-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sg5cK09SYYOqZqSK0OyeCqa8pQvY5iLwZCUMY5lo9HiMaESUFkAfsH7eUNM8qxS4 ArIZW3KB4YGzKJbWyH8oVQ== 0000950147-98-000256.txt : 19980401 0000950147-98-000256.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950147-98-000256 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARIZONA INSTRUMENT CORP CENTRAL INDEX KEY: 0000724904 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 860410138 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-12575 FILM NUMBER: 98583043 BUSINESS ADDRESS: STREET 1: 4114 E WOOD ST CITY: PHOENIX STATE: AZ ZIP: 85040 BUSINESS PHONE: 6024701414 MAIL ADDRESS: STREET 1: 4114 E WOOD STREET CITY: PHOENIX STATE: AZ ZIP: 85040 FORMER COMPANY: FORMER CONFORMED NAME: QUINTEL CORP DATE OF NAME CHANGE: 19870329 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTRAC INSTRUMENTS INC DATE OF NAME CHANGE: 19840613 10KSB 1 10KSB 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, 1997 |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (no fee required) For the transition period from _________ to __________. Commission File Number: 0-12575 ARIZONA INSTRUMENT CORPORATION - -------------------------------------------------------------------------------- (Name of small business issuer as specified in its charter) Delaware 86-0410138 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 4114 East Wood Street, Phoenix, AZ 85040 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (602) 470-1414 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference In Part III of this Form 10-IKSB or any amendment to this Form 10-KSB. |_| 1 As of March 23, 1998, the aggregate market value of the voting stock held by non-affiliates of the registrant was $7,771,285. The aggregate market value is computed with reference to the average bid and asked prices. Shares of Common Stock held by each officer and director and by such person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive. Issuers revenues for its most recent fiscal year were $15,232,319 As of March 20, 1998, 6,717,086 shares of Common Stock ($.01 par value) were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Part III: Portions of the Proxy Statement for the 1998 Annual Shareholders' Meeting (to be filed). 2 Unless the context indicates otherwise, the term "Company" or "AZI" refers to Arizona Instrument Corporation and its wholly-owned subsidiaries. Except for the historical information contained herein, the discussion in this Form 10-KSB contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The forward-looking statements include statements regarding management's anticipation of the Company's future market position, development of additional products, product introduction and delivery dates, reliability of products, adequate sources of supplies, acquisition of related product lines or companies, positive responses to new developments, and availability and terms of credit. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties, and on assumptions that involve judgments with respect to, among other things, future economic, competitive and market conditions, research and development results, product introduction and delivery schedules, raw materials, market conditions, stability of the regulatory environment, future business decisions and the outcome of negotiations with its lender, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements, many of which are beyond the control of the Company, are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking information will be realized. Important factors which may cause actual results to differ materially from those contemplated or implied by such forward-looking statements are discussed in more detail in this form 10-KSB and the Company's 1997 Annual Report to Shareholders. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. PART I ITEM 1. DESCRIPTION OF BUSINESS General - ------- Arizona Instrument Corporation designs and manufactures precision instruments used in quality control, industrial control and environmental monitoring applications. The operations of AZI's wholly-owned subsidiary, Horizon Engineering and Testing, Inc. ("Horizon"), which had specialized in testing and engineering services for the underground storage tank ("UST") market, were discontinued during 1997. AZI completed its initial public stock offering on September 22, 1983 as Computrac Instruments, Inc. Later that year, the Company changed its name to Quintel Corporation. In March 1987, to reflect new product offerings, the Company was renamed Arizona Instrument Corporation. AZI's initial product was the Computrac moisture analyzer for use in process control industries, but the Company has successfully expanded into other product areas. In December 1986, AZI acquired Jerome Instrument Corporation ("Jerome"), a manufacturer of mercury and hydrogen sulfide gas analyzers. In January 1988, AZI completed the acquisition of certain assets from Genelco, Inc. ("Genelco") including the Soil Sentry line of UST leak detection systems. In June 1994, the Company introduced the ENCOMPASS(TM) product, its next generation of fuel management and leak detection compliance systems. In September 1992, the Company 3 acquired Horizon, a company that specialized in testing and engineering services for USTs; however, the Company discontinued Horizon's operations during 1997. Sales of the Company's Encompass and Soil Sentry products, as well as similar products of the Company's competitors, have been slower than predicted by industry analysts. Many UST operators have chosen the less expensive but temporary, regulatory option of annual tank testing, combined with monthly inventory reconciliation, thus delaying their move to more expensive permanent monitoring. By December 1998, the law will require virtually all UST operators to move from the temporary, annual testing option to a monthly inventory reconciliation service or permanent leak monitoring. ENCOMPASS(TM) and Soil Sentry Product Line - ------------- ---------------------------- Products - ENCOMPASS and the Soil Sentry line of UST monitoring systems include various products that allow UST operators with diverse site needs to automate fuel management and comply with federal and local leak detection regulations. In June 1994, the Company introduced the ENCOMPASS product, a personal computer-based fuel inventory reporting and environmental compliance system that utilizes on-site personal computers to manage fuel inventory and meet EPA leak detection requirements. The ENCOMPASS system is compatible with other business software and runs in the computer's background without interrupting other site activities. In the event of an alarm condition, the system automatically notifies the operator. The ENCOMPASS system runs in a Windows-based environment. In 1996, the Company expanded the ENCOMPASS system to include line leak detection and continuous statistical tank testing products. The addition of statistical inventory reconciliation ("SIR"), as well as additional interfaces to hardware produced by third parties is scheduled for 1998. The Soil Sentry Twelve-X, improved in 1993, combines aspirated and dynamic vapor monitoring technologies to monitor both tanks and piping at sites which have existing hydrocarbon contamination. It uses a unique aspirated vapor technology to measure for the presence of leak-indicating hydrocarbon vapors in the soil surrounding underground and aboveground tanks. Sampling points placed at strategic locations throughout a site are connected with transport tubing to a Twelve-X console. A pump inside the system console automatically draws air samples from each sampling point, one at a time, back to the console for analysis by the sensor. The microprocessor establishes a baseline contamination level, then employs a series of statistical tests and mathematical modeling to differentiate between new leaks, spills and existing background contamination to eliminate false alarms. If thresholds are exceeded, an alarm is sounded. Because the monitoring wells are located throughout the site, the user is able to pinpoint the problem area quickly, greatly reducing costs to repair tanks and/or piping and remediate the site. Primary features of all ENCOMPASS and Soil Sentry products include the ability to remotely access and control the system through a modem using a personal computer. Market and Applications - In 1984, Congress amended the Resource Conservation and Recovery Act, requiring the implementation of strict registration and monitoring regulations for all underground storage tanks in the United States. For the purpose of these regulations, the EPA has defined any storage tank system with 4 more than 10 percent of its total volume underground as a UST. Estimates of the total number of USTs affected by the federal regulations vary, ranging from 1.8 to 2.1 million, with an average of 3.3 USTs per site. The markets and applications for UST leak detection include: major oil company service stations; major oil company production and storage facilities; independent retail service stations; convenience stores that sell gasoline; shipping and trucking firms; manufacturing and distribution firms with fleets; airports; government and military sites equipped with underground storage tanks and pipelines, and facilities with back-up power systems. All of these markets contain applications appropriate for ENCOMPASS and Soil Sentry systems. In addition, non-regulated fuel systems such as aboveground storage tanks can also be monitored with the ENCOMPASS and Soil Sentry products. Horizon - ------- Services - Horizon was acquired in 1992 to facilitate the penetration of the UST market by the Company's Soil Sentry products. Horizon provided tank testing services using a tracer testing system for USTs, which was licensed to Horizon by Tracer Research Corp. ("Tracer") of Tucson, Arizona. In 1996, Horizon began offering a complete set of products and services which were required by its tank testing customers choosing to convert to a permanent method of leak detection. Offering ENCOMPASS as the leak detection compliance method, Horizon also provided installation management of the system, cathodic protection, interior tank lining, spill/overfill protection as well as other services and products required to upgrade the site to meet federal and local leak detection requirements. Markets - Horizon had been engaged since 1990 in the business of testing USTs for leakage using EPA-recognized testing methods. Due to its declining market share in tank testing, and its inability to generate profits from tank upgrades, Horizon was discontinued in 1997. Jerome Product Line - ------------------- Products - The first Jerome product was developed in 1976 as a portable mercury detector for mining applications. The initial "mercury in soil" detector spawned a line of hand-held, battery powered, field portable instruments capable of detecting mercury vapor and hydrogen sulfide in minute quantities. The Jerome 431-X mercury vapor analyzer ("Jerome Mercury Analyzer") quickly and accurately quantifies low levels of mercury in ambient air for on-site environmental testing, clean-up and analysis. Using the Company's gold-film sensing technology, the unit can be carried to sources of mercury, and displays results in seconds with the push of a button. After spill clean-up, the analyzer can be used to verify that no hazardous residue remains. The Jerome 631-X hydrogen sulfide analyzer ("Jerome H2S Analyzer") detects and measures low levels of ambient hydrogen sulfide ("H2S"). Using the Company's gold-film sensing technology, the hand-held instrument quickly quantifies H2S levels down to parts-per-billion, allowing corrective action to reduce complaints which arise at noxious-odor levels. The simple-to-operate, push button unit is easily carried to sources of H2S where it monitors gas levels to meet air quality standards. 