resulting corporation and to the shareholders shown
on the list at the addresses therein stated. Such notice shall also be
given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City
of Wilmington, Delaware or such publication as the Court deems
advisable. The forms of the notices by mail and by publication shall
be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
shareholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the shareholders
who have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to
the Register in Chancery for notation thereon of the pendency of the
<PAGE>
appraisal proceedings; and if any shareholder fails to comply with
such direction, the Court may dismiss the proceedings as to such
shareholder.
(h) After determining the shareholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of
the merger or consolidation, together with a fair rate of interest, if
any, to be paid upon the amount determined to be the fair value. In
determining such fair value, the Court shall take into account all
relevant factors. In determining the fair rate of interest, the Court
may consider all relevant factors, including the rate of interest
which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application
by the surviving or resulting corporation or by any shareholder
entitled to participate in the appraisal proceeding, the Court may, in
its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination
of the shareholder entitled to an appraisal. Any shareholder whose
name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted such shareholder's certificates of stock to the Register in
Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such shareholder is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting
corporation to the shareholders entitled thereto. Interest may be
simple or compound, as the Court may direct. Payment shall be so made
to each such shareholder, in the case of holders of uncertificated
stock forthwith, and the case of holders of shares represented by
certificates upon the surrender to the corporation of the certificates
representing such stock. The Court's decree may be enforced as other
decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or
of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances.
Upon application of a shareholder, the Court may order all or a
portion of the expenses incurred by any shareholder in connection with
the appraisal proceeding, including, without limitation, reasonable
attorney's fees and the fees and expenses of experts, to be charged
pro rata against the value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
shareholder who has demanded appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock
for any purpose or to receive payment of dividends or other
distributions on the stock (except dividends or other distributions
payable to shareholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however,
that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such shareholder
shall deliver to the surviving or resulting corporation a written
withdrawal of such shareholder's demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval
of the corporation, then the right of such shareholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in
the Court of Chancery shall be dismissed as to any shareholder without
the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting shareholders would have been converted had
they assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting
corporation.
<PAGE>
ANNEX D
Form 10-KSB
For the Year Ended December 31, 1999
<PAGE>
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
-----------------------------------------------------------
(Name of small business issuer as specified in its charter)
Delaware 86-0410138
------------------------------ -------------------
(State or other jurisdiction (IRS Employer or
incorporation of organization) Identification No.)
1912 West 4th Street, Tempe, AZ 85281
- ---------------------------------------- ----------
(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).
<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 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.
<PAGE>
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.
2
<PAGE>
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
3
<PAGE>
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.
4
<PAGE>
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.
5
<PAGE>
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.
6
<PAGE>
1999 HIGH LOW
---- ---- ----
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
---- ---- ----
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.
7
<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 1999
and 1998. See ITEM 7 FINANCIAL STATEMENTS.
Percentage of net Sales Percentage change
Year Ended December 31, over prior periods
----------------------- ------------------
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%
----- -----
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%
===== =====
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
8
<PAGE>
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
<PAGE>
ANNEX E
Form 10-QSB
For the Quarter Ended March 31, 2000
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2000 Commission File Number
0-12575
Arizona Instrument Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 86-0410138
------------------------ ----------------
(State of incorporation) (I.R.S. Employer
identification number)
1912 W. 4th Street, Tempe, Arizona 85281-1941
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (602) 470-1414
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months, (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
As of May 10, 2000, 1,371,399 shares of Common Stock ($0.01 par value) were
outstanding.
<PAGE>
ARIZONA INSTRUMENT CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets March 31, 2000 and
December 31, 1999 3
Consolidated Statements of Operations Three months
ended March 31, 2000 and March 31, 1999 4
Consolidated Statements of Cash Flows Three months
ended March 31, 2000 and March 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 9
Item 5 Other Information 9
Item 6 Exhibits and Reports on Form 8-K 9
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,158,101 $ 3,471,429
Receivables, net 1,155,412 1,649,030
Inventories 691,278 688,236
Deferred Income Tax 333,000 358,000
Prepaid expenses and other current assets 63,679 35,827
----------- -----------
Total current assets 6,401,470 6,202,522
PROPERTY, PLANT AND EQUIPMENT, net 730,936 793,971
GOODWILL, net of accumulated amortization 1,260,035 1,306,727
DEFERRED INCOME TAXES 379,500 379,500
OTHER ASSETS 339,063 335,139
----------- -----------
TOTAL ASSETS $ 9,111,004 $ 9,017,859
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 155,261 $ 191,798
Current portion of long-term debt and
capital lease obligations 6,277 10,691
Other accrued expenses 934,748 907,566
----------- -----------
Total current liabilities 1,096,286 1,110,055
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, .01 par value per share:
Authorized, 10,000,000 shares; Issued,
1,391,098 and 1,383,213 shares outstanding
1,371,399 and 1,363,514 shares 13,911 13,832
Preferred stock, $.01 par value per share:
Authorized, 1,000,000 shares
Additional paid-in capital 9,997,371 9,978,131
Accumulated deficit (1,761,782) (1,849,377)
----------- -----------
8,249,500 8,142,586
Less treasury stock, 19,699 shares at cost (234,782) (234,782)
----------- -----------
Total shareholders' equity 8,014,718 7,907,804
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,111,004 $ 9,017,859
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
--------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
NET SALES $ 2,018,123 $ 2,140,665
COST OF GOODS SOLD 696,662 768,524
----------- -----------
Gross margin 1,321,461 1,372,141
----------- -----------
EXPENSES
Marketing 450,954 662,364
General & administrative 441,657 391,535
Research & development 178,671 297,955
Amortization & depreciation 114,952 140,039
----------- -----------
Total Expenses 1,186,234 1,491,893
----------- -----------
OPERATING INCOME (LOSS) 135,227 (119,752)
----------- -----------
OTHER REVENUE (EXPENSE)
Interest income 39,928 --
Interest expense (1,184) (9,833)
Other 1,219 4,264
----------- -----------
Total other (expense) 39,963 (5,569)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
(BENEFIT) FROM OPERATIONS 175,190 (125,321)
INCOME TAXES EXPENSE 87,595 --
----------- -----------
NET INCOME $ 87,595 $ (125,321)
=========== ===========
NET INCOME (LOSS) PER SHARE - BASIC $ 0.06 $ (0.09)
=========== ===========
NET INCOME (LOSS) PER SHARE - DILUTED $ 0.06 $ (0.09)
=========== ===========
BASIC SHARES OUTSTANDING (WEIGHTED AVERAGE) 1,370,273 1,361,300
EQUIVALENT SHARES - STOCK OPTIONS 21,011 --
----------- -----------
DILUTED SHARES OUTSTANDING 1,391,284 1,361,300
=========== ===========
See Notes to Consolidated Financial Statements
4
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 87,595 $ (125,320)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 123,771 149,324
Decrease in receivables 493,618 1,625,276
Increase in inventories (3,042) (201,313)
Increase in prepaid expenses and other current assets (27,852) (5,519)
(Increase) decrease in other assets (3,924) 1,611
Decrease in deferred income tax 25,000 --
Decrease in accounts payable and other accrued expenses (9,355) (399,229)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 685,811 1,044,830
----------- -----------
INVESTING ACTIVITIES:
Purchases of capital equipment (14,044) (41,804)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (14,044) (41,804)
----------- -----------
FINANCING ACTIVITIES:
Net payment under lines of credit -- (150,000)
Issuance of common stock pursuant to stock purchase plan 19,319 31,717
Payments of long-term debt and capital leases (4,414) (2,965)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES 14,905 (121,248)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 686,672 881,778
CASH AND CASH EQUIVALENTS, beginning of period 3,471,429 1,098,846
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 4,158,101 $ 1,980,624
=========== ===========
Supplemental cash flow information:
Interest expense $ 1,184 $ 9,833
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 2000, and the consolidated
statements of operations and cash flows for the three-month periods ended March
31, 2000, and March 31, 1999, have been prepared by the Company without audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position at
March 31, 2000, and the results of operations and cash flows for the three-month
periods ended March 31, 2000, and March 31, 1999, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's 1999 Report on Form 10-KSB, as amended. The results of
operations for the interim periods are not necessarily indicative of the results
to be obtained for the entire year.
Certain reclassifications have been made to the prior period financial
statements to conform to classifications used in the current period. The reclass
relates to discontinued operations in prior periods reclassed to continuing
operations.
2. INVENTORIES
Inventories consist of the following:
March 31, December 31,
2000 1999
---------- ----------
Finished Goods $ 138,230 $ 81,961
Components 553,048 606,275
---------- ----------
$ 691,278 $ 688,236
========== ==========
3. STOCK OPTIONS ISSUED
Pursuant to a 1991 Stock Option Plan, the Company issued 6,000 stock options to
members of the Board of Directors on January 1, 2000, at an exercise price of
$3.88 per share, which approximate fair value at the time of grant.
6
<PAGE>
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere herein. Historical results are not necessarily
indicative of trends in operating results for any future period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The statements contained herein regarding management's anticipation of the
Company's future market position, development of additional products, product
introduction and delivery dates, reliability of products, adequate sources of
supplies, acquisition of related product lines or companies, and positive
responses to new developments, constitute "forward-looking" statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
Management's anticipation is based upon assumption regarding levels of
competition, research and development results, product introduction and delivery
schedules, raw material markets, the markets in which the Company operates, and
stability of the regulatory environment. Any of these assumptions could prove
inaccurate, and therefore there can be no assurance that the forward-looking
information will prove to be accurate.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999.
Net sales for the three months ended March 31, 2000, decreased 6%, or $122,542,
to $2,018,123 from $2,140,665 generated for the first three months of 1999. This
decrease was due primarily to a reduction in Soil Sentry/Encompass sales, and to
a lesser degree from a decrease in international sales.
Cost of goods sold for the three months ended March 31, 2000, was $696,662, a
decrease of 9% from the $768,524 incurred for the first three months of 1999.
The decrease in cost of goods sold was primarily due to improved manufacturing
efficiencies and, to a lesser extent, the costs of goods associated with
decreased sales.
Operating expenses for the first quarter of 2000 were $1,186,234, a decrease of
$305,659 or 20%, as compared to operating expenses of $1,491,893 for the first
quarter of 1999. Marketing expenses for the first quarter of 2000 were $450,954,
a decrease of 32%, or $211,410, over the same period in 1999. Decreased
marketing expenses were due to the sale of the Soil Sentry/Encompass product
lines. General and administrative expenses for the first quarter of 2000 were
$441,657, an increase of 13%, or $50,122, as compared to the first quarter of
1999, due primarily to legal expenses related to the Soil Sentry/Encompass
product lines. Research and development expenses for the first quarter of 2000
were $178,671, a decrease of 40%, or $119,284, compared to the $297,955 of
research and development expenses incurred in the first quarter of 1999. The
decrease in research and development expenses was primarily due to a reduction
in personnel related to the sale of the Soil Sentry/Encompass product lines.
7
<PAGE>
Other expenses for the first quarter of 2000 were $35, a decrease from the
$5,569 in other expenses incurred for the first quarter of 1999. This decrease
was due primarily to a reduction in interest expense that resulted from reduced
levels of borrowing by the Company for the first quarter of 2000, as compared to
the first quarter of 1999. Interest income for the first quarter of 2000 was
$39,928, as compared to no interest income in the first quarter of 1999. This
increase was due to interest income from short-term investments.