5 The Company is working on developing new proprietary gold film sensors for future generations of the Company's Jerome line of toxic gas monitors. Markets and Applications - Mercury - The market for Jerome Mercury Analyzer comprises customers in three major groups: Industrial Hygiene - These applications involve workplace screening to ensure employees are not subjected to unacceptable mercury risk. The United States Occupational Safety and Health Administration requires industries such as battery and caustic soda manufacturers, thermometer and fluorescent light manufacturers, hospitals and laboratories to monitor for mercury. Industrial Process Quality Control - These customers test for mercury in products where even trace amounts can have toxic effects, such as the confined environments of submarines, engine rooms or spacecraft. Suppliers to the National Aeronautics and Space Administration and the United States Navy are required under procurement contracts to certify that certain equipment components are mercury free. Mercury Dental Amalgam Screening - Mercury and silver dental amalgams have become the subject of intense scrutiny and controversy. The Jerome Mercury Analyzer has been used in research on this topic, and the Company believes that it is recognized in the dental and medical professions as the only portable instrument that provides accurate mercury vapor readings at the required levels. Markets and Applications - Hydrogen Sulfide - The Jerome H2S Analyzer allows industries to monitor H2S in low parts per billion levels for odor and corrosion control. Odor Control - Jerome H2S Analyzers effectively quantify the noxious odor of H2S given off from industrial processes in order to manage customer complaints or potential litigation. The most common market is the wastewater treatment industry. Corrosion Control - Searching for and quantifying the presence of H2S near costly industrial equipment is critical since H2S and its byproducts are highly corrosive. Industries utilizing the Jerome H2S Analyzer for corrosion control include wastewater treatment, oil and gas refining, and pulp and paper processing. Computrac Product Line - ---------------------- Products - AZI was founded on the Computrac line of moisture analyzers. The Computrac moisture analyzers simplify and automate a tedious industrial quality control procedure. Typically, a sample material is weighed, then dried in an oven for several hours to drive off moisture. The sample is weighed again and the initial moisture content of the sample is computed based on the loss of water weight. Computrac instruments house a heating chamber to dry the sample, a precision balance to measure sample weight change and a microprocessor that uses an algorithm to quickly extrapolate moisture content based on the rate of weight loss. This technology is named the loss on drying or LOD technique. Computrac instruments are rugged enough to be used on the factory floor for quick batch analysis and accurate enough for precise laboratory testing. They do not require a trained technician for operation. Thus, they can save customers both time and money. 6 In 1994, the Company completed development of the Computrac MAX-2000 and MAX-1000 moisture analyzers. The MAX-2000 uses the latest digital technology to detect moisture levels accurately down to .005% in as little as two minutes. The MAX-2000 is programmable from an easy-to-use front panel menu system, allowing the user to store test parameters for 30 different sample materials. It features a real-time front panel display of moisture values, the elapsing test time and drying-curve graph, a statistical software package, and the ability to send test results to a PC or printer. In December 1995, the Company announced that it completed proof of concept of its new line of Computrac moisture analyzers with Alpha and Beta production units completed in 1996. The new product, targeted at the worldwide titration market, requires no toxic reagents, is simple to use and maintain, and offers excellent correlation and repeatability. The new Computrac product was released for sale to customers during 1997 and additional product enhancements are under development. The MAX-500 was introduced in 1996 as a lower priced, reduced feature version of the MAX-1000 and MAX-2000. The MAX-500 is for customers who do not need all the features or the resolution of the other Computrac moisture analyzers. Markets and Applications - The markets for Computrac instruments tend to be niche applications in various industries. Three primary industries have yielded the Company's historical sales: Foods - measuring the moisture content of cookie dough, cigarette tobacco, pasta and numerous other raw and finished food products; Chemicals - measuring moisture and total solids content of such chemical products as adhesives, coatings, and paints; and Plastics - measuring the water content of resins used in molding or extrusion. Other applications include pharmaceutical production and forestry management. Product Reliability and Quality Control - --------------------------------------- The Company believes its products are highly reliable. The Company's products have built-in self-test features which are designed to insure that the instrument is functioning properly and will provide an accurate result. If any of the self-tests indicate abnormal conditions, the operator is alerted by a light, and a coded display indicates the type of malfunction. The Company's products have one-, two- and five-year parts and labor warranties. For the year ended December 31, 1997, warranty expense approximated 2% of net sales. 7 In February 1996, the Company announced that it achieved ISO 9001 Quality System Certification. This certification is registered through SGS International Certification Services, Inc., an ANSI-RAB accredited registrar. The ISO 9001 certification defines models for quality assurance in every phase of business operations including design, development, quality control, customer service, production, installation and service. Certification to the worldwide ISO 9001 standard documents that the Company has in place policies, practices and procedures to provide services using quality management systems in compliance with International Organization of Standardization (ISO) model. Manufacturing and Sources of Supply - ----------------------------------- The majority of the Company's manufacturing costs are for purchased components. Certain of the components are then provided to outside companies for subassembly, with final assembly and testing performed by the Company. Although two vendors currently supply in excess of 45% of the raw materials used in Jerome's instrumentation, secondary vendors are available. The raw materials and component parts are supplied by the two vendors pursuant to specifications by the Company. The Company has prequalified certain other vendors and believes that, if necessary, the raw materials and components could be supplied by such other vendors without disruption of the manufacturing process or other adverse effect on the Company. Marketing and Sales; Backlog - ---------------------------- The Company's marketing and sales strategy is to identify major markets its products can serve, evaluate the sales potential of each market segment, and conduct specialized promotional campaigns, market by market, to elicit sales inquiries from prospective customers. The majority of the Company's promotion budget is spent on trade advertising, public relations and exhibiting at industry trade shows. Inquiries are processed through an in-house inquiry handling system. Sales representatives are trained to follow up on inquiries and qualify the applicability of the Company's products to the prospect's need. Historically, due to the relatively short time period between receipt of customer orders and shipment of products, the Company's backlog has been quite low. Since 1988, the dollar amount of unfilled orders at the beginning of any quarter has not exceeded 15% of sales for that quarter. The Company markets its instruments for export through its own sales force, as well as through foreign distributors in Canada, Europe, the Middle East, the Far East, and Latin America. Industries Served - Customers - ----------------------------- The specific industries served domestically by each product are detailed in the specific Markets and Applications sections presented earlier. One customer represented approximately 29% of net sales in 1997. The Company is actively seeking to diversify sales of this product to other customers and anticipates that additional customers will be added in the next 12 months. Most export sales are to foreign distributors. The Company is unable to determine which industries are served by the export sales, but believes them to be similar in pattern to domestic sales. Export sales were 8 approximately 14% of total sales in 1997, with no sales to any country exceeding 10% of net sales. (See Note I to the Consolidated Financial Statements) The Company's business with United States government agencies is effected through two contracts with the General Services Administration. Both Jerome and Soil Sentry products are available for purchase by federal agencies through these contracts. None of the contracts provide for renegotiation of profits, except upon renewal of such contract or termination at the election of the government. The contracts will expire in January 1999. The Company's products and services are not subject to government approval. The Company is not aware of any pending government regulations which would materially affect its business. Competition - ----------- ENCOMPASS and Soil Sentry - There are a number of suppliers of permanent storage tank monitoring systems which compete with the ENCOMPASS and Soil Sentry product line. These companies are nationwide in scope and many operate in foreign markets. Channels of distribution for the competition include direct account sales, distributors, and manufacturers' representatives. The ENCOMPASS and Soil Sentry products overlap the products of these competitors, except that AZI believes that it is the only provider of an aspirated vapor monitoring system. Computrac - A number of companies have products which compete with Computrac moisture analyzers. For applications where very low moisture levels are measured, titrators provide the greatest competition. Many of these companies operate both domestically and internationally. Jerome - There is no significant competition for Jerome in applications where low levels of hydrogen sulfide gas or mercury vapor need to be measured with a hand-held ambient air analyzer. When a less sensitive instrument is needed, the level of competition increases. Research and Development - ------------------------ The Company believes that the development of new products, enhancements for existing products, and the development of new applications for its existing products are critical to its success. Research and development expenses increased 37% in 1997 compared to 1996. Expenditures for research and development for the years ended December 31, 1997, 1996 and 1995 were $984,628, $720,133, and $605,628, respectively. This represented 6.5% of sales in 1997, 6.8% of sales in 1996, and 5.7% of sales in 1995. The Company's research and development expenditures for 1997 were channeled into the development of new products in all three product lines. The Company also intends to develop additional instrumentation products and services through OEM relationships and the acquisition of related product lines or instrument companies. Patents, Licenses and Trademarks - -------------------------------- The Company owns two patents directed to aspects of its Computrac product, one patent directed to aspects of its Soil Sentry product, one patent directed to its ENCOMPASS product and one domestic and five foreign patents directed to aspects of its Jerome product. Two additional domestic Jerome patents, one domestic ENCOMPASS patent and one Computrac patent are currently pending. The Company does not 9 believe that patents are a significant long-term competitive factor in these businesses and intends to rely more on its on-going research and development, engineering and customer service to maintain a long-term competitive advantage in the market place. The Company has not granted licenses under any of its patents and such patents have not been challenged or upheld in court. There can be no assurance that the validity of the patents will be upheld if challenged. The Company has trademarked its ENCOMPASS(TM) product. Employees - --------- As of December 31, 1997, the Company had a total of 86 full time employees and 2 part-time employees. The Company provides ongoing training to its technical and sales personnel. None of the Company's employees are represented by a union. Management believes that relations between the Company and its employees are excellent. ITEM 2. DESCRIPTION OF PROPERTY The Company currently leases approximately 35,000 square feet in Phoenix, Arizona. All administration, sales, customer service, engineering and manufacturing for the Company are in the Phoenix facility. The lease on this building expires in August 2003. The Company believes that its facilities are modern, well-maintained and adequate for current needs. ITEM 3. LEGAL PROCEEDINGS On March 7, 1997, the Company was served with a summons and first amended complaint which was filed in the United States District Court for the District of Idaho on February 28, 1997 by United Co-op, Inc. and Idaho Petroleum Clean Water Trust Fund. The complaint alleges breach of contractual promises and breach of warranties in a commercial transaction for tank and line tightness services. The Company does not believe that the resolution of this claim will have a material adverse effect. 