As a result of these changes, income before taxes for the first quarter of 2000
was $175,190, as compared to the loss of $125,321 recorded for the first quarter
of 1999. Tax expense for the first quarter of 2000 was $87,595, as compared to
no provision in 1999. The unusual relationship between income tax expense and
pre-tax net income (loss) is due to non-deductible amortization of Goodwill.
The net income for the first quarter 2000 was $87,595, as compared to the net
loss of $125,321 achieved for the first quarter of 1999.
The Company has historically experienced and expects to continue to experience
quarterly fluctuations, potentially in a material amount, in its operating
results. A variety of factors influence the Company's operating results in a
particular period, including economic conditions in the industries served by the
Company, regulatory developments, the timing of significant orders, shipment
delays, specific features requested by the customers, the introduction of new
products by the Company and its competitors, market acceptance of new products
and enhancements of existing products, changes in the cost of materials,
disruptions in the sources of supply, seasonal variations of spending by
customers, the timing of the Company's expenditures in anticipation of future
orders and other factors, many of which are beyond the Company's control.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at March 31, 2000, was $5,305,184, an increase of $212,717, or
4%, from the working capital of $5,092,467 as of December 31, 1999. Working
capital increased due to an increase in cash, as well as due to a reduction of
accrued expenses, which offset a reduction in receivables. As a result, the
Company's current ratio as of March 31, 2000, increased to 5.8 from a current
ratio of 5.6 as of December 31, 1999.
The Company currently has one line of credit available through a bank,
collateralized by accounts receivable, inventory, and property, plant and
equipment, which provides for a maximum commitment of $2,000,000 through June
2000. Advances can be made against the line based on qualified levels of
receivables and inventory. As of March 31, 2000, nothing had been borrowed under
this line of credit.
The Company believes that cash generated from ongoing operations and the
borrowing arrangements described above will satisfy the anticipated cash
requirements of the Company's current operations over the next 12 months, though
there can be no assurance that this will be the case. The Company's ability to
continue funding its planned operations beyond the next 12 months is dependent
upon its ability to generate sufficient cash flow to meet its obligations on a
timely basis, or to obtain additional funds though equity or debt financing, or
from other sources of financing, as may be required.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 2000, the Company received a demand in the amount of $100,000 from
Maxey Energy System for alleged difficulties with Encompass/Soil Sentry software
and hardware. This matter was settled for the amount of $27,000 pursuant to a
Release and Settlement Agreement dated May 5, 2000.
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 5. OTHER INFORMATION
a) On February 1, 2000, the company entered into a letter of intent with George
G. Hays, its President and Chief Executive Office, 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.
b) The employment agreement between George G. Hays and the Company, effective as
of January 1, 1998, was amended by the Board of Directors effective March 18,
1999. Pursuant to the amendment, the term of the employment contract was
extended to March 31, 2001. The contract was further modified by granting 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.
c) The Company currently has a line of credit with Imperial Bank. As of March
31, 1999, the Company was in default under certain financial covenants of its
borrowing agreement with the bank. The bank has granted the Company forbearance
from compliance with these covenants, subject to certain customary conditions,
including one relating to the Company's affirmation of its current compliance
with all of the representations and warranties that it made in the original
borrowing agreement. Currently there is no outstanding balance on this line of
credit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Letter of Intent dated January 1, 2000, between Arizona Instrument
Corporation and George G. Hays, Harold D. Schwartz, and G. James
Hays. Filed herewith.
3.1 Composite Certificate of Incorporation of Registrant as amended
through February 16, 1999. Incorporated by reference from the Form
10-QSB for period ended March 31, 1999, filed on May 17, 1999.
9
<PAGE>
3.2 Bylaws of Registrant. Incorporated by reference from the Form 8-A
filed June 26, 1996.
10.1 Amendment of employment agreement between George G. Hays and
Registrant dated March 18, 1999 (management contract or
compensatory plan). Incorporated by reference from the Form 10-QSB
for the period ended March 31, 1999, filed on May 17, 1999.
27.0 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K.
On February 8, 2000, the Registrant filed a Form 8-K for a change
in accountant from Toback CPAs P.C. to McGladrey & Pullen, LLP, who
acquired the attest assets of Toback CPAs P.C.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARIZONA INSTRUMENT CORPORATION
May 15, 2000 /s/ George G. Hays
- ---------------- ----------------------------------------
Date George G. Hays, President and CEO
(Authorized officer)
May 15, 2000 /s/ Linda J. Shepherd
- ---------------- ----------------------------------------
Date Linda J. Shepherd, Controller
(Principal Accounting officer)
10
<PAGE>
PROXY
ARIZONA INSTRUMENT CORPORATION
4114 EAST WOOD STREET
PHOENIX, ARIZONA 85040
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF ARIZONA INSTRUMENT CORPORATION
The undersigned shareholder of ARIZONA INSTRUMENT CORPORATION, a Delaware
corporation (the "Company"), hereby appoints S. THOMAS EMERSON and STEVEN G.
ZYLSTRA, and each of them, as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent, and to vote as
designated on the reverse side, all the shares of common stock of Arizona
Instrument held of record by the undersigned on May 15, 2000, at the Special
Meeting of Shareholders of Arizona Instrument, to be held at Fiesta Inn, 2100
South Priest Drive, Tempe, Arizona 85282 , on June 26, 2000, at 9:00 a.m.
Mountain Standard Time and at all adjournments or postponements thereof upon the
following matters, as set forth in the Notice of Special Meeting of Shareholders
and Proxy Statement, each dated _______________, 2000, copies of which have been
received by the undersigned, hereby revoking any proxy heretofore given.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE APPROVAL OF THE AGREEMENT AND PLAN OF MERGER AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
(CONTINUED AND TO BE DATED AND SIGNED ON REVERSE SIDE)
PLEASE MARK YOUR VOTES
AS INDICATED IN THIS EXAMPLE: /X/
The Board of Directors of Arizona Instrument recommends a vote FOR the
Agreement and Plan of Merger.
1. Proposal to approve and adopt the Agreement and Plan of Merger, dated as of
March 31, 2000, by and among AZI LLC, George G. Hays, Harold D. Schwartz
and Arizona Instrument, as heretofore and hereafter amended, and the
transactions contemplated thereby:
/ / FOR / / AGAINST / / ABSTAIN
2. The proxies are hereby authorized to vote in their discretion upon all
other business as may properly come before the Special Meeting.
Please sign exactly as your name appears on this proxy. If the shares
represented by this proxy are held by joint tenants, both must sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such. If shareholder is a corporation, please sign in full
corporate name by President or other authorized officer. If shareholder is a
partnership, please sign in partnership name by authorized person.
Signature: Date:
- ---------------------------------------
Signature: Date:
- ---------------------------------------
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED POSTAGE PREPAID ENVELOPE
Arizona
Instrument
VALUATION REPORT
JUNE 30, 1999
OXFORD ADVISORS
Phoenix, Arizona
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Arizona
Instrument
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TABLE OF CONTENTS
Description of the Assignment ............................................. A
Conditions and Assumptions................................................. B
General Valuation Factors Considered....................................... C
Summary of Due Diligence Procedures ....................................... D
Valuation of Arizona Instrument Corporation................................ E
Comparable Public Company Screen........................................... F
Comparable Public Company Analysis......................................... G
Comparable Acquisition Analysis ........................................... H
Discounted Cash Flow and Sensitivity Analysis.............................. I
Valuation Opinion.......................................................... J
Qualifications of Appraiser................................................ K
Contingent and Limiting Conditions ........................................ L
Independence of Appraiser.................................................. M
APPENDICES
Company Prepared Financial Information............................ Appendix A
Comparable Company Information.................................... Appendix B
Control Premium Study ............................................ Appendix C
Bibliography ..................................................... Appendix D
Professional Resume .............................................. Appendix E
AZIC Beta Coefficient Data ....................................... Appendix F
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A. DESCRIPTION OF THE ASSIGNMENT
Oxford Advisors was retained for purposes of determining the fair market value
of Arizona Instrument Corporation ("AZIC" or the "Company") and its Common Stock
as of June 30, 1999 ("Valuation Date"). The fair market value of the Company is
referred to herein as the Enterprise Value. The following schematic places this
value in perspective relative to other levels of corporate and securities
valuation:
LEVELS OF VALUE:
Strategic Acquisition Value
Premium for Strategic Value
Enterprise Value
(100% Ownership Interest)
Premium for Control Minority Interest Discount
Public Stock Market Quotation
(Marketable Minority Interest)
Discount for Lack of Marketability
Nonmarketable Minority Interest Value
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Fair market value is considered to represent the value at which a willing
seller and willing buyer, each having reasonable knowledge and both being
informed of the relevant facts about the business, could reasonably conduct a
transaction, neither party acting under any compulsion to do so. The Enterprise
Value is calculated from the perspective of a hypothetical buyer that maintains
voting control over the business or asset and maintains the ability to determine
strategic and financial direction. Certain calculations within this report have
been rounded in accordance with standard investment banking industry practice.
The impact of this practice within this report does not have a material impact
on our opinion.
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B. CONDITIONS AND ASSUMPTIONS
This report is subject to the following conditions and assumptions:
1. We have relied on information provided by certain third parties, including
unaudited financial information, without independent verification and have
assumed the financial information is presented in compliance with generally
accepted accounting principles ("GAAP") and is accurate and complete in all
material respects.
2. We have relied upon certain information and data supplied by third parties.
We have assumed that this information is reliable and does not contain any
material misstatement or omit any material fact that would render it
misleading.
3. In determining the various levels of value described in the previous
section, we have assumed that AZIC is structured and operated in its
current configuration on a stand-alone basis. We have not considered any
synergy that might be achieved through either merger, alliance or any other
type of arrangement with a strategic partner. We have not solicited any
third party indication of interest to acquire any or all of AZIC's Common
Stock. Consequently, the opinion set forth within this report does not
reflect the potential strategic or synergistic value of the Company. It is
possible that this value may differ from the value underlying our opinion
and is highly dependent on the characteristics of the specific buyer of a
business.
4. We have relied on, and examined, certain public information regarding the
financial performance of comparable companies, comparable acquisitions,
comparable initial public offerings and on certain private information. We
have assumed that such information is accurate in all material aspects.
5. Our report is based on business, economic, market and other conditions as
they existed as of June 30, 1999.
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C. GENERAL VALUATION FACTORS CONSIDERED
Numerous factors need to be considered in determining the Enterprise Value and
Common Stock Values of Arizona Instrument Corporation. For purposes of this
valuation, we considered the following factors:
1. The economic outlook in general and, in particular, the outlook of the
industries in which the Company operates;
2. The history of the business, the background of management, the nature of
the Company's operations, and the factors affecting its business segments;
3. The historical operating results of the Company, and its various business
segments, particularly revenues, earnings and cash flow;
4. The market and competitive positions of the Company;
5. The barriers to entry into the Company's industries;
6. The growth prospects for the Company and the capital resources required to
achieve such growth;
7. Projected financial performance, particularly revenues, earnings and cash
flow as well as the factors which affect these financial indicators;
8. As we deemed appropriate, the present worth of future monetary benefits
based upon appropriate rates of return as indicated by alternative
investment opportunities of comparable magnitude, character, and risk;
9. Certain valuation ratios or multiples based upon "comparable" entities,
assets, and/or transactions;
10. The Company's dividend policy;
11. The viability and costs associated with a public offering or other
potential exit strategy;
12. An appropriate and reasonable holding period for each of the asset
categories;
13. Prior sales/transfers of Common Stock acquired or exchanged and other
factors related to the Company's redemption policy;
14. Our opinion also takes into consideration all elements of appraisal listed
in Internal Revenue Service Ruling 59-60, which provides guidelines for the
valuation of closely-held companies. Revenue Ruling 59-60 states that all
relevant factors should be taken into consideration, including the
following:
* The nature of the business and the history of the enterprise from its
inception.
* The economic outlook in general and the condition and outlook of the
specific industry in particular.
* The book value of the stock and the financial condition of the
business.
* The earning and dividend-paying capacity of the Company.
* Whether or not the enterprise had goodwill or other intangible value.
* Sales of the stock and the size of block to be valued.
* The market price of stocks of corporations engaged in the same or a
similar line of business having their stocks actively traded in a free
and open market, either on an exchange or over-the-counter.
15. Certain other valuation factors that we deemed to be relevant with respect
to this assignment.
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D. SUMMARY OF DUE DILIGENCE PROCEDURES AND INFORMATION SOURCES
During the process of determining the Enterprise and Common Stock Values of the
Company, we performed various procedures designed to obtain information
necessary to develop an informed conclusion. These procedures are summarized as
follows:
1. Conducted several discussions with Company management for purposes of
understanding the following:
* Its overall strategic plan;
* The nature and outlook of its business segments, and the level of
competition affecting these segments;
* The assumptions underlying financial projections prepared in
connection with this assignment; and,
* Other topics related to the determination of the Enterprise Value and
Common Stock Value of the Company.
2. Performed certain analysis of the Company's financial projections for
purposes of determining reasonableness.
3. Reviewed publicly available information related to industry in which the
Company operates.
4. Reviewed the historical stock price and volume information of AZIC.
5. Analyzed empirical information pertaining to acquisition transactions
involving companies in related industries to the Company.
6. Performed other procedures that we deemed to be relevant with respect to
this assignment.
Several sources of information were used to complete this appraisal. The
following summarizes certain sources of information:
* Financial projections prepared by AZIC.
* Historical financial statements and analysis provided by the Company.
* Industry information obtained from third party interviews and data.
* Public company information and data were obtained on-line from the SEC
Edgar Service and NASDAQ.
* Information pertaining to selected comparable sales transactions was
obtained from MergerStat, PratStat's, and from certain industry
telephone interviews.
* Discussions with Company management pertaining to the estimated level
of comparability of certain companies in the Measurement and Control
Instrument Industry.
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E. VALUATION OF ARIZONA INSTRUMENT CORPORATION
THE COMPANY
Arizona Instrument Corporation designs and manufactures precision
instruments used in quality control, industrial control and environmental
monitoring applications. AZIC's initial product was the Computrac moisture
analyzer for In-Process applications, but the Company has expanded into other
product areas. AZIC completed its initial public stock offering on September 22,
1983 as Computrac Instruments, Inc. and changed its name to Quintel Corporation
later that year. In March 1987, to reflect new product offerings, the Company
was renamed Arizona Instrument Corporation. The following chart reflects the
Company's stock price and volume performance for the twenty-four (24) months
ending July 7, 1999.
24 Month Price end Volume as of 7/7/99
[GRAPH]
[ ]Close [ ]Share Volume Click on the chart to view the underlying data.
In December 1986, the Company acquired Jerome Instrument Corporation
("Jerome"), a manufacturer of mercury and hydrogen sulfide gas analyzers. In
January 1988, AZIC 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 product, its next generation
of fuel management and leak detection compliance systems. In September 1992, the
Company acquired Horizon Engineering Systems (`Horizon"), a company that
specialized in testing and engineering services for USTs; however, the Company
discontinued Horizon's operations during 1997. On April 30, 1999, the Company
completed the sale of the assets of AZIC's Encompass and Soil Sentry product
lines to National Environmental Service Company. This transaction allows AZIC to
focus on its historic core businesses of toxic gas analysis ("Jerome Product
Line") and moisture analysis ("Computrac Product Line").
On March 9, 1999, BP Oil Company ("BP Oil") filed suit in United States
District Court in the Northeast District of Ohio, alleging breach of contract
and breach of warranty by AZIC in the sale of Encompass systems. BP Oil was
seeking approximately $2.0 million in actual damages plus an additional several
million dollars in incidental and consequential damages. On June 28, 1999, the
Company reached a settlement agreentent with BP Oil whereby the Company pays
$35,000 in cash damages and will accept the return of the Encompass systems that
were delivered to BP Oil.
The following is a summary of selected financial information for the
Company, adjusted for certain discontinued operations:
1995 1996 1997 1998
---- ---- ---- ----
Sales $10,593,000 $10,663,000 $15,232,000 $13,737,000
Operating Income 1,240,100 492,000 (843,000) 502,000
Depreciation 780,000 804,000 1,168,000 668,000
EBITDA $2,020,000 $1,296,000 $325,000 $1,170,000
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PHOTO
JEROME PRODUCT LINE
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 nominal quantities. The Jerome
431-X mercury vapor analyzer detects 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 detects and measures low levels
of ambient hydrogen sulfide ("H2S"). Using the Company's gold-film sensing
technology, the hand-held instrument 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.
The market for Jerome Mercury Analyzer comprises customers in three major
groups: (i) Industrial Hygiene 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; (ii)
Industrial Process Quality Control 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; and (iii) Mercury Dental Amalgam Screening applications where 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.
The Jerome H2S Analyzer allows industries to monitor H2S in low parts per
billion levels for odor and corrosion 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. 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
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 eliminate moisture. The sample is weighed again
and the initial moisture content of the sample is computed based on the loss of
water weight. Computrac instruments house a heating chamber to dry the sample, a
precision balance to measure sample weight change and a microprocessor that uses
an algorithm to quickly extrapolate moisture content based on the rate of weight
loss. This technology is named the "loss on drying" or LOD technique. Computrac
instruments are rugged enough to be used on the factory floor for quick batch
analysis and accurate enough for precise laboratory testing. They do not require
a trained technician for operation.
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PHOTO
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 additional
product enhancements are under development. The MAX-500 was released in 1996 and
is designed for price-sensitive customers who do not need all the features or
the resolution of the other Computrac moisture analyzers.
The markets for Computrac instruments tend to be niche applications in
various industries. Three primary industries have yielded the Company's
historical sales: (i) Foods - measuring the moisture content of cookie dough,
cigarette tobacco, pasta and numerous other raw and finished food products; (ii)
Chemicals - measuring moisture and total solids content of such chemical
products as adhesives, coatings, and paints; and, (iii) Plastics - measuring the
water content of resins used in molding or extrusion. Other applications include
pharmaceutical production and forestry management.
TECHNOLOGY DEVELOPMENT
The Company's research and development ("R&D) 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 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. For purposes of the this assignment, we performed an
analysis of companies with operations similar to AZIC ("Comparable Companies").
In connection with this analysis, we evaluated the level of the Company's R&D
expenses with these companies as set forth below. It appears that the Company's
R&D expenses are in-line with its closest comparable (CEM Corp.) and above the
composite average.
R&d as a R&d as a
Company Name % of Sales Company Name % of Sales
- ------------ ---------- ------------ ----------
Badger Meter Co. 4.3% Moore Products 7.0%
CEM Corp. 9.1% OI Corp. 6.1%
Invivo Corp. 6.0% TSI Inc. 13.1%
Modern Controls 7.0% Average (1) 7.5%
AZIC 9.6%
- ----------
(1) Calculation of average excludes Arizona Instrument Corp.
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The Company owns two patents directed to aspects of its Computrac product
and five foreign patents directed to aspects of its Jerome product. Two
additional domestic Jerome patents 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.
ADMINISTRATIVE
As of June 30, 1999, the Company had a total of 58 full-time employees and
2 part-time employees. AZIC utilizes telemarketing extensively and maintains a
staff of 10 professionals who each focus on a specific product application
market. The Company provides ongoing training to its technical and sales
personnel. None of the Company's employees are represented by a union.
AZIC ENTERPRISE VALUATION
For purposes of developing a substantive valuation opinion, we considered
several approaches to calculating the Common Stock Value of Arizona Instrument
Corp. On the basis of our diagnostic and the current positioning of the Company,
our approach focuses on the Discounted Cash Flow ("DCF") Approach. The DCF
Approach is widely used in the securities industry (including investment banking
and corporate finance) for purposes of valuing new issues, equity research, and
advising sophisticated clientele in change of ownership transactions. This
approach is heavily emphasized in Underwriting Committee meetings within the top
tier of global investment banking firms.
Implicit in the use of a DCF model is forward-looking assumptions. This is
consistent with the concept of value which is highly dependent on future events.
It is our opinion that the financial acumen and overall knowledge of the
Company's management is very high. Consequently, financial projections prepared
by AZIC, using reasonable and conservative forward-looking assumptions, provide
a substantive basis to develop a conclusion as to the Enterprise and Common
Stock Values. Notwithstanding the foregoing, we have also applied the
appropriate multiples to pro forma historical financial information in order to
test the DCF model for reasonableness.
CALCULATION OF ENTERPRISE VALUE
DISCOUNTED CASH FLOW APPROACH
The DCF approach continues to gain widespread use within the securities
industry. In a recently acclaimed book, the authors make the following
conclusion:
"The DCF approach captures all the elements that affect the value of the
company in a comprehensive yet straightforward manner. Furthermore, the DCF
approach is strongly supported by research into how the stock market
actually values companies." (Copeland, T., Koller, T., Murrin, J.
"Valuation: Measuring And Managing The Value of Companies." NY., NY.: John
Wiley & Sons, Inc. 1990).
The discounted cash flow approach is predicated upon the principal that the
value of an asset is the present value of the expected cash flow that the asset
will generate during the holding period. This valuation approach requires
quantification in four key areas: (1) the amounts of future cash flow to be
discounted during the interim or projection period, (2) the amount of cash flow
expected to be generated at the completion of the projection period (otherwise
referred to as the Terminal Value), (3) the appropriate discount rate for the
interim and terminal cash flows, and (4) the time period in which it is
reasonable to assume that an owner of the asset will maintain ownership/control.
For purposes of the June 30, 1999, valuation model, we used an investment
horizon that extended through December 31, 2003, which represents a common and
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reasonable time period used by "sophisticated buyers and investors" in assessing
the value of companies and their securities.
Determining the amounts of future cash flow to be discounted requires
comprehensive knowledge of the investment and/or company. Management has
prepared the financial projections used for our DCF Valuation Model. These
projections were prepared for the period from January 1, 1999, through December
31, 2003, on an annual basis by management. For purposes of applying the DCF
Approach, free cash flow is defined as cash flow after capital expenditures
financed by equity capital, debt service, tax payments, and changes in working
capital.
In addition to the value developed using the DCF Approach, the Company maintains
cash balances above the industry standard. Consequently, it is necessary to
include this excess cash in the valuation calculations as the amount is
necessary to achieve the operating cash flow levels forecasted by AZIC. As set
forth in the following table and calculation, we believe that AZIC maintains
approximately $1,700,000 in excess cash. Please note that the discussion
pertaining to the Comparable Companies is included within this section.