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 1997. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information regarding executive officers of the Company. George G. Hays, age 42, is the President, Chief Executive Officer and Chairman of the Board of Directors. Mr. Hays joined the Company in 1997 as Vice President of Finance, Chief Financial Officer, and Vice President of Manufacturing. In November 1997, Mr. Hays was elected President and Chief Executive 10 Officer for the Company. In January 1998, Mr. Hays was elected Chairman of the Board of Directors. Prior to his position with the Company, Mr. Hays was president and founder of Hays Financial Group, Inc., an investment banking firm, since 1986. Walfred R. Raisanen, age 62, is the Vice President of Engineering of the Company and a member of the Board of Directors. He served as Chairman of the Board of Directors since the Company's inception in January 1981 until early 1998. Prior to his position with the Company, he was President and a Director of Motorola Process Control, Inc., a predecessor to the Company. Susan Berry, age 49, was named Secretary in early 1989. She has served as Human Resources Manager for the Company since 1985. Prior to her position with the Company, Ms. Berry was in corporate administration for Inter-Tel, Inc. Allen Porter, age 40, was named Vice President of Marketing in 1996. Mr. Porter has been with the Company since 1985, working in sales, sales management and product management. Prior to his position with the Company, he was program director for an Arizona-based behavioral health agency. Linda Shepherd, age 46, was named Controller and Chief Accounting Officer in mid-1997. Ms. Shepherd has been an accountant for the Company since 1984. Prior to her position with the Company, she served as an accountant for a local trucking firm for nine years. Executive officers are elected annually and serve at the discretion of the Board of Directors. 11 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the Nasdaq Small Cap Market. As of March 20, 1998, there were approximately 400 shareholders of record of the Company's common stock, its only class of common equity. The high and low prices set forth below are derived from the Nasdaq Monthly Statistical Report prepared by the National Association of Securities Dealers, Inc., represent quotations by dealers, may not reflect applicable markups, markdowns or commissions, and do not necessarily represent actual transactions. Bid ---------------------------- 1997 HIGH LOW -------------------- ------------ ------------ First Quarter 2.56 2.44 Second Quarter 1.81 1.75 Third Quarter 1.65 1.50 Fourth Quarter 0.96 0.84 1996 HIGH LOW -------------------- ------------ ------------ First Quarter 2.71 2.51 Second Quarter 3.42 3.11 Third Quarter 2.84 2.64 Fourth Quarter 2.63 2.38 The Company has never paid a cash dividend and currently intends to retain all earnings for use in its business. The declaration and payment of dividends in the future will be determined by the Board of Directors in light of conditions then existing, including the Company's earnings, financial condition, capital requirements and other factors. Dividends are also restricted by the Company's lines of credit agreements with Silicon Valley Bank. See "Management's Discussion and Analysis or Plan of Operation." 12 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 and the Company's 1997 Annual Report to Shareholders. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. 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 1997, 1996 and 1995. See ITEM 7 FINANCIAL STATEMENTS. 13
Percentage of Net Sales -------------------------- Percentage change Year Ended December 31, ------------------- -------------------------- 1997 vs 1996 vs 1997 1996 1995 1996 1995 ------- ------- ------- ------- ------- NET SALES 100% 100.0% 100.0% 42.8% 0.7% COST OF GOODS SOLD 51.8% 41.4% 40.6% 78.8% 2.6% ------- ------- ------- ------- ------- Gross margin 48.2% 58.6% 59.4% 17.5% -0.7% ------- ------- ------- ------- ------- EXPENSES Marketing 25.5% 26.1% 24.9% 39.4% 5.4% General & administrative 17.9% 15.8% 12.4% 61.6% 28.5% Research & development 6.5% 6.8% 5.7% 36.7% 18.9% Amortization & depreciation 4.0% 5.4% 4.7% 5.5% 14.5% ------- ------- ------- ------- ------- Total Expenses 53.8% 54.0% 47.7% 42.2% 13.9% ------- ------- ------- ------- ------- OPERATING INCOME (LOSS) -5.5% 4.6% 11.7% -271.0% -60.2% ------- ------- ------- ------- ------- OTHER REVENUE (EXPENSE) Interest income 0.1% 0.2% 0.2% -33.3% 0.4% Interest expense -0.9% -1.9% -3.7% -31.2% -48.6% Settlement of litigation 0.0% 9.4% 0.0% -100.0% Other 0.0% 0.6% 0.9% -103.2% -34.9% ------- ------- ------- ------- ------- Total other income (expense) -0.8% 8.3% -2.6% -114.2% -425.2% INCOME (LOSS) BEFORE INCOME TAXES -6.4% 12.9% 9.1% -170.4% 42.1% ------- ------- ------- ------- ------- INCOME TAXES (BENEFIT) -2.4% -4.1% 0.1% -17.0% -4109.1% ------- ------- ------- ------- ------- NET INCOME (LOSS) FROM CONTINUING OPERATIONS -4.0% 17.0% 9.0% -133.1% 89.8% GAIN (LOSS) FROM DISCONTINUED OPERATIONS -4.2% -0.6% -4.0% -788.7% 90.2% ------- ------- ------- ------- ------- NET INCOME -8.1% 16.4% 5.0% -171.0% 227.7% ======= ======= ======= ======= =======
1997 vs. 1996 - ------------- Net sales increased by $4,568,830 or 42.8% to $15,232,319 in 1997 from $10,663,489 in 1996. Sales increased primarily due to increased sales of Encompass installations, Encompass systems, and Computrac instruments. Net sales of Jerome instruments declined slightly, while sales generated from customer service activities were essentially flat. Cost of goods sold increased by $3,474,626 or 78.8% to $7,885,507 in 1997 from $4,410,881 in 1996. Cost of goods sold was 51.8% of sales in 1997 compared to 41.4% of sales in 1996. Gross margin decreased primarily due to the substantially larger portion of sales represented by low margin Encompass installations, and to a lesser extent, a price reductions in the Computrac product line and increases in material costs. Operating expenses in 1997 increased by $2,428,791 or 42.2% to $8,188,933 from $5,760,142 in 1996. The percentage increase in operating expenses for 1997 over 1996 was in line with sales growth. Operating expenses were 53.8% of sales in 1997, as compared to 54.0% of sales in 1996. Marketing expenses increased by $1,096,572 or 39.4% to $3,881,984 from $2,785,412 in 1996. Marketing expenses increased primarily due 14 to increased activities necessary to support the growth in sales, and were 25.5% of sales in 1997 as compared to 26.1% of sales in 1996. General and administrative expenses increased by $1,036,512 or 61.6% to $2,720,249 from $1,683,737 in 1996. General and administrative expenses were 17.9% of sales in 1997 as compared to 15.8% of sales in 1996. General and administrative expenses increased in 1997 due to the costs associated with efforts taken to improve profitability including severance packages to terminated employees, the write off of bad debt, increased reserves for bad debt and other contingencies, the shutting down of the Company's office in Singapore, and increased personnel expenses. Research and development expenses increased by $264,495 or 36.7% in 1997 to $984,628 from $720,133 in 1996. The increase in research and development expenses was primarily the result of a planned increase in research and development personnel to support the new product activities for all the Company's various product lines. Research and development expenses were 6.5% of sales in 1997 as compared to 6.8% of sales in 1996. Amortization and depreciation expenses increased by $31,212 or 5.5% to $602,072 from $570,860 in 1996, due to the purchase of additional capital equipment, including demonstration units of the Company's own instruments as well as computer equipment. Other revenue (expense) in 1997 decreased by $1,007,722 or 114.2.% to an expense of $125,600 as compared to income of $882,122 in 1996. The decrease in other revenue was due primarily to other revenue of $997,096 recognized in 1996 related to the settlement of litigation, which did not recur in 1997. Interest expense in 1997 decreased by $62,713 or 31.2% to $138,314 from $201,027 in 1996,due to a decrease in average borrowings. As a result income from continuing operations before taxes decreased by $2,342,309 or 170.4% to a loss of $967,721 from income before taxes of $1,374,589 for 1996. Income taxes from continuing operations for 1997 were a benefit of $366,000 which approximated the statutory rate. For 1996, the Company realized an income tax benefit from continuing operations of $441,000 as a result of reducing the Company's deferred tax valuation allowance and recognizing a deferred tax asset. As a result, income from continuing operations for 1997 was a loss of $601,721, a decrease of $2,417,310 or 133.1% from the income from continuing operations of $1,815,589 generated for 1996. Loss from discontinued operations for 1997 was $636,799 as the Company discontinued its tank testing business which was performed through its Horizon Engineering and Testing, Inc. subsidiary. The loss from discontinued operations in 1996 was $71,652. The increased loss in 1997 of $565,147 as compared to 1996 was due primarily to expenses associated in shutting down the tank testing business and the write off of intangible assets associated with the purchase of Horizon in 1992. As a result, net income decreased by $2,982,457 or 171.0% to a net loss of $1,238,520 in 1997 from net income of $1,743,937 in 1996. 1996 vs. 1995 - ------------- Net sales increased by $70,931 or 0.7% to $10,663,489 in 1996 from $10,592,558 in 1995. Sales increased for Encompass and Jerome products which offset a decrease in sales of Computrac products. Sales generated from customer service activities were essentially flat. 15 Cost of goods sold increased by $113,155 or 2.6% to $4,410,881 in 1996 from $4,297,726 in 1995. Cost of goods sold was 41.4% of sales in 1996 compared to 40.6% of sales in 1995. Gross margin decreased slightly due to the a lower mix of sales of Computrac products. Operating expenses in 1996 increased by $704,109 or 13.9% to $5,760,142 from $5,056,033 in 1995. Operating expenses were 54.0% of sales in 1996, as compared to 47.7% of sales in 1995. Marketing expenses increased by $143,791 or 5.4% to $2,785,412 for 1996 as compared to $2,641,621 in 1995. Marketing expenses increased primarily due to increased personnel expenses. Marketing expenses were 26.1% of sales in 1996 as compared to 24.9% of sales in 1995. General and administrative expenses increased by $373,449 or 28.5% to $1,683,737 from $1,310,288 in 1995. General and administrative expenses were 15.8% of sales in 1996 as compared to 12.4% of sales in 1995. General and administrative expenses increased in 1996 due to the increased personnel expenses. Research and development expenses increased by $114,505 or 18.9% in 1996 to $720,133 from $605,628 in 1995. The increase in research and development expenses was primarily the result of a planned increase in research and development activities to support new product development including the development of the Computrac 3000 moisture analyzer. Research and development expenses were 6.8% of sales in 1996 as compared to 5.7% of sales in 1995. Amortization and depreciation expenses increased by $72,365 or 14.5% to $570,860 from $498,495 in 1995, due to the purchase of additional capital equipment. Other revenue (expense) in 1996 increased by $1,153,383 to income of $882,122 from an expense of $271,261 in 1995. The increase in other revenue was due primarily to other revenue of $997,096 recognized in 1996 related to the settlement of litigation, which did not occur in 1995. Interest expense in 1996 decreased by $190,455 or 48.6% to $201,027 from $391,482 in 1995,due to a decrease in average borrowings. As a result income from continuing operations before taxes increased by $407,051 or 42.1% to $1,374,589 compared to $967,538 for 1995. Income taxes from continuing operations for 1996 were a benefit of $441,000 which resulted from the reduction in the Company's deferred tax valuation allowance and the recognition of a deferred tax asset. Income taxes for 1995 were $11,000 which differed from the amount computed at the statutory rate due to a change in valuation allowance. As a result, income from continuing operations for 1996 was $1,815,589 an increase of $859,051 or 89.8% from the income from continuing operations of $956,538 generated in 1995. Loss from discontinued operations for 1996 was $71,652, an improvement of $352,748 from the loss from discontinued operations of $424,400 incurred by the Company in 1995. In 1997, the Company discontinued its tank testing business which was performed through its Horizon Engineering and Testing, Inc. subsidiary. As a result, net