<TABLE>
<CAPTION>
ST Investments Working WC as a % of
Company Name Annual Revenue and Cash Capital (WC) Revenue
- ------------ -------------- -------- ------------ -------
<S> <C> <C> <C> <C>
Badger Meter Inc. $148,711 $1,097 $11,108 7.47%
CEM Corp. 32,222 6,014 13,571 42.12%
Invivo Corp. 46,912 10,546 20,913 44.58%
Modern Controls 16,053 6,541 8,933 55.65%
Moore Products 168,958 3,768 39,995 23.67%
Of Corp. 23,964 3,999 9,091 37.94%
TSI Inc. 85,352 13,437 32,172 37.69%
Average 35.59%
Weighted Average(1) 39.45%
AZIC Revenue $8,584,000
Weighted Average Industry WC Level 39.45%
------
Optimal AZIC Working Capital Level $3,386,173
Actual Workin Capital $5,075,000
==========
Estimated Excess Working Capital $1,688,827
</TABLE>
- ----------
(1) Based on a composite system to determine working capital levels implied in
the EBITDA Multiple the following weights were used: CEM Corp. - 50.00%; OI
Corp. - 25.00%; Comparable Company Average - 25.00%. This also corresponds
to the weighting system applied to the Comparable Public Company data in
order to derive the Terminal Value EBITDA Multiple.
DISCOUNT RATE
Under the equity approach to DCF valuation, the free cash flow and terminal
value are discounted at a discount rate indicative of an appropriate rate of
return registered by alternative investment opportunities of comparable
magnitude, character, and risk. Frequently, the basis for the discount rate can
be derived from groups of comparable companies using the Capital Asset Pricing
Model ("CAPM") or similar models.
Given the nature of the Company's industry, its capital structure, and the
general capital structure of similar companies, we employed the equity cost of
capital for purposes of calculating the present value of future cash flows. On
the basis of information pertaining to comparable companies and their estimated
cost of capital and conditions in the capital markets as of June 30, 1999,
AZIC's cost of equity capital can be computed as follows:
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Long-Term S & P 500 Return (1945-1997) 13.35%
Risk-free Interest Rate 5.55%
-----
Market Risk Premium - Ibbotson Associates 7.80%
Estimated Beta Coefficient - Barra (1) 1.40
----
AZIC Risk Premium 10.92%
Small Company Premium 4.00%
Risk-free Interest Rate 5.55%
-----
AZIC ESTIMATED EQUITY COST OF CAPITAL 20.47%
======
- ----------
(1) Please refer to Appendix F.
COMPARABLE PUBLICLY TRADED COMPANY DATA
The purpose of gathering data on comparable publicly traded companies is to
derive some benchmarks by which the financial markets value companies on a
marketable, minority basis. In turn, this information can be applied to the AZIC
financial data for purposes of calculating the value of the Company, including
the Terminal Value. Selection of comparable public companies generally entails
applying a series of increasingly detailed screens to descriptive and financial
information on the public companies. The rationale for this process is to
attempt to isolate companies subject to the same, or similar, business risks as
AZIC. The factors used to determine the appropriate level of comparability
included but were not limited to:
* The nature of the business
* Barriers to entry
* The proprietary nature of the end product
* The maturity of the business
* Profitability trends and levels
* Products
* The asset and capitalization structure of the company
* Market
* Other financial and non-financial factors
* Nature of the competition
* Sales trends
In order to identify comparable publicly traded companies, we performed a
screen for comparable publicly traded companies (Using Compact Disclosure Inc.
databases) utilizing the following criteria:
<TABLE>
<CAPTION>
SIC Description # of Cos. Comments
- --- ----------- --------- --------
<S> <C> <C> <C>
3821 Laboratory Apparatus 12 Scientific Development Technology
3822 Environmental Controls 3 Substantively Related to AZIC Primary
Industry Classification Category
3823 Process Control Instruments 53 AZIC Primary Industry Classification Category
3824 Fluid Meter and Counting Devices 5 Substantively Related to AZIC Primary
Industry Classification Category
3825 Electricity Measuring Instruments 44 Semiconductor Industry Applications
3826 Analytical Instruments 40 Dominated by Clinical and Biological and
Healthcare Applications
3827 Optical Instruments 11 Optics-Based Technology
3829 Measuring and Controlling 33 Industry Classification Dominated by Oil and
Gas Applications
Measuring & Monitoring Devices 201
</TABLE>
The 201 companies that passed the initial screen were then subjected to
further scrutiny using the criteria previously described in this section. This
level of analysis produced a population of twenty-five companies that was
presented to the Company for detailed analysis and to develop a rating as to the
estimated level of comparability. This analysis produced a group of eight
companies that offered sufficient levels of comparability. As a group the
-11-
<PAGE>
Arizona
Instrument
- --------------------------------------------------------------------------------
comparables provide a meaningful "band" of information and data in which to
triangulate a conclusion. The results of the this analysis are included in
Sections F and G within this report.
COMPARABLE TRANSACTION DATA
Similar to the previous screen using publicly-traded company data, the
purpose of gathering data on comparable acquisition transactions is to derive
some benchmarks by which the capital markets value companies on an Enterprise
Basis. In turn, this information can be applied to the AZIC financial data for
purposes of calculating the value of the Company. Utilizing Mergistat and
Pratt's Stats database information, we gathered the data included in Section H
herein. The SIC Codes set forth above were used to screen for recent acquisition
transactions.
TERMINAL VALUE MULTIPLE
A Terminal Value (or value in perpetuity) was calculated based upon the
information obtained from the comparable companies identified in the previous
table. The Terminal Value multiple, used in the year in perpetuity, accounts for
the fact that the Company continues to maintain value at the end of the
investment horizon. The principal source of data in which to form a conclusion
as to a reasonable Terminal Value multiple was based upon multiples at which the
financial markets value "comparable" publicly traded companies that are
previously identified above. In using the data obtained from these companies,
the implicit assumption is that the environment at December 31, 2003, will
remain broadly similar to today's and that AZIC will continue to be operated as
a going concern. On the basis of our analysis, we believe that a reasonable and
appropriate Terminal Value Multiple is five (5) to six (6) times earnings before
interest, taxes, depreciation, and amortization ("EBITDA").
CONCLUSION - AZIC ENTERPRISE VALUE
The results of the calculation of the Enterprise Value utilizing the DCF
Approach are included in Section I of this report. Also included in Section I is
a comprehensive analysis based on the sensitivity of the Enterprise Value to
certain key variables. These variables include the discount rate, Terminal Value
multiple, and the Control Premium. This analysis supports a conclusion as to the
Enterprise Value of the Company of $6.5 million to $7.0 million. This range is
substantiated in applying the terminal multiples to 1999 budgeted financial
information. We believe that the lower end of the range is more applicable as
the DCF model takes into consideration the effect of the growth rate which is
substantially lower than the Company's equity cost of capital. It is also
important to note that the Company maintains excess levels of cash.
Consequently, it is necessary to incorporate this excess cash balance in
calculating the Enterprise Value.
Budgeted 1999
-------------
Total Revenue $8,584,000
Gross Margin 5,286,000
Total Operating Expenses 4,819,000
---------
Operating Income 467,000
Depreciation 521,000
-------
EBITDA 988,000
Multiple 5.5
---
5,434,000
Excess Cash Balance 1,700,000
---------
AZIC ENTERPRISE VALUE $7,134,000
==========
- ----------
(1) 1999 has been adjusted to reflect the ongoing configuration of the Company.
This data was supplied by the Company and reflects discussions pertaining
to the normalization of the Income Statement for comparative purposes.
-12-
<PAGE>
Arizona
Instrument
- --------------------------------------------------------------------------------
CALCULATION OF THE COMMON STOCK VALUE OF AZIC
AZIC has requested that we determine the Common Stock Value of its common
stock value on a nonmarketable, minority basis. Consequently, we have considered
the characteristics of the common stock as they apply to the Common Stock Value.
Therefore, in order to determine the Common Stock Value, it is necessary to
adjust the Enterprise Value to reflect the characteristics of the common stock,
the lack of marketability of the common stock, and the lack of control of these
securities. The results of this analysis provide the basis for adjusting the
Enterprise Value identified in the preceding subsection in order to calculate
the Common Stock Value.
PREMIUM FOR CONTROL
As contrasted with a minority interest, the controlling interest in a
company maintains the ability to alter the firm's capital structure, liquidate
all or part of the company, elect directors, determine the overall strategy, and
declare dividends, as well as other rights and privileges. A control premium is
defined as the additional consideration that an investor would pay over a
marketable minority equity value (e.g., The Wall Street Journal price) in order
to own a controlling interest in the common stock of a company. Control premiums
can vary greatly. Factors affecting the level of a control premium include:
* The nature and magnitude of nonoperating assets.
* The nature and magnitude of discretionary expenses.
* The perceived quality of existing management.
* The nature and magnitude of business opportunities which are not
currently being exploited.
* The ability to integrate the acquiree into the acquiror's business or
distribution channels.
The national valuation firm of Houlihan Lokey Howard & Zukin publishes an
extensive study of control premiums each quarter of the year. The most recent
report that is available prior to the Valuation Report is the Control Premium
Study for 1998. This report has been included in Appendix C. We believe that the
quality and detail in which Houlihan Lokey Howard & Zukin information prepared
supports its use for purposes of our valuation calculations. However, for
companies that were the most similar to AZIC (in the three SIC classifications
previously noted giving equal weight to each), the average control premium for
this period was approximately 16.70%. Consequently, we have utilized a control
premium of 17.00% for purposes of our valuation analysis.
Enterprise Value of AZIC $6,500,000
Control Discount (1/(1+.17) 15.00%
------
Adjusted Value $5,525,000
Number of Shares Outstanding 1,382,670
---------
Non-controlling Value Per Share $4.00
=====
DISCOUNTS FOR LACK OF MARKETABILITY
While the Common Stock of AZIC is publicly-traded, the volume activity is
nominal. Consequently, it is necessary to adjust the Non-controlling Value Per
Share in order to reflect the inefficient nature of the stock price and to
consider the relatively thin market for the Common Stock. Various studies on
discounts for lack of marketability have been published. In the September 1997
issue of Business Valuation Review, the author of an article studies the
relationships between the price of private placements of common stock and the
initial public offering ("IPO") price of the same class of securities. The eight
studies since 1980 were conducted in very diverse market conditions yet the
results were not dissimilar. However, in the 1980-1981 study, the prime
-13-
<PAGE>
Arizona
Instrument
- --------------------------------------------------------------------------------
lending rate went from 15.25% to 20% causing a noticeable aberration in the
results. The mean discount for the 310 qualifying transactions included in the
seven studies was 43%. In the description of the study, the author notes that
only private placements transactions completed within five months of the IPO
qualified for inclusion in the study. Given the substantive lead time in
considering an IPO, it is likely that these transactions incorporated some level
of expectation as to marketability.
Further studies attempting to quantify the depressing effects upon value of
the lack of marketability of closely held securities can be found in VALUING A
BUSINESS, The Analysis and Appraisal of Closely Held Companies, Third Edition.
The authors discuss the results of nine studies of discounts on the sale of
restricted shares of publicly traded companies, as well as two other studies of
discounts on the sale of closely held company shares compared to the price of
subsequent initial public offerings of the same company's shares. The results of
the first group of studies are tabulated below.
Restricted Stock Study Discount
- ---------------------- --------
SEC Institutional Study - Overall Average 25.8%
Non-reporting OTC companies 32.6%
Gelman Study 33.0%
Trout Study 33.5%
Morone Study 35.6%
Maher Study 35.4%
Standard Research Consultants Study 45.0%
Willamette Management Associates Study 31.2%
UCLA 24.0%
Silber Study 33.8%
FMV Opinions, Inc. Study 23.0%
As shown above, the various restricted stock studies indicate marketability
discounts in the range of 23.0% to 45.0%, with most of the results falling into
a narrow band between approximately 30.0% and 35.0%. Additional research
conducted by Management Planning Inc. (MPI) using the criteria set forth in
77-287 also supports the independent data described herein. While AZIC's Common
Stock is publicly traded, its level of liquidity is relatively low in relation
to the Comparable Companies. Consequently, it is appropriate to apply a discount
to reflect this analysis. It is difficult to accurately, apply the results of
these generic studies to this assignment. Therefore, we believe that it is
reasonable to apply a discount that is lower than the lower end of the range for
the various private transaction studies. On the basis of this analysis, the per
share Common Stock Value of Arizona Instrument Corp. can be computed as follows:
Illiquidity/Inefficiency Discount
---------------------------------
Control Premium 5 % 10 % 15 % 20% 25 %
- --------------- --- ---- ---- --- ----
17% $3.80 $3.60 $3.40 $3.20 $3.00
Note: As previously noted, calculations that correspond to our opinion have been
rounded in accordance with investment banking industry practice.
-14-
<PAGE>
ARIZONA INSTRUMENT CORPORATION
VALUATION ANALYSIS
JUNE 30, 1999
COMPARABLE COMPANY ANALYSIS - COMPACT/DISCLOSURE DATABASE SCREEN
<TABLE>
<CAPTION>
SIC
Code Industry Description # of Cos. Comments
- ---- -------------------- --------- --------
<S> <C> <C> <C>
3821 Laboratory Apparatus 12 Scientific Development Technology
3822 Environmental Controls 3 Substantively Related to AZIC Primary
Industry Classification Category
3823 Process Control Instruments 53 AZIC Primary Industry Classification Category
3824 Fluid Meter and Counting Devices 5 Substantively Related to AZIC Primary
Industry Classification Category
3825 Electricity Measuring Instruments 44 Semiconductor Industry Applications
3826 Analytical Instruments 40 Dominated by Clinical and Biological and
Healthcare Applications
3827 Optical Instruments 11 Optics-Based Technology
3829 Measuring and Controlling 33 Industry Classification Dominated by Oil and
Gas Applications
--
MEASURING & MONITORING DEVICES 201
===
COMPACT/DISCLOSURE COMPARABLE COMPANY SCREEN #1
SIC Co. Est. Oxford Est.
Code Company Name Comp. Level Comp. Level Traded Ticker Comments
- ---- ------------ ----------- ----------- ------ ------ --------
3824 Badger Meter Inc. 6 6 ASE BMI Flow measurement and control
3823 BEI Technologies Inc. 3 3 NMS BEIQ Insufficient level of comparability
for valuation analysis
3823 BTU International Inc. 4 4 NMS BTUI Insufficient level of comparability
for valuation analysis
3826 CEM Corp. 10 10 NMS CEMX Microwave-based testing and control
instruments
3823 DSP Technology 2 2 NMS DSPT Insufficient level of comparability
for valuation analysis
3823 Engineering Measurements 5 5 NMS EMCO Insufficient level of comparability
for valuation analysis
3823 Faro Technologies 2 2 NMS FARO Insufficient level of comparability
for valuation analysis
3829 Fiberchem Inc. 2 2 OTH FOCS Insufficient level of comparability
for valuation analysis
3823 Industrial Scientific Corp. 4 4 NMS ISCX Insufficient level of comparability
for valuation analysis
3823 Invivo Corp. 6 6 NMS SAFE Sensor-based instruments for medicine,
safety and industrial control
3823 Laminaise Corp 3 3 OTH THMZ Insufficient level of comparability
for valuation analysis
3823 Measurement Specialties Inc. 5 5 ASE MSS Insufficient level of comparability
for valuation analysis
3823 Medar Inc. 6 6 NMS MDXR Not utilized as comparable due to
history of operating losses
3823 Metrika Systems Corp. 5 5 ASE MKA Insufficient level of comparability
for valuation analysis
3829 Modern Controls 6 8 NMS MOCO Measurement and analysis of gases and
chemical compounds
3823 Moore Products Co. 6 6 NMS MORP Process automation and control systems
3826 OI Corp. 8 8 NMS OICO Measurement and analysis of chemical
compounds
3829 Onix Systems 5 5 ASE ONX Insufficient level of comparability
for valuation analysis
3823 Perception Inc. 1 1 NMS PRCP Insufficient level of comparability
for valuation analysis
3829 Sierra Monitor 4 4 OTH SRMC Insufficient level of comparability
for valuation analysis
3823 Sentex Sensing Technology 6 6 OTH SENS Unprofitable/development stage company
- explosives detection
3823 Sutron Corp. 3 3 OTH STRN Insufficient level of comparability
for valuation analysis
3823 Thermedics Detection Inc. 6 5 ASE TDX Quality assurance and detection
instruments, ownership structure
3823 Thermo Sentron Inc. 4 4 ASE TSR Insufficient level of comparability
for valuation analysis
3824 TSI Inc. 6 6 ASE TSII Safety and productivity measuring and
control instruments
</TABLE>
- ----------
* DEGREE OF COMPARABILITY IS BASED ON ESTIMATES USING A SCALE FROM 1 TO 10.
A RATING OF 10 SUGGESTS A HIGH DEGREE OF COMPARABILITY.
<PAGE>
ARIZONA INSTRUMENT CORPORATION
VALUATION ANALYSIS
JUNE 30, 1999
<TABLE>
<CAPTION>
("TIC") Ratio of TIC To:
Estimated Total -------------------------------------
Comparability Invested SIC Operating Net
Company Name Level Capital Code Revenue EBITDA Income Income *
- ------------ ----- ------- ---- ------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Badger Meter Company 6.00 $127,516 3824 0.86 6.39 8.49 14.19
ASE-BMI
CEM Corporation 10.00 $ 25,387 3826 0.79 3.21 3.82 11.08
NASDAQ-CEMX
Invivo Corporation 6.00 $ 53,986 3823 1.15 8.82 10.12 15.77
NASDAQ-SAFE
Modern Controls Inc. 8.00 $ 35,766 3829 2.23 7.66 8.33 14.18
NASDAQ-MOCO
Moore Products Co. 6.00 $ 67,207 3823 0.40 5.35 7.99 17.73
NASDAQ-MORP
OI Corporation 8.00 $ 15,508 3826 0.65 5.79 6.99 9.06
NASDAQ-OICO
TSI Inc. 6.00 $123,563 3824 1.45 8.87 11.05 15.88
NASDAQ-TSII
</TABLE>
Enterprise TIC/
TIC/ Control TIC/ EBITDA
EBITDA Premium EBITDA Contribution
------ ------- ------ ------------
Badger Meter Company
ASE-BMI 6.39 16.70% 7.45 0.89
CEM Corporation
NASDAQ-CEMX 3.21 16.70% 3.74 0.75
Invivo Corporation
NASDAQ-SAFE 8.82 16.70% 10.29 1.23
Modern Controls Inc.
NASDAQ-MOCO 7.66 16.70% 8.93 1.43
Moore Products Co.
NASDAQ-MORP 5.35 16.70% 6.24 0.75
OI Corporation
NASDAQ-OICO 5.79 16.70% 6.76 1.08
TSI Inc.
NASDAQ-TSII 8.87 16.70% 10.35 1.24
Weighted Average EBITDA Multiple 7.38
Weighted Average EBITDA Multiple:
TIC/
Weight Factor EBITDA
------------- ------
CEM Corporation 50.00% 3.74 1.87
OI Corporation 25.00% 6.76 1.69
Composite EBITDA Multiple 25.00% 7.38 1.85
------- ----
100.00%
=======
Weighted Average EBITDA Multiple= 5.41 x (Represents AZIC Comparable Company
Multiple)
<PAGE>
ARIZONA INSTRUMENT CORPORATION
VALUATION ANALYSIS
JUNE 30, 1999
<TABLE>
<CAPTION>
Estimated R & D Total
Comparability As a % Recent Shares Market Invested
Company Name Level of Sales Price O/S Capitalization LTD Capital
- ------------ ----- -------- ----- --- -------------- --- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Badger Meter Company 6.00 4.25% $34.00 3,674 $124,916 $2,600 $127,516
ASE-BMI
CEM Corporation 10.00 9.10% $ 7.88 3,076 $ 24,224 $1,163 $ 25,387
NASDAQ-CEMX
Invivo Corporation 6.00 6.00% $12.50 4,193 $ 52,413 $1,573 $ 53,986
NASDAQ-SAFE
Modern Controls Inc. 8.00 7.00% $ 5.69 6,288 $ 35,766 $ 0 $ 35,766
NASDAQ-MOCO
Moore Products Co. 6.00 7.00% $22.00 2,637 $ 58,014 $9,193 $ 67,207
NASDAQ-MORP
OI Corporation 8.00 6.10% $ 4.63 3,353 $ 15,508 $ 0 $ 15,508
NASDAQ-OICO
TSI Inc. 6.00 13.10% $11.00 11,233 $123,563 $ 0 $123,563
NASDAQ-TSII
</TABLE>
Latest Twelve Months Financial Info.
-------------------------------------------
Operating Net
Revenue EBITDA Income Income
------- ------ ------ ------
Badger Meter Company $148,711 $19,964 $15,015 $8,801
ASE-BMI 100.00% 13.42% 10.10% 5.92%
CEM Corporation $32,222 $ 7,914 $ 6,653 $2,186
NASDAQ-CEMX 100.00% 24.56% 20.65% 6.78%
Invivo Corporation $46,912 $ 6,122 $ 5,337 $3,324
NASDAQ-SAFE 100.00% 13.05% 11.38% 7.09%
Modern Controls Inc. $16,053 $ 4,672 $ 4,293 $2,522
NASDAQ-MOCO 100.00% 29.10% 26.74% 15.71%
Moore Products Co. $168,958 $12,563 $ 8,410 $3,273
NASDAQ-MORP 100.00% 7.44% 4.98% 1.94%
OI Corporation $23,964 $ 2,678 $ 2,220 $1,712
NASDAQ-OICO 100.00% 11.18% 9.26% 7.14%
TSI Inc. $85,352 $13,926 $11,179 $7,782
NASDAQ-TSII 100.00% 16.32% 13.10% 9.12%
<PAGE>
ARIZONA INSTRUMENT CORPORATION
VALUATION ANALYSIS
JUNE 30, 1999
($ IN MILLIONS)
<TABLE>
<CAPTION>
Target
Seller Target Net
Primary Revenue Income TIC/
Closed Seller Buyer SIC LTM LTM EBIT EBITDA TIC EBITDA
- ------ ------ ----- --- --- --- ---- ------ --- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1-Sep-97 Advanced Electromagnetics Not Disclosed 3821 3.365 0.464 0.472 0.552 1.377 2.49
Inc.