income increased by $1,211,799 or 227.7% to $1,743,937 in 1995 from net income of $532,138 in 1995. Liquidity and Capital Resources - ------------------------------- 16 Working capital decreased 35.2% to $2,556,983 at December 31, 1997 compared to $3,947,282 at December 31 1996. The current ratio decreased to 1.6 at December 31, 1997 from 2.8 at December 31, 1996. The decrease in working capital and the current ratio was primarily due to the Company's net loss. At December 31, 1997, accounts receivable were $3,990,192 an increase of $1,072,716 from the accounts receivable of $2,917,476 as of December 31, 1996. Receivables increased to support the increased level of sales. The ratio of net sales to ending accounts receivable for 1997 was 3.8 as compared to 3.7 for 1996. This ratio increased due to a greater amount of sales being shipped during the last part of 1997 as compared to 1996. Inventory at December 31, 1997 was $2,556,992 an increase of $507,010 from the inventory of $2,049,982 as of December 31, 1996. Inventory increased due to substantially higher levels of component inventory, primarily for the Encompass product line, which more than offset a reduction in finished goods inventory. Cash and cash equivalents at December 31, 1997 were $143,173, a decrease of $454,758 from cash of $597,931 at December 31, 1996. Cash used by operating activities was $283,093 for 1997. Cash was used by operating activities primarily to fund the net loss of $1,238,520, an increase in inventory , receivables, and the increase in deferred tax asset, which were partially offset by depreciation and amortization of $1,167,514, a decrease in other assets, and increases in accounts payable and accrued expenses. Cash used by investing activities was $565,405 in 1997, which was due to capital expenditures. Cash provided by financing activities was $393,739, as the Company borrowed $1,066,000 under its line of credit and repaid $794,031 in long term debt and capital leases. As of December 31, 1997, the Company was operating under a forbearance agreement with Silicon Valley Bank (the "Bank"), as a result of the breach of certain financial covenants by the Company during 1997. This forbearance agreement expired in February 1998. At December 31, 1997, the Company had lines of credit with the Bank aggregating $3,500,000 which were collateralized by accounts receivable, inventory and property, plant and equipment. These lines of credit expired on March 15, 1998. At December 31, 1997, the Company had $1,066,000 outstanding under these lines of credit. Of these borrowings, $996,000 was at the Bank's prime rate of interest plus 1.5% (10% at December 31, 1997), and $70,000 was at the international borrowing rate. As part of this credit facility the Company was able to borrow at prime plus 1.0% (9.5% at December 31, 1997) to support international receivables 90% guaranteed by the Export-Import Bank of the United States. The Company is currently negotiating with the Bank to renew the lines of credit and revise the financial covenants previously breached by the Company. Although there can be no assurance that the Bank will renew the lines of credit or revise the financial covenants, the Company believes that the Bank will continue to make credit available to it. It is likely that any continuing borrowing arrangement with the Bank will contain certain covenants, including minimum net income ratios and financial covenants. There can be no assurance that the Company will be able to meet any such covenants under any future borrowing arrangement with the Bank. Failure by the Company to renew the lines of credit or the default of the Company under the terms of the renewed borrowing arrangement will likely result in the acceleration of all amounts payable under the borrowing arrangement. The failure to maintain adequate credit facilities would have a material adverse effect on the Company. On November 17, 1995, the Company entered into a Loan Agreement with the Bank. Pursuant to the Loan Agreement, at December 31, 1997 the Bank held a note in the principal amount of $231,757 at an interest rate of prime plus 2% 17 (10.5% at December 31, 1997) and a warrant to purchase up to 62,500 shares of the Company's Common Stock at an exercise price of $2,08 per share. The Company is required to pay 28 monthly principal payments of $13,633 and one final payment of $13,629 in addition to monthly interest payments from January 7, 1997 through May 7, 1999. The note is cross-collateralized with the Company's bank lines of credit with accounts receivable, inventory, and property, plant and equipment. The note contains certain covenants, including minimum net income levels and certain financial ratios. On a quarterly basis, half of any excess cash flow that the Company generates is required to be used to prepay any remaining principal balance due on this note. Excess cash flow is defined as net income plus non-cash expenses less capital expenditures, scheduled principal payments and increases in net working capital. At December 31, 1997, the Company was not in compliance with certain covenants of this agreement and was operating under a forebearance agreement with the Bank. The forebearance agreement expired in February 1998. In connection with the renewal of the lines of credit discussed above, the Company is negotiating with the Bank to revise the financial covenants previously breached by the Company. See the paragraph above for a discussion of the likelihood and effects of obtaining a renewed borrowing arrangement. On April 14, 1995, the Company entered into a Subordinated Loan Agreement with Classic Syndicate, Inc. ("Classic"). Pursuant to the Subordinated Loan Agreement, Classic held a 10% Note in the principal amount of $375,000 with a maturity date of April 30, 1997. This Loan was repaid in 1997. The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2 digit year is commonly referred to as the Year 2000 problem. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. The Company has identified some applications that will require modification to address the Year 2000 problem. Internal and external resources will be used to make the required modifications and test these modifications. The Company plans on completing the modifications and testing of these modifications by mid 1999. The total cost to the Company of these Year 2000 problem related activities is not anticipated to be material. These costs and the date on which the Company plans to complete the modifications and testing to solve the Year 2000 problem are based upon management's estimates. However, there can be no assurance that these estimates will be achieved and the costs of solving the Year 2000 problem could differ significantly from management's estimates. 18 ITEM 7. FINANCIAL STATEMENTS INDEX Page Independent Auditors' Report ............................................ 20 Consolidated Balance Sheets ............................................. 21 Consolidated Statements of Operations ................................... 22 Consolidated Statements of Shareholders' Equity ......................... 23 Consolidated Statements of Cash Flows ................................... 24 Notes to Consolidated Financial Statements .............................. 26 19 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Arizona Instrument Corporation: We have audited the accompanying consolidated balance sheets of Arizona Instrument Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Arizona Instrument Corporation and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Phoenix, Arizona March 15, 1998 20 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
December 31, ---------------------------- 1997 1996 ---------------------------- ASSETS ------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 143,173 $ 597,931 Receivables, less allowance for doubtful accounts of $279,000 and $165,000 3,990,192 2,917,476 Inventories: Components 1,974,553 1,369,007 Finished Goods 582,439 680,975 ---------------------------- Total Inventories 2,556,992 2,049,982 Current portion of notes receivable related party 45,501 Prepaid expenses and other current assets 49,942 550,840 ---------------------------- Total current assets 6,740,299 6,161,730 PROPERTY, PLANT AND EQUIPMENT, net 975,180 846,458 GOODWILL, net of accumulated amortization 1,680,261 2,209,650 of $2,650,655 and $2,121,266 COVENANT NOT TO COMPETE, net of accumulated -- 102,084 amortization of $350,000 and $247,917 DEFERRED INCOME TAXES 1,431,237 641,437 OTHER ASSETS 764,739 1,062,805 ---------------------------- TOTAL ASSETS $ 11,591,716 $ 11,024,164 ============================ LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- CURRENT LIABILITIES Lines of credit $ 1,066,000 $ -- Accounts payable 1,342,539 771,679 Current portion of long-term debt and capital lease obligations 284,801 794,268 Other accrued expenses 1,489,976 648,501 ---------------------------- Total current liabilities 4,183,316 2,214,448 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - less current portions 93,444 378,010 SHAREHOLDERS' EQUITY Common stock, .01 par value per share: Authorized, 10,000,000 shares; Issued, 6,774,696 and 6,677,680 shares 67,747 66,777 Preferred stock, $.01 par value per share: Authorized, 1,000,000 shares Additional paid-in capital 9,826,963 9,706,163 Deficit (2,357,303) (1,118,783) ---------------------------- 7,537,407 8,654,157 Less treasury stock, 86,165 shares at cost (222,451) (222,451) ---------------------------- Total shareholders' equity 7,314,956 8,431,706 ============================ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,591,716 $ 11,024,164 ============================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES ----------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------
Year Ended December 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ NET SALES $ 15,232,319 $ 10,663,489 $ 10,592,558 COST OF GOODS SOLD 7,885,507 4,410,881 4,297,726 ------------ ------------ ------------ Gross margin 7,346,812 6,252,608 6,294,832 ------------ ------------ ------------ EXPENSES Marketing 3,881,984 2,785,412 2,641,621 General & administrative 2,720,249 1,683,737 1,310,288 Research & development 984,628 720,133 605,628 Amortization & depreciation 602,072 570,860 498,495 ------------ ------------ ------------ TOTAL EXPENSES 8,188,933 5,760,142 5,056,033 ------------ ------------ ------------ OPERATING INCOME (LOSS) (842,121) 492,466 1,238,799 ------------ ------------ ------------ OTHER REVENUE (EXPENSE) Interest income 14,751 22,124 22,038 Interest expense (138,314) (201,027) (391,482) Settlement of litigation (Note J) -- 997,096 Other (2,037) 63,929 98,183 ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (125,600) 882,122 (271,261) ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (967,721) 1,374,589 967,538 ------------ ------------ ------------ INCOME TAXES (BENEFIT) (366,000) (441,000) 11,000 ------------ ------------ ------------ NET INCOME (LOSS) FROM CONTINUING OPERATIONS (601,721) 1,815,589 956,538 ------------ ------------ ------------ LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX BENEFIT OF $388,000, $47,000, AND $0 (636,799) (71,652) (424,400) ------------ ------------ ------------ NET INCOME $ (1,238,520) $ 1,743,937 $ 532,138 ============ ============ ============ NET INCOME (LOSS) PER SHARE - BASIC: FROM CONTINUING OPERATIONS $ (0.09) $ 0.28 $ 0.15 ============ ============ ============ FROM DISCONTINUED OPERATIONS $ (0.10) $ (0.01) $ (0.07) ============ ============ ============ NET INCOME (LOSS) $ (0.19) $ 0.27 $ 0.08 ============ ============ ============ NET INCOME (LOSS) PER SHARE - DILUTED: FROM CONTINUING OPERATIONS $ 0.09 $ 0.26 $ 0.14 ============ ============ ============ FROM DISCONTINUED OPERATIONS $ 0.10 $ (0.01) $ (0.06) ============ ============ ============ NET INCOME (LOSS) $ 0.19 $ 0.25 $ 0.08 ============ ============ ============ BASIC SHARES OUTSTANDING 6,647,689 6,507,112 6,186,966 EQUIVALENT SHARES - STOCK OPTIONS -- 444,699 397,894 ------------ ------------ ------------ DILUTED SHARES OUTSTANDING 6,647,689 6,951,811 6,584,860 ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------