30-May-97 Control Systems Inc. Not Disclosed 3821 10.388 0.589 1.053 1.254 5.2 4.15
6-Jul-98 Kavouras Inc Data Transmission
Network ( 3829 19.68 1.44 2.42 3.55 19.65 5.54
30-Jul-97 David White Inc Choucroute Partners
LLC 3829 13.56 0.33 0.75 1.22 7.19 5.89
1-Jun-99 DSP Technology Inc MTS Systems Corp 3823 24.47 1.90 3.10 4.15 24.66 5.94
2-Jun-97 Teletrac Inc Axsys Technologies
Inc 3826 8.00 0.94 1.58 1.67 10.13 6.07
1-May-99 Environmental Systems Corp. TSI Inc. 3824 22.901 1.926 2.976 3.865 26.84 6.94
10-Jan-97 Opal Inc Applied Materials
Inc 3829 61.70 12.06 13.14 14.58 175.27 12.02
15-Jan-97 Advanced Seperation
Technologies Inc. Not Disclosed 3823 27.318 3.301 5 5.279 70.5 13.35
7-May-98 Granville-Phillips Co Helix Technology
Corp 3823 25.00 2.42 2.64 3.33 46.47 13.95
14-May-96 Andros Inc Genstar Capital LLC 3823 40.10 1.84 3.17 5.24 87.50 16.70
30-Dec-97 Computational Systems Inc Emerson Electric Co 3829 57.03 4.08 6.38 8.77 147.35 16.80
10-Jul-96 Pryon Corp Protocol Systems Inc 3826 12.35 0.68 0.87 1.55 27.04 17.45
13-Feb-98 Impact Systems Inc Voith (J.M.) AG 3823 15.17 1.23 1.24 1.41 28.61 20.29
Mean
Search Criteria: Average 10.54
Seller SIC = 3823,3824,3826,3829
Seller Country = United States Statistical Median 6.94
Any Deal Status
Deal Size <= $250 Million Average (Eliminate Hi and Lo) 10.40
Percent Sought >= 100.00%
Closed Date >= 1 /1 /90 Comp Transaction Average 5.68
TIC/EBITDA >= 0 (Positive EBITDA)
Revenue <= $100 Million
</TABLE>
<PAGE>
ARIZONA INSTRUMENT CORPORATION
VALUATION ANALYSIS
JUNE 30, 1999
DISCOUNTED CASH FLOW STATEMENT:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total Revenues $ 8,584,000 $ 9,048,430 $ 9,540,852 $ 10,063,155 $ 10,617,372
Cost of Goods Sold $ 3,298,080 $ 3,479,784 $ 3,672,519 $ 3,877,030 $ 4,094,120
Gross Profit $ 5,285,920 $ 5,568,646 $ 5,868,333 $ 6,186,125 $ 6,523,252
Total Operating Expenses $ 4,818,920 $ 5,008,215 $ 5,206,722 $ 5,465,262 $ 5,739,599
----------- ----------- ----------- ------------ ------------
Operating Income $ 467,000 $ 560,431 $ 661,611 $ 720,863 $ 783,653
Add: Depreciation $ 521,000 $ 521,000 $ 521,000 $ 521,000 $ 521,000
Add: Other $ 0 $ 0 $ 0 $ 0 $ 0
----------- ----------- ----------- ------------ ------------
Earnings Before Interest,
Taxes, Depreciation, and
Amortization $ 988,000 $ 1,081,431 $ 1,182,611 $ 1,241,863 $ 1,304,653
Less: Taxes ($ 216,400) ($ 272,718) ($ 328,888) ($ 361,399) ($ 396,103)
Less: Changes in Working Capital ($ 100,000) ($ 104,000) ($ 108,160) ($ 112,486) ($ 116,986)
Less: Capital Expenditures ($ 250,000) ($ 300,000) ($ 350,000) ($ 400,000) ($ 500,000)
Add: Other Income $ 74,000 $ 121,364 $ 160,608 $ 182,634 $ 206,605
Add: Other $ 0 $ 0 $ 0 $ 0 $ 0
Less: Other $ 0 $ 0 $ 0 $ 0 $ 0
----------- ----------- ----------- ------------ ------------
Free Cash Flow $ 495,600 $ 526,077 $ 556,171 $ 550,612 $ 498,169
TERMINAL VALUE 5.50 x EBITDA $ 7,175,590
Excess Cash Balance $ 1,700,000 $ 7,175,590
Total Free Cash To Equity $ 495,600 $ 526,077 $ 556,171 $ 550,612 $ 7,673,759
Adjusted Cash Flow ('99 Mid-Year) $ 247,800 $ 526,077 $ 556,171 $ 550,612 $ 7,673,759
----------- ----------- ----------- ------------ ------------
Present Value Factor @ 20%
Present Value $ 226,209 $ 400,200 $ 352,578 $ 290,878 $ 3,378,256
----------- ----------- ----------- ------------ ------------
Enterprise Value (Includes
Excess Cash $) $ 6,348,122
</TABLE>
<PAGE>
ARIZONA INSTRUMENT CORPORATION
VALUATION ANALYSIS - DCF COMPUTATION SENSITIVITY ANALYSIS
JUNE 30, 1999
SENSITIVITY ANALYSIS - OPERATING ENTERPRISE EQUITY VALUE
<TABLE>
<CAPTION>
REVENUE GROWTH RATE
-----------------------------------------------------------------------------------------------------
5.00% 7.50% 10.00% 12.50% 15.00% 17.50% 20.00% 22.50%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3.00 $4,912,238 $4,912,238 $4,912,238 $4,912,238 $4,912,238 $4,912,238 $4,912,238 $4,912,238
3.25 $5,055,826 $5,055,826 $5,055,826 $5,055,826 $5,055,826 $5,055,826 $5,055,826 $5,055,826
3.50 $5,199,415 $5,199,415 $5,199,415 $5,199,415 $5,199,415 $5,199,415 $5,199,415 $5,199,415
3.75 $5,343,003 $5,343,003 $5,343,003 $5,343,003 $5,343,003 $5,343,003 $5,343,003 $5,343,003
4.00 $5,486,592 $5,486,592 $5,486,592 $5,486,592 $5,486,592 $5,486,592 $5,486,592 $5,486,592
4.25 $5,630,180 $5,630,180 $5,630,180 $5,630,180 $5,630,180 $5,630,180 $5,630,180 $5,630,180
4.50 $5,773,768 $5,773,768 $5,773,768 $5,773,768 $5,773,768 $5,773,768 $5,773,768 $5,773,768
4.75 $5,917,357 $5,917,357 $5,917,357 $5,917,357 $5,917,357 $5,917,357 $5,917,357 $5,917,357
5.00 $6,060,945 $6,060,945 $6,060,945 $6,060,945 $6,060,945 $6,060,945 $6,060,945 $6,060,945
5.25 $6,204,534 $6,204,534 $6,204,534 $6,204,534 $6,204,534 $6,204,534 $6,204,534 $6,204,534
5.50 $6,348,122 $6,348,122 $6,348,122 $6,348,122 $6,348,122 $6,348,122 $6,348,122 $6,348,122
5.75 $6,491,710 $6,491,710 $6,491,710 $6,491,710 $6,491,710 $6,491,710 $6,491,710 $6,491,710
6.00 $6,635,299 $6,635,299 $6,635,299 $6,635,299 $6,635,299 $6,635,299 $6,635,299 $6,635,299
TERMINAL 6.25 $6,778,887 $6,778,887 $6,778,887 $6,778,887 $6,778,887 $6,778,887 $6,778,887 $6,778,887
MULTIPLE 6.50 $6,922,476 $6,922,476 $6,922,476 $6,922,476 $6,922,476 $6,922,476 $6,922,476 $6,922,476
6.75 $7,066,064 $7,066,064 $7,066,064 $7,066,064 $7,066,064 $7,066,064 $7,066,064 $7,066,064
7.00 $7,209,652 $7,209,652 $7,209,652 $7,209,652 $7,209,652 $7,209,652 $7,209,652 $7,209,652
7.25 $7,353,241 $7,353,241 $7,353,241 $7,353,241 $7,353,241 $7,353,241 $7,353,241 $7,353,241
7.50 $7,496,829 $7,496,829 $7,496,829 $7,496,829 $7,496,829 $7,496,829 $7,496,829 $7,496,829
7.75 $7,640,418 $7,640,418 $7,640,418 $7,640,418 $7,640,418 $7,640,418 $7,640,418 $7,640,418
8.00 $7,784,006 $7,784,006 $7,784,006 $7,784,006 $7,784,006 $7,784,006 $7,784,006 $7,784,006
8.25 $7,927,594 $7,927,594 $7,927,594 $7,927,594 $7,927,594 $7,927,594 $7,927,594 $7,927,594
8.50 $8,071,183 $8,071,183 $8,071,183 $8,071,183 $8,071,183 $8,071,183 $8,071,183 $8,071,183
8.75 $8,214,771 $8,214,771 $8,214,771 $8,214,771 $8,214,771 $8,214,771 $8,214,771 $8,214,771
9.00 $8,358,360 $8,358,360 $8,358,360 $8,358,360 $8,358,360 $8,358,360 $8,358,360 $8,358,360
9.25 $8,501,948 $8,501,948 $8,501,948 $8,501,948 $8,501,948 $8,501,948 $8,501,948 $8,501,948
9.50 $8,645,536 $8,645,536 $8,645,536 $8,645,536 $8,645,536 $8,645,536 $8,645,536 $8,645,536
9.75 $8,789,125 $8,789,125 $8,789,125 $8,789,125 $8,789,125 $8,789,125 $8,789,125 $8,789,125
10.00 $8,932,713 $8,932,713 $8,932,713 $8,932,713 $8,932,713 $8,932,713 $8,932,713 $8,932,713
</TABLE>
<PAGE>
ARIZONA INSTRUMENT CORPORATION
VALUATION ANALYSIS - DCF COMPUTATION SENSITIVITY ANALYSIS
JUNE 30, 1999
SENSITIVITY ANALYSIS - OPERATING ENTERPRISE EQUITY VALUE
<TABLE>
<CAPTION>
TERMINAL EBITDA MULTIPLE
-----------------------------------------------------------------------------------------------------
3 4 5 5.5 6 7 8 9
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
14.0% $5,559,864 $6,283,339 $7,006,813 $7,368,550 $7,730,287 $8,453,762 $9,177,236 $9,900,710
14.5% $5,499,164 $6,208,530 $6,917,896 $7,272,579 $7,627,261 $8,336,627 $9,045,993 $9,755,359
15.0% $5,439,799 $6,135,391 $6,830,983 $7,178,779 $7,526,575 $8,222,168 $8,917,760 $9,613,352
15.5% $5,381,734 $6,063,878 $6,746,022 $7,087,094 $7,428,165 $8,110,309 $8,792,453 $9,474,597
16.0% $5,324,933 $5,993,945 $6,662,957 $6,997,464 $7,331,970 $8,000,982 $8,669,994 $9,339,006
16.5% $5,269,364 $5,925,552 $6,581,740 $6,909,834 $7,237,928 $7,894,116 $8,550,304 $9,206,492
17.0% $5,214,993 $5,858,656 $6,502,319 $6,824,151 $7,145,982 $7,789,645 $8,433,309 $9,076,972
17.5% $5,161,790 $5,793,219 $6,424,648 $6,740,362 $7,056,077 $7,687,506 $8,318,935 $8,950,364
18.0% $5,109,723 $5,729,201 $6,348,679 $6,658,418 $6,968,157 $7,587,635 $8,207,113 $8,826,591
18.5% $5,058,762 $5,666,565 $6,274,367 $6,578,268 $6,882,169 $7,489,972 $8,097,774 $8,705,576
19.0% $5,008,880 $5,605,274 $6,201,669 $6,499,866 $6,798,063 $7,394,458 $7,990,852 $8,587,247
DISCOUNT 19.5% $4,960,047 $5,545,295 $6,130,542 $6,423,165 $6,715,789 $7,301,036 $7,886,284 $8,471,531
RATE 20.0% $4,912,238 $5,486,592 $6,060,945 $6,348,122 $6,635,299 $7,209,652 $7,784,006 $8,358,360
20.5% $4,865,425 $5,429,132 $5,992,839 $6,274,692 $6,556,546 $7,120,252 $7,683,959 $8,247,666
21.0% $4,819,584 $5,372,884 $5,926,184 $6,202,835 $6,479,485 $7,032,785 $7,586,085 $8,139,385
21.5% $4,774,690 $5,317,817 $5,860,944 $6,132,508 $6,404,072 $6,947,199 $7,490,326 $8,033,454
22.0% $4,730,718 $5,263,900 $5,797,082 $6,063,673 $6,330,264 $6,863,447 $7,396,629 $7,929,811
22.5% $4,687,645 $5,211,104 $5,734,563 $5,996,292 $6,258,022 $6,781,480 $7,304,939 $7,828,398
23.0% $4,645,449 $5,159,401 $5,673,352 $5,930,327 $6,187,303 $6,701,254 $7,215,206 $7,729,157
23.5% $4,604,109 $5,108,762 $5,613,416 $5,865,743 $6,118,070 $6,622,724 $7,127,378 $7,632,032
24.0% $4,563,601 $5,059,163 $5,554,724 $5,802,505 $6,050,285 $6,545,847 $7,041,408 $7,536,969
24.5% $4,523,907 $5,010,575 $5,497,243 $5,740,578 $5,983,912 $6,470,580 $6,957,248 $7,443,916
25.0% $4,485,006 $4,962,975 $5,440,945 $5,679,929 $5,918,914 $6,396,883 $6,874,852 $7,352,821
25.5% $4,446,879 $4,916,338 $5,385,798 $5,620,527 $5,855,257 $6,324,717 $6,794,176 $7,263,636
26.0% $4,409,506 $4,870,640 $5,331,774 $5,562,342 $5,792,909 $6,254,043 $6,715,177 $7,176,312
26.5% $4,372,869 $4,825,858 $5,278,847 $5,505,341 $5,731,836 $6,184,825 $6,637,813 $7,090,802
27.0% $4,336,950 $4,781,969 $5,226,988 $5,449,497 $5,672,006 $6,117,025 $6,562,044 $7,007,062
</TABLE>
<PAGE>
Arizona
Instrument
- --------------------------------------------------------------------------------
J. VALUATION OPINION
Based on and subject to the foregoing, including the assumptions and limitations
set forth herein, we are of the opinion that the Enterprise Value of Arizona
Instrument Corporation as of June 30, 1999 is in the range of $6,000,000 to
$7,000,000. In addition, it is our opinion that the intrinsic value of the
Common Stock of the Company is in the range of $3.20 to $3.50. This conclusion
incorporates a Control Premium of 17.00% which is derived from data included in
Appendix C.
/s/ Ben F. Ederer II
--------------------
Ben F. Ederer II
Managing Director
Oxford Advisors
2425 East Camelback Road
Suite 450
Phoenix, Arizona 85016
(602) 912-8572
-SEE APPENDIX E FOR PROFESSIONAL RESUME-
- --------------------------------------------------------------------------------
Notes:
1). As previously noted, calculations that correspond to our opinion have been
rounded in accordance with investment banking industry practice.
2). Refer to Section I of this report for detail underlying calculations.
-15
<PAGE>
K. QUALIFICATIONS OF APPRAISER
This appraisal report was prepared by Oxford Advisors. Oxford Advisors conducts
valuations of both publicly-traded and privately-held business enterprises for a
variety of purposes, including: public stock offerings, tender offerings,
mergers and acquisitions, federal gift and estate tax purposes, divorces, other
commercial litigation, and for general business planning purposes.
Oxford Advisors' lead appraiser is Ben F. Ederer. His professional resume is
attached hereto as Appendix E.
-16-
<PAGE>
L. CONTINGENT AND LIMITING CONDITIONS
This appraisal is subject to the following contingent and limiting conditions:
* Information, estimates and opinions contained in this report were
obtained from sources considered reliable; however, no liability for
such sources is assumed by the appraiser.
* The Company and its representatives warranted to appraiser that the
information supplied to appraiser was complete and accurate to the
best of client's knowledge; and that any reports, analysis, or other
documents prepared for it by appraiser will be used only in compliance
with all applicable laws and regulations.
* Possession of this report, or a copy thereof, does not carry with it
the right of publication of all or part of it, nor may it be used for
any purpose by anyone but the client without the previous written
consent of the appraiser or the client, and in any event only with
proper attribution.
* Appraiser is not required to give testimony in court, or be in
attendance during any hearings or depositions, with reference to the
Company, unless previous arrangements have been made.
* The various estimates of value presented in this report apply to this
appraisal only, and may not be used out of the context presented
herein.
-17-
<PAGE>
M. INDEPENDENCE OF APPRAISER
I certify to the best of my knowledge and belief ...
* The statements of fact contained in this report are true and correct;
* The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of Oxford Advisors;
* Neither Oxford Advisors nor I have any present or prospective interest in
the property that is the subject of this report, and have no personal
interest or bias with respect to the parties involved;
* Compensation for Oxford Advisors is not contingent on any action or event
resulting from the analyses, opinions, or conclusions in, or the use of,
this report; and,
* I have made a personal inspection of the Company that is the subject of
this report.
/s/ Ben F. Ederer II
--------------------
Ben F. Ederer II
Managing Director
Oxford Advisors
2425 East Camelback Road
Suite 450
Phoenix, Arizona 85016
(602) 912-8572
-17-
<PAGE>
ARIZONA INSTRUMENT CORPORATION
C&J Income Statement
($000s)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 2000 2001 2002 2003
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales
Domestic 4,725 4,082 5,269 6,194 6,215 6,526 6,852 7,195 7,554
International 1,481 1,643 1,615 1,842 1,325 1,447 1,581 1,727 1,887
Service 1,620 1,653 1,303 1,041 1,044 1,075 1,108 1,142 1,176
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Sales 7,826 7,378 8,187 9,077 8,584 9,048 9,541 10,063 10,617
Cost of Goods Sold
Domestic 2,007 1,681 2,361 2,540 2,515 2,641 2,773 2,912 3,057
International 725 717 727 730 522 570 623 680 743
Service 389 435 210 139 261 269 277 285 294
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Cost of Goods Sold 3,121 2,833 3,298 3,409 3,298 3,480 3,673 3,877 4,094
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross Profit 4,705 4,545 4,889 5,668 5,286 5,569 5,868 6,186 6,523
Operating Expenses
Selling & Marketing 1,965 2,027 2,812 2,052 2,017 2,126 2,242 2,365 2,495
General & Administrative 968 1,165 1,462 1,144 1,545 1,583 1,622 1,711 1,805
Research & Development 448 498 529 876 773 814 859 906 956
Amortization & Depreciation 368 395 324 420 484 484 484 484 484
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Operating Expenses 3,748 4,085 5,127 4,492 4,819 5,008 5,207 5,465 5,740
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating Income 957 460 (238) 1,176 467 560 662 721 784
====== ====== ====== ======
Other Income
Interest Income 80 121 161 183 207
Interest Expense (30) -- -- -- --
Settlement of Litigation -- -- -- -- --
Other 24 -- -- -- --
------ ------ ------ ------ ------
Total Other Income 74 121 161 183 207
------ ------ ------ ------ ------
Pretax income 541 682 822 903 990
Income taxes 216 273 329 361 396
------ ------ ------ ------ ------
Net Income 325 409 493 542 594
====== ====== ====== ====== ======
Operating Income 957 460 (238) 1,176 467 560 662 721 784
Amortization & Depreciation 368 395 324 420 484 484 484 484 484
Non SG&A Amort & Depr 208 161 304 21 37 37 37 37 37
------ ------ ------ ------ ------ ------ ------ ------ ------
EBITDA 1,533 1,016 390 1,617 988 1,081 1,183 1,242 1,305
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
ARIZONA INSTRUMENT CORPORATION
Balance Sheets
($000s)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 2000 2001 2002 2003
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash 486 598 143 1,099 3,534 4,515 5,066 5,665 6,221
Receivables 3,372 2,918 3,991 2,912 2,060 2,172 2,290 2,415 2,548
Inventory 1,794 2,050 2,557 1,647 1,088 1,148 1,212 1,279 1,351
Deferred Taxes -- -- 577 625 465 -- -- -- .
Prepaids & Other 278 596 50 37 50 50 50 50 50
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Current Assets 5,930 6,162 7,318 6,320 7,198 7,885 8,618 9,410 10,170
3,664 3,370 3,552 3,745 3,949
Property, Plant & Equipment
At cost 4,165 4,194 4,722 4,957 5,207 5,507 5,857 6,257 6,757
Acc. Depreciation (3,082) (3,348) (3,747) (4,095) (4,404) (4,723) (5,052) (5,391) (5,740)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net PP&E 1,083 846 975 862 803 784 805 866 1,017
Other Assets
Goodwill 4,331 4,331 4,331 4,331 4,331 4,331 4,331 4,331 4,331
Acc. Amortization (1,875) (2,121) (2,651) (2,837) (3,024) (3,211) (3,398) (3,585) (3,772)
Covenant not to Compete 350 350 350 -- -- -- -- -- --
Acc. Amortization (190) (248) (350) -- -- -- -- --
Deferred Taxes 114 641 854 465 -- -- -- -- --
Other Assets 857 1,063 765 638 250 225 200 175 150
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Other Assets 3,587 4,016 3,299 2,597 1,557 1,345 1,133 921 709
------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL ASSETS 10,600 11,024 11,592 9,779 9,558 10,014 10,556 11,197 11,896
======= ======= ======= ======= ======= ======= ======= ======= =======
LIABILITIES & EQUITY
Current Liabilities
Line of credit 250 -- 1,066 300
Current maturities 613 794 285 13 -- -- -- -- --
Accounts payable 863 772 1,343 278 165 174 184 194 205
Accrued expenses 872 648 1,490 1,684 1,545 1,583 1,622 1,711 1,805
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Current Liabilities 2,598 2,214 4,184 2,275 1,710 1,757 1,806 1,905 2,010
1,954 1,612 1,746 1,840 1,940
Long Term Debt 1,663 378 93 12 -- -- -- -- --
Stockholders' Equity
Common Stock 9,424 9,773 9,894 9,959 9,990 9,990 9,990 9,990 9,990
Retained Earnings (2,863) (1,119) (2,357) (2,232) (1,907) (1,498) (1,005) (463) 131
------- ------- ------- ------- ------- ------- ------- ------- -------
6,561 8,654 7,537 7,727 8,083 8,492 8,985 9,527 10,121
Less: Treasury Stock (222) (222) (222) (235) (235) (235) (235) (235) (235)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Stockholders' Equity 6,339 8,432 7,315 7,492 7,848 8,257 8,750 9,292 9,886
------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL LIABILITIES & EQUITY 10,600 11,024 11,592 9,779 9,558 10,014 10,556 11,197 11,896
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
ARIZONA INSTRURNENT CORPORATION
Ratio Analysis
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Computrac Sales Growth
Domestic 12.3% -18.7% 36.6% 17.6% 5.0% 5.0% 5.0% 5.0%
International 26.0% -14.7% 33.2% 26.3% 10.0% 10.0% 10.0% 10.0%
Service 5.5% 4.4% -27.2% -28.9% 4.0% 4.0% 4.0% 4.0%
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Computrac Sales Growt 12.9% -13.8% 21.7% 12.9%
Avg Growth 1995-1998 8.4%
Jerome Sales Growth
Domestic -0.5% -1.3% 14.2% 17.4% 5.0% 5.0% 5.0% 5.0%
-15.6% 42.6% -27.5% -2.6% 8.0% 8.0% 8.0% 8.0%
Service -9.9% -1.3% -12.2% -9.2% 2.0% 2.0% 2.0% 2.0%
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Jerome Sales Growth -6.9% 9.4% -4.9% 7.1%
Avg Growth 1995-1998 1.2%
Computrac COGS %
Domestic 42.8% 41.4% 45.5% 43.4% 42.0% 42.0% 42.0% 42.0% 42.0%
International 49.0% 43.6% 45.0% 39.6% 39.0% 39.0% 39.0% 39.0% 39.0%
Service 24.0% 26.3% 16.1% 13.3% 25.0% 25.0% 25.0% 25.0% 25.0%
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Computrac COGS % 40.3% 38.3% 41.5% 40.1 % 40.0% 40.0% 40.0% 40.0% 40.0%
Jerome COGS %
Domestic 41.8% 40.8% 43.1% 35.4% 37.0% 37.0% 37.0% 37.0% 37.0%
International 48.9% 43.6% 45.0% 39.6% 40.0% 40.0% 40.0% 40.0% 40.0%
Service 24.0% 26.3% 16.1% 13.4% 25.0% 25.0% 25.0% 25.0% 25.0%
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Jerome COGS % 39.1% 38.5% 38.0% 32.5% 35.4% 35.5% 35.6% 35.6% 35.7%
Marketing/Sales 25.1% 27.5% 34.3% 22.6% 23.5% 23.5% 23.5% 23.5% 23.5%