Additional (Deficit) Common Stock paid-in retained Treasury Shares Amount capital earnings stock TOTAL ------------- ----------- -------------- ----------------- ------------ ------------- BALANCE JANUARY 1,1995 6,195,484 $ 61,955 $ 9,294,400 $ (3,395,306) $ (222,451) $ 5,738,598 Issuance of stock pursuant to: Stock purchase plan 46,476 465 37,806 38,271 Exercise of warrants 105,603 1,056 21,444 22,500 Exercise of stock options 5,000 50 7,300 7,350 Net Income 532,585 532,585 ------------- ----------- -------------- ----------------- ------------ ------------- BALANCE DECEMBER 31, 1995 6,352,563 63,526 9,360,950 (2,862,721) (222,451) 6,339,304 Issuance of stock pursuant to: Stock purchase plan 40,637 406 57,207 57,613 Exercise of warrants 22,714 227 27,773 28,000 Earnout agreement 208,424 2,084 200,501 202,585 Exercise of stock options 53,342 534 59,732 60,266 Net Income 1,743,938 1,743,938 ------------- ----------- -------------- ----------------- ------------ ------------- BALANCE DECEMBER 31, 1996 6,677,680 66,777 9,706,163 (1,118,783) (222,451) 8,431,706 Issuance of stock pursuant to: Stock purchase plan 43,756 437 72,367 72,804 Exercise of stock options 53,260 533 48,433 48,966 Net Income (1,238,520) (1,238,520) ------------- ----------- -------------- ----------------- ------------ ------------- BALANCE DECEMBER 31, 1997 6,774,696 $ 67,747 $ 9,826,963 $ (2,357,303) $ (222,451) $ 7,314,956 ============= =========== ============== ================= ============ =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, --------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $(1,238,520) $ 1,743,937 $ 532,138 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 1,167,514 804,495 779,577 Gain on sale or abandonment of property, plant and equipment 0 (34,570) (62,294) Provision for losses on receivables 113,855 (25,289) 4,257 Provision for inventory obsolesence 35,035 Change in operating assets and liabilities: (Increase) decrease in receivables (1,186,571) 479,650 486,164 (Increase) decrease in inventories (542,046) (256,212) 296,388 Decrease in other current assets 546,400 46,257 11,639 Increase in settlement receivable 0 (364,419) Increase in deferred tax asset (789,800) (518,000) (Increase) decrease in other assets 198,707 (330,412) 21,011 (Decrease) increase in accounts payable 570,860 (91,707) 47,025 (Decrease) increase in accrued expenses 841,474 (222,635) 125,836 ------------ ------------ ------------ NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (283,092) 1,231,095 2,241,741 ------------ ------------ ------------ INVESTING ACTIVITIES: Purchases of property, plant and equipment and other assets (565,405) (207,354) (106,523) Proceeds from sale of property, plant and equipment and other assets 0 77,897 80,553 ------------ ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (565,405) (129,457) (25,970) ------------ ------------ ------------
(continued) 24 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended December 31, --------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ FINANCING ACTIVITIES: Borrowings of long-term debt $ - $ - $ 1,625,000 Payments of long-term debt and capital leases (794,031) (1,104,058) (2,441,192) Net (payments) borrowings under bank lines of credit 1,066,000 (250,000) (1,375,000) Proceeds received on notes receivable 0 15,506 5,703 Stock issued for warrants and options 0 88,265 29,850 Sale of common stock, net proceeds 48,966 Issuance of common stock for earnout agreement 0 202,585 Issuance of common stock pursuant to stock purchase plan 72,804 57,613 38,271 ------------ ------------ ------------ NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES 393,739 (990,089) (2,117,368) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (454,758) 111,549 98,403 CASH AND CASH EQUIVALENTS, beginning of year 597,931 486,382 387,979 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS end of year 143,173 597,931 486,382 ============ ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Transfer of inventories to property, plant and equipment to be used as demonstration units 315,354 57,057 100,589 Property, plant and equipment acquired through capital lease obligations 51,524 Interest paid 153,736 126,172 502,759 Income taxes paid 90,000 5,025 4,669
25 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES ----------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ THREE YEARS ENDED DECEMBER 31, 1997 ----------------------------------- A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidated financial statements include the accounts of Arizona Instrument Corporation and its wholly-owned subsidiaries (collectively, the "Company"). All material intercompany profits, transactions and balances have been eliminated upon consolidation. Description of business. Arizona Instrument Corporation designs, manufactures and markets the Computrac line of automated microprocessor controlled analytical instruments used to measure the moisture content of various materials, the ENCOMPASS and Soil Sentry line of computer-based fuel management and compliance leak detection instruments for monitoring underground storage tanks (USTs) and the Jerome line of toxic gas detection instruments primarily used to detect mercury and hydrogen sulfide. The Company also provided tank testing and related services for the underground storage tank market through its subsidiary, Horizon Engineering and Testing, Inc. In 1997, the Company discontinued the operations of Horizon Engineering and Testing, Inc. See Note K. The Company sells in the United States and also in international markets. Sales of instruments are recognized once the shipment is made. Inventories are stated at the lower of cost (first-in, first-out method) or market. Property, plant and equipment are recorded at cost. Depreciation is provided by the straight-line method over the estimated useful lives of the various classes of assets. Equipment and furniture/fixtures are estimated to have 5 and 7 year lives, respectively. Leasehold improvements are amortized over the shorter of the estimated useful life or the period of the lease. Equipment under capital leases are generally amortized over the estimated lives of the related equipment. Goodwill is the cost of investments in purchased companies in excess of the fair value of net assets of the businesses acquired. Goodwill is amortized on a straight-line basis over 20 years for the Jerome goodwill and over 10 years for the Horizon goodwill (See Note K). The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121 during 1995. SFAS No. 121 establishes the accounting standard for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used for long-lived assets and certain identifiable intangibles to be disposed of. The Company adopted SFAS No. 121 effective January 1, 1996. Covenant not to compete resulted as part of the Horizon acquisition in 1992 and had been amortized on a straight line basis. See Note K. Debt issue costs are amortized using the interest method over the term of the related debt. 26 Stock-based compensation. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock Based Compensation". The Company has determined that it will not change to the fair value method and will continue to use Accounting Principles Board Opinion No. 25 for measurement and recognition of employee stock based compensation. SFAS No. 123 additional disclosures have been included in the financial statements. Income (Loss) per share is computed on the weighted average number of common or common and common equivalent shares outstanding during each year. Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities and includes shares issuable upon exercise of stock options when dilutive. Statements of cash flows - For purposes of the consolidated statements of cash flows, cash and cash equivalents represent cash in bank and money market funds. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. New accounting pronouncements - In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", effective for both interim and annual periods ending after December 15, 1997. This statement specifies the computation, presentation and disclosure of earnings per share for entities with publicly held common stock or potential common stock. Prior year disclosure of earnings per share have been restated to comply with SFAS No. 128. The Financial Accounting Standards Board recently issued SFAS No. 130 on "Reporting Comprehensive Income" and SFAS No. 131 on "Disclosures about Segments of an Enterprise and Related Information." The "Reporting Comprehensive Income" standard is effective for fiscal years beginning after December 15, 1997. The standard changes the reporting of certain items currently reported in the stockholders' equity section of the balance sheet. The Company is currently evaluating what impact this standard will have on the Company's financial statements. The "Disclosures about Segments on an Enterprise and Related Information" standard is effective for fiscal years beginning after December 15, 1997. This standard requires that public companies report certain information about operating segments in their financial statements. It also establishes related disclosures about products and services, geographic areas, and major customers. The Company is currently evaluating what impact this standard will have on its financial statements and related disclosures. B. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 consists of the following; 27 1997 1996 ----------------- --------------- Leasehold Improvements $ 169,654 $ 157,604 Furniture, fixtures and equipment 4,452,959 3,936,984 Automobiles 99,358 99,359 ----------------- --------------- 4,721,971 4,193,947 Less accumulated depreciation (3,746,791) (3,347,489) ----------------- --------------- and amortization $ 975,180 $ 846,458 ================= =============== C. BANK LINES OF CREDIT At December 31, 1997, the Company had two lines of credit available (one for domestic operations and one for international operations) collateralized by accounts receivable, inventory, and property, plant and equipment which provided for an aggregate maximum commitment of $3,500,000 through March 15, 1998. At December 31, 1997, the Company had $996,000 outstanding under its domestic line of credit at the bank's prime rate of interest plus 1.5% (10% at December 31, 1997). The Company also had $70,000 outstanding under the international line of credit at December 31, 1997. Borrowings under this line of credit were at the bank's prime rate of interest plus 1.0% (9.5% at December 31, 1997). The lines of credit contained certain covenants, including minimum net income levels and certain financial ratios. The lines of credit expired on March 15, 1998 and have not yet been renewed. The Company was not in compliance with certain bank covenants at December 31, 1997, and was operating under a forbearance agreement which expired in February 1998. D. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations at December 31 consist of the following: 1997 1996 --------------- ------------ Capital lease obligation $ 146,487 $ 398,557 Notes payable 0 375,000 Notes payable to the bank 231,758 398,721 --------------- ------------ Total Debt and Capital Leases 378,245 1,172,278 Less current position 284,801 794,268 --------------- ------------ Long-Term Portion of Debt and Capital Leases $ 93,444 $ 378,010 =============== ============ 28 On April 14, 1995, the Company entered into an agreement with Classic Syndicate, Inc. ("Classic"). Pursuant to the Subordinated Loan Agreement, Classic held a 10% Note in the principal amount of $375,000 The loan matured during 1997 and was repaid in full. On November 17, 1995, the Company entered into an agreement with a bank ("Bank"). Pursuant to the Loan Agreement, the Bank holds a Note in the principal amount of $231,758 at an interest rate of prime plus 2% (10.5% at December 31, 1997) and a warrant to purchase up to 62,500 unregistered shares of the Company's Common Stock at an exercise price of $2.08 per share. The Company is required to pay 28 monthly principal payments of $13,633 and one final payment of $13,629 in addition to monthly interest payments from January 7, 1997 through May 7, 1999. The Note is cross-collateralized with the Company's bank lines of credit with accounts receivable, inventory, and property, plant and equipment. The Note contains certain covenants, including minimum net income levels and certain financial ratios. On a quarterly basis, half of any excess cash flow that the Company generates, is required to be used to prepay any remaining principal balance due on this Note. Excess cash flow is defined as net income plus non-cash expenses less capital expenditures, scheduled principal payments and increases in net working capital. At December 31, 1997, the Company was not in compliance with certain covenants of this agreement and was operating under a forbearance agreement with the Bank. The forebearance agreement expired in February 1998. Long-term debt and capital lease obligations at December 31, 1997 are payable as follows: 1998 $ 284,801 1999 81,618 2000 11,826 ----------------- $ 378,245 ================= E. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standard ("SFAS") No. 107 "Disclosures About Fair Value of Financial Instruments" was adopted for the year ending December 31, 1995. SFAS No. 107 requires disclosure of the estimated fair value of certain financial instruments. The Company has estimated the fair value of its financial instruments using available market data. However, considerable judgement is required in interpreting market data to develop estimates of fair value. The use of different market assumptions or methodologies may have a material effect on the estimates of fair values. The carrying values of cash, receivables, lines of credit, accounts payable, accrued expenses, and long term debt and capital lease obligations approximate fair values due to the short-term maturities or market rates of interest. F. SHAREHOLDERS' EQUITY In March 1985, the Company adopted a Stock Option Plan ("SOP") under which the Company could, for a period of ten years, grant options to purchase up to 250,000 shares of the Company's Common Stock. SOP options may be granted to employees, officers or directors of the Company or any 29 subsidiary. The exercise price of options must be at least the fair market value of the Company's Common Stock on the date of grant and the options must be exercised within 11 years from the date of grant. In April 1991, the Company adopted the 1991 Stock Option Plan ("OP") under which the Company may, for a period of ten years, grant incentive stock options and nonstatutory stock options to purchase up to 450,000 shares of the Company's Common Stock. In May, 1996 the Board of Directors amended this Plan to increase the shares reserved for issuance by 300,000 shares. Additionally, each year, the number of shares of stock that may be issued is increased automatically by 1% on January 1 if certain conditions are met. Stock options may be granted to employees, directors and other persons whose participation is deemed to be in the Company's best interest, but only employees may be granted incentive stock options. Incentive stock options granted under the plan have a maximum term of ten years and nonstatutory options may have a maximum term of twenty years. The exercise price for an incentive stock option must be at least the fair market value of the Company's common stock on the date of grant. The exercise price for a nonstatutory option may be any amount above the par value of the Company's Common Stock determined in good faith. The following is a summary of stock option activity: Weighted Average Exercise Number Price Of Shares Per Share Outstanding January 1, 1995 377,884 $ 2.39 Granted 678,903 0.92 Canceled (332,884) 2.39 Exercised (5,000) 1.47 ----------- Outstanding December 31, 1995 718,903 1.00 Granted 145,000 2.57 Canceled (17,850) 0.92 Exercised (53,342) 0.96 ----------- Outstanding December 31, 1996 792,711 1.29 Granted 97,500 1.91 Canceled (182,240) 0.96 Exercised (53,260) 0.99 ----------- Outstanding December 31, 1997 654,711 $ 1.50 ============ ============= 30 At December 31, 1997, 225,083 options were exercisable. At December 31, 1996, 141,544 options were exercisable. In January 1985, the Company adopted an Employee Stock Purchase Plan which provides for the sale of up to 200,000 shares of common stock to qualifying employees of the Company. In May, 1996 the Board of Directors amended this Plan to increase the shares reserved for issuance by 200,000 shares. 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, 1997, 1996 and 1995 a total of 43,756, 40,637 and 46,476 shares of common stock have been purchased at average prices of $1.66, $1.42 and $.82 per share, respectively. As of December 31, 1997 a total of 137,507 shares were available under this plan. The estimated fair value of options granted during 1997 was $0.57 per share, while the estimated fair value of options granted during 1996 was $1.15 per share. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option and purchase plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share for the years ended December 31 would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 Net income (loss) to common shareholders As reported ($1,238,520) $1,743,937 $532,138 Pro forma ($1,266,730) $1,671,943 $485,340 Net income (loss) per common and dilutive share As reported ($0.19) $0.25 $0.08 Pro forma ($0.19) $0.24 $0.07
The fair values of options granted under the Company's fixed stock option plans were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: No dividend yield, expected volatility of 35%, risk free interest rate of 6.4% and expected lives of 3 years from vest date. Stock Private Placement ----------------------- At November 30, 1993 the Company completed a private placement of 2,090,000 shares of common stock raising gross proceeds of $2,612,550 and net proceeds after fees and expenses of $2,195,523. The proceeds were used to reduce debt, to obtain certain European product certifications, and for new product development. The Company also utilized $159,999 of the net proceeds to redeem 73,845 shares of its common stock held primarily by Mr. Quinn Johnson, a director and executive officer of the Company. On November 30, 1993, the Company issued a warrant to purchase up to 209,000 shares at an exercise price of $1.25 per share to the placement agent in connection with the private placement of the Company's stock. 31 A shelf registration statement covering 3,781,000 shares of common stock issued in the private placement described above in a 1992 private placement and in connection with the Horizon acquisition was declared effective by the Securities and Exchange Commission on February 11, 1994. G. INCOME TAXES The (benefit) provision for income taxes for the years ended December 31, consists of the following: 1997 1996 1995 -------------- ------------ ------------ Current $ 35,800 $ 30,000 $ 11,000 Deferred (789,800) (518,000) $ (754,000) $ (488,000) $ 11,000 ============== ============ ============ The provision for income taxes as shown in the accompanying consolidated statements of operations differs from the amounts computed by applying the federal statutory income tax rates to income before income taxes. A reconciliation of the (benefit) provision for income taxes and the amounts that would be computed using the statutory federal income tax rates for the years ended December 31 is set forth below: 1997 1996 1995 ------------- ------------ ------------ Provision (benefit) computed at Federal statutory rates $ (678,000) $ 427,000 $ 185,000 State taxes (120,000) (15,500) 9,000 Goodwill 63,000 63,500 63,000 Other (19,000) (19,000) 66,000 Change in valuation allowance - (944,000) (312,000) ------------- ------------ ------------ $ (754,000) $ (488,000) $ 11,000 ============= ============ ============ Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards The tax effects of significant items comprising the Company's net deferred tax asset as of December 31 are as follows: 32 1997 1996 ----------- ----------- Deferred tax assets: Reserves not currently deductible $ 323,000 $ 216,000 Operating loss carryforwards 636,000 123,000 Tax credit carryforwards 380,000 380,000 Difference between book and tax basis of property 94,000 4,000 ----------- ----------- Total deferred tax assets 1,433,000 723,000 Deferred tax liabilities Other intangibles 0 (43,000) Other (1,763) (39,500) ----------- ----------- Total deferred tax liabilities (1,763) (82,500) Valuation allowance -- -- =========== =========== Net deferred tax asset $ 1,431,237 $ 640,500 =========== =========== The Company has evaluated its past earnings history and trends, sales backlog and budgets and determined that it is more likely than not that its deferred tax assets will be realized. At December 31, 1997, the Company had net operating loss carryforwards of approximately $1,600,000 available to reduce federal taxable income. These net operating losses begin to expire in 2005. H. PROFIT SHARING PLAN Full time employees with greater than six months of service are eligible to participate in the Company's 401K profit sharing retirement plan adopted in 1981 whereby, at the Board of Directors' discretion, contributions are made on an annual basis. Contributions made in any of the three years ended December 31, 1997 have not been material. I. SALES Export sales, primarily to Canada, Korea and Sweden were approximately $2,118,975, $2,191,000 and $1,950,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company has a concentration of sales of a product to a customer that makes up approximately 29% of net sales during 1997. The potential for a negative financial impact could result from a partial or total loss of the business relationship with this customer. Management believes that the relationship between the Company and the customer was good at December 31, 1997. Management is actively seeking to diversify sales of this product to a number of other customers. J. COMMITMENTS AND CONTINGENCIES Leases ------ Certain office facilities and equipment are held under capital and operating leases. These leases expire in periods through 2004 and include renewal options. Capital leases included in Property and 33 Equipment total $1,281,374 and $1,281,374 (less accumulated amortization of $1,160,190 and $945,105) as of December 31, 1997 and 1996, respectively. At December 31, 1997, future minimum lease payments under such leases having non-cancelable terms in excess of one year are summarized as follows: Operating Minimum Lease Payments Capital leases Leases ----------------- --------------- 1998 131,000 333,422 1999 13,500 338,991 2000 12,000 328,182 2001 0 317,604 2002 0 304,900 Thereafter 0 568,511 ----------------- --------------- Total minimum lease payments 156,500 2,191,610 =============== Less amount representing interest 10,012 ----------------- Net present value of future minimum Lease payments 146,488 ================= Rent expense for operating leases was approximately $289,598, $325,000 and $360,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Genelco Earnout Agreement ------------------------- In connection with the Company's purchase of Genelco, Inc. on January 30, 1988, the Company entered into a potential $700,000 earnout agreement based on future sales. The agreement was modified on December 31, 1992 for a remaining earnout of $202,585 to be compensated with 208,421 shares of unregistered common stock in 1996. Through December 31, 1991, $155,669 has been earned under the prior earnout agreement. Under the modified agreement, the expense was $33,765, $33,764 and $33,764 for the years ended December 31, 1997, 1996 and 1995, respectively. In March 1996 the Company issued 208,421 shares of unregistered common stock under the modified agreement. The earnout period under the modified agreement was completed on December 31, 1997. Litigation ---------- In a prior year, litigation was commenced in Superior Court, Maricopa County, Arizona with respect to certain matters arising in connection with a technology development agreement and related agreements entered into by the Company and a state organization in 1988 related to the Company's Jerome product line and providing the Company with certain rights thereunder. The Company believed, not withstanding such agreements, the state organization exclusively licensed relevant technology to another firm in February 1993. The Company filed suit in February 1996 against this firm and, the state organization and certain other defendants requesting a declaratory judgement, confirming the 34 Company's right to the contested technology and seeking damages. The firm also filed suit in January 1996 against the state organization, AZI and certain executive officers of AZI seeking declaratory judgement confirming the validity of its license agreement with the state organization and seeking damages. The parties reached a settlement in June, 1996 under which the Company would receive $1,000,000 and certain free education rights, in addition to exclusive rights to the contested technology. The Company has received full payment of this settlement as of January 30, 1997. From time to time, the Company may become a defendant as the result of a claim filed by a customer alleging breach of contractual promises and warranties in a commercial transaction. While the outcome of any such claim cannot be determined at this time, management of the Company does not believe that the ultimate disposition of these claims will have a material effect on the financial position or results of operations or cash flows of the Company. K. DISCONTINUED OPERATIONS In August 1997, the Company adopted a plan to discontinue the operations of Horizon Engineering and Testing, Inc. ("Horizon"). The disposition of Horizon was substantially completed by December 31, 1997. Net assets of the discontinued operation at December 31, 1997 and 1996 were $0 and $541,146 respectively. Such assets were primarily goodwill and other intangibles. The Company estimates that the final disposal of Horizon will not have a material effect on the Company's operations during 1998. The loss from discontinued operations for 1997 (before income tax benefit) includes a write-off of goodwill and other intangibles of $444,705 and a loss from operations of $580,713. L. RELATED PARTY TRANSACTIONS During September 1993, the Company loaned $45,000 to one of its officers. The loan was collateralized by a pledge of 15,000 shares of common stock of the Company and the cash value of a life insurance policy. During 1996, a $10,000 principal payment was made on this loan leaving a remaining balance of $35,000. The note bears interest at 10% per annum and the remaining balance was due December, 1997. During April 1994, the Company loaned approximately $10,000 to another officer. The note bears interest at 10% and was due December, 1997. These loans have been repaid. 35 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART III ITEMS 9 THROUGH 12. Within 120 days after the close of the fiscal year, the Company intends to file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A which will involve the election of directors. The answers to Items 9 through 12 are incorporated by reference pursuant to General Instruction E(3). PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K Financial Statements. The following is a list of the consolidated financial statements of Arizona Instrument Corporation and its subsidiaries included in Item 8 of Part II. Independent auditors' report Consolidated balance sheets - December 31, 1997 and 1996 Consolidated statements of operations - Years ended December 31, 1997, 1996 and 1995 Consolidated statements of shareholders' equity - Years ended December 31, 1997, 1996 and 1995 Consolidated statements of cash flows - Years ended December 31, 1997, 1996 and 1995 Notes to consolidated financial statements (a) The following exhibits are incorporated by reference or are filed with this Form 10-KSB, as indicated. 3.1 Composite of Certificate of Incorporation of Registrant, as amended through July 5, 1994. Incorporated by reference from Registrant's Form 8-A filed on June 26, 1996 (the "June 1996 8-A"). 36 3.2 Bylaws of Registrant, as amended. Incorporated by reference from the June 1996 8-A. 10.1* Registrant's 1985 Stock Option Plan. Incorporated by reference from Registrant's Form 10-KSB for the year ended December 31, 1995 filed in March 1996. 10.2* Registrant's 1985 Stock Purchase Plan. Incorporated by reference from Registrant's Form S-8 filed on August 5, 1996. 10.3* Registrant's 1991 Stock Option Plan. Incorporated by reference from Registrant's Form S-8 filed on June 28, 1996. 10.4 Amended and Restated Export-Import Guaranteed Business Loan Agreement between Registrant and Silicon Valley Bank dated February 1993. Incorporated by reference From Registrant's Form 10-KSB for the year ended December 31, 1992, filed in March 1993 (the "1992 10-KSB"). 10.5 Warrant Purchase Agreement between Registrant and Silicon Valley Bank dated December 14, 1991. Incorporated by reference from the 1992 10-KSB. 10.6 Loan Modification Agreement between Registrant and Silicon Valley Bank dated November 7, 1995. Incorporated by reference to Registrant's Form 10-KSB for the Year ended December 31, 1995 filed on March 29, 1996 (the "1995 10-KSB"). 10.7 Promissory Note between Registrant and Silicon Valley Bank dated November 7, 1995. Incorporated by reference to the 1995 10-KSB. 10.8 Loan Modification Agreement between Registrant and Silicon Valley Bank dated March 24, 1997. Filed herewith. 10.9 Promissory Note between Registrant and Classic Syndicate, Inc. dated April 15, 1996. Incorporated by reference to the 1995 10-KSB. 10.10 Warrant Agreement between Registrant and Cruttenden & Co., Inc. dated November 30, 1993. Incorporated by reference from Registrant's Form 10-QSB for the quarter ended September 30, 1993 filed on November 30, 1993 (the "September 1993 10-QSB"). 10.11 Lease Agreement between Registrant and Wood Street Limited Partnership dated September 1, 1993. Incorporated by reference from the September 1993 10-QSB. 10.12* Employment Agreement between Registrant and Walfred R. Raisanen dated November 5, 1992. Incorporated by reference to the 1992 10-KSB. 10.13* Employment Agreement between Registrant and George G. Hays dated April 1, 1997. Incorporated by reference from Registrant's Form 10-QSB for the quarter 37 Ended March 31, 1997 filed on May 15, 1997. 10.14* Employment Agreement between Registrant and George G. Hays dated January 1, 1998. Filed herewith. 21.1 Subsidiaries of Registrant. Filed herewith. 23.1 Consent of Deloitte & Touche LLP. Filed herewith. 27. Financial Data Schedule. Filed herewith. - ------------------ *Management contract of compensatory plan or arrangement required to be filed pursuant to Item 13(a) of Form 10-KSB. (b) The following Form 8-K was filed by Registrant during the last quarter of the period Covered by this Form 10-KSB. Form 8-K filed November 26, 1997 reporting under Item 5 that George G. Hays had been appointed President and Chief Executive Officer of Registrant, and John P. Hudnall had resigned from the Board of Directors and his employment as President and Chief Executive Officer of Registrant had been terminated. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARIZONA INSTRUMENT CORPORATION Date: March 31, 1998 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 31, 1998 - ------------------------------------- (Principal Executive Officer) --------------------- George G. Hays /s/ Walfred R. Raisanen Director, Vice President of March 31, 1998 - ------------------------------------- Engineering --------------------- Walfred R. Raisanen /s/ S. Thomas Emerson Director March 31, 1998 - ------------------------------------- --------------------- S. Thomas Emerson /s/ Steven Zylstra Director March 31, 1998 - ------------------------------------- --------------------- Steven Zylstra /s/ Harold Schwartz Director March 31, 1998 - ------------------------------------- --------------------- Harold Schwartz
39 EX-10.7 2 LOAN MODIFICATION AGREEMENT LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of March 14, 1997, by and between Arizona Instrument Corporation ("Borrower") whose address is 4114 East Wood Street, Phoenix, AZ 85050, and Silicon Valley Bank, a California chartered bank ("Lender") whose address is 3003 Tasman Drive, Santa Clara, CA 95054. 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, an Amended and Restated Loan and Security Agreement (the "Domestic Loan Agreement") and a Second Amended and Restated Loan and Security Agreement (the "Export Loan Agreement"), both dated March 15, 1995, as such agreements may be amended from time to time, (collectively, the "Loan Agreement"). The Domestic Loan Agreement provided for, among other things, a Committed Line in the original amount of One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00) (the "Domestic Line"). The Export Loan Agreement provided for, among other things, a Committed Line in the principal amount of One Million Two Hundred Fifty Thousand and 00/100 Dollars ($1,250,000.00) (the "Export Line"). Borrower has also executed a Promissory Note, dated November 7, 1995, in the original principal amount of One Million Two Hundred Fifty Thousand and 00/100 Dollars ($1,250,000.00) (the "Term Loan"). The Export Loan Agreement has been modified pursuant to, among other documents, a Loan Modification Agreement dated March 15, 1996, pursuant to which, among other things, the principal amount of the Committed Line was decreased to One Million and 00/100 Dollars ($1,000,000.00). Defined terms used but not otherwise defined shall have the same meaning as in the Loan Agreements. Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to as the "Indebtedness". 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness, together with other promissory notes from Borrower to Lender, is secured by the Collateral as defined in each of the Loan Agreements, a Collateral Assignment, Patent Mortgage and Security Agreement dated February 12, 1993 and a Reaffirmation of Collateral Assignment, Patent Mortgage and Security Agreement dated March 15, 1995. Additionally, repayment of the Export Committed Line is guaranteed by the Export-Import Bank of the United States (the "Guarantor") pursuant to a Guarantee Agreement (the "Guaranty"). Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. Modification(s) to the Loan Agreement. ------------------------------------- 1. The term "Maturity Date" shall mean March 13, 1998. 2. Section 6.9 entitled "Debt-Net Worth Ratio" is hereby amended in its entirety to read as follows: Borrower shall maintain as of the last day of each quarter, a ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than 1.00 to 1.00. 1 B. Modification(s) to the Domestic Loan Agreement. ---------------------------------------------- 1. Subparagraph (a) of Section 2.3 entitled "Interest Rate" is hereby amended to read as follows: Except as set forth in Section 2.3(b), any Advances shall bear interest, on the average Daily Balance, at a rate equal to one (1.000) percentage point over the Prime Rate. C. Modification(s) to the Export Loan Agreement. -------------------------------------------- 1. Subparagraph (a) of Section 2.3 entitled "Interest Rate" is hereby amended to read as follows: Except as set forth in Section 2.3(b), any Advances shall bear interest, on the average Daily Balance, at a rate equal to three fourths of one (0.750) percentage point over the Prime Rate. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. PAYMENT OF LOAN FEES. Borrower shall pay to Lender a fee for the Domestic Loan in the amount of Seven Thousand Five Hundred and 00/100 Dollars ($7,500.00) (the "Domestic Loan Fee"), and a fee for the Export Loan in the amount of Fifteen Thousand and 00/100 Dollars ($15,000.00) (the "Export Loan Fee") (collectively, the "Loan Fees") plus all out-of-pocket expenses. 6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that it has no defenses against the obligations to pay any amounts under the Indebtedness. 7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Lender's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Lender to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Lender and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Lender in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. 8. CONDITIONS. The effectiveness of this Loan Modification Agreement is conditioned upon Borrower's payment of the Loan Fees. 2 This Loan Modification Agreement is executed as of the date first written above. BORROWER: LENDER: ARIZONA INSTRUMENT CORPORATION SILICON VALLEY BANK By: /s/ George G. Hays By: /s/ Kevin Conway --------------------------- ---------------------------- Name: GEORGE G. HAYS Name: Kevin Conway ------------------------- -------------------------- Title: VICE PRESIDENT Title: Vice President ------------------------ ------------------------- 3 EX-10.14 3 EMPLOYEMENT AGREEMENT EMPLOYMENT AGREEMENT ARIZONA INSTRUMENT CORPORATION AND George G. Hays THIS EMPLOYMENT AGREEMENT ("Agreement") effective as of January 1, 1998 is between Arizona Instrument Corporation ("AZI" or the "Company" or "Employer") and George G. Hays ("Employee"). 1. Employment Duties. Employer hereby employs Employee and Employee hereby accepts employment on the terms and conditions set forth herein. Employee shall serve in the position of President and Chief Executive Officer, with responsibility for overseeing the operations of the Company, and will have such other powers and duties consistent with such position as may from time to time be prescribed by the Board of Directors. 2. Term. Employee's employment shall continue from the effective date of this Agreement through March 31, 2000. This Agreement shall be automatically renewed for a one-year period unless the Company has given Employee written notice of nonrenewal by September 30, 1999. 3. Full-time Employment. Employee shall devote substantially all his employment energies, interest, abilities and time to the performance of his obligations hereunder. 4. Compensation. Employer shall pay to Employee the sum of $165,000.00 per year during the term hereof, to be paid in accordance with the Employer's normal payroll practice, but in no event shall such salary be paid less frequently than twice a month. Employee shall participate in an annual incentive bonus plan administered by the Board of Directors equal to at least 30% of annual salary. The Board of Directors will consider merit increases on a periodic basis commensurate with the executive compensation practices of the Company. Employer may deduct from the compensation to Employee social security taxes and all federal, state and municipal taxes and charges as may now be in effect or which may hereafter be enacted or required. Employer shall pay or reimburse Employee for reasonable travel and other expenses incurred by Employee in furtherance of or in connection with the performance of his duties hereunder, consistent with Employer policies regarding such expenses. 