Gen 8 Administrative/Sales 12.4% 15.8% 17.9% 12.6% 18.0% 17.5% 17.0% 17.0% 17.0%
R&D/Sales 5.7% 6.8% 6.5% 9.6% 9.0% 9.0% 9.0% 9.0% 9.0%
Operating Income/Sales 11.7% 4.6% -5.5% 3.7% 5.4% 6.2% 6.9% 7.2% 7.4%
Income from Continuing/Sale 9.0% 17.0% -4.0% 0.9% 3.8% 4.5% 5.2% 5.4% 5.6%
Receivables/Sales 31.8% 27.4% 26.2% 21.2% 24.0% 24.0% 24.0% 24.0% 24.0%
Inventory/COGS 41.7% 46.5% 32.4% 25.7% 33.0% 33.0% 33.0% 33.0% 33.0%
Net PP&E/Sales 10.2% 7.9% 6.4% 6.3% 9.4% 8.7% 8.4% 8.6% 9.6%
Payables/COGS 20.1% 17.5% 17.0% 4.3% 5.0% 5.0% 5.0% 5.0% 5.0%
Accrued Expenses/G&A 66.6% 38.5% 54.8% 97.2% 40.0% 40.0% 40.0% 40.0% 40.0%
Tax Rate 40.0% 40.0% 40.0% 40.0% 40.0%
Interest Rate on Borrowings 9.5% 9.5% 9.5% 9.5% 9.5%
Interest Rate on Cash > 500k 4.0% 4.0% 4.0% 4.0% 4.0%
</TABLE>
<PAGE>
ARIZONA INSTRUMENT CORPORATION
Consolidated Income Statements
(3000s)
1995 1996 1997 1998
------- ------- ------- -------
Sales
Domestic 6,884 6,720 11,608 10,231
International 1,972 2,191 2,118 2,322
Service 1,737 1,752 1,506 1,184
------- ------- ------- -------
Net Sales 10,593 10,663 15,232 13,737
Cost of Goods Sold
Domestic 2,915 2,994 6,690 5,319
International 966 956 953 920
Service 417 461 243 158
------- ------- ------- -------
Total Cost of Goods Sold 4,298 4,411 7,886 6,397
------- ------- ------- -------
Gross Profit 6,295 6,252 7,346 7,340
59.4% 58.6% 48.2% 53.4%
Operating Expenses
Selling & Marketing 2,641 2,785 3,882 3,145
General & Administrative 1,310 1,684 2,720 1,732
Research & Development 606 720 985 1,325
Amortization & Depreciation 498 571 602 636
------- ------- ------- -------
Total Operating Expenses 5,055 5,760 8,189 6,838
------- ------- ------- -------
Operating Income 1,240 492 (843) 502
Other Income
Interest Income 22 22 15 17
Interest Expense (391) (201) (138) (105)
Settlement of Litigation -- 997 -- --
Other 98 64 (2) 56
------- ------- ------- -------
Total Other Income (271) 882 (125) (32)
------- ------- ------- -------
Pretax income 969 1,374 (968) 470
Income taxes 11 (441) (366) 344
------- ------- ------- -------
Income from Continuing Ops 958 1,815 (602) 126
Loss from Discontinued Ops (425) (72) (637) --
------- ------- ------- -------
Net Income 533 1,743 (1,239) 126
======= ======= ======= =======
Operating Income 1,240 492 (843) 502
Amortization & Depreciation 498 571 602 636
Non SG&A Amort & Depr 282 233 566 32
------- ------- ------- -------
EBITDA 2,020 1,296 325 1,170
======= ======= ======= =======
<PAGE>
BIBLIOGRAPHY
Arneson, George S., "Nonmarketability Discounts Should Exceed Fifty Percent,"
TAXES - THE TAX MAGAZINE, January, 1981.
Arneson, George S., "Minority Discounts Beyond Fifty Percent Can Be Supported,"
TAXES - THE TAX MAGAZINE, February, 1981.
Copeland, T. et. al., "VALUATION: MEASURING AND MANAGING THE VALUE OF
COMPANIES," NY. NY.: John Wiley & Sons, Inc. 1990.
Dukes, William P. and Oswald D. Boslin, "Valuation Of Closely-held Firms,"
BUSINESS VALUATION REVIEW, December, 1990.
Emory, John D., "The Value of Marketability As Illustrated In Initial Public
Offerings of Common Stock," BUSINESS VALUATION REVIEW, December, 1995.
Gampel, Peter, "Recent Thoughts When Valuing A Minority Interest In A
Closely-held Company," BUSINESS VALUATION REVIEW, June, 1987.
Gelman, Milton, "An Economist's - Financial Analyst's Approach To Valuing Common
Stock In A Closely-held Company," JOURNAL OF TAXATION, June, 1972.
Maher, Michael J., "An Objective Measure For A Discount For A Minority Interest
And A Premium For A Controlling Interest," TAXES - THE TAX MAGAZINE, JULY, 1979.
Maroney, Robert E., "Why 25% Discounts For Non-marketability In One Valuation,
100% In Another," TAXES -THE TAX MAGAZINE, May, 1987.
Maroney, Robert E., "Most Courts Overvalue Closely-held Stocks," TAXES - THE TAX
MAGAZINE, March, 1973.
Pratt, Shannon, "VALUING A BUSINESS: THE ANALYSIS AND APPRAISAL OF CLOSELY-HELD
COMPANIES", (Second Edition) Dow Jones - Irwin, Chicago, Illinois. 1981.
Securities and Exchange Commission ("SEC"), "THE INSTITUTIONAL INVESTOR STUDY
REPORT", Washington DC, 1971.
Simpson, David W., "Minority Interest and Marketability Discounts: A
Perspective," BUSINESS VALUATION REVIEW, March, 1991 (Part I) June, 1991 (Part
II).
<PAGE>
RESUME
BEN F. EDERER
2425 EAST CAMELBACK ROAD, SUITE 450
PHOENIX, ARIZONA 85016
BUSINESS: (602) 553-1055
PROFESSIONAL EXPERIENCE:
Oxford Advisors, Inc. Phoenix, AZ/Houston, TX
Independent Consultant/Advisor
* Provide corporate valuation services for mergers and acquisitions, ESOP,
litigation, estate tax, business planning and other purposes
* Provide financial advisory services in connection with change of ownership
transactions
* Engaged by private capital source to identify, initiate, and execute
venture financing
* Advised leading U.S. architectural woodworking company in proposed
divestiture. Performed organizational diagnostic designed to optimize
operations
* Provided financial advisory services, including corporate valuation, in
conjunction with the $42 million sale of a Texas-based document copying and
printing company
* Provided financial advisory, consulting, and other services to
Phoenix-based investment banking firm
* Assisted in establishing corporate finance department in Houston for major
U.S. commercial bank
McKinsey & Company, Inc.
Management Consulting Houston, Texas
* Texas representative to firm's Corporate Finance Practice Center. The
efforts of this group resulted in the publication of Valuation: Measuring
And Managing the Value of Companies. Other topics addressed in this group
were the tax and strategic issues related to change of ownership
transactions.
* Responsible for designing and assisting in the implementation of strategic
plans for corporate clients
* Assisted in the development of optimal solutions for marketing,
micro-economics, and financial problems
* Developed programs for linking strategic decision-making with shareholder
value maximization
* Identified plans for optimizing the trade and distribution of various
corporate products and services
* Performed pro bono studies on behalf of The University of Houston Board of
Regents, The Houston Grand Opera, and The Houston Coalition For the
Homeless
* Received extensive training focused on skill development in public
speaking, corporate strategy, and business problem solving
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Smith Barney, Harris Upham & Co., Inc. New York, NY
Corporate Finance - East Coast Group
* Assisted in the design and execution of financing strategies for corporate
clients in a variety of industries
* Acted as financial advisor in the development and implementation of
acquisition and divestiture strategy. Initiated and executed mergers and
acquisitions on behalf of middle-market clients.
* Performed a number of corporate valuations including fairness opinions and
purchase price allocation
* Managed and co-managed initial and secondary public offerings of equity
securities
Underwood, Neuhaus & Co., Incorporated Houston, Texas
* Responsible for originating, structuring, and executing financial
transactions on behalf of emerging and middle-market companies including:
* Initial Public Offerings
* Real Estate Investment Trusts
* Collateralized Pass-Through Securities (Grantor Trust)
* Limited Partnerships
* Venture Capital Financing
* Acted as financial advisor in the development and implementation of
acquisition and divestiture strategy
* Financial Advisor to various parties in corporate restructuring and
reorganization.
* Performed a variety of corporate valuation assignments for the following
purposes:
* ESOP
* Litigation support including bankruptcy, divorce, and ownership
dispute proceedings
* Estate planning
* Fairness opinions
* Establishing corporate value for public and private financing
transactions
Investment Banking/Consulting Industry Experience:
Manufacturing Environmental Services
Retail Computer Hardware
Natural Resources Financial Institutions
Agriculture & Livestock Real Estate
Sporting Goods Distribution
Entertainment Consumer Products
Health Care Non-Profit
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EDUCATION:
GRADUATE DEGREE
University of Houston Houston, Texas
Masters of Business Administration; Emphasis on Accounting
Internship positions as a candidate for degree:
* Graduate Research Fellowship. Assisted Dr. Paul Horvitz in the
preparation of a research study on banking deregulation which was
submitted to the U.S. Treasury Department. This position was normally
awarded to doctoral candidates.
* Investment Banking Internships. Analyst in the corporate finance
departments of Bateman Eichler, Hill Richards, Inc. and Underwood,
Neuhaus & Co. Supported senior corporate finance personnel in research
and in executing public equity, subordinated debenture, mergers and
acquisitions, and partnership financing.
* Public Accounting Internship. Accounting internship in the audit
department of the Houston Arthur Andersen & Co. Office.
Financed 100% of education
UNDERGRADUATE DEGREE
The University of Arizona Tucson, Arizona
Bachelor of Business Administration; Emphasis on Finance
* Member of Delta Chi Fraternity
* Received various scholarships for academic achievement
* Worked in the farming and ranching industries during Christmas and
summer periods
Financed 100% of education
Lecturer at the Arizona State University Graduate Business School
Qualified as a business valuation expert in U.S. Federal Court
PERSONAL INTERESTS: Backpacking, reading, travel, private pilot, and scuba
diving
REFERENCES: References will be furnished upon request.
BORN: October 16, 1959 in La Jolla, California