5. Participation in Employee Benefits. Employee shall be entitled to and shall receive all other benefits and conditions of employment available generally to executives of AZI pursuant to Employer plans and programs, including group health insurance benefits, life insurance benefits and the opportunity to participate in any stock option, profit sharing or retirement income plan; provided, however, that Employee may request leave of absence without pay during the term hereof, and Employer agrees to grant such leave if it determines that the leave would not be materially injurious to the operations of Employer; and provided, further, that Employee shall be entitled to a vacation of four weeks in each twelve-month period during the term of this Agreement, during which time his compensation shall be paid in full. The manner of implementation of such benefits with respect to such items as procedures and amounts is discretionary with the Company. 6. Termination. A) For Cause. The Company may terminate this Agreement for cause upon written notice to the Employee stating the facts constituting such cause, provided that Employee shall have 10 days following such notice to cure any conduct or act, if curable, alleged to provide grounds for termination for cause hereunder. In the event of termination for cause, the Company shall be obligated to pay the Employee only the base salary due him through the date of termination. Cause shall include material neglect of duties, willful failure to abide by ethical and good faith instructions or policies from or set by the Board of Directors, commission of a felony or serious misdemeanor offense or pleading guilty or nolo contendere to same, the commission by Employee of an act of dishonesty or moral turpitude involving the Company, Employee's material breach of this Agreement, the filing of bankruptcy proceedings by or against Employee, or breach by Employee of any other material obligation to the Company. B) Without Cause. The Company may terminate this Agreement at any time immediately, without cause, by giving written notice to Employee. Upon termination under this Section 6(B), the Company shall be obligated to pay Employee the base salary payable hereunder for the balance of the employment term set forth in Section 2. The amount of base salary to be paid to Employee after termination under this Section 6(B) may be reduced by any wages or consulting fees earned by Employee from third parties from the date of termination of this Agreement through the term of this Agreement. At the Company's election, such payment can be made in a lump sum or pursuant to the Company's normal payroll practices over the balance of the term. The Company shall also maintain Employee's participation in the employee benefit programs referred to in Section 5 hereof for the remainder of the employment term set forth in Section 2 and to the extent contemplated in Section 5 hereof, except that the Company shall have no obligation to Employee under any profit sharing or retirement plan other than amounts due through the date of termination of employment. If continued coverage or participation in any such benefit program is prohibited by the terms thereof, the Company will provide a substantially similar benefit during such period. The obligations provided in this Section 6(B) shall be the Company's sole obligations upon termination under this Section 6(B). C) Disability. If during the term of this Agreement, Employee fails to perform his duties hereunder because of illness or other incapacity for a period of two consecutive months, or for 90 days during any 150-day period, the Company shall have the right to terminate this Agreement without further obligation hereunder except for any amounts payable pursuant to disability plans generally applicable to executive employees. D) Death. If Employee dies during the term of this Agreement, this Agreement shall terminate immediately, and Employee's legal representatives shall be entitled to receive the base salary due Employee through the last day of the calendar month in which his death shall have occurred and any other death benefits generally applicable to executive employees. E) Employee Termination. Employee may terminate this Agreement at any time upon written notice to the Company. 7. Cooperation with Employer After Termination of Employment. Following any termination of employment hereunder, Employee shall fully cooperate with Employer in all matters relating to the winding up of his pending work on behalf of Employer and the orderly transfer of any such pending work to other employees of Employer as may be designated by Employer. Employer shall be entitled to such full time or part time services of Employee as Employer may reasonably require during all or any part of the 30-day period following any termination hereunder, and shall compensate Employee for such services on a basis consistent with Employee's compensation pursuant to Section 4 hereof. 8. Non-Competition. The parties acknowledge that the Employee will acquire much knowledge and information concerning the business of the Company and its affiliates as the result of his employment. The parties further acknowledge that the scope of business in which the Company is engaged as of the date of execution of this Agreement is world-wide and very competitive and one in which few companies can successfully compete. Competition by Employee in that business after this Agreement is terminated would severely injure the Company. Accordingly, for a period of one year after this Agreement is terminated for any reason (except termination by the Company without cause), Employee agrees not to become an employee, consultant, advisor, principal, partner or substantial shareholder of any firm or business that in any way competes with the Company or its affiliates in any of their presently existing or then existing products and markets. 9. Specific Performance. The parties agree that the provisions in Sections 3 and 8 are of a special, unique and extraordinary character, which gives them a peculiar value, the loss of which could not be reasonably or adequately compensated in damages in any action at law, and that a breach by Employee will cause Employer great and irreparable injury and damage. Employee hereby expressly agrees that Employer shall be entitled to the remedies of injunction, specific performance and other equitable relief to prevent a breach by Employee. This provision shall not, however, be construed as a waiver of any of the rights which Employer may have for damages. 10. Miscellaneous Provisions. 10.1 Decisions by Employer. For all purposes herein, Employee may not make any decisions or take any action with respect to this Agreement as an agent of Employer. Actions of Employer hereunder shall be taken by its Board of Directors. 10.2 Governing Law. This Agreement is governed by Arizona law. 10.3 Entire Agreement. This Agreement supersedes all prior agreements between the parties concerning the subject matter hereof and this Agreement constitutes the entire agreement between the parties with respect hereto. This Agreement may be modified only with a written instrument duly executed by each of the parties. No person has any authority to make any representation or promise not set forth herein on behalf of any of the parties and this Agreement has not been executed in reliance upon any representation or promise except those contained herein. 10.4 Notices. Any notice, request, demand or other communication hereunder shall be in writing and shall be deemed given when personally delivered to AZI or to Employee, as the case may be, or when delivered by certified mail, return receipt requested. To the Company: 4114 East Wood Street Phoenix, AZ 85040 To the Employee: 4114 East Wood Street Phoenix, AZ 85040 10.5 Waiver of Breach. The failure of either party to require the performance of any term or condition of the Agreement, or the waiver by either party of any breach of this Agreement shall not prevent a subsequent enforcement of any such term or any other term nor be deemed to be a waiver of any subsequent breach. 10.6 Severability. The provisions of this Agreement shall be deemed severable. If any part of this Agreement shall be held unenforceable, the remainder shall remain in full force and effect, and such unenforceable provisions shall be reformed so as to give maximum legal effect to the intent of the parties as expressed herein. 11. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by binding arbitration conducted in Phoenix, Arizona in accordance with the laws of the State of Arizona conducted in accordance with the rules of the American Arbitration Association. Judgement upon the award rendered by the arbitration may be entered in any court having jurisdiction thereof. /s/ Walfred R. Rausamen 1/14/98 /s/ George G. Hays 1/13/98 - --------------------------------- ---------------------------------- Employer Date Employee Date EX-21.1 4 SUBSIDIARIES OF REGISTRANT Exhibit 21.1 Subsidiaries of Registrant Quintel International, Inc., incorporated under the Companies Act of 1982 of Barbados, W.I. Computrac International, Inc., an Arizona corporation Horizon Engineering and Testing, Inc., an Arizona corporation Each of the above companies is wholly owned by Registrant. EX-23.1 5 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.1 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Arizona Instrument Corporation's Registration Statement No. 33-73614 on Form S-3 and Registration Statement Nos. 33-2712, 33-2713 and 2-99078 on Form S-8 of our report dated March 15, 1998, appearing in this Annual Report on Form 10-KSB of Arizona Instrument Corporation for the year ended December 31, 1997. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Phoenix, Arizona March 30, 1998 EX-27.1 6 ARTICLE 5 FDS FOR 10-KSB
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTRD FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND ITS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 724904 ARIZONA INSTRUMENT CORPORATION 1 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 143,173 0 4,269,192 279,000 2,556,992 6,740,299 3,440,597 0 11,591,716 4,183,316 93,445 0 0 67,747 7,467,435 11,591,716 15,232,320 15,245,031 7,885,507 8,188,932 0 0 138,314 (967,722) (366,000) (601,721) (636,799) 0 0 (1,238,520) (0.19) (0.19)
EX-27.2 7 ARTICLE 5 FDS FOR 10-KSB
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTRD FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND ITS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 724904 ARIZONA INSTRUMENT CORPORATION 1 U.S. DOLLARS 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 1 1 1 1 1 486,382 597,931 384,956 359,151 652,267 0 0 0 0 0 3,562,608 3,082,476 3,349,790 3,189,617 2,883,732 190,771 165,000 188,381 153,828 156,823 1,793,770 2,049,982 1,907,006 1,877,547 1,962,817 5,930,170 6,161,730 5,772,715 6,629,496 6,064,930 2,804,147 2,912,573 2,797,657 2,828,886 4,244,848 2,316,713 2,402,384 2,326,405 2,362,728 3,322,328 10,600,162 11,024,164 10,281,114 11,475,921 10,805,307 2,597,746 2,211,634 2,126,584 2,388,318 2,318,744 1,124,464 380,824 1,514,471 953,301 296,681 0 0 0 0 0 0 0 0 0 0 63,526 66,777 65,849 66,073 66,147 6,275,778 8,364,929 6,582,913 8,068,229 8,123,735 10,600,162 11,024,164 10,281,114 11,475,921 10,805,307 10,592,558 10,663,489 2,797,863 5,396,084 7,928,111 10,712,779 11,746,638 2,820,744 6,427,373 8,989,953 4,297,726 4,410,881 1,239,158 2,344,480 3,344,701 5,056,033 5,760,142 1,425,308 2,860,364 3,975,065 0 0 0 0 0 0 0 0 0 0 391,482 201,027 61,467 118,625 169,766 967,538 1,374,589 94,810 1,103,902 1,285,826 11,000 (441,000) 2,000 (396,500) (381,500) 956,538 1,815,589 92,810 1,496,402 1,667,325 (424,400) (71,651) (14,211) 39,737 (82,360) 0 0 0 0 0 0 0 0 0 0 532,138 1,743,937 78,599 1,536,140 1,584,965 0.08 0.27 0.01 0.22 0.24 0.08 0.25 0.01 0.20 0.22
EX-27.3 8 ARTICLE 5 FDS FOR 10-KSB
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTRD FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND ITS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 724904 ARIZONA INSTRUMENT CORPORATION 1 U.S. DOLLARS 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 1 1 1 174,285 189,330 275,345 0 0 0 3,799,648 5,294,498 3,109,785 152,841 162,173 568,024 2,045,755 2,597,970 2,858,223 6,172,947 8,240,881 5,848,749 3,041,318 3,287,791 3,355,977 2,444,489 2,480,137 2520247 10,937,862 13,025,968 10,768,424 2,100,670 4,200,862 3,251,766 2,100,670 169,817 163,407 0 0 0 0 0 0 67,109 67,259 67,684 0 8,588,030 7,285,567 0 11,024,164 10,768,424 3,219,880 7,285,821 10,364,558 3,224,674 7,290,498 10,373,005 1,384,953 3,398,989 5,257,138 1,601,686 3,423,570 5,974,936 0 0 0 0 0 0 24,997 26,240 46,946 203,450 213,250 (1,373,953) 80,890 155,928 (362,052) 122,560 260,772 (595,200) (41,883) (99,459) (599,298) 0 0 0 0 0 0 80,677 161,312 (1,194,499) 0.01 0.01 0.18 0.01 0.01 0.